<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 2000
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 3561
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
<S> <C>
NEW YORK 31-0267900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
---------------------
222 W. LAS COLINAS BLVD.
SUITE 1500
IRVING, TEXAS 75039
(972) 443-6500
(Address, including zip code, and telephone number, including area code, of
Flowserve Corporation's principal executive offices)
FLOWSERVE FINANCE B.V.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
THE NETHERLANDS 3561
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
<S> <C>
THE NETHERLANDS NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
PARALLELWEG 6
ETTEN-LEUR 4870AA
THE NETHERLANDS
011 3176 502 8200
(Address, including zip code, and telephone number, including area code, of
Flowserve Finance B.V.'s principal executive offices)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK,NY 10011
(212) 894-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for process)
---------------------
with copies to
CHRISTOPHER C. PACI, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, N.Y. 10022
(212) 848-8515
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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. [ ]
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/4% Senior Subordinated Notes due 2010
of Flowserve Corporation.................. $290,000,000 100% $290,000,000 $76,560(2)
---------------------------------------------------------------------------------------------------------------------------------
12 1/4% Senior Subordinated Notes due 2010
of Flowserve Finance B.V. ................ E100,000,000 100% $ 85,220,000(1) $23,068(3)
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</TABLE>
(1) Calculated based on the euro noon buying rate on September 25, 2000 of
$0.8738 per E1.00.
(2) The registration fee was calculated pursuant to Rule 457(f)(2) under the
Securities Act.
(3) The registration fee was calculated pursuant to Rule 457(f)(2) under the
Securities Act based on the euro noon buying rate on September 25, 2000 of
$0.8738 per E1.00.
THESE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
FLOWSERVE CORPORATION
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY STANDARD
STATE OF INDUSTRIAL
INCORPORATION CLASSIFICATION
NAME OR ORGANIZATION CODE NUMBER
---- --------------- ----------------
<S> <C> <C>
Flowserve RED Corporation................................... Delaware 3561
Flowserve FSD Corporation................................... Delaware 3561
Flowserve FCD Corporation................................... Delaware 3561
Flowserve International, Inc. .............................. Delaware 3561
Flowserve Management Company................................ Delaware 3561
BW/IP-New Mexico, Inc. ..................................... Delaware 3561
Flowserve International, LLC................................ Delaware 3561
Flowserve Holdings, Inc..................................... Delaware 3561
Durametallic Australia Holding Company...................... Michigan 3561
Flowserve International Limited............................. United Kingdom 3561
Innovative Valve Technologies, Inc. ........................ Delaware 3561
Plant Maintenance, Inc. .................................... Delaware 3561
Varco Valve, Inc. .......................................... Delaware 3561
Colonial Equipment & Service Co., Inc. ..................... Delaware 3561
CECORP, Inc. ............................................... Delaware 3561
DIVT Acquisition, LLC....................................... Delaware 3561
DIVT Subsidiary, LLC........................................ Delaware 3561
IPSCO Holding, Inc. ........................................ Delaware 3561
Southern Valve Service, Inc. ............................... Alabama 3561
L.T. Koppl Industries, Inc. ................................ California 3561
Koppl Company............................................... California 3561
Koppl Industrial Systems, Inc. ............................. California 3561
Harley Industries, Inc. .................................... California 3561
Koppl Company of Arizona.................................... Arizona 3561
Seeley & Jones, Incorporated................................ Connecticut 3561
GSV, Inc. .................................................. Florida 3561
IPSCO-Florida, Inc. ........................................ Florida 3561
International Piping Services Company....................... Illinois 3561
Cypress Industries, Inc. ................................... Illinois 3561
DALCO, LLC.................................................. Kentucky 3561
Plant Specialties, Inc. .................................... Louisiana 3561
Energy Maintenance, Inc. ................................... Missouri 3561
Preventive Maintenance, Inc. ............................... North Carolina 3561
Production Machine Incorporated............................. Oklahoma 3561
ICE Liquidating, Inc. ...................................... Pennsylvania 3561
Valve Repair of South Carolina, Inc. ....................... South Carolina 3561
The Safe Seal Company, Inc. ................................ Texas 3561
Flickinger-Benicia Inc. .................................... Washington 3561
Puget Investments, Inc. .................................... Washington 3561
Steam Supply & Rubber Co., Inc. ............................ Washington 3561
Flickinger Company.......................................... Washington 3561
Boyden Inc. ................................................ West Virginia 3561
Valve Actuation & Repair Co. ............................... West Virginia 3561
Ingersoll-Dresser Pump Company.............................. Delaware 3561
IDP Alternate Energy Company................................ Delaware 3561
Energy Hydro, Inc. ......................................... Delaware 3561
Pump Investments, Inc. ..................................... Delaware 3561
</TABLE>
The address, including zip code, and telephone number, including area code,
of the principal offices of the additional registrants listed above is: 222 W.
Las Colinas Blvd., Suite 1500, Irving, Texas 75039; the telephone number at that
address is (972) 443-6500.
<PAGE> 3
Subject to completion dated September , 2000
PROSPECTUS
FLOWSERVE LOGO
OFFER TO EXCHANGE
any and all
12 1/4% Senior Subordinated Notes due August 15, 2010
($290,000,000 aggregate principal amount outstanding)
for
12 1/4% Senior Subordinated
Notes due August 15, 2010 of
FLOWSERVE CORPORATION
and
12 1/4% Senior Subordinated Notes due August 15, 2010
(E100,000,000 principal amount outstanding)
for
12 1/4% Senior Subordinated
Notes due August 15, 2010 of
FLOWSERVE FINANCE B.V.
Fully and Unconditionally Guaranteed on a Senior Subordinated Basis by
FLOWSERVE CORPORATION
-------------------------
TERMS OF EXCHANGE OFFER
- Expires 12:00 p.m., New York time (5:00 p.m., London time) on ,
2000, unless extended
- Not subject to any other condition other than that the Exchange Offer
does not violate applicable law or any applicable interpretation of the
Staff of the Securities and Exchange Commission
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged
- Tenders of outstanding notes may be withdrawn by you any time prior to
12:00 p.m., New York time (5:00 p.m., London time), on the date of the
expiration of the Exchange Offer
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes
- We will not receive any proceeds from the Exchange Offer
- The terms of the exchange notes to be issued are substantially similar to
the outstanding notes, except for transfer restrictions and registration
rights relating to the outstanding notes
- We intend to list the exchange notes on the Luxembourg Stock Exchange
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
<PAGE> 4
The Exchange Offer is not being made to, nor will we accept surrenders of
or exchange from, holders of outstanding notes in any jurisdiction in which the
Exchange Offer or the acceptance of outstanding notes would not be in compliance
with the securities or blue sky laws of such jurisdiction.
No dealer, salesperson or other individual has been authorized to give any
information or make any representation not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by us. This prospectus does not constitute an offer or a solicitation in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus, nor any distribution
of securities made using this prospectus, shall under any circumstances create
any implication that there has not been any change in the facts set forth in
this prospectus or in our affairs since the date of this prospectus.
The securities may not be offered or sold in or into the United Kingdom
except in circumstances that do not constitute an offer to the public within the
meaning of the Public Offers of Securities Regulation 1995. All applicable
provisions of the Financial Services Act 1986 must be complied with in respect
of anything done in relation to securities in, from or otherwise involving the
United Kingdom.
Exchange notes may only be offered in The Netherlands or elsewhere to
persons who trade or invest in securities in the conduct of their profession or
trade within the meaning of the Securities Transactions Supervision Act 1995
(Wet Toezicht Effectenverkeer 1995) and its implementing regulations (which
includes banks, securities intermediaries (including dealers and brokers),
insurance companies, pension funds, other institutional investors, and
commercial enterprises which as an ancillary activity regularly invest in
securities).
i
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY...................... 1
RISK FACTORS............................ 22
SOURCES AND USES OF PROCEEDS............ 33
THE EXCHANGE OFFER...................... 34
CAPITALIZATION.......................... 42
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS.................. 43
SELECTED HISTORICAL FINANCIAL
DATA.................................. 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 55
BUSINESS................................ 70
MANAGEMENT.............................. 88
DESCRIPTION OF THE ACQUISITION.......... 91
DESCRIPTION OF CERTAIN INDEBTEDNESS..... 93
DESCRIPTION OF THE NOTES................ 95
CERTAIN TAX CONSIDERATIONS.............. 144
PLAN OF DISTRIBUTION.................... 152
LEGAL MATTERS........................... 153
EXPERTS................................. 153
WHERE YOU CAN FIND MORE INFORMATION..... 153
GENERAL LISTING INFORMATION............. 154
INDEX TO FINANCIAL STATEMENTS........... F-1
</TABLE>
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
ii
<PAGE> 6
SERVICE OF PROCESS AND
ENFORCEABILITY OF CIVIL LIABILITIES
Flowserve Finance B.V. is a company formed under the laws of The
Netherlands and substantially all of its assets are located outside the United
States. In addition, certain future members of Flowserve Finance's management
board are residents of countries other than the United States. As a result, it
may not be possible for investors to effect service of process within the United
States upon such persons or to enforce against such persons or Flowserve Finance
judgments of courts of the United States based upon civil liabilities under the
United States federal securities laws. We have been advised by our Netherlands
counsel, De Brauw Blackstone Westbroek N.V., that a judgment rendered by a court
in the United States will not be recognized and enforced by the Netherlands
courts. However, if a person has obtained a final and conclusive judgment for
the payment of money rendered by a court in the United States which is
enforceable in the United States and files his claim with the competent
Netherlands court, the Netherlands court will generally give binding effect to
such judgment insofar as it finds that the jurisdiction of the United States
court has been based on grounds which are internationally acceptable and that
proper legal procedures have been observed and unless such judgment contravenes
the public policy of The Netherlands.
There can be no assurance that United States investors will be able to
enforce against Flowserve Finance, or members of the management board, or
certain experts named herein who are residents of The Netherlands or other
countries outside the United States, any judgments in civil and commercial
matters, including judgments under the U.S. federal securities laws. In
addition, there is doubt as to whether a Netherlands court would impose civil
liability on Flowserve Finance or on the members of the management board in an
original action predicated solely upon the federal securities laws of the United
States brought in a court of competent jurisdiction in The Netherlands against
Flowserve Finance or such members.
Flowserve Finance is a besloten vennootschap (private company with limited
liability) with its corporate seat at Amsterdam, The Netherlands and its
principal place of business at Parallelweg 6, Etten-Leur 4870 AA, The
Netherlands. Its telephone number is 011-31-76-502-8200.
INDUSTRY DATA
In this prospectus, we rely on and refer to information regarding the flow
control products market and its segments and competitors from The Freedonia
Group, Hydraulic Institute, Valve Manufacturers Association, Bloomberg, and
Hydrocarbon Processing Magazine, market research reports, analyst reports and
other publicly available information. Although we believe that this information
is reliable, we cannot guarantee the accuracy and completeness of the
information and have not independently verified it.
iii
<PAGE> 7
FORWARD-LOOKING STATEMENTS
This prospectus contains various forward-looking statements and includes
assumptions about future market conditions, operations and results. These
statements are based on current expectations and are subject to significant
risks and uncertainties. They are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Among the many factors that
could cause actual results to differ materially from the forward-looking
statements are:
- further changes in the already competitive environment for our products
or competitors' responses to our strategies;
- our ability to integrate Ingersoll-Dresser Pump Company ("IDP") and
Innovative Valve Technologies, Inc. ("Invatec") into our management and
operations and realize anticipated synergies and cost savings;
- political risks or trade embargoes affecting important country markets;
- the health of the petroleum, chemical and power generation industries;
- economic conditions in areas outside the United States;
- continued economic growth within the United States; and
- the recognition of significant expenses associated with adjustments to
realign our combined facilities and other capabilities with our strategic
objectives and business conditions including, without limitation,
expenses incurred in restructuring our operations to incorporate IDP's
facilities and the cost of financing to acquire IDP.
We undertake no obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or otherwise.
iv
<PAGE> 8
PROSPECTUS SUMMARY
The following is a summary of the more detailed information contained
elsewhere in this prospectus. Except where otherwise indicated and unless the
context otherwise requires, (i) the terms "we", "us", "our" and "our company"
refer collectively to Flowserve Corporation and its subsidiaries giving effect
to the acquisition of Innovative Valve Technologies, Inc. and Ingersoll-Dresser
Pump Company and their respective subsidiaries; (ii) the terms "Flowserve",
"Flowserve Finance", "Invatec" and "IDP" refer to Flowserve Corporation,
Flowserve Finance B.V., Innovative Valve Technologies, Inc. and
Ingersoll-Dresser Pump Company, respectively, and their respective subsidiaries,
as stand-alone companies; (iii) the term "Transactions" refers to our
acquisition of IDP, the financing provided under new senior credit facilities
entered into on August 8, 2000 to finance the acquisition, refinance outstanding
indebtedness and pay transaction fees and expenses, and the offering of the
notes on August 8, 2000 and the application of the proceeds, all as described in
this prospectus; and (iv) the term "1999" refers to the year ended December 31,
1999 on a pro forma basis giving effect to the Transactions and the acquisition
of Invatec as though they had occurred on January 1, 1999. Flowserve Finance
issued the euro notes. It is an indirect wholly owned subsidiary of Flowserve
and was formed for the purpose of issuing and selling securities and making the
proceeds of those issuances available to us.
THE EXCHANGE OFFER
On August 8, 2000:
- we completed a private offering of $290,000,000 12 1/4% Senior
Subordinated Notes due August 15, 2010, which are referred to in this
prospectus as the outstanding dollar notes
and
- our wholly owned subsidiary, Flowserve Finance B.V., completed a private
offering of E100,000,000 12 1/4% Senior Subordinated Notes due August 15,
2010, which are referred to in this prospectus as the outstanding euro
notes, and we refer to the outstanding dollar notes and the outstanding
euro notes collectively as the outstanding notes.
On the same day, Flowserve and Flowserve Finance each entered into a
separate registration rights agreement relating to the outstanding dollar notes
and the outstanding euro notes, respectively, with the initial purchasers in the
private offering of these securities in which Flowserve and Flowserve Finance
each agreed, among other things, to deliver to you this prospectus and to
complete this exchange offer within 180 days of the issuance of the outstanding
dollar notes and the outstanding euro notes. The outstanding dollar notes and
the outstanding euro notes can now be tendered for exchange. You should read the
discussion under the heading "Summary Description of the Notes" and "Description
of the Notes" for further information regarding the registered notes. We refer
to the registered notes to be issued in the exchange offer as the notes or the
exchange notes.
We believe that the notes issued in the exchange offer may be resold by you
under U.S. federal securities laws without compliance with the registration and
prospectus delivery provisions of the Securities Act of 1933, subject to certain
conditions. You should read the discussion under the headings "Summary of the
Terms of Exchange Offer" and "The Exchange Offer" for further information
regarding the exchange offer and resale of the notes.
1
<PAGE> 9
COMPANY
We are the largest manufacturer and aftermarket service provider of
comprehensive flow control systems in the world. We have been in the flow
control industry for over 125 years. We develop and manufacture
precision-engineered flow control equipment for critical service applications
where high reliability is required. The flow control system components we
produce include pumps, valves and mechanical seals. Our products and services
are used in several industries, including petroleum, chemical, power generation
and water treatment. We believe that our product portfolio is the most
comprehensive and our scope of operations is the most geographically diversified
in the industry. In 1999, we generated revenue of $2.1 billion.
We sell our products and services to more than 1,000 companies including
some of the world's leading engineering and construction firms, original
equipment manufacturers ("OEMs"), distributors and end users. Our sales mix by
industry in 1999 consisted of petroleum (39%), chemical (20%), power generation
(14%), general industrial (14%), water treatment (6%) and other industries (7%).
Some of our top customers include Asea Brown Boveri, Atlantic Richfield
("ARCO"), BASF, Bayer, Bechtel, BP Amoco, Dow Chemical, Duke Energy, DuPont,
Eastman Chemical, ExxonMobil, Royal Dutch/Shell, Saudi Aramco, Texaco,
TotalFinaElf, and the United States Navy. No single customer accounted for more
than 3% of our total revenues in 1999. Our revenues by geographic region in 1999
consisted of North America (55%), Europe and the Middle East (28%), Latin
America (9%) and Asia (8%). We have pursued a strategy of geographic diversity
to mitigate the impact of an economic downturn in any one part of the world on
our business.
We believe we have an installed base of approximately 1,100,000 pumps
worldwide, which we believe is the most extensive installed base of industrial
pumps in the industry. A large installed equipment base is critical to securing
future revenues as industry analysts suggest that approximately 86% of the total
life-cycle cost of a pump consists of aftermarket products and services, such as
replacement parts, mechanical seals and maintenance. When outsourced, a majority
of replacement part orders and aftermarket service business is typically awarded
to the original equipment manufacturer. Aftermarket parts and services have
provided us with a steady source of revenues at higher margins than original
equipment sales. In 1999, we generated approximately 49% of our revenues from
aftermarket products and services.
We believe we are the largest manufacturer of pumps used in the petroleum
and chemical industries, with approximately 59% of our 1999 sales from companies
operating in those industries. Due to the simultaneous decline in oil and
chemical prices in 1998 and 1999, many of our key customers reduced their
capital spending, which resulted in declines in our revenues, net income and
EBITDA in those years. Additionally, the economic downturn in Asia in late 1997
and 1998 had a negative impact on our overall business in that region. With the
strong recent recovery in oil prices to a year to date high of over $35.00 per
barrel in 2000 from a low of $10.73 in December of 1998, higher expected
chemical prices and renewed signs of economic growth in Asia, we are seeing
renewed capital spending by our customers that should result in increasing
bookings and revenues for us. In general, market improvements reflected in our
bookings precede revenue growth by six to twelve months. We have already begun
to see tangible signs of recovery in our petroleum and chemical end-markets as
bidding activity and bookings are improving.
On August 8, 2000, Flowserve acquired all of the equity interests of IDP
from Ingersoll-Rand Company for a consideration of $775.0 million. IDP is a
leading manufacturer of pumps with a diverse mix of pump products and customers
with operations in 30 countries. As a result of the IDP acquisition, we expect
to:
- be the second largest pump manufacturer in the world (improving from
fifth and seventh largest for IDP and Flowserve, respectively);
- be the largest pump manufacturer for the petroleum, chemical and power
generation industries;
- offer a more comprehensive range of products and services at a time when
our customers are seeking to lower costs by reducing supplier
relationships;
2
<PAGE> 10
- expand our customer base in the water, general industrial, mining, paper,
power and U.S. Navy sectors;
- diversify our customer and geographic sales mix, reducing the impact of
commodity price cycles and regional economic downturns; and
- triple Flowserve's installed equipment base to an estimated 1,100,000
pumps worldwide, creating a significant opportunity to capture additional
recurring aftermarket replacement parts and service revenue.
Our acquisition of IDP also provides significant cost saving opportunities,
which we estimate to be $75.0 million by mid-2002. We will incur significant
cash integration costs to achieve these cost savings. We expect these cost
savings to result from the execution of a number of actions including:
- eliminating redundant administrative overhead;
- reducing overlapping sales personnel; and
- eliminating fixed costs by shifting manufacturing capacity to more
economic facilities.
In addition to the tangible and identified cost savings, we also expect to
benefit from significant operating synergies from several initiatives,
including:
- capitalizing on the opportunities to cross-sell valves, mechanical seals
and aftermarket services to IDP customers that are currently being
serviced by our competitors;
- realizing volume procurement savings; and
- lowering unit variable costs due to larger scale and better capacity
utilization.
We believe we are well positioned to gain market share and increase
revenues, net income and EBITDA by (i) leveraging our leading market position;
(ii) cross-selling our comprehensive product offerings; (iii) capitalizing on
our customers' trend to outsource service and repair; (iv) realizing significant
cost savings and operating synergies from the IDP acquisition; and (v)
benefiting from the recent improvement of our end markets.
INDUSTRY
The flow control industry generates $54-57 billion per year in worldwide
sales and includes pumps, valves, mechanical seals and aftermarket services.
According to industry sources, engineered pumps account for approximately $23
billion, valves approximately $21 billion, seals approximately $2-3 billion and
aftermarket services approximately $8-10 billion of annual worldwide sales. The
pumps, seals, valves and aftermarket services segments are projected to grow
annually at 3-4%, 3-4%, 3-4% and 7-8%, respectively, over the next several
years. The engineered pump segment in which we operate excludes non-industrial
applications, such as residential, which represents a market of approximately
equivalent size to the industrial segment.
Quality and reliability of equipment are critical in the industry as the
failure of a pump, valve or seal may halt the flow process. Of the three product
types, at the time of the original equipment purchase, pumps are generally the
most expensive followed by valves then seals. During the replacement cycle,
seals may have to be replaced every few hours in highly corrosive applications,
while pumps can run for months or years before needing replacement. Products and
services in the flow control industry are sold to engineering and construction
firms, OEMs, distributors and end users throughout the world.
Despite the consolidation trend over the past ten years, the industry
remains highly fragmented. Competition for original equipment sales among the
industry leaders is primarily against a select group of large companies
operating on a global scale. Competition for original equipment sales is
generally based on price, expertise, delivery times, breadth of product
offerings, contractual terms, previous installation history
3
<PAGE> 11
and reputation for quality. In the pump segment, there are more than 500
companies, with the top ten pump companies accounting for less than 40% of total
1999 estimated worldwide annual pump sales. In the valve segment, we believe
that the top ten domestic manufacturers generate less than 25% of domestic
sales. The aftermarket service sector is extremely fragmented as many end users
either use in-house resources or buy service from local operators, which are
often very small.
COMPETITIVE STRENGTHS
WORLDWIDE MARKET LEADER. We are the largest provider of comprehensive flow
control systems in the world, offering an extensive range of pumps, valves,
mechanical seals and aftermarket services. We are the largest pump manufacturer
serving the petroleum, chemical and power generation industries and the second
largest overall pump manufacturer in the world. We believe we are also the
largest independent aftermarket product and service provider for the flow
control industry. We have one of the most extensive global manufacturing and
service networks in the industry, with 49 manufacturing facilities and more than
150 service and repair centers in 30 countries (after giving effect to planned
facilities rationalization within the first twelve months after closing of the
IDP acquisition). As the larger end users of flow control products continue to
consolidate and operate globally, they seek providers that can offer a broad
range of products and services on a global basis. Our widely recognized global
brands, extensive breadth of product and service offerings and worldwide
presence position us to serve our customers' flow control needs and capture
additional business.
AFTERMARKET SERVICES PROVIDE STABLE, CONSISTENT REVENUES. Industry analysts
estimate that approximately 86% of the lifetime cost of a pump consists of
aftermarket replacement parts, services and maintenance. We have a strong and
growing aftermarket business, representing approximately 49% of our 1999
revenues. The consistent requirement for maintenance and installation of
replacement parts provides us with a steady source of revenues from our
aftermarket business at significantly higher margins than our original equipment
business. As a result of Flowserve's historic focus on aftermarket services, we
believe Flowserve has achieved approximately 50% higher aftermarket revenue per
installed pump than IDP. The opportunity to leverage IDP's installed pump base
to increase our aftermarket business provides us with significant potential for
growth.
LARGE INSTALLED EQUIPMENT BASE. We believe our global installed base of
approximately 1,100,000 pumps is the largest in the industry and provides us
with a unique platform to grow our aftermarket service business. When
outsourced, a significant amount of replacement parts orders and aftermarket
services business is awarded to the original equipment manufacturer, assuming
they provide those parts and services. We are well positioned to capitalize on
IDP's large installed equipment base which is significantly larger than
Flowserve's installed base, by utilizing our extensive service network of more
than 150 service and repair centers to cross-sell aftermarket products and
services to IDP's pump customers.
PROVEN ABILITY TO INTEGRATE ACQUISITIONS. Flowserve's management team has
extensive experience in acquiring and integrating companies, having completed 23
acquisitions since 1990. We completed the integration of the merger of Durco
International Inc. with BW/IP, Inc., which created Flowserve in 1997,
approximately one year ahead of schedule and generated annual cost savings in
excess of $37 million, which was approximately 10% greater than originally
announced. We employ a systematic and decisive approach to integrating acquired
companies by implementing best practices across our operations, rationalizing
manufacturing capacity, eliminating overlapping sales and service coverage,
reducing overhead costs, leveraging supply chain opportunities and developing
additional cross-selling opportunities. Most of our key operating managers who
led the integration of our predecessor companies, BW/IP and Durco, will be
responsible for the integration of Flowserve and IDP. In order to integrate IDP,
we have a team of specialists from Flowserve, IDP and third party consultants
exclusively dedicated to the integration.
GLOBAL MANUFACTURING AND SERVICE CAPABILITIES. After giving effect to
planned facilities rationalization, we will have one of the most extensive
global manufacturing and service networks in the industry, with 49 manufacturing
facilities and more than 150 service and repair centers located in 30 countries.
Our global operations help us serve our customers' manufacturing and aftermarket
service needs on a 24-hour basis. Because of the critical nature of the
applications in which our products are used, immediate
4
<PAGE> 12
response times are important to capturing and retaining our customer's business.
Original equipment sales benefit from our global presence, as our customers
often require real-time design and engineering assistance for new projects.
DIVERSE CUSTOMER MIX. We sell our products and services to more than 1,000
companies globally including the world's leading engineering and construction
firms, OEMs, distributors and end users. In 1999, no one customer accounted for
more than 3% of our revenues, and our top ten customers accounted for
approximately 11% of our revenues. Our customers operate in many industries
throughout the world, including petroleum, chemical, power generation and water
treatment. Our acquisition of IDP significantly increases our market share in
the power and water industries, both of which are expected to continue to grow
faster than the overall flow control industry.
COMPREHENSIVE PRODUCT OFFERINGS WITH LEADING BRANDS. We believe we offer
the most comprehensive array of products and services in the industry, providing
a "one-stop shop" for our customers, who increasingly require comprehensive flow
control solutions including pumps, valves, seals and services. Many of our
brands have an extensive history within our industry and are well-known for
their superior quality and high performance, including Flowserve(R), Byron
Jackson(R), Durco(R), Atomac(TM), BW Seals(R), Durametallic(R), United
Centrifugal(R), Stork(R), Worthington(R), Jeumont Schneider(R), Pleuger(R),
Pacific Wietz(TM) and Scienco(R). Our brand identity has created customer
loyalty and helps us capture additional business, as well as maintain existing
business, particularly as our customers look to procure from fewer
manufacturers.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has an average of
over 25 years of experience in industrial manufacturing. In addition, this team
has substantial experience in the integration of acquired businesses, supply
chain management and lean manufacturing techniques. Our operating division
managers are among the most experienced in the flow control industry, with an
average of more than 20 years of experience.
BUSINESS STRATEGY
EFFICIENTLY INTEGRATE IDP'S OPERATIONS AND CAPITALIZE ON OPPORTUNITIES FOR
OPERATING SYNERGIES. We have begun to quickly integrate IDP's business in order
to capitalize on the significant operating and financial benefits of the IDP
acquisition. We have established a dedicated integration team comprised of
representatives from Flowserve, IDP and third party consultants that has created
a detailed plan to capture cost savings and achieve operating synergies through
eliminating redundant administrative overhead, cutting overlapping sales
personnel, shifting production to lower cost facilities, and realizing volume
procurement savings and other opportunities.
BECOME THE LOW COST PRODUCER AND INCREASE OPERATIONAL EFFICIENCY. We
continue to lower costs, enhance product quality, reduce manufacturing
inefficiency and increase product throughput. We have several initiatives in
process to accomplish this, including:
- FOCUS ON SUPPLY CHAIN MANAGEMENT. Supply chain management focuses on
reducing procurement costs. We have implemented several initiatives,
including creating alliances, standardizing procedures, negotiating more
favorable contract terms and conditions and forming dedicated teams for
procurement of raw materials on a company-wide basis.
- INCREASE OPERATIONAL EFFICIENCY. In early 2000, Flowserve introduced a
"lean" manufacturing program that is focused on optimizing the
productivity and profitability of Flowserve's plants around the world.
For example, in Flowserve's Kalamazoo, Michigan facility, Flowserve
expects to experience in 2001 an approximate 25% increase in
productivity, 25% reduction in work in process, 25% reduction in lead
times and a significant increase in usable shop floor space.
- IMPLEMENT 6 SIGMA. The 6 Sigma Value Analysis process has been launched
within IDP to accelerate improvement of processes, products and services.
This analytical process is focused on reducing product defects, improving
product quality and streamlining manufacturing and transactional
processes. We believe this process resulted in total cost savings for IDP
of approximately $10 million in 1999.
5
<PAGE> 13
GROW AFTERMARKET SERVICE BUSINESS. Growing our aftermarket business is an
essential aspect of our strategy which complements our manufacturing
capabilities. Historically, many of our customers have utilized their in-house
service capabilities and outsourced only the most technical portion of their
service needs. Customers are increasingly utilizing third party aftermarket
service providers like us to reduce their fixed costs and improve profitability.
Our leading installed equipment base creates a powerful platform from which we
can expand this business. Our aftermarket products and service business offers
steady revenues with margins significantly higher than our original equipment
sales and enables us to remain close to our customers and quickly address their
requirements. We have significantly enhanced our aftermarket business with the
acquisition of Invatec. Invatec focuses on valve service and repair, which
complements Flowserve's pump and seal repair expertise, allowing us to expand
the range of services offered to our customers.
PURSUE CROSS-SELLING OPPORTUNITIES. Historically, IDP has focused on
manufacturing pumps for the original equipment market. In contrast, Flowserve's
strategy focuses on meeting the full range of end user needs from original
equipment (pumps, valves and seals) to replacement parts and services. We plan
to capitalize on the cross-selling opportunities created by Flowserve's
comprehensive aftermarket business platform and IDP's extensive installed
equipment base. In addition, significant opportunities exist to cross-sell
valves and mechanical seals to IDP's pump customers, which are being primarily
serviced by our competitors. Further, Invatec's expanded service center network
provides an opportunity for us to extend pump repair coverage to Flowserve's and
IDP's customer base.
6
<PAGE> 14
THE TRANSACTIONS
We will not receive any cash proceeds from the issuance of the exchange
notes offered hereby. In consideration for issuing the notes contemplated by
this prospectus, we will receive in exchange the outstanding notes in like
principal amount. The outstanding notes surrendered in exchange for the exchange
notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the exchange notes will not result in any change in our indebtedness.
On August 8, 2000, Flowserve acquired IDP from Ingersoll-Rand Company for
consideration of $775.0 million. In order to finance the IDP acquisition,
refinance existing indebtedness of Flowserve and pay related transaction fees
and expenses, we:
- entered into and incurred initial borrowings of $750.0 million under new
senior credit facilities (the "Senior Credit Facilities") which provide
for borrowings of up to $1.05 billion; and
- issued the outstanding dollar notes and, through our subsidiary Flowserve
Finance, the outstanding euro notes.
The following table sets forth the sources and uses of funds for the IDP
acquisition as of June 30, 2000 on a pro forma basis, as though the Transactions
had occurred at that date:
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C> <C>
SOURCES:
Cash and Cash Equivalents............. $ 22.0
Term Loan Facilities(1)............... 750.0
Senior Subordinated Dollar Notes(3)... 285.9
Senior Subordinated Euro Notes(3)(4)... 89.1
--------
Total Sources............... $1,147.0
========
USES:
Purchase of IDP....................... $ 775.0
Refinance Existing Flowserve
Debt(2)............................... 315.4
Transaction Fees and Expenses......... 56.6
--------
Total Uses.................. $1,147.0
========
</TABLE>
-------------------------
(1) Includes two facilities, Term Loan A and Term Loan B, which we collectively
refer to as the Term Loan Facilities. The Term Loan A facility of $275.0
million will mature in six years and the Term Loan B facility of $475.0
million will mature in eight years.
(2) Includes debt incurred in connection with the Invatec acquisition, which
closed on January 13, 2000.
(3) Reflects issuance of the senior subordinated dollar notes of $290.0 million
and the senior subordinated euro notes of E100.0 million at 98.586% of face
value.
(4) Utilizing a conversion rate of euro into U.S. dollars of E0.9033 to $1.00,
which was the rate in effect on August 3, 2000.
7
<PAGE> 15
CORPORATE STRUCTURE FOR
FLOWSERVE CORPORATION/FLOWSERVE FINANCE B.V. OFFERINGS
The following chart sets forth our corporate structure.
CORPORATE STRUCTURE FOR FLOWSERVE CORPORATION/FLOWSERVE BV OFFERING
<TABLE>
<S> <C> <C> <C> <C>
$290.0 million Senior Subordinated Notes
$1.05 billion Senior Credit Facilities
FLOWSERVE CORPORATION
(a)
E100.0 million
Senior Subordinated Notes
Flowserve Innovative Valve Ingersoll-Dresser
Domestic Technologies, Inc. Pump Company
Subsidiaries ("Invatec") ("IDP") Flowserve International, Inc.
(b)(c)(d) (b)(c)(d) (b)(c)(d) (b)(c)(d)
Invatec IDP
Domestic Domestic FLOWSERVE
Subsidiaries Subsidiaries Foreign(e) FINANCE B.V.
(b)(c)(d) (b)(c)(d) Subsidiaries (b)(c)
</TABLE>
---------------
(a) Guarantor (on a senior subordinated basis) of outstanding euro notes
issued by Flowserve Finance B.V.
(b) Guarantor (on a senior basis) of Senior Credit Facilities.
(c) Guarantor (on a senior subordinated basis) of dollar notes issued by
Flowserve Corporation.
(d) Guarantor (on a senior subordinated basis) of euro notes issued by
Flowserve Finance B.V.
(e) Intercompany loans to Flowserve's foreign subsidiaries out of proceeds of
the offering of the euro notes issued by Flowserve Finance B.V., including
loans made initially to Flowserve's subsidiaries in Germany and Italy to
purchase the outstanding shares of IDP subsidiaries in Germany and Italy
in connection with the closing of the IDP acquisition.
8
<PAGE> 16
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $290,000,000 aggregate
principal amount of the outstanding 12 1/4% Senior Subordinated Notes due August
15, 2010 and up to E100,000,000 aggregate principal amount of the outstanding
12 1/4% Senior Subordinated Notes due August 15, 2010 for an equal aggregate
principal amount of exchange notes. The exchange notes will be our obligations
(and the obligation of Flowserve Finance in the case of the euro exchange notes)
and are entitled to the benefits of the indentures relating to the outstanding
notes. The form and terms of the exchange notes are identical in all material
respects to the form and terms of the outstanding notes, except that the
exchange notes have been registered under the Securities Act of 1933, and
therefore contain no restrictive legends. The exchange notes are not entitled to
the benefits of the registration rights granted under the registration rights
agreements, executed as a part of the offering of the outstanding notes, each
dated as of August 8, 2000, among, in the case of the outstanding dollar notes,
Flowserve Corporation, the guarantors of the outstanding dollar notes and the
initial purchasers of the outstanding dollar notes and, in the case of the
outstanding euro notes, Flowserve Finance B.V., the guarantors of the
outstanding euro notes and the initial purchasers of the outstanding euro notes.
REGISTRATION RIGHTS........ In August 2000, Flowserve Corporation and Flowserve
Finance and the initial purchasers agreed that you,
as a holder of the outstanding notes, would be
entitled to exchange your notes for registered
notes with substantially identical terms. This
exchange offer is intended to satisfy these rights.
After the exchange offer is complete, you will no
longer be entitled to any exchange or registration
rights with respect to your outstanding notes.
THE EXCHANGE OFFER......... Flowserve Corporation is offering to exchange:
- $1,000 principal amount of 12 1/4% Senior
Subordinated Notes due 2010 which have been
registered under the Securities Act of 1933 for
each $1,000 principal amount of its outstanding
12 1/4% Senior Subordinated Notes due 2010, which
were issued on August 8, 2000 in a private
offering; and
Flowserve Finance B. V. is offering to exchange:
- E1,000 principal amount of 12 1/4% Senior
Subordinated Notes due 2010 which have been
registered under the Securities Act of 1933 for
each E1,000 principal amount of its outstanding
12 1/4% Senior Subordinated Notes due 2010 which
were issued on August 8, 2000 in a private
offering.
In order to be exchanged, an outstanding note must
be properly tendered and accepted. All outstanding
notes that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are $290 million in
aggregate principal amount of outstanding 12 1/4%
Senior Subordinated Notes due 2010 and E100 million
in aggregate principal amount of outstanding
12 1/4% Senior Subordinated Notes due 2010.
We will issue the exchange notes to you on or
promptly after the expiration of the Exchange
Offer.
RESALE OF THE NOTES ISSUED
IN THE EXCHANGE OFFER.. Based on an interpretation by the staff of the
Securities and Exchange Commission set forth in
no-action letters issued to third parties,
including "Exxon Capital Holdings Corporation"
(available May 13,
9
<PAGE> 17
1988), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics,
Inc." (available June 5, 1991) and "Warnaco, Inc."
(available October 11, 1991), we believe that the
notes issued in the exchange offer may be offered
for resale, resold and otherwise transferred by you
under U.S. federal securities laws without
compliance with the registration and prospectus
delivery provisions of the Securities Act of 1933
provided that:
- you are acquiring the notes issued in the
exchange offer in the ordinary course of
business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the notes issued to you in
the exchange offer;
- you are not a broker-dealer who purchased the
outstanding notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933; and
- you are not an "affiliate" of ours.
If our belief is inaccurate and you transfer any
note issued to you in the exchange offer without
delivering a prospectus meeting the requirements of
the Securities Act of 1933 or without an exemption
from registration of your notes from such
requirements, you may incur liability under the
Securities Act of 1933. We do not assume or
indemnify you against such liability, but we do not
believe that any such liability should exist.
Each broker-dealer that is issued notes in the
exchange offer for its own account in exchange for
notes which were acquired by such broker-dealer as
a result of market-making or other trading
activities must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act of 1933, in connection with any
resale of the notes issued in the exchange offer.
The letter of transmittal states that by so
acknowledging and by delivering a prospectus, such
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act of 1933. A broker-dealer may use
this prospectus for an offer to resell or otherwise
retransfer of the notes issued to it in the
exchange offer. We have agreed that, for a period
of 180 days after the date of this prospectus, we
will make this prospectus and any amendment or
supplement to this prospectus available to any such
broker-dealer for use in connection with any such
resales. We do not believe that any registered
holder of the outstanding notes is an affiliate (as
such term is defined in Rule 405 of Securities Act
of 1933) of ours.
The exchange offer is not being made to, nor will
we or Flowserve Finance accept surrenders for
exchange from, holders of outstanding notes in any
jurisdiction in which this exchange offer or the
acceptance thereof would not be in compliance with
the securities or blue sky laws of such
jurisdiction.
EXPIRATION OF EXCHANGE
OFFER................. The exchange offer will expire at 12:00 p.m., New
York City time (5:00 p.m., London time), for the
outstanding notes, on , 2000, unless we decide
to extend the expiration date.
10
<PAGE> 18
ACCRUED INTEREST ON THE
NOTES ISSUED IN THE
EXCHANGE OFFER AND THE
OUTSTANDING NOTES........ The notes issued in the exchange offer will bear
interest from August 8, 2000. Holders of
outstanding notes whose outstanding notes are
accepted for exchange will be deemed to have waived
the right to receive any payment in respect of
interest on such outstanding notes accrued from
August 8, 2000 to the date of the issuance of the
exchange notes. Consequently, holders who exchange
their outstanding notes for exchange notes will
receive the same interest payment on February 15,
2001 (the first interest payment date with respect
to the outstanding notes and the notes issued in
the exchange offer) that they would have received
had they not accepted the exchange offer.
TERMINATION OF THE EXCHANGE
OFFER.................... We may terminate the exchange offer if we determine
that our ability to proceed with the exchange offer
could be materially impaired due to any legal or
governmental action, new law, statute, rule or
regulation or any interpretation of the staff of
the Securities and Exchange Commission of any
existing law, statute, rule or regulation. We do
not expect any of the foregoing conditions to
occur, although there can be no assurance that such
conditions will not occur. Holders of outstanding
notes will have certain rights against our company
under the registration rights agreements executed
as part of the offering of the outstanding notes
should we fail to consummate the exchange offer.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES........ If you are a holder of an outstanding dollar note
and you wish to tender your note for exchange
pursuant to the exchange offer, you must transmit
to The Bank of New York, at its New York office as
exchange agent for the dollar notes, on or prior to
the expiration date a letter of transmittal in
accordance with the instructions contained in the
letter of transmittal accompanying this prospectus.
Then you must mail, fax or deliver the completed
letter of transmittal, together with the
outstanding dollar notes you wish to exchange and
any other required documentation, to The Bank of
New York, which is acting as exchange agent. Its
address appears on the letter of transmittal.
However, if you hold outstanding dollar notes
through The Depositary Trust Company ("DTC") and
wish to participate in the exchange offer, you must
comply with DTC's Automated Tender Offer Program
procedures, by which you will agree to be bound by
the letter of transmittal.
If you are a holder of an outstanding euro note and
you wish to tender your note for exchange pursuant
to the exchange offer, you must transmit to The
Bank of New York, at its London office as exchange
agent for the euro notes, on or prior to the
expiration date:
- a computer-generated message transmitted in
accordance with Euroclear's or Clearstream,
Luxembourg's, as the case may be, standard
operating procedures for electronic tenders and
received by Euroclear or Clearstream, Luxembourg
and forming a part of a confirmation of
book-entry transfer in which you acknowledge and
agree to be bound by the terms of the letter of
transmittal which accompanies this prospectus;
and
11
<PAGE> 19
- a timely confirmation of book-entry transfer of
your outstanding euro notes to either Euroclear
or Clearstream, Luxembourg, as the case may be,
pursuant to the procedure for book-entry
transfers described in this prospectus under the
heading "The Exchange Offer -- Procedure for
Tendering," must be received by the exchange
agent in London on or prior to the expiration
date.
By agreeing to the terms of the letter of
transmittal which accompanies this prospectus, each
holder will represent to us that, among other
things, (i) the notes to be issued in the exchange
offer are being obtained in the ordinary course of
business of the person receiving such notes whether
or not such person is the holder, (ii) neither the
holder nor any such other person has an arrangement
or understanding with any person to participate in
the distribution or such notes and (iii) neither
the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the
Securities Act of 1933, of ours.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ If you are a beneficial owner of outstanding notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such notes in the
exchange offer, you should contact such person
whose name your notes are registered promptly and
instruct such person to tender on your behalf. If
you, as such beneficial holder, wish to tender on
your own behalf you must, prior to completing and
executing the letter of transmittal and delivering
your outstanding notes, either make appropriate
arrangements to register ownership of the
outstanding notes in your name or obtain a properly
completed bond power from the registered holder.
The transfer of record ownership may take
considerable time.
GUARANTEED DELIVERY
PROCEDURES FOR OUTSTANDING
NOTES.................... If you wish to tender your outstanding dollar notes
and time will not permit your required documents to
reach the exchange agent by the expiration date, or
the procedure for book-entry transfer cannot be
completed on time or certificates for registered
notes cannot be delivered on time, you may tender
your outstanding dollar notes pursuant to the
guaranteed delivery procedures described in this
prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedure for
Outstanding Dollar Notes." The guaranteed delivery
procedures are not available for euro notes.
WITHDRAWAL RIGHTS.......... You may withdraw the tender of your outstanding
notes at any time prior to 12:00 p.m., New York
City time (5:00 p.m. London time), on ,
2000, the business day prior to the expiration
date, unless your outstanding notes were previously
accepted for exchange.
ACCEPTANCE OF OUTSTANDING
NOTES AND DELIVERY OF NOTES
TO BE ISSUED IN THE
EXCHANGE OFFER........... Subject to the conditions summarized above in
"Termination of the Exchange Offer" and described
more fully under the "The Exchange
Offer -- Termination," we will accept for exchange
any and all outstanding notes which are properly
tendered in the exchange offer prior to 12:00 p.m.,
New York City time (5:00 p.m. London time), on
12
<PAGE> 20
the expiration date. The notes issued pursuant to
the exchange offer will be delivered promptly
following the expiration date.
CERTAIN U.S. FEDERAL INCOME
TAX CONSEQUENCES......... The exchange of the notes will generally not be a
taxable exchange for United States federal income
tax purposes.
USE OF PROCEEDS............ We will not receive any proceeds from the issuance
of notes pursuant to the exchange offer. We will
pay all expenses incident to the exchange offer.
EXCHANGE AGENT FOR
OUTSTANDING NOTES........ The Bank of New York is serving as exchange agent
in connection with the outstanding notes. The
exchange agent with respect to matters concerning
the outstanding dollar notes can be reached at 101
Barclay Street, New York, N.Y. 10286. The exchange
agent with respect to matters concerning the
outstanding euro notes can be reached at 30 Common
Street, London EC4M 6XH. For more information with
respect to the exchange of outstanding dollar
notes, the telephone number of the exchange agent
in New York is (212) 815-6331 and the facsimile
number is (212) 815-6339. For more information with
respect to the exchange of outstanding euro notes,
the telephone number is 011 44 207 964-7284 or 011
44 207 964-7235 and the facsimile number is 011 44
207 964-6369 or 011 44 207 964-7294.
13
<PAGE> 21
DESCRIPTION OF THE NOTES TO BE ISSUED IN THE EXCHANGE OFFER
ISSUER
Dollar Notes............. Flowserve Corporation
Euro Notes............... Flowserve Finance B.V., an indirect wholly owned
subsidiary of Flowserve
SECURITIES OFFERED
Dollar Notes............. $290,000,000 aggregate principal amount of 12 1/4%
Senior Subordinated Notes Due 2010, which we refer
to as dollar notes, of Flowserve.
Euro Notes............... E100,000,000 aggregate principal amount of 12 1/4%
Senior Subordinated Notes Due 2010, which we refer
to as euro notes, of Flowserve Finance. We refer to
the euro notes and the dollar notes, collectively,
as the notes or the exchange notes.
MATURITY DATE
Dollar Notes............. August 15, 2010
Euro Notes............... August 15, 2010
INTEREST PAYMENTS
Dollar Notes............. 12 1/4% per year, payable February 15, and August
15 of each year, commencing February 15, 2001.
Euro Notes............... 12 1/4% per year, payable February 15, and August
15 of each year, commencing February 15, 2001.
OPTIONAL REDEMPTION........ We (in the case of the dollar notes) and Flowserve
Finance (in the case of the euro notes) cannot
redeem the notes issued by each of them prior to
August 15, 2005 except as discussed below. Until
August 15, 2003, we (in the case of the dollar
notes) and Flowserve Finance (in the case of the
euro notes) can choose to redeem the applicable
notes in an amount not to exceed 35.0% of the sum
of the original principal amount of the applicable
notes with money we receive from certain equity
offerings, as long as:
- we (in the case of the dollar notes) and
Flowserve Finance (in the case of the euro
notes) pay the holders of the applicable
notes a redemption price of 112.25% (in the
case of the dollar notes) and 112.25% (in
the case of the euro notes) of the principal
amount of the applicable notes, plus accrued
but unpaid interest to the date of
redemption; and
- at least 65.0% of the original aggregate
principal amount of the respective dollar
notes and the euro notes remains outstanding
after each such redemption.
On or after August 15, 2005, we (in the case of the
dollar notes) and Flowserve Finance (in the case of
the euro notes) can redeem some or all of the notes
issued by each of them at the redemption prices
listed in the "Description of the Notes -- Optional
Redemption" section of this prospectus, plus
accrued but unpaid interest to the date of
redemption.
14
<PAGE> 22
PAYMENTS OF ADDITIONAL
AMOUNTS.................. All payments of principal and interest with respect
to the euro notes will be made free and clear of,
and without withholding or deduction for and on
account of, any present or future taxes, duties,
levies, imposts, assessments or other governmental
charges of whatever nature imposed or levied by or
on behalf of The Netherlands or any successor
jurisdiction or any political subdivision or taxing
authority thereof or therein having power to tax,
unless such withholding or deduction is required by
law or by regulation or governmental policy of
general application. In the event that any such
withholding or deduction is so required, subject to
certain exceptions, Flowserve Finance will pay such
additional amounts as will result in receipt by
holders of the euro notes of such amounts as would
have been received by them had no such withholding
or deduction been required. See "Description of the
Notes -- Withholding Taxes".
REDEMPTION FOR TAX
REASONS................. Upon the occurrence of certain changes in or
amendments to The Netherlands tax law requiring the
payment of additional amounts, Flowserve Finance
may redeem the euro notes at 100% of the principal
amount thereof plus accrued and unpaid interest, if
any, to the date fixed for redemption. See
"Description of the Notes -- Withholding Taxes".
EXCESS CASH FLOW
REPURCHASE OFFER......... If we have excess cash flow for any fiscal year
(commencing with the fiscal year ending December
31, 2001), we will be required, subject to certain
exceptions and limitations, to make an offer to
purchase, on a pro rata basis, dollar notes and
euro notes with 50% of such excess cash flow
(reduced by the amount of any similar payments we
elect or are required to make to our senior lenders
or other holders of senior indebtedness) at a price
equal to 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of
purchase. The term "Excess Cash Flow" is defined in
the "Description of the Notes -- Certain
Definitions" section of this prospectus.
CHANGE OF CONTROL OFFER.... If we experience a change of control, subject to
certain conditions, we (in the case of the dollar
notes) and Flowserve Finance (in the case of the
euro notes) must give holders of the respective
notes an opportunity to sell to them their notes at
a purchase price of 101% of the principal amount of
the notes, plus accrued and unpaid interest. The
term "Change of Control" is defined in the
"Description of the Notes -- Change of Control"
section of this prospectus.
RANKING.................... The dollar notes will be senior subordinated
unsecured obligations of ours and the euro notes
will be senior subordinated unsecured obligations
of Flowserve Finance. They will rank ahead in right
of payment of any of our (in the case of the dollar
notes) and Flowserve Finance's (in the case of the
euro notes) future subordinated obligations, equal
in right of payment with any of our (in the case of
the dollar notes) and Flowserve Finance's (in the
case of the euro notes) existing and future senior
subordinated indebtedness and behind in right of
payment to any of our (in the case of the dollar
notes) and Flowserve Finance's (in the case of the
euro notes) existing and future senior
indebtedness. As of June 30, 2000, on a pro forma
basis after giving effect to the Transactions, we
would have had approximately
15
<PAGE> 23
$750.0 million in the aggregate of senior
indebtedness outstanding (which would have
represented indebtedness under our Senior Credit
Facilities), and Flowserve Finance would have had
no senior indebtedness outstanding except its
senior guaranty under our Senior Credit Facilities.
We would have had additional availability of
approximately $270.0 million, net of issued letters
of credit, for revolving credit facility borrowings
under our Senior Credit Facilities, all of which
would be senior indebtedness, if borrowed. We and
Flowserve Finance may incur additional senior
indebtedness in the future, subject to
restrictions. The terms "Senior Indebtedness",
"Senior Subordinated Indebtedness" and
"Subordinated Obligations" are defined in the
"Description of the Notes -- Certain Definitions"
section in this prospectus.
GUARANTIES................. Upon consummation of the exchange offer, Flowserve
Finance, Flowserve International Limited
("Flowserve International") and our material
domestic subsidiaries will guarantee the dollar
notes, and we, Flowserve International and our
material domestic subsidiaries will guarantee the
euro notes.
Each guarantor will provide a full and
unconditional guarantee of the payment of the
principal, premium and interest on the notes on a
senior subordinated unsecured basis.
The guaranty by each guarantor will be subordinated
to all existing and future senior indebtedness of
such guarantor. See "Description of the
Notes -- Guaranties".
A substantial portion of our business is conducted
through our foreign operating subsidiaries, none of
which will be guarantors of the notes other than
Flowserve International (in the case of the dollar
notes and the euro notes) and Flowserve Finance (in
the case of the dollar notes).
RESTRICTIVE COVENANTS...... The indentures governing the dollar notes and the
euro notes will each contain covenants that limit
our ability and the ability of certain of our
subsidiaries (including Flowserve Finance) to:
- incur or guarantee additional indebtedness;
- pay dividends and make distributions;
- make investments and other restricted payments;
- permit payment or dividend restrictions on our
subsidiaries;
- transfer or sell assets;
- engage in transactions with affiliates; and
- consolidate or merge.
The indenture governing the euro notes will also
restrict Flowserve Finance from engaging in
business activities other than those incident to
the issuance and payment of the euro notes, the
issuance of guaranties of the Senior Credit
Facilities and the dollar notes and the lending of
intercompany loans to other Flowserve subsidiaries,
and will require that Flowserve Finance remain a
wholly owned subsidiary of ours.
16
<PAGE> 24
All these restrictions and prohibitions are subject
to a number of important qualifications and
exceptions. See "Description of the
Notes -- Certain Covenants".
LISTING.................... We intend to list the euro exchange notes on the
Luxembourg Stock Exchange. We do not intend to list
the dollar exchange notes on any exchange.
CONSEQUENCES OF FAILURE TO
EXCHANGE................. Untendered outstanding notes will remain restricted
securities and will continue to be subject to the
following restrictions on transfer:
(i) outstanding notes may be resold only if
registered pursuant to the Securities Act of 1933,
if an exemption from registration is available, or
if neither such registration nor such exemption is
required by law,
(ii) outstanding notes shall bear a legend
restricting transfer in the absence of registration
or an exemption therefrom, and
(iii) a holder of outstanding notes who desires
to sell or otherwise dispose of all or any part of
its outstanding notes under an exemption from
registration under the Securities Act of 1933, if
requested by us, must deliver to us an opinion of
independent counsel experienced in Securities Act
matters, reasonably satisfactory in form and
substance to us, that such exemption is available.
See "Risk Factors -- Consequences of failure to
exchange your outstanding notes for exchange
notes."
For more complete information about the notes, see "Description of the
Notes".
RISK FACTORS
Investing in the notes involves substantial risks. See the "Risk Factors"
section of this prospectus for a description of certain of the risks you should
carefully consider before exchanging your outstanding notes.
ADDITIONAL INFORMATION
Flowserve is incorporated under the laws of the State of New York. Our
principal executive offices are located at 222 W. Las Colinas Blvd., Suite 1500,
Irving, Texas 75039. Our telephone number is (972) 443-6500. Flowserve Finance
is a company formed under the laws of The Netherlands. Its corporate seat is at
Amsterdam, The Netherlands and its principal executive offices are located at
Parallelweg 6, Etten-Leur 4870 AA, The Netherlands, and its telephone number is
011-31-76-502-8200.
17
<PAGE> 25
SUMMARY UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following summary unaudited pro forma condensed consolidated financial
information is based on the historical consolidated financial statements of
Flowserve Corporation, Innovative Valve Technologies, Inc. and Ingersoll-Dresser
Pump Company included elsewhere in this prospectus, adjusted to give effect to
the acquisition of Invatec and the Transactions.
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1999 and the six months ended June 30, 1999 and June 30,
2000 give effect to the acquisition of Invatec and the Transactions as if they
had occurred on January 1, 1999. The unaudited pro forma consolidated balance
sheet data give effect to the Transactions as if they had occurred as of June
30, 2000.
The following summary unaudited pro forma condensed consolidated financial
information should be read in conjunction with "Summary Historical Consolidated
Financial Information of Flowserve Corporation," "Summary Historical
Consolidated Financial Information of Ingersoll-Dresser Pump Company,"
"Capitalization," "Unaudited Pro Forma Consolidated Financial Statements,"
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the historical consolidated
financial statements of Flowserve Corporation, Innovative Valve Technologies,
Inc. and Ingersoll-Dresser Pump Company included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED -------------------------------
DECEMBER 31, 1999 JUNE 30, 1999 JUNE 30, 2000
----------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales......................................... $2,060.7 $1,031.2 $947.9
Cost of sales..................................... 1,433.8 715.3 662.4
Gross profit...................................... 626.8 315.8 285.5
Operating income.................................. 87.4 56.0 53.0
Loss before income taxes.......................... (35.4) (9.4) (7.4)
Benefit for income taxes.......................... (12.7) (3.4) (2.7)
Net loss.......................................... $ (22.7) $ (6.0) $ (4.7)
======== ======== ======
</TABLE>
SUMMARY OF HISTORICAL AND PRO FORMA EBITDA RESULTS
You should read the following summary historical calculation of EBITDA, as
defined, in conjunction with the consolidated financial statements and other
financial information of Flowserve included elsewhere in this prospectus. The
definition of EBITDA, used herein, may differ from the definition of EBITDA used
by other companies and should not be considered as an alternative to net income,
cash flows or any other items calculated in accordance with generally accepted
accounting principles or as an indicator of Flowserve's operating performance.
HISTORICAL EBITDA
(AS DEFINED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Flowserve Corporation(1).......................... $142.9 $157.7 $175.0 $167.7 $113.2
IDP(2)............................................ $ 46.1 $ 72.9 $ 84.3 $ 94.5 $ 87.1
</TABLE>
18
<PAGE> 26
PRO FORMA EBITDA(3)
<TABLE>
<CAPTION>
PRO IDP
HISTORICAL INVATEC FORMA HISTORICAL ACQUISITION/
------------------- ACQUISITION FLOWSERVE/ ---------- FINANCING PROFORMA
FLOWSERVE INVATEC ADJUSTMENTS INVATEC IDP ADJUSTMENTS CONSOLIDATED
--------- ------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended
December 31, 1999...... $113.2 $11.5 $1.6 $126.3 $87.1 $10.2 $223.6
For the six months ended
June 30, 1999.......... $ 65.8 $ 6.6 $ -- $ 72.4 $35.8 $ 4.5 $112.7
For the six months ended
June 30, 2000.......... $ 68.2 --(4) --(4) --(4) $22.1 $ 5.3 $ 95.6
</TABLE>
---------------
(1) EBITDA means net income before interest, taxes, depreciation, amortization,
other income, net (excluding commission and royalty income) and other
non-recurring items. For Flowserve, other non-recurring items consist of
merger transaction and restructuring expense, merger integration expense
and, for the year ended December 31, 1999 non-cash charges of $5.8 million
related to executive severance and facility closures and $5.1 million
related to inventory and fixed asset impairment. Such definition of EBITDA
may differ from the definition of EBITDA used by other companies and should
not be considered as an alternative to net income, cash flows or any other
items calculated in accordance with generally accepted accounting principles
or as an indicator of Flowserve's operating performance.
(2) EBITDA means net income before interest, taxes, depreciation, amortization,
other income, net (excluding commission and royalty income) and other
non-recurring items. For IDP, other non-recurring items consist of
restructuring expense and, in 1999, $3.1 million of non-recurring consultant
expense and $0.9 million of severance expense.
(3) Pro forma EBITDA means net income (loss) before interest, taxes,
depreciation, amortization, other income, net (excluding commission and
royalty income) and other non-recurring items, on a pro forma basis.
For Flowserve, other non-recurring items consist of merger transaction and
restructuring expense, merger integration expense and, for the year ended
December 31, 1999, non-cash charges of $5.8 million related to executive
severance and facility closures and $5.1 million related to inventory and
fixed asset impairment.
For IDP, other non-recurring items consist of restructuring expense and, for
the year ended December 31, 1999, $3.1 million of non-recurring consultant
expense and $0.9 million of severance expense.
For Invatec, other non-recurring items in 1999 included $39.1 million of
goodwill impairment, $3.8 million of loss on assets held for sale and $2.0
million of merger transaction costs.
(4) Flowserve historical includes the results of Invatec from January 13, 2000.
19
<PAGE> 27
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
OF FLOWSERVE CORPORATION
You should read the following summary historical consolidated financial
information in conjunction with the consolidated financial statements and the
other financial information of Flowserve included elsewhere in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATION:
NET SALES.................................. $ 983.9 $1,097.6 $1,152.2 $1,083.1 $1,061.3
COST OF SALES.............................. 591.6 668.7 703.3 667.7 697.9
-------- -------- -------- -------- --------
GROSS PROFIT............................... 392.3 428.9 448.9 415.4 363.4
Selling and administrative expense....... 264.4 283.4 285.9 265.6 275.9
Research, engineering and development
expense............................... 24.6 24.5 26.9 26.4 25.6
Merger transaction and restructuring
expense............................... 5.1 5.8 44.5 -- 15.9
Merger integration expense............... -- -- 7.0 38.3 14.2
-------- -------- -------- -------- --------
OPERATING INCOME........................... 98.2 115.2 84.6 85.1 31.8
Interest expense......................... 12.3 12.1 13.3 13.2 15.5
Other income, net........................ (2.5) (5.2) (18.5) (1.3) (2.0)
-------- -------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES............... 88.4 108.3 89.8 73.2 18.3
Provision for income taxes............... 34.4 37.2 38.2 25.5 6.1
Cumulative effect of change in accounting
principle............................. -- -- -- (1.2) --
-------- -------- -------- -------- --------
NET INCOME................................. $ 54.0 $ 71.1 $ 51.6 $ 48.9 $ 12.2
======== ======== ======== ======== ========
PER COMMON SHARE:
Net earnings (basic and diluted)......... $ 1.30 $ 1.72 $ 1.26 $ 1.23 $ 0.32
Dividends paid........................... .51 .57 .65 .56 .56
Book value(1)............................ 9.01 9.40 9.74 9.15 8.23
OTHER FINANCIAL DATA:
Bookings................................. $1,013.9 $1,141.6 $1,172.4 $1,082.5 $1,039.3
Depreciation and amortization............ 34.5 36.7 38.9 39.3 39.6
Capital expenditures, net................ 39.9 35.7 39.6 38.2 40.5
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital.......................... $ 251.8 $ 280.0 $ 284.2 $ 268.2 $ 258.1
Total assets............................. 801.1 829.8 880.0 870.2 838.2
Long-term debt........................... 125.9 144.0 128.9 186.3 198.0
Shareholders' equity..................... 375.2 388.6 395.3 344.8 308.3
</TABLE>
-------------------------
(1) Calculated as shareholders' equity as of the end of the period divided by
common shares issued, less amounts held in treasury.
20
<PAGE> 28
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
OF INGERSOLL-DRESSER PUMP COMPANY
You should read the following summary historical consolidated financial
information in conjunction with the consolidated financial statements and the
other financial information of IDP included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
----------- ------ ------ ------ ------
(UNAUDITED) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET SALES........................................ $793.1 $856.3 $865.1 $907.2 $838.4
COST OF SALES.................................... 607.5 641.2 637.2 661.1 610.7
------ ------ ------ ------ ------
GROSS PROFIT..................................... 185.6 215.1 227.9 246.1 227.7
Selling and administrative expense............. 162.5 163.2 163.1 168.9 162.1
Research, engineering and development
expense..................................... 1.6 2.8 3.6 3.8 3.0
Restructuring expense.......................... -- 4.5 19.5 3.6 0.2
------ ------ ------ ------ ------
OPERATING INCOME................................. 21.5 44.6 41.7 69.8 62.4
Interest expense............................... 1.7 1.5 1.3 1.6 1.4
Other income, net.............................. (13.0) (5.0) (4.1) (7.1) (7.5)
------ ------ ------ ------ ------
EARNINGS BEFORE INCOME TAXES..................... 32.8 48.1 44.5 75.3 68.5
Provision for income taxes..................... 6.8 11.8 13.2 16.6 19.0
------ ------ ------ ------ ------
NET INCOME....................................... $ 26.0 $ 36.3 $ 31.3 $ 58.7 $ 49.5
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
Bookings....................................... $827.8 $855.0 $919.7 $925.9 $840.0
Depreciation and amortization.................. 21.6 20.5 20.1 19.0 18.3
Capital expenditures, net...................... 17.3 17.0 16.3 20.3 18.2
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital................................ $261.4 $329.6 $215.9 $197.5 $174.9
Total assets................................... 630.2 690.0 725.9 800.6 796.4
Partners' equity............................... 362.8 401.0 416.4 479.1 492.5
</TABLE>
21
<PAGE> 29
RISK FACTORS
You should carefully consider the risks described below in addition to the
other information set forth in this prospectus before making an investment in
the notes.
RISKS RELATING TO THE NOTES
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH, MAKE
US VULNERABLE TO ADVERSE ECONOMIC AND INDUSTRY CONDITIONS AND PREVENT US FROM
FULFILLING OUR OBLIGATIONS UNDER THE NOTES
We have a significant amount of indebtedness. The following chart sets
forth important credit information, assuming we had completed the Transactions
as of the date specified below and applied the proceeds as described in the
unaudited pro forma consolidated financial information contained in this
prospectus:
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, 2000
---------------------------------
(UNAUDITED, DOLLARS IN MILLIONS)
<S> <C>
Total indebtedness.................... $1,125.0
Shareholders' equity.................. 314.4
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage relative to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
Furthermore, failing to comply with those covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on our business, financial condition and results of operations.
DESPITE THE CURRENTLY EXPECTED LEVELS OF INDEBTEDNESS, WE STILL MAY BE ABLE TO
INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE EFFECT OF ANY
OF THE CONSEQUENCES DESCRIBED ABOVE
We may be able to incur substantial additional indebtedness in the future,
subject to the terms of the indentures governing the notes and the Senior Credit
Facilities. Our Senior Credit Facilities permit us to borrow up to approximately
an additional $270.0 million, net of issued letters of credit, under the
revolving credit facility portion of the Senior Credit Facilities. All of these
borrowings will be secured by substantially all of the assets of our domestic
subsidiaries and pledges of the stock of our subsidiaries. The addition of new
debt to our current debt levels could intensify the leverage-related risks that
we now face. See "Description of Certain Indebtedness" and "Description of the
Notes."
22
<PAGE> 30
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES RANKS BEHIND OUR AND FLOWSERVE
FINANCE'S SENIOR INDEBTEDNESS AND POSSIBLY ALL OF OUR AND FLOWSERVE FINANCE'S
FUTURE BORROWINGS. FURTHER, THE GUARANTIES OF THE NOTES RANK BEHIND ALL OF THE
GUARANTORS' EXISTING SENIOR INDEBTEDNESS AND POSSIBLY ALL OF THEIR FUTURE
BORROWINGS
The notes will be unsecured senior subordinated obligations of Flowserve
(in the case of the dollar notes) and Flowserve Finance (in the case of the euro
notes). Therefore, your right to receive payments on these notes will rank
behind Flowserve's and Flowserve Finance's respective existing senior debt
(including borrowings and guarantees under the Senior Credit Facilities) and any
future senior debt Flowserve or Flowserve Finance may incur. Further, the
guaranties of the notes by the guarantors (including Flowserve with respect to
its guaranty of the euro notes) will rank behind those guarantors' existing
senior debt and all of their future senior debt. As a result, upon any
distribution to Flowserve's, Flowserve Finance's or the guarantors' creditors,
as applicable, in a bankruptcy, liquidation or reorganization or similar
proceeding or upon the distribution of Flowserve's, Flowserve Finance's or the
guarantors' property, the holders of the senior debt of these entities,
including the lenders under the Senior Credit Facilities, will be entitled to be
paid in full in cash before any payment may be made with respect to the notes or
the guaranties.
In addition, all payments on the notes and the guaranties will be blocked
in the event of a payment default on certain of our senior indebtedness
(including borrowings under the Senior Credit Facilities) and may be blocked for
specified periods in the event of certain non-payment defaults on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to the guarantors, holders of the notes will participate
with other creditors in the assets remaining after the guarantors have paid all
of their senior indebtedness. Similarly, in the event of a bankruptcy,
liquidation or reorganization or similar proceeding relating to Flowserve (in
the case of the dollar notes) or Flowserve Finance (in the case of the euro
notes), holders of the notes will participate with other creditors in the assets
remaining after Flowserve (in the case of the dollar notes) or Flowserve Finance
(in the case of the euro notes) have paid all of their senior indebtedness.
However, because the indentures governing the notes requires that amounts
otherwise payable to holders of the notes in a bankruptcy or similar proceeding
be paid to holders of senior indebtedness instead, holders of the notes may
receive ratably less than holders of trade payables in any such proceeding. In
any of these cases, Flowserve, Flowserve Finance and the guarantors may not have
sufficient funds to pay all of their respective creditors and holders of the
notes may receive ratably less than holders of senior indebtedness.
Assuming we had completed the Transactions and used the proceeds from these
offerings as described in this prospectus, in each case on June 30, 2000, the
notes and the guaranties would have been subordinated to approximately $750.0
million of senior indebtedness (consisting of debt (and guaranties thereof)
outstanding under the term loan facilities portion of the Senior Credit
Facilities) and approximately $270.0 million would have been available for
additional borrowings under our revolving credit facility, all of which would be
senior indebtedness, if borrowed. All of our subsidiaries that guarantee the
notes are also guarantors of our Senior Credit Facilities. Obligations under
such guaranties constitute senior indebtedness.
THE SENIOR CREDIT FACILITIES AND THE INDENTURES GOVERNING THE DOLLAR NOTES AND
THE EURO NOTES CONTAIN VARIOUS COVENANTS WHICH LIMIT MANAGEMENT'S DISCRETION IN
THE OPERATION OF OUR BUSINESS
The Senior Credit Facilities and the indentures governing the dollar notes
and the euro notes contain various provisions that limit management's discretion
in operating our (including our subsidiaries') businesses by restricting their
ability to:
- incur additional debt;
- pay dividends and make other distributions;
- prepay subordinated debt, make investments and other restricted payments;
- enter into sale and leaseback transactions;
- create liens;
23
<PAGE> 31
- sell assets; and
- enter into transactions with affiliates.
The indenture governing the euro notes also restricts Flowserve Finance
from engaging in business activities other than those incident to the issuance
and payment of the euro notes, the issuance of guaranties of the Senior Credit
Facilities and the dollar notes and the lending of intercompany loans to other
Flowserve subsidiaries, and requires that Flowserve Finance remain a wholly
owned subsidiary of Flowserve.
In addition, the Senior Credit Facilities require us to maintain certain
financial ratios, which will become more restrictive over time.
If we fail to comply with the restrictions contained in the Senior Credit
Facilities, the indentures governing the dollar notes and the euro notes or any
other subsequent financing agreements, a default may occur. This default may
allow some creditors, if their respective agreements so provide, to accelerate
payments owed on such debt as well as any other indebtedness as to which a
cross-acceleration or cross-default provision applies. In addition, our lenders
may be able to terminate any commitments they had made to supply us with further
funds. See "Description of Certain Indebtedness" and "Description of the Notes."
FLOWSERVE FINANCE IS A FINANCE VEHICLE WITH LIMITED ASSETS, NO OPERATIONS OF ITS
OWN AND A LIMITED SOURCE OF FUNDS FROM WHICH TO REPAY THE EURO NOTES
Flowserve Finance is a finance vehicle which has limited assets and no
operations of its own. Following the closing of the offering of the euro notes,
Flowserve Finance loaned all of the proceeds of that offering to our European
operating subsidiaries, which applied those proceeds, to purchase all of the
capital stock of IDP's operating subsidiaries in Germany and Italy. Flowserve
Finance's assets consist solely of the intercompany notes entered into by our
European operating subsidiaries evidencing their obligation to repay the loans
made to them by Flowserve Finance from time to time. Flowserve Finance's only
source of funds will be payments of interest and principal due to it by those
subsidiaries pursuant to such intercompany notes. The ability of Flowserve
Finance to make payments of principal and interest on the euro notes is
dependent on the ability of the European operating subsidiaries that are
obligors on the intercompany notes to make payments under those notes. In the
event of a default in payment by those European operating subsidiaries under the
intercompany notes, absent a loan or capital contribution from us or one of our
other subsidiaries, Flowserve Finance would be unable to make payments under the
euro notes.
CERTAIN SUBSIDIARIES ARE NOT INCLUDED AS SUBSIDIARY GUARANTORS
The guarantors of the notes (other than Flowserve and Flowserve
International in the case of the euro notes and Flowserve Finance and Flowserve
International in the case of the dollar notes) include only material domestic
subsidiaries of Flowserve. Additionally, immediately after the consummation of
the closing of the IDP acquisition, IDP and its material domestic subsidiaries
became subsidiary guarantors of the dollar notes and the euro notes. However,
the historical consolidated financial information (including the consolidated
financial statements of Flowserve, Invatec and IDP included elsewhere in this
prospectus) and the pro forma consolidated financial information included in
this prospectus are presented on a consolidated basis, including both domestic
and foreign subsidiaries of Flowserve, Invatec and IDP. The aggregate net sales,
EBITDA and total assets for the twelve months ended December 31, 1999 of
Flowserve's subsidiaries which are not subsidiary guarantors were $472.6
million, $63.4 million and $36.1 million, respectively.
Because a substantial portion of both Flowserve's operations and IDP's
operations is conducted by foreign subsidiaries, our cash flow and our ability
to service debt, including our and the subsidiary guarantors' ability to pay the
interest on and principal of the dollar notes when due and the subsidiary
guarantors' ability and our ability under our guaranty to pay the interest on
and principal of the euro notes when due, are dependent to a significant extent
upon interest payments, cash dividends and distributions or
24
<PAGE> 32
other transfers from our foreign subsidiaries. In addition, any payment of
interest, dividends, distributions, loans or advances by our foreign
subsidiaries to us, to Flowserve Finance and to the subsidiary guarantors, as
applicable, could be subject to restrictions on dividends or repatriation of
earnings under applicable local law, monetary transfer restrictions and foreign
currency exchange regulations in the jurisdiction in which those foreign
subsidiaries operate. Moreover, payments to us, Flowserve Finance and the
subsidiary guarantors by the foreign subsidiaries will be contingent upon these
subsidiaries' earnings.
Our foreign subsidiaries are separate and distinct legal entities and
(except to the extent of Flowserve Finance's guaranty of the dollar notes and
Flowserve International's guaranties of the dollar notes and the euro notes)
have no obligation, contingent or otherwise, to pay any amounts due pursuant to
the dollar notes, the euro notes, our guaranty or the subsidiary guaranties or
to make any funds available therefor, whether by dividends, loans, distributions
or other payments. Any right that we or the subsidiary guarantors have to
receive any assets of any of the foreign subsidiaries upon the liquidation or
reorganization of those subsidiaries, and the consequent rights of holders of
dollar notes or euro notes to realize proceeds from the sale of any of those
subsidiaries' assets, will be effectively subordinated to the claims of that
subsidiary's creditors, including trade creditors and holders of debt of that
subsidiary. See Flowserve and IDP unaudited consolidated financial statements
contained elsewhere in this prospectus.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE ANY CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURES GOVERNING THE NOTES
If we undergo a change of control (as defined in the indentures governing
the notes) we may need to refinance large amounts of our debt, including the
notes and borrowings under the Senior Credit Facilities. If a change of control
occurs, we (in the case of the dollar notes) and Flowserve Finance (in the case
of the euro notes) must offer to buy back the notes for a price equal to 101% of
the principal amount of the notes, plus any accrued and unpaid interest. We
cannot assure you that there will be sufficient funds available for us (in the
case of the dollar notes) and Flowserve Finance (in the case of the euro notes)
to make any required repurchases of the notes upon a change of control. In
addition, our Senior Credit Facilities will prohibit us (in the case of the
dollar notes) and Flowserve Finance (in the case of the euro notes) from
repurchasing the notes until we first repay the Senior Credit Facilities in
full. If we (in the case of the dollar notes) and Flowserve Finance (in the case
of the euro notes) fail to repurchase the notes in that circumstance, we (in the
case of the dollar notes) and Flowserve Finance (in the case of the euro notes)
will go into default under both the indenture governing the applicable notes and
the Senior Credit Facilities. Any future debt which we incur may also contain
restrictions on repayment upon a change of control. If any change of control
occurs, we cannot assure you that we (in the case of the dollar notes) and
Flowserve Finance (in the case of the euro notes) will have sufficient funds to
satisfy all of our debt obligations. The buyback requirements may also delay or
make it harder for others to effect a change of control. However, certain other
corporate events, such as a leveraged recapitalization that would increase our
level of indebtedness, would not constitute a change of control under the
indentures governing the notes. See "Description of Certain Indebtedness" and
"Description of the Notes -- Change of Control."
FEDERAL OR STATE LAWS ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID DEBTS,
INCLUDING GUARANTIES, AND REQUIRE HOLDERS OF NOTES TO RETURN PAYMENTS RECEIVED
FROM US AND THE DOMESTIC GUARANTORS
If a bankruptcy proceeding or lawsuit were to be initiated by unpaid
creditors, the dollar notes and the guaranties of the dollar notes and the euro
notes by our domestic subsidiaries could come under review for federal or state
fraudulent transfer violations. Under federal bankruptcy law and comparable
provisions of state fraudulent transfer laws, obligations under the dollar notes
or guaranties of the dollar notes or euro notes could be voided, or claims in
respect of the dollar note or guaranties of the dollar notes or euro notes could
be subordinated to all other debts of the debtor or guarantor if, among other
things, the debtor or guarantor at the time it incurred the indebtedness
evidenced by such notes or guaranties:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such debt or guaranty; and
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- one of the following applies:
- it was insolvent or rendered insolvent by reason of such incurrence;
- it was engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital; or
- it intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that debtor or guarantor under the dollar notes or
guaranties of the dollar notes or euro notes could be voided and required to be
returned to the debtor or guarantor, as the case may be, or to a fund for the
benefit of the creditors of the debtor or guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a debtor or guarantor
would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair salable value of all of its assets;
- if the present fair salable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
DUTCH INSOLVENCY LAWS MAY ADVERSELY AFFECT A RECOVERY BY THE HOLDERS OF THE EURO
NOTES
Flowserve Finance, the issuer of the euro notes, is a Dutch company. Dutch
insolvency laws differ significantly from insolvency proceedings in the United
States and may make it more difficult for holders of the euro notes to effect a
restructuring of Flowserve Finance or to recover the amount they would have
recovered in a liquidation or bankruptcy proceeding in the United States. There
are two primary insolvency regimes under Dutch law: the first, moratorium of
payment (surseance van betaling), is intended to facilitate the reorganization
of a debtor's debts and enable the debtor to continue as a going concern. The
second, bankruptcy (faillissement), is primarily designed to liquidate and
distribute the assets of a debtor to its creditors.
Should Flowserve Finance not comply with certain Netherlands rules issued
pursuant to the Wet toezicht kredietwezen 1992 (the 1992 Act on the supervision
of the credit system), then instead of the faillissement and surseance van
betaling rules mentioned above, the specific insolvency regime of this act, the
noodregeling (emergency regulation), will apply.
Upon commencement of moratorium of payment proceedings, the court will
grant a provisional moratorium. The definitive moratorium will generally be
granted upon the approval of a qualified majority of the unsecured creditors. In
both cases, certain creditors will be precluded from attempting to recover their
claims from the assets of the debtor. This moratorium is subject to exceptions,
the most important of which excludes certain secured and certain preferential
creditors (such as tax and social security authorities) from the protection of
the moratorium. Unlike Chapter 11 proceedings under U.S. bankruptcy law, during
which both secured and unsecured creditors are generally barred from seeking to
recover on their claims, during Dutch moratorium of payment proceedings, certain
secured creditors may proceed against the assets that secure their claims to
satisfy their claims. A recovery under Dutch law, therefore, could involve a
sale of the assets of the debtor in a manner that does not reflect the going
concern value of the debtor. Consequently, Dutch insolvency laws could preclude
or inhibit the ability of the holders of the euro notes to effect a
restructuring of Flowserve Finance and could reduce the recovery in a Dutch
insolvency proceeding.
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<PAGE> 34
In connection with Dutch bankruptcy proceedings, the assets of a debtor are
generally liquidated and the proceeds distributed to the debtor's creditors on
the basis of the relative claims of those creditors, and certain parties (such
as secured creditors) will have special rights that may adversely affect the
interests of holders of the euro notes. The claim of a creditor may be limited
depending on the date the claim becomes due and payable in accordance with its
terms. Generally, claims of holders of euro notes which were not due and payable
by their terms on the date of a bankruptcy of Flowserve Finance will be
accelerated and become due and payable as of that date. Each of these claims
will have to be submitted to the receiver of Flowserve Finance to be verified by
the receiver. "Verification" under Dutch law means that the receiver determines
the value of the claim and whether and to what extent it will be admitted in the
bankruptcy proceedings. The valuation of claims that otherwise would not have
been payable at the time of the bankruptcy proceedings may be based on a net
present value analysis. Creditors that wish to dispute the valuation of their
claims by the receiver will need to commence a court proceeding. These
verification procedures could cause holders of euro notes to recover less than
the principal amount of their notes or less than they could recover in a U.S.
liquidation. Such verification procedures could also cause payments to the
holders of euro notes to be delayed compared with holders of undisputed claims.
YOUR RIGHTS UNDER THE GUARANTY BY ONE OF OUR ENGLISH SUBSIDIARIES MAY BE
IMPAIRED UNDER INSOLVENCY LAWS IN ENGLAND
One of the guarantors of the dollar notes and the euro notes, Flowserve
International, is incorporated in England. Any insolvency proceedings by or
against Flowserve International would likely be based on English insolvency
laws. The procedural and substantive provisions of English insolvency laws
generally are more favorable to secured creditors than comparable provisions of
U.S. law and afford debtors and unsecured creditors only limited protection from
secured creditors. Due to the nature of English insolvency laws and the
unsecured nature of the claims of holders of the notes against Flowserve
International, the ability of holders of the notes to protect their interests
will be more limited than would be the case under U.S. bankruptcy laws. In
addition, under English insolvency law, in the event of a winding up of
Flowserve International, its liabilities under its guaranty will be paid only
after certain of its other debts which are entitled to priority under English
law, such as money owed to the U.K. Inland Revenue for income tax deducted at
source, value added tax and certain other taxes and duties owed to the U.K.
Customs and Excise, social security contributions, occupational pension scheme
contributions and salaries owed to employees. In addition, in any insolvency
proceedings by or against Flowserve International, its guaranty will rank behind
all of its current and future senior indebtedness.
Under English insolvency law, the liquidator or administrator of a
subsidiary guarantor incorporated in England may, among other things, apply to
the court under Section 238 of the U.K. Insolvency Act 1986 to rescind the
issuance of its guaranty, if that subsidiary guarantor was unable to pay its
debts (within the meaning of Section 123 of the U.K. Insolvency Act 1986) at the
time of the issuance of its guaranty or became unable to pay its debts (within
the meaning of that section) in consequence thereof and there occurs in relation
to that subsidiary the onset of insolvency (as defined in Section 240 of the
U.K. Insolvency Act 1986) within two years after the guaranty is issued. The
guaranty might be subject to such recision (or other competent order of a court
under Section 241 of the U.K. Insolvency Act 1986) if it involved a gift by the
subsidiary guarantor or if the subsidiary guarantor received consideration of
significantly less value than the consideration given by it. A court, however,
cannot make an order under Section 238 if it is satisfied that the subsidiary
guarantor entered into the transaction in good faith for the purpose of carrying
on its business and that at the time it did so that there were reasonable
grounds for believing that the transaction would benefit such guarantor.
We believe that the guaranty to be issued by Flowserve International will
not be provided in a transaction at less than fair value or for inadequate
consideration and that the guaranty will be provided in good faith for the
purposes of carrying on the business of the guarantor and that there are
reasonable grounds for believing that the transaction will benefit that
guarantor. We cannot assure you, however, that a person entitled to apply to a
court pursuant to Section 238 or 242 or the relevant English court would concur
with our analysis.
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In addition, under English insolvency law any debt payable in the
liquidation of a company in a currency other than pounds sterling (such as euros
in the case of the euro notes and dollars in the case of the dollar notes) must
be converted into pounds sterling in the case of a company incorporated in
England, at the "official exchange rate" prevailing on the date when the debtor
went into liquidation for the purpose of proving in the liquidation. The
"official exchange rate" for these purposes is the middle market rate at the
Bank of England as published for the date in question or, if no such rate is
published, the court determines the rate. Accordingly, in the event of an
insolvency of Flowserve International, holders of notes may be subject to
exchange rate risk between the date that Flowserve International went into
liquidation and the date of receipt of any amounts to which the holders of notes
may become entitled.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES
Prior to this exchange offer, there has been no public market for the
notes. We do not intend to apply for listing of the dollar notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System. We have made application to list
the euro exchange notes on the Luxembourg Stock Exchange in accordance with the
rules of the Luxembourg Stock Exchange. Both the liquidity and the market price
quoted for the dollar notes and the euro notes may be adversely affected by
changes in the overall market for high yield securities and by changes in our
financial performance or prospects, or in the prospects for companies in our
industry generally. As a result, we cannot assure you that an active or stable
trading market will develop for the notes.
CONSEQUENCES OF FAILURE TO EXCHANGE YOUR OUTSTANDING NOTES FOR EXCHANGE NOTES
If you do not tender your outstanding notes to be exchanged in this
exchange offer, your notes will remain restricted securities and will be subject
to certain transfer restrictions. As restricted securities, your outstanding
notes:
- may be resold only if registered pursuant to the Securities Act of 1933,
if an exemption from registration is available thereunder, or if neither
such registration nor such exemption is required by law; and
- shall bear a legend restricting transfer in the absence of registration
or an exemption therefrom.
In addition, a holder of outstanding notes who desires to sell or otherwise
dispose of all or any part of its outstanding notes under an exemption from
registration under the Securities Act of 1933, if requested by us, must deliver
to us an opinion of independent counsel experienced in Securities Act matters,
reasonably satisfactory in form and substance to us, that such exemption is
available.
RISKS RELATING TO OUR BUSINESS
WE MAY NOT BE ABLE TO INTEGRATE THE BUSINESS OF IDP AND INVATEC
Our future success will depend in part on our ability to effectively
integrate the businesses of IDP and Invatec into Flowserve's operations. The
combination of Flowserve, Invatec and IDP involves the integration of companies
that have previously operated independently. The integration process may be
disruptive to the businesses and may cause an interruption of, or a loss of
momentum in, the businesses as a result of a number of obstacles such as:
- loss of key employees or customers;
- failure to maintain the quality of customer service that such companies
have historically provided;
- the need to coordinate geographically diverse organizations;
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<PAGE> 36
- retooling and reprogramming of equipment; and
- the resulting diversion of management's attention from our day-to-day
business and the need to hire additional management personnel to address
integration obstacles.
If we are not successful in this combination, if the combination takes
longer than anticipated, or if our integrated product and service offering fails
to achieve market acceptance, our business could be adversely affected.
WE MAY NOT BE ABLE TO REALIZE THE ANTICIPATED COST SAVINGS, SYNERGIES OR REVENUE
ENHANCEMENTS FROM COMBINING FLOWSERVE, INVATEC AND IDP AND WE WILL INCUR
SIGNIFICANT CASH INTEGRATION COSTS TO ACHIEVE THESE COST SAVINGS
Even if we are able to integrate the operations of the companies
successfully, we cannot assure you that we will realize the cost savings,
synergies or revenue enhancements that we anticipate from such integration or
that we will realize such benefits within the time frame that we currently
expect.
- Whether we can effectively eliminate redundant administrative overhead
and overlapping sales personnel, rationalize manufacturing capacity and
shift production to more economic facilities is difficult to predict.
Accordingly, the amount and timing of the resulting cost savings are
inherently difficult to estimate.
- Any cost savings and other synergies from the transactions may be offset
by costs incurred in integrating the companies.
- The cost savings and other synergies may also be offset by increases in
other expenses, by operating losses or by problems unrelated to the
transactions.
- Labor cost savings depend on the avoidance of labor disruptions in
connection with the integration of the businesses.
- We will incur significant cash integration costs to achieve these cost
savings.
WE HAVE LIMITED INFORMATION CONCERNING IDP AND INVATEC, AND THEY MAY HAVE
LIABILITIES OR OBLIGATIONS THAT ARE NOT REFLECTED IN THEIR HISTORICAL FINANCIAL
STATEMENTS
In connection with the acquisitions of Invatec and IDP, we conducted a
review of information available to us regarding Invatec and IDP; however, we
have been unable to perform a complete review of the past activities and
financial performance of the two companies. Prior to our acquisition of their
businesses, Invatec and IDP may have incurred contractual, financial or other
obligations and liabilities that may impact us in the future and that are not
currently reflected in their historical financial statements or otherwise known
to us. In addition, with respect to the IDP acquisition we have received limited
warranties with respect to these obligations and liabilities from
Ingersoll-Rand. Any such obligation or liability could have a material adverse
effect on our business, financial condition and results of operations.
IF ACTUAL RESULTS DIFFER FROM THE ESTIMATES UNDERLYING SOME OF THE COST SAVINGS
INFORMATION, OUR RESULTS MAY BE LESS FAVORABLE THAN ANTICIPATED
Certain information contained within this prospectus is based on
anticipated cost savings that our management believes are reasonable, including
cost savings resulting from plant closures and certain cost savings anticipated
in connection with the Transactions and the Invatec acquisition. We cannot
assure you that the anticipated cost savings will be achieved. If our savings
are less than our estimates or adversely affect our revenues or operations, our
results will be less than we anticipate and less than the amounts set forth in
this prospectus.
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ALTHOUGH WE HAVE ENTERED INTO A CONSENT DECREE WITH THE U.S. DEPARTMENT OF
JUSTICE ADDRESSING ITS ANTITRUST CONCERNS RELATED TO THE IDP ACQUISITION, WE MAY
NOT OBTAIN A FINAL COURT ORDER APPROVING THE IDP ACQUISITION
In connection with the IDP acquisition, we entered into a consent decree
with the U.S. Department of Justice to resolve its antitrust concerns related to
the acquisition. This consent decree provides for a post-closing divestiture of
certain product lines, a manufacturing facility and two service and repair
centers. The consent decree was filed with the United States District Court for
the District of Columbia on July 28, 2000. The provisions of the consent decree
are described in more detail in "Business -- Regulatory Divestitures."
On September 13, 2000, after the filing of the consent decree, the
Department of Justice published the consent decree in the Federal Register.
Under the Antitrust Procedures and Penalties Act, the general public will have
60 days from the date of publication in the Federal Register to comment on the
adequacy of the consent decree. The federal district court will only issue a
final order approving the IDP acquisition after the public has had the
opportunity to comment on the adequacy of the consent decree, the Department of
Justice has responded to such comments, and the federal district court has
determined that the consent decree is in the public interest. We cannot assure
you that we will obtain the final order from the federal district court
approving the acquisition. The issuance of the final order by the federal
district court is not a condition to the closing of the acquisition, although
the failure of the court to issue such a final order could result in the
restructuring or unwinding of the acquisition.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR BUSINESS
Since we sell our products worldwide, our business is subject to risks
associated with doing business internationally. Our sales outside North America,
as a percentage of our total sales, was 45% in 1999. Accordingly, our future
results could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- differing protection of intellectual property; and
- unexpected changes in regulatory requirements.
OUR OPERATING RESULTS COULD BE HARMED DURING ECONOMIC DOWNTURNS
The businesses of most of our industrial customers, particularly
refineries, chemical companies and power plants, are, to varying degrees,
cyclical and have historically experienced periodic downturns. Margins in those
industries are highly sensitive to demand cycles, and our customers in those
industries historically have tended to delay large capital projects, including
expensive maintenance and upgrades, during economic downturns. For example, due
to the simultaneous decline in oil and chemical prices in 1998 and 1999, many of
our key customers significantly reduced their capital spending, which resulted
in declines in revenues and EBITDA during those years. These industry downturns
have been characterized by diminished product demand, excess manufacturing
capacity and subsequent accelerated erosion of average selling prices in the
flow control industry. Therefore, any significant downturn in our customers'
markets or in general economic conditions could result in a reduction in demand
for our products and services and could harm our business.
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WE FACE INTENSE COMPETITION
We encounter intense competition in all areas of our business.
Additionally, customers for our products are attempting to reduce the number of
vendors from which they purchase in order to reduce the size and diversity of
their inventory. To remain competitive, we will need to invest continuously in
manufacturing, marketing, customer service and support and our distribution
networks. We anticipate that we may have to adjust the prices of some of our
products to stay competitive. We cannot assure you that we will have sufficient
resources to continue to make such investments or that we will maintain our
competitive position.
ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION
Our operations and properties are subject to increasingly stringent laws
and regulations relating to environmental protection, including laws and
regulations governing air emissions, water discharges, waste management and
workplace safety. Such laws and regulations can impose substantial fines and
sanctions for violations and require the installation of costly pollution
control equipment or operational changes to limit pollution emissions and/or
decrease the likelihood of accidental hazardous substance releases. We must
conform our operations and properties to these laws, and adapt to regulatory
requirements in all countries as these requirements change. In connection with
the IDP acquisition, we believe that we may be required to incur costs to bring
the former IDP properties into compliance with applicable requirements.
We use and generate hazardous substances and wastes in our manufacturing
and foundry operations. In addition, many of our current and former properties
are or have been used for industrial purposes. Accordingly, we are conducting
investigation and remediation activities at several on-site and off-site
locations. We also may be subject to potentially material liabilities relating
to the investigation and clean-up of contaminated properties and to claims
alleging personal injury.
We have experienced, and expect to continue to experience, operating costs
to comply with environmental laws and regulations. In addition, new laws and
regulations, stricter enforcement of existing laws and regulations, the
discovery of previously unknown contamination or the imposition of new clean-up
requirements could require us to incur costs or become the basis for new or
increased liabilities that could have a material adverse effect on our business,
financial condition or results of operations.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING NEW COLLECTIVE
BARGAINING AGREEMENTS
As of December 31, 1999, we had approximately 12,000 employees, of whom
approximately 18% are represented by unions. Our operations in the following
countries are unionized: Argentina, Austria, Belgium, Brazil, Canada, France,
Germany, Italy, Mexico, The Netherlands, Spain and the United Kingdom. Each of
our material collective bargaining agreements with such unions expires from
November 2000 to December 2002. Although we believe that our relations with our
employees are good and we have not experienced any strikes or work stoppages
since the strike at IDP's Phillipsburg facilities in the mid 1990s, we cannot
assure you that we will be successful in negotiating new collective bargaining
agreements, that such negotiations will not result in significant increases in
the cost of labor or that a breakdown in such negotiations will not result in
the disruption of our operations. In addition, our planned closures of certain
facilities may create the risk of strikes or work stoppages at those and other
facilities.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY
Our success depends in part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our proprietary
rights. If we fail to successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results. We
may be required to spend significant resources to monitor and police our
intellectual property rights.
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OUR SUCCESS WILL CONTINUE TO DEPEND TO A SIGNIFICANT EXTENT ON OUR EXECUTIVES
AND OTHER KEY PERSONNEL
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management and other key personnel. The
loss of the services of any of these individuals could adversely affect our
ability to implement our business strategy, including integrating IDP and
Invatec, and our results of operations.
WE ARE DEPENDENT ON THE AVAILABILITY OF RAW MATERIALS
We require substantial amounts of raw materials and substantially all raw
materials we require are purchased from outside sources. The availability and
prices of raw materials may be subject to curtailment or change due to, among
other things, new laws or regulations, suppliers' allocations to other
purchasers, interruptions in production by suppliers, changes in exchange rates
and worldwide price levels. Any change in the supply of, or price for, these raw
materials could materially affect our operating results.
WE ARE SUBJECT TO THE EFFECTS OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES
We are exposed to fluctuations in foreign currencies as a significant
portion of our revenue, and certain of our costs, assets and liabilities, are
denominated in currencies other than U.S. dollars. Principal and interest on the
dollar notes will be payable in U.S. dollars. Our ability to pay interest and
principal on the dollar notes when due is dependent on the then current exchange
rates between U.S. dollars, on the one hand, and the euro and other European as
well as Asian currencies, on the other hand, which rates are and will be subject
to fluctuation. Approximately 45% of our revenue during 1999 was from sales
outside of North America. Our share of revenue in non-dollar denominated
currencies may continue to increase in future periods. We can offer no
assurance, however, that exchange rate fluctuations will not have a material
adverse effect on our results of operations and financial condition and
therefore on our ability to make principal and interest payments on our
indebtedness, including the dollar notes, when due.
WE CANNOT GUARANTEE THAT JUDGMENTS OBTAINED IN A U.S. COURT WILL BE ENFORCEABLE
AGAINST FLOWSERVE FINANCE
All of Flowserve Finance's assets will be located outside the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon Flowserve Finance. In addition, it may not
be possible for investors to enforce judgments obtained in a U.S. court against
its assets, including in order to foreclose upon such assets. See "Service of
Process and Enforceability of Civil Liabilities."
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SOURCES AND USES OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes offered hereby. In consideration for issuing the notes contemplated by
this prospectus, we will receive in exchange the outstanding notes in like
principal amount. The outstanding notes surrendered in exchange for the exchange
notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the exchange notes will not result in any change in our indebtedness.
The following table sets forth the sources and uses of funds for the IDP
acquisition as of June 30, 2000 on a pro forma basis, as though the Transactions
had occurred at that date:
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C> <C>
SOURCES:
Cash and Cash Equivalents............ $ 22.0
Term Loan Facilities(1).............. 750.0
Senior Subordinated Dollar
Notes(3)........................... 285.9
Senior Subordinated Euro
Notes(3)(4)........................ 89.1
--------
Total Sources.............. $1,147.0
========
USES:
Purchase of IDP...................... $ 775.0
Refinance Existing Flowserve
Debt(2).............................. 315.4
Transaction Fees and Expenses........ 56.6
--------
Total Uses................. $1,147.0
========
</TABLE>
-------------------------
(1) Includes two facilities, Term Loan A and Term Loan B, which we collectively
refer to as the Term Loan Facilities. The Term Loan A facility of $275.0
million will mature in six years and the Term Loan B facility of $475.0
million will mature in eight years.
(2) Includes debt incurred in connection with the Invatec acquisition, which
closed on January 13, 2000.
(3) Reflects issuance of the senior subordinated dollar notes of $290.0 million
and senior subordinated euro notes of E100.0 million at 98.586% of face
value.
(4) Assuming a conversion rate of euro into U.S. dollars of E0.9033 to $1.00,
which was the rate in effect on August 3, 2000.
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THE EXCHANGE OFFER
GENERAL
In connection with the exchange offer, Flowserve and the guarantors of the
outstanding dollar notes entered into a registration rights agreement with
Credit Suisse First Boston Corporation, Bank of America Securities LLC, ABN AMRO
Incorporated, Banc One Capital Markets, Inc. (the "Dollar Notes Initial
Purchasers") relating to the outstanding dollar notes and Flowserve Finance and
the guarantors of the outstanding euro notes entered into a registration rights
agreement with Credit Suisse First Boston (Europe) Limited, Bank of America
International Limited, ABN AMRO Bank N.V. and First Chicago Limited (the "Euro
Notes Initial Purchasers," and together with the Dollar Notes Initial
Purchasers, the "Initial Purchasers") relating to the outstanding euro notes
(the "Registration Rights Agreements"). Under the Registration Rights
Agreements, Flowserve and Flowserve Finance agreed to file within 90 days of the
date of the original issuance of the outstanding notes a registration statement
(the "Exchange Offer Registration Statement") of which this prospectus is a part
with respect to a registered offer to exchange the outstanding notes for the
notes with terms identical in all material respects to the outstanding notes
(the "Exchange Offer"). We further agreed to use our reasonable best efforts to
(i) cause the Exchange Offer Registration Statement to become effective and
commence the Exchange Offer on or prior to the 150th day after the Issue Date,
(ii) keep the Exchange Offer open for 30 days (or longer if required by
applicable law) (the last day of such period, the "Expiration Date") and (iii)
exchange the notes to be issued in the Exchange Offer for all outstanding notes
validly tendered and not withdrawn pursuant to the Exchange Offer on or prior to
the fifth day following the Expiration Date.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, we will accept all outstanding
notes validly tendered prior to 12:00 p.m., New York City time (5:00 p.m. London
time) on , 2000 (the "Expiration Date"). Flowserve will issue $1,000
principal amount of exchange notes in exchange for each $1,000 principal amount
of outstanding dollar notes accepted in the exchange offer. Flowserve Finance
will issue E1,000 principal amount of exchange notes in exchange for each E1,000
principal amount of outstanding euro notes accepted in the Exchange Offer.
Holders may tender some or all of their outstanding dollar notes and outstanding
euro notes pursuant to the Exchange Offer in denominations of $1,000 and E1,000,
respectively and integral multiples thereof.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "SEC") to third parties, we believe that the notes
issued pursuant to the Exchange Offer in exchange for outstanding notes may be
offered for resale, resold and otherwise transferred by any holder thereof under
U.S. federal securities laws (other than (i) a broker-dealer who purchased such
outstanding notes directly from us to resell pursuant to Rule 144A or any other
available exemption under the Securities Act of 1933, as amended (the
"Securities Act") or (ii) a person that is an "affiliate" of ours within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that the holder is acquiring the notes issued in the Exchange Offer in
its ordinary course of business and is not participating and does not intend to
participate, and has no arrangements or understanding with any person to
participate, in the distribution of the notes issued in the Exchange Offer.
Holders of outstanding notes wishing to accept the exchange offer must represent
to us that such conditions have been met.
Each broker-dealer that receives notes in exchange for outstanding notes
held for its own account, as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, such broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. The prospectus, as it may be amended or supplemented from time to time, may
be used by such broker-dealer in connection with resales of notes received in
exchange for outstanding notes. We have agreed that, for a period of 180 days
after the Expiration Date, we will make this prospectus and any amendment or
supplement to this prospectus available to any such broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
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As of the date of this prospectus, $290 million aggregate principal amount
of the outstanding dollar notes and E100 million aggregate principal amount of
the outstanding euro notes are outstanding. In connection with the issuance of
the outstanding notes, we arranged for the outstanding notes initially purchased
by Qualified Institutional Buyers and certain eligible persons in "offshore
transactions" (within the meaning of Regulation S under the Securities Act)
pursuant to Regulation S under the Securities Act of 1933 to be issued and
transferable in book-entry form through the facilities of, with respect to the
dollar notes, the Depositary Trust Company ("DTC") and, with respect to the euro
notes, Euroclear or Clearstream, Luxembourg, acting as depositary for the
outstanding euro notes. The dollar notes and the euro notes to be issued in the
Exchange Offer will also be issuable and transferable in book-entry form through
DTC or Euroclear or Clearstream, Luxembourg, as the case may be, respectively.
This prospectus, together with the accompanying letter of transmittal, is
being sent to all registered holders as of , 2000 (the "Record Date").
We will be deemed to have accepted validly tendered outstanding notes when,
as and if we have given oral or written notice thereof to the Exchange Agent.
See "-- Exchange Agent." The Exchange Agent will act as agent for the tendering
holders of outstanding notes for the purpose of receiving notes to be issued in
the Exchange Offer from us and delivering such notes to such holders.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted outstanding notes will be returned, without
expenses, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of outstanding notes who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes pursuant to the Exchange Offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean , 2000 unless we, in our
sole discretion, extend the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, we will notify the Exchange Agent
of any extension by oral or written notice and will mail to the record holders
of outstanding notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that we are extending the Exchange Offer for a
specified period of time.
We reserve the right (i) to delay acceptance of any outstanding notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept outstanding notes not previously accepted, if any of the conditions set
forth herein under "-- Termination" shall have occurred and shall not have been
waived by us (if permitted to be waived by us), by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, and (ii) to amend
the terms of the Exchange Offer in any manner deemed by us to be advantageous to
the holders of the outstanding notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a manner that we
determine to constitute a material change, we will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the
outstanding notes of such amendment.
Without limiting the manner by which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, we will have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than making a timely
release to a financial news service.
35
<PAGE> 43
INTEREST ON THE NOTES TO BE ISSUED IN THE EXCHANGE OFFER
The notes to be issued in the Exchange Offer will bear interest from August
8, 2000, payable semiannually in arrears on February 15 and August 15 of each
year, commencing on February 15, 2001, at the rate of 12 1/4% per annum, in the
case of both the dollar notes and the euro notes. Holders of outstanding notes
whose outstanding notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the outstanding notes
accrued from August 8, 2000 until the date of the issuance of the notes to be
issued in the Exchange Offer. Consequently, holders who exchange their
outstanding notes for notes to be issued in the Exchange Offer will receive the
same interest payment on February 15, 2001 (the first interest payment date with
respect to the outstanding notes and the notes to be issued in the Exchange
Offer) that they would have received had they not accepted the Exchange Offer.
PROCEDURES FOR TENDERING
Procedures for Tendering Outstanding Dollar Notes
To tender outstanding dollar notes in the Exchange Offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or
otherwise deliver the letter of transmittal or facsimile to the Exchange
Agent prior to 5:00 p.m., New York City time on the Expiration Date; or
- comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
- the Exchange Agent must receive any corresponding certificate or
certificates representing outstanding dollar notes along with the letter
of transmittal; or
- the Exchange Agent must receive, before expiration of the Exchange Offer,
a timely confirmation of book-entry transfer of outstanding dollar notes
into the Exchange Agent's account at DTC according to DTC's Automated
Tender Offer Program described below and a properly transmitted agent's
message described below; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the Exchange Agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "-- Exchange Agent" before expiration of the
Exchange Offer. Delivery of documents to DTC in accordance with its procedures
does not constitute delivery to the Exchange Agent.
Any financial institution that is a participant in DTC's system may use
DTC's Automated Tender Offer Program to tender. Participants in the program may,
instead of physically completing and signing the letter of transmittal and
delivering it to the Exchange Agent, transmit their acceptance of the Exchange
Offer electronically. They may do so by causing DTC to transfer the outstanding
dollar notes to the Exchange Agent in accordance with its procedures for
transfer. DTC will then send an agent's message to the Exchange Agent. The term
"agent's message" means a message transmitted by DTC, received by the Exchange
Agent and forming part of the book-entry confirmation which states that:
- DTC has received an express acknowledgment from the participant that is
tendering outstanding dollar notes; and
- the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery.
36
<PAGE> 44
Procedures for Tendering Outstanding Euro Notes
To tender outstanding euro notes in the Exchange Offer, a holder must
effect such tender pursuant to the standard operating procedures of Euroclear or
Clearstream, Luxembourg, as the case may be, for book-entry transfers, prior to
5:00 p.m., London time, on the Expiration Date.
Any financial institution that is a participant in the Euroclear or
Clearstream, Luxembourg system, as the case may be, may make book-entry delivery
of the outstanding euro notes to Euroclear or Clearstream, Luxembourg in
accordance with Euroclear's or Clearstream, Luxembourg's standard procedures for
such transfer. In lieu of delivering a letter of transmittal to the Exchange
Agent, a computer-generated message, in which the holder of the outstanding euro
notes acknowledges and agrees to be bound by the terms of the letter of
transmittal, must be transmitted and received or confirmed by Euroclear or
Clearstream, Luxembourg, as the case may be, prior to 5:00 p.m., London time, on
the Expiration Date.
The tender by a holder of outstanding euro notes will constitute an
agreement between such holder and us in accordance with the terms and subject to
the conditions set forth in this prospectus and in the letter of transmittal.
Procedures for Tendering applicable to all Outstanding Notes
Holders may also request that their respective brokers, dealers, commercial
banks, trust companies or nominees effect such tender for such holders.
The method of delivery of outstanding notes and all other required
documents to the Exchange Agent is at the election and risk of the holders.
Instead of delivery by mail, we recommend that holders use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
timely delivery. No letter of transmittal or outstanding notes should be sent to
us.
Only a holder of outstanding notes may tender such outstanding notes in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name outstanding notes are registered on our books or the books
of any other person who has obtained a properly completed bond power from the
registered holder, or any person whose outstanding notes are held of record by
DTC, Euroclear or Clearstream, Luxembourg, who desires to deliver such
outstanding notes by book-entry transfer at DTC, Euroclear or Clearstream,
Luxembourg, as the case may be.
Any beneficial holder whose outstanding notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial holder wishes
to tender on his own behalf, such beneficial holder must, prior to completing
and executing the letter of transmittal and delivering his outstanding notes,
either make appropriate arrangements to register ownership of the outstanding
notes in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" (an "Eligible Institution")
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), unless the outstanding notes tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the letter of transmittal or (ii) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed therein, such outstanding
notes must be endorsed or accompanied by appropriate bond powers which authorize
such person to tender the outstanding notes on behalf of the registered holder,
in either case signed as the name of the registered holder or holders appears on
the outstanding notes.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
37
<PAGE> 45
representative capacity, such persons should so indicate when signing and,
unless waived by us, evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
All the questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered outstanding notes will be
determined by us in our sole discretion, which determinations will be final and
binding. We reserve the absolute right to reject any and all outstanding notes
not validly tendered or any outstanding notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within such time as
we will determine. Neither we, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of outstanding notes nor shall any of them incur any liability for
failure to give such notification. Tenders of outstanding notes will not be
deemed to have been made until such irregularities have been cured or waived.
Any outstanding notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost by the Exchange Agent to the tendering
holder of such Outstanding Notes unless otherwise provided in the letter of
transmittal, as soon as practicable following the Expiration Date.
In addition, we reserve the right in our sole discretion to (a) purchase or
make offers for any outstanding notes that remain outstanding subsequent to the
Expiration Date, or, as set forth under "Termination," to terminate the Exchange
Offer and (b) to the extent permitted by applicable law, purchase outstanding
notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
By tendering, each holder of outstanding notes will represent to us that,
among other things, the notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such notes,
whether or not such person is the holder, that neither the holder nor any other
person has an arrangement or understanding with any person to participate in the
distribution of such notes and that neither the holder nor any such other person
is an "affiliate" of ours within the meaning of Rule 405 under the Securities
Act.
GUARANTEED DELIVERY PROCEDURES FOR OUTSTANDING DOLLAR NOTES
Holders who wish to tender their outstanding dollar notes and (i) whose
outstanding dollar notes are not immediately available, or (ii) who cannot
deliver their outstanding dollar notes, the letter of transmittal, or any other
required documents to the Exchange Agent prior to the Expiration Date, or if
such holder cannot complete the procedure for book-entry transfer on a timely
basis, may effect a tender if:
(a) the tender is made through an Eligible Institution or pursuant to
DTC's, Euroclear's or Clearstream, Luxembourg's standard operating
procedures;
(b) prior to the Expiration Date (i) the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed "notice of
guaranteed delivery" in the form accompanying this prospectus (by facsimile
transmission, mail or hand delivery) setting forth the name and address of
the holder of the outstanding dollar notes, the certificate number or
numbers of such outstanding dollar notes and the principal amount of
outstanding dollar notes tendered, stating that the tender is being made
thereby, and guaranteeing that, within five business days after the
Expiration Date, the letter of transmittal (or facsimile thereof), together
with the certificate(s) representing the outstanding dollar notes to be
tendered in proper form for transfer and any other documents required by
the letter of transmittal, will be deposited by the Eligible Institution
with the Exchange Agent, or (ii) in lieu of "notice of guaranteed delivery"
DTC, Euroclear or Clearstream, Luxembourg receives an electronic
transmission which contains the character by which the participant
acknowledges its receipt of and agrees to be bound by the guaranteed
delivery procedures set forth herein; and
38
<PAGE> 46
(c) such properly completed and executed letter of transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered outstanding dollar notes in proper form for transfer (or to DTC,
Euroclear or Clearstream, Luxembourg, as the case may be, of outstanding
dollar notes delivered electronically) and all other documents required by
the letter of transmittal are received by the Exchange Agent within five
business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to 12:00 p.m., New York City time (5:00 p.m., London
time) on the Expiration Date unless previously accepted for exchange.
For a withdrawal to be effective:
- the exchange agent must receive a written notice, which may be by
telegram, telex, facsimile transmission or letter, of withdrawal at the
address set forth below under "-- Exchange Agent";
- for DTC participants, (with respect to the dollar notes only) holders
must comply with the appropriate procedures of DTC's Automated Tender
Offer Program system and the exchange agent must receive an electronic
notice of withdrawal from DTC and any notice of withdrawal must specify
the name and number of the account at DTC to be credited with the
withdrawn outstanding notes and otherwise comply with the procedures of
the facility; or
- with respect to the euro notes, a notice of withdrawal must be
transmitted to Euroclear and Clearstream, Luxembourg, as the case may be,
in accordance with the standard operating procedures of Euroclear or
Clearstream, Luxembourg, as the case may be, prior to 12:00 p.m., New
York City time (5:00 p.m., London time), on the business day prior to the
Expiration Date and prior to acceptance for exchange thereof by Flowserve
Finance.
Any written or facsimile notice of withdrawal for outstanding notes must
(i) specify the name of the person having deposited the outstanding notes to be
withdrawn (the "Depositor"), (ii) identify the outstanding notes to be withdrawn
(including the certificate number or numbers and principal amount of such
outstanding notes), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such outstanding notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfers sufficient to permit the Trustee with respect to the
outstanding notes to register the transfer of such outstanding notes into the
name of the Depositor withdrawing the tender and (iv) specify the name in which
any such outstanding notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) for such withdrawal notices will be determined by us, and our
determination shall be final and binding on all parties. Any outstanding notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no exchange notes will be issued with respect thereto
unless the outstanding notes so withdrawn are validly tendered. Any outstanding
notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn outstanding notes may be tendered by following the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, we will not be
required to accept for exchange, or exchange notes for, any outstanding notes
not therefore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such outstanding notes if: (i)
any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer, which, in our
reasonable judgment, might materially impair our ability to proceed with the
Exchange Offer or (ii) any law, statute, rule or regulation is proposed, adopted
or enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of
39
<PAGE> 47
the SEC or court of competent jurisdiction in a manner, which, in our reasonable
judgment, might materially impair our ability to proceed with the Exchange
Offer.
If we determine that we may terminate the Exchange Offer, as set forth
above, we may (i) refuse to accept any outstanding notes and return any
outstanding notes that have been tendered to the holders thereof, (ii) extend
the Exchange Offer and retain all outstanding notes tendered prior to the
Expiration Date, subject to the rights of such holders of tendered outstanding
notes to withdraw their tendered outstanding notes, or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered outstanding notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, we will disclose such
change by means of a supplement to this prospectus that will be distributed to
each registered holder of outstanding notes, and we will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders of the
outstanding notes, if the Exchange Offer would otherwise expire during such
period.
EXCHANGE AGENT
The Bank of New York, has been appointed as Exchange Agent for the exchange
of the outstanding notes (the "Exchange Agent"). Questions and requests for
assistance relating to the exchange of the outstanding dollar notes should be
directed to the Exchange Agent in New York addressed as follows:
<TABLE>
<S> <C>
By Mail: The Bank of New York
Reorganization Section
101 Barclay Street, Floor 7 East
New York, New York 10286
By Hand Delivery: The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground level
New York, New York 10286
Facsimile Transmission: (212) 815-6339
Confirm by Telephone: (212) 815-6331
</TABLE>
Questions and requests for assistance relating to the exchange of the
outstanding euro notes should be directed to the Exchange Agent in London
addressed as follows:
<TABLE>
<S> <C>
By Mail or Hand Delivery: The Bank of New York
Lower Ground Floor
30 Cannon Street
London
EC4m 6XH
Facsimile Transmission: 011 44 207 964-6369 or
011 44 207 964-7294
Confirm by Telephone: 011 44 207 964-7284 or
011 44 207 964-7235
</TABLE>
Banque Internationale a Luxembourg has been appointed as Luxembourg Paying
Agent for the exchange of the outstanding euro notes.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the Exchange
Offer. The principal solicitation for tenders pursuant to the Exchange Offer is
being made by mail. Additional solicitations may
40
<PAGE> 48
be made by officers and regular employees of Flowserve and its affiliates in
person, by telegraph or telephone.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. We, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. We may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this prospectus, letters of transmittal and related documents to the
beneficial owners of the outstanding notes and in handling or forwarding tenders
for exchange.
We will pay the expenses to be incurred in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustees and
accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes pursuant to the Exchange Offer. If, however, certificates
representing exchange notes or outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the outstanding notes tendered, or if tendered outstanding notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of outstanding notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
41
<PAGE> 49
CAPITALIZATION
The following table sets forth our consolidated capitalization as of June
30, 2000 (i) on an actual basis and (ii) on a pro forma basis as adjusted to
give effect to the Transactions as if they had occurred on such date. The
information set forth in the table below should be read in conjunction with the
consolidated financial statements and the notes thereto of Flowserve and IDP and
the Unaudited Pro Forma Consolidated Financial Statements included elsewhere in
this prospectus. Except as set forth in this prospectus, there has been no
material change in our capitalization on a consolidated basis since June 30,
2000.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL AS ADJUSTED
------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 14.5 $ 16.1
====== ========
Current portion of long-term debt........................... -- 6.0
Long-term debt:
Other long-term debt...................................... 52.4 --
Existing credit facilities............................. 263.0 --
New senior credit facilities:
Revolving credit facility(1)......................... -- --
Term loan facilities................................. -- 744.0
Dollar notes offered hereby(2)......................... -- 285.9
Euro notes offered hereby(2)(3)........................ -- 89.1
------ --------
Total current and long-term debt.................. $315.4 $1,125.0
------ --------
Shareholders' equity:
Serial preferred stock, $1.00 par value:
No shares issued....................................... -- --
Common shares, $1.25 par value:
Shares authorized -- 120,000;
Shares issued and outstanding -- 41,484................ 51.9 51.9
Capital in excess of par value............................ 67.7 67.7
Retained earnings......................................... 368.8 366.6
Treasury stock............................................ (93.2) (93.2)
Accumulated other comprehensive income.................... (78.7) (78.6)
------ --------
Total shareholders' equity........................ 316.5 314.4
------ --------
Total capitalization.............................. $631.9 $1,439.4
====== ========
</TABLE>
-------------------------
(1) Borrowings of up to $300.0 million will be available under the revolving
credit facility for six years. We had approximately $30.0 million in undrawn
letters of credit issued under the revolving credit facility at the closing
of the IDP acquisition. As a result, under our revolving credit facility
immediately after the closing of the IDP acquisition we had unused borrowing
capacity, net of issued letters of credit, of approximately $270.0 million.
(2) Reflects issuance of the senior subordinated dollar notes of $290.0 million
and senior subordinated euro notes of E100.0 million at 98.586% of face
value.
(3) Assuming a conversion rate of euro into U.S. dollars of E0.9033 to $1.00,
which was the rate in effect on August 3, 2000.
42
<PAGE> 50
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements (the
"Unaudited Pro Forma Financial Statements") are based on the historical
consolidated financial statements of Flowserve, Invatec and IDP included
elsewhere in this prospectus, adjusted to give effect to the transactions
described herein.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1999 and six months ended June 30, 1999 and June 30, 2000,
respectively, give effect to the Transactions and the acquisition of Invatec as
if they had occurred on January 1, 1999. The Unaudited Pro Forma Consolidated
Balance Sheet gives effect to the Transactions as if they had occurred as of
June 30, 2000.
The Transactions and the acquisition of Invatec and the related adjustments
are described in the accompanying notes. The pro forma adjustments are based
upon available information and certain assumptions that we believe are
reasonable. In our opinion, all adjustments that are necessary to present fairly
the pro forma data have been made. The Unaudited Pro Forma Consolidated
Financial Statements do not purport to represent what our results of operations
or financial condition would actually have been had the Transactions in fact
occurred on such dates or to project our results of operations or financial
condition for any future period or date. The Unaudited Pro Forma Consolidated
Financial Statements should be read in conjunction with the historical
consolidated financial statements of Flowserve, Invatec and IDP included
elsewhere in this prospectus and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The unaudited pro forma consolidated financial statements do not include
the impact of any post-closing regulatory divestitures required under our
consent decree with the U.S. Department of Justice in connection with the IDP
acquisition. See "Business -- Regulatory Divestitures." These divestitures would
affect less than three percent of the combined 1999 revenues of Flowserve and
IDP. In the opinion of management, the impact of these divestiture actions will
not be material to our overall pro forma financial position or results of
operations.
The unaudited pro forma information with respect to the Invatec acquisition
and the IDP acquisition is based on the historical financial statements of
Flowserve, Invatec and IDP. The Invatec acquisition and the IDP acquisition have
been accounted for under the purchase method of accounting. The total purchase
price for the Invatec acquisition and the IDP acquisition has been allocated to
the tangible and identifiable intangible assets and liabilities of the acquired
businesses based upon our preliminary estimates of their fair value with the
remainder allocated to goodwill. The purchase price allocations for the Invatec
acquisition and the IDP acquisition are subject to refinement when additional
information concerning asset and liability valuations is obtained.
The historical consolidated financial statements of Flowserve, Invatec and
IDP were prepared in accordance with accounting principles generally accepted in
the United States.
43
<PAGE> 51
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO IDP
HISTORICAL INVATEC FORMA HISTORICAL ACQUISITION/
--------------------- ACQUISITION FLOWSERVE/ ---------- FINANCING PRO FORMA
FLOWSERVE INVATEC ADJUSTMENTS(1) INVATEC IDP ADJUSTMENTS(1) CONSOLIDATED
---------- -------- -------------- ---------- ---------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $1,061,272 $160,991 $ -- $1,222,263 $838,390 $ -- $2,060,653
Cost of sales................ 697,928 115,956 -- 813,884 610,745 (1,400)(f) 1,433,842
6,112(g)
4,884(k)
(383)(p)
---------- -------- -------- ---------- -------- --------- ----------
Gross profit................. 363,344 45,035 -- 408,379 227,645 (9,213) 626,811
Selling and administrative
expense.................. 275,884 40,368 (1,554)(a) 314,642 162,047 (600)(f) 480,472
(56)(b) (3,600)(h)
(4,200)(i)
9,134(j)
3,049(k)
Research, engineering and
development expense...... 25,645 -- -- 25,645 2,984 -- 28,629
Merger transaction and
restructuring
expense(2)............... 15,860 -- -- 15,860 200 -- 16,060
Merger integration
expense(3)............... 14,207 -- -- 14,207 -- -- 14,207
---------- -------- -------- ---------- -------- --------- ----------
Operating income............. 31,748 4,667 1,610 38,025 62,414 (12,996) 87,443
Interest (income)
expense.................. 15,504 12,724 (6,928)(c) 21,300 1,362 105,993(l) 128,655
Loss on assets held for
sale..................... -- 3,810 -- 3,810 -- -- 3,810
Impairment of goodwill..... -- 39,073 (39,073)(d) -- -- -- --
Other income, net.......... (2,001) (174) -- (2,175) (7,446) -- (9,621)
---------- -------- -------- ---------- -------- --------- ----------
Earnings (loss) before income
taxes...................... 18,245 (50,766) 47,611 15,090 68,498 (118,989) (35,401)
Provision (benefit) for
income taxes............. 6,068 6,372 (7,234)(e) 5,206 18,965 (36,915)(m) (12,744)
---------- -------- -------- ---------- -------- --------- ----------
Net income (loss).......... $ 12,177 $(57,138) $ 54,845 $ 9,884 $ 49,533 $ (82,074) $ (22,657)
========== ======== ======== ========== ======== ========= ==========
PER COMMON SHARE:
Net loss per share (basic and diluted).......................................................................... $ (.60)
==========
Average shares outstanding...................................................................................... 37,856
OTHER FINANCIAL DATA:
Depreciation and
amortization............... $ 39,599 $ 4,851 $ (56) $ 44,394 $ 18,251 $ 23,179 $ 85,824
Cash interest expense(n)........................................................................................ 122,215
Ratio of earnings to fixed charges(o)........................................................................... --
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
44
<PAGE> 52
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
IDP
HISTORICAL INVATEC PRO FORMA HISTORICAL ACQUISITION/
------------------- ACQUISITION FLOWSERVE/ ---------- FINANCING PRO FORMA
FLOWSERVE INVATEC ADJUSTMENTS INVATEC(1) IDP ADJUSTMENTS(1) CONSOLIDATED
--------- ------- ----------- ------------ ---------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $544,583 $87,103 $631,686 $399,490 $ -- $1,031,176
Cost of sales................... 353,903 60,902 414,805 295,575 (700)(f) 715,345
3,056(g)
2,442(k)
167(p)
-------- ------- ------- -------- -------- -------- ----------
Gross profit.................... 190,680 26,201 -- 216,881 103,915 (4,965) 315,831
Selling and administrative
expense..................... 133,314 22,062 $ (28)(b) 155,348 79,847 (300)(f) 237,303
(1,800)(h)
(1,884)(i)
4,567(j)
1,525(k)
Research, engineering and
development expense......... 13,199 -- -- 13,199 1,470 -- 14,669
Merger integration
expense(3).................. 7,838 -- -- 7,838 -- -- 7,838
-------- ------- ------- -------- -------- -------- ----------
Operating income................ 36,329 4,139 28 40,496 22,598 (7,073) 56,021
Interest (income) expense..... 7,203 6,197 (3,464)(c) 9,936 765 53,627(l) 64,328
Loss on assets held for
sale........................ 3,810 3,810 3,810
Other (income) expense, net... 525 (60) 465 (3,167) -- (2,702)
-------- ------- ------- -------- -------- -------- ----------
Earnings (loss) before income
taxes......................... 28,601 (5,808) 3,492 26,285 25,000 (60,700) (9,415)
Provision (benefit) for income
taxes....................... 9,724 (547) (109)(e) 9,068 10,005 (22,462)(m) (3,389)
-------- ------- ------- -------- -------- -------- ----------
Net income (loss)............. $ 18,877 $(5,261) $ 3,601 $ 17,217 $ 14,995 $(38,238) $ (6,026)
======== ======= ======= ======== ======== ======== ==========
PER COMMON SHARE:
Net loss per share (basic and diluted).......................................................................... $ (.16)
==========
Average Shares Outstanding...................................................................................... 37,771
OTHER FINANCIAL DATA:
Depreciation and amortization................................................................................... $ 45,134
Cash interest expense(n)........................................................................................ 61,108
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
45
<PAGE> 53
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL IDP
----------------------- FLOWSERVE/ ACQUISITION/FINANCING PRO FORMA
FLOWSERVE(A) IDP IDP ADJUSTMENTS(1) CONSOLIDATED
------------ -------- ---------- --------------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales................... $584,462 $363,409 $947,871 $ -- $947,871
Cost of sales............... 382,070 279,792 661,862 (700)(f) 662,378
1,573(g)
193(k)
(550)(p)
-------- -------- -------- -------- --------
Gross profit................ 202,392 83,617 286,009 (516) 285,493
Selling and administrative
expense................ 142,220 76,362 218,582 (300)(f) 218,789
(1,800)(h)
(1,944)(i)
2,899(j)
1,352(k)
Research, engineering and
development expense.... 12,353 1,310 13,663 -- 13,663
-------- -------- -------- -------- --------
Operating income............ 47,819 5,945 53,764 (723) 53,041
Interest expense.......... 13,576 530 14,106 50,222(l) 64,328
Other (income) expense,
net.................... (3,161) (712) (3,873) -- (3,873)
-------- -------- -------- -------- --------
Earnings (loss) before
income
taxes.................. 37,404 6,127 43,531 (50,945) (7,414)
Provision (benefit) for
income taxes........... 12,905 8,591 21,496 (24,165)(m) (2,669)
-------- -------- -------- -------- --------
Net income (loss)......... $ 24,499 $ (2,464) $ 22,035 $(26,780) $ (4,745)
======== ======== ======== ======== ========
PER COMMON SHARE:
Net loss per share (basic and diluted).................................................... $ (0.13)
========
Average shares outstanding................................................................ 37,810
OTHER FINANCIAL DATA:
Depreciation and amortization............................................................. $ 41,302
Cash interest expense(n).................................................................. 61,108
Ratio of earnings to fixed charges(o)..................................................... --
</TABLE>
-------------------------
(A) Includes the results of Invatec from January 13, 2000.
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
46
<PAGE> 54
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS
NOTE 1: PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been applied to the accompanying
historical consolidated statements of operations of Flowserve, Invatec and IDP
to give effect to the Invatec acquisition and the IDP acquisition (see note 1 to
the unaudited pro forma consolidated balance sheet) and the financing
transactions as if they had all occurred on January 1, 1999.
<TABLE>
<S> <C>
(a) Represents reduction in Invatec selling and administrative
costs for non-recurring items associated with
pre-acquisition bank fees and other credit facility related
expenses.
(b) Represents incremental decrease in annual goodwill
amortization based on decrease of $4.3 million of estimated
goodwill originating from the Invatec acquisition and
reduction of amortization period from 40 to 20 years.
(c) Represents the net reduction in consolidated interest
expense related to Invatec debt financing.
(d) Represents reversal of Invatec goodwill impairment charge.
(e) Represents income tax adjustments required to arrive at the
expected pro forma effective tax rate of 34.5% after
Flowserve's acquisition of Invatec.
(f) Represents actuarially determined adjustment to retiree
pension and post-retirement benefits expense for hourly and
salaried personnel of IDP that, pursuant to the IDP purchase
agreement, were retained by Ingersoll-Rand, IDP's
predecessor parent, net of the pension benefits provided to
IDP employees under the Flowserve plans.
(g) Represents incremental increase in depreciation expense in
cost of sales based on estimated fair market value of
property, plant and equipment over estimated useful lives of
3 to 40 years.
This adjustment is based on a preliminary allocation of the
purchase price for the IDP acquisition. The final allocation
of the purchase price is contingent upon valuations that
have not been completed. See note 1 to the unaudited pro
forma consolidated balance sheet for further discussion on
the purchase price allocation related to the IDP
acquisition.
(h) Represents the elimination of corporate overhead expenses
allocated by Ingersoll-Rand to IDP. Pursuant to the IDP
purchase agreement, this allocation was eliminated upon
closing of the IDP acquisition on August 8, 2000. Flowserve
will assume and provide services with no significant
incremental cost above what it cost Flowserve to provide
such services prior to the acquisition for tax services,
information technology support, pensions and benefits
administration and other overhead costs.
(i) Represents the elimination of expense recorded by IDP
related to a phantom stock incentive plan that was
eliminated upon consummation of the Acquisition. IDP
personnel losing these previous incentives may be eligible
to participate in Flowserve's established stock option
incentive scheme, which generally does not result in any
compensation charge.
(j) Represents incremental increase in annual goodwill
amortization based on $225.7 million of estimated goodwill
over an estimated useful life of 40 years related to the IDP
acquisition.
(k) Represents incremental increase in amortization expense
based on estimated fair value of other intangible assets
acquired over their estimated useful lives of approximately
17 years.
</TABLE>
47
<PAGE> 55
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
FOR YEAR ENDED ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 1999 JUNE 30, 2000
----------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
(l) Represents the following:
Interest on Term Loan A ($275.0 @ 9.4%)..................... $ 25.9 $12.9 $12.9
Interest on Term Loan B ($475.0 @ 10.1%).................... 48.0 24.0 24.0
Interest expense associated with notes offered hereby
($380.3 @ 12.25%)........................................... 46.5 23.3 23.3
Letter of credit fee ($110.0 @ 1.64% weighted average,
including $30.0 under the Revolving Credit Facility)........ 1.8 0.9 0.9
------ ----- -----
Cash interest expense..................................... 122.2 61.1 61.1
Non-cash increase in amortization associated with $46.5
million in deferred financing costs and $5.4 million
discount on the note offerings incurred in connection with
entering into the Senior Credit Facilities and issuance of
the notes offered hereby, amortized over terms ranging from
6 to 10 years. ............................................. 6.5 3.2 3.2
------ ----- -----
Sub-total interest expense................................ 128.7 64.3 64.3
Elimination of interest and associated fees on borrowings
repaid in connection with the financings.................... (22.7) (10.7) (14.1)
------ ----- -----
Net Adjustment............................................ $106.0 $53.6 $50.2
====== ===== =====
</TABLE>
For each 0.125% change in the interest rates payable on the
outstanding balance under the Senior Credit Facilities and
the notes offered hereby, annual interest expense would
change by $1.4 million before the effect of income taxes.
(m) Represents income tax adjustment required to arrive at the
expected pro forma effective tax rate of 36.0% and to
provide U.S. taxes on IDP partnership earnings.
(n) Cash interest expense is total interest expense less amortization of
deferred financing costs and discount of notes offered hereby. For purposes
of determining the ratio of earnings to fixed charges, earnings
(o) consist of income (loss) from continuing operations before income taxes,
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness, amortization of deferred financing fees and the estimated
interest portion of rental expense estimated to be attributable to
interest. For the year ended December 31, 1999 and the six months ended
June 30, 2000, earnings were insufficient to cover fixed charges by $34.5
million and $7.9 million, respectively.
(p) Represents estimated rental expense for the Phillipsburg plant for
Flowserve's planned usage prior to the shutdown of the facility, net of
direct costs related to the facility historically incurred by IDP which are
not incremental costs to Flowserve as the Phillipsburg plant was not
acquired under the terms of the Agreement.
NOTE 2: MERGER TRANSACTION AND RESTRUCTURING EXPENSE
Represents non-recurring merger transaction and restructuring expenses. In
1999, $15.9 million for Flowserve represents facility closure and personnel
reductions of 9% to reduce excess capacity and $0.2 million for IDP relates to
additional costs incurred in regards to a foundry closure initiated in 1996.
NOTE 3: MERGER INTEGRATION EXPENSES
Represents non-recurring expenses related to the merger of BW/IP and Durco
in order to achieve the planned merger synergies. These expenses were
principally for costs for consultants and costs related to integration team
members including salaries, benefits and training.
48
<PAGE> 56
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
FLOWSERVE IDP(1) ADJUSTMENTS(2) CONSOLIDATED
--------- -------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 14,495 $ 23,566 $ (21,963)(a) $ 16,098
Accounts receivable, net.................... 246,331 178,848 -- 425,179
Inventories................................. 210,617 122,117 -- 332,734
Prepaids and other current assets........... 37,094 26,746 22,598(b) 86,438
-------- -------- --------- ----------
Total current assets................ 508,537 351,277 635 860,449
Property, plant and equipment, net............ 221,336 164,863 27,701(c) 413,900
Goodwill, net................................. 145,155 139,675 225,676(d) 510,506
Intangibles assets, net....................... 6,197 75,622 63,478(e) 145,297
Other assets.................................. 80,851 17,162 44,301(f) 142,314
-------- -------- --------- ----------
Total assets............................. $962,076 $748,599 $ 361,791 $2,072,466
======== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and notes
payable.................................. $ 575 $ -- $ 5,956(g) $ 6,531
Accounts payable............................ 76,802 187,420 -- 264,222
Income taxes................................ 8,904 -- 8,904
Accrued expenses and other liabilities...... 96,957 3,458 54,646(h) 155,061
-------- -------- --------- ----------
Total current liabilities........... 183,238 190,878 60,602 434,718
-------- -------- --------- ----------
Noncurrent liabilities........................ -- 90 -- 90
Post-retirement benefits and deferred items... 146,963 92,477 (35,088)(i) 204,352
Long-term debt due after one year............. 315,348 -- 803,604(g) 1,118,952
Shareholders' equity:
Serial preferred stock
Common stock................................ 51,856 414,558 (414,558) 51,856
Capital in excess of par value.............. 67,697 -- -- 67,697
Retained earnings........................... 368,754 89,982 (92,155) 366,581
Treasury stock, at cost..................... (93,226) -- -- (93,226)
Accumulated other comprehensive income...... (78,554) (39,386) 39,386 (78,554)
-------- -------- --------- ----------
Total shareholders' equity............... 316,527 465,154 (467,327)(j) 314,354
-------- -------- --------- ----------
Total liabilities and shareholders'
equity............................ $962,076 $748,599 $ 361,791 $2,072,466
======== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
49
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
The following pro forma adjustments have been applied to the accompanying
historical balance sheets of Flowserve and IDP to give effect to the IDP
acquisition and the financing transactions as if they had occurred on June 30,
2000.
NOTE 1. ACQUISITIONS
On August 8, 2000 Flowserve acquired IDP. The IDP acquisition will be
accounted for as a purchase, with the excess of the purchase price over the fair
value of net assets acquired allocated to goodwill.
A summary of the purchase price and related preliminary purchase price
allocation follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Cash paid at closing........................................ $ 775,000
Cash paid for direct acquisition costs, including financial
advisory, accounting and legal costs...................... 10,049
---------
Aggregate purchase price.................................. 785,049
Book value of IDP net assets acquired....................... (505,242)
---------
Excess of cost over net book value of assets acquired....... 279,807
Adjustments to record assets and liabilities at fair market
values(a)
Prepaid rent on Phillipsburg Plant........................ (1,839)
Property and equipment.................................... (27,701)
Elimination of Phantom Stock Incentive Plan............... (3,018)
Intangible assets, including patents, trademarks and trade
names.................................................. (63,478)
Deferred income taxes related to IDP acquisition.......... 5,000
Severance, facility closing expenses and other exit costs
to be incurred in connection with the Acquisition, net
of taxation(b)......................................... 36,905
---------
Net adjustment to goodwill........................ $ 225,676
=========
</TABLE>
-------------------------
(a) Upon completion of appraisals of the fair values of the acquired assets and
liabilities, our allocation of the purchase price may differ from that
presented above, and we may identify other assets to which a portion of the
purchase price will be allocated. We believe that the depreciation and
amortization periods for such identifiable other assets will be
approximately 17 years.
(b) Reflects exit costs to be incurred in connection with the Acquisition in
accordance with EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination."
50
<PAGE> 58
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
NOTE 2: PRO FORMA ADJUSTMENTS TO CONSOLIDATED BALANCE SHEET
The Unaudited Pro Forma Consolidated Balance Sheet reflects the IDP
acquisition and related financing transactions, as if they had occurred as of
June 30, 2000. The application of the proceeds from borrowings under the Senior
Credit Facilities and the issuance of the notes offered by this offering
occurred concurrently with the closing of this offering.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
(a) Changes in cash and cash equivalents are:
Cash proceeds from initial borrowings under the Senior Credit
Facilities.................................................. $ 750,000
Cash proceeds from issuance of the notes ($380.3 million)
offered hereby................................................ 374,952
-----------
Proceeds from these borrowings................................ 1,124,952
Payment to Ingersoll-Rand for purchase of IDP................. (775,000)
Repayment of existing Flowserve debt.......................... (315,392)
Transaction fees and expenses................................. (56,523)
-----------
Uses of cash............................................. (1,146,915)
-----------
Total adjustment to cash............................... $ (21,963)
===========
(b) To record prepaid asset associated with free rental period
provided by Ingersoll-Rand in accordance with contractual
terms of the Agreement based on the planned usage of the
facility by Flowserve prior to shut-down...................... $ 1,839
Deferred taxes resulting from restructuring costs associated
with IDP...................................................... 20,759
-----------
Total adjustment to prepaids and other current
assets................................................. $ 22,598
===========
(c) To record property and equipment acquired from IDP at
estimated fair value, excluding the Phillipsburg Plant which
was not acquired under the terms of the Agreement............. $ 27,701
(d) To record goodwill resulting from the IDP acquisition......... $ 225,676
(e) To reflect adjustments to record fair value of intangible
assets acquired from the IDP acquisition...................... $ 63,478
(f) To reflect adjustments to record the following:
To record deferred financing costs in connection with entering
into the Senior Credit Facilities and issuing the notes
offered hereby................................................ $ 46,474
Write-off of deferred financing fees related to existing
Flowserve credit facility..................................... (2,173)
-----------
Total adjustment to other assets....................... $ 44,301
===========
</TABLE>
51
<PAGE> 59
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET -- (CONTINUED)
NOTE 2: PRO FORMA ADJUSTMENTS TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
(g) Reflects the issuance of the notes offered hereby and initial
borrowings under the Senior Credit Facilities, net of
repayment of existing indebtedness:
Issuance of the notes offered herein.......................... $ 374,952
Initial borrowings under the Senior Credit Facilities......... 750,000
-----------
1,124,952
Less: repayment of Flowserve long-term debt................... (315,348)
Less: reclassification of long-term to current for initial
principal payment due June 30, 2001........................... (6,000)
-----------
Net adjustment to long-term debt.............................. $ 803,604
===========
Adjustment to current portion of long-term debt:
Current portion of Term Loan A and Term Loan B due
June 30, 2001.......................................... $ 6,000
Less: repayment of existing current portion of long-term
debt.................................................... (44)
-----------
Net adjustment to current portion of long-term debt........... $ 5,956
===========
(h) To reflect adjustments to record integration related
restructuring costs associated with the Acquisition in
accordance with EITF 95-3 "Recognition of liabilities in
connection with a Purchase Business Combination".............. $ 57,664
Represents elimination of liability recorded by IDP related to
a phantom stock incentive plan that ceased at the date of the
IDP acquisition............................................... (3,018)
-----------
Total adjustments............................................. $ 54,646
===========
(i) Pension and post-retirement health care liabilities retained
by Ingersoll-Rand, IDP's predecessor parent................... $ (40,088)
Deferred income taxes related to IDP acquisition.............. 5,000
-----------
Net adjustment to Post-retirement benefits and deferred
items......................................................... $ (35,088)
===========
(j) Represents adjustments to reflect the following:
Elimination of IDP contributed capital........................ $ 414,558
Elimination of IDP accumulated earnings............. $89,982
Write-off of pre-existing deferred financing costs
related to existing Flowserve debt.................. 2,173
-------
Sub-total, retained/accumulated earnings
adjustments......................................... 92,155
Elimination of IDP accumulated other comprehensive
income........................................................ (39,386)
-----------
Total adjustments............................................. $ 467,327
===========
</TABLE>
52
<PAGE> 60
SELECTED HISTORICAL FINANCIAL DATA
FLOWSERVE CORPORATION
The following selected historical financial data of Flowserve as of and for
each of five fiscal years in the period ended December 31, 1999 have been
derived from Flowserve's audited consolidated financial statements and the notes
thereto. The following selected historical financial data as of and for the six
months ended June 30, 1999 and June 30, 2000 have been derived from Flowserve's
unaudited consolidated financial statements included elsewhere within this
prospectus. This selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Flowserve" and the consolidated financial
statements of Flowserve included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
---------------------------------------------------- ENDED ENDED
1995 1996 1997 1998 1999 JUNE 30, 1999 JUNE 30, 2000
-------- -------- -------- -------- -------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 983.9 $1,097.6 $1,152.2 $1,083.1 $1,061.3 $544.6 $584.5
Cost of sales............................. 591.6 668.7 703.3 667.7 697.9 353.9 382.1
-------- -------- -------- -------- -------- ------ ------
Gross profit.............................. 392.3 428.9 448.9 415.4 363.4 190.7 202.4
Selling and administrative expense...... 264.4 283.4 285.9 265.6 275.9 133.3 142.2
Research, engineering and development
expense............................... 24.6 24.5 26.9 26.4 25.6 13.2 12.4
Merger transaction and restructuring
expense............................... 5.1 5.8 44.5 -- 15.9
Merger integration expense.............. -- -- 7.0 38.3 14.2 7.9 --
-------- -------- -------- -------- -------- ------ ------
Operating income.......................... 98.2 115.2 84.6 85.1 31.8 36.3 47.8
Interest expense........................ 12.3 12.1 13.3 13.2 15.5 7.2 13.6
Other (income) expense, net............. (2.5) (5.2) (18.5) (1.3) (2.0) .5 (3.2)
-------- -------- -------- -------- -------- ------ ------
Earnings before income taxes.............. 88.4 108.3 89.8 73.2 18.3 28.6 37.4
Provision for income taxes.............. 34.4 37.2 38.2 25.5 6.1 9.7 12.9
Cumulative effective of change in
accounting principle.................. -- -- -- (1.2) -- -- --
-------- -------- -------- -------- -------- ------ ------
Net income................................ $ 54.0 $ 71.1 $ 51.6 $ 48.9 $ 12.2 $ 18.9 $ 24.5
======== ======== ======== ======== ======== ====== ======
PER COMMON SHARE:
Net earnings (basic and diluted)........ $ 1.30 $ 1.72 $ 1.26 $ 1.23 $ 0.32 $ 0.50 $ 0.65
Dividends............................... .51 .57 .65 .56 .56 0.28 --
Book value(1)........................... 9.01 9.40 9.74 9.15 8.23 9.23 8.46
OTHER FINANCIAL DATA:
Depreciation and amortization........... 34.5 36.7 38.9 39.3 39.6 21.2 20.4
Capital expenditures, net............... 39.9 35.7 39.6 38.2 40.5 20.2 12.4
Ratio of earnings to fixed charges(2)... 6.3 7.3 5.9 5.2 1.8 3.6 3.1
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital......................... $ 251.8 $ 280.0 $ 284.2 $ 268.2 $ 258.1 $267.6 $325.3
Total assets............................ 801.1 829.8 880.0 870.2 838.2 845.0 962.1
Long-term debt.......................... 125.9 144.0 128.9 186.3 198.0 192.9 315.3
Shareholders' equity.................... 375.2 388.6 395.3 344.8 308.3 345.3 316.5
</TABLE>
-------------------------
(1) Calculated as shareholders' equity as of the end of the period divided by
common shares issued, less amounts held in Treasury.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
from continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest expense on all indebtedness, amortization of
deferred financing fees and the estimated interest portion of rental expense
attributable to interest.
53
<PAGE> 61
INGERSOLL-DRESSER PUMP COMPANY
The following selected historical financial data of IDP as of and for the
years ended December 31, 1996, 1997, 1998 and 1999 have been derived from its
audited consolidated financial statements and the notes thereto. The selected
historical financial data as of and for the year ended December 1995 is
unaudited. The following selected historical financial data as of and for the
six months ended June 30, 1999 and June 30, 2000 have been derived from IDP's
unaudited consolidated financial statements included elsewhere in this
prospectus. This selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Ingersoll-Dresser Pump Company" and the
consolidated financial statements of Ingersoll-Dresser Pump Company included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
----------------------------------------------- JUNE 30, JUNE 30,
1995 1996 1997 1998 1999 1999 2000
----------- ------ ------ ------ ------ ---------- ----------
(UNAUDITED) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................................. $793.1 $856.3 $865.1 $907.2 $838.4 $399.5 $363.4
Cost of Sales......................................... 607.5 641.2 637.2 661.1 610.7 295.6 279.8
------ ------ ------ ------ ------ ------ ------
Gross profit.......................................... 185.6 215.1 227.9 246.1 227.7 103.9 83.6
Selling and administrative expense.................. 162.5 163.2 163.1 168.9 162.1 79.8 76.4
Research, engineering and development expense....... 1.6 2.8 3.6 3.8 3.0 1.5 1.3
Restructuring expense............................... -- 4.5 19.5 3.6 0.2 -- --
------ ------ ------ ------ ------ ------ ------
Operating income...................................... 21.5 44.6 41.7 69.8 62.4 22.6 5.9
Interest expense.................................... 1.7 1.5 1.3 1.6 1.4 .8 0.5
Other income, net................................... (13.0) (5.0) (4.1) (7.1) (7.5) (3.2) (0.7)
------ ------ ------ ------ ------ ------ ------
Earnings before income taxes.......................... 32.8 48.1 44.5 75.3 68.5 25.0 6.1
Provision for income taxes............................ 6.8 11.8 13.2 16.6 19.0 10.0 8.6
------ ------ ------ ------ ------ ------ ------
Net income............................................ $ 26.0 $ 36.3 $ 31.3 $ 58.7 $ 49.5 $ 15.0 $ (2.5)
====== ====== ====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
Depreciation and amortization....................... $ 21.6 $ 20.5 $ 20.1 $ 19.0 $ 18.3 $ 9.9 $ 14.9
Capital expenditures................................ 17.3 17.0 16.3 20.3 18.2 5.9 4.8
BALANCE SHEET DATA (AS OF END OF PERIOD):
Working capital..................................... $261.4 $329.6 $215.9 $197.5 $174.9 429.6 $160.4
Total assets........................................ 630.2 690.0 725.9 800.6 796.4 748.9 748.6
Partners' equity.................................... 362.8 401.0 416.4 479.1 492.5 474.4 465.2
</TABLE>
54
<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of Flowserve and IDP appearing elsewhere
in this prospectus. For information regarding our pro forma financial condition,
see "Unaudited Pro Forma Consolidated Financial Statements" included in this
prospectus.
OVERVIEW
On February 9, 2000, Flowserve announced it had reached a definitive
agreement to acquire Ingersoll-Dresser Pump Company from Ingersoll-Rand for $775
million in cash. The acquisition closed August 8, 2000. The transaction was
financed with a combination of new bank facilities and senior subordinated
notes. In connection with the acquisition, all of Flowserve's existing
indebtedness was refinanced. Flowserve also announced suspension of dividend
payments.
We believe we are the largest manufacturer and aftermarket service provider
of comprehensive flow control systems in the world. Our customers include the
world's leading engineering and construction firms, OEMs, distributors and end
users, including Asea Brown Boveri, ARCO, BASF, Bayer, Bechtel, BP Amoco, Dow
Chemical, Duke Energy, DuPont, Eastman Chemical, ExxonMobil, Royal Dutch/Shell,
Saudi Aramco, Texaco, TotalFinaElf and the United States Navy. Our ability to
provide the full spectrum of products and services in our markets in a time
critical manner is key to increasing our market share.
The principal elements comprising cost of sales are raw materials, labor
and manufacturing overhead. During 1999, raw materials accounted for
approximately half of cost of sales. Principal raw materials we use include bar
stock and structural steel, castings, fasteners, gaskets, motors, silicon faces
and carbon faces and teflon(R). We expect to reduce our overall cost of raw
materials through increased negotiating leverage and improvements in
manufacturing efficiency. Although we often purchase raw materials from one
supplier, we have multiple sources from which we can procure raw materials.
Labor costs include employee costs of salaried and hourly employees. We have
reduced labor costs over the last few years through productivity improvements
and restructuring efforts. Manufacturing overhead includes lease costs,
depreciation on property, plant and equipment, utilities, property taxes and
repairs and maintenance.
Operating expenses include selling, general and administrative expenses and
research, engineering and development expenses. Selling expenses primarily
include salaries and benefits to the sales force and commissions to independent
sales representatives. Our sales force is paid a commission on recurring sales.
General and administrative expenses include corporate overhead relating to
employee costs, rent expense, professional fees and information system costs.
Research, engineering and development expenses are incurred for the development
of new products and the enhancement of existing products. We have reduced our
engineering, design and development costs through, among other things, the use
of common designs and components.
FLOWSERVE
OVERVIEW
Flowserve was created on July 22, 1997, through a merger of equals between
BW/IP, Inc. and Durco International Inc., which was accounted for under the
"pooling of interests" method of accounting. Accordingly, all historical
information for Flowserve has been restated giving effect to the transaction as
if the two companies had been combined at the beginning of all periods
presented.
Flowserve produces engineered pumps, precision mechanical seals, automated
and manual quarter-turn valves, control valves and valve actuators, and provides
a range of related flow management services worldwide, primarily for the process
industries. Flowserve's products are used in industries which process difficult
to handle and often corrosive fluids, in environments with extreme temperature
and pressure and wherever process leakage cannot be tolerated. Flowserve's
businesses are affected by economic conditions in the United States and other
countries where its products are sold and serviced, by the relationship of the
U.S. dollar to other currencies, and by the demand and pricing for customers'
products. The impact of
55
<PAGE> 63
these conditions is somewhat mitigated by the strength and diversity of
Flowserve's product lines and geographic coverage.
RESULTS OF OPERATIONS
The following table sets forth summary categories of statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1997 1998 1999 1999 2000
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 61.0 61.6 65.8 65.0 65.4
Gross profit................................... 39.0 38.4 34.2 35.0 34.6
Selling and administrative expenses............ 24.8 24.5 26.0 24.5 24.3
Operating income............................... 7.3 7.9 3.0 6.7 8.2
Interest expense............................... 1.2 1.2 1.5 1.3 2.3
Earnings before income taxes................... 7.8 6.8 1.7 5.3 6.4
Net income..................................... 4.5 4.5 1.1 3.5 4.2
</TABLE>
In general, results for the first half of 2000 were higher than the
corresponding period of the previous year due to Flowserve's acquisition of
Invatec on January 13, 2000 and 1999 results were lower than the two previous
years due to trends in the global markets in which Flowserve participates. The
economic turmoil that started in Asia in the second half of 1997 spread to other
parts of the world, including Latin America. The profitability of Flowserve's
chemical and petroleum customers, which collectively represent about 71% of the
business, was negatively impacted by the economic weakness. This economic
weakness contributed to a supply/demand imbalance of chemical products, and an
oil price that fell to as low as $10.73 per barrel in December 1998 compared
with $17.78 per barrel in December 1997. At the end of 1999, the price per
barrel increased to $25.60 and, as a result, Flowserve began to see an increase
in bid activity in the petroleum and chemical markets. This increase did not
have a significant positive effect on 1999 results as any market upturn
generally precedes an increase in shipments by six to twelve months.
SALES AND BOOKINGS
Bookings, or incoming orders for which there are purchase commitments, for
the first six months of 2000, were $620.1 million, 23.0% higher than the first
half of 1999 when bookings were $504.2 million. Excluding Invatec, bookings also
showed year-on-year improvement of 5.3%. Sales increased 7.3% to $584.5 million
for the six months ended June 30, 2000, compared with $544.6 million for the
same period in 1999. Sales for the first half of 2000 would have been $501.2
million without the acquisition of Invatec, 8% below the first half of 1999.
Bookings were lower in 1999 at $1,039.3 million, compared with $1,082.5
million in 1998 and $1,172.4 million in 1997. Sales decreased to $1,061.3
million in 1999 from $1,083.1 million in 1998 and $1,152.2 million in 1997.
Bookings and sales declines in 1999 were largely a result of the economic and
market factors previously discussed.
There were several other factors that affected the comparison of 1999 to
1998 and 1998 to 1997. A stronger U.S. dollar, in relation to other currencies
in which Flowserve conducts its business, had the effect of reducing both
bookings and sales when compared with the prior year. The negative translation
effect reduced 1999 bookings and sales by about 1% and 1998 bookings and sales
by about 2%. The negative translation impact on net earnings was about 7% in
1999 and 2% in 1998.
Comparisons are also impacted by the divestitures of several businesses in
1997 that contributed about $18 million to both bookings and sales in 1997.
Several acquisitions affected the comparability as well. Acquisitions made in
late 1998 and 1999 added over $12 million to 1999 bookings and sales, compared
56
<PAGE> 64
with 1998. In addition, acquisitions made in 1998 added about $14 million to
1998 bookings and sales, compared with 1997.
BUSINESS SEGMENTS
Flowserve manages its operations through three business segments: Rotating
Equipment Division ("RED") for pumps (prospectively to be known as Flowserve
Pump Division); Flow Control Division ("FCD") for automated and manual
quarter-turn valves, control valves and valve actuators; and Flow Solutions
Division ("FSD") for precision mechanical seals and aftermarket services. Each
division's results include aftermarket sales of spare parts.
Sales and operating income before special items, as defined below, for each
of the three business segments are:
<TABLE>
<CAPTION>
ROTATING EQUIPMENT DIVISION
--------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales..................................... $412.8 $371.5 $353.2 $189.7 $155.7
Operating income, before special items.... 51.0 39.1 23.1 11.5 10.1
</TABLE>
The sales decrease in 2000 was generally due to a reduced opening backlog
of highly engineered pumps. Unfavorable currency translation also reduced sales
by about 3%.
Sales of pumps and pump parts for the Rotating Equipment Division decreased
to $353.2 million in 1999 from $371.5 million in 1998 and $412.8 million in
1997. The sales decline was generally due to reduced demand for chemical process
pumps as Flowserve's chemical industry customers lowered their capital and
maintenance spending in response to over-capacity in their industry. RED sales
were also lower due to unfavorable pricing. RED sales decreased in 1998 compared
with 1997 due to the same factors.
Operating income before special items, as a percentage of sales, increased
to approximately 6.5% in first half of 2000 from about 6.1% in the comparable
prior-year period. The operating income margin increased due to an improved
gross margin resulting from an improved product mix and ongoing cost reduction
efforts.
Operating income, before restructuring expenses and other special items, as
a percentage of RED sales, declined to 6.5% in 1999 from 10.5% in 1998 and 12.4%
in 1997. The decline was due to the lower volume of more profitable chemical
process and vertical pumps, nuclear products and other parts and replacement
business that more than offset the benefits of the merger integration program.
The decline was also impacted by unfavorable pricing.
<TABLE>
<CAPTION>
FLOW CONTROL DIVISION
--------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales..................................... $317.2 $313.2 $295.3 $151.7 $135.2
Operating income, before special items.... 47.0 43.8 25.1 15.1 16.2
</TABLE>
The decrease in sales was due to reduced backlog at the beginning of the
year and lower book-to-build volume during the period. Unfavorable currency
translation also reduced sales by about 4%.
Sales of valves and valve automation products for the Flow Control Division
declined to $295.3 million in 1999 from $313.2 million in 1998 and $317.2
million in 1997. The decrease was primarily due to increased price competition
for valves and accessories and a decline in business levels of control valve
products and a weaker chemical market that reduced demand and placed downward
pressure
57
<PAGE> 65
on selling prices. The sales decrease between 1998 and 1997 was partly offset by
the acquisition of Valtek Engineering (United Kingdom licensee) in July 1998.
Operating income before special items, as a percentage of sales, was 12.0%
in the first half of 2000, compared with 10.0% in 1999. The improved operating
margin in 2000 was generally due to improved gross margins and lower operating
expenses. These improvements were generally due to a favorable product mix and
reduced costs principally related to the Company's restructuring program
initiated in the fourth quarter of 1999.
Operating income, before restructuring expenses and other special items, as
a percentage of FCD sales was 8.5% in 1999, compared with 14.0% in 1998 and
14.8% in 1997. The decline in 1999 was primarily due to severe price erosion, an
unfavorable product mix and lower sales volume. The decline in 1998 from 1997
was generally due to the lower sales volume. Operating income in 1998 was also
affected by lower selling prices and a reduced volume of higher profit spare
parts.
<TABLE>
<CAPTION>
FLOW SOLUTIONS DIVISION
--------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales..................................... $430.1 $428.5 $438.5 $217.9 $308.4
Operating income, before special items.... 62.7 65.1 56.1 27.9 35.4
</TABLE>
Sales were higher than the prior-year period generally due to the
acquisition of Invatec. The increase in sales was offset slightly by an
unfavorable currency translation which reduced sales by about 2%.
Sales of seal products and services for the Flow Solutions Division
increased to $438.5 million in 1999, compared with $428.5 million in 1998 and
$430.1 million in 1997. The sales increase primarily resulted from the addition
of new service and repair centers while seal sales remained stable as a result
of increased market share.
Operating income before special items, as a percentage of sales, decreased
to 11.5% from 12.8% in the first half of 1999. The lower margins were generally
due to the acquisition of Invatec, as Invatec's gross margins are historically
lower than the balance of FSD operations, and period integration expenses
relating to the Company's 1999 restructuring program.
Operating income, before restructuring expenses and other special items, as
a percentage of FSD sales, decreased to 12.8% in 1999 from 15.2% in 1998 and
14.6% in 1997. The decrease in 1999 from 1998 was due to lower margins in the
service group that was impacted by competition and facility underutilization in
certain markets. The improved margin in 1998 compared to 1997 is due to the
leveraging of a higher volume of sales and the benefits of the merger
integration program, partly offset by a seal mix change to lower-margin
products.
OPERATIONS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The gross profit margin was 34.6% for the six months ended June 30, 2000,
compared with 35.0% for the same period in 1999. The slight decrease was due to
the lower margins associated with Invatec. Excluding Invatec, margins were 0.7
percentage points above the prior year.
Selling and administrative expense as a percentage of net sales was 24.3%
for the six-month period ended June 30, 2000, compared with 24.5% for the
corresponding 1999 period. The slight decrease was due to the Company's cost
reduction initiatives which more than offset period costs incurred as a result
of the Company's 1999 restructuring program and costs associated with
Flowserver, the Company's global business process improvement initiative.
Flowserver expenses totaled $2.5 million in the first half of 2000. In 1999,
Flowserver expenses were $7.8 million and were identified and disclosed
separately as merger integration expense.
58
<PAGE> 66
Research, engineering and development expense was $12.4 million for the
first six months of 2000, compared with $13.2 million during the same period
last year. The lower level of spending was generally the result of cost control
initiatives and the reallocation of resources to assist in project engineering.
Interest expense during the first half of 2000 was $13.6 million, up $6.4
million from the same period in 1999 due to higher interest rates and the
increased borrowing levels required to acquire Invatec stock and retire debt
obtained in the acquisition.
The Company recorded other income of $3.2 million during the six months
ended June 30, 2000 primarily as a result of two factors. Income of $1.1 million
was realized due to the quarterly mark-to-market adjustments requirement under
the provisions of EITF No. 97-14 "Accounting for Deferred Compensation
Agreements Where Amounts Earned Are Held in a Rabbi Trust and Invested". In
addition, $1.0 million of income was recorded as a result of the Company
reaching an agreement and receiving payment on an outstanding promissory note
which had previously been fully reserved.
The Company's effective tax rate for the first half of 2000 was 34.5%
compared to 34.0% in the first half of 1999. The increase was due to the
acquisition of Invatec.
Net earnings for the first half of 2000 were $24.5 million or $0.65 per
share. This was 30.0% above net earnings of $18.9 million, or $0.50 per share,
for the same period in 1999. Excluding special items, net earnings for the first
half of 1999 were $24.1 million or $0.64 per share.
1999 compared to 1998 and 1997
Gross profit margin, or gross profit as a percentage of sales, declined to
34.2% in 1999 from 38.4% in 1998 and 39.0% in 1997. The 1999 margin included
$5.1 million in one-time costs relating to inventory and fixed asset
impairments. The lower margin in 1999 related to these impairments along with
underabsorption variances due to lower sales, lower selling prices and a less
favorable product mix. These reductions were partly offset by savings related to
Flowserve's merger integration program that reduced cost of sales by
approximately $5 million. The lower margin in 1998 was generally related to
valve price discounting and a product mix change toward lower margin products.
These factors and lower sales contributed to a decline in gross profit dollars
to $363.4 million in 1999 from $415.4 million in 1998 and $448.9 million in
1997.
Selling and administrative expense was $275.9 million in 1999 compared with
$265.6 million in 1998 and $285.9 million in 1997. Selling and administrative
expense in 1999 included $5.8 million in costs for executive separation
contracts and certain costs relating to fourth-quarter 1999 facility closures
while 1998 included $3.8 million in costs associated with an obligation under an
executive employment agreement. As a percentage of sales, selling and
administrative expense was 26.0% (25.5% when adjusted for the special items),
compared with 24.5% (24.2% when adjusted for the executive employment agreement)
in 1998 and 24.8% in 1997. The increase in 1999 was generally due to expenses
related to the implementation of a consolidated benefit program and other
personnel related costs as well as lower sales. Reductions in selling and
administrative expense in 1998 compared to 1997 were generally due to savings
from merger integration activities of about $12 million and lower sales.
Research, engineering and development expense was $25.6 million in 1999,
compared with $26.4 million in 1998 and $26.9 million in 1997. The decline in
these expenses in 1999 is related to reallocation of some resources to assist in
project engineering and cost controls.
Interest expense was $15.5 million in 1999, compared with $13.2 million in
1998 and $13.3 million in 1997. The increase in 1999 is primarily due to higher
interest rates and increased average borrowings due to the share repurchase
program initiated in the second quarter of 1998.
59
<PAGE> 67
The effective tax rate, excluding special items, was 33.3% in 1999,
compared with 34.9% in 1998 and 36.9% in 1997. The decrease in 1999 was due to
the geographic mix of earnings while the decrease in 1998 was due to the
geographic mix of earnings and post-merger restructuring of operations. The
effective tax rate after special items in both 1999 and 1998 was the same as the
effective tax rate excluding special items. In 1997, the effective tax rate was
42.6% due to the nondeductibility of certain merger transaction expenses, partly
offset by certain tax benefits realized from the sale of a subsidiary.
Earnings after special items were $12.2 million in 1999, compared with
$48.9 million in 1998 and $51.6 million in 1997. Special items include
restructuring charges, merger integration expense, merger transaction expense,
inventory and fixed asset impairments, costs associated with obligations under
executive employment and separation agreements, a gain on the sale of a
subsidiary and the cumulative effect of a change in accounting principle.
Earnings before special items were $39.5 million in 1999, compared with $74.9
million in 1998 and $82.1 million in 1997. The decline in earnings in 1999 was
largely due to the decline in sales and a lower gross profit margin.
The restructuring charge of $15.9 million in 1999 was related to the
closure of 10 facilities and a corresponding reduction in workforce at those
locations while the restructuring charge of $32.6 million in 1997 was related to
Flowserve's merger integration program. Merger integration expense was $14.2
million in 1999, $38.3 million in 1998 and $7.0 million in 1997. Merger
integration expense in 1999 related solely to Flowserve's business process
improvement initiative, "Flowserver". Merger integration expense in 1998 and
1997 was principally related to the consolidation of the business units and
headquarters, plant closures and the formation of the Services Group of the Flow
Solutions Division. Merger transaction expense of $11.9 million in 1997 was for
severance and other expenses triggered by the merger of BW/IP and Durco, and
investment banking fees, legal fees and other costs required to effect the
merger. In 1999, Flowserve recorded special items of $5.1 million for inventory
and fixed asset impairments in cost of sales and special items of $5.8 million
for executive separation contracts and certain costs relating to fourth-quarter
1999 facility closures in selling and administrative expense. In 1998, Flowserve
recognized an obligation under an executive employment agreement of $3.8 million
recorded in selling and administrative expense. In 1997, Flowserve sold its
Metal Fab subsidiary and realized a pre-tax gain of $11.4 million. The change in
accounting principle resulted in a one-time cumulative net of tax benefit of
$1.2 million in 1998. The accounting change was due to the required adoption of
EITF 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested."
RESTRUCTURING
In the fourth quarter of 1999, Flowserve initiated a restructuring program
designed to streamline Flowserve for better value and improve asset utilization.
This $26.7 million program consists of a one-time charge of $15.9 million
recorded as restructuring expense and $10.8 million of other special items. The
restructuring charge related to the planned closure of 10 facilities and a
corresponding reduction in workforce at those locations, as well as at other
locations that are part of the restructuring. The other special items relate to
inventory impairments and a fixed asset impairment totaling $5.1 million, and
executive separation contracts and certain costs related to fourth-quarter 1999
facility closures of $5.8 million. The inventory impairments relate to the
rationalization of certain low-margin product lines and the related inventory
writedown. The fixed asset impairment relates primarily to the reduction in fair
market value of a facility. The impairment amounts are included in cost of goods
sold while the remaining items are recorded as selling and administrative
expenses.
Flowserve expects to realize ongoing annual operating income benefits of
approximately $20 million per year effective in 2001. Approximately $10 million
in savings is expected to be realized in selling and administrative expenses
while the remainder is expected in costs of sales.
In 2000, period integration costs related to the implementation of the
program are expected to offset any potential benefit to operating income.
Current estimates are that planned savings of approximately $10 million will be
offset by period integration costs.
60
<PAGE> 68
Additionally, in 2000, a majority of the costs associated with the
restructuring program will be incurred and charged against the remaining
restructuring reserve.
The restructuring program is expected to result in a net reduction of
approximately 300 employees. As of June 30, 2000, the program has resulted in a
net reduction of 149 employees. Expenditures charged to the restructuring
reserve as of June 30, 2000 were:
<TABLE>
<CAPTION>
OTHER
SEVERANCE EXIT COSTS TOTAL
--------- ---------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance at December 24, 1999............................. $12.9 $ 3.0 $15.9
Cash expenditures........................................ (0.1) -- (0.1)
----- ----- -----
Balance at December 31, 1999............................. 12.8 3.0 15.8
Cash expenditures........................................ (1.7) (0.6) (2.3)
----- ----- -----
Balance at March 31, 2000................................ 11.1 2.4 13.5
Cash expenditures........................................ (1.3) (1.0) (2.3)
----- ----- -----
Balance at June 30, 2000................................. $ 9.8 $ 1.4 $11.2
===== ===== =====
</TABLE>
MERGER INTEGRATION PROGRAM
In 1997, Flowserve developed a program designed to achieve the synergies
planned for the merger of BW/IP and Durco. The program included facility
rationalizations in North America and Europe, organizational realignments at the
corporate and division levels, procurement initiatives, investments in training
and support for service operations. In the fourth quarter of 1997, Flowserve
recognized a one-time restructuring charge of $32.6 million, excluding
Flowserver, in connection with this program. Other non-recurring expenses
related to the merger (merger integration expense) were incurred in 1998 and
1997 in order to achieve the planned synergies. These expenses of $33.2 million
and $7.0 million, respectively were principally for costs for consultants,
relocation and training.
As of June 30, 1999, the restructuring portion of the merger integration
had been completed. Flowserve paid severance to approximately 331 employees at a
cost of $22.4 million.
In 1999, Flowserve realized approximately $37.3 million in operating income
benefit related to the merger compared with about $21.3 million in 1998. By
2001, Flowserve expects to achieve $45 million to $55 million of annual
operating income benefit from this program. The benefits are expected to result
from eliminating cost redundancies, capturing procurement savings and realizing
earnings increases from sales synergies.
In the week following Flowserve's acquisition of IDP, the Company announced
its progress in making facility consolidations and reducing employment levels by
approximately 1,100 positions as part of working to realize the estimated $75
million in annual synergies expected by December 2001. The majority of these
reductions are planned to occur before December 31, 2000. The Company expects to
complete all consolidation actions within 15 months.
Flowserve also will divest eight pump lines, and the repair and service
centers in Batavia, Ill., and La Mirada, Calif., and its manufacturing facility
in Tulsa, Okla., as part of its antitrust agreement with the U.S. Department of
Justice.
BUSINESS PROCESS IMPROVEMENT INITIATIVE
In 1998, Flowserve's Board of Directors approved a $120.0 million
expenditure for "Flowserver." This business process improvement program was
planned to have costs and benefits incremental to the initial merger integration
program. Effective January 1, 1999, merger integration costs relate solely to
Flowserver. Flowserver includes the standardization of Flowserve's processes and
the implementation of a global information system to facilitate common
practices. In 1999, Flowserve incurred costs associated with this project of
$14.2 million recorded as merger integration expense and $11.4 million as
capital expenditures.
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<PAGE> 69
In 1998, these costs were $5.1 million recorded as merger integration expense
and $1.5 million as capital expenditures.
Flowserve has re-evaluated the Flowserver project and its 2000 investment
in Flowserver is expected to be approximately one-half the 1999 level. In
addition, the overall duration of the program will extend beyond its originally
planned five years and the scope will be scaled back significantly. Costs prior
to 2000 related to the development of a common business model. Costs in 2000
generally relate to implementation and will no longer be identified separately
as merger integration expense. Instead, beginning with the first quarter of
2000, Flowserver costs are classified as selling and administrative expense.
INGERSOLL-DRESSER PUMP COMPANY
OVERVIEW
IDP was formed in October 1992 when Ingersoll-Rand Company and Dresser
Industries merged their respective pump divisions to form Ingersoll-Dresser Pump
Company, a 51%/49% partnership. IDP is considered an industry leader with over
150 years of experience and expertise as one of the world's leading pump
designers, engineers and specialists. Ingersoll-Dresser Pump Company,
headquartered in Liberty Corner, New Jersey, is a leading full service pump
manufacturer providing a broad array of pump products and services to various
worldwide markets. IDP's product portfolio is among the most diverse in the
industry with 40 product families and over 90 discrete product types serving
twelve broad end-market segments.
In September 1998, Dresser Industries, IDP's 49% holder, completed its
merger with Halliburton Company, which resulted in Halliburton Company acquiring
Dresser Industries' 49% interest in IDP. In August 1999, Ingersoll-Rand
announced its intention to terminate the IDP partnership and exit the industry
due to changes in Ingersoll-Rand's strategic direction. As provided for in the
IDP partnership agreement, Halliburton Company sold its interest in IDP to
Ingersoll-Rand Company, at which point IDP became a wholly owned business unit
of Ingersoll-Rand Company in December 1999.
RESULTS OF OPERATIONS
The following table sets forth summary categories of statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 73.7 72.9 72.8 74.0 77.0
Gross profit......................... 26.3 27.1 27.2 26.0 23.0
Selling and administrative
expenses........................... 18.9 18.6 19.3 20.0 21.0
Operating income..................... 4.8 7.7 7.4 5.7 1.6
Interest expense..................... 0.2 0.2 0.2 0.2 0.1
Earnings before income taxes......... 5.1 8.3 8.2 6.3 1.7
Net income (loss).................... 3.6 6.5 5.9 3.8 (0.7)
</TABLE>
In general, IDP's results for the six months ended June 30, 2000 reflect
the weakness of bookings encountered during mid-1999 and the impact of
additional costs recognized as a result of the December 1999 purchase of the
partnership interest from Halliburton by Ingersoll-Rand. As a result of applying
pushdown accounting for the December 1999 purchase for the six months ended June
30, 2000, IDP has recorded additional depreciation and amortization and higher
cost of sales for inventory on hand at December 31, 1999. IDP's 1999 results
were lower than the prior years due to trends in the global markets in which IDP
participates. Historically low oil prices reduced capital spending by the major
oil and chemical companies. This was further compounded by, among other things,
significant strategic combinations of oil companies, such as BP Amoco and
ExxonMobil, resulting in volume reductions which
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reduced IDP's overall performance below expectations. The economic turmoil that
started in Asia in the second half of 1997 spread to other parts of the world,
including Latin America. In addition, IDP's operations were negatively affected
by reduced spending in the North American agricultural market.
SALES AND BOOKINGS
First half 2000 bookings at $453.3 million were $50.1 million, or 12%,
above the $403.2 million bookings level experienced in 1999. The year over year
growth occurred in both the engineered pump and industrial pump product areas,
with the most significant increase appearing in the industrial water markets
served by IDP's European businesses. There was also evidence of strengthening in
the North American general industrial and power industries, though to a lesser
extent than in the water treatment segment. In addition, there was noticeable
improvement in the South American and Asia Pacific regions, which appear to be
recovering from the depressed levels of business experienced last year.
Complete pumps bookings of $279.2 million were $35.5 million, or 15%,
greater than the $243.7 million booked in the first half last year. Parts
bookings of $115.7 million increased by $11.0 million, or 10.5%, while repairs
and service bookings of $58.4 million increased by $3.4 million, or 6.2%, when
compared with the prior year.
Sales for the first half of 2000 totaled $363.4 million, down $36.1
million, or 9% from sales of $399.5 million in the comparable period in the
prior year. The decline in sales was experienced within both the engineered and
the industrial pumps product areas. The decline in engineered pump sales is
directly related to entering the year with a lower level of shippable backlog
for the hydrocarbon processing industry, whereas prior years' bookings were
negatively impacted by the low world oil price. The decline in industrial pump
sales was primarily due to the scheduled timing of backlog, where significant
order volumes are scheduled for shipment later in the year. In addition, the
decline in the value of the euro relative to the dollar had a significant
negative impact on sales in IDP's European markets.
Bookings were lower in 1999 at $826.6 million, compared with $925.9 million
in 1998 and $919.7 million in 1997. Sales totaled $838.4 million in 1999, down
from $907.2 million in 1998 and down from $865.1 million in 1997. Bookings and
sales declines in 1999 were largely the result of reduced activity within the
hydrocarbon processing industry that was adversely affected by the low oil
prices throughout most of the year.
The substantial decline in spending by the American farming industry,
resulting from depressed agricultural commodity prices, negatively affected one
of IDP's most profitable product areas. The financial crisis in Brazil, which
spread throughout Latin America, reduced the normal sales volume in that
geographic region below the prior years' levels.
In total, sales outside the United States were $484.6 million, $562.2
million and $574.0 million in 1999, 1998 and 1997, respectively. Foreign sales
have declined during the past two years. The decline was primarily due to the
deteriorating economic conditions throughout the Asia Pacific region, which
began in late 1997 and continued through the end of 1999. In addition, the
Brazilian currency crisis, which began in early 1999, had a depressing impact on
all of the neighboring Latin American economies, resulting in a reduction in our
bookings and sales within that geographic region.
BUSINESS SEGMENTS
IDP manages its operations through two business segments: engineered pumps
and industrial pumps. Though there is some cross-over as each end user market is
not exclusively tied to these two business segments, the engineered pump markets
primarily include hydrocarbon processing, marine and navy, oil and gas
production, pipeline, power generation and water resources, while the industrial
pump markets primarily include agriculture, chemical processing, general
industrial, mining, primary metals, pulp and paper and water resources.
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Sales and operating income before special items, as described below, for
the two business segments were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Engineered pumps
Sales.................................... $534.0 $577.1 $569.7 $ 262.5 $ 235.6
Operating income......................... 31.1 47.5 48.4 15.3 5.9
</TABLE>
Sales of engineered pumps decreased by $26.9 million to $235.6 million in
the first half of 2000 from $262.5 million in the first half of 1999. The sales
decline consisted almost entirely of reduced sales volume within two business
units and were primarily related to the adverse impact on shipments of depressed
conditions in the hydrocarbon processing industry.
Operating income as a percentage of sales declined to 2.5% in the first
half of 2000 from 5.8% in the comparable period in the prior year, due
principally to lower sales volumes, as well as less favorable sales mix, and
less weighting toward spare parts and repair compared with the prior year and
the impact of pushdown accounting.
Sales of engineered pumps decreased slightly to $569.7 million in 1999 from
$577.1 million in 1998, but were 6.7% greater than the $534.0 million of sales
in 1997. The sales decline in 1999 was primarily attributable to reduced spare
parts shipments resulting from curtailment of oil and gas plant maintenance
spending due to low oil prices and volume decreases resulting from significant
strategic combinations of oil companies such as BP Amoco and ExxonMobil.
Operating income as a percentage of sales improved to 8.5% in 1999 from
8.2% in 1998 and 5.8% in 1997. The improvement in operating margin experienced
in 1999 was accomplished despite the moderate sales decrease, as manufacturing
cost improvements were realized and expense controls were maintained.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Industrial pumps
Sales................................... $331.1 $330.1 $268.7 $137.0 $127.8
Operating income........................ 34.0 30.3 11.9 7.7 3.5
</TABLE>
Sales of industrial pumps decreased $9.2 million, to $127.8 million in the
first half of 2000, from $137.0 million in the first half of 1999. The sales
decline was due principally to the negative impact of currency translation.
Operating income as a percentage of sales declined to 2.7% for the first
half of 2000 from 5.6% in the comparable period in the prior year, primarily due
to the reduced shipment volume within these business units servicing the
agriculture and chemical industries and the impact of pushdown accounting. In
addition, the weakness of the European currency negatively impacted the sector's
financial performance.
Sales of industrial pumps decreased to $268.7 million in 1999 from $330.1
million in 1998 and $331.1 million in 1997. The sales decline was generally due
to the decline of the North American agriculture industry, the Brazilian
financial crisis and its negative impact on most of the Latin American
economies, and the downturn in both the chemical and water resources markets in
the United Kingdom.
Operating income as a percentage of industrial pump sales declined to 4.4%
in 1999 from 9.2% in 1998 and 10.3% in 1997. The decline in operating margin was
directly related to the same negative factors impacting the sales volume noted
above.
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OPERATIONS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Gross profit margin for the first quarter of 2000 declined to 23.0% from
26.0% in the comparable period in the prior year. This decline is the combined
result of a less favorable sales mix of spare parts versus complete pumps, sales
volumes, and the impact of pushdown accounting on cost of sales.
Selling, general and administrative expense was $76.4 million, or 20.9% of
sales, in 2000 compared with $79.8 million, or 20.0% of sales in 1999. The
decline in costs relates to reduced sales volumes and cost control efforts, net
of the impact of pushdown accounting.
Research, engineering and development expense was $1.3 million for the six
months ended June 30, 2000, compared with $1.5 million for the same period in
1999. The decline in these costs in 2000 related to cost control efforts
previously put in place.
Interest expense was $0.5 million in 2000 compared to $0.8 million for the
first half of 1999.
The effective tax rate was 140.0% in the first half of 2000, compared with
40.0% in the first half of 1999. The increase was due primarily to losses in the
US that can not be offset against income generated in foreign jurisdictions. No
U.S. federal or state taxes were paid by IDP because it is a partnership for
U.S. tax purposes. Under U.S. tax law, such taxes are levied upon the partners
rather than the partnership.
Earnings before income taxes as a percentage of sales were 1.7% in the
first half of 2000 down from 6.3% in the comparable period in the prior year.
1999 Compared to 1998 and 1997
Gross profit margin remained relatively unchanged at 27.2% in 1999 compared
with 27.1% in 1998, while reflecting an improvement when compared with 26.3% in
1997. While gross profit margin in 1999 was relatively unchanged from 1998, IDP
experienced an improving trend in standard margins for complete pumps, spare
parts and repairs and services, as a result of a change in sales mix. Higher
margin spare parts sales contributed a reduced share of total sales in 1999
compared to 1998.
Selling and administrative expense was $162.1 million in 1999 compared with
$168.9 million in 1998 and $163.1 million in 1997. Selling and administrative
expense in 1999 included $3.1 million of non-recurring consultant expenses and
$0.9 million of severance expense. The decreased spending level in 1999 was
primarily attributable to the combined impact of reduced commission expense and
reductions in expense spending levels throughout the selling and administrative
areas. As a percentage of sales, selling and administrative expense was 19.3% in
1999 due to reduced sales, compared with 18.6% in 1998 and 18.9% in 1997.
Selling and administrative expense increased by $5.8 million from 1997 to 1998
principally due to increased commissions on higher sales volume and due to
higher expenses related to consultants, marketing initiatives and operational
improvement initiatives.
Research, engineering and development expense was $3.0 million in 1999,
compared with $3.8 million in 1998 and $3.6 million in 1997. The decline in
spending during 1999 was the result of overall expense reductions necessitated
by the reduced business volume.
Interest expense was $1.4 million in 1999, compared with $1.6 million in
1998 and $1.3 million in 1997.
The effective tax rate was 27.7% in 1999, compared with 22.0% in 1998 and
29.7% in 1997. The increase in 1999 was due to greater earnings in the higher
taxed foreign entities compared with 1998. No U.S. federal or state taxes are
paid by IDP because it is a partnership for U.S. tax purposes. Under U.S. tax
law, such taxes are levied upon the partners rather than the partnership.
Earnings were $49.5 million in 1999, compared with $58.7 million in 1998
and $31.3 million in 1997. Special items include restructuring charges. Earnings
before special items were $49.7 million in 1999, compared with $62.3 million in
1998 and $50.8 million in 1997. The decline in earnings in 1999 was
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primarily due to reduced sales volume. Sales declined under the pressure of low
world oil prices, the downturn in the Asia Pacific and Latin American economies
and reduced spending in the North American agriculture industry.
OUR LIQUIDITY AND CAPITAL RESOURCES FOLLOWING THE TRANSACTIONS
Following the Transactions, our debt capitalization consists of $375.0
million aggregate principal amount of the notes and $750.0 million under our
Senior Credit Facilities. Under our Revolving Credit Facility we had unused
borrowing capacity, net of issued letters of credit, of approximately $270.0
million, on a pro forma basis, as of June 30, 2000. The borrowings under the
Senior Credit Facilities and the notes will increase debt service costs. The
notes mature in 2010. The Senior Credit Facilities and the indentures under
which the notes are issued will limit our ability, among other things, to incur
additional debt, to pay dividends, to redeem capital stock and to sell certain
assets. We may incur additional indebtedness under the indenture as long as our
Consolidated Coverage Ratio, as defined, is greater than certain minimum levels
or if such additional indebtedness fits within certain exceptions. Loans under
the Senior Credit Facilities mature from 2006 to 2008. We believe that based on
current financial performance and anticipated growth, cash flow from operations,
together with the available sources of funds including borrowings under the
Senior Credit Facilities, will be adequate to make required payments of interest
on our indebtedness, to fund anticipated capital expenditures and working
capital requirements and to enable us to comply with the terms of our debt
agreements. Our actual capital requirements may change, particularly as a result
of acquisitions we may make, although no acquisitions are currently
contemplated. We expect that our capital expenditures (exclusive of
acquisitions) in 2000 will be approximately $40 million. We believe that these
capital expenditures will be sufficient to maintain our equipment and to provide
additional planned manufacturing capabilities and upgrades. Our future operating
performance and ability to service or refinance the notes and to extend or
refinance the Senior Credit Facilities will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF FLOWSERVE
Cash flows from operations and financing available under existing credit
agreements are Flowserve's primary sources of short-term liquidity. Cash flows
from operating activities for the first six months of 2000 were significantly
below the same period in 1999. The decrease in cash flows in 2000 was primarily
due to payments relating to the restructuring program and Invatec acquisition.
Cash flows from operating activities in 1999 increased to $81.9 million,
compared with $54.1 million in 1998 and $90.0 million in 1997. The increase in
cash flows in 1999 was primarily due to Flowserve's increased focus on capital
utilization and reduced merger integration costs. The decrease in cash flows in
1998 compared to 1997 was primarily due to cash expended for restructuring and
lower operating profits.
Capital expenditures, net of disposals, were $12.4 million during the first
six months of 2000, compared with $20.2 million in the first six months of 1999.
The reduction reflects a concerted effort by the Company to reduce capital
spending. Capital expenditures were funded primarily by operating cash flows.
On January 13, 2000, Flowserve acquired Invatec, a company which is
principally engaged in providing comprehensive maintenance, repair, replacement
and value-added distribution services for valves, piping systems,
instrumentation and other process-system components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed through
the borrowings under the revolving credit facility. The results of operations
for Invatec are included in Flowserve consolidated financial statements from the
date of acquisition. The purchase price was approximately $18.3 million in cash.
Liabilities of $94.9 million were simultaneously paid through borrowing under
Flowserve's revolving credit agreement.
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The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company. The
preliminary estimated fair value of net identifiable assets acquired exceeded
the purchase price by $4.3 million, which resulted in net additional goodwill of
$48.6 million at the time of the purchase. The final allocation of the purchase
price will be determined in a reasonable time and will be based on a complete
evaluation of assets acquired and the liabilities assumed. Accordingly, the
information presented herein may differ from the final purchase price
allocation.
During the second quarter of 1998, Flowserve initiated a $100.0 million
share repurchase program. In 1998, Flowserve spent approximately $64.5 million
to repurchase approximately 2.8 million, or 7.1%, of its outstanding shares.
During 1999, Flowserve spent approximately $5.3 million to purchase an
additional 325,300 shares. Flowserve generally used credit facilities to fund
the purchases. Future repurchases may be restricted under the notes and the
Senior Credit Facilities.
In October 1999, Flowserve entered into a revolving credit agreement that
replaced its then-existing agreement. At June 30, 2000, Flowserve had borrowings
outstanding of $263.0 million and $4.0 million in issued letters of credit, and
availability of $193.0 million under the revolving credit agreement. At June 30,
2000, total debt was 50.0% of Flowserve's capital structure compared with 39.6%
at December 31, 1999. At December 31, 1999, total debt was 39.6% of Flowserve's
capital structure, compared with 37.2% at December 31, 1998. The ratio at
December 31, 1999 increased due to Flowserve's 1999 restructuring charge and the
negative currency translation effect. The interest coverage ratio of Flowserve's
indebtedness was 5.3 times interest at June 30, 2000, compared with 4.3 times
interest at December 31, 1999, compared with 9.5 times interest at December 31,
1998.
During October 1999, Flowserve purchased certain assets and liabilities of
Honeywell's industrial control-valve product line and production equipment
located near Frankfurt, Germany. Flowserve completed the phased move of this
operation to its existing control-valve manufacturing facilities in Europe by
June 30, 2000. In October 1999, Flowserve also acquired R&C Valve Service, Inc.
The assets of this company were integrated into Flowserve's existing services
and repair center network during the fourth quarter of 1999.
On February 9, 2000, the Company announced it had reached a definitive
agreement to acquire Ingersoll-Dresser Pump Company (IDP) from Ingersoll-Rand
Company for $775 million in cash. On August 8, 2000, the Company announced the
completion of the acquisition. The transaction, which was accounted for as a
purchase, was financed with a combination of bank financing and senior
subordinated notes. Upon closing of the transaction, the existing Flowserve debt
was repaid. Flowserve has received $1,425 million of financing to pay for the
acquisition and pay off existing debt as well as provide for a $300 million
revolving credit facility in connection with the acquisition. The financing
consists of approximately $375 million of 12.25% Senior Subordinated Notes due
in ten years and $1.05 billion of senior credit facilities. The credit
facilities consist of a $275 million term loan with a final maturity of six
years and an initial interest rate of LIBOR plus 2.75%, a $475 million term loan
with a final maturity of eight years and an initial interest rate of LIBOR plus
3.50%, and a $300 million revolving credit facility with a term of six years and
an initial interest rate of LIBOR plus 2.75%. During the first quarter of 2000,
the Company also announced it was suspending the payment of its cash dividend
which is required by the financing. The Company believes that internally
generated funds, including synergies from the IDP acquisition, will be adequate
to service the debt.
At June 30, 2000, total debt was 50.0% of the Company's capital structure,
compared with 39.6% at December 31, 1999. The interest coverage ratio of the
Company's indebtedness was 5.3 times interest at June 30, 2000, compared with
4.3 times interest at December 31, 1999.
HISTORICAL LIQUIDITY AND CAPITAL RESOURCES OF IDP
Generally, IDP's primary source of short-term liquidity is through cash
flows from operations. Cash flows from operations were $53.5 million in 1999,
$77.4 million in 1998 and $63.3 million in 1997. The decrease in cash flows in
1999 was primarily due to a decrease in accounts payable and accruals as
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compared to the year ended December 31, 1998. Cash flows from operations for the
first half of 2000 were a net outflow of $1.7 million, primarily as a result of
a higher level of receivables at June 30, 2000 as compared with the end of 1999.
Capital expenditures have remained fairly consistent at $18.2 million in
1999, $20.2 million in 1998 and $16.3 million in 1997. Capital expenditures for
the first six months of 2000 were $4.8 million compared to $5.8 million in the
first six months of 1999.
As a partnership, IDP provides excess cash to the partners. Amounts
transferred to the partners increased from $43.0 million in 1997 to $69.8
million in 1998. The increase in amounts transferred results primarily from the
increase in cash flow provided by operations. At December 31, 1999, the amount
due from the partners, other than amounts relating to trade receivables and
payables, was transferred to equity, as a result of the acquisition by
Ingersoll-Rand of Halliburton's 49% interest in IDP and thereby IDP becoming a
wholly owned entity of Ingersoll-Rand. In addition, at December 31, 1999, there
were loans from IDP foreign subsidiaries to Halliburton that had matured late in
1999 of $36.2 million. The IDP foreign subsidiaries retained the cash received
on these matured loans in 1999, resulting in an increase in cash and cash
equivalents at December 31, 1999. These amounts, or portions thereof, were
provided to Ingersoll-Rand in the first quarter of 2000.
INFLATION AND FOREIGN CURRENCY TRANSLATION
Inflation during the past three years had little impact on Flowserve's
consolidated financial performance. Foreign currency translation had the effect
of reducing sales by 1% and earnings by 7% in 1999 and both sales and earnings
by 2% in 1998.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS OF FLOWSERVE
Flowserve has certain market-sensitive financial instruments, including
long-term debt and investments in foreign subsidiaries. To evaluate the risks
associated with these instruments, Flowserve considered the impact of
unfavorable changes in the rates or values of these instruments as of December
31, 1999. The market changes, assumed to occur as of December 31, 1999, to
measure potential risk are a 100-basis-point increase in market interest rates,
a 10% adverse change in all foreign currency exchange rates and a 10% decline in
the value of its net investment in foreign subsidiaries.
Flowserve considered the impact of a 100-basis-point increase in interest
rates and determined such an increase would not materially affect its earnings.
Flowserve employs a foreign currency hedging strategy to minimize potential
losses in earnings or cash flows from unfavorable foreign currency exchange rate
movements. Foreign currency exposures arise from transactions, including firm
commitments and anticipated transactions, denominated in a currency other than
an entity's functional currency and from foreign-denominated revenues and
profits translated back into U.S. dollars. The primary currencies to which
Flowserve has exposure are the German mark; British pound; Dutch guilder and
other European currencies; the Canadian dollar; the Mexican peso; the Japanese
yen; the Singapore dollar; and the Australian dollar.
Exposures are hedged primarily with foreign currency forward contracts that
generally have maturity dates of less than one year. Flowserve's policy allows
foreign currency coverage only for identifiable foreign currency exposures and,
therefore, Flowserve does not enter into foreign currency contracts for trading
purposes where the objective is to generate profits. The potential loss in fair
value at December 31, 1999, based on year-end positions of outstanding foreign
currency contracts resulting from a hypothetical 10% adverse change in all
foreign currency exchange rates, would not be material. The potential loss would
exclude hedges of existing balance sheet exposures as losses in these contracts
would be offset by exchange gains in the underlying net monetary exposures for
which the contracts are designated as hedges.
As a rule, Flowserve generally views investments in foreign subsidiaries
from a long-term perspective, and therefore, does not hedge these investments.
Flowserve uses capital structuring techniques to manage investment in foreign
subsidiaries as deemed necessary. Net investment in foreign subsidiaries and
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affiliates, translated into U.S. dollars using year-end exchange rates, was
$113.8 million at December 31, 1999. A potential loss in value of net investment
in foreign subsidiaries resulting from a hypothetical 10% adverse change in
quoted foreign exchange rates at the end of 1999 would approximate $11.4
million.
There have been no material changes in reported market risk since the end
of 1999.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS OF IDP
IDP managed exposure to changes in foreign currency exchange rates through
its normal operating and financing activities, as well as through the use of
financial instruments. Generally, the only financial instruments IDP used were
forward exchange contracts. IDP used sensitivity analysis to assess the market
risk associated with its foreign currency transactions. Market risk is defined
here as the potential change in fair value resulting from an adverse movement in
foreign currency exchange rates. A 10% adverse movement in foreign currency
rates would have resulted in a net loss of $7.0 million in 1999 on IDP's foreign
currency forward contracts. The purpose of IDP's hedging activities was to
mitigate the impact of changes in foreign currency exchange rates. IDP attempted
to hedge transaction exposures through natural offsets. To the extent this was
not practicable, major exposure areas considered for hedging included foreign
currency denominated receivables and payables, intercompany loans, firm
committed transactions, anticipated sales and purchases, and dividends relating
to foreign subsidiaries.
IDP maintained significant operations in foreign countries. A 10% adverse
movement in foreign currency rates would have resulted in an unrealized loss of
$18.0 million in 1999 on its net investment in foreign subsidiaries. However,
since IDP viewed these investments as long term, they would not expect such a
loss to be realized in the near term.
EURO CONVERSION
On January 1, 1999, 11 European Union member states (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the euro as their common national currency. Until January 1,
2002, either the euro or a participating country's national currency will be
accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills
and coins will be issued, and by July 1, 2002, only the euro will be accepted as
legal tender. Flowserve does not expect future balance sheets, statements of
earnings or statements of cash flows to be materially impacted by the euro
conversion.
ACCOUNTING DEVELOPMENTS
In 1999, Flowserve adopted Financial Accounting Standards Board (FASB)
Statement of Position (SOP) No. 98-1, "Accounting for Costs of Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for fiscal
periods beginning after December 15, 1998 and establishes guidelines to
determine whether software-related costs should be capitalized or expensed.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements". As amended in June 2000, this
bulletin will become effective in the fourth quarter of 2000. SAB 101 expresses
the SEC staff's view regarding the application of generally accepted accounting
principles to revenue recognition in financial statements. Management is still
evaluating the impact of SAB 101 on reported financial position, results of
operations and cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
will become effective beginning January 1, 2001. SFAS No. 133 requires all
derivatives to be recognized as assets or liabilities on the balance sheet and
measured at fair value. Changes in the fair value of derivatives will be
recognized in earnings or other comprehensive income, depending on the
designated purpose of the derivative.
During June 2000, FASB issued statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment to SFAS No.
133. SFAS No. 138 is to be adopted concurrently with SFAS No. 133. These
standards are not expected to materially impact Flowserve's reported financial
position, results of operations or cash flows.
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BUSINESS
GENERAL
We are the largest manufacturer and aftermarket service provider of
comprehensive flow control systems in the world. We have been in the flow
control industry for over 125 years. We develop and manufacture
precision-engineered flow control equipment for critical service applications
where high reliability is required. The flow control system components we
produce include pumps, valves and mechanical seals. Our products and services
are used in several industries, including petroleum, chemical, power generation
and water treatment. We believe that our product portfolio is the most
comprehensive and our scope of operations is the most geographically diversified
in the industry. For the year ended December 31, 1999, we generated revenue of
$2.1 billion.
We sell our products and services to more than 1,000 companies including
some of the world's leading engineering and construction firms, OEMs,
distributors and end users. Our sales mix by industry in 1999 consisted of
petroleum (39%), chemical (20%), power generation (14%), general industrial
(14%), water treatment (6%) and other industries (7%). Some of our top customers
include Asea Brown Boveri, ARCO, BASF, Bayer, Bechtel, BP Amoco, Dow Chemical,
Duke Energy, DuPont, Eastman Chemical, ExxonMobil, Royal Dutch/Shell, Saudi
Aramco, Texaco, TotalFinaElf and the United States Navy. No single customer
accounted for more than 3% of our total revenues in 1999. Our revenues by
geographic region in 1999 consisted of North America (55%), Europe and the
Middle East (28%), Latin America (9%) and Asia (8%). We have pursued a strategy
of geographic diversity to mitigate the impact of an economic downturn in any
one part of the world on our business.
We believe we have an installed base of approximately 1,100,000 pumps
worldwide, which we believe is the most extensive installed base of industrial
pumps in the industry. A large installed equipment base is critical to securing
future revenues as industry analysts suggest that approximately 86% of the total
life-cycle cost of a pump consists of aftermarket products and services, such as
replacement parts, mechanical seals and maintenance. When outsourced, a majority
of replacement part orders and aftermarket service business is typically awarded
to the original equipment manufacturer. Aftermarket parts and services have
provided us with a steady source of revenues at higher margins than original
equipment sales. In 1999, we generated approximately 49% of our revenues from
aftermarket products and services.
We believe we are the largest manufacturer of pumps used in the petroleum
and chemical industries, with approximately 59% of our 1999 sales from companies
operating in those industries. Due to the simultaneous decline in oil and
chemical prices in 1998 and 1999, many of our key customers reduced their
capital spending, which resulted in declines in our revenues and EBITDA in those
years. Additionally, the economic downturn in Asia in late 1997 and 1998 had a
negative impact on our overall business in that region. With the strong recent
recovery in oil prices to a year to date high of over $35.00 per barrel in 2000
from a low of $10.73 in December of 1998, higher expected chemical prices and
renewed signs of economic growth in Asia, we are seeing renewed capital spending
by our customers that should result in increasing bookings and revenues for us.
In general, market improvements reflected in our bookings precede revenue growth
by six to twelve months. We have already begun to see tangible signs of recovery
in our petroleum and chemical end-markets as bidding activity and bookings are
improving.
We believe we are well positioned to gain market share and increase
revenues and EBITDA by (i) leveraging our leading market position; (ii)
cross-selling our comprehensive product offerings; (iii) capitalizing on our
customers' trend to outsource service and repair; (iv) realizing significant
cost savings and operating synergies from the Acquisition; and (v) benefiting
from the recent improvement of our end markets.
ACQUISITION RATIONALE
On February 9, 2000, Flowserve agreed to acquire all of the equity
interests of IDP from Ingersoll-Rand for a consideration of $775.0 million. The
acquisition was consummated August 8, 2000. IDP is a
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<PAGE> 78
leading manufacturer of pumps with a diverse mix of pump products and customers
with operations in 30 countries. As a result of the IDP acquisition, we expect
to:
- be the second largest pump manufacturer in the world (improving from
fifth and seventh largest for IDP and Flowserve, respectively);
- be the largest pump manufacturer for the petroleum, chemical and power
generation industries;
- offer a more comprehensive range of products and services at a time when
our customers are seeking to lower costs by reducing supplier
relationships;
- expand our customer base in the water, general industrial, mining, paper,
power and U.S. Navy sectors;
- diversify our customer and geographic sales mix, reducing the impact of
commodity price cycles and regional economic downturns; and
- triple Flowserve's installed equipment base to an estimated 1,100,000
pumps worldwide, creating a significant opportunity to capture additional
recurring aftermarket replacement parts and service revenue.
The IDP acquisition also provides significant cost saving opportunities,
which we estimate to be approximately $75.0 million by mid-2002. We will incur
significant cash integration costs to achieve these cost savings. We expect
these cost savings to result from the execution of a number of actions
including:
- eliminating redundant administrative overhead;
- eliminating fixed costs by shifting overlapping sales personnel to more
economic facilities; and
- rationalizing manufacturing capacity.
In addition to the tangible and identified cost savings, we also expect to
benefit from significant operating synergies from several initiatives including:
- capitalizing on the opportunities to cross-sell valves, mechanical seals
and aftermarket services to IDP customers that are currently being
serviced by our competitors;
- realizing volume procurement savings; and
- lowering unit variable costs due to larger scale and better capacity
utilization.
COMPETITIVE STRENGTHS
WORLDWIDE MARKET LEADER. We are the largest provider of comprehensive flow
control systems in the world, offering an extensive range of pumps, valves,
mechanical seals and aftermarket services. We are the largest pump manufacturer
serving the petroleum, chemical and power generation industries and the second
largest overall pump manufacturer in the world. We believe we are also the
largest independent aftermarket product and service provider for the flow
control industry. We have one of the most extensive global manufacturing and
service networks in the industry, with 49 manufacturing facilities and more than
150 service and repair centers in 30 countries (after giving effect to planned
facilities rationalization within the first twelve months after closing of the
IDP acquisition). As the larger end users of flow control products continue to
consolidate and operate globally, they seek providers that can offer a broad
range of products and services on a global basis. Our widely recognized global
brands, extensive breadth of product and service offerings and worldwide
presence position us to serve our customers' flow control needs and capture
additional business.
AFTERMARKET SERVICES PROVIDE STABLE, CONSISTENT REVENUES. Industry analysts
estimate that approximately 86% of the lifetime cost of a pump consists of
aftermarket replacement parts, services and maintenance. We have a strong and
growing aftermarket business, representing approximately 49% of our 1999
revenues. The consistent requirement for maintenance and installation of
replacement parts provides
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<PAGE> 79
us with a steady source of revenues from our aftermarket business at
significantly higher margins than our original equipment business. As a result
of Flowserve's historic focus on aftermarket services, we believe Flowserve has
achieved approximately 50% higher aftermarket revenue per installed pump than
IDP. The opportunity to leverage IDP's installed pump base to increase our
aftermarket business provides us with significant potential for growth.
LARGE INSTALLED EQUIPMENT BASE. We believe our global installed base of
approximately 1,100,000 pumps is the largest in the industry and provides us
with a unique platform to grow our aftermarket service business. When
outsourced, a significant amount of replacement parts orders and aftermarket
services business is awarded to the original equipment manufacturer, assuming
they provide those parts and services. We are well positioned to capitalize on
IDP's large installed equipment base which is significantly larger than
Flowserve's installed base, by utilizing our extensive service network of more
than 150 service and repair centers to cross-sell aftermarket products and
services to IDP's pump customers.
PROVEN ABILITY TO INTEGRATE ACQUISITIONS. Flowserve's management team has
extensive experience in acquiring and integrating companies, having completed 23
acquisitions since 1990. We completed the integration of the merger of Durco
with BW/IP, which created Flowserve in 1997, approximately one year ahead of
schedule and generated annual cost savings in excess of $37 million, which was
approximately 10% greater than originally announced. We employ a systematic and
decisive approach to integrating acquired companies by implementing best
practices across our operations, rationalizing manufacturing capacity,
eliminating overlapping sales and service coverage, reducing overhead costs,
leveraging supply chain opportunities and developing additional cross-selling
opportunities. Most of our key operating managers who led the integration of our
predecessor companies, BW/IP and Durco, will be responsible for the integration
of Flowserve and IDP. In order to integrate the IDP acquisition, we have a team
of specialists from Flowserve, IDP and third party consultants exclusively
dedicated to the integration.
GLOBAL MANUFACTURING AND SERVICE CAPABILITIES. After giving effect to
planned facilities rationalization, we will have one of the most extensive
global manufacturing and service networks in the industry, with 49 manufacturing
facilities and more than 150 service and repair centers located in 30 countries.
Our global operations help us serve our customers' manufacturing and aftermarket
service needs on a 24-hour basis. Because of the critical nature of the
applications in which our products are used, immediate response times are
important to capturing and retaining our customer's business. Original equipment
sales benefit from our global presence, as our customers often require real-time
design and engineering assistance for new projects.
DIVERSE CUSTOMER MIX. We sell our products and services to more than 1,000
companies globally including the world's leading engineering and construction
firms, OEMs, distributors and end users. In 1999, no one customer accounted for
more than 3% of our revenues and our top ten customers accounted for
approximately 11% of our revenues. Our customers operate in many industries
throughout the world, including petroleum, chemical, power generation and water
treatment. The IDP acquisition significantly increases our market share in the
power and water industries, both of which are expected to continue to grow
faster than the overall flow control industry.
COMPREHENSIVE PRODUCT OFFERINGS WITH LEADING BRANDS. We believe we offer
the most comprehensive array of products and services in the industry, providing
a "one-stop shop" for our customers, who increasingly require comprehensive flow
control solutions including pumps, valves, seals and services. Many of our
brands have an extensive history within our industry and are well-known for
their superior quality and high performance, including Flowserve(R), Byron
Jackson(R), Durco(R), Atomac(TM), BW Seals(R), Durametallic(R), United
Centrifugal(R), Stork(R), Worthington(R), Jeumont Schneider(R), Pleuger(R),
Pacific Wietz(TM) and Scienco(R). Our brand identity has created customer
loyalty and helps us capture additional business, as well as maintain existing
business, particularly as our customers look to procure from fewer
manufacturers.
EXPERIENCED MANAGEMENT TEAM. Our senior management team has an average of
over 25 years of experience in industrial manufacturing. In addition, this team
has substantial experience in the integration of acquired businesses, supply
chain management and lean manufacturing techniques. Our operating
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<PAGE> 80
division managers are among the most experienced in the flow control industry,
with an average of more than 20 years of experience.
BUSINESS STRATEGY
EFFICIENTLY INTEGRATE THE ACQUISITION AND CAPITALIZE ON OPPORTUNITIES FOR
OPERATING SYNERGIES. We have begun to quickly integrate IDP's business in order
to capitalize on the significant operating and financial benefits of the IDP
acquisition. We have established a dedicated integration team comprised of
representatives from Flowserve, IDP and third party consultants that has created
a detailed plan to capture cost savings and achieve operating synergies through:
(i) eliminating redundant administrative overhead, (ii) cutting overlapping
sales personnel, (iii) shifting production to lower cost facilities, and (iv)
realizing volume procurement savings and other opportunities.
BECOME THE LOW COST PRODUCER AND INCREASE OPERATIONAL EFFICIENCY. We
continue to lower costs, enhance product quality, reduce manufacturing
inefficiency and increase product throughput. We have several initiatives in
process to accomplish this, including:
- FOCUS ON SUPPLY CHAIN MANAGEMENT. Supply chain management focuses on
reducing procurement costs. We have implemented several initiatives,
including creating alliances, standardizing procedures, negotiating more
favorable contract terms and conditions and forming dedicated teams for
procurement of raw materials on a company-wide basis.
- INCREASE OPERATIONAL EFFICIENCY. In early 2000, Flowserve introduced a
"lean" manufacturing program that is focused on optimizing the
productivity and profitability of Flowserve's plants around the world.
For example, in Flowserve's Kalamazoo, Michigan facility, Flowserve
expects to experience in 2001 an approximate 25% increase in
productivity, 25% reduction in work in process, 25% reduction in lead
times and a significant increase in usable shop floor space.
- IMPLEMENT 6 SIGMA. The 6 Sigma Value Analysis process has been launched
within IDP to accelerate improvement of processes, products and services.
This analytical process is focused on reducing product defects, improving
product quality and streamlining manufacturing and transactional
processes. We believe this process resulted in total cost savings for IDP
of approximately $10 million in 1999.
GROW AFTERMARKET SERVICE BUSINESS. Growing our aftermarket business is an
essential aspect of our strategy which complements our manufacturing
capabilities. Historically, many of our customers have utilized their in-house
service capabilities and outsourced only the most technical portion of their
service needs. Customers are increasingly utilizing third party aftermarket
service providers like us to reduce their fixed costs and improve profitability.
Our leading installed equipment base creates a powerful platform from which we
can expand this business. Our aftermarket products and service business offers
steady revenues with margins significantly higher than our original equipment
sales and enables us to remain close to our customers and quickly address their
requirements. We have significantly enhanced our aftermarket business with the
acquisition of Invatec. Invatec focuses on valve service and repair, which
complements Flowserve's pump and seal repair expertise, allowing us to expand
the range of services offered to our customers.
PURSUE CROSS-SELLING OPPORTUNITIES. Historically IDP has focused on
manufacturing pumps for the original equipment market. In contrast, Flowserve's
strategy focuses on meeting the full range of end user needs from original
equipment (pumps, valves and seals) to replacement parts and services. We plan
to capitalize on the cross-selling opportunities created by Flowserve's
comprehensive aftermarket business platform and IDP's extensive installed
equipment base. In addition, significant opportunities exist to cross-sell
valves and mechanical seals to IDP's pump customers, which are being primarily
serviced by our competitors. Further, Invatec's expanded service center network
provides an opportunity for us to extend pump repair coverage to Flowserve's and
IDP's customer base.
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<PAGE> 81
OPERATIONS
We conduct our operations through three segments that encompass our primary
product types: (i) Rotating Equipment Division (pumps); (ii) Flow Control
Division (valves); and (iii) Flow Solutions Division (mechanical seals, repairs
and service). Through our Flow Solutions Division, we provide aftermarket
services. Through each of our segments, we provide aftermarket replacement
parts.
[1999 SALES BY DIVISION 1999 EBITDA BY DIVISION]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999
SALES BY DIVISION OPERATING INCOME BY DIVISION
<S> <C> <C> <C> <C> <C>
Flow Flow Rotating Flow Flow Rotating
Solutions Control Equipment Solutions Control Equipment
29% 14% 57% 35% 15% 50%
</TABLE>
Note: Amounts are pro forma for the IDP and Invatec acquisitions and exclude
elimination of intercompany sales and corporate allocations.
ROTATING EQUIPMENT DIVISION ("RED"; 57% OF REVENUE)
Through our Rotating Equipment Division, we design, manufacture and
distribute engineered pump systems, replacement parts and related equipment
principally to industrial markets. Following the Acquisition, all of IDP's
operations will be integrated into RED. The sales price for a RED product can
range from $1,000 to $2.5 million. RED's products and services are primarily
used by companies that operate in the petroleum, chemical processing, power
generating, water treatment and general industrial markets. Following the
facilities rationalization contemplated in connection with the Acquisition, we
will manufacture our pump systems and components at eight plants in the United
States, four in Latin America, ten in Europe and the Middle East and one in
Asia. We also manufacture a small portion of our pumps through several foreign
joint ventures. We market our RED products, which are primarily sold to end
users and engineering and construction companies, through our worldwide sales
force, regional services and repair centers, independent distributors and sales
representatives.
RED Summary Segment Financials(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
PRO FORMA(2)
1997 1998 1999 1999
------ ------ ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales......................................... $412.8 $371.5 $353.2 $1,191.6
Operating income before all special items..... 51.0 39.1 23.1 80.2
Bookings...................................... 420.2 371.6 331.5 1,171.5
Backlog....................................... 167.7 164.2 143.1 506.3
Identifiable assets........................... 301.2 285.6 223.0 1,333.4
</TABLE>
-------------------------
(1) Summary segment financials are before corporate headquarters costs and
certain intercompany eliminations. These amounts are not discussed in
"Business -- Operations" and therefore the amounts for each of our
three segments will not agree in total to the consolidated figures
found elsewhere in this prospectus. See note 13 of Flowserve's Audited
Consolidated Financial Statements and note 7 of Flowserve's unaudited
Interim Consolidated Financial Statements contained in this prospectus
for additional segment information.
(2) Combines the historical results of Flowserve and IDP giving effect to
the Pro Forma adjustments anticipated to be realized from the
Acquisition. See note (1) to "Unaudited Pro Forma Consolidated
Statement of Operations."
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<PAGE> 82
RED Products
We manufacture more than 350 different pump models, of which approximately
60-70% are highly engineered and designed for customized applications. These
high horsepower engineered pumps are manufactured with a wide range of metal
alloys and in a variety of configurations including pumps that utilize seals
(sealed) and pumps that do not (sealless). We continually update our pump
designs and materials for new technologies.
The following is a summary list of RED's general product types and globally
recognized brands:
<TABLE>
<CAPTION>
PRODUCT TYPES BRAND NAMES
------------- -----------
<S> <C>
- Chemical Process ANSI and ISO - Byron Jackson(R)
- Petroleum Process API 610 - Durco(R)
- Horizontal Between Bearing Single-stage - United Centrifugal(R)
- Horizontal Between Bearing Multi-stage - Wilson-Snyder(R)
- Vertical - Flowserve(R)
- Submersible Motor - Stork(R)
- Specialty
- Nuclear
</TABLE>
<TABLE>
<S> <C>
ENGINEERED HIGH PRESSURE DOUBLE CASE PUMP. This highly
engineered double case pump is utilized in the power
[PICTURE] industry for boiler feed water service in central power
stations and in the hydrocarbon industry for high pressure
charge and water injection applications.
DURCO(R)CHEMICAL PROCESS PUMPS. We offer a broad line of
Durco(R) chemical pumps which are widely recognized in the
chemical and related process industries for their materials,
expertise, engineering and ability to handle tough
[PICTURE] applications. Durco(R) process pumps are used in all areas
of a chemical or petrochemical plant to move fluids through
the facilities and have performed successfully in hundreds
of thousands of applications involving corrosive and toxic
substances in plants throughout the world.
BARREL TYPE PUMPS USED AS JET PUMP IN DECOKING
SYSTEM. Barrel type pumps are critical for our decoker
[PICTURE] systems. Our decoker systems were developed by IDP. These
pumps are responsible for breaking up coke deposits that
form during the petroleum refinery process.
</TABLE>
RED New Product Developments
Our investments in new product research and development have consistently
led to producing longer lasting and more efficient pumps. The majority of our
new products and enhancements are driven by our customers' needs to achieve
higher throughput at lower costs with increased time between failure. Our
research and development efforts are solutions based and performed both by
dedicated personnel and throughout our manufacturing facilities. As a result, we
continually work with our customers to develop better products to improve their
operations. Some examples of our latest pump innovations, currently in
production, include:
- POLYCHEM SEALED AND SEALLESS PUMPS. A range of fluoropolymer PFA lined,
sealed and sealless pumps is being developed to American, European and
Japanese standards. Many common components are included in the range of
pump sizes, some of which are manufactured with
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<PAGE> 83
proprietary technology. Applications in the worldwide chemical and
pharmaceutical industries include pumping of highly corrosive and toxic
fluids.
- GENERAL INDUSTRIAL SUMP PUMP. A line of vertical sump pumps for a variety
of general industrial applications including coolant, lube oil,
filtration, paint, industrial waste, sump, spray and pickling.
- GLOBAL WATER PUMP. This is an integrated product platform encompassing
horizontal (coupled and close-coupled), vertical sump and vertical
cantilevered pumps utilizing common hydraulic components. The new product
line will be based on a globally transportable design and will replace
multiple legacy products manufactured at four of our locations.
- SEALLESS CANNED AXIAL FIELD MOTOR PUMP. This innovative product embodies
a unique design that effectively makes the pump an integral part of the
motor. The design employs "built in" variable speed. The technology is a
platform for a variety of pump applications and product variants
including small sealless pumps for the process industries; specialty OEM
applications (i.e., CO(2) dry cleaning); marine/navy applications where
compact size and performance are important; and large pump applications.
RED Customers
RED sells its products to more than 1,000 customers including leading
engineering and construction firms, OEMS, distributors and end users. RED's
sales are diversified across several industries including the petroleum (38%),
power (16%), chemical (13%), water treatment (8%) and other industries (25%).
Our sales mix of original equipment products (61%) and aftermarket replacement
parts (39%) diversifies our business and mitigates somewhat the impact on us of
an economic downturn on our business.
Some of RED's top customers include: ARCO, Bechtel, BP Amoco, Dow Chemical,
Duke Power, DuPont, Eastman Chemical, ExxonMobil, Fluor, PEMEX, Royal
Dutch/Shell, Saudi Aramco and the United States Navy.
RED Competition
The industry is highly fragmented with more than 500 competitors. The top
ten pump companies accounted for less than 40% of total 1999 estimated worldwide
pump sales. We compete, however, primarily against a limited number of large
companies operating on a global scale. Competition is generally based on price,
expertise, delivery times, breadth of product offerings, contractual terms,
previous installation history and reputation for quality. Price competition for
original equipment tends to be more intense than for aftermarket services. Some
of the largest pump industry competitors include ITT Industries, Ebara, KSB,
Weir, Sulzer and Textron.
The pump industry has undergone a significant amount of consolidation in
recent years. For example, in the last 24 months, ten acquisitions of pump
companies with annual sales of at least $40.0 million each have been announced.
This trend can be illustrated by the mergers announced in 1999 including Weir
Group acquiring Warman, United Technologies acquiring Sundstrand and Eaton
acquiring Aeroquip-Vickers. The three primary causes for this consolidation
trend are: (1) the need to lower costs through reduction of excess capacity in
the market, (2) the desire among the leading players to solidify their market
positions in terms of both product offering and geographic coverage, and (3)
customers' preference to align with global full service suppliers and simplify
their supplier base. Despite the consolidation activity, the market remains
highly fragmented.
FLOW CONTROL DIVISION ("FCD"; 14% OF REVENUE)
Through our Flow Control Division, we design, manufacture and distribute
valves, actuators and related equipment. FCD's valve products are an integral
part of a flow control system and are used to control the flow of liquids and
gases. Substantially all of FCD's valves are specialized and engineered to
perform specific functions within a flow control system. The sales price for an
FCD product can range from $200 to $750,000. FCD's products are primarily used
by companies that operate in the petroleum,
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<PAGE> 84
chemical, and power generation industries. We manufacture valves and actuators
through 4 plants in the United States, 6 in Europe and 3 in other regions. We
also manufacture a small portion of our valves through a foreign joint venture.
Manual valve products and valve actuators are distributed through our sales
force personnel and a network of distributors. Automatic control valves are
marketed through sales engineers and service and repair centers or on a
commission basis through sales representatives in our principal markets. We
increased FCD's manufacturing capacity with the purchase of Honeywell Inc.'s
European industrial control-valve product line in September 1999 and with the
purchase of the Valtek Engineering division of Allen Power Engineering, Limited
from Rolls Royce plc in July 1998.
FCD Summary Segment Financials(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Sales...................................................... $317.2 $313.2 $295.3
Operating income before all special items.................. 47.0 43.8 25.1
Bookings................................................... 302.4 318.9 293.1
Backlog.................................................... 69.8 71.3 67.6
Identifiable assets........................................ 219.1 233.1 213.3
</TABLE>
-------------------------
(1) Summary segment financials are before corporate headquarters costs and
certain intercompany eliminations. These amounts are not discussed in
"Business -- Operations" and therefore the amounts for each of our
three segments will not agree in total to the consolidated figures
found elsewhere in this prospectus. See note 13 of Flowserve's
Consolidated Financial Statements and note 7 of Flowserve's unaudited
Interim Consolidated Financial Statements contained in this prospectus
for additional segment information.
FCD Products
We manufacture approximately 50 different valves, actuators and automated
valve accessories, of which 65% are highly engineered and designed for
customized applications. Our valves are used in a wide variety of applications
from general service to highly corrosive environments as well as in environments
experiencing extreme temperatures and/or pressures and applications requiring
zero leakage. In addition to traditional valves, we also produce valves under
the Valtek(R) brand that incorporate "smart" valve technologies. "Smart" valve
technology packages integrate high technology sensors, microprocessor controls
and digital positioners into a high performance control valve, which permits
real time system analysis, system warnings and remote services. We were the
first company to introduce "smart" valve technologies in response to demands for
increased plant automation, more efficient process control and digital
communications. Through our technology alliance with Honeywell Inc., FCD's
"smart" and control valve technologies are being incorporated in Honeywell's
distributed control systems. We offer a growing line of digital products and are
incorporating digital technologies into existing products to upgrade
performance.
The following is a summary list of FCD's general product types and globally
recognized brands:
<TABLE>
<CAPTION>
PRODUCT TYPES BRAND NAMES
------------- -----------
<S> <C>
- Actuator Accessories - Accord(R)
- Control Valve - Anchor/Darling
- Digital Communications - Atomac(TM)
- Manual Quarter-turn Valves - Automax(R)
- Valve Automation Systems - Battig
- Valve/Actuator Software - Durco(R)
- Nuclear Valves - Kammer(R)
- Quarter-Turn Actuators - Sereg(TM)
- Valtek(R)
</TABLE>
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<PAGE> 85
[PICTURE]
DURCO(R) 1/4-TURN VALVE UNDER AUTOMAX(TM) ACTUATOR
SUPPORTED BY ACCORD(R) POSITIONER. Our product line of
Durco(R) 1/4-Turn Valves consist of manually operated plug,
ball and butterfly valves which are widely used in the
petroleum refining, chemical processing, paper and
pharmaceutical industries. Automax(R) actuators and
accessories are available as separate components or as part
of an integrated 1/4-turn valve automation package.
[PICTURE]
SMART VALVE PRODUCTS. We offer the Valtek(R) intelligent
system for control valves -- in our opinion, the only true
"smart valve" package available today that includes process
sensors, a micro processor-based controller and a highly
accurate digital positioner mounted on a high performance
control valve.
FCD New Product Developments
Our investments in new product research and development are focused on
maintaining our technological leadership position and differentiating our
product offering. When necessary, we invest in the redesign of existing products
in an effort to improve their performance and continually meet customer needs.
Some examples of our latest product innovations include:
- LOGIX DIGITAL POSITIONER. This enhances performance, speed and accuracy
of pneumatic control valves and provides for quick calibration and setup
due to its revolutionary circuitry. This positioner is available in both
standard digital and advanced "smart" versions. The Logix digital
positioner keeps Flowserve on the leading edge of technology in the
control valve industry.
- BUSWITCH. This enables control and monitoring of automated on/off
quarter-turn valves through FOUNDATION fieldbus technology. The BUSwitch
technology is the first of its kind in the marketplace for on/off
applications. Customers will realize greater ability to perform
predictive and preventative maintenance, thus saving on installation and
operating costs. Due to this enhancement FCD expects to gain additional
business for quarter-turn valve and actuation products due to the market
potential of this product.
FCD Customers
FCD's customer mix is diversified within several industries including
chemical (51%), petroleum (16%), power (12%) and other industries (21%). We
benefit from a mix of original equipment sales (81%) and aftermarket parts
(19%).
Some of FCD's top customers include: Air Liquide, Air Products, Celanese,
Dow Chemical, DuPont, Eastman Chemical, Formosa Plastics, Merck and Royal
Dutch/Shell.
FCD Competition
Like the industrial pump market, the industrial valve market is highly
fragmented and has undergone a significant amount of consolidation in recent
years. According to a study done by the Freedonia Group, the leading six public
companies account for less than 25% of the market for standard industrial
valves. Beyond these six public companies, there are hundreds of private
companies with the largest three
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<PAGE> 86
accounting for a combined 4% of the market. Within the valves segment, we
believe that the top ten domestic manufacturers generate less than 25% of
domestic sales.
FLOW SOLUTIONS DIVISION ("FSD"; 29% OF REVENUE)
Through our Flow Solutions Division, we design, manufacture and distribute
mechanical seals and sealing systems and provide parts, repair and services for
flow control equipment used in process industries. Flow control products require
mechanical seals to be replaced throughout the products' useful lives. The
replacement of mechanical seals is an integral part of aftermarket services. The
sales price for an FSD product can range from $3 to $140,000. Our mechanical
seals are used on a variety of pumps, mixers, compressors, steam turbines and
specialty equipment, primarily in the petroleum, chemical processing, power
generation, water treatment industries and general industrial end-markets.
Through FSD's global network of more than 150 service and quick response centers
in more than 30 countries we provide service, repair and diagnostic services for
maintaining flow control system components.
FSD Summary Segment Financials(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
PRO FORMA(2)
1997 1998 1999 1999
------ ------ ------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Sales......................................... $430.1 $428.5 $438.5 $599.5
Operating income before all special items..... 62.7 65.1 56.1 62.4
Bookings...................................... 439.5 430.5 436.0 597.0
Backlog....................................... 68.2 64.2 50.4 50.4
Identifiable assets........................... 257.5 266.5 292.0 403.0
</TABLE>
-------------------------
(1) Summary segment financials are before corporate headquarters costs and
certain intercompany eliminations. These amounts are not discussed in
"Business -- Operations" and therefore the amounts for each of our
three segments will not agree in total to the consolidated figures
found elsewhere in this prospectus. See note 13 of Flowserve's
Consolidated Financial Statements and note 7 of Flowserve's unaudited
Interim Consolidated Financial Statements contained in this prospectus
for additional segment information.
(2) Combines the historical results of Flowserve and Invatec giving effect
to the Pro Forma adjustments anticipated to be realized from the
acquisition of Invatec. See note (1) "Unaudited Pro Forma Consolidated
Statement of Operations."
We manufacture mechanical seals through three plants in the United States,
two in Europe, three in Latin America and three in Asia. We also manufacture our
mechanical seals through foreign joint ventures. Our mechanical seal products
are primarily marketed through our sales force directly to end users. A portion
of our mechanical seal products is sold directly to OEMs for incorporation into
pumps, compressors, mixers or other rotating equipment requiring mechanical
seals. Distributors and sales agents are also used in the sale of mechanical
seals.
FSD Products and Services
MECHANICAL SEALS. Mechanical seals accounted for approximately 51% of 1999
FSD sales. We design, manufacture and distribute approximately 180 different
models of mechanical seals and sealing systems, of which approximately 65% are
highly engineered and designed for customized applications. We believe our
ability to turn around new seal product orders within 72 hours from the
customer's request, through design, engineering, manufacturing, testing and
delivery provides us with a competitive advantage. The mechanical seal is
critical to the smooth operation of pumps, compressors and mixers for prevention
of leakage and emissions of hazardous substances and the reduction of shaft
wear. We also manufacture a gas lubricated mechanical seal used in high-speed
compressors for gas transmission and oil and gas production markets. We
continually update our mechanical seals and sealing systems for new
technologies.
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<PAGE> 87
The following is a summary list of FSD's general product types and globally
recognized brands:
<TABLE>
<CAPTION>
PRODUCT TYPES BRAND NAMES
------------- -----------
<S> <C>
- Cartridge BW Seals(R)
- Dry-running Durametallic(R)
- Metal bellow Five Star Seal(R)
- Elastomeric GASPAC(R)
- Split Pacific Wietz(TM)
- Gas barrier Pac-Seal(R)
- Service and repair
</TABLE>
[PICTURE]
FSD SEAL GROUP. FSD manufactures and markets
highly engineered mechanical shaft seals for
containing corrosive, volatile, abrasive, precious
or flammable fluids. Our mechanical seals are used
on pumps, compressors, mixers, steam turbines and
other rotating-motion equipment. Flowserve seals
offer innovative designs, responsiveness, and
development of new technologies that aim to produce
lower maintenance and operating costs. Flowserve
seals can be found in nearly every process fluid
industry, including petroleum refining, oil and gas
production and pipelines, chemical processing, power
generation, pharmaceutical, mining and ore
processing, and pulp and paper. Major manufacturing
locations are in Michigan, The Netherlands and
Germany. FSD also has a worldwide network of quick
response centers, conveniently located for immediate
delivery of factory parts and complete seal
assemblies.
SERVICE. Service accounted for approximately 49% of 1999 FSD sales. We
provide aftermarket services through our global network of 575 service personnel
operating through more than 150 service and quick response centers in 30
countries, after giving effect to Flowserve's integration of Invatec. Our
service personnel provide a comprehensive set of equipment maintenance services
for flow control systems, including repair, advanced diagnostics, installation,
commissioning, re-rate and retrofit programs and full machining capabilities. A
large portion of our service work is performed on a quick response basis, and we
offer 24-hour service in all of our major markets. In 1998, we expanded our
service network with the acquisition of two valve repair companies in Belgium
and the Netherlands and a Canadian pump service repair facility. In October
1999, we acquired a valve repair company in Southern California. In January,
2000, we acquired Econ, another valve service business located in the
Netherlands.
Invatec Acquisition
On January 13, 2000, Flowserve completed the acquisition of Invatec.
Invatec provides repair, service and distribution of parts to many of the same
end users that we serve, but with a focus on valve products. The purchase
involved acquiring all of the outstanding stock of Invatec and assuming
Invatec's existing debt and related obligations. The purchase price was
approximately $18.3 million in cash. Liabilities of $94.9 million were
simultaneously paid through borrowing under Flowserve's revolving credit
agreement. Prior to Flowserve's acquisition, Invatec had approximately 500
service technicians, operating through 64 domestic locations and 2 UK locations.
We have identified 19 facilities that we are closing and consolidating with our
existing locations. Invatec significantly enhances our service capabilities and
helps us stay closer to end users on a day-to-day basis. This acquisition builds
on our plan to continue strengthening our aftermarket service and repair
business, which offers revenues that are recurring in nature with margins
significantly higher than original equipment sales.
Invatec is a single-source provider of comprehensive maintenance, repair,
replacement and value added distribution services for industrial valves, piping
systems and other flow control system components. For valves, Invatec services a
wide range of equipment including control, safety relief, manual and automated
valves both off site or on-line as needed. Invatec also provides field machining
services for
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turning, milling, drilling and severing/beveling work. Large portable machining
equipment and mobile machine shops are fully equipped for cleaning, machining,
welding, lapping and testing of equipment. Invatec offers all these on-site
services for a faster, more cost-efficient solution than conventional repair
methods. Invatec also provides on-call valve leak service and utilizes its
leakseal technology for volatile organic chemical and hydrocarbon leaks.
Safeseal technology for on-line valve restoration provides a permanent solution
for leaking rising stem valves. Invatec also provides additional field services
including routine and turnaround maintenance services, site evaluations, cost
evaluations, proactive maintenance programs for pumps and valves, shutdown
planning and mechanical repair.
Invatec Summary Financials
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Sales...................................................... $ 58.6 $154.6 $161.0
Operating income before all special items(1)............... 2.0 6.6 6.7
EBITDA(2).................................................. 3.2 11.1 11.5
Total assets............................................... 105.4 183.7 132.3
</TABLE>
---------------
(1) Special items in 1997 consisted of $7.6 million in special non-cash
compensation expenses, in 1998 consisted of $2.2 million in the
write-off of capitalized costs and $2.0 million of merger transaction
costs in 1999.
(2) EBITDA means net income before interest, taxes, depreciation,
amortization, other income, net (excluding commission and royalty
income) and other non-recurring items. Other non-recurring items in 1997
consisted of $7.6 million in special non-cash compensation expenses in
1998 consisted of $2.2 million in the write-off of capitalized costs and
$39.1 million of goodwill impairment, $3.8 million loss on assets held
for sale and $2.0 million of merger transaction costs in 1999. Such
definition of EBITDA may differ from the definition of EBITDA used by
other companies and should not be considered as an alternative to net
income, cash flows or any other items calculated in accordance with
generally accepted accounting principles or as an indicator of Invatec's
operating performance.
FSD New Product Developments
Our investments in new product research and development are focused on
developing products that last longer and work more efficiently. Approximately
30% of our original equipment mechanical seal sales for 1999 were sales of
products developed within the past five years. The following are examples of our
latest mechanical seal and seal system innovations:
- Innovative Standard Cartridge
- GX2000 Double Gas Seal
- Gaspac(R) HP High Pressure Compressor Seal
- Gas Steam Turbine Seal
- LS-300 Cartridge Seal
- SLC Flushless, Heavy Duty Slurry Seal
FSD Customers
Our mechanical seal products are sold to OEMs for incorporation into pumps,
compressors, mixers or other rotating equipment requiring mechanical seals, and
directly to end-users. FSD's mix of mechanical seal sales is approximately 23%
for original equipment and 77% for aftermarket replacement and parts. FSD's
mechanical seal sales in 1999 were diversified among several industries
including petroleum (42%), chemical (36%), power generation (3%) and other
industries (19%).
We have established alliances with over 200 customers including BP Amoco,
Chevron, Dow Chemical, DuPont, Eastman Chemical, ExxonMobil and Royal
Dutch/Shell. In approximately 70% of our alliances, we have been selected as the
primary supplier and service provider. These alliances provide significant
benefits to us, as well as to our customers by creating a more efficient supply
chain through the
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reduction of procurement costs and increased communication with our customers.
Our alliances enable us to provide products and services to our customers in a
timely and cost-effective manner. We plan to capture an increasing share of our
current alliance partners' business as well as expand these types of
arrangements to new customers.
FSD Competition
In the aftermarket segment, we often compete against the customers'
in-house maintenance departments. An estimated 86% of the total costs of pump
ownership are attributable to maintenance, replacement parts and ongoing
service. The aftermarket service business is highly fragmented and there are no
other large independent competitors offering comprehensive services for flow
control products. Customers frequently use in-house resources or buy services
from small and local operations. Delivery speed and the proximity of services
and repair centers are particularly important in the aftermarket segment, with
customers more likely to rely on top tier, rather than smaller, providers for
more complex servicing needs.
REGULATORY DIVESTITURES
In connection with the IDP acquisition, we have entered into a consent
decree with the U.S. Department of Justice to resolve its antitrust concerns
related to the acquisition. The consent decree was filed with the United States
District Court for the District of Columbia on July 28, 2000 and published in
the Federal Register on September 13, 2000. See "Risk Factor -- Risks Relating
to our Business -- Although we have entered into a consent decree with the U.S.
Department of Justice addressing its antitrust concerns related to the
Acquisition, we may not obtain a final court order approving the Acquisition".
Pursuant to this consent decree, we have committed to divest the following
assets:
- certain designated models of highly engineered pumps in four product
lines serving the oil refinery and power industry markets;
- Flowserve's Tulsa manufacturing facility; and
- on-site plant and equipment at two IDP service and repair centers located
in the United States
In the divestures of product lines, we will be able to retain certain
overlapping models in all of the product lines. In addition, we will be required
to grant the purchaser of the divested product line(s) the exclusive right to
sell such product line(s) for installation within the United States and a
non-exclusive right to sell such product line(s) for installation outside the
United States, except for special provisions permitting sales in the U.S. to two
major alliance customers of equipment and parts on certain product lines for
specified periods of time from the date of entry of the consent decree.
With respect to the divestiture of the Tulsa manufacturing facility,
Flowserve must leave all production equipment and related assets used to
manufacture the pump product lines to be divested.
We must make the above divestitures within 150 calendar days after the
filing of the consent decree, subject to one 30-day extension by the Department
of Justice, in its sole discretion. If we have not divested these assets within
that time period, a trustee will be appointed by the federal district court, who
shall have the sole right to divest the assets following such appointment.
The above divestitures would affect less than three percent of the combined
1999 revenues of Flowserve and IDP. In the opinion of management, the impact of
these divestitures will not be material to our overall pro forma financial
position or results of operations.
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SALES AND MARKETING
We sell our products through a direct sales force totaling over 700 sales
and marketing personnel, distributors and commissioned sales agents in 70
countries. A significant percentage of our direct sales force has technical
backgrounds, including degrees in engineering. We believe that our worldwide
sales and distribution presence enables us to provide timely and responsive
support and service to our customers, many of which operate internationally, and
to capitalize on growth opportunities in both developed and emerging markets
around the world.
INTERNET AND E-COMMERCE INITIATIVES
Our Internet site (www.flowserve.com) provides information to existing and
potential customers, detailed information about our three divisions' products
and services, as well as supporting internal data sharing and exchange. We are
establishing several customer specific extranets through which we will share and
communicate information related to individual projects or distribution
activities, which will be implemented during 2000. The core of our e-commerce
strategy is to: (1) work closely with our major customers in identifying
opportunities to electronically integrate our work processes; (2) extend our
traditional lines of marketing and distribution using Web-based technologies;
and (3) reduce product lead time and supplier costs by sharing and leveraging
planning, scheduling and purchasing information on a global basis.
PROPERTIES
Our corporate headquarters are located in Irving, Texas encompassing
approximately 34,000 square feet of leased space. Information on the principal
manufacturing facilities, by segment, after giving effect to the Transactions
and the Invatec acquisition and eight announced facility closings, is as
follows:
<TABLE>
<CAPTION>
RED FSD FCD
------------------------ ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF
FACILITIES SIZE(FT(2)) FACILITIES SIZE(FT(2)) FACILITIES SIZE(FT(2))
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Domestic....................... 8 1,129,000 3 172,500 4 528,400
International.................. 15 1,991,000 8 286,400 9 398,850
</TABLE>
Most of our principal manufacturing facilities are owned and our leased
facilities are subject to long-term lease agreements.
We estimate that we utilize approximately 55%-65% of our manufacturing
capacity. Pursuant to a restructuring program announced in December 1999, we
expect to close one of the FSD manufacturing plants in the United States and a
number of smaller U.S. and foreign facilities. In addition, in connection with
our integration of IDP's operations, we intend to shut down a number of
additional Flowserve and IDP plants and service and repair centers in order to
realize the opportunities for cost savings and synergies presented by the IDP
acquisition. Management believes that after giving affect to the planned
rationalization of our facilities we will have sufficient capacity to meet
increased customer demand as our market recovers.
We maintain a substantial network of domestic and foreign service and
repair centers and sales offices, most of which are leased.
In connection with the IDP acquisition, we have entered into a consent
decree with the U.S. Department of Justice to resolve its antitrust concerns
related to the acquisition. This consent decree requires us to divest certain
product lines, our manufacturing facility in Tulsa, Oklahoma, and on-site plant
and equipment at two IDP service and repair centers located in the United States
that would affect less than three percent of the combined 1999 revenues of
Flowserve and IDP. See "-- Regulatory Divestitures."
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RESEARCH AND DEVELOPMENT
We conduct research and development at various facilities. In 1999, 1998
and 1997, we spent approximately $28.6 million, $30.1 million, and $30.5
million, respectively, on company-sponsored research and development, primarily
for new product development and extensions of existing products.
Our research and development group consists of engineers involved in new
product development as well as the support and improvement of existing products.
Additionally, we sponsor consortium programs for research with various
universities and conduct limited development work jointly with certain of our
vendors, licensees and customers. We believe current expenditures are adequate
to sustain ongoing research and development activities.
RAW MATERIALS
The principal raw materials we use in manufacturing our products are
readily available. The main raw materials we use include bar stock and
structural steel, castings, fasteners, gaskets, motors, silicon and carbon faces
and teflon(R). While substantially all raw materials are purchased from outside
sources, we have been able to obtain an adequate supply of raw materials and no
shortage of such materials is currently anticipated. We intend to expand our use
of worldwide sourcing to capitalize on low cost sources of purchased goods.
Certain corrosion-resistant castings for our pumps and quarter-turn valves are
manufactured at our Dayton, Ohio foundries, and other metal castings are
manufactured at three other foundries or purchased from outside sources. We also
produce most of our highly-engineered corrosion resistant plastic parts for
certain pump and valve product lines. This includes rotomolding, as well as
injection and compression molding, of a variety of fluorocarbon and other
plastic materials. Suppliers of raw materials for nuclear markets must be
qualified by the American Society of Mechanical Engineers and, accordingly, are
limited in number. However, to date we have experienced no significant
difficulty in obtaining such materials.
EMPLOYEES AND LABOR RELATIONS
We employ approximately 12,000 persons of whom approximately 47% work in
the United States. Our hourly employees at five principal U.S. pump
manufacturing plants, plus those at our valve manufacturing plant in
Williamsport, Pennsylvania and at our foundries in Dayton, Ohio are represented
by unions. Our operations in the following countries are unionized: Argentina,
Austria, Belgium, Brazil, Canada, France, Germany, Italy, Mexico, The
Netherlands, Spain and United Kingdom. We have a highly educated technical
workforce, many of whom have engineering degrees. We believe relations with our
employees throughout our operations are satisfactory, including with those
employees represented by unions.
TRADEMARKS AND PATENTS
We own a number of trademarks and patents relating to the name and design
of our products. We consider our trademarks Flowserve(R), Byron Jackson(R),
Durco(R), Atomac(TM), BW Seals(R), Durametallic(R), United Centrifugal(R),
Stork(R), Worthington(R), Jeumont Schneider(R), Pleuger(R), Pacific Wietz(TM)
and Scienco(R) to be important to our business. The patents underlying much of
the technology for our products have been in the public domain for many years.
Surviving patents are not considered, either individually or in the aggregate,
to be material to our business. However, our pool of proprietary information,
consisting of know-how and trade secrets relating to the design, manufacture and
operation of our products and their use, is considered particularly important
and valuable. Accordingly, we protect such proprietary information. In general,
we are the owner of the rights to the products which we manufacture and sell,
and we are not dependent in any material way upon any license or franchise to
operate.
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ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations in all jurisdictions
in which we have operating facilities. We periodically make capital expenditures
for pollution abatement and control to meet environmental requirements. At
present, we have no plans for any material capital expenditures for
environmental control facilities. However, we have experienced and continue to
experience operating costs relating to environmental matters, although certain
costs have been offset by our successful waste minimization programs.
We are also currently investigating and remediating several contaminated
properties, including several properties that we recently obtained through the
Acquisition that Ingersoll-Rand is responsible for remediating pursuant to the
IDP purchase agreement. While we believe that Ingersoll-Rand will honor its
contractual remediation obligations in this regard, we cannot assure you of
this. In the event that Ingersoll-Rand were to successfully dispute its
remediation obligations or our operations were to cause additional
contamination, we could incur clean up costs or other liabilities in connection
with these properties.
Based on information currently available, we believe that future
environmental compliance expenditures will not have a material adverse effect on
our financial position and have established allowances which we believe to be
adequate to cover potential environmental liabilities. See "Risk
Factors -- Environmental compliance costs and liabilities could adversely affect
our financial condition."
LEGAL PROCEEDINGS
We are involved in ordinary routine litigation incidental to our business,
none of which we believe to be material to our financial condition.
In addition, we are involved as a "potentially responsible party" at five
former public waste disposal sites that may be subject to remediation under
pending government procedures. Under certain environmental laws, we could be
held jointly and severally liable for all investigation and remediation costs at
these sites, as well as related natural resources damages, without regard to
fault. The sites are in various stages of evaluation by federal and state
environmental authorities. The projected cost of remediating these sites, as
well as our alleged "fair share" allocation, is uncertain and speculative until
all studies have been completed and parties have either negotiated an amicable
resolution or the matter has been judicially resolved. At each site, there are
many other parties who have similarly been identified, and the identification
and location of additional parties is continuing under applicable federal or
state law. Based on our preliminary information about the waste disposal
practices at these sites and the environmental regulatory process in general, we
believe that it is likely that ultimate remediation liability costs for each
site will be apportioned among all parties, including site owners and waste
transporters, according to the volumes and/or toxicity of the wastes shown to
have been disposed of at the sites.
We also have been named as one of a number of defendants in numerous
lawsuits involving approximately 70,000 claims (of which approximately 35,000
have been settled or dismissed) that seek to recover damages for alleged
personal injury claimed to result from exposure to asbestos-containing products
formerly manufactured and distributed by us. All such products were used within
self-contained process equipment, and management does not believe that there was
any emission of ambient asbestos fiber during the use of this equipment. We have
successfully resolved virtually all closed cases without payment or with a
nominal payment. We believe that the open cases are without merit, that we have
adequate insurance to pay most of the costs and liabilities in connection
therewith and that the ongoing costs and liabilities associated with current and
future asbestos-related litigation will not adversely affect us. Nevertheless,
unexpected adverse future events, such as a significant increase in the number
of new cases or changes in our current insurance arrangements, could result in
liabilities that could have a material adverse effect on our business, financial
condition or results of operations.
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INDUSTRY
The flow control industry generates $50-55 billion per year in worldwide
sales and includes pumps, valves, mechanical seals and aftermarket services.
According to industry sources, engineered pumps account for approximately $23
billion, valves approximately $21 billion, seals approximately $2-3 billion and
aftermarket services approximately $8-10 billion of annual world-wide sales. The
pump, valves and aftermarket service segments are projected to grow annually at
3-4%, 3-4% and 7-8%, respectively, over the next several years. The engineered
pump segment in which we operate excludes non-industrial applications, such as
residential, which represents a market of approximately equivalent size to the
industrial segment.
Quality and reliability of equipment are critical as the failure of a pump,
valve or seal may halt the flow process. Of the three product types, at the time
of the original equipment purchase, pumps are generally the most expensive
followed by valves then seals. During the replacement cycle, seals may have to
be replaced every few hours in highly corrosive applications, while pumps can
run for months or years before needing replacement. Products and services in the
flow control industry are sold to engineering and construction firms, OEMs,
distributors and end users throughout the world.
Despite the consolidation trend over the past ten years, the industry
remains highly fragmented. Competition for original equipment sales among the
industry leaders is primarily against a select group of large companies
operating on a global scale. Competition for original equipment sales is
generally based on price, expertise, delivery times, breadth of product
offerings, contractual terms, previous installation history and reputation for
quality. In the pump segment, there are more than 500 companies, with the top
ten pump companies accounting for less than 40% of total 1999 estimated
worldwide annual pump sales. In the valves segment, we believe that the top ten
domestic manufacturers generate less than 25% of domestic sales. The aftermarket
service sector is extremely fragmented as many end users either use in-house
resources or buy service from local operators, which are often very small.
COMPETITION
The industry is highly fragmented, although for original equipment sales
the industry leaders primarily compete against a selected number of large
companies operating on a global scale. In the pump segment, there are more than
500 companies, with the top ten pump companies accounting for less than 40% of
total 1999 estimated worldwide annual pump sales. In the valves segment, we
believe that the top ten domestic manufacturers generate less than 25% of
domestic sales. The aftermarket service sector is extremely fragmented as
customers either use in-house resources or buy service from local operators,
which are often times very small. Competition for original equipment sales is
generally based on price, expertise, delivery times, breadth of product
offerings, contractual terms, previous installation history and reputation for
quality.
END MARKET SEGMENTS
The following end market discussions address the primary segments we serve.
HYDROCARBON PROCESSING (PETROLEUM) INDUSTRY
Capital spending in the hydrocarbon processing (petroleum) industry fell by
approximately 20% in consecutive years in 1998 and 1999 as a result of
historically low oil prices. The depressed oil prices caused many planned
projects to become uneconomical. With the strong recent recovery in oil prices
to a year-to-date high of over $35.00 per barrel in 2000, from a low of $10.73
in December of 1998, industry analysts project HPI expenditures in the petroleum
and chemical sectors to begin to sustain growth momentum over the next several
years. Additionally, the recent consolidation among some of the oil industry's
largest competitors also impacted capital spending levels as those companies
sought to rationalize the combined entities' assets. Growth in capital spending
is expected to be driven by new projects, reinstated projects and deferred
maintenance work.
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CHEMICAL
The chemical industry appears to be in the early stages of recovery driven
by improved markets in Europe, Latin America and Asia. Industry analysts are
forecasting higher sales, volumes and capital investments for chemical companies
in 2000 and into 2001. Chemical producers' margins are expected to increase in
2000 and 2001 as price increases outpace raw material cost increases. This trend
appeared to be somewhat offset by higher feed stock prices in 2000, but this
imbalance is expected to reverse in 2001 as prices for most chemical products
have been rising in response to the continued strength of the U.S. economy and
the economic recovery in Asia.
POWER
The U.S. power generation market is expected to require increasing levels
of capital spending as the country's installed plants are becoming outdated and
obsolete, and therefore need to be replaced and repowered. In addition, the
deregulation of the power industry could lead to additional and more efficient
capacity as competition between suppliers heightens and producers focus on
lowering prices and costs while enhancing quality of service. Both these factors
have led to an increase in demand for flow control products and services. China
is the largest purchaser of pumps for new systems and represents 38% of the
global pump market; however, China's replacement market share is only 13%. In
the United States the opposite is true, as the United States holds a 9% share
for new pumps with a 32% market share for replacement pumps.
WATER TREATMENT
Demand for new pumps in the water treatment market is largely attributable
to the significant need for potable water and water treatment facilities around
the world, particularly in lesser-developed countries. It is estimated that
nearly half a billion people around the world face a shortage of potable water,
and that number is expected to grow. The anticipated economic improvement in
Asia, which requires a significant amount of infrastructure, is also a large
driving force behind new pump sales growth. The need for water and water
treatment is not limited to developing countries. A report published in August
1999 estimated that the United Kingdom must spend almost $60.0 billion over the
next ten years building wastewater treatment facilities to comply with new
European water quality standards. Industry analysts estimate that new and
replacement pump sales in the water treatment industry will grow at a compounded
annual growth rate of 9% and 5%, respectively, over the next four years.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth the names and ages of each of Directors and
officers of Flowserve, as well as the positions and offices held by such
persons. A summary of the background and experience of each of these individuals
is set forth after the table. The Board of Directors consists of 9 directors who
are divided into three classes, with one full class being elected at each annual
meeting of shareholders.
MANAGEMENT AND BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Scott Greer............................ 49 Chairman, President and Chief Executive
Officer and Director
Renee J. Hornbaker........................ 48 Vice President and Chief Financial Officer
Howard D. Wynn............................ 53 Vice President and President of Rotating
Equipment Division
George A. Shedlarski...................... 56 Vice President and President of Flow
Solutions Division and President of Flow
Control Division
Rick L. Johnson........................... 47 Vice President and Controller
Kenneth P. Bell........................... 52 Vice President, Manufacturing Operations
Mark D. Dailey............................ 41 Vice President, Supply Chain Integration
Cheryl D. McNeal.......................... 50 Vice President, Human Resources
Rory E. MacDowell......................... 50 Vice President and Chief Information
Officer
Ronald F. Shuff........................... 48 Vice President, Secretary and General
Counsel
M. Kathleen McVay......................... 45 Vice President and Treasurer
Diane C. Harris........................... 57 Director
James O. Rollans.......................... 58 Director
Hugh K. Coble............................. 65 Director
George T. Haymaker, Jr. .................. 62 Director
William C. Rusnack........................ 55 Director
Michael F. Johnston....................... 53 Director
Charles M. Rampacek....................... 57 Director
Kevin E. Sheehan.......................... 55 Director
</TABLE>
C. SCOTT GREER has been our President since July 1999, Chief Executive
Officer since January 2000 and Chairman of the Board of Directors since April
2000. He has also been a director since 1999. Mr. Greer was Chief Operating
Officer from July 1999 until succeeding Bernard G. Rethore as Chief Executive
Officer in January 2000. Mr. Greer had been President of UT Automotive, a
subsidiary of United Technologies Corporation, a supplier of automotive systems
and components, from 1997 to 1999. He was president and a director of Echlin,
Inc., an automotive parts supplier, from 1990 to 1997, and its Chief Operating
Officer from 1994 to 1997.
RENEE J. HORNBAKER has been our Vice President and Chief Financial Officer
since December 1997. She was Vice President, Business Development and Chief
Information Officer in 1997. She served as Vice President, Finance and Chief
Financial Officer of BW/IP, Inc. in 1997 and Vice President, Business
Development of BW/IP from 1996 to 1997. She also served as Director-Business
Analysis and Planning of Phelps Dodge Industries, the diversified international
manufacturing business of Phelps Dodge Corporation in 1996 and
Director-Financial Analysis and Control from 1991 to 1996.
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HOWARD D. WYNN has been our President of Rotating Equipment Division since
1997. He was Vice President of BW/IP, Inc. and President, Pump Division of
BW/IP, Inc. from 1996 to 1997 and Vice President, Pump Division of BW/IP, Inc.
from 1993 to 1996.
GEORGE A. SHEDLARSKI has been our President of Flow Solutions Division
since January 1999 and President of Flow Control Division since August 1999. He
was President of Fluid Sealing Division from 1997 to 1999, President of Service
Repair Division in 1997, President of Rotating Equipment Group in 1997 and Group
Vice President, Industrial Products Group from 1994 to 1997 .
RICK L. JOHNSON has been our Vice President since January 1998 and
Controller since November 1998. He served as Vice President and Controller of
the Industrial Products Division from 1997 to January 1998, Industrial Products
Group Vice President and Controller from 1995 to 1997 and President, Durco
Valtek (Singapore) from 1993 to 1995.
KENNETH P. BELL has been our Vice President, Manufacturing Operations since
January 2000. He was General Manager and held other executive positions from
1985 to 1999 at UT Automotive, a subsidiary of United Technologies Corporation,
a supplier of automotive systems and components.
MARK D. DAILEY has been our Vice President, Supply Chain Integration since
September 1999. He was Vice President, Supply Chain and other Supply Chain
management positions, from 1992 to 1999 for the North American Power Tools
Division of The Black and Decker Company, a manufacturer of power tools,
fastening and assembly systems and security hardware and plumbing products.
CHERYL D. MCNEAL has been our Vice President, Human Resources since 1996.
She was Assistant Vice President, Human Resources and held other Human Resource
management positions at NCR from 1978 to 1996.
RORY E. MACDOWELL has been our Vice President and Chief Information Officer
since 1998. He served as Chief Information Officer of Keystone International,
Inc., a manufacturer and distributor of flow control products from 1993 to 1997.
RONALD F. SHUFF has been our Vice President since 1990 and Secretary and
General Counsel since 1989.
M. KATHLEEN MCVAY has been our Vice President and Treasurer since May 2000.
She had served as Chief of Staff to the President and as Head of Planning and
Administration, Global Corporate & Investment Bank, and held other management
positions at Bank of America Corporation from 1984 to 1999.
DIANE C. HARRIS has been a director since 1993. She is President of
Hypotenuse Enterprises, Inc., a merger and acquisition service and corporate
development outsourcing company. She was Vice President, Corporate Development,
of Bausch & Lomb, an optics and health care products company, from 1981 to 1996,
when she left to form Hypotenuse Enterprises, Inc.
JAMES O. ROLLANS has been a director since 1997. He is President and Chief
Executive Officer of Fluor Signature Services, a subsidiary of Fluor
Corporation, a major engineering and construction firm. He was Senior Vice
President of Fluor from 1992 to 1999. He was also its Chief Financial Officer
from 1998 to 1999 and 1992 to 1994, Chief Administrative Officer from 1994 to
1998 and Vice President, Corporate Communications from 1982 to 1992. Mr. Rollans
is also a director of Fluor Corporation and of Inovision, Inc., a pharmaceutical
products company.
HUGH K. COBLE has been a director since 1994. He is Vice Chairman Emeritus
of Fluor Corporation. Mr. Coble was a director of Fluor Corporation from 1984
and Vice Chairman from 1994 until his retirement in 1997. He joined Fluor
Corporation in 1966 and most recently was Group President of Fluor Daniel, Inc.,
a subsidiary of Fluor Corporation, from 1986 to 1994. He is also a director of
Beckman Instruments, Inc., a company that sells medical instruments, and a
director of ICO Global Communications, a telecommunications business.
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GEORGE T. HAYMAKER, JR. has been a director since 1997. He is Chairman of
Kaiser Aluminum Corporation, a company that operates in all principal aspects of
the aluminum industry, since 1994. Mr. Haymaker was Chief Executive Officer of
Kaiser Aluminum from 1994 to 1999. Prior to joining Kaiser Aluminum in 1993 as
President and Chief Operating Officer, Mr. Haymaker worked with a private
partner in the acquisition and redirection of several metal fabricating
companies. He was Executive Vice President of Alumax, Inc. from 1984 to 1986.
WILLIAM C. RUSNACK has been a director since 1997. He is President, Chief
Executive Officer and a director of Clark U.S.A., Inc., a company which refines
crude oil to manufacture petroleum products, since 1998. Before joining Clark
U.S.A., Inc., Mr. Rusnack was Senior Vice President of ARCO, an integrated
petroleum company, from 1990 to 1998, and President of ARCO Products Company
from 1993 to 1998. He is also a director of Clark Refining & Marketing, Inc.,
which is affiliated with Clark U.S.A., Inc.
MICHAEL F. JOHNSTON has been a director since 1997. He is President and
Chief Operating Officer of Visteon Corporation, which was spun off from Ford
Motor Company in late June 2000. Mr. Johnston previously was President at
Johnson Controls, Inc., Americas Automotive Group from 1997 to 1999, Vice
President and General Manager of ASG Interior Systems Business during 1997, Vice
President and General Manager of the Johnson Controls Battery Group from 1993 to
1997, Vice President and General Manager of SLI Battery Division from 1991 to
1993.
CHARLES M. RAMPACEK has been a director since 1998. He is President and
Chief Executive Officer of Probex Corporation, an energy technology company.
Before joining Probex, Mr. Rampacek served as President and Chief Executive
Officer of Lyondall-Citgo Refining, a manufacturer of petroleum products. Mr.
Rampacek also served as President of Tenneco Gas Transportation Company from
1992 to 1996, Executive Vice President of Tenneco Gas operations from 1989 to
1992 and Senior Vice President of Refining of Tenneco Oil Company from 1982 to
1988.
KEVIN E. SHEEHAN has been a director since 1990. He is a general partner of
CID Equity Partners, a venture capital firm that concentrates on early-stage and
high-growth entrepreneurial companies. Before joining CID Equity Partners, he
was a Vice President of Cummins Engine Company, a manufacturer of diesel engines
and related components, from 1980 to 1993. He is also a director of the Auburn
Foundry Group.
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DESCRIPTION OF THE ACQUISITION
THE ACQUISITION
On February 9, 2000, Flowserve and Flowserve RED Corporation, a subsidiary
of Flowserve, entered into a Purchase Agreement with Ingersoll-Rand Company and
its subsidiary IDP Acquisition, LLC, which was amended on July 14, 2000 (the
"Purchase Agreement"), to purchase all of the partnership interests in
Ingersoll-Dresser Pump Company at a price of $775.0 million. Flowserve and
Flowserve RED closed the purchase of the partnership interests on August 8,
2000.
THE PHILLIPSBURG FACILITY
At the closing of the IDP acquisition, Ingersoll-Rand agreed to lease, rent
free, to IDP the Phillipsburg facility for three years. There is ongoing
remediation of contamination at the Phillipsburg property that is being
conducted by Ingersoll-Rand. Under the Purchase Agreement, Ingersoll-Rand has
agreed to indemnify Flowserve and Flowserve RED for all environmental
liabilities at Phillipsburg except for new liabilities affirmatively caused by
IDP as the new tenant.
EMPLOYEE BENEFIT MATTERS
Ingersoll-Rand has assumed the phantom stock plan applicable to IDP
employees and is responsible for satisfying all obligations and liabilities with
respect to that plan.
Ingersoll-Rand has assumed each of IDP's qualified defined benefit pension
plans and all assets and liabilities accrued through the closing date of the IDP
acquisition. In addition, Ingersoll Rand has retained liability for certain
enhanced pension benefits payable to transferred employees under such defined
benefit pension plans that may be triggered by plant shutdowns occurring until
the first anniversary of the closing date of the acquisition, and has agreed to
grant one year's service credit for purposes of determining accrued benefits
under such defined benefit pension plans to transferred employees at the Liberty
Corners, Huntington Park and Phillipsburg facilities.
Flowserve has agreed to establish new pension plans for certain transferred
employees and, more generally, has agreed to maintain, for not less than a year
following the closing date of the IDP acquisition, (1) salaries for transferred
employees at levels no less favorable than immediately prior to the closing date
and (2) employee benefit plans (other than certain bonus and incentive
arrangements) for non-union transferred employees that, in the aggregate, are
competitive with salaries and employee benefit plans maintained by Flowserve and
those generally provided in IDP's industry in the relevant jurisdictions.
OTHER PROVISIONS
The Purchase Agreement also provides that Ingersoll-Rand will provide
certain transition services at no charge to the purchasers from the closing date
of the IDP acquisition through December 31, 2000.
- Immediately before the consummation of the IDP acquisition,
Ingersoll-Rand caused IDP to distribute all receivables (except for the
$3 million loan Ingersoll-Rand owed to the IDP Austrian subsidiary) held
by subsidiaries of IDP which were owed by Ingersoll-Rand in the form of
capital reductions of Ingersoll-Rand's capital account in IDP. To the
extent that the sum of cash retained by the non-U.S. Subsidiaries of IDP
and the principal amount of the loan Ingersoll-Rand owes to the IDP
Austrian subsidiary exceeds or falls below $25 million as of the closing
date, the amount of any such excess or shortfall will be paid by
Flowserve or Ingersoll-Rand to the other party. In any event,
Ingersoll-Rand will repay the loan it owes to the IDP Austrian subsidiary
on the closing date.
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REGULATORY APPROVALS
UNITED STATES
We have entered into a consent decree with the U.S. Department of Justice
to resolve its antitrust concerns relating to the IDP acquisition. This consent
decree requires us to divest certain product lines, Flowserve's Tulsa, Oklahoma
manufacturing facility, and on-site plant and equipment at two IDP service and
repair centers located in the United States. The provisions of the consent
decree are described in more detail in "Business -- Regulatory Divestiture." See
"Risk Factors -- Risk Factors Relating To Our Business -- Although we have
entered into a consent decree with the U.S. Department of Justice resolving its
antitrust concerns related to the IDP acquisition, we may not obtain a final
court order approving the acquisition." Under the purchase agreement, Flowserve
has agreed to take all steps necessary to obtain approval from the Department of
Justice with respect to the transaction.
GERMANY
We filed our notification of the IDP acquisition with the German Federal
Cartel Office in April 2000. The German Federal Cartel Office issued its
approval of the portion of the IDP acquisition subject to its jurisdiction on
July 17, 2000.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain indebtedness of our company. To the
extent such summary contains descriptions of the Senior Credit Facilities and
other loan documents, such descriptions do not purport to be complete and are
qualified in their entirety by reference to such documents which are filed as
Exhibits to the registration statement of which this prospectus is a part.
SENIOR CREDIT FACILITIES
General. In connection with the Transactions, we entered into the Senior
Credit Facilities with a syndicate of certain financial institutions, as
lenders, Credit Suisse First Boston, New York branch, as Syndication Agent, Bank
of America, N.A., as Administrative Agent, Collateral Agent and Swingline Lender
and ABN AMRO Bank N.V., Bank One, N.A. and Salomon Smith Barney Inc. as
Co-Documentation Agents. The description below of the Credit Agreement is a
summary of the principal terms of the Senior Credit Facilities and related loan
documents.
The Senior Credit Facilities provide for up to $1,050.0 million of
aggregate borrowing capacity for our company, consisting of:
- a secured $275.0 million funded term A loan (the "Term Loan A");
- a secured $475.0 million funded term B loan (the "Term Loan B"); and
- a secured $300.0 million revolving line of credit (the "Revolving Credit
Facility"). Approximately $30.0 million in letters of credit have been
issued under the Revolving Credit Facility. As a result, under our
Revolving Credit Facility we will have unused borrowing capacity, net of
issued letters of credit, of approximately $270.0 million. The Revolving
Credit Facility permits up to $25.0 million of swingline loans.
Use of the Senior Credit Facilities. We used the proceeds from the Term
Loan A and Term Loan B and borrowings under the Revolving Credit Facility,
together with the proceeds from the offering of the $290 million 12 1/4% Senior
Subordinated Notes due 2010 and the proceeds from the E100 million 12 1/4%
Senior Subordinated Notes due 2010, (i) to fund the Acquisition, (ii) to
refinance our existing indebtedness and (iii) to pay related fees and expenses.
Guarantees; Security. Our obligations under the Senior Credit Facilities
are unconditionally guaranteed, jointly and severally, by substantially all of
our existing and subsequently acquired or organized domestic subsidiaries. Our
obligations and those of such guarantors under the Senior Credit Facilities are
secured by substantially all of the assets of our company and each of the
guarantors. No foreign subsidiary is required to guarantee the senior credit
facilities and less than two-thirds of the capital stock of certain foreign
subsidiaries is required to be pledged to secure the senior credit facilities.
Amortization; Interest; Fees; Maturity. The Term Loan A Term Loan B will
amortize each year on a quarterly basis in the following approximate aggregate
principal amounts as set forth below:
<TABLE>
<CAPTION>
YEAR TERM LOAN A TERM LOAN B
---- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
2001........................................................ $ 15.0 $ 3.0
2002........................................................ 41.0 4.0
2003........................................................ 56.0 4.0
2004........................................................ 60.0 4.0
2005........................................................ 64.0 4.0
2006........................................................ 39.0 67.6
2007........................................................ -- 258.7
2008........................................................ -- 129.7
------ ------
$275.0 $475.0
====== ======
</TABLE>
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The Revolving Credit Facility is available until June 30, 2006 unless
terminated earlier under certain circumstances.
Our borrowings under the Term Loan A, Term Loan B and Revolving Credit
Facility bear interest at a rate equal to, at our option, either (i) the base
rate (which is based on the prime rate most recently announced by the
Administrative Agent or the Federal Funds rate plus one-half of 1%) or (ii) the
applicable London interbank offered rate, in each case plus applicable margin.
In addition, the Senior Credit Facilities are subject to a commitment fee of
0.50% per annum of the undrawn portion of the Revolving Credit Facility and
letter of credit fees with respect to each letter of credit outstanding under
the Senior Credit Facilities equal to the applicable margin over Adjusted LIBOR
(as defined in the Senior Credit Facilities) in effect for loans under the
Revolving Credit Facility.
Prepayments. The loans under the Senior Credit Facilities are required to
be prepaid with certain assets and capital stock sales and dispositions, certain
incurrences of indebtedness, certain offerings of common equity securities and
by certain percentages of our annual Excess Cash Flow (as defined in the Credit
Agreement).
Voluntary prepayments may be made in whole or in part without premium or
penalty.
Covenants and Events of Default. The Senior Credit Facilities contain,
among other things, covenants restricting our ability and our subsidiaries'
ability to dispose of assets, merge, pay dividends, repurchase or redeem capital
stock and indebtedness (including the notes), incur indebtedness and guarantees,
create liens, enter into agreements with negative pledge clauses, make certain
investments or acquisitions, enter into sale and leaseback transactions, enter
into transactions with affiliates, change our business or make fundamental
changes, and otherwise restrict corporate actions. The Senior Credit Facilities
also contain a number of financial maintenance covenants.
The Senior Credit Facilities also include events of default usual for these
types of credit facilities and transactions, including but not limited to
nonpayment of principal or interest, violation of covenants, incorrectness of
representations and warranties, cross defaults and cross acceleration,
bankruptcy, material judgments, ERISA, actual or asserted invalidity of the
guarantees or the security documents and certain changes of control of our
company. The occurrence of any event of default could result in the acceleration
of our company's and the guarantors' obligations under the Senior Credit
Facilities, which could materially and adversely affect holders of the notes.
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<PAGE> 102
DESCRIPTION OF THE NOTES
Flowserve Corporation will issue the Dollar Notes under an Indenture dated
August 8, 2000 (the "Dollar Notes Indenture") between itself, the guarantors
identified herein and The Bank of New York, as trustee (the "Dollar Notes
Trustee"). Flowserve Finance B.V. will issue the Euro Notes under an Indenture
dated August 8, 2000 (the "Euro Notes Indenture") between itself, the guarantors
identified herein and The Bank of New York, as trustee (the "Euro Notes
Trustee"). The Dollar Notes and the Euro Notes are collectively referred to as
the "Notes", the Dollar Notes Indenture and the Euro Notes Indenture are
collectively referred to as the "Indentures" and the Dollar Notes Trustee and
the Euro Notes Trustee are collectively referred to as the "Trustees". The terms
of each series of Notes include those stated in the applicable Indenture and
those made part of that Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act").
Certain terms used in this description are defined under the subheading
"-- Certain Definitions". In this description, the words "Company", "we", "us"
and "our" refer only to Flowserve Corporation and not to any of its subsidiaries
and "FFBV" refers only to Flowserve Finance B.V.
The following description is only a summary of the material provisions of
the Indentures. We urge you to read the Indentures because they, not this
description, define your rights as holders of these Notes. You may request
copies of these agreements at our address set forth under the heading
"Prospectus Summary -- Additional Information".
BRIEF DESCRIPTION OF THE NOTES
DOLLAR NOTES
The Dollar Notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company;
- are guaranteed on a senior subordinated basis by each Dollar Notes
Guarantor, including FFBV; and
- are subject to registration with the SEC pursuant to the Dollar Notes
Registration Rights Agreement.
EURO NOTES
The Euro Notes:
- are unsecured senior subordinated obligations of FFBV;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of FFBV;
- are senior in right of payment to any future Subordinated Obligations of
FFBV;
- are guaranteed on a senior subordinated basis by the Company and each
other Euro Notes Guarantor; and
- are subject to registration with the SEC pursuant to the Euro Notes
Registration Rights Agreement.
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<PAGE> 103
PRINCIPAL, MATURITY AND INTEREST
DOLLAR NOTES
The Company issued the old Dollar Notes initially in a principal amount of
$290.0 million. The Company issued the Dollar Notes in denominations of $1,000
and any integral multiple of $1,000. The Dollar Notes will mature on August 15,
2010. Subject to our compliance with the covenant described under the subheading
"-- Certain Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Indebtedness", we are permitted to issue more Dollar
Notes under the Dollar Notes Indenture in an unlimited principal amount (the
"Additional Dollar Notes"). The Dollar Notes and the Additional Dollar Notes, if
any, will be treated as a single class for all purposes of the Dollar Notes
Indenture, including waivers, amendments, redemptions and offers to purchase.
Unless the context otherwise requires, for all purposes of the Dollar Notes
Indenture and this "Description of the Notes", references to the Dollar Notes
include any Additional Dollar Notes actually issued.
Interest on the Dollar Notes will accrue at the rate of 12 1/4% per annum
and will be payable semiannually in arrears on February 15 and August 15,
commencing on February 15, 2001. We will make each interest payment to the
holders of record of the Dollar Notes on the immediately preceding February 1
and August 1. We will pay interest on overdue principal at 1% per annum in
excess of the above rate and will pay interest on overdue installments of
interest at such higher rate to the extent lawful.
Interest on the Dollar Notes will accrue from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
EURO NOTES
FFBV may issue Euro Notes initially in the principal amount of E100.0
million. FFBV will issue the Euro Notes in denominations of E1,000 and any
integral multiple of E1,000. The Euro Notes will mature on August 15, 2010.
Subject to the Company's compliance with the covenant described under the
subheading "-- Certain Covenants -- Covenants Applicable to the Dollar Notes and
the Euro Notes -- Limitation on Indebtedness", FFBV is permitted to issue more
Euro Notes under the Euro Notes Indenture in an unlimited principal amount (the
"Additional Euro Notes"). The Euro Notes, including the Additional Euro Notes,
if any, will be treated as a single class and series for all purposes of the
Euro Notes Indenture, including waivers, amendments, redemptions and offers to
purchase. Unless the context otherwise requires, for all purposes of the Euro
Notes Indenture and this "Description of the Notes", references to the Euro
Notes include any Additional Euro Notes actually issued.
Interest on the Euro Notes will accrue at the rate of 12 1/4% per annum and
will be payable semiannually in arrears on February 15 and August 15, commencing
on February 15, 2001. FFBV will make each interest payment to the holders of
record of the Euro Notes on the immediately preceding February 1 and August 1.
FFBV will pay interest on overdue principal at 1% per annum in excess of the
above rate and will pay interest on overdue installments of interest at such
higher rate to the extent lawful.
Interest on the Euro Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
DOLLAR NOTES
Except as set forth below, we will not be entitled to redeem the Dollar
Notes at our option prior to August 15, 2005.
On and after August 15, 2005, we will be entitled at our option to redeem
all or a portion of the Dollar Notes upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed in percentages of principal
amount), plus accrued interest to the redemption date (subject to the right of
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<PAGE> 104
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on August 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2005........................................................ 106.125%
2006........................................................ 104.083
2007........................................................ 102.042
2008 and thereafter......................................... 100.000
</TABLE>
In addition, before August 15, 2003, we may at our option on one or more
occasions redeem Dollar Notes (which includes Additional Dollar Notes, if any)
in an aggregate principal amount not to exceed 35% of the aggregate principal
amount of the Dollar Notes (which includes Additional Dollar Notes, if any)
originally issued at a redemption price (expressed as a percentage of principal
amount) of 112.25%, plus accrued and unpaid interest to the redemption date,
with the net cash proceeds from one or more Public Equity Offerings; provided
that
(1) at least 65% of such aggregate principal amount of Dollar Notes
(which includes Additional Dollar Notes, if any) remains outstanding
immediately after the occurrence of each such redemption (other than Dollar
Notes held, directly or indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 60 days after the date of the
related Public Equity Offering.
EURO NOTES
Except as set forth below and under "-- Withholding Taxes", FFBV will not
be entitled to redeem the Euro Notes at its option prior to August 15, 2005. On
and after August 15, 2005, FFBV will be entitled at its option to redeem all or
a portion of the Euro Notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
August 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2005........................................................ 106.125%
2006........................................................ 104.083
2007........................................................ 102.042
2008 and thereafter......................................... 100.000
</TABLE>
In addition, before August 15, 2003, FFBV may at its option on one or more
occasions redeem Euro Notes (which includes Additional Euro Notes, if any) in an
aggregate principal amount not to exceed 35% of the aggregate principal amount
of the Euro Notes (which includes Additional Euro Notes, if any) originally
issued at a redemption price (expressed as a percentage of principal amount) of
112.25%, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds contributed to it by the Company from one or more Public Equity
Offerings; provided that
(1) at least 65% of such aggregate principal amount of Euro Notes
(which includes Additional Euro Notes, if any) remains outstanding
immediately after the occurrence of each such redemption (other than Euro
Notes held, directly or indirectly, by the Company, FFBV or any of their
respective Affiliates); and
(2) each such redemption occurs within 60 days after the closing date
of the related Public Equity Offering.
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<PAGE> 105
WITHHOLDING TAXES
FFBV is required to make all its payments under or with respect to the Euro
Notes free and clear of and without withholding or deduction for or on account
of any present or future tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and other liabilities related
thereto) (hereinafter "Taxes") imposed or levied by or on behalf of the
government of The Netherlands or any political subdivision or any authority or
agency therein or thereof having power to tax, or within any other jurisdiction
in which it is organized or is otherwise resident for tax purposes or any
jurisdiction from or through which payment is made (each a "Relevant Taxing
Jurisdiction"), unless it is required to withhold or deduct Taxes by law or by
the interpretation or administration thereof.
If FFBV is so required to withhold or deduct any amount for or on account
of Taxes imposed by a Relevant Taxing Jurisdiction from any payment made under
or with respect to the Euro Notes, it will be required to pay such additional
amounts ("Additional Amounts") as may be necessary so that the net amount
received by you (including Additional Amounts) after such withholding or
deduction will not be less than the amount you would have received if such Taxes
had not been withheld or deducted; provided, however, that the foregoing
obligation to pay Additional Amounts does not apply to (1) any Taxes that would
not have been so imposed but for the existence of any present or former
connection between the relevant holder (or between a fiduciary, settlor,
beneficiary, member or shareholder of, or possessor of power over the relevant
holder, if the relevant holder is an estate, nominee, trust or corporation) and
the Relevant Taxing Jurisdiction (other than the mere receipt of such payment or
the ownership or holding outside of The Netherlands of such Euro Note); or (2)
any estate, inheritance, gift, sales, excise, transfer, personal property tax or
similar tax, assessment or governmental charge; nor will it pay Additional
Amounts (a) if the payment could have been made without such deduction or
withholding if the beneficiary of the payment had presented the Euro Note for
payment within 30 days after the date on which such payment or such Euro Note
became due and payable or the date on which payment thereof is duly provided
for, whichever is later (except to the extent that the holder would have been
entitled to Additional Amounts had the Euro Note been presented on the last day
of such 30 day period), (b) with respect to any payment of principal of (or
premium, if any, on) or interest on such Euro Note to any holder who is a
fiduciary or partnership or any person other than the sole beneficial owner of
such payment, to the extent that a beneficiary or settlor with respect to such
fiduciary, a member of such a partnership or the beneficial owner of such
payment would not have been entitled to the Additional Amounts had such
beneficiary, settlor, member or beneficial owner been the actual holder of such
Euro Note, (c) if Euro Notes are presented for payment in The Netherlands;
provided, however, that at such time FFBV has at least one paying agent in the
European Union (other than in The Netherlands), or (d) if Euro Notes are
presented for payment by, or on behalf of, a Holder who would be able to avoid
withholding or deduction by presenting any form or certificate and/or making a
declaration of non-residence or similar claim for exemption but fails to do so.
Upon request, FFBV will provide the Euro Notes Trustee with official
receipts or other documentation satisfactory to the Euro Notes Trustee
evidencing the payment of the Taxes with respect to which Additional Amounts are
paid.
Whenever in the Euro Indenture there is mentioned, in any context:
(1) the payment of principal;
(2) purchase prices in connection with a purchase of Euro Notes;
(3) interest; or
(4) any other amount payable on or with respect to any of the Euro
Notes,
such reference shall be deemed to include payment of Additional Amounts as
described under this heading to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
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FFBV will pay any present or future stamp, court or documentary taxes or
any other excise or property taxes, charges or similar levies that arise in any
jurisdiction from the execution, delivery, enforcement or registration of the
Euro Notes, the Euro Indenture or any other document or instrument in relation
thereof, or the receipt of any payments with respect to the Euro Notes,
excluding such taxes, charges or similar levies imposed by any jurisdiction
outside of The Netherlands, the jurisdiction of incorporation of any successor
of FFBV or any jurisdiction in which a paying agent is located, and FFBV will
agree to indemnify the Holders for any such taxes paid by such Holders.
The obligations described under this heading will survive any termination,
defeasance or discharge of the Euro Indenture and will apply mutatis mutandis to
any jurisdiction in which any successor Person to FFBV is organized or any
political subdivision or taxing authority or agency thereof or therein.
For a discussion of Netherlands withholding taxes applicable to payments
under or with respect to the Euro Notes, see "Certain Tax Considerations".
GUARANTIES
The Dollar Notes Guarantors will jointly and severally guarantee, on a
senior subordinated and full and unconditional basis, our obligations under the
Dollar Notes. The Euro Notes Guarantors will jointly and severally guarantee, on
a senior subordinated and full and unconditional basis, FFBV's obligations under
the Euro Notes. The Dollar Notes Guarantors and the Euro Notes Guarantors are
collectively referred to as the "Guarantors". The obligations of each Guarantor
(other than the Company) that is a domestic subsidiary of the Company under its
Guaranty will be limited as necessary to prevent that Guaranty from constituting
a fraudulent conveyance under applicable law. See "Risk Factors -- Risks
Relating to the Notes -- Federal or state laws allow courts, under specific
circumstances, to void debts, including guaranties, and require holders of notes
to return payments received from us and the domestic guarantors".
Each Guarantor (other than the Company) that makes a payment under its
Guaranty will be entitled to a contribution from each other Guarantor in an
amount equal to such other Guarantor's pro rata portion of such payment based on
the respective net assets of all the Guarantors (other than the Company) at the
time of such payment determined in accordance with GAAP.
If a Guaranty (other than the Guaranty of the Euro Notes by the Company)
were rendered voidable, it could be subordinated by a U.S. court to all other
indebtedness (including guarantees and other contingent liabilities) of the
applicable Guarantor, and, depending on the amount of such indebtedness, such
Guarantor's liability on its Guaranty could be reduced to zero. See "Risk
Factors -- Risks Relating to the Notes -- Your right to receive payments on the
notes will rank behind our and Flowserve Finance's Senior Indebtedness and
possibly all of our and Flowserve Finance's future borrowings. Further, the
guaranties of the notes will rank behind all of the guarantors' existing Senior
Indebtedness and possibly all of their future borrowings".
The Guaranty of a Guarantor (other than FFBV's Guaranty of the Dollar Notes
and the Company's Guaranty of the Euro Notes) will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a Guarantor;
(2) upon the sale or disposition of all or substantially all the
assets of a Guarantor; or
(3) at such time as such Guarantor no longer Guarantees any other
Indebtedness of the Company, FFBV or another Guarantor;
in the case of clauses (1) and (2), other than to the Company or an Affiliate of
the Company and as permitted by the applicable Indenture.
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RANKING
Senior Indebtedness versus Notes
The payment of the principal of, premium, if any, and interest on the
Dollar Notes and the Euro Notes and the payment of any Guaranty is subordinate
in right of payment to the prior payment in full of all Senior Indebtedness of
the Company, FFBV or the relevant Guarantor, as the case may be, including the
obligations of the Company, FFBV and such Guarantor in respect of the Credit
Agreement.
As of June 30, 2000, after giving pro forma effect to the Transactions:
(1) the Company's Senior Indebtedness would have been approximately
$750.0 million, all of which would have been secured indebtedness; and
(2) FFBV and the Guarantors (other than the Company) would have had no
Senior Indebtedness other than their obligations as guarantors of the
Company's obligations under the Credit Agreement.
Although the Indentures contain limitations on the amount of additional
Indebtedness that the Company, FFBV and the Guarantors may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Indebtedness".
Liabilities of Subsidiaries versus Notes
A substantial portion of our operations are conducted through our foreign
subsidiaries. None of our foreign subsidiaries are guaranteeing the Notes except
FFBV (in the case of the Dollar Notes) and Flowserve International (in the case
of both the Dollar Notes and Euro Notes). Claims of creditors of such
non-guarantor subsidiaries, including trade creditors holding indebtedness or
guarantees issued by such non-guarantor subsidiaries, and claims of preferred
stockholders of such non-guarantor subsidiaries generally will effectively have
priority with respect to the assets and earnings of such non-guarantor
subsidiaries over the claims of our creditors and FFBV's creditors, including
holders of the Notes, even if such claims do not constitute Senior Indebtedness.
Accordingly, the Notes and each Guaranty will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders, if any, of
such non-guarantor subsidiaries.
At December 31 1999, after giving pro forma effect to the Transactions, the
total liabilities of the Company's subsidiaries (other than FFBV and the other
Guarantors) would have been approximately $344.3 million, including trade
payables. Although the Indentures limit the incurrence of Indebtedness and
preferred stock of certain of our subsidiaries, each such limitation is subject
to a number of significant qualifications. Moreover, the Indentures do not
impose any limitation on the incurrence by such subsidiaries of liabilities that
are not considered Indebtedness under the Indentures. See "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Indebtedness".
Other Senior Subordinated Indebtedness versus Notes
Only Indebtedness of the Company, FFBV or another Guarantor that is Senior
Indebtedness of such Person will rank senior to the Dollar Notes, the Euro Notes
or the relevant Guaranty, as the case may be, in accordance with the provisions
of the applicable Indenture. The Dollar Notes, the Euro Notes and each Guaranty
will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company, FFBV and the relevant Guarantor, respectively.
The Company, FFBV and the other Guarantors have agreed in the applicable
Indenture that the Company, FFBV and such Guarantors will not Incur, directly or
indirectly, any Indebtedness that is contractually subordinate or junior in
right of payment to the Company's Senior Indebtedness, FFBV's
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Senior Indebtedness or the Senior Indebtedness of such Guarantors, unless such
Indebtedness is Senior Subordinated Indebtedness of such Person or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness of such
Person. The Indentures do not treat unsecured Indebtedness as subordinated or
junior to Secured Indebtedness merely because it is unsecured.
Payment of Notes
We and FFBV are not permitted to pay principal of, premium, if any, or
interest on the Dollar Notes or Euro Notes, respectively, or make any deposit
pursuant to the provisions described under "-- Defeasance" below and may not
purchase, redeem or otherwise retire any Dollar Notes or Euro Notes,
respectively (collectively, "pay the Notes"), if either of the following occurs
(a "Payment Default"):
(1) any Designated Senior Indebtedness of the Company (in the case of
the Dollar Notes) or FFBV (in the case of the Euro Notes) is not paid in
cash when due; or
(2) any other default on Designated Senior Indebtedness of the Company
(in the case of the Dollar Notes) or FFBV (in the case of the Euro Notes)
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash. Regardless of the foregoing, we and FFBV are
permitted to pay the Dollar Notes and the Euro Notes, respectively, if the
applicable issuer and the applicable Trustee receive written notice approving
such payment from the Representatives of all applicable Designated Senior
Indebtedness with respect to which the Payment Default has occurred and is
continuing.
During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness of the Company or FFBV, as the
case may be, pursuant to which the maturity thereof may be accelerated without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, we and FFBV are
not permitted to pay the Dollar Notes and the Euro Notes, respectively, for a
period (a "Payment Blockage Period") commencing upon the receipt by the
applicable Trustee (with a copy to the applicable issuer) of written notice (a
"Blockage Notice") of such default from the Representative of such Designated
Senior Indebtedness specifying an election to effect a Payment Blockage Period
and ending 179 days thereafter. The Payment Blockage Period will end earlier if
such Payment Blockage Period is terminated:
(1) by written notice to the applicable Trustee and us or FFBV, as
applicable, from the Person or Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured,
waived or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such Designated Senior
Indebtedness have accelerated the maturity of such Designated Senior
Indebtedness, we and FFBV are permitted to resume paying the Dollar Notes and
the Euro Notes, respectively, after the end of such Payment Blockage Period.
Neither the Dollar Notes nor the Euro Notes shall be subject to more than one
Payment Blockage Period in any consecutive 360-day period irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period, except that if any Blockage Notice is delivered to the applicable
Trustee by or on behalf of holders of Designated Senior Indebtedness (other than
holders of the Bank Indebtedness), a Representative of holders of the Bank
Indebtedness may give another Blockage Notice within such period. However, in no
event may the total number of days during which any Payment Blockage Period or
Periods is in effect exceed 179 days in the aggregate during any 360-consecutive
day period, and there must be 181 days during any 360-day consecutive period
during which no Payment Blockage Period is in effect.
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For purposes of this provision, no default or event of default which existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness of the Company and FFBV
initiating such Payment Blockage Period shall be, or be made, the basis of the
commencement of a subsequent Payment Blockage Period by the Representative of
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such default or event of default shall have been cured
or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company (in the case
of the Dollar Notes) or FFBV (in the case of the Euro Notes) upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company (in the case of the Dollar Notes) or FFBV (in the case
of the Euro Notes) or its respective property:
(1) the holders of Senior Indebtedness of the Company (in the case of
the Dollar Notes) or FFBV (in the case of the Euro Notes) will be entitled
to receive payment in full in cash of such Senior Indebtedness before the
holders of the applicable Notes are entitled to receive any payment;
(2) until the Senior Indebtedness of the Company (in the case of the
Dollar Notes) or FFBV (in the case of the Euro Notes) is paid in full in
cash, any payment or distribution to which holders of the applicable Notes
would be entitled but for the subordination provisions of the applicable
Indenture will be made to holders of such Senior Indebtedness as their
interests may appear, except that holders of the applicable Notes may
receive certain Capital Stock and subordinated debt obligations; and
(3) if a distribution is made to holders of the applicable Notes that,
due to the subordination provisions, should not have been made to them,
such holders of the applicable Notes are required to hold it in trust for
the holders of Senior Indebtedness of the Company (in the case of the
Dollar Notes) or FFBV (in the case of the Euro Notes) and pay it over to
them as their interests may appear.
If payment of the Dollar Notes or the Euro Notes is accelerated because of
an Event of Default, the Company or FFBV, as the case may be, or the applicable
Trustee must promptly notify the holders of Designated Senior Indebtedness of
the applicable issuer or the Representative of such Designated Senior
Indebtedness of the acceleration. If any Designated Senior Indebtedness of the
applicable issuer is outstanding, neither the Company or FFBV, as the case may
be, nor any Guarantor may pay the Dollar Notes or the Euro Notes, as the case
may be, until five Business Days after the Representatives of all the issues of
Designated Senior Indebtedness receive notice of such acceleration and,
thereafter, may pay the applicable Notes only if the applicable Indenture
otherwise permits payment at that time.
A Guarantor's obligations under its Guaranty are senior subordinated
obligations. As such, the rights of Noteholders to receive payment by a
Guarantor pursuant to its Guaranty will be subordinated in right of payment to
the rights of holders of Senior Indebtedness of such Guarantor. The terms of the
subordination provisions described above with respect to the Company's
obligations under the Dollar Notes and FFBV's obligations under the Euro Notes
apply equally to a Guarantor of such Notes and the obligations of such Guarantor
under its Guaranty.
By reason of the subordination provisions contained in the Indentures, in
the event of a liquidation or insolvency proceeding, creditors of the Company,
FFBV or a Guarantor who are holders of Senior Indebtedness of the Company, FFBV
or a Guarantor, as the case may be, may recover more, ratably, than the holders
of the Dollar Notes or the Euro Notes, as the case may be, and creditors of the
Company, FFBV or a Guarantor, as applicable, who are not holders of Senior
Indebtedness of such Person may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than the holders of the Dollar Notes
or the Euro Notes, as the case may be.
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The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of securities held in trust by the
applicable Trustee for the payment of principal of and interest on the Dollar
Notes or the Euro Notes pursuant to the provisions described under
"-- Defeasance".
BOOK-ENTRY, DELIVERY AND FORM
DOLLAR NOTES
The old Dollar Notes were, and the new Dollar Notes will be, issued in the
form of one or more global dollar notes (the "Global Dollar Note"). The Global
Dollar Note will be deposited with, or on behalf of, the Depository and
registered in the name of the Depository or its nominee. Except as set forth
below, the Global Dollar Note may be transferred, in whole and not in part, only
to the Depository or another nominee of the Depository. You may hold your
beneficial interests in the Global Dollar Note directly through the Depository
if you have an account with the Depository or indirectly through organizations
which have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Dollar Note with the Depository, the
Depository will credit, on its book-entry registration and transfer system, the
principal amount of Dollar Notes represented by such Global Dollar Note to the
accounts of participants. The accounts to be credited shall be designated by the
Initial Purchasers. Ownership of beneficial interests in the Global Dollar Note
will be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the Global Dollar Note will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to participants'
interests), the participants and the indirect participants (with respect to the
owners of beneficial interests in the Global Dollar Note other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Dollar Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Dollar Note, the Depository or such nominee, as the case may
be, will be considered the sole legal owner and holder of any related Dollar
Notes evidenced by the Global Dollar Note for all purposes of such Dollar Notes
and the Dollar Notes Indenture. Except as set forth below, as an owner of a
beneficial interest in the Global Dollar Note, you will not be entitled to have
the Notes represented by the Global Dollar Note registered in your name, will
not receive or be entitled to receive physical delivery of certificated Dollar
Notes and will not be considered to be the owner or holder of any Dollar Notes
under the Global Dollar Note. We understand that under existing industry
practice, in the event an owner of a beneficial interest in the Global Dollar
Note desires to take any action that the Depository, as the holder of the Global
Dollar Note, is entitled to take, the Depository would authorize the
participants to take such action, and the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
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We will make payments of principal of, premium, if any, and interest on
Dollar Notes represented by the Global Dollar Note registered in the name of and
held by the Depository or its nominee to the Depository or its nominee, as the
case may be, as the registered owner and holder of the Global Dollar Note.
We expect that the Depository or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the Global Dollar Note will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Dollar
Note as shown on the records of the Depository or its nominee. We also expect
that payments by participants or indirect participants to owners of beneficial
interests in the Global Dollar Note held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Dollar Note for any Dollar Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
indirect participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Dollar Note
owning through such participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Dollar Note among participants
of the Depository, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Dollar Notes Trustee nor the Company will have any responsibility or
liability for the performance by the Depository or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EURO NOTES
The Euro Notes will be represented by a global Euro Note. The global Euro
Note will be issued in registered form without coupons and the global Euro Note
represents the aggregate principal amount of the outstanding Euro Notes. The
global Euro Note will be deposited with, or on behalf of The Bank of New York
Depositary (Nominees) Limited as common depositary for the Euroclear System
("Euroclear") and for Clearstream Banking, societe anonyme ("Clearstream,
Luxembourg"), formerly known as Cedelbank, and will be, registered in the name
of a nominee of the common depositary.
Upon the issuance of a global Euro Note, Euroclear or Clearstream,
Luxembourg, as the case may be, will credit the accounts of persons holding
through it with the respective principal amounts represented by such global Euro
Note purchased by such person in this offering. Such accounts shall be limited
to persons who have accounts with Euroclear or Clearstream, Luxembourg
("participants") or persons who may hold interests through participants.
Ownership of beneficial interests in a global Euro Note will be shown on, and
the transfer of that ownership interest will be effected only through, records
maintained by Euroclear or Clearstream, Luxembourg (with respect to
participants' interests) and such participants (with respect to the owners of
beneficial interests in such global Euro Notes other than participants).
Payment of principal of and interest on Euro Notes represented by a global
Euro Note will be made in immediately available funds to the common depositary
for Euroclear and Clearstream, Luxembourg or its nominee, as the case may be, as
the sole registered owner and the sole holder of the global Euro Notes
represented thereby for all purposes under the Euro Notes Indenture. FFBV has
been advised by Euroclear and Clearstream, Luxembourg that upon receipt of any
payment of principal of or interest on any global Euro Note, Euroclear and
Clearstream, Luxembourg will immediately credit, on their respective book-entry
registration and transfer systems, the accounts of participants with payments in
amounts proportionate to their respective beneficial interests in the principal
or face amount of such global Euro Note as shown on the records of Euroclear and
Clearstream, Luxembourg. Payments by participants to owners of beneficial
interests in a global Euro Note held through such participants will be governed
by standing instructions and customary practices as is now the case with
securities held for customer accounts registered in "street name" and will be
the sole responsibility of such participants.
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Purchasers of book-entry interests in the Euro Notes will hold their
book-entry interests in an underlying global Euro Note.
So long as the common depositary for Euroclear and Clearstream, Luxembourg
or its nominee, as the case may be, is the registered owner of a global Euro
Note, The Bank of New York Depositary (Nominees) Limited or such successor
depositary or such party will be considered the sole owner or holder of the Euro
Notes represented by such global Euro Note for all purposes under the Euro Notes
Indenture and the Euro Notes. Except as set forth above, owners of beneficial
interests in a global Euro Note will not be entitled to have the Euro Notes
represented by such global Euro Note registered in their names, will not receive
or be entitled to receive physical delivery of certificated Euro Notes in
definitive form and will not be considered to be the owners or holders of any
Euro Notes under such global Euro Note. Accordingly, each Person owning a
beneficial interest in a global Euro Note must rely on the procedures of
Euroclear or Clearstream, Luxembourg, as the case may be, and, if such Person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder under the Euro
Notes Indenture. FFBV understands that under existing industry practices, in the
event that FFBV requests any action of holders or that an owner of a beneficial
interest in a global Euro Note desires to give or take any action which a holder
is entitled to give or take under the Euro Indenture, Euroclear or Clearstream,
Luxembourg, as the case may be, would authorize the participants holding the
relevant beneficial interest to give or take such action and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
FFBV understands that Euroclear and Clearstream, Luxembourg each hold
securities for their account holders and facilitate the clearance and settlement
of securities transactions by electronic book-entry transfer between their
respective account holders, thereby eliminating the need for physical movements
of certificates and any risks from lack of simultaneous transfers of securities.
Euroclear and Clearstream, Luxembourg each provide various services
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Euroclear and Clearstream, Luxembourg each also deals with domestic securities
markets in several countries through established depository and custodial
relationships. The respective systems of Euroclear and Clearstream, Luxembourg
have established and electronic bridge between their two systems which enables
their respective account holders to settle trades with each other.
Account holders in Euroclear and Clearstream, Luxembourg are world-wide
financial institutions including underwriters, securities brokers, and dealers,
banks, trust companies and clearing corporations. Indirect access to both
Euroclear and Clearstream, Luxembourg is available to other institutions that
clear through or maintain a custodial relationship with an account holder of
either system.
An account holder's overall contractual relations with either Euroclear or
Clearstream, Luxembourg are governed by the respective rules and operating
procedures of Euroclear or Clearstream, Luxembourg and any applicable laws. Both
Euroclear and Clearstream, Luxembourg act under those rules and operating
procedures only on behalf of their respective account holders, and have no
record of or relationship with persons holding through their respective holders.
CERTIFICATED NOTES
Subject to certain conditions, the Notes represented by the Global Notes
are exchangeable for certificated Notes of the same series in definitive form of
like tenor in denominations of $1,000 (in the case of the Dollar Notes) or
E1,000 (in the case of the Euro Notes) and integral multiples thereof if
(1) the Depository (in the case of the Dollar Notes) or Euroclear and
Clearstream, Luxembourg (in the case of the Euro Notes) notify us that it
is unwilling or unable to continue as a clearing agency for the applicable
Global Notes and we are unable to locate a qualified successor clearing
agency within 90 days;
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(2) we or FFBV, as the case may be, in our discretion at any time
determine not to have all the Dollar Notes or the Euro Notes, respectively,
represented by a Global Note; or
(3) a default entitling the holders of the Dollar Notes or the Euro
Notes, as the case may be, to accelerate the maturity thereof has occurred
and is continuing.
Any Note that is exchangeable as above is exchangeable for certificated
Notes issuable in authorized denominations and registered in such names as the
applicable depositary shall direct. Subject to the foregoing, the Global Notes
are not exchangeable, except for Global Notes of the same aggregate denomination
to be registered in the name of the applicable depository or its nominee.
SAME-DAY PAYMENT
Each Indenture requires us and FFBV, as applicable, to make payments in
respect of the applicable Notes (including principal, premium and interest) by
wire transfer of immediately available funds to the U.S. dollar accounts with
banks in the U.S. (in the case of the Dollar Notes) or to the Euro accounts with
banks in the European Union (in the case of the Euro Notes) specified by the
holders thereof or, if no such account is specified, by mailing a check to each
such holder's registered address.
EXCESS CASH FLOW REPURCHASE OFFER
(a) If the Company has Excess Cash Flow for any fiscal year (commencing
with the fiscal year ending December 31, 2001), no later than the 120th day
following the end of such fiscal year, the Company shall apply an amount equal
to 50% of the Excess Cash Flow for such fiscal year:
(1) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase (and
permanently reduce the commitments thereunder) Senior Indebtedness of the
Company with such percentage of Excess Cash Flow;
(2) second, to the extent of the balance of such percentage of Excess
Cash Flow after application in accordance with clause (1), to make an offer
to the holders of the Dollar Notes and Euro Notes (and to holders of other
Senior Subordinated Indebtedness of the Company or FFBV designated by the
Company) to purchase, on a pro rata basis, Dollar Notes and Euro Notes (and
such other Senior Subordinated Indebtedness of the Company or FFBV)
pursuant to and subject to the conditions contained in the Indentures (an
"Excess Cash Flow Offer"); and
(3) third, to the extent of the balance of such percentage of Excess
Cash Flow after application in accordance with clause (1) or (2) above, to
any other application or use not prohibited by the Indentures;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (1) above, the Company shall
permanently retire such Indebtedness and shall cause the related loan commitment
(if any) to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased; and provided, further, that no Excess Cash Flow
Offer shall be required to be made if the Company's Leverage Ratio is less than
3.0 to 1.0 on the last day of such fiscal year.
(b) In the event of an Excess Cash Flow Offer, the Company will be required
to purchase, on a pro rata basis, Dollar Notes and Euro Notes tendered pursuant
to an offer by the Company for the Notes (and other Senior Subordinated
Indebtedness of the Company and FFBV, as applicable) at a purchase price of 100%
of their respective principal amount (or, in the event such other Senior
Subordinated Indebtedness was issued with significant original issue discount,
100% of the accreted value thereof), without premium, plus accrued but unpaid
interest (or, in respect of such Senior Subordinated Indebtedness, such lesser
price, if any, as may be provided for by the terms of such Senior Subordinated
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Indentures. If the aggregate
purchase price of securities tendered pursuant to such offer is less than the
Excess Cash Flow allotted to their purchase, the Company will be entitled to
apply the remaining Excess
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Cash Flow in accordance with clause (a)(3) above. The Company shall not be
required to make an Excess Cash Flow Offer to purchase Notes (and other Senior
Subordinated Indebtedness) pursuant to this covenant if the Excess Cash Flow
available therefor is less than $5.0 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to the Excess Cash Flow in any subsequent fiscal year).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue of its compliance with
such securities laws or regulations.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company (in the
case of the Dollar Notes) and FFBV (in the case of the Euro Notes) repurchase
such Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that for purposes of this
clause (1) such person shall be deemed to have "beneficial ownership" of
all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of a majority of the total voting power of the
Voting Stock of the Company (for the purposes of this clause (1), such
other person shall be deemed to beneficially own any Voting Stock of a
Person (the "specified person") held by any other Person (the "parent
entity"), if such other person is the beneficial owner (as defined above in
this clause (1)), directly or indirectly, of a majority of the voting power
of the Voting Stock of such parent entity);
(2) individuals who on the Issue Date constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of 66 2/3% of the directors of the Company
then still in office who were either directors on the Issue Date or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors then in
office; or
(3) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company (determined on a
consolidated basis) to another Person, other than a transaction following
which in the case of a merger or consolidation transaction, securities that
represented 100% of the Voting Stock of the Company immediately prior to
such transaction (or other securities into which such securities are
converted as part of such merger or consolidation transaction) constitute
at least a majority of the voting power of the Voting Stock of the
surviving Person in such merger or consolidation transaction.
Within 30 days following any Change of Control, the Company (in the case of
the Dollar Notes) or FFBV (in the case of the Euro Notes) will mail a notice to
each Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company (in the case of the Dollar Notes) or FFBV (in
the case of the Euro Notes) to purchase such Holder's applicable Notes at a
purchase price in cash equal to 101% of the principal amount
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thereof on the date of purchase, plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest on the relevant interest payment
date);
(2) the circumstances and relevant facts regarding such Change of
Control (including relevant information with respect to income, cash flow
and capitalization;
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us (in the case of the Dollar
Notes) or FFBV (in the case of the Euro Notes), consistent with the
covenant described hereunder, that a Holder must follow in order to have
its Notes purchased.
The Company (in the case of the Dollar Notes) and FFBV (in the case of the
Euro Notes) will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the relevant Indenture applicable to a Change of Control Offer made by us (in
the case of the Dollar Notes) and FFBV (in the case of the Euro Notes) and
purchases all Dollar Notes or Euro Notes, as the case may be, validly tendered
and not withdrawn under such Change of Control Offer.
The Company (in the case of the Dollar Notes) and FFBV (in the case of the
Euro Notes) will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes as a result of a Change of Control.
To the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, the Company (in the
case of the Dollar Notes) and FFBV (in the case of the Euro Notes) will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached the obligations under the covenant described hereunder by virtue
of compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations among the Company, FFBV and the
Initial Purchasers. We have no present intention to engage in a transaction
involving a Change of Control, although it is possible that we could decide to
do so in the future. Subject to the limitations discussed below, we could, in
the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indentures, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect our capital structure or credit
ratings. Restrictions on our ability to Incur additional Indebtedness are
contained in the covenant described under "-- Certain Covenants -- Covenants
Applicable to the Dollar Notes and the Euro Notes -- Limitation on
Indebtedness". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the applicable Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indentures will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged transaction.
The Credit Agreement generally prohibits us and FFBV from purchasing Notes,
and also provides that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event that
at the time of such Change of Control the terms of any applicable Senior
Indebtedness (including the Credit Agreement) restrict or prohibit the purchase
of Notes following such Change of Control, then prior to the mailing of the
notice to Holders but in any event within 30 days following any Change of
Control, each of the Company (in the case of the Dollar Notes) and FFBV (in the
case of the Euro Notes) undertakes to (i) repay in full all such applicable
Senior Indebtedness or (ii) obtain the requisite consents under the agreements
governing such Senior Indebtedness to permit the repurchase of the applicable
Notes. If the Company (in the case of the Dollar Notes) and FFBV (in the case of
the Euro Notes) do not repay such Senior Indebtedness or obtain such consents,
the Company and FFBV, respectively, will remain prohibited from purchasing
Notes. In such case, the Company's and
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FFBV's failure to comply with the foregoing undertaking, after appropriate
notice and lapse of time would result in an Event of Default under the
applicable Indenture, which would, in turn, constitute a default under the
Credit Agreement. In such circumstances, the subordination provisions in the
applicable Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require the Company (in the case
of the Dollar Notes) and FFBV (in the case of the Euro Notes) to repurchase the
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on us or
FFBV. Finally, the Company's and FFBV's ability to pay cash to the holders of
Notes following the occurrence of a Change of Control may be limited by the
Company's and FFBV's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
The provisions under the Indentures relative to the Company's and FFBV's
respective obligation to make an offer to repurchase the Dollar Notes and the
Euro Notes as a result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount of the Dollar
Notes and the Euro Notes, respectively.
CERTAIN COVENANTS
COVENANTS APPLICABLE TO THE DOLLAR NOTES AND THE EURO NOTES
Each Indenture contains covenants including, among others, the following:
Limitation on Indebtedness
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company will be entitled to Incur Indebtedness, and its Restricted Subsidiaries
will be entitled to Incur Eligible Indebtedness, in each case if, on the date of
such Incurrence and after giving effect thereto no Default has occurred and is
continuing and, the Consolidated Coverage Ratio exceeds 2.0 to 1 if such
Indebtedness is Incurred prior to September 1, 2003, or 2.25 to 1 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company pursuant to any Revolving
Credit Facility; provided, however, that, immediately after giving effect
to any such Incurrence, the aggregate principal amount of all Indebtedness
Incurred under this clause (1) and then outstanding does not exceed the
greater of (A) $300.0 million and (B) the sum of (x) 50% of the book value
of the inventory of the Company and its Restricted Subsidiaries and (y) 50%
of the book value of the accounts receivable of the Company and its
Restricted Subsidiaries (other than any accounts receivable constituting
Receivables and Related Assets pledged, sold or otherwise transferred or
encumbered in connection with a Receivables Program), less the sum of all
principal payments made with respect to such Indebtedness in satisfaction
of the provisions of paragraph (a)(3)(A) of the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock";
(2) Indebtedness Incurred by the Company pursuant to any Term Loan
Facility; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of all Indebtedness Incurred
under this clause (2) and then outstanding does not exceed $750.0 million
less the aggregate sum of all principal payments actually made from time to
time after the Issue Date with respect to such Indebtedness (other than
principal payments made from any permitted Refinancings thereof);
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(3) Indebtedness Incurred by a Receivables Subsidiary pursuant to a
Receivables Program; provided, however, that, after giving effect to any
such Incurrence, the aggregate principal amount of all Indebtedness
Incurred under this clause (3) and then outstanding does not exceed $400.0
million;
(4) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the obligor thereon and (B) if the Company or FFBV is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all obligations with respect to the Dollar Notes
and the Euro Notes, respectively;
(5) the Notes and the Exchange Notes (other than any Additional Dollar
Notes and Additional Euro Notes);
(6) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2), (3), (4) or (5) of this
covenant);
(7) Indebtedness of a Person Incurred and outstanding on or prior to
the date on which such Person becomes a Restricted Subsidiary (including
upon merger or consolidation with the Company or any Restricted Subsidiary)
or assumed in connection with the purchase of assets from another Person
(other than Indebtedness Incurred by such Person in connection with, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Person became a Restricted Subsidiary or such Person or such
assets were acquired by the Company); provided, however, that (A) with
respect to any such Indebtedness Incurred prior to the first anniversary of
the Issue Date, such Indebtedness is in an aggregate principal amount which
when taken together with all other Indebtedness Incurred pursuant to this
clause (7), does not exceed $50.0 million or (B) on the date of such
acquisition and after giving pro forma effect thereto, the Company would
have been able to Incur at least $1.00 of additional Indebtedness pursuant
to paragraph (a) of this covenant;
(8) Indebtedness of the Company or any of its Restricted Subsidiaries
attributable to Capital Lease Obligations, or Incurred to finance the
acquisition, construction or improvement of any fixed or capital assets,
including any Indebtedness assumed in connection with the acquisition of
any such assets, in an aggregate principal amount which, when taken
together with all other Indebtedness of the Company or any of its
Restricted Subsidiaries Incurred pursuant to this clause (8) and then
outstanding, does not exceed $25.0 million (including any Refinancing
Indebtedness with respect thereto);
(9) Indebtedness under industrial revenue bonds in an aggregate
principal amount which, when taken together with all other Indebtedness of
the Company or any of its Restricted Subsidiaries Incurred pursuant to this
clause (9) and then outstanding, does not exceed $20.0 million;
(10) Indebtedness Incurred by Foreign Restricted Subsidiaries in an
aggregate principal amount which, when taken together with all other
Indebtedness of Foreign Restricted Subsidiaries Incurred pursuant to this
clause (10) and then outstanding, does not exceed $25.0 million;
(11) Indebtedness of the Company, whether secured or unsecured,
consisting of Guarantees of Permitted Employee Stock Purchase Loans;
(12) Indebtedness or other obligations solely in respect of worker's
compensation claims, self-insurance obligations and surety, appeal and
performance bonds entered into in the ordinary course of business of the
Company and its Restricted Subsidiaries;
(13) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (5), (6) or (7) or this
clause (13); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary
Incurred pursuant to clause (7), such Refinancing Indebtedness shall be
Incurred only by such Subsidiary;
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(14) Hedging Obligations under or with respect to Interest Rate
Agreements, Currency Agreements or Commodity Agreements entered into in the
ordinary course of business and not for the purpose of speculation;
(15) Indebtedness consisting of the Guaranty of a Guarantor;
(16) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business, provided that the Indebtedness is satisfied within five business
days of Incurrence;
(17) Indebtedness of the Company or any Restricted Subsidiary
consisting of indemnification, adjustment of purchase price or similar
obligations, in each case incurred in connection with the disposition of
any assets of the Company or any Restricted Subsidiary;
(18) Indebtedness consisting of the Guarantee by (i) the Company of
any Indebtedness of a Restricted Subsidiary that was permitted to be
Incurred by another provision of this covenant and (ii) any Restricted
Subsidiary of the Company of Indebtedness of the Company that was permitted
to be Incurred by another provision of this covenant; and
(19) Indebtedness of the Company in an aggregate principal amount
which, when taken together with all other Indebtedness of the Company
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (18) above or paragraph (a)) does not
exceed $25.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any Dollar Notes
Guarantor (in the case of the Dollar Notes) and neither FFBV nor any Euro Notes
Guarantor (in the case of the Euro Notes) will Incur any Indebtedness pursuant
to the foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company or any
Dollar Notes Guarantor (in the case of the Dollar Notes) or FFBV or any Euro
Notes Guarantor (in the case of the Euro Notes) unless such Indebtedness shall
be subordinated to the applicable Notes or the applicable Guaranty to at least
the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, (1) in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above, the Company and FFBV, as the case may be,
in its sole discretion, will classify such item of Indebtedness at the time of
Incurrence and only be required to include the amount and type of such
Indebtedness in one of the above clauses and (2) the Company and FFBV, as the
case may be, will be entitled to divide and classify an item of Indebtedness in
more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
any Dollar Notes Guarantor (in the case of the Dollar Notes) and neither FFBV
nor any Euro Notes Guarantor (in the case of the Euro Notes) will Incur (1) any
Indebtedness if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness of such Person, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness of such Person or (2) any Secured
Indebtedness that is not Senior Indebtedness of such Person unless
contemporaneously therewith such Person makes effective provision to secure the
applicable Notes equally and ratably with such Secured Indebtedness for so long
as such Secured Indebtedness is secured by a Lien.
(f) For purposes of determining compliance with any U.S. dollar or Euro
denominated restriction on the Incurrence of Indebtedness where the Indebtedness
Incurred is denominated in a different currency, the amount of such Indebtedness
will be the U.S. Dollar Equivalent or Euro Equivalent, as the case may be,
determined on the date of the Incurrence of such Indebtedness; provided,
however, that if any such Indebtedness denominated in a different currency is
subject to a Currency Agreement with respect to U.S. dollars or Euros, as the
case may be, covering all principal, premium, if any, and interest payable on
such Indebtedness, the amount of such Indebtedness expressed in U.S. dollars or
Euros will be as provided
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in such Currency Agreement. The principal amount of any Refinancing Indebtedness
Incurred in the same currency as the Indebtedness being Refinanced will be the
Euro Equivalent or U.S. Dollar Equivalent, as appropriate, of the Indebtedness
Refinanced, except to the extent that (i) such U.S. Dollar Equivalent or Euro
Equivalent was determined based on a Currency Agreement, in which case the
Refinancing Indebtedness will be determined in accordance with the preceding
sentence, and (ii) the principal amount of the Refinancing Indebtedness exceeds
the principal amount of the Indebtedness being Refinanced, in which case the
U.S. Dollar Equivalent or Euro Equivalent of such excess, as appropriate, will
be determined on the date such Refinancing Indebtedness is Incurred.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent
fiscal quarter for which internal financial statements are available on
or prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of, or cash capital contribution in respect
of, its Capital Stock (other than Disqualified Stock) subsequent to the
Issue Date (other than an issuance or sale to a Subsidiary of the
Company and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); plus
(C) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company or
any Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person, proceeds
realized on the sale of such Investment, and proceeds representing the
return of capital (to the extent not included in Consolidated Net
Income), in each case received by the Company or any Restricted
Subsidiary, and (y) to the extent such Person is an Unrestricted
Subsidiary, the portion (proportionate to the Company's equity interest
in such Subsidiary) of the fair market value of the net assets of such
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any such Person or
Unrestricted Subsidiary, the amount of Investments (excluding Permitted
Investments) previously made (and treated as a Restricted Payment) by
the Company or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock of
the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) or a substantially
concurrent cash capital contribution received by the Company in respect of
its Capital Stock (other than Disqualified Stock); provided, however, that
(A) such Restricted Payment shall be excluded in the calculation of the
amount of Restricted Payments and
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(B) the Net Cash Proceeds from such sale or such cash capital contribution
(to the extent so used for such Restricted Payment) shall be excluded from
the calculation of amounts under clause (3)(B) of paragraph (a) above and
under clause (4) below;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness which is permitted to be Incurred pursuant to the covenant
described under "-- Limitation on Indebtedness"; provided, however, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the Company
or any of its Subsidiaries (A) from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), (B) in the open market to the extent such shares are acquired
to satisfy a current obligation to deliver shares in connection with the
exercise of stock options or similar rights, in each case pursuant to the
terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such Capital Stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed in any calendar
year the sum of (x) $5.0 million plus (y) the Net Cash Proceeds from the
sale of Capital Stock to employees or directors of the Company (including
pursuant to the exercise of stock options) that occur during such calendar
year (to the extent such Net Cash Proceeds are not applied to the payment
of a Restricted Payment pursuant to clause (1) above); provided further,
however, that (i) such repurchases and other acquisitions shall be excluded
in the calculation of the amount of Restricted Payments and (ii) the Net
Cash Proceeds from such sales described in clause (y) shall be excluded
from the calculation of amounts under clause (3)(B) of paragraph (a) above;
or
(5) Restricted Payments not exceeding $15.0 million in the aggregate;
provided, however, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or result therefrom) and (B)
such Restricted Payments shall be included in the calculation of Restricted
Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date, including the Indentures and the
Credit Agreement as in effect on the Issue Date;
(2) any encumbrance or restriction with respect to a Receivables
Subsidiary pursuant to a Receivables Program of such Receivables
Subsidiary;
(3) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
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Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
(4) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (1), (2) or (3) of this covenant or this clause (4) or contained
in any amendment to an agreement referred to in clause (1), (2) or (3) of
this covenant or this clause (4); provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in
any such refinancing agreement or amendment are, in the good faith judgment
of the Board of Directors, no less favorable, taken as a whole, to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(5) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the property
leased thereunder;
(6) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness, or under letters of
credit or bank guarantees, of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of, or the grant of security over, the
property subject to such security agreements, mortgages, letters of credit
or bank guarantees;
(7) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition;
(8) purchase money obligations (including Capital Lease Obligations)
for property acquired in the ordinary course of business that impose
restrictions on the property so acquired of the nature described in clause
(c) above;
(9) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
in the ordinary course of business; and
(10) any such encumbrance or restriction with respect to a Foreign
Restricted Subsidiary pursuant to an agreement governing Indebtedness
Incurred by such Foreign Restricted Subsidiary.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors, of the shares and
assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of cash or cash equivalents;
and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be)
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness of the Company or Indebtedness (other than any Disqualified
Stock) of a Restricted Subsidiary (in each case other than Indebtedness
owed to the Company or an Affiliate of the Company) within one year from
the later of the date of such Asset Disposition or the receipt of such
Net Available Cash;
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(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year (or enter
into a binding commitment therefor within such period and acquire such
Additional Assets within 18 months) from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an
offer to the holders of the Dollar Notes and the Euro Notes (and to
holders of other Senior Subordinated Indebtedness of the Company or FFBV
designated by the Company) to purchase, on a pro rata basis, Dollar
Notes and Euro Notes (and such other Senior Subordinated Indebtedness of
the Company or FFBV) pursuant to and subject to the conditions contained
in the Indentures;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company
or such Restricted Subsidiary shall permanently retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased.
Notwithstanding the foregoing provisions of this covenant, (i) the Company
and the Restricted Subsidiaries will not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions which are not applied in
accordance with this covenant exceeds $10.0 million, and (ii) to the extent any
Asset Disposition constitutes the disposition of Consent Decree Assets, the
Company shall be required to apply the Net Available Cash from such Asset
Disposition pursuant to clause (a)(3)(A) and the Company shall not be required
to comply with clause (a)(1) above.
Pending application of Net Available Cash pursuant to this covenant, such
Net Available Cash shall be invested in Temporary Cash Investments or applied to
temporarily reduce revolving credit indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash.
In addition, the Company may elect to deem Additional Assets (determined
based on the fair market value of such assets) as cash and cash equivalents for
purposes of this covenant; provided, however, that such Additional Assets were
acquired for fair market value as part of the transaction constituting an Asset
Disposition; and provided further, however, that such Additional Assets will be
deemed to have been acquired in accordance with clause (a)(3)(B) above.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness of the Company or FFBV)
pursuant to clause (a)(3)(C) above, the Company will purchase, on a pro rata
basis, Dollar Notes and Euro Notes tendered pursuant to an offer by the Company
for the Notes (and such other Senior Subordinated Indebtedness of the Company
and FFBV, as applicable) at a purchase price of 100% of their respective
principal amount (or, in the event such other Senior Subordinated Indebtedness
was issued with significant original issue discount, 100% of the accreted value
thereof), without premium, plus accrued but unpaid interest (or, in respect of
such other Senior Subordinated Indebtedness, such lesser price, if any, as may
be provided for by the terms of such Senior Subordinated Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indentures. If the aggregate purchase price
of the Dollar Notes and Euro Notes and other Senior Subordinated Indebtedness of
the Company or FFBV tendered exceeds the Net Available Cash allotted to their
purchase, the Company will select the Dollar Notes and Euro Notes and other
Senior Subordinated Indebtedness of the Company or FFBV to be purchased on a pro
rata basis but
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in round denominations, which in the case of the Dollar Notes will be
denominations of $1,000 principal amount or multiples thereof and in the case of
the Euro Notes will be denominations of E1,000 principal amount or multiples
thereof. The Company shall not be required to make such an offer to purchase
Notes (and other Senior Subordinated Indebtedness) pursuant to this covenant if
the Net Available Cash available therefor is less than $10.0 million (which
lesser amount shall be carried forward for purposes of determining whether such
an offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this clause by virtue of its compliance with
such securities laws or regulations.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained
at the time of the Affiliate Transaction in arm's-length dealings with a
Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of
$10.0 million, the terms of the Affiliate Transaction are set forth in
writing and a majority of the non-employee directors of the Company
disinterested with respect to such Affiliate Transactions have determined
in good faith that the criteria set forth in clause (1) are satisfied and
have approved the relevant Affiliate Transaction as evidenced by a Board
resolution; and
(3) if such Affiliate Transaction involves an amount in excess of
$20.0 million, the Board of Directors shall also have received a written
opinion from (A) an investment banking firm of national prominence or (B)
an accounting or appraisal firm nationally recognized in making such
determinations, in each case that is not an Affiliate of the Company to the
effect that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options, stock ownership plans or other similar
incentive arrangements approved by the Board of Directors;
(3) loans or advances to employees in the ordinary course of business
in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $5.0 million in the aggregate
outstanding at any one time;
(4) guaranties of Permitted Employee Stock Purchase Loans;
(5) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
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(6) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in
or otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
(7) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company;
(8) any Receivables Program of the Company or a Restricted Subsidiary;
(9) customary directors' and officers' indemnification arrangements;
and
(10) any agreement with the Company or any Restricted Subsidiary as in
effect as of the Issue Date and any amendment or replacement thereto or any
transaction contemplated thereby so long as such amendment or replacement
agreement is not more disadvantageous to the Company and its Restricted
Subsidiaries than the original agreement as in effect on the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Company
(1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of (but excluding any pledge of such
Capital Stock otherwise permitted by the applicable Indenture) any Capital
Stock of any Restricted Subsidiary to any Person (other than the Company or
a Wholly Owned Subsidiary), and
(2) will not permit any Restricted Subsidiary to issue any of its
Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' or other legally required qualifying shares) to any
Person (other than to the Company or a Wholly Owned Subsidiary),
unless
(A) immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary;
(B) immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto would have been permitted to be made under the
covenant described under "-- Limitation on Restricted Payments" if made
on the date of such issuance, sale or other disposition; or
(C) the Company concurrently acquires sufficient shares of Capital
Stock of such Restricted Subsidiary to at least maintain the same
percentage ownership interest it had prior to the transaction.
Notwithstanding the foregoing, the issuance or sale of shares of Capital Stock
of any Restricted Subsidiary of the Company will not violate the provisions of
the immediately preceding sentence if such shares are issued or sold in
connection with:
(i) the formation or capitalization of a Restricted Subsidiary, or
(ii) a single transaction or a series of substantially contemporaneous
transactions whereby such Restricted Subsidiary becomes a Restricted
Subsidiary of the Company by reason of the acquisition of securities or
assets from another Person.
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Merger and Consolidation
Neither the Company nor FFBV will consolidate with or merge with or into,
or convey, transfer or lease, in one transaction or a series of transactions,
directly or indirectly, all or substantially all its assets to, any Person,
unless, in the case of the Company:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia or
under the laws of Bermuda, the British Virgin Islands, the Bahamas or
Canada and the Successor Company (if not the Company) shall expressly
assume, by an indenture supplemental thereto, executed and delivered to the
applicable Trustee, in form satisfactory to such Trustee, all the
obligations of the Company under the Dollar Notes and the Dollar Notes
Indenture (in the case of the Dollar Notes) and under its Guaranty of the
Euro Notes and the Euro Notes Indenture (in the case of the Euro Notes);
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness";
(4) immediately after giving pro forma effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction;
(5) the Company shall have delivered to each Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and each such supplemental indenture (if
any) comply with the applicable Indenture;
(6) in the event that the Successor Company in any merger is organized
and existing under the laws of Bermuda, the British Virgin Islands, the
Bahamas or Canada (any such merger, a "Foreign Jurisdiction Merger"), the
Company shall have delivered to each Trustee an Opinion of Counsel to the
effect that the Holders will not recognize income, gain or loss for U.S.
Federal income tax purposes and, in the case of the Euro Notes, Netherlands
tax purposes, as a result of such transaction and will be subject to U.S.
Federal income tax and, in the case of the Euro Notes, Netherlands tax (if
any), on the same amounts and at the same times as would have been the case
if such transaction had not occurred; and
(7) in the event of a Foreign Jurisdiction Merger, the Company shall
have delivered to each Trustee an Opinion of Counsel in the jurisdiction of
the Successor Company to the effect that (A) any payment of interest or
principal under or with respect to the applicable Notes or the applicable
Guaranties will, after giving effect to such transaction, be exempt from
any withholding or deduction for or on account of any present or future
tax, duty, levy, impost, assessment or other governmental charge of
whatever nature imposed or levied by or on behalf of any jurisdiction from
or through which payment is made or in which the payor is organized,
resident or engaged in business for tax purposes and (B) no other taxes or
income (including capital gains) will be payable by a Holder of Dollar
Notes or Euro Notes, as the case may be, under the laws of any jurisdiction
where the Successor Company is or becomes organized, resident or engaged in
business for tax purposes in respect of the acquisition, ownership or
disposition of the Notes, including the receipt of interest or principal
thereon, provided that such Holder does not use or hold, and is not deemed
to use or hold the Dollar Notes or the Euro Notes, as the case may be, in
carrying on a business in the jurisdiction where the Successor Company is
or becomes organized, resident or engaged in business for tax purposes.
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provided, however, that clauses (3) and (4) will not be applicable to (A) a
Restricted Subsidiary consolidating with, merging into or transferring all or
part of its properties and assets to the Company or (B) the Company merging with
an Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under each Indenture, and the predecessor Company, except in the
case of a lease, shall be released from the obligation to pay the principal of
and interest on the Notes.
Each Indenture will provide that the Company will not permit any Guarantor
(other than the Company which, in its capacity as a Guarantor of the Euro Notes,
shall be bound by the provisions described above) to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless:
(1) except in the case of a Guarantor that has been disposed of in its
entirety to another Person (other than to the Company or an Affiliate of
the Company), whether through a merger, consolidation or sale of Capital
Stock or assets, the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by Guaranty Agreements,
in a form satisfactory to the applicable Trustee, all the obligations of
such Guarantor, if any, under its Dollar Notes Guaranty and Euro Notes
Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time
of such transaction), no Default shall have occurred and be continuing; and
(3) the Company (in the case of the Dollar Notes) or FFBV (in the case
of the Euro Notes) delivers to the applicable Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such Guaranty Agreement, if any,
complies with the applicable Indenture.
Future Guarantors
The Company and FFBV will cause each domestic Restricted Subsidiary that
Guarantees any Indebtedness of the Company, FFBV or any other Guarantor to, at
the same time, execute and deliver to each Trustee a supplemental indenture
pursuant to which such Restricted Subsidiary will Guarantee payment of the
Dollar Notes and the Euro Notes on the same terms and conditions as those set
forth in the applicable Indenture.
Concurrently with the closing of the Acquisition, IDP and its domestic
subsidiaries will become Guarantors.
SEC Reports
Notwithstanding that the Company and FFBV may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
and FFBV will file with the SEC and provide the applicable Trustees and
Noteholders with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filings of such information, documents and reports under such Sections;
provided, however, that so long as the Company is a Guarantor of the Euro Notes
(or the Exchange Euro Notes) and the rules and regulations of the SEC would
permit FFBV (if subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act) to satisfy such reporting requirements with the reports,
information and other documents required to be filed by the Company, the
provision of such reports,
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information and other documents by the Company hereunder shall be deemed to
satisfy the obligations of FFBV hereunder.
In addition, the Company and FFBV shall furnish to the Holders of the Notes
and to prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the Notes are not freely transferable under the Securities Act.
COVENANTS APPLICABLE SOLELY TO THE EURO NOTES
The Euro Notes Indenture contains the following additional covenants:
Ownership of FFBV
FFBV will at all times be a Wholly Owned Subsidiary of the Company.
Limitation on Business Activities of FFBV
FFBV will not, and the Company will not permit FFBV to, (a) incur any
Indebtedness other than (1) the Euro Notes (and the Exchange Euro Notes), (2)
FFBV's Guaranty of the Dollar Notes (and the Exchange Dollar Notes), (3) FFBV's
guaranty of obligations in respect of the Credit Agreement and (4) Indebtedness
incurred in compliance with clause (b)(4) of the covenant described under
"-- Covenants applicable to the Dollar Notes and the Euro Notes -- Limitation on
Indebtedness" and, in the case of (1) and (2), any refinancings or replacements
thereof permitted by the covenant described under "-- Covenants Applicable to
the Dollar Notes and the Euro Notes -- Limitation on Indebtedness" or (b) engage
in any business activities other than (1) the issuance of the Euro Notes and the
guaranties described in the preceding clause (a), (2) the making of Intercompany
Loans and (3) activities incidental to the activities described in clauses (1)
or (2) of this clause (b).
Limitation on Use of Proceeds
FFBV will use all the net proceeds of the issuance of the Euro Notes to
make Intercompany Loans and pay fees and expenses of the offering of the Euro
Notes, including customary organizational expenses of FFBV.
DEFAULTS
Each of the following is an Event of Default with respect to the Notes:
(1) a default in the payment of interest or any Additional Amounts on
the Dollar Notes or the Euro Notes, as the case may be, when due, continued
for 30 days;
(2) a default in the payment of principal of any Dollar Note or Euro
Note, as the case may be, when due at its Stated Maturity, upon optional
redemption, upon required purchase, upon declaration or otherwise;
(3) the failure by the Company or FFBV, as the case may be, to comply
with its obligations under "-- Certain Covenants -- Covenants Applicable to
the Dollar Notes and the Euro Notes -- Merger and Consolidation" above;
(4) the failure by the Company or FFBV, as the case may be, to comply
for 30 days after notice with any of its respective obligations in the
covenants described above under "Change of Control" (other than a failure
to purchase Notes) or under "-- Certain Covenants -- Covenants Applicable
to the Dollar Notes and the Euro Notes" under "-- Limitation on
Indebtedness", "-- Limitation on Restricted Payments", "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation
on Sales of Assets and Subsidiary Stock" (other than a failure to purchase
Notes), "-- Limitation on Affiliate Transactions", "-- Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries", "-- Future
Guarantors" or "-- SEC Reports" or, with respect to the Euro Notes only,
the failure by the Company or FFBV to comply for 30 days after notice with
any of its obligations under "-- Certain Covenants -- Covenants Applicable
Solely to the Euro Notes" under
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"-- Ownership of FFBV" or "-- Limitation on Business Activities of FFBV" or
"-- Limitation on Use of Proceeds";
(5) the failure by the Company, FFBV, or any Guarantor to comply for
60 days after notice with its other agreements contained in the applicable
Indenture;
(6) Indebtedness of a Guarantor, the Company, FFBV or any Significant
Subsidiary is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and
the total amount of such Indebtedness unpaid or accelerated exceeds $10.0
million (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, FFBV or a Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money the uninsured
amount of which is in excess of $10.0 million is entered against a
Guarantor, the Company, FFBV or a Significant Subsidiary, remains
outstanding for a period of 60 consecutive days following such judgment and
is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision"); or
(9) a Guaranty ceases to be in full force and effect (other than in
accordance with the terms of the applicable Indentures) or a Guarantor
denies or disaffirms its obligations under its Guaranty.
However, a default under clauses (4), (5) and (8) will not constitute an Event
of Default until the applicable Trustee or the holders of 25% in principal
amount of the outstanding Dollar Notes or Euro Notes, as the case may be, notify
the Company or FFBV, as the case may be, of the default and the Company or FFBV,
as the case may be, does not cure such default within the time specified after
receipt of such notice.
If an Event of Default occurs and is continuing, the applicable Trustee or
the holders of at least 25% in principal amount of the outstanding applicable
Notes may declare the principal of and accrued but unpaid interest on all the
applicable Notes to be due and payable. Upon such a declaration, such principal
and interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company or FFBV, as the case may be, occurs and is continuing, the principal of
and interest on all the applicable Notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the applicable Trustee or any holders of such Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Dollar Notes or Euro Notes, as the case may be, may rescind any such
acceleration with respect to the Dollar Notes or Euro Notes, as the case may be,
and its consequences.
Subject to the provisions of each Indenture relating to the duties of the
relevant Trustee, in case an Event of Default under an Indenture occurs and is
continuing, the applicable Trustee will be under no obligation to exercise any
of the rights or powers under such Indenture at the request or direction of any
of the holders of the applicable Notes unless such holders have offered to such
Trustee reasonable indemnity or security against any loss, liability or expense.
Except to enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder of a Note may pursue any remedy with respect to the
related Indenture or Notes unless:
(1) such holder has previously given the applicable Trustee notice
that an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
Notes of the applicable series have requested such Trustee to pursue the
remedy;
(3) such holders have offered such Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) such Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and
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(5) holders of a majority in principal amount of the outstanding
Dollar Notes or Euro Notes, as the case may be, of such series have not
given the applicable Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Dollar Notes or Euro Notes, as the case may be, are given the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the applicable Trustee or of exercising any trust or power
conferred on the applicable Trustee. The applicable Trustee, however, may refuse
to follow any direction that conflicts with law or the applicable Indenture or
that the applicable Trustee determines is unduly prejudicial to the rights of
any other holder of such Notes or that would involve the applicable Trustee in
personal liability.
If a Default under an Indenture occurs, is continuing and is known to the
relevant Trustee, such Trustee must mail to each holder of the Dollar Notes or
Euro Notes, as the case may be, notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the applicable Trustee may withhold notice if and so long
as a committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the applicable Notes. In addition, we
(in the case of the Dollar Notes) and FFBV (in the case of the Euro Notes) are
required to deliver to each Trustee, within 120 days after the end of each
fiscal year, a certificate indicating whether the signers thereof know of any
Default under the related Indenture that occurred during the previous year. We
(in the case of the Dollar Notes) and FFBV (in the case of the Euro Notes) are
required to deliver to the applicable Trustee, within 30 days after the
occurrence thereof, written notice of any event which would constitute certain
Defaults, their status and what action we are taking or propose to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Dollar Notes Indenture and the Euro
Notes Indenture may be amended with the consent of the holders of a majority in
principal amount of the Dollar Notes or the Euro Notes, respectively, then
outstanding (including consents obtained in connection with a tender offer or
exchange for such Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of such Notes then outstanding. However, without the consent of each
holder of an outstanding Dollar Note or Euro Note, as the case may be, affected
thereby, an amendment may not, among other things:
(1) reduce the amount of Dollar Notes or the Euro Notes, as the case
may be, whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Dollar Note or Euro Note, as the case may be;
(3) reduce the principal of or extend the Stated Maturity of any
Dollar Note or Euro Note, as the case may be;
(4) reduce the amount payable upon the redemption of any Dollar Note
or Euro Note, as the case may be, or change the time at which any Dollar
Note or Euro Note, as the case may be, may be redeemed as described under
"-- Optional Redemption" or, in the case of the Euro Notes only,
"-- Withholding Taxes", above;
(5) make any Dollar Note or Euro Note, as the case may be, payable in
money other than that stated in the Dollar Note or Euro Note, as the case
may be;
(6) impair the right of any holder of the Dollar Notes or the Euro
Notes, as the case may be, to receive payment of principal of and interest
on such holder's Dollar Notes or Euro Notes, as the case may be, on or
after the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such holder's Dollar Notes or Euro Notes,
as the case may be;
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(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Dollar Note or
Euro Note, as the case may be, that would adversely affect the applicable
Noteholders;
(9) make any change in any Guaranty that would adversely affect the
applicable Noteholders; or
(10) in the case of the Euro Notes only, make any change in the
provisions of the Indenture described under "-- Withholding Taxes" that
adversely affects the rights of any applicable Noteholder or amend the
terms of the Euro Notes or the Euro Notes Indenture in a way that would
result in the loss of an exemption from any of the Taxes described
thereunder.
Notwithstanding the preceding, without the consent of any holder of the
Dollar Notes or Euro Notes, as the case may be, the Company, FFBV, the
Guarantors and relevant Trustee may amend an Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company under such Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add guarantees with respect to the related Notes, including any
Guaranties, to secure such Notes;
(5) to add to the covenants of the Company, FFBV or a Guarantor for
the benefit of the holders of the such Notes or to surrender any right or
power conferred upon the Company, FFBV or a Guarantor;
(6) to make any change that does not adversely affect the rights of
any holder of such Notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of such Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of such
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company, FFBV or a Guarantor then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consent to such change.
The consent of the holders of Notes is not necessary under an Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under an Indenture becomes effective, we (in the case of
the Dollar Notes) and FFBV (in the case of the Euro Notes) are required to mail
to holders of the related Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of such Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
In connection with any such transfer, the Indentures will require the transferor
to, among other things, furnish appropriate endorsements and transfer documents,
to furnish certain certificates and to pay any taxes, duties and governmental
charges in
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connection with such transfer. Such transfer documents, if any, will be made
available at the office of the Luxembourg Paying Agent where copies may be
obtained on request.
Notwithstanding the foregoing, the Company (in the case of the Dollar
Notes) and FFBV (in the case of the Euro Notes) are not required to register the
transfer of any certificated Notes:
(1) for a period of 15 calendar days prior to any date fixed for the
redemption of the Notes;
(2) for a period of 15 calendar days immediately prior to the date
fixed for selection of Notes to be redeemed in part;
(3) for a period of 15 calendar days prior to the record date with
respect to any interest payment date; or
(4) which the Holder has tendered (and not withdrawn) for repurchase
in connection with an offer in connection with a Change of Control offer or
an Asset Disposition offer.
Any such transfer will be made without charge to the Holder, other than any
taxes, duties and governmental charges payable in connection with such transfer.
DEFEASANCE
At any time, we (in the case of the Dollar Notes) or FFBV (in the case of
the Euro Notes) may terminate all our or FFBV's obligations under the Dollar
Notes or the Euro Notes, as the case may be, and the related Indenture ("legal
defeasance"), except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of such
Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a
registrar and paying agent in respect of such Notes.
In addition, at any time we (in the case of the Dollar Notes) or FFBV (in
the case of the Euro Notes) may terminate our or FFBV's obligations under
"-- Excess Cash Flow Repurchase Offer" and "-- Change of Control" and under the
covenants described under "-- Certain Covenants" (other than the covenant
described under "-- Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-- Defaults"
above and the limitations contained in clauses (3) and (4) of the first
paragraph under "-- Certain Covenants -- Covenants Applicable to the Dollar
Notes and the Euro Notes -- Merger and Consolidation" above ("covenant
defeasance").
We (in the case of the Dollar Notes) or FFBV (in the case of the Euro
Notes) may exercise our legal defeasance option notwithstanding our or their
prior exercise of the covenant defeasance option. We and FFBV may exercise
either option with respect to the Dollar Notes or the Euro Notes, as the case
may be, without exercising any option with respect to the other series of Notes.
If we (in the case of the Dollar Notes) or FFBV (in the case of the Euro Notes)
exercise our legal defeasance option, payment of the applicable Notes may not be
accelerated because of an Event of Default with respect thereto. If we (in the
case of the Dollar Notes) or FFBV (in the case of the Euro Notes) exercise our
covenant defeasance option, payment of the applicable Notes may not be
accelerated because of an Event of Default specified in clause (4), (6), (7)
(with respect only to Significant Subsidiaries) or (8) under "-- Defaults" above
or because of the failure of the Company (in the case of the Dollar Notes) or
FFBV (in the case of the Euro Notes) to comply with clauses (3) and (4) of the
first paragraph under "-- Certain Covenants -- Covenants Applicable to the
Dollar Notes and the Euro Notes -- Merger and Consolidation" above. If we (in
the case of the Dollar Notes) or FFBV (in the case of the Euro Notes) exercise
our legal defeasance option or our covenant defeasance option, each applicable
Guarantor will be released from all of its obligations with respect to its
applicable Guaranty.
In order to exercise either of our or FFBV's defeasance options with
respect to a series of Notes, we (in the case of the Dollar Notes) or FFBV (in
the case of the Euro Notes) must irrevocably deposit in trust (the "defeasance
trust") with the related Trustee money, U.S. Government Obligations (in the case
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of the Dollar Notes or the Euro Notes) or European Governmental Obligations (in
the case of the Euro Notes) for the payment of principal and interest on the
Dollar Notes or the Euro Notes, as the case may be, to redemption or maturity,
as the case may be, and must comply with certain other conditions, including
delivery to the applicable Trustee of (i) an Opinion of Counsel to the effect
that holders of the applicable Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law) and (ii) an Opinion of Counsel in The
Netherlands to the effect that (A) holders of the Euro Notes will not recognize
income, gain or loss for Dutch federal or provincial income tax purposes as a
result of such legal defeasance or covenant defeasance, as applicable, and will
be subject to Dutch federal and provincial income tax on the same amounts, in
the same manner and at the same times as would have been the case if such legal
defeasance or covenant defeasance, as applicable, had not occurred, and (B)
payments from the defeasance trust will be free and exempt from any and all
withholding and other income taxes of whatever nature of The Netherlands or any
province thereof or any political subdivision thereof or therein having the
power to tax. Money denominated in currency other than Euros and U.S. Government
Obligations deposited in respect of the Euro Notes pursuant to this paragraph
shall be subject in their entirety (including principal, interest and premium,
if any) to a customary currency agreement that is of a duration not less than
the defeasance period that fixes the exchange rate of such money or U.S.
Government Obligations into Euros for the benefit of the Euro Notes Trustee. The
amount of such money and U.S. Government Obligations expressed in Euros will be
as provided in such currency agreement. The counterparty to such currency
agreement shall be a commercial bank organized in the United States having
capital and surplus in excess of $500.0 million or a commercial bank organized
under the laws of any country that is a member of the OECD having total assets
in excess of $500.0 million (or its foreign currency equivalent at the time).
Such counterparty may obtain from the Company and FFBV an opinion of counsel to
the effect that such currency agreement has been duly authorized and entered
into by the Company and FFBV.
CONCERNING THE TRUSTEE
The Bank of New York is to be the Dollar Notes Trustee under the Dollar
Notes Indenture and the Euro Notes Trustee under the Euro Notes Indenture. The
Bank of New York has been appointed as Registrar and Paying Agent with regard to
the Dollar Notes and the Euro Notes.
Each Indenture contains certain limitations on the rights of the related
Trustee, should it become a creditor of the Company or FFBV, as applicable, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. Each Trustee
will be permitted to engage in other transactions; provided, however, if it
acquires any conflicting interest it must either eliminate such conflict within
90 days or apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Dollar
Notes or Euro Notes, as the case may be, will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the related Trustee, subject to certain exceptions. If an Event of
Default under an Indenture occurs (and is not cured), the applicable Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, such
Trustee will be under no obligation to exercise any of its rights or powers
under the related Indenture at the request of any Holder of the Dollar Notes or
the Euro Notes, as the case may be, unless such Holder shall have offered to
such Trustee security and indemnity satisfactory to it against any loss,
liability or expense and then only to the extent required by the terms of such
Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
FFBV or any Guarantor will have any liability for any obligations of the
Company, FFBV or any Guarantor under the Dollar Notes
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or the Euro Notes, as the case may be, any Guaranty or the Dollar Notes
Indenture or the Euro Notes Indenture or for any claim based on, in respect of,
or by reason of such obligations or their creation. Each Holder of the Dollar
Notes or (to the extent permitted under Netherlands law) the Euro Notes, as the
case may be, by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Dollar
Notes and the Euro Notes. Such waiver and release may not be effective to waive
liabilities under the U.S. federal securities laws, and it is the view of the
SEC that such a waiver is against public policy.
GOVERNING LAW
Each Indenture, Guaranty and the Dollar Notes and the Euro Notes will be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
LISTING OF EURO NOTES
Application has been made to list the Euro Notes on the Luxembourg Stock
Exchange.
PAYING AGENT AND REGISTRAR FOR THE EURO NOTES
FFBV has appointed The Bank of New York, as registrar and as paying agent
in respect of the Global Euro Notes (the "US Paying Agent") and Banque
Internationale a Luxembourg as paying agent in Luxembourg (the "Luxembourg
Paying Agent"). The US Paying Agent and the Luxembourg Paying Agent are
collectively referred to herein as the "Euro Paying Agents". FFBV will ensure
that for as long as any Euro Notes are outstanding there will always be a
registrar and a paying agent to perform the functions assigned to them in the
Euro Notes Indenture. FFBV has agreed to appoint the Luxembourg Paying Agent as
transfer agent in the event the Euro Notes are issued in definitive registered
form.
So long as the Euro Notes are listed on the Luxembourg Stock Exchange and
the rules of such Exchange so require, FFBV will maintain a paying agent and
transfer agent in Luxembourg. If the Euro Notes are listed on any other
securities exchange, FFBV will satisfy any requirement at such securities
exchange as to paying agents. So long as the Euro Notes are listed on the
Luxembourg Stock Exchange, any change in the paying agent or transfer agent
shall be notified to holders of Euro Notes in accordance with the procedures
described in "-- Notices".
NOTICES
So long as the Euro Notes are listed on the Luxembourg Stock Exchange and
it is required by the rules of the Luxembourg Stock Exchange, FFBV will make
publication of notices to the holders of the Euro Notes in a leading newspaper
having general circulation in Luxembourg or, if such publication is not
practicable, in one other leading daily newspaper with general circulation in
Europe, such newspaper being published on each business day in morning editions,
whether or not it is published in Saturday, Sunday or holiday editions. For so
long as the Euro Notes are listed on the Luxembourg Stock Exchange, a copy of
all notices will be provided by FFBV to the Luxembourg Stock Exchange.
CONSENT TO JURISDICTION AND SERVICE
The Euro Notes Indenture will provide that FFBV will appoint CT Corporation
System, 111 8th Avenue, 13th Floor, New York, New York 10011 as its agent for
actions brought under Federal or state securities laws brought in any Federal or
state court located in the Borough of Manhattan in The City of New York and will
submit to such jurisdiction.
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CERTAIN DEFINITIONS
"Acquisition" means the acquisition by the Company, directly or indirectly,
of 100% of the partnership interests of Ingersoll-Dresser Pump Company.
"Additional Assets" means any:
(1) property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means:
(1) any other Person, directly or indirectly, controlling or
controlled by; or
(2) under direct or indirect common control with such specified
Person.
For the purposes of this definition, "control" when used with respect to any
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the covenants described
under "-- Certain Covenants -- Covenants Applicable to the Dollar Notes and the
Euro Notes -- Limitation on Restricted Payments", "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Affiliate Transactions" and "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate"
shall also mean any beneficial owner of Capital Stock representing 5% or more of
the total voting power of the Voting Stock (on a fully diluted basis) of the
Company or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary
(other than, in the case of clauses (1), (2) and (3)
(A) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary (or
to a Restricted Subsidiary so long as the aggregate fair market value of
all assets transferred to Restricted Subsidiaries pursuant to this
clause (A) does not exceed $50.0 million);
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(B) for purposes of the covenant described under "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that constitutes a Restricted Payment permitted by the
covenant described under "-- Certain Covenants -- Covenants Applicable
to the Dollar Notes and the Euro Notes -- Limitation on Restricted
Payments" or a Permitted Investment;
(C) sales or other dispositions of obsolete, worn-out or otherwise
unsuitable assets or excess equipment in the ordinary course of
business; and
(D) a disposition of assets with a fair market value of less than
$1,000,000).
Notwithstanding anything to the contrary set forth above, (x) unless, at
the time of such disposition, the Company has Investment Grade Status, a
disposition of Receivables and Related Assets shall be deemed to constitute an
Asset Disposition and (y) a disposition of all or substantially all the assets
of the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the captions "-- Change
of Control" and/or "Merger and Consolidation" and not by the provisions of the
covenant described under "-- Covenants Applicable to the Dollar Notes and the
Euro Notes -- Limitation on Sales of Assets and Subsidiary Stock".
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the applicable Notes, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means all Obligations pursuant to the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board and (in the
case of FFBV) the Board of Managing Directors.
"Business Day" means each day other than a Saturday, Sunday or a day on
which commercial banking institutions are authorized or required by law to close
in New York City and, in the case of the Euro Notes, Amsterdam, London or
Luxembourg.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means, in respect of a Person, any forward contract,
commodity swap agreement, commodity option agreement or other similar agreement
or arrangement designed to protect such Person against fluctuations in commodity
prices.
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"Consent Decree" means the consent decree entered on July 28, 2000 in the
U.S. District Court for the District of Columbia in the matter of United States
of America v. Flowserve Corporation, Ingersoll-Dresser Pump Company and
Ingersoll-Rand Company relating to the purchase of Ingersoll-Dresser Pump
Company by Flowserve Corporation.
"Consent Decree Assets" means the assets identified in the Consent Decree
that Flowserve Corporation, Ingersoll-Dresser Pump Company and Ingersoll-Rand
Company have been ordered and directed to divest in connection with the
Acquisition.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial statements are
available ending on or prior to the date of such determination to (y)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or such
Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that
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would have required an adjustment pursuant to clause (3) or (4) above if
made by the Company or a Restricted Subsidiary during such period, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer (and shall
include any applicable Pro Forma Cost Savings). If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest of
such Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations;
(7) Preferred Stock dividends in respect of all Preferred Stock held
by Persons other than the Company or a Wholly Owned Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the issuer of such Preferred Stock);
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets of) the
Company or any Restricted Subsidiary and there shall have occurred and
continues an event of default under such Indebtedness or any payment is
actually made in respect of such Guarantee;
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust; and
(11) any premiums, fees, discounts, expenses and losses on the sale of
Receivables and Related Assets (and any amortization thereof) payable in
connection with a Receivables Program, as determined on a consolidated
basis in conformity with GAAP.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income
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up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income of any Restricted Subsidiary that is not a
Subsidiary Guarantor if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Restricted Subsidiary,
to the limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other
disposition of any assets (other than any Consent Decree Assets) of the
Company, its consolidated Subsidiaries or any other Person (including
pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain (but
not loss) realized upon the sale or other disposition of any Capital Stock
of any Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"-- Certain Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any repurchases, repayments or redemptions of
Investments, proceeds realized on the sale of the Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(C)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital Stock
plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock. In determining "Consolidated Net Worth," the Company shall
exclude the impact of any write-off of deferred financing fees occurring in
connection with any transaction subject to the covenant entitled "-- Merger and
Consolidation" for the purpose of which the determination is being made.
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"Credit Agreement" means the Credit Agreement by and among the Company,
certain of its Subsidiaries, the lenders referred to therein, Credit Suisse
First Boston, New York branch, as Syndication Agent, Bank of America, N.A., as
Administrative Agent, Collateral Agent and Swingline Lender, and ABN-AMRO N.V.,
Bank One, N.A. and Salomon Smith Barney, Inc., as Co-Documentation Agents,
together with the related documents thereto (including the term loans and
revolving loans thereunder, any guarantees and security documents), as amended,
extended, renewed, restated, refinanced, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time, and any agreement (and
related document) governing Indebtedness incurred to Refinance, in whole or in
part, the borrowings and commitments then outstanding or permitted to be
outstanding under such Credit Agreement or a successor Credit Agreement, whether
by the same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" with respect to a Person means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the applicable
Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence
of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
applicable Notes; provided, however, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the applicable Notes shall not
constitute Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable to the holders of such Capital
Stock than the terms applicable to the applicable Notes and described under
"-- Certain Covenants -- Covenants Applicable to the Dollar Notes and the
Euro Notes -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Covenants Applicable to the Dollar Notes and the
Euro Notes -- Change of Control"; and
(2) any such requirement only becomes operative after compliance with
such terms applicable to the applicable Notes, including the purchase of
any Notes tendered pursuant thereto.
"Dollar Notes Guarantor" means FFBV, Flowserve International Limited, each
direct or indirect Subsidiary of the Company that is a guarantor of Senior
Indebtedness under the Credit Agreement and
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each direct or indirect domestic Restricted Subsidiary that is a guarantor of
any other Indebtedness of the Company.
"Dollar Notes Guaranty" means a Guarantee by a Dollar Notes Guarantor of
the Company's obligations with respect to the Dollar Notes.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period);
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period); and
(5) cash integration and restructuring charges in connection with the
Acquisition and taken with respect to periods ended on or prior to December
31, 2001, in an aggregate amount not to exceed $65.0 million;
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Eligible Indebtedness" means any indebtedness other than:
(1) Indebtedness in the form of, or represented by, bonds or other
securities or any guarantee thereof (other than a guarantee of Indebtedness
of the Company in the form of, or represented by, bonds or other
securities); and
(2) Indebtedness that is, or may be, quoted, listed or purchased and
sold on any stock exchange, automated trading system or over-the-counter or
other securities market (including, without prejudice to the generality of
the foregoing, the market for securities eligible for resale pursuant to
Rule 144A under the Securities Act).
"European Economic Area" means the member nations of the European Economic
Area pursuant to the Oporto Agreement on the European Economic Area dated May 2,
1992, as amended.
"Euro Equivalent" means with respect to any monetary amount in a currency
other than Euros, at any time of determination thereof, the amount of Euros
obtained by converting such foreign currency involved in such computation into
Euros at the spot rate for the purchase of Euros with the applicable foreign
currency as published in The Wall Street Journal in the "Exchange Rates" column
under the heading "Currency Trading" on the date two Business Days prior to such
determination.
"Euro Notes Guarantor" means the Company, Flowserve International Limited,
each direct or indirect Subsidiary of the Company that is a guarantor of Senior
Indebtedness under the Credit Agreement and each direct or indirect domestic
Restricted Subsidiary that is a guarantor of any other Indebtedness of the
Company.
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"Euro Notes Guaranty" means a Guarantee by a Euro Notes Guarantor of FFBV's
obligations with respect to the Euro Notes.
"European Governmental Obligation" means direct non-callable obligations
of, or non-callable obligations permitted by, any member nation of the European
Union, the payment or guarantee of which is secured by the full faith and credit
of the respective nation, provided that such nation has a credit rating at least
equal to that of the highest rated member nation of the European Economic Area.
"European Union" means the member nations to the third stage of economic
and monetary union pursuant to the Treaty of Rome establishing the European
Community, as amended by the Treaty on European Union, signed at Maastricht on
February 7, 1992.
"Excess Cash Flow", with respect to the Company, has the meaning specified
in the Credit Agreement as in effect on the Issue Date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company (in the case of
the Dollar Notes) and FFBV (in the case of the Euro Notes) issued pursuant to
the applicable Indenture in exchange for, and in an aggregate principal amount
at maturity equal to, the relevant Notes, in compliance with the terms of the
relevant Registration Rights Agreement.
"Facilities" means the Term Loan Facilities and the Revolving Credit
Facilities.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary that is
incorporated in a jurisdiction other than the United States or a State thereof
or the District of Columbia and with respect to which more than 80% of any of
its sales, earnings or assets (determined on a consolidated basis in accordance
with GAAP) are located in, generated from or derived from operations located in
territories outside of the United States of America and jurisdictions outside
the United States of America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
All ratios and computations based on GAAP contained in the Indentures shall
be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
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provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Guarantor" means a Dollar Notes Guarantor or a Euro Notes Guarantor, as
applicable.
"Guaranty" means a Dollar Notes Guaranty or a Euro Notes Guaranty, as
applicable.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the applicable Trustee, pursuant to which a Guarantor guarantees the
Company's obligations with respect to the Dollar Notes or FFBV's obligations
with respect to the Euro Notes on the terms provided for in the applicable
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Dollar Note or a
Euro Note, as the case may be, is registered on the applicable Registrar's
books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. The accretion
of principal of a non-interest bearing or other discount security shall not be
deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance, bank guaranty or
similar credit transaction (other than obligations with respect thereto
securing obligations (other than obligations described in clauses (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit, banker's acceptances, bank
guaranties or similar credit transactions are not drawn upon or, if and to
the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following payment thereon);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Subsidiary of such
Person, the principal amount of such Preferred Stock to be determined in
accordance with the applicable Indenture (but excluding, in each case, any
accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such
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Person), the amount of such obligation being deemed to be the lesser of the
value of such property or assets and the amount of the obligation so
secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Intercompany Loans" means the loans by FFBV to the Company or any of the
Company's Wholly Owned Subsidiaries.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary", the definition
of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary equal to an amount (if positive) equal to (A)
the Company's "Investment" in such Subsidiary at the time of such
redesignation less (B) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.
"Investment Grade Status" means that the credit rating of the Company's
senior unsecured, non-credit-enhanced long-term debt is (a) "BBB-" or higher
according to Standard & Poor's Ratings Group or (b) "Baa 3" or higher according
to Moody's Investors Service, Inc.
"Issue Date" means the date on which the Dollar Notes or the Euro Notes, as
the case may be, are originally issued.
"Lenders" has the meaning specified in the Credit Agreement.
"Leverage Ratio" has the meaning specified in the Credit Agreement as in
effect on the Issue Date.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of
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assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form), in each
case net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"OECD" shall mean the Organization for Economic Cooperation and
Development.
"Permitted Employee Stock Purchase Loans" means loans, in an aggregate
amount outstanding at any time not to exceed $30.0 million, made by third
parties (other than any Affiliate of the Company) to employees of the Company
and its Subsidiaries who are participants in the Company's stock purchase
program to enable such employees to purchase common stock of the Company.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary, but in any event not to exceed $5.0 million in the aggregate
outstanding at any one time;
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(7) guaranties of Permitted Employee Stock Purchase Loans;
(8) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(9) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Certain Covenants -- Covenants
Applicable to the Dollar Notes and the Euro Notes -- Limitation on Sales of
Assets and Subsidiary Stock";
(10) so long as no Default shall have occurred and be continuing (or
result therefrom), in Unrestricted Subsidiaries in an aggregate amount
which, when taken together with the amount of all other Investments made
pursuant to this clause (10) which at such time have not been repaid, does
not exceed $25.0 million;
(11) so long as no Default shall have occurred and be continuing (or
result therefrom), in any Person in an aggregate amount which, when taken
together with the amount of all other Investments made pursuant to this
clause (11) which at such time have not been repaid, does not exceed $25.0
million; and
(12) a trust, limited liability company, special purpose entity or
other similar entity in connection with a Receivables Program; provided,
however, that (A) such Investment is made by a Receivables Subsidiary and
(B) the only assets transferred to such trust, limited liability company,
special purpose entity or other similar entity consist of Receivables and
Related Assets of such Receivables Subsidiary.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Pro Forma Cost Savings" means, with respect to any period, the reduction
in costs that were (1) directly attributable to an asset acquisition and
calculated on a basis that is consistent with Regulation S-X under the
Securities Act in effect and applied as of the Issue Date; or (2) implemented by
the business that was the subject of any such asset acquisition within 6 months
of the date of such asset acquisition and that are supportable and quantifiable
by the underlying accounting records of such business, in the case of each of
(1) and (2), as if such reduction in costs had been effected as of the beginning
of such period.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Receivables and Related Assets" means accounts receivable, instruments,
chattel paper, obligations, general intangibles and other similar assets,
including interest in merchandise or goods, the sale or lease of which give rise
to the foregoing, related contractual rights, guarantees, insurance proceeds,
collections, other related assets and proceeds of all the foregoing.
"Receivables Program" means with respect to any Person, any accounts
receivable securitization program pursuant to which such Person pledges, sells
or otherwise transfers or encumbers its accounts receivable, including a trust,
limited liability company, special purpose entity or other similar entity.
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"Receivables Subsidiary" means a Wholly Owned Subsidiary (i) created for
the purpose of financing receivables created in the ordinary course of business
of the Company and its Subsidiaries and (ii) the sole assets of which consist of
Receivables and Related Assets of the Company and its Subsidiaries and related
Permitted Investments.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company, FFBV or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with the applicable Indenture, including
Indebtedness that Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or FFBV
or (B) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreements" means the Dollar Notes Registration Rights
Agreement in respect of the Dollar Notes dated August 3, 2000, among the
Company, the Dollar Notes Guarantors, Credit Suisse First Boston Corporation,
Bank of America Securities LLC, ABN AMRO Incorporated and Banc One Capital
Markets, Inc. and the Euro Notes Registration Rights Agreement in respect of the
Euro Notes dated August 3, 2000 among FFBV, the Euro Notes Guarantors, Credit
Suisse First Boston (Europe) Limited, Bank of America International Limited, ABN
AMRO Bank N.V. and First Chicago Limited.
"Related Business" means any business in which the Company was engaged on
the Issue Date and any business related, ancillary or complementary to any
business of the Company in which the Company was engaged on the Issue Date or
any industrial manufacturing or related services business.
"Representative" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to the Company or a Restricted Subsidiary, and other than
pro rata dividends or other distributions made by a Subsidiary that is not
a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other
than a corporation));
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(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
of such Person (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of such purchase, repurchase or other
acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
In determining the amount of any Restricted Payment made in property other
than cash, such amount shall be the fair market value of such property at the
time of such Restricted Payment, as determined in good faith by the Board of
Directors.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility contained
in the Credit Agreement and any other facility or financing arrangement that
Refinances, in whole or in part, any such revolving credit facility.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person:
(1) Bank Indebtedness of or guaranteed by such Person, whether
outstanding on the Issue Date or thereafter Incurred;
(2) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred; and
(3) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to such Person whether or not a claim for post-filing interest is
allowed or allowable in such proceeding) in respect of (A) such Bank
Indebtedness, (B) indebtedness of such Person for money borrowed and (C)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the Notes;
provided, however, that Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
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(4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect
to any other Indebtedness or other obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the applicable Indenture.
"Senior Subordinated Indebtedness" means, with respect to a Person, the
Dollar Notes (in the case of the Company), the Euro Notes (in the case of FFBV),
a Guaranty (in the case of a Guarantor) and any other Indebtedness of such
Person that specifically provides that such Indebtedness is to rank pari passu
with the Dollar Notes, the Euro Notes or such Guaranty, as the case may be, in
right of payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of such Person which is not Senior Indebtedness
of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Dollar Notes (in the
case of the Company), the Euro Notes (in the case of FFBV) or a Guaranty of such
Person, as the case may be, pursuant to a written agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, association, partnership or other business entity of which
more than 50% of the total voting power of shares of Voting Stock is at the time
owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America, European Government Obligations or direct obligations of any other
European Union member state in which the Company or any of its Restricted
Subsidiaries has operations, or any agency thereof or obligations
guaranteed by the United States of America or any other European Union
member state in which the Company or any of its Restricted Subsidiaries has
operations, or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker-dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
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(4) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-2" (or higher) according to Moody's Investors
Service, Inc. or "A-2" (or higher) according to Standard and Poor's Ratings
Group; and
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.
"Term Loan Facility" means the term loan facility contained in the Credit
Agreement and any other facility or financing arrangement that Refinances in
whole or in part any such term loan facility.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Covenants Applicable to the
Dollar Notes and the Euro Notes -- Limitation on Restricted Payments".
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "-- Certain
Covenants -- Covenants Applicable to the Dollar Notes and the Euro
Notes -- Limitation on Indebtedness" and (B) no Default shall have occurred and
be continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the resolution of
the Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Dollar Equivalent" means with respect to any monetary amount in a
currency other than U.S. dollars, at any time for determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as published in The Wall Street
Journal in the "Exchange Rates" column under the heading "Currency Trading" on
the date two Business Days prior to such determination.
Except as described under "Certain Covenants -- Covenants Applicable to the
Dollar Notes and the Euro Notes -- Limitation on Indebtedness", whenever it is
necessary to determine whether the Company or FFBV has complied with any
covenant in the Indentures or a Default has occurred and an amount is expressed
in a currency other than U.S. dollars, such amount will be treated as the U.S.
Dollar Equivalent determined as of the date such amount is initially incurred in
such currency.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
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"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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CERTAIN TAX CONSIDERATIONS
UNITED STATES
The following summary describes certain United States federal income tax
consequences of the exchange offer and the acquisition, ownership and
disposition of the notes by a United States Holder (as defined below) and the
notes by a Non-United States Holder (as defined below), subject to the
limitations stated herein. The summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
as of the date hereof, all of which may be repealed, revoked or modified so as
to result in federal income tax consequences different from those described
below. Such changes could be applied retroactively in a manner that could
adversely affect holders of the notes. It is therefore possible that the
consequences of the acquisition, ownership and disposition of the notes may
differ from the treatment described below.
The tax treatment of a holder of the notes may vary depending upon the
particular situation of the holder. This summary is limited to investors who
will hold the notes as capital assets within the meaning of section 1221 of the
Code and does not deal with holders that may be subject to special tax rules
(including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions, dealers in securities or currencies, holders whose
functional currency is not the U.S. dollar or holders who will hold the notes as
a hedge against currency risks or as part of a straddle, synthetic security,
conversion transaction or other integrated investment comprised of the notes and
one or more other investments).
This summary is for general information only and does not address all
aspects of federal income taxation that may be relevant to holders of the notes
in light of their particular circumstances, and it does not address any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction. Prospective holders are urged to consult their own tax advisors as
to the particular tax consequences to them of acquiring, holding or disposing of
the notes.
As used herein, a "United States Holder" means a beneficial owner of a note
that is or which is (i) an individual that is a citizen or resident of the
United States, (ii) a corporation, or other entity taxable as a corporation for
U.S. federal income tax purposes, created or organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of its
source, or (iv) a trust if (1) a U.S. court is able to exercise primary
supervision over the administration of the trust and (2) one or more U.S.
persons have the authority to control all substantial decisions of the trust. A
"Non-United States Holder" is a holder that is not a United States Holder.
EXCHANGE OFFER
The exchange of notes for new notes pursuant to the exchange offer will not
be a taxable event for the holders of the notes, and a holder will have the same
tax basis and holding period in the exchange notes as the outstanding notes.
UNITED STATES HOLDERS OF NOTES
Interest. Interest on the notes generally will be taxable to a United
States Holder as ordinary income at the time accrued or received, in accordance
with such United States Holder's method of accounting for U.S. federal income
tax purposes.
In the case of a euro note, the amount of interest required to be included
in income by a United States Holder will include the amount of additional
amounts and taxes, if any, withheld by Flowserve Finance on payments made on the
euro note. Thus, in the event of such withholding, a United States Holder would
be required to report gross income in an amount greater than the cash it
receives in respect of payments on its euro note. However, a United States
Holder could be eligible, subject to certain limitations, to claim such
withholding taxes as a credit or deduction for purposes of computing the amount
of its U.S. federal income tax liability (notwithstanding that the payment of
such taxes will be made by
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Flowserve Finance). Interest income on the euro notes will constitute foreign
source income and generally will be considered "passive" income (or "high
withholding tax interest" if the applicable withholding tax is imposed at a rate
of 5% or more) or "financial services" income for U.S. foreign tax credit
purposes. The rules relating to foreign tax credits and the timing thereof are
extremely complex and United States Holders should consult with their own tax
advisors with regard to the availability of a foreign tax credit and the
application of the foreign tax credit limitations to their particular
situations.
A cash basis United States Holder receiving an interest payment in euros
will be required to include in income the U.S. dollar value of such payment
(determined using the spot rate in effect on the date such payment is received)
regardless of whether such payment is subsequently converted into U.S. dollars.
No exchange gain or loss will be recognized by such holder if the euros are
converted to U.S. dollars on the date received. The U.S. federal income tax
consequences of the conversion of euro into U.S. dollars is described below. See
"-- Transaction in Euros."
An accrual basis United States Holder will be required to include in income
the U.S. dollar value of the amount of interest income that has accrued on a
euro note in a taxable year, determined by translating such income at the
average rate of exchange for the relevant interest accrual period or, with
respect to an interest accrual period that spans two taxable years, at the
average rate for the portion of such interest accrual period within the taxable
year. The average rate of exchange for an interest accrual period (or portion
thereof) is the simple average of the exchange rates for each business day of
such period (or such other average that is reasonably derived and consistently
applied). An accrual basis United States holder may elect to translate interest
income on a euro note using the spot rate in effect on the last day of an
interest accrual period (or the last day of the taxable year for the portion of
such period within the taxable year). In addition, a holder may elect to use the
spot rate in effect on the date of receipt (or payment) for such purpose if such
date is within five business days of the last date of an interest accrual
period. The election must be made in a statement filed with the taxpayer's
return and is applicable to all debt instruments for such year and thereafter
unless changed with the consent of the IRS.
Upon receipt of an interest payment on a euro note, an accrual basis United
States Holder will recognize ordinary gain or loss with respect to accrued
interest income in an amount equal to the difference between the U.S. dollar
value of the payment received (determined using the spot rate in effect on the
date such payment is received) in respect of such interest accrual period and
the U.S. dollar value of the interest income that has accrued during such
interest accrual period (as determined in the preceding paragraph). Any such
gain or loss will be treated as ordinary income or loss but generally will not
be treated as interest income or expense, except to the extent provided by
future regulations or administrative pronouncements of the IRS. The U.S. federal
income tax consequences of the conversion of euro into U.S. dollars is described
below. See "-- Transactions in Euros."
Market Discount and Premium. If a United States Holder purchases a note for an
amount that is less than its principal amount, the amount of the difference will
be treated as "market discount" for U.S. federal income tax purposes, unless
such difference is less than a specified de minimis amount.
Unless a United States Holder elects to accrue market discount as described
below, such United States Holder will be required to treat any partial principal
payment on, or any gain realized on the sale, exchange, retirement or other
disposition of, a note as ordinary income to the extent of the lesser of (i) the
amount of such payment or realized gain and (ii) the market discount that has
not previously been included in income and is treated as having accrued on such
note at the time of such payment or disposition. Market discount will be
considered to accrue on a straight-line basis during the period from the date of
acquisition to the maturity date of the note, unless the United States Holder
elects to accrue such discount on a constant-yield basis.
A United States Holder may be required to defer the deduction of all or a
portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a note until the maturity of the note or its
earlier disposition. A United States Holder may elect to include market discount
in income currently as it accrues (on either a straight-line or a constant-yield
basis), in which case such United
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States Holder will not be subject to the rules described above regarding the
treatment of gain as ordinary income upon the disposition of the note and upon
the receipt of certain cash payments and regarding the deferral of interest
deductions.
In the case of a euro note, any accrued market discount not taken into
income shall be translated into U.S. dollars at the spot rate on the date the
United States Holder disposes of the euro note (or receives a partial principal
payment to which the accrued market discount relates). No part of such accrued
market discount is treated as exchange gain or loss. With respect to a United
States Holder of a euro note that elects to include market discount into income
currently as it accrues, such accrued market discount shall be translated in
U.S. dollars at the average exchange rate for the accrual period in a manner
described above in "-- Interest."
If a United States Holder purchases a note for an amount that is greater
than the sum of all amounts payable on the note after its acquisition (other
than payments of stated interest), such United States Holder will be considered
to have purchased such note at a "premium" equal in amount to such excess, and
may elect (in accordance with applicable Code provisions) to amortize such
premium, on a constant yield method over the remaining term of the note (subject
to special rules concerning early call provisions). If an election to amortize
the premium is not made, the premium will decrease the gain or increase the loss
otherwise recognized on a taxable disposition of the note. In the case of a euro
note, the amount of amortizable premium is determined using the exchange
conventions applicable to payments of interest. See "-- Interest" above.
The election to include market discount in income currently or to amortize
premium, once made, applies to all debt obligations held or subsequently
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applied and may not be revoked without
the consent of the IRS.
Dispositions. Upon the sale, exchange, redemption, retirement or other
disposition of a note, a United States Holder generally will recognize taxable
gain or loss equal to the difference between the amount realized on the sale,
exchange, redemption, retirement or other disposition and such holder's adjusted
tax basis in the note (generally equal to the cost of such note to such holder
and increased by any market discount previously includible in income by the
United States Holder and decreased by amortized premium with respect to the
note).
For these purposes, the amount realized on the sale, exchange, redemption,
retirement or other disposition of a note does not include any amount
attributable to accrued but unpaid interest, which will be taxable as ordinary
income unless previously taken into account. Except with respect to gains or
losses attributable to changes in currency exchange rates, as described below,
and except for any market discount, such gain or loss will be capital gain or
loss. Such gain or loss will generally be treated as U.S. source gain or loss.
In the case of a euro note, a United States Holder's tax basis in such note
generally will be the U.S. dollar value of the purchase price of such euro note
on the date of a purchase (determined by translating the purchase price into
U.S. dollars at the spot rate in effect on the date of purchase, adjusted by
market discount or premium as described above). Upon the sale, exchange,
redemption, retirement or other disposition of a euro note, a United States
holder generally will recognize gain or loss equal to the difference between the
amount realized on such sale, exchange, redemption, retirement or other
disposition (or, if it is realized in other than U.S. dollars, the U.S. dollar
value of the amount using the spot rate in effect on the date of such sale,
exchange, redemption, retirement or other disposition) and the holder's tax
basis in such euro note.
Gain or loss recognized by a United States Holder on the sale, exchange,
redemption, retirement or other disposition of a euro note that is attributable
to changes in the rate of exchange between the U.S. dollar and the euro will be
treated as ordinary income or loss and generally will not be treated as interest
income or expense except to the extent provided by future regulations or
administrative pronouncements of the IRS. Such foreign currency gain or loss is
recognized on the sale, exchange,
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redemption, retirement or other disposition of a euro note only to the extent of
total gain or loss recognized on such sale, exchange, redemption, retirement or
other disposition. Such foreign currency gain or loss will be treated as U.S.
source gain or loss.
As a result of certain limitations on the U.S. foreign tax credit under the
Code, a U.S. Holder may not be able to claim a U.S. foreign tax credit for
Netherlands withholding taxes, if any, imposed on the proceeds received upon the
sale, exchange, redemption, retirement or other disposition of a euro note by
Flowserve Finance. Prospective holders should consult their own tax advisors
concerning the application of the U.S. foreign tax credit rules to their
particular situations.
For certain non-corporate United States Holders (including individuals),
the rate of taxation of capital gains will depend upon (i) the holder's holding
period in the capital asset (with a preferential rate available for capital
assets held for more than one year) and (ii) the holder's marginal tax rate for
ordinary income. The deductibility of capital losses is subject to limitations.
Transactions in Euros. Euro received as interest on, or on the sale,
exchange, redemption, retirement or other disposition of, a euro note will have
a tax basis equal to their U.S. dollar value at the time such interest is
received or at the time payment is received in consideration of such sale
exchange, redemption, retirement or other disposition. The amount of gain or
loss recognized on a sale or other disposition of such euro will be equal to the
difference between (i) the amount of U.S. dollars, or the fair market value in
U.S. dollars of the other currency or property received in such sale or other
disposition and (ii) the tax basis of such euro.
A United States Holder that purchases a euro note with previously owned
euros would recognize gain or loss in an amount equal to the difference, if any,
between such holder's tax basis in such euros and the U.S. dollar fair market
value of such euro note on the date of purchase. Generally, any such gain or
loss will be ordinary income or loss and will not be treated as interest income
or expense, except to the extent provided by future regulations or
administrative pronouncements of the IRS. However, a United States Holder that
converts U.S. dollars to euro and immediately uses such euro to purchase a euro
note ordinarily would not recognize any exchange gain or loss in connection with
such conversion or purchase.
NON-UNITED STATES HOLDERS OF NOTES
Payments on Dollar Notes. Subject to the discussion below concerning backup
withholding, no U.S. federal withholding tax will be imposed with respect to the
payment of principal, premium, if any, or interest on a dollar note owned by a
Non-United States Holder (the "Portfolio Interest Exception"), provided (i) that
such Non-United States Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of Flowserve
entitled to vote within the meaning of section 871(h)(3) of the Code and the
U.S. Treasury regulations thereunder, (ii) such Non-United States Holder is not
a controlled foreign corporation that is related, directly or indirectly, to
Flowserve through stock ownership, (iii) such Non-United States Holder is not a
bank whose receipt of interest on a dollar note is described in section
881(c)(3)(A) of the Code and (iv) such Non-United States Holder satisfies the
statement requirement (described generally below) set forth in section 871(h)
and section 881(c) of the Code and the U.S. Treasury regulations thereunder.
To satisfy the requirement referred to in (iv) above, the beneficial owner
of such dollar note, or a financial institution holding the dollar note on
behalf of such owner, must provide, in accordance with specified procedures, a
paying agent of our company with a statement to the effect that the beneficial
owner is not a United States Holder. Pursuant to U.S. Treasury regulations,
these requirements will be met if (1) the beneficial owner provides his name and
address, and certifies, under penalties of perjury, that he is not a United
States Holder (which certification may be made on an Internal Revenue Service
(the "IRS") Form W-8 or W-8BEN) or (2) a financial institution holding the
dollar note on behalf of the beneficial owner certifies, under penalties of
perjury, that such statement has been received by it and furnishes a paying
agent with a copy thereof.
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If a Non-United States Holder cannot satisfy the requirements of the
Portfolio Interest Exception described in (a) above, payments on a dollar note
made to such Non-United States Holder will be subject to a 30% withholding tax
unless the beneficial owner of the dollar note provides our company or our
paying agent, as the case may be, with a properly executed (1) IRS Form 1001 or
W-8BEN claiming an exemption from or reduction of withholding under the benefit
of a tax treaty or (2) IRS Form 4224 or W-8ECI stating that interest paid on the
dollar note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States.
Payments on Euro Notes. Subject to the discussion below concerning backup
withholding, no U.S. federal withholding tax will be imposed with respect to the
payment of principal, premium, if any, or interest on a euro note owed by a
Non-United States Holder.
U.S. Trade or Business Income. If a Non-United States Holder is engaged in
a trade or business in the United States and payments on a note are effectively
connected with the conduct of such trade or business, and, in the case of a euro
note, certain other conditions are satisfied, the Non-United States Holder,
although exempt from U.S. federal withholding tax as discussed above, will be
subject to U.S. federal income tax on such payment on a net income basis in the
same manner as if it were a United States Holder. In addition, if such
Non-United States Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its effectively connected earnings and profits for
the taxable year, subject to adjustments.
Disposition. Any gain realized upon the sale, exchange, redemption,
retirement or other disposition of a note generally will not be subject to
United States federal income tax, except that gain realized upon the disposition
of a dollar note will be subject to United States federal income tax if (i) such
gain or income is effectively connected with a trade or business in the United
States of the Non-United States Holder or (ii) in the case of a Non-United
States Holder who is an individual, (y) such individual is present in the United
States for 183 days or more in the taxable year of such sale, exchange,
redemption, retirement or other disposition, and certain other conditions are
met or (z) such individual is a former citizen or former long-term resident of
the United States meeting certain qualifications.
Estate Tax. Notes beneficially owned by an individual who at the time of
death is a Non-United States Holder will not be subject to federal estate tax as
a result of such individual's death, provided that such individual does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of Flowserve or Flowserve Finance entitled to vote within
the meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such dollar note would not have been, if received at
the time of such individual's death, effectively connected with the conduct of a
U.S. trade or business by such individual.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Interest on a note and proceeds from a sale, exchange, redemption,
retirement or other disposition may be reported to the IRS and a 31% backup
withholding tax may apply to such amounts unless the holder (i) is a
corporation, (ii) provides an accurate taxpayer identification number (in the
case of a United States Holder) or a properly executed IRS Form W-8 (in the case
of a Non-United States Holder), or (iii) otherwise establishes a basis for
exemption. The amount of any backup withholding tax will be allowed as a credit
against the holder's U.S. federal income tax liability, provided that the
required information is furnished to the IRS. After December 31, 2000, the
requirements and procedures for establishing an exemption from information
reporting and backup withholding will change. Prospective holders should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
THE NETHERLANDS
This section contains a brief summary of a number of key Netherlands
taxation principles that are or could be relevant to the holders of the notes.
It does not address all aspects of Netherlands taxation that may be relevant to
holders of the notes in light of their particular circumstances. Prospective
holders are urged to consult their tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the notes.
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THE NETHERLANDS
This section contains a brief summary of a number of key Netherlands
taxation principles that are or could be relevant to the holders of the notes.
It does not address all aspects of Netherlands taxation that may be relevant to
holders of the notes in light of their particular circumstances. Prospective
holders are urged to consult their tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the notes.
This summary is based on current Netherlands law as of the date of this
prospectus, as well as on the double taxation treaties currently in force. Tax
regulations may change. Holders should be aware that recently the Netherlands
legislative authorities have adopted a proposal for an extensive change of
Netherlands personal income tax (and changes to corresponding elements in other
tax laws). The new personal income tax act will enter into force on January 1,
2001.
Flowserve Finance has been advised that under existing Netherlands tax law
the following Netherlands tax treatment will apply to the euro notes, provided:
(1) they do not carry interest or any other payment contingent on the
profits of, or on the distribution of profits by Flowserve Finance;
(2) they will not be redeemable in exchange for, convertible into or
linked to shares or other equity instruments issued or to be issued by
Flowserve Finance; and
(3) they do not have a maturity in excess of 30 years.
WITHHOLDING TAX
All payments under the euro notes can be made free of withholding or
deduction for or on account of any taxes of whatsoever nature imposed, levied,
withheld or assessed by the Netherlands or any political subdivision or taxing
authority thereof or therein.
TAXES ON INCOME AND CAPITAL GAINS
A holder of a euro note who derives income from a euro note or who realizes
a gain on the disposal or deemed disposal or redemption of a euro note will not
be subject to Netherlands taxation on income or capital gains, provided that:
(1) such holder is neither resident nor deemed to be resident in The
Netherlands;
(2) such holder does not have an enterprise or an interest in an
enterprise which is, in whole or in part, carried on through a permanent
establishment (or deemed permanent establishment) or a permanent
representative (or deemed permanent representative) in the Netherlands and
to which enterprise or part of an enterprise the euro notes are
attributable;
(3) such holder does not have a substantial interest or a deemed
substantial interest in Flowserve Finance or, if the holder does have such
an interest, it forms part of the assets of an enterprise; and
(4) such holder does not carry out and has not carried out employment
activities in the Netherlands nor carries out employment activities outside
the Netherlands the remuneration for which is subject to Netherlands wage
withholding tax and with which employment activities the holding of the
euro notes is connected.
NET WEALTH TAX
Netherlands net wealth tax will not be levied on a holder of a euro note
unless such holder is an individual and:
(1) the holder is, or is deemed to be, resident in The Netherlands for
the purpose of the relevant provisions; or
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(2) such euro note is attributable to an enterprise or part thereof
which is carried on through a permanent establishment (or deemed permanent
establishment) or a permanent representative (or deemed permanent
representative) in The Netherlands.
GIFT, ESTATE OR INHERITANCE TAXES
Netherlands gift, estate or inheritance taxes will not be levied upon the
acquisition of a euro note by way of gift by, or on the death of, a holder of a
euro note unless:
(1) the holder is, or is deemed to be, resident of The Netherlands for
the purpose of the relevant provisions; or
(2) the holder at the time of the gift has or at the time of his death
had an enterprise that is or was, in whole or in part, carried on through a
permanent establishment (or deemed permanent establishment) and to which
enterprise or part of an enterprise the euro notes are or were
attributable; or
(3) in the case of a gift of a euro note by any individual who, at the
date of the gift was not resident or deemed to be resident in The
Netherlands, such individual dies within 180 days after the date of the
gift, while being resident or deemed to be resident in The Netherlands.
CAPITAL TAX
There is no Netherlands capital tax payable in the Netherlands in respect
of or in connection with the execution, delivery and enforcement by legal
proceedings (including any foreign judgement in the courts of the Netherlands)
of the euro notes or the performance of FFBV's obligations under the euro notes,
other than capital tax that may be due by FFBV on capital contributions made or
deemed to be made to FFBV under the guarantee of the dollar notes.
OTHER TAXES AND DUTIES
There is no Netherlands registration tax, capital tax, stamp duty or any
other similar tax or duty other than court fees and contributions for the
registration with the Trade Register of the Chamber of Commerce payable in The
Netherlands in respect of or in connection with the execution, delivery and
enforcement by legal proceedings (including any foreign judgement in the courts
of The Netherlands) of the euro notes or the performance of Flowserve Finance's
obligation under the euro notes.
VAT
There is no Netherlands value added tax payable in consideration for the
issue of the euro notes, in respect of the payment of interest or principal
under the euro notes, or the transfer of a euro note.
A holder of a euro note will not become resident, or deemed to be resident,
in The Netherlands by reason only of the holding of a euro note or the
execution, delivery or enforcement of the euro notes or the performance by
Flowserve Finance of its obligation under the euro notes.
PROPOSED NETHERLANDS TAX LEGISLATION
Recently, the Netherlands legislative authorities have adopted a proposal
for an extensive change of the Netherlands personal income tax (and changes to
corresponding elements in other tax laws). This "Personal Income Tax Act 2001"
shall become effective on January 1, 2001. The Personal Income Tax Act 2001 will
substantially change the income tax position of a holder of euro notes who is
resident or deemed to be resident in The Netherlands. Under the new act, tax at
a rate of 30% will be due on a fictitious yield of 4% of the average market
value of the euro notes at the beginning and the end of each year. The
Netherlands income tax position for individuals holding the euro notes, who are
not resident or deemed to be resident in The Netherlands, will in principle
remain unaltered. Under the new act, the net wealth tax will be abolished.
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PROPOSED DIRECTIVE APPLICABLE TO INTEREST PAYMENTS
In May 1998, the European Commission presented to the Council of Ministers
of the European Union a proposal to oblige its member states to adopt either a
"withholding tax system" or an "information reporting system" in relation to
payments of interest, discounts and premiums. It is unclear whether this
proposal will be adopted, and if it is adopted, whether it will be adopted in
its current form. Once sufficient reassurances with regard to the application of
the same measures in dependent or associated territories and of equivalent
measures in the United States and key third countries have been obtained, the
Council of Ministers of the European Union will decide on the adoption and
implementation of the proposal no later than December 31, 2002.
The "withholding tax system" would require a paying agent established in a
member state to withhold tax at a minimum rate of 20% from any interest,
discount or premium paid to an individual resident in another member state,
unless such an individual presents a certificate obtained from the tax
authorities of the member state in which he is resident confirming that those
authorities are aware of the payment due to that individual. The "information
reporting system" would require a member state to supply to other member states
details of any payment of interest, discount or premium made by the paying
agents within its jurisdiction to an individual resident in another member
state. For these purposes, the term "paying agent" is widely defined and
includes an agent who is responsible for the payment of interest, discounts or
premiums for the immediate benefit of an individual beneficially entitled
thereto.
THE INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION.
PROSPECTIVE HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER U.S. FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECTS OF CHANGES IN SUCH
LAWS.
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<PAGE> 159
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the SEC set forth in no-action
letters issued to Exxon Capital Holdings Corp. and Morgan Stanley & Co. Inc.,
among others, we believe that exchange notes issued pursuant to the Exchange
Offer in exchange for outstanding notes may be offered for resale, resold and
otherwise transferred by holders thereof under U.S. federal securities laws
(other than any holder which is (i) an "affiliate" of ours within the meaning of
Rule 405 under the Securities Act, (ii) a broker-dealer who acquired exchange
the notes directly from us, or (iii) broker-dealers who acquired exchange notes
as a result of market-making or other trading activities) without compliance
with the registration and prospectus delivery provisions for the Securities Act
provided that such exchange notes are acquired in the ordinary course of such
holders' business, and such holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of such exchange notes, provided that
broker-dealers ("Participating Broker-Dealers") receiving exchange notes in the
Exchange Offer will be subject to a prospectus delivery requirement with respect
to resales of such exchange notes. To date, the staff of the SEC has taken the
position that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the outstanding notes to the Initial
Purchasers thereof) with the prospectus contained in the Registration Statement.
Pursuant to the Registration Rights Agreements, we have agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this prospectus in connection with the
resale of such exchange notes. We have agreed that, for a period of 180 days
after the Exchange Offer has been consummated, we will make this prospectus, and
any amendment or supplement to this prospectus, available to any broker-dealer
that requests such documents in the letter of transmittal.
Each holder of outstanding notes who wishes to exchange its outstanding
notes for exchange notes in the Exchange Offer will be required to make certain
representations to us as set forth in "The Exchange Offer". In addition, each
holder who is a broker-dealer and who receives Exchange Notes for its own
account in exchange for outstanding notes that were acquired by it as a result
of market-making activities or other trading activities, will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such exchange notes.
Holders who tender outstanding notes in the Exchange Offer with the
intention to participate in a distribution of the exchange notes may not rely
upon the Exxon Capital Holdings Corp., the Morgan Stanley & Co. Inc. or similar
no-action letters.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the Exchange Offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the outstanding notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreements.
Exchange notes may only be offered in The Netherlands or elsewhere to
persons who trade or invest in securities in the conduct of their profession or
trade within the meaning of the Securities Transactions Supervision Act 1995
(Wet Toezicht Effectenverkeer 1995) and its implementing regulations (which
includes banks, securities intermediaries (including dealers and brokers),
insurance companies, pension
152
<PAGE> 160
funds, other institutional investors, and commercial enterprises which as an
ancillary activity regularly invest in securities).
LEGAL MATTERS
Certain legal matters in connection with the notes will be passed upon for
Flowserve by Shearman & Sterling, New York, New York. Certain Dutch company law
matters relating to Flowserve Finance will be passed upon by De Brauw Blackstone
Westbroek N.V., Amsterdam, The Netherlands.
EXPERTS
The consolidated financial statements of Flowserve Corporation at December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, appearing in this Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The financial statements of Innovative Valve Technologies as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this prospectus have been so included in reliance on the
report of Arthur Andersen LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Ingersoll-Dresser Pump Company as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at:
- the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington
DC 20549;
- the public reference facilities at the SEC's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 or 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
Website at http://www.sec.gov. Reports and other information concerning us can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
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<PAGE> 161
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to other documents we file with the SEC. The information
incorporated by reference is considered to be part of this prospectus, except
for any information superseded by information in this prospectus or in any
subsequently filed document that is incorporated by reference in this
prospectus. This prospectus incorporates by reference the documents set forth
below that we have previously filed with the SEC. These documents contain
important information about our company and our finances.
<TABLE>
<CAPTION>
SEC FILING (FILE NO. 1-13179) PERIOD/DATE
----------------------------- -----------
<S> <C>
Annual Report on Form 10-K........... Year ended December 31, 1999
Proxy Statement...................... Dated March 16, 2000
Quarterly Report on Form 10-Q........ Quarter ended March 31, 2000 and
June 30, 2000
Current Reports on Form 8-K.......... July 20, 2000, August 2, 2000,
August 8, 2000, August 23, 2000
and August 30, 2000
</TABLE>
GENERAL LISTING INFORMATION
LISTING
The outstanding euro notes are listed on the Luxembourg Stock Exchange. The
exchange euro notes are expected to be listed on the Luxembourg Stock Exchange
upon the expiration of the Exchange Offer. The Articles of Association of
Flowserve Finance and the legal notice relating to the issue of the exchange
euro notes will be deposited prior to the listing with the Chief Registrar of
the District Court in Luxembourg (Greffier en Chef du Tribunal d' Arrondissement
a Luxembourg), where such documents will be available for inspection and where
copies thereof can be obtained upon request. As long as the exchange euro notes
are listed on the Luxembourg Stock Exchange, an agent for making payments on,
and transfer of, exchange euro notes will be maintained in Luxembourg. In
connection with the Exchange Offer: (a) notice will be given to the Luxembourg
Stock Exchange and published in a Luxembourg newspaper announcing the beginning
of the registered exchange offer and, following the completion of such offer,
the results of such offer; (b) a Luxembourg exchange agent, through which all
relevant documents with respect to the registered exchange offer will be made
available, will be appointed and (c) the Luxembourg exchange agent will be able
to perform all agency functions to be performed by any exchange agent, including
providing a letter of transmittal and other relevant documents to holders, and
accepting such documents on behalf of us. The exchange euro notes will be
accepted for clearance through Euroclear and Clearstream and notice will be
given to the Luxembourg Stock Exchange and published in a Luxembourg newspaper
announcing the relevant Common Codes and International Securities Identification
Numbers. We have appointed Banque Internationale a Luxembourg S.A. as our
listing, paying and transfer agent in Luxembourg and The Bank of New York as our
paying and transfer agent in New York. We reserve the right to vary such
appointment. The paying agent in Luxembourg will act as intermediary between the
holders and us.
AUTHORIZED CAPITAL
The authorized capital of Flowserve Finance is E100,000. The issued and
outstanding share capital of Flowserve Finance is E20,000, all of which is held
by Flowserve International, Inc.
CONSENTS
We have obtained all necessary consents, approvals and authorizations in
connection with the issue of the exchange euro notes. The issue of the exchange
euro notes will be authorized by resolutions of the Board of Managing Directors
of Flowserve Finance.
154
<PAGE> 162
NO MATERIAL CHANGE
Except as disclosed in this prospectus, there has been no material change
in the financial position of Flowserve and its subsidiaries since June 30, 2000.
LITIGATION
Neither Flowserve nor any of its subsidiaries or affiliates is involved in
any litigation or arbitration proceedings which relate to claims or amounts
which are material in the context of the issue of the euro notes that may have,
or have had during the 12 months preceding the date of this prospectus, a
material adverse effect on the financial position of Flowserve, nor, so far as
any of them is aware, is any such proceeding pending or threatened.
RESPONSIBILITY STATEMENT
Having made all reasonable enquiries, Flowserve Finance confirms that, to
the best of its knowledge and belief, the information contained in this
prospectus with regard to Flowserve Finance and the euro notes is true and
accurate in all material respects, that this prospectus is not misleading and
that there are no other facts the omission of which would in the context of the
issue of the euro notes make any statement herein, whether of fact or opinion,
misleading in any material respect. Flowserve Finance accepts responsibility
accordingly.
PRESCRIPTION
Under New York's statute of limitations, any legal action upon the euro
notes in respect of principal or interest must be commenced within six years
after the payment thereof is due. Thereafter, such principal or interest will
become generally unenforceable.
MEETINGS
The indenture governing the euro notes does not specifically require
regular meetings of holders of the euro notes. However, under Section 13.07 of
the indenture governing the euro notes, the trustee, the paying agent and the
registrar may make reasonable rules for a meeting of holders of the euro notes.
AUDITORS
The consolidated accounts of Flowserve as of December 31, 1999 and 1998 and
for the three years in the period ended December 31, 1999 have been prepared in
accordance with U.S. GAAP and have been audited by Ernst & Young LLP in
accordance with United States generally accepted auditing standards. The
unaudited consolidated interim accounts for the six months ended June 30, 2000
and 1999 were prepared in accordance with U.S. GAAP.
DOCUMENTS
Copies of the following documents may be inspected at the specified office
of the paying and transfer agent in Luxembourg.
- Articles of Association of Flowserve Finance;
- The purchase agreement and registration rights agreement relating to the
euro notes;
- The indenture relating to the euro notes (which include the forms of the
respective note certificates); and
- This prospectus and registered exchange offer prospectus (if any).
Flowserve Finance intends to publish Dutch statutory accounts and it will
also publish its financial statements in accordance with U.S. GAAP. Copies of
such statutory accounts and financial statements will
155
<PAGE> 163
be available free of charge at the specified office of the paying and transfer
agent in Luxembourg for so long as the euro notes are listed on the Luxembourg
Stock Exchange.
CLEARING SYSTEMS
The euro notes have been accepted for clearance through the facilities of
Euroclear and Clearstream, Luxembourg. Relevant trading information is set forth
below.
<TABLE>
<CAPTION>
ISIN COMMON CODE
---- -----------
<S> <C> <C>
Euro notes due 2010.....................................
</TABLE>
NOTICES
All notices shall be deemed to have been given upon (i) the mailing by
first class mail, postage prepaid, of such notices to holders of the euro notes
at their registered addresses as recorded in the register; and (ii) so long as
the euro notes are listed on the Luxembourg Stock Exchange and it is required by
the rules of the Luxembourg Stock Exchange, publication of such notice to the
holders of the euro notes in English in a leading newspaper having general
circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, if
such publication is not practicable, in one other leading English language daily
newspaper with general circulation in Europe, such newspaper being published on
each business day in morning editions, whether or not it shall be published in
Saturday, Sunday or holiday editions.
156
<PAGE> 164
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FLOWSERVE CORPORATION
Audited Consolidated Financial Statements:
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Comprehensive (Loss) Income for
the Years Ended December 31, 1999, 1998 and 1997....... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and
1997................................................... F-6
Notes to Consolidated Financial Statements................ F-7
Interim Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets -- June 30, 2000 (unaudited)
and December 31, 1999.................................. F-36
Consolidated Statements of Income -- Six Months Ended June
30, 2000 and 1999
(unaudited)............................................ F-37
Consolidated Statements of Comprehensive Income -- Six
Months Ended June 30, 2000 and 1999 (unaudited)........ F-37
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 2000 and 1999 (unaudited)..................... F-38
Notes to Consolidated Financial Statements................ F-39
INNOVATIVE VALVE TECHNOLOGIES, INC.
Report of Independent Public Accountants.................. F-50
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-51
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and
1997................................................... F-52
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997... F-53
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and
1997................................................... F-54
Notes to Consolidated Financial Statements................ F-55
INGERSOLL-DRESSER PUMP COMPANY
Audited Consolidated Financial Statements:
Report of Independent Accountants......................... F-70
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-71
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... F-72
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and
1997................................................... F-73
Consolidated Statements of Partners' Equity for the Years
Ended December 31, 1999, 1998 and 1997................. F-74
Notes to Consolidated Financial Statements................ F-75
Interim Condensed Consolidated Financial Statements
(unaudited):
Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and
December 31, 1999...................................... F-100
Condensed Consolidated Statements of Income for the Six
Months ended June 30, 2000 and 1999 (unaudited)........ F-101
Condensed Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999 (unaudited).... F-102
Notes to Condensed Consolidated Financial Statements...... F-103
</TABLE>
F-1
<PAGE> 165
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Flowserve Corporation
We have audited the accompanying consolidated balance sheets of Flowserve
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of Flowserve
Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
In 1998, as discussed in Note 6 to the consolidated financial statements,
the Company changed its method of accounting for costing its inventory, and as
discussed in Note 8, changed its method of accounting for certain defined
compensation arrangements.
Ernst & Young LLP
Dallas, Texas
February 10, 2000 except for Note 16,
as to which date is July 14, 2000 and
Note 15, as to which date
is August 9, 2000
F-2
<PAGE> 166
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 30,463 $ 24,928
Accounts receivable, net.................................. 213,625 234,191
Inventories............................................... 168,356 199,286
Prepaids and other current assets......................... 41,344 28,885
-------- --------
Total current assets.............................. 453,788 487,290
Property, plant and equipment, net.......................... 209,976 209,032
Intangible assets, net...................................... 96,435 99,875
Other assets................................................ 77,952 74,000
-------- --------
Total assets................................................ $838,151 $870,197
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 72,103 $ 76,745
Notes payable............................................. 734 3,488
Income taxes.............................................. 7,878 17,472
Accrued liabilities....................................... 111,820 107,028
Long-term debt due within one year........................ 3,125 14,393
-------- --------
Total current liabilities......................... 195,660 219,126
Long-term debt due after one year........................... 198,010 186,292
Post-retirement benefits and deferred items................. 136,207 120,015
Commitments and contingencies
Shareholders' equity
Serial preferred stock, $1.00 par value, no shares
issued................................................. -- --
Common shares, $1.25 par value............................ 51,856 51,856
Shares authorized -- 120,000
Shares issued and outstanding -- 41,484
Capital in excess of par value............................ 67,963 70,698
Retained earnings......................................... 344,254 353,249
-------- --------
464,073 475,803
Treasury stock, at cost -- 4,071 and 3,817 shares......... (93,448) (90,404)
Accumulated other comprehensive income.................... (62,351) (40,635)
-------- --------
Total shareholders' equity........................ 308,274 344,764
-------- --------
Total liabilities and shareholders' equity.................. $838,151 $870,197
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 167
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales.................................................... $1,061,272 $1,083,086 $1,152,196
Cost of sales............................................ 697,928 667,753 703,319
---------- ---------- ----------
Gross profit............................................. 363,344 415,333 448,877
Selling and administrative expense..................... 275,884 265,556 285,890
Research, engineering and development expense.......... 25,645 26,372 26,893
Merger transaction and restructuring expense........... 15,860 -- 44,531
Merger integration expense............................. 14,207 38,326 6,982
---------- ---------- ----------
Operating income......................................... 31,748 85,079 84,581
Interest expense....................................... 15,504 13,175 13,275
Other income, net...................................... (2,001) (1,253) (7,107)
Gain on sale of subsidiary............................. -- -- (11,376)
---------- ---------- ----------
Earnings before income taxes............................. 18,245 73,157 89,789
Provision for income taxes............................... 6,068 25,502 38,223
---------- ---------- ----------
Earnings before cumulative effect of change in accounting
principle.............................................. 12,177 47,655 51,566
Cumulative effect of change in accounting principle...... -- (1,220) --
---------- ---------- ----------
Net earnings............................................. $ 12,177 $ 48,875 $ 51,566
========== ========== ==========
Earnings per share (basic and diluted)
Before cumulative effect of change in accounting
principle........................................... $ 0.32 $ 1.20 $ 1.26
Cumulative effect of change in accounting principle.... -- .03 --
---------- ---------- ----------
Net earnings per share................................... $ 0.32 $ 1.23 $ 1.26
========== ========== ==========
Average shares outstanding............................... 37,856 39,898 40,896
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net earnings............................................. $ 12,177 $ 48,875 $ 51,566
Other comprehensive expense:
Foreign currency translation adjustments............... 20,874 9,861 24,002
Nonqualified pension plan adjustment................... 842 -- --
---------- ---------- ----------
Other comprehensive expense.............................. 21,716 9,861 24,002
---------- ---------- ----------
Comprehensive (loss) income.............................. $ (9,539) $ 39,014 $ 27,564
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 168
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------- -------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMMON SHARES
Beginning balance -- January
1........................... 41,484 $ 51,856 41,484 $ 51,856 41,482 $ 51,854
Stock activity under stock
plans....................... -- -- -- -- 2 2
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... 41,484 $ 51,856 41,484 $ 51,856 41,484 $ 51,856
------- -------- ------- -------- ------- --------
CAPITAL IN EXCESS OF PAR VALUE
Beginning balance -- January
1........................... $ 70,698 $ 70,655 $ 72,434
Stock activity under stock
plans....................... (2,735) 43 (1,779)
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... $ 67,963 $ 70,698 $ 70,655
------- -------- ------- -------- ------- --------
RETAINED EARNINGS
Beginning balance -- January
1........................... $353,249 $326,681 $298,563
Stock activity under stock
plans....................... -- -- 3
Net earnings................... 12,177 48,875 51,566
Cash dividends declared........ (21,172) (22,307) (23,451)
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... $344,254 $353,249 $326,681
------- -------- ------- -------- ------- --------
TREASURY STOCK
Beginning balance -- January
1........................... (3,817) $(90,404) (881) $(23,145) (1,081) $(27,455)
Stock activity under stock
plans....................... 154 3,903 184 4,782 200 4,310
Treasury stock repurchases..... (315) (5,250) (2,841) (64,508) -- --
Rabbi Trust adjustment......... (93) (1,697) (279) (7,533) -- --
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... (4,071) $(93,448) (3,817) $(90,404) (881) $(23,145)
------- -------- ------- -------- ------- --------
ACCUMULATED OTHER COMPREHENSIVE
INCOME
Beginning balance -- January
1........................... $(40,635) $(30,774) $ (6,772)
Foreign currency translation
adjustment.................. (20,874) (9,861) (24,002)
Nonqualified pension plan
adjustment.................. (842) -- --
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... $(62,351) $(40,635) $(30,774)
------- -------- ------- -------- ------- --------
TOTAL SHAREHOLDERS' EQUITY
Beginning balance -- January
1........................... 37,667 $344,764 40,603 $395,273 40,401 $388,624
Net changes in shareholders'
equity...................... (254) (36,490) (2,936) (50,509) 202 6,649
------- -------- ------- -------- ------- --------
Ending balance -- December
31.......................... 37,413 $308,274 37,667 $344,764 40,603 $395,273
======= ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 169
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net earnings.............................................. $ 12,177 $ 48,875 $ 51,566
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 35,045 35,110 35,277
Amortization........................................... 4,554 4,189 3,656
Gain on sale of subsidiary, net of income taxes........ -- -- (7,417)
Loss on the sale of fixed assets....................... 440 57 33
Cumulative effect of change in accounting principle.... -- (1,220) --
Change in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable.................................. 12,723 3,015 (18,401)
Inventories.......................................... 28,359 (11,507) (9,943)
Loss on impairment of facilities and equipment....... 2,834 -- --
Prepaid expenses..................................... (12,910) 8,718 (10,287)
Other assets......................................... 436 (11,066) (13,232)
Accounts payable..................................... (1,919) 5,654 1,574
Accrued liabilities.................................. 6,333 (25,848) 48,806
Income taxes......................................... (12,395) 1,051 (2,005)
Post-retirement benefits and deferred items.......... 8,072 (3,709) 13,195
Net deferred taxes................................... (1,817) 1,033 (1,477)
Other................................................ -- (248) (1,342)
-------- -------- --------
Net cash provided by operating activities................... 81,932 54,104 90,003
-------- -------- --------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of disposals.................... (40,535) (38,249) (39,560)
Payments for acquisitions, net of cash acquired........... (5,743) (19,951) (10,461)
Proceeds from sale of subsidiary.......................... -- -- 18,793
Other..................................................... -- (427) 1,777
-------- -------- --------
Net cash flows used by investing activities................. (46,278) (58,627) (29,451)
-------- -------- --------
CASH FLOWS -- FINANCING ACTIVITIES:
Net repayments under lines of credit...................... (13,645) (2,314) 576
Payments on long-term debt................................ (6,370) (20,212) (15,760)
Proceeds from long-term debt.............................. 18,776 76,950 929
Repurchase of common stock................................ (5,250) (64,508) --
Proceeds from issuance of common stock.................... (529) 4,764 2,584
Dividends paid............................................ (21,172) (22,307) (26,121)
Other..................................................... (842) -- --
-------- -------- --------
Net cash flows used by financing activities................. (29,032) (27,627) (37,792)
-------- -------- --------
Effect of exchange rate changes............................. (1,087) (1,524) (3,091)
-------- -------- --------
Net change in cash and cash equivalents..................... 5,535 (33,674) 19,669
Cash and cash equivalents at beginning of year.............. 24,928 58,602 38,933
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 30,463 $ 24,928 $ 58,602
======== ======== ========
Taxes paid.................................................. $ 19,336 $ 23,579 $ 27,636
Interest paid............................................... 16,128 11,190 13,420
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 170
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority-owned subsidiaries. Intercompany profits,
transactions and balances have been eliminated. Investments in unconsolidated
affiliated companies, which represent all nonmajority ownership interests, are
carried on the equity basis, which approximates the Company's equity interest in
their underlying net book value.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIS OF COMPARISON
Certain amounts in 1998 and 1997 have been reclassified or restated to
conform with the 1999 presentation.
BUSINESS COMBINATIONS
Business combinations accounted for under the pooling of interests method
of accounting combine the assets, liabilities and shareholders' equity of the
acquired entity with the Company's respective accounts at recorded values.
Prior-period financial statements have been restated to give effect to the
transactions as if they had occurred at the beginning of all periods presented.
Business combinations accounted for under the purchase method of accounting
include the results of operations of the acquired business from the date of
acquisition. Net assets of the companies acquired are recorded at their fair
value to the Company at the date of acquisition and any excess of purchase price
over fair value of the identifiable assets is recorded as goodwill.
REVENUE RECOGNITION
Revenues and costs are generally recognized as units are shipped. Revenue
for certain longer-term contracts is recognized based on the percentage of
completion. Progress billings are generally shown as a reduction of inventory
unless such billings are in excess of accumulated costs, in which case such
balances are included in accrued liabilities.
SHORT-TERM INVESTMENTS AND CREDIT RISK
The Company places its temporary cash investments with financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution. These investments, with an original maturity of three
months or less when purchased, are classified cash equivalents. They are highly
liquid with principal values not subject to significant risk of change due to
interest rate fluctuations. Credit risk is also limited due to the large number
of customers in the Company's customer base, the Company's diverse product line
and the dispersion of the Company's customers across many geographic regions. As
of December 31, 1999, the Company does not believe that it had significant
concentrations of credit risk.
F-7
<PAGE> 171
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of the allowance for doubtful accounts
of $5,705 and $4,533 at December 31, 1999 and 1998, respectively.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined for
certain inventories by the last-in, first-out (LIFO) method and for other
inventories by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT, AND DEPRECIATION
Property, plant and equipment are stated on the basis of cost. Depreciation
is computed by the straight-line method based on the estimated useful lives of
the depreciable assets for financial statement purposes and by accelerated
methods for income tax purposes. The estimated useful lives of the assets are:
<TABLE>
<S> <C>
Buildings, improvements, furniture and fixtures....... 5 to 35 years
Machinery and equipment............................... 3 to 12 years
Capital leases........................................ 3 to 25 years
</TABLE>
INTANGIBLES
The excess cost over the fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 15 to 40 years. The carrying value of
goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill will
be adjusted accordingly. Accumulated amortization was $21,531 and $14,062 as of
December 31, 1999 and 1998, respectively.
HEDGING/FORWARD CONTRACTS
The Company is party to forward contracts for purposes of hedging certain
transactions denominated in foreign currencies. The Company has a
risk-management and derivatives policy statement outlining the conditions in
which the Company can enter into hedging or forward transactions. Gains and
losses on forward contracts qualifying as hedges are deferred and included in
the measurement of the related foreign currency transaction. Gains and losses on
hedges of existing assets or liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income as part of
those carrying amounts. Gains and losses related to hedges of anticipated
transactions are recognized in income as the transactions occur. The carrying
amounts in the Company's financial instruments approximate fair value as defined
under Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments." Fair value is estimated by reference
to quoted prices by financial institutions. The Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments, but it expects all counterparties to meet their
obligations, given their high credit ratings. As of December 31, 1999, the
Company had no significant outstanding hedges or forward contracts with third
parties.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates, other than
those located in highly inflationary countries, are translated at current
exchange rates, while income and expenses are translated at average rates for
the period. For entities in highly inflationary countries, a combination of
current and historical rates is used to determine currency gains and losses
resulting from financial-statement translation and those resulting from
transactions. Translation gains and losses are reported as a component of
shareholders'
F-8
<PAGE> 172
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity, except for those associated with highly inflationary countries, which
are reported directly in the consolidated statements of income.
ACCOUNTING DEVELOPMENTS
In 1999, the Company adopted Financial Accounting Standards Board Statement
of Position (SOP) No. 98-1, "Accounting for Costs of Software Developed or
Obtained for Internal Use." SOP 98-1 is effective for fiscal periods beginning
after December 15, 1998, and establishes guidelines to determine whether
software-related costs should be capitalized or expensed. The adoption of this
standard did not materially impact Flowserve's reported financial position,
results of operation or cash flows.
In 1999, the Financial Accounting Standards Board also issued one Statement
of Financial Accounting Standard (SFAS) that was applicable to the Company --
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. This standard is not expected to
materially impact Flowserve's reported financial position, results of operations
or cash flows.
EARNINGS PER SHARE
Earnings per share is presented in accordance with SFAS No. 128, "Earnings
Per Share." The Company's potentially dilutive common stock equivalents have
been immaterial for all periods presented. Accordingly, basic earnings per share
is equal to diluted earnings per share and is presented on the same line for
income statement presentation.
INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes."
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), and related interpretations in
accounting for its employee stock options. Under APB No. 25, no compensation
expense is recorded if the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant. Accordingly, the
Company has no compensation expense recorded.
NOTE 2: MERGER
On July 22, 1997, shareholders of Durco International Inc. (Durco) and
BW/IP, Inc. (BW/IP) voted to approve a merger between Durco and BW/IP in a
stock-for-stock merger of equals that was accounted for as a pooling of
interests transaction. As part of the merger agreement, the Company changed its
name from Durco to Flowserve Corporation. The Company issued approximately
16,914,000 shares of common stock in connection with the merger. BW/IP
shareholders received 0.6968 shares of the Company's common stock for each
previously owned share of BW/IP stock.
The consolidated financial statements, including the accompanying notes
thereto, have been restated for all periods prior to the merger to include the
financial position, results of operations, and cash flows of BW/IP and Durco as
if the merger had occurred at the beginning of all periods presented.
In connection with the merger, the Company recorded a one-time charge of
$11,900 for merger-related expenses in 1997. These expenses included severance
and other expenses triggered by the merger
F-9
<PAGE> 173
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and investment banking fees, legal fees, and other costs related to the merger,
which are primarily nondeductible for tax purposes.
In 1997, the Company developed a merger integration program that includes
facility rationalizations in North America and Europe, organizational
realignments at the corporate and division levels, procurement initiatives,
investments in training, and support for the service and repair operations. In
the fourth quarter of 1997, the Company recognized a one-time restructuring
charge of $32,600 related to this program. Other nonrecurring expenses related
to the merger (merger integration expense) were incurred in 1999, 1998 and 1997
in order to achieve the planned synergies. These expenses of $14,200, $38,300
and $7,000, respectively, were principally for costs for consultants, relocation
and training.
As of June 30, 1999, the restructuring portion of the merger integration
had been completed. The Company paid severance to approximately 331 employees at
a cost of $22,400. Expenditures charged to the 1997 restructuring reserve were:
<TABLE>
<CAPTION>
OTHER EXIT
SEVERANCE COSTS TOTAL
--------- ---------- --------
<S> <C> <C> <C>
Balance at October 27, 1997........................... $22,400 $10,200 $ 32,600
Cash expenditures..................................... (3,400) (500) (3,900)
Noncash expenditures.................................. -- (1,200) (1,200)
------- ------- --------
Balance at December 31, 1997.......................... 19,000 8,500 27,500
Cash expenditures..................................... (16,300) (3,100) (19,400)
Noncash expenditures.................................. -- (5,400) (5,400)
------- ------- --------
Balance at December 31, 1998.......................... 2,700 -- 2,700
Cash expenditures..................................... (2,700) -- (2,700)
Noncash expenditures.................................. -- -- --
------- ------- --------
Balance at December 31, 1999.......................... $ -- $ -- $ --
======= ======= ========
</TABLE>
NOTE 3: RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring
program that included a one-time charge of $15,860 recorded as restructuring
expense. The restructuring charge related to the planned closure of 10
facilities and a corresponding reduction in workforce at those locations, as
well as at other locations that are part of the restructuring.
The restructuring program is expected to result in a net reduction of
approximately 300 employees at a cost of $12,900. In addition, exit costs
associated with the facilities closings are estimated at $2,960. As of December
31, 1999, the program had resulted in a net reduction of 64 employees.
Expenditures charged to the 1999 restructuring reserve were:
<TABLE>
<CAPTION>
OTHER EXIT
SEVERANCE COSTS TOTAL
--------- ---------- -------
<S> <C> <C> <C>
Balance at December 24, 1999........................... $12,900 $2,960 $15,860
Cash expenditures...................................... (102) -- (102)
Noncash expenditures................................... -- -- --
------- ------ -------
Balance at December 31, 1999........................... $12,798 $2,960 $15,758
======= ====== =======
</TABLE>
F-10
<PAGE> 174
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: ACQUISITIONS AND DISPOSITIONS
In October 1999, the Company purchased certain assets and liabilities of
Honeywell's industrial control-valve product line and production equipment
located near Frankfurt, Germany. The Company expects to complete the phased move
of this operation to its existing control-valve manufacturing facilities in
Europe by March 2000. This business generated revenues of about $7 million in
1999. In October 1999, the Company also acquired R&C Valve Service, Inc. The
assets of this company were integrated into the Company's existing service
center network during the fourth quarter of 1999.
In July 1998, the Company purchased certain assets and liabilities of the
Valtek Engineering Division of Allen Power Engineering, Limited, from Rolls
Royce plc. The Valtek Engineering Division was the British licensee for many of
Flowserve's control-valve products, with exclusive territorial rights for
portions of Europe, the Middle East and Africa since 1971.
In September 1998, the Company acquired the remaining 49% ownership
interest in Durametallic Asia Pte. Ltd., a fluid sealing manufacturer located in
Singapore, from its joint-venture partner. Also in 1998, the Company acquired
the outstanding shares of ARS Lokeren NV, a Belgian company, and ZAR Beheer BV,
a Dutch company, which specialize in the service and repair of industrial
valves, with service and repair facilities near Rotterdam, the Netherlands, and
Ghent and Antwerp, Belgium.
In 1997, the Company purchased the 49% remaining shares of its joint
venture in Argentina, Byron Jackson Argentina I.C.S.A., and purchased the
engineered pump business of Stork Pompen, B.V.
The Company sold its wholly owned Metal Fab subsidiary for $18,793 in
December 1997 and realized a pretax gain of $11,376. In addition, in 1997 the
Company sold its Filtration Systems Division.
NOTE 5: STOCK PLANS
The Company maintains shareholder-approved stock option plans, which in
1999 provided for the grant of an additional 1,900,000 options to purchase
shares of the Company's common stock. At December 31, 1999, approximately
1,089,500 options were available for grant. Options under these plans have been
granted to officers and employees to purchase shares of common stock at or above
the fair market value at the date of grant. Generally, these options, whether
granted from the current or prior plans, become exercisable over staggered
periods, but expire after 10 years from the date of the grant. The plan provides
that any option may include a stock appreciation right; however, none has been
granted since 1989. The aggregate number of shares exercisable was 2,117,816 at
December 31, 1999; 1,703,171 at December 31, 1998; and 1,707,677 at December 31,
1997.
Stock options issued to officers and other employees were:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at beginning of
year......................... 2,831,614 $23.49 2,246,557 $25.05 1,842,239 $22.83
Granted......................... 1,249,501 18.29 794,240 18.50 690,270 26.53
Exercised....................... (28,149) 11.63 (167,867) 20.32 (285,952) 14.30
Cancelled....................... (130,037) 23.88 (41,316) 25.80 -- --
--------- ------ --------- ------ --------- ------
Outstanding at end of year...... 3,922,929 $21.86 2,831,614 $23.49 2,246,557 $25.05
========= ====== ========= ====== ========= ======
</TABLE>
F-11
<PAGE> 175
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average contractual life of options outstanding is 7.4 years.
Additional information relating to the range of options outstanding at December
31, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
REMAINING AVERAGE EXERCISABLE AT AVERAGE
CONTRACTUAL NUMBER EXERCISE PRICE DECEMBER 31, EXERCISE PRICE
RANGE OF EXERCISE PRICES PER SHARE LIFE OUTSTANDING PER SHARE 1999 PER SHARE
---------------------------------- ----------- ----------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.95 - $11.76.................. 2.0 33,106 $ 8.58 33,106 $ 8.58
$11.76 - $27.44.................. 7.9 3,131,773 $19.67 1,427,444 $21.54
$27.44 - $39.20.................. 5.8 758,050 $31.48 657,266 $31.72
--------- ---------
3,922,929 2,117,816
========= =========
</TABLE>
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The "fair
value" for these options at the date of grant was estimated using a binomial
option pricing model (a modified Black-Scholes model). The assumptions used in
this valuation are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.1% 5.6% 5.5%
Dividend yield.............................................. 3.3% 3.3% 2.0%
Stock volatility............................................ 32.5% 34.1% 35.5%
Average expected life (years)............................... 9.1 8.6 8.1
</TABLE>
The options granted had a weighted average "fair value" per share on date
of grant of $5.75 in 1999, $6.14 in 1998 and $10.69 in 1997. For purposes of pro
forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting periods.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net earnings
As reported........................................... $12,177 $48,875 $51,566
Pro forma............................................. 8,671 47,030 48,224
Earnings per share (basic and diluted)
As reported........................................... $ 0.32 $ 1.23 $ 1.26
Pro forma............................................. 0.23 1.18 1.18
</TABLE>
Because the determination of the fair value of all options granted includes
an expected volatility factor and because additional option grants are expected
to be made each year, the above pro forma disclosures are not representative of
pro forma effects for future years.
The amended restricted stock plan as approved by shareholders in 1999
authorizes the grant of up to 250,000 shares of the Company's common stock. In
general, the shares cannot be transferred for a period of at least one but not
more than 10 years and are subject to forfeiture during the restriction period.
The fair value of the shares is amortized to compensation expense over the
periods in which the restrictions lapse. Restricted stock grants were 181,213
shares in 1999, 10,165 shares in 1998 and 21,700 shares in 1997. The weighted
average fair value of the restricted stock grants at date of grant was $18.66 in
1999,
F-12
<PAGE> 176
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$24.07 in 1998 and $27.73 in 1997. Total compensation expense recognized in the
income statement for all stock-based awards was $878 in 1999, $485 in 1998 and
$510 in 1997.
NOTE 6: DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
INVENTORIES
Inventories and the method of determining cost were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Raw materials.......................................... $ 29,674 $ 26,088
Work in process and finished goods..................... 182,493 226,843
Less: Progress billings................................ (5,746) (15,024)
-------- --------
206,421 237,907
LIFO reserve........................................... (38,065) (38,621)
-------- --------
Net inventory.......................................... $168,356 $199,286
======== ========
Percent of inventory accounted for by LIFO............. 64% 61%
Percent of inventory accounted for by FIFO............. 36% 39%
</TABLE>
The U.S. operations of the former BW/IP changed its method of accounting
for inventory to LIFO during 1998. Because the December 31, 1997, BW/IP
inventory valued at FIFO is the opening LIFO inventory, there is neither a
cumulative effect to January 1, 1998, nor pro forma amounts of retroactively
applying the change to LIFO. The effect of the change in 1998 was not
significant.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Land.................................................. $ 16,311 $ 17,856
Buildings, improvements, furniture and fixtures....... 189,561 179,588
Machinery, equipment, capital leases and construction
in progress......................................... 293,310 290,730
--------- ---------
499,182 488,174
Less: Accumulated depreciation........................ (289,206) (279,142)
--------- ---------
Net property, plant and equipment..................... $ 209,976 $ 209,032
========= =========
</TABLE>
F-13
<PAGE> 177
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Pension assets.......................................... $ -- $11,461
Deferred tax assets..................................... 33,914 22,098
Deferred compensation funding........................... 13,773 10,408
Investments in unconsolidated affiliates................ 7,091 5,331
Prepaid financing fees.................................. 2,882 935
Long-term notes receivable.............................. 1,978 2,914
Other................................................... 18,314 20,853
------- -------
Total................................................... $77,952 $74,000
======= =======
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Wages and other compensation........................... $ 56,285 $ 62,249
Accrued restructuring, current portion................. 15,758 2,730
Accrued commissions and royalties...................... 8,876 7,494
Other.................................................. 30,901 34,555
-------- --------
Total.................................................. $111,820 $107,028
======== ========
</TABLE>
POST-RETIREMENT BENEFITS AND DEFERRED ITEMS
Post-retirement benefits and deferred items were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Post-retirement benefits............................... $ 65,359 $ 64,311
Deferred compensation.................................. 19,251 13,231
Deferred taxes......................................... 26,233 16,977
Other.................................................. 25,364 25,496
-------- --------
Total.................................................. $136,207 $120,015
======== ========
</TABLE>
F-14
<PAGE> 178
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: DEBT AND LEASE OBLIGATIONS
Long-term debt, including capital lease obligations, consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Senior Notes, interest of 7.14% and 7.17%............... $ 50,000 $ 58,333
Revolving credit agreement, interest at 7.07% in 1999
and 5.50% in 1998..................................... 140,000 124,000
Loan, due annually through 2002, interest at 8.94%...... 10,156 12,321
Credit agreements, average interest rate 6.20% in
1998.................................................. -- 2,935
Capital lease obligations and other..................... 979 3,096
-------- --------
201,135 200,685
Less amounts due within one year........................ 3,125 14,393
-------- --------
Total long-term debt.................................... $198,010 $186,292
======== ========
</TABLE>
Maturities of long-term debt, including capital lease obligations, for the
next five years are:
<TABLE>
<S> <C>
2000...................................................... $ 3,125
2001...................................................... 3,125
2002...................................................... 9,906
2003...................................................... 10,000
2004...................................................... 10,000
Thereafter................................................ 164,979
--------
Total..................................................... $201,135
========
</TABLE>
In October 1999, the Company entered into a five-year $600,000 revolving
credit agreement that replaced the Company's existing $200,000 agreement. As of
December 31, 1999, the Company had commitments available of $460,000, and
$140,000 was outstanding. The Company has an interest-rate swap that fixes
$50,000 usage of the revolving credit facility at 6.74%.
In connection with a German acquisition, the Company converted a
deutsche-mark obligation through a currency swap agreement against its U.S.
dollar private placement to fund the acquisition. The effective rate on the loan
swap was 8.94%. Unrealized gains and losses on the hedge are not recognized in
income, but are shown in the cumulative translation adjustment account included
in shareholders' equity with the related amounts due to and from the
counterparty included in long-term debt. The maturity and repayment terms of the
swap match precisely the maturity and repayment term of the underlying debt.
In 1992, the Company issued $50,000 Senior Notes requiring annual payments
of $8,333 through 1999, bearing interest at 7.92%. The final payment was made
May 17, 1999. In 1996, the Company issued $30,000 Senior Notes requiring annual
principal payments of $6,000 commencing in 2002, bearing interest of 7.14%. In
1997, the Company issued $20,000 in Senior Notes, bearing interest of 7.17% with
principal payments of $4,000 due annually, commencing in 2003.
The provisions of the credit agreements require the Company to meet or
exceed specified financial covenants that are defined in the agreements. The
agreements also contain limitations or restrictions relating to new indebtedness
and liens, disposition of assets, and payment of dividends or other
distributions. All such covenants were met in each of the years presented. The
most restrictive of these include a debt-to-capital ratio and a minimum tangible
net worth requirement.
F-15
<PAGE> 179
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company had short-term credit facilities
available from banks under which it could borrow at local market rates up to
$58,500. Under these facilities, the Company had borrowings outstanding of
$3,488 at December 31, 1998. The weighted average interest rate on these
borrowings at December 31, 1998, was 6.0%. Borrowings against these facilities
were used primarily to support the operations of foreign subsidiaries. These
short-term credit facilities were terminated in 1999 and replaced by additional
available credit under the revolving credit agreement.
As of December 31, 1999, the Company had contingent obligations of $10,518
relating to bank guarantees and credit lines and $27,083 relating to outstanding
letters of credit and performance bonds.
The Company has noncancelable operating leases for certain offices, service
and quick response centers, certain manufacturing and operations facilities, and
machinery, equipment and automobiles. Rental expense relating to operating
leases was $11,648 in 1999, $11,798 in 1998 and $15,000 in 1997.
The future minimum lease payments under noncancelable operating leases are:
<TABLE>
<S> <C>
2000....................................................... $ 8,243
2001....................................................... 5,870
2002....................................................... 4,594
2003....................................................... 3,085
2004....................................................... 2,837
Thereafter................................................. 4,096
-------
Total...................................................... $28,725
=======
</TABLE>
NOTE 8: DEFERRED COMPENSATION -- RABBI TRUST
In September 1998, the Company adopted the provisions of EITF No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested." This standard established new guidelines for
deferred compensation arrangements where amounts earned by an employee are
invested in the employer's stock that is placed in a Rabbi Trust. The EITF
requires that the Company's stock held in the trust be recorded at historical
cost, the corresponding deferred compensation liability recorded at the current
fair value of the Company's stock, and the stock held in the Rabbi Trust
classified as treasury stock. The difference between the historical cost of the
stock and the fair value of the liability at September 30, 1998, has been
recorded as a cumulative effect of a change in accounting principle of $1,220,
net of tax. Prior-year financial statements have not been restated to reflect
the change in accounting principle. The effect of the change on 1997 income
before the cumulative effect would have been a reduction of $490. Subsequent to
the adoption of the provision, the effect on continuing operations has been
immaterial.
NOTE 9: RETIREMENT BENEFITS
The Company sponsors several noncontributory defined benefit pension plans,
covering substantially all U.S. employees, which provide benefits based on years
of service and compensation. Retirement benefits for all other employees are
provided through defined contribution pension plans, cash balance pension plans
and government-sponsored retirement programs. All defined benefit pension plans
are funded based on independent actuarial valuations to provide for current
service and an amount sufficient to amortize unfunded prior service over periods
not to exceed 30 years.
F-16
<PAGE> 180
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net defined benefit pension expense (including both qualified and
nonqualified plans) was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the period....... $ 7,817 $ 6,411 $ 5,627
Interest cost on projected benefit obligations....... 14,978 14,704 13,931
Gain on plan assets.................................. (19,137) (18,086) (16,284)
Unrecognized prior service (benefit) cost............ (311) 537 (427)
Unrecognized net (asset) obligation.................. (529) (499) 576
-------- -------- --------
Net defined benefit pension expense.................. $ 2,818 $ 3,067 $ 3,423
======== ======== ========
</TABLE>
The following table reconciles the plans' funded status to amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Projected benefit obligations......................... $208,745 $ 226,463
Plan assets, at fair value............................ 239,133 225,260
-------- ---------
Plan assets in excess of (less than) projected benefit
obligations......................................... 30,388 (1,203)
Unrecognized net transition asset..................... (716) (942)
Unrecognized net gain................................. (14,616) (622)
Unrecognized prior service (cost) benefit............. (21,426) 2,612
-------- ---------
Net pension liability................................. $ (6,370) $ (155)
======== =========
Discount rate......................................... 7.50% 6.75%
Rate of increase in compensation levels............... 4.5% 4.0%-8.0%
Long-term rate of return on assets.................... 9.5% 9.5%
</TABLE>
Following is a reconciliation of the defined benefit pension obligations:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Beginning benefit obligation............................ $226,463 $210,878
Service cost............................................ 7,817 6,411
Interest cost........................................... 14,978 14,704
Plan amendments......................................... (21,617) --
Actuarial (gain) loss................................... (4,293) 7,725
Benefits paid........................................... (14,603) (13,154)
Curtailments............................................ -- (101)
-------- --------
Ending benefit obligation............................... $208,745 $226,463
======== ========
</TABLE>
F-17
<PAGE> 181
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of the defined benefit pension assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Beginning plan assets................................... $225,260 $219,860
Return on plan assets................................... 28,081 18,093
Company contributions................................... 395 462
Benefits paid........................................... (14,603) (13,155)
-------- --------
Ending plan assets...................................... $239,133 $225,260
======== ========
</TABLE>
The Company sponsors several defined contribution pension plans covering
substantially all U.S. and Canadian employees and certain other foreign
employees. Employees may contribute to these plans, and these contributions are
matched in varying amounts by the Company. The Company may also make additional
contributions for eligible employees. Defined contribution pension expense for
the Company was $7,712 in 1999, $7,309 in 1998 and $7,733 in 1997. Effective
July 1, 1999, three existing defined benefit programs for U.S. employees were
consolidated into one program. The plan was amended to reflect the conversion of
primarily final-average-pay methodologies into a cash balance design and
resulted in lowering the defined benefit pension obligation by $21,617 in 1999.
In conjunction with this change, new employee groups became eligible to
participate in the plan.
The Company also sponsors several defined benefit post-retirement health
care plans covering approximately 60% of future retirees and most current
retirees in the United States. These plans are for medical and dental benefits
and are provided through insurance companies and health maintenance
organizations. The plans include participant contributions, deductibles,
coinsurance provisions and other limitations, and are integrated with Medicare
and other group plans. The plans are funded as insured benefits and health
maintenance organization premiums are incurred.
Net post-retirement benefit expense comprised:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period......... $ 957 $ 882 $ 916
Interest cost on accumulated post-retirement benefit
obligations............................................. 3,841 3,749 3,652
Amortization of unrecognized prior service cost........... (1,333) (1,497) (2,012)
------- ------- -------
Net post-retirement benefit expense....................... $ 3,465 $ 3,134 $ 2,556
======= ======= =======
</TABLE>
Following is a reconciliation of the accumulated post-retirement benefits
obligations:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Beginning accumulated post-retirement benefit
obligation.............................................. $57,313 $53,072
Service cost.............................................. 957 882
Interest cost............................................. 3,841 3,749
Plan amendments........................................... (7,565) --
Actuarial (gain) loss..................................... (1,396) 3,460
Benefits paid............................................. (4,105) (3,850)
------- -------
Ending accumulated post-retirement benefit obligation..... $49,045 $57,313
======= =======
</TABLE>
F-18
<PAGE> 182
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of post-retirement benefit
amounts recognized in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Actuarial present value of accumulated post-retirement
benefit obligations:.................................... $49,045 $57,313
Unrecognized prior service benefit........................ 13,568 7,369
Unrecognized net gain (loss).............................. 1,059 (371)
------- -------
Accrued post-retirement benefits.......................... $63,672 $64,311
======= =======
Discount rate............................................. 7.50% 6.75%
</TABLE>
The assumed ranges for the annual rates of increase in per capita costs for
periods prior to Medicare were 7.5% for 1999 with a gradual decrease to 6.0% for
2002 and future years, and for periods after Medicare, 5.5% for 1999 with a
gradual decrease to 5.0% for 2002 and future years.
Increasing the assumed rate of increase in post-retirement benefit costs by
1% in each year would increase net post-retirement benefit expense by
approximately $304 and accumulated post-retirement benefit obligations by
$3,379. Reducing the assumed rate of decrease in post-retirement benefit costs
by 1% in each year would reduce net post-retirement benefit expense by
approximately $280 and accumulated benefit obligations by $3,093.
The Company made contributions to the defined benefit post-retirement plan
of $4,105 in 1999 and $3,850 in 1998.
NOTE 10: CONTINGENCIES
As of December 31, 1999, the Company was involved as a "potentially
responsible party" (PRP) at five former public waste disposal sites that may be
subject to remediation under pending government procedures. The sites are in
various stages of evaluation by federal and state environmental authorities. The
projected cost of remediating these sites, as well as the Company's alleged
"fair share" allocation, is uncertain and speculative until all studies have
been completed and the parties have either negotiated an amicable resolution or
the matter has been judicially resolved. At each site, there are many other
parties who have similarly been identified, and the identification and location
of additional parties is continuing under applicable federal or state law. Many
of the other parties identified are financially strong and solvent companies
that appear able to pay their share of the remediation costs. Based on the
Company's preliminary information about the waste disposal practices at these
sites and the environmental regulatory process in general, the Company believes
that it is likely that ultimate remediation liability costs for each site will
be apportioned among all liable parties, including site owners and waste
transporters, according to the volumes and/or toxicity of the wastes shown to
have been disposed of at the sites.
The Company is a defendant in numerous pending lawsuits (which include, in
many cases, multiple claimants) that seek to recover damages for alleged
personal injury allegedly resulting from exposure to asbestos-containing
products formerly manufactured and distributed by the Company. All such products
were used within self-contained process equipment, and management does not
believe that there was any emission of ambient asbestos fiber during the use of
this equipment.
The Company is also a defendant in several other products liability
lawsuits that are insured, subject to the applicable deductibles, and certain
other noninsured lawsuits received in the ordinary course of business.
Management believes that the Company has adequately accrued estimated losses for
such lawsuits. No insurance recovery has been projected for any of the insured
claims, because management
F-19
<PAGE> 183
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currently believes that all will be resolved within applicable deductibles. The
Company is also a party to other noninsured litigation that is incidental to its
business, and, in management's opinion, will be resolved without a material
impact on the Company's financial statements.
Although none of the aforementioned gives rise to any additional liability
that can now be reasonably estimated, the Company believes such costs will be
immaterial. The Company will continue to evaluate these contingent loss
exposures and, if they develop, recognize expense as soon as such losses can be
reasonably estimated.
NOTE 11: SHAREHOLDERS' EQUITY
In 1997, the Company increased its authorized $1.25 par value common stock
from 60,000,000 to 120,000,000 shares. The authorized shares were increased in
connection with the merger of Durco and BW/IP resulting in the formation of
Flowserve Corporation. At both December 31, 1999 and 1998, the Company had
authorized 1,000,000 shares of $1.00 par value preferred stock.
Each share of the Company's common stock contains a preferred stock
purchase right. These rights are not currently exercisable and trade in tandem
with the common stock. The rights become exercisable and trade separately in the
event of certain significant changes in common stock ownership or on the
commencement of certain tender offers that, in either case, may lead to a change
of control of the Company. Upon becoming exercisable, the rights provide
shareholders the opportunity to acquire a new series of Company preferred stock
to be then automatically issued at a preestablished price. In the event of
certain forms of acquisition of the Company, the rights also provide Company
shareholders the opportunity to purchase shares of the acquiring Company's
common stock from the acquirer at a 50% discount from the current market value.
The rights are redeemable for $0.022 per right by the Company at any time prior
to becoming exercisable and will expire in August 2006.
At December 31, 1999, approximately 2,210,323 shares of common stock were
reserved for exercise of stock options and for grants of restricted stock.
NOTE 12: INCOME TAXES
The provision (benefit) for taxes on income consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Current:
U.S. federal................................ $ 1,179 $ 1,226 $ 30,461
Non-U.S..................................... 8,836 13,798 17,752
State and local............................. 1,630 438 5,485
-------- ------- --------
Total current....................... 11,645 15,462 53,698
-------- ------- --------
Deferred:
U.S. federal................................ (11,780) 7,915 (15,585)
Non-U.S..................................... 6,777 1,409 1,012
State and local............................. (574) 716 (902)
-------- ------- --------
Total deferred...................... (5,577) 10,040 (15,475)
-------- ------- --------
Total provision..................... $ 6,068 $25,502 $ 38,223
======== ======= ========
</TABLE>
F-20
<PAGE> 184
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for taxes on income was different from the statutory
corporate rate due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
U.S. federal income tax rate........................... 35.0% 35.0% 35.0%
Non-U.S. tax rate differential and utilization of
operating loss carryforwards......................... 0.7 2.6 2.2
Merger transaction expenses............................ -- -- 3.7
State and local income taxes, net...................... 2.7 1.4 3.2
Utilization of tax credits............................. (1.6) (1.5) (2.7)
Foreign sales corporation.............................. (2.2) (2.6) (1.8)
Other net.............................................. (1.3) -- 3.0
---- ---- ----
Effective tax rate..................................... 33.3% 34.9% 42.6%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's consolidated deferred tax assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets related to:
Post-retirement benefits................................ $23,989 $17,556
Net operating loss carryforwards........................ 4,837 11,553
Compensation accruals................................... 9,773 8,131
Inventories............................................. -- 7,892
Credit carryforwards.................................... 5,410 3,679
Loss on dispositions.................................... 1,852 2,462
Warranty and accrued liabilities........................ 2,542 1,258
Restructuring charge.................................... 9,013 988
Other................................................... 4,851 9,914
------- -------
Total deferred tax assets....................... 62,267 63,433
Less valuation allowances............................... 7,763 8,655
------- -------
Net deferred tax assets......................... 54,504 54,778
------- -------
Deferred tax liabilities related to:
Property, plant and equipment........................... 12,520 13,563
Goodwill................................................ 10,610 12,225
Other................................................... 2,183 5,376
------- -------
Total deferred tax liabilities.................. 25,313 31,164
------- -------
Deferred tax assets, net.................................. $29,191 $23,614
======= =======
</TABLE>
The Company has recorded valuation allowances to reflect the estimated
amount of deferred tax assets that may not be realized due to the expiration of
net operating loss and foreign tax credit carryforwards. The net changes in the
valuation allowances were attributable to utilization and expiration of net
operating loss carryforwards partially offset by an increase in expected
nonutilization of net operating loss and credit carryforwards. The Company had
approximately $13,000 of net operating loss carryforwards at December 31, 1999,
the majority of which was generated in non-U.S. jurisdictions in which net
operating losses do not expire.
F-21
<PAGE> 185
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings before income taxes comprised:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
U.S.................................................... $(21,116) $27,326 $48,897
Non-U.S................................................ 39,361 45,831 40,892
-------- ------- -------
$ 18,245 $73,157 $89,789
======== ======= =======
</TABLE>
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $137,000 at December 31, 1999. These earnings are considered to be
indefinitely reinvested and, accordingly, no additional U.S. income taxes or
non-U.S. withholding taxes have been provided. Determination of the amount of
additional taxes that would be payable if such earnings were not considered
indefinitely reinvested is not practical.
NOTE 13: SEGMENT INFORMATION
Flowserve is principally engaged in the worldwide design, manufacture,
distribution and service of industrial flow management equipment. The Company
provides pumps, valves, mechanical seals and flow management services primarily
for the refinery and pipeline segments of the petroleum industry, the
chemical-processing industry, the power-generation industry and other industries
requiring flow management products.
The Company has three divisions, each of which constitutes a business
segment. Each division manufactures different products and is defined by the
type of products and services provided. Each division has a president, who
reports directly to the Office of the Chief Executive, and a Division
Controller. For decision-making purposes, the Chief Executive Officer, Chief
Financial Officer and other members of upper management use financial
information generated and reported at the division level.
The Rotating Equipment Division designs, manufactures and distributes pumps
and related equipment. The Flow Control Division designs, manufactures and
distributes automated and manual quarter-turn valves, control valves and valve
actuators, and related components. The Flow Solutions Division designs,
manufactures and distributes mechanical seals and sealing systems and provides
service and repair for flow control equipment used in process industries. The
Company also has a corporate headquarters that does not constitute a separate
division or business segment. Amounts classified as All Other include Corporate
Headquarters costs, other minor entities that are not considered separate
segments and businesses subsequently divested. See Note 4: Acquisitions and
Dispositions.
F-22
<PAGE> 186
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company evaluates segment performance and allocates resources based on
profit or loss excluding merger transaction, integration, restructuring and
interest expense, other income and income taxes. The accounting policies of the
reportable segments are the same as described in Note 1: Significant Accounting
Policies. Intersegment sales and transfers are recorded at cost plus a profit
margin. This intersegment profit is eliminated in consolidation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------
ROTATING FLOW FLOW CONSOLIDATED
EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
--------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers............ $347,159 $283,670 $423,658 $ 6,785 $1,061,272
Intersegment sales..................... 6,011 11,650 14,841 (32,502) --
Segment operating income(1)............ 19,927 23,536 55,882 (37,530) 61,815
Segment operating income (before all
special items)....................... 23,095 25,069 56,148 (31,631) 72,681
Depreciation and amortization.......... 10,246 9,824 12,998 6,531 39,599
Identifiable assets.................... $222,999 $213,322 $292,015 $109,815 $ 838,151
Capital expenditures................... 12,377 4,583 17,068 6,507 40,535
</TABLE>
-------------------------
(1) Excludes merger transaction, integration, restructuring, interest expense,
other income and income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
ROTATING FLOW FLOW CONSOLIDATED
EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
--------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers............ $365,806 $298,918 $412,076 $ 6,286 $1,083,086
Intersegment sales..................... 5,663 14,253 16,436 (36,352) --
Segment operating income(1)............ 39,078 43,826 65,113 (24,612) 123,405
Depreciation and amortization.......... 11,535 11,290 13,186 3,288 39,299
Identifiable assets.................... $285,618 $233,120 $266,485 $ 84,974 $ 870,197
Capital expenditures................... 13,416 9,284 15,049 500 38,249
</TABLE>
-------------------------
(1) Excludes merger transaction, integration, restructuring, interest expense,
other income and income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
ROTATING FLOW FLOW CONSOLIDATED
EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
--------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers............ $403,801 $305,150 $415,321 $ 27,924 $1,152,196
Intersegment sales..................... 9,000 12,001 14,780 (35,781) --
Segment operating income(1)............ 50,969 46,981 62,728 (24,584) 136,094
Depreciation and amortization.......... 9,767 9,160 13,286 6,720 38,933
Identifiable assets.................... $301,176 $219,074 $257,531 $102,244 $ 880,025
Capital expenditures................... 14,623 8,140 11,733 5,064 39,560
</TABLE>
-------------------------
(1) Excludes merger transaction, integration, restructuring, interest expense,
other income and income taxes.
F-23
<PAGE> 187
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
Significant items from the Company's reportable segments can be reconciled
to the consolidated amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
SALES
Total sales for reportable segments.............. $1,054,487 $1,076,800 $1,124,272
Total intersegment sales for reportable
segments....................................... 32,502 36,352 35,781
Other sales...................................... 6,785 6,286 27,924
Elimination of intersegment sales................ (32,502) (36,352) (35,781)
---------- ---------- ----------
Total sales...................................... $1,061,272 $1,083,086 $1,152,196
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
PROFIT OR LOSS
Total segment operating income................... $ 99,345 $ 148,017 $ 160,678
Corporate expenses and other..................... 37,530 24,612 24,584
Restructuring and merger transaction expense..... 15,860 -- 44,531
Merger integration expense....................... 14,207 38,326 6,982
Interest expense................................. 15,504 13,175 13,275
Other income..................................... (2,001) (1,253) (7,107)
Gain on sale of subsidiary....................... -- -- (11,376)
---------- ---------- ----------
Earnings before income taxes..................... $ 18,245 $ 73,157 $ 89,789
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Total assets for reportable segments............. $ 728,336 $ 785,223 $ 777,781
Other assets..................................... 141,911 106,552 125,826
Elimination of intercompany receivables.......... (32,096) (21,578) (23,582)
---------- ---------- ----------
Total assets..................................... $ 838,151 $ 870,197 $ 880,025
========== ========== ==========
</TABLE>
F-24
<PAGE> 188
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC INFORMATION
The Company attributes revenues to different geographic areas based on the
facilities location. Long-lived assets are classified based on the geographic
area in which the assets are located. Sales related to and investment in
identifiable assets by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------------
LONG-LIVED
SALES ASSETS
---------- ----------
<S> <C> <C>
United States......................................... $ 611,374 $243,107
Europe................................................ 270,850 81,616
Other(1).............................................. 179,048 28,559
---------- --------
Consolidated total.................................... $1,061,272 $353,282
========== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------------
LONG-LIVED
SALES ASSETS
---------- ----------
<S> <C> <C>
United States......................................... $ 629,117 $250,999
Europe................................................ 279,117 81,058
Other(1).............................................. 174,852 28,751
---------- --------
Consolidated total.................................... $1,083,086 $360,808
========== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------------
LONG-LIVED
SALES ASSETS
---------- ----------
<S> <C> <C>
United States......................................... $ 691,337 $228,056
Europe................................................ 261,289 78,400
Other(1).............................................. 199,570 32,991
---------- --------
Consolidated total.................................... $1,152,196 $339,447
========== ========
</TABLE>
-------------------------
(1) Includes Canada, Latin America and Asia/Pacific. No individual geographic
segment within this group represents 10% or more of consolidated totals.
MAJOR CUSTOMER INFORMATION
The Company has not received revenues from any customer that represent 10%
or more of consolidated revenues for any of the years presented.
F-25
<PAGE> 189
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1999(A) 1998 (B)
--------------------------------- ---------------------------------
QUARTER 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------- ------ ------ ------ ------ ------ ------ ------ ------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $262.7 $254.0 $275.2 $269.4 $279.3 $264.8 $280.7 $258.3
Gross profit............ 84.3 88.3 93.9 96.8 108.5 99.6 106.0 101.2
Net earnings before
special items......... 8.6 6.8 11.4 12.7 19.0 17.6 20.2 18.1
Net earnings............ (11.6) 4.9 8.5 10.4 7.2 16.1 12.5 13.1
Earnings per share
before special items
(basic and diluted)... $ 0.23 $ 0.18 $ 0.30 $ 0.34 $ 0.50 $ 0.44 $ 0.50 $ 0.44
Earnings per share
(basic and diluted)... (0.31) 0.13 0.22 0.28 0.20 0.40 0.31 0.32
</TABLE>
-------------------------
(a) Net earnings in 1999 include merger expenses of $14.2 million, restructuring
expenses of $15.9 million, other nonrecurring items for inventory and fixed
asset impairment of $5.1 million (included in costs of goods sold), and
executive separation contracts and certain costs related to fourth-quarter
1999 facility closures of $5.8 million (included in selling and
administrative expense), resulting in a reduction in net earnings of $27.3
million, or $0.72 per share after tax.
(b) Net earnings in 1998 included merger expenses of $38.3 million, an
obligation under an executive employment agreement of $3.8 million (included
in selling and administrative expense) and the benefit of the cumulative
effect of an accounting change of $1.2 million, resulting in a reduction in
net earnings of $26.1 million, or $0.65 per share after tax.
NOTE 15: SUBSEQUENT EVENTS
On November 18, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding stock of Innovative Valve Technologies,
Inc. (Invatec) for $1.62 per share, or about $15.7 million. In addition, the
Company would assume Invatec's projected debt and related obligations of about
$84.0 million, plus certain transaction-related expenses. Invatec, headquartered
in Houston, Texas, had unaudited 1999 net revenues of $161.0 million and is
principally engaged in providing comprehensive maintenance, repair, replacement
and value-added distribution services for valves, piping systems,
instrumentation and other process-system components for industrial customers. On
January 6, 2000, the Company's offer to purchase all outstanding shares of
common stock expired with approximately 92.3% of the total outstanding shares
tendered. The Company then implemented a statutory merger of Invatec and
acquired all of the remaining outstanding shares.
On February 9, 2000, the Company announced that it had signed a definitive
agreement to acquire Ingersoll-Dresser Pumps (IDP) for $775 million in cash. The
Acquisition closed August 8, 2000. IDP is a wholly owned business unit of
Ingersoll-Rand Company and recorded 1999 sales of $838.0 million and operating
income of $62.4 million after special items. The transaction was accounted for
as a purchase and was financed with a combination of bank financing and senior
subordinated notes. Flowserve received $1,425 million of financing in connection
with the acquisition and repaid its existing indebtedness at the date of the
acquisition. In connection with the acquisition, the Company announced that it
would be closing certain operating facilities and reducing its workforce.
F-26
<PAGE> 190
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the IDP acquisition and as part of the related
financing, the Company and a newly formed Dutch subsidiary, Flowserve Finance
B.V., issued an aggregate of $375 million of dollar-denominated senior
subordinated notes (the dollar Notes) and euro-denominated senior subordinated
notes (the euro Notes, and together with the dollar Notes, the Notes) in private
placements pursuant to Rule 144A and Regulation S. The dollar Notes and the euro
Notes are expected to be general unsecured obligations of the Company and
Flowserve Finance B.V., respectively, subordinated in right of payment to all
existing and future senior indebtedness of the Company and Flowserve Finance
B.V., respectively, and guaranteed on a full, unconditional, joint and several
basis by the Company's wholly owned domestic subsidiaries and, in the case of
the euro Notes, by the Company.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of December 31, 1999 and
1998 and the related statements of income and cash flows for each of the
three years in the period ended December 31, 1999, of (a) Flowserve
Corporation, the parent; (b) the guarantor subsidiaries; (c) the
nonguarantor subsidiaries; and the Company on a consolidated basis, and
(2) Elimination entries necessary to consolidate Flowserve
Corporation, the parent, with guarantor and nonguarantor subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor subsidiaries and the nonguarantor
subsidiaries are not presented because management believes that such financial
statements would not be meaningful to investors.
F-27
<PAGE> 191
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales.............................. $140,710 $519,035 $472,563 $(71,036) $1,061,272
Cost of sales...................... 72,042 380,302 316,620 (71,036) 697,928
-------- -------- -------- -------- ----------
Gross Profit....................... 68,668 138,733 155,943 -- 363,344
Selling and administrative
expense....................... 61,195 121,417 93,272 -- 275,884
Research, engineering and
development expense........... 5,265 16,546 3,834 -- 25,645
Merger transaction and
restructuring expense......... -- 13,674 2,186 -- 15,860
Merger integration expense....... -- 13,514 693 -- 14,207
-------- -------- -------- -------- ----------
Operating income................... 2,208 (26,418) 55,958 -- 31,748
Interest expense................. 2,064 16,845 2,580 (5,985) 15,504
Other (income) expense, net...... (1,935) (15,490) 9,439 5,985 (2,001)
Equity in earnings of
subsidiaries.................. (10,915) -- -- 10,915 --
-------- -------- -------- -------- ----------
Earnings (loss) before income
taxes............................ 12,994 (27,773) 43,939 (10,915) 18,245
Provision (benefit) for income
taxes............................ 817 (8,027) 13,278 -- 6,068
-------- -------- -------- -------- ----------
Net earnings............. $ 12,177 $(19,746) $ 30,661 $(10,915) $ 12,177
======== ======== ======== ======== ==========
</TABLE>
F-28
<PAGE> 192
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales.............................. $153,292 $582,691 $441,701 $(94,598) $1,083,086
Cost of sales...................... 104,383 374,684 283,284 (94,598) 667,753
-------- -------- -------- -------- ----------
Gross Profit....................... 48,909 208,007 158,417 -- 415,333
Selling and administrative
expense....................... 41,076 135,887 88,593 -- 265,556
Research, engineering and
development expense........... 5,361 16,618 4,393 -- 26,372
Merger integration expense....... 5,976 24,325 8,025 -- 38,326
-------- -------- -------- -------- ----------
Operating income (loss)............ (3,504) 31,177 57,406 -- 85,079
Interest expense................. 4,513 6,974 3,244 (1,556) 13,175
Other (income) expense, net...... (5,738) (6,166) 9,095 1,556 (1,253)
Equity in earnings of
subsidiaries.................. (49,287) -- -- 49,287
-------- -------- -------- -------- ----------
Earnings before income taxes....... 47,008 30,369 45,067 (49,287) 73,157
Provision (benefit) for income
taxes............................ (647) 9,663 16,486 -- 25,502
-------- -------- -------- -------- ----------
Earnings before cumulative effect
of change in accounting
principle........................ 47,655 20,706 28,581 (49,287) 47,655
Cumulative effect of change in
accounting principle............. (1,220) -- -- -- (1,220)
-------- -------- -------- -------- ----------
Net earnings............. $ 48,875 $ 20,706 $ 28,581 $(49,287) $ 48,875
======== ======== ======== ======== ==========
</TABLE>
F-29
<PAGE> 193
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales.............................. $188,673 $604,141 $452,504 $(93,122) $1,152,196
Cost of sales...................... 120,018 382,223 294,200 (93,122) 703,319
-------- -------- -------- -------- ----------
Gross Profit....................... 68,655 221,918 158,304 -- 448,877
Selling and administrative
expense....................... 60,415 125,674 99,801 -- 285,890
Research, engineering and
development expense........... 4,978 14,363 7,552 -- 26,893
Merger transaction and
restructuring expense......... 33,019 714 10,798 -- 44,531
Merger integration expense....... -- -- 6,982 -- 6,982
-------- -------- -------- -------- ----------
Operating income (loss)............ (29,757) 81,167 33,171 -- 84,581
Interest expense................. 3,428 8,224 4,114 (2,491) 13,275
Other (income) expense, net...... (7,143) (5,376) 2,921 2,491 (7,107)
Equity in earnings loss of
subsidiaries.................. (71,710) -- -- 71,710 --
Gain on sale of subsidiary....... -- -- (11,376) (11,376)
-------- -------- -------- -------- ----------
Earnings before income taxes....... 45,668 78,319 37,512 (71,710) 89,789
Provision (benefit) for income
taxes............................ (5,898) 26,822 17,299 38,223
-------- -------- -------- -------- ----------
Net earnings............. $ 51,566 $ 51,497 $ 20,213 $(71,710) $ 51,566
======== ======== ======== ======== ==========
</TABLE>
F-30
<PAGE> 194
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ -- $ 889 $ 29,966 $ (392) $ 30,463
Inter-company receivables................ 194,594 930 7,640 (203,164) --
Accounts receivable, net................. 16,702 94,639 102,284 -- 213,625
Inventories.............................. 17,811 76,580 73,965 -- 168,356
Prepaids and other current assets........ -- 34,639 11,733 (5,028) 41,344
-------- -------- -------- ----------- --------
Total current assets............. 229,107 207,677 225,588 (208,584) 453,788
Property, plant and equipment, net......... 33,223 118,356 58,397 -- 209,976
Investment in subsidiaries................. 403,643 273,430 -- (677,073) --
Inter-company receivables.................. 60,432 209,138 20,674 (290,244) --
Intangible assets, net..................... 2,744 39,045 54,646 -- 96,435
Other assets............................... 40,954 35,175 1,823 -- 77,952
-------- -------- -------- ----------- --------
Total assets..................... $770,103 $882,821 $361,128 $(1,175,901) $838,151
======== ======== ======== =========== ========
Current liabilities:
Accounts payable......................... $ 12,481 $ 31,659 $ 32,164 $ (4,201) $ 72,103
Inter-company payables................... 159,578 21,494 22,092 (203,164) --
Notes payable............................ 734 -- -- -- 734
Income taxes............................. 3,592 -- 5,505 (1,219) 7,878
Accrued liabilities...................... 11,813 64,963 35,044 -- 111,820
Long-term debt due within one year....... 870 387 1,868 -- 3,125
-------- -------- -------- ----------- --------
Total current liabilities........ 189,068 118,503 96,673 (208,584) 195,660
Long-term debt due after one year.......... 4,610 190,000 3,400 -- 198,010
Total Inter-company loans payable.......... 233,473 16,479 40,292 (290,244) --
Post-retirement benefits and deferred
items.................................... 34,678 86,640 14,889 -- 136,207
Shareholder's Equity:
Serial preferred stock, $1.00 par
value................................. -- -- -- -- --
Common shares, $1.25 par value........... 51,856 1 71,933 (71,934) 51,856
Capital in excess of par value........... 67,963 168,495 91,238 (259,733) 67,963
Retained earnings........................ 344,254 357,605 46,468 (404,073) 344,254
-------- -------- -------- ----------- --------
464,073 526,101 209,639 (735,740) 464,073
Treasury stock at cost..................... (93,448) (612) 1,837 (1,225) (93,448)
Accumulated other comprehensive income..... (62,351) (54,290) (5,602) 59,892 (62,351)
-------- -------- -------- ----------- --------
Total shareholders' equity....... 308,274 471,199 205,874 (677,073) 308,274
-------- -------- -------- ----------- --------
Total liabilities and shareholders'
equity................................... $770,103 $882,821 $361,128 $(1,175,901) $838,151
======== ======== ======== =========== ========
</TABLE>
F-31
<PAGE> 195
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ -- $ -- $ 31,062 $ (6,134) $ 24,928
Inter-company receivables................. 8,101 57,828 45,213 (111,142) --
Accounts receivable, net.................. 14,543 109,098 110,550 -- 234,191
Inventories............................... 31,087 94,627 73,572 -- 199,286
Prepaids and other current assets......... 26,298 16,060 6,986 (20,459) 28,885
-------- -------- -------- --------- --------
Total current assets.............. 80,029 277,613 267,383 (137,735) 487,290
-------- -------- -------- --------- --------
Property, plant and equipment, net.......... 29,377 122,073 57,582 -- 209,032
Investments in subsidiaries................. 354,144 110,185 -- (464,329) --
Inter-company receivables................... 170,268 -- 34,628 (204,896) --
Intangible assets, net...................... 5,621 35,219 59,035 -- 99,875
Other assets................................ 56,759 12,360 4,881 -- 74,000
-------- -------- -------- --------- --------
Total assets...................... $696,198 $557,450 $423,509 $(806,960) $870,197
======== ======== ======== ========= ========
Current liabilities:
Accounts payable.......................... $ 7,062 $ 44,782 $ 31,035 $ (6,134) $ 76,745
Inter-company payables.................... 53,029 -- 58,113 (111,142) --
Notes payable............................. 3,488 -- -- -- 3,488
Income taxes.............................. -- 27,264 10,667 (20,459) 17,472
Accrued liabilities....................... 30,446 40,503 36,079 -- 107,028
Long-term debt due within one year........ (2,522) 8,790 8,125 -- 14,393
-------- -------- -------- --------- --------
Total current liabilities......... 91,503 121,339 144,019 (137,735) 219,126
-------- -------- -------- --------- --------
Long-term debt due after one year........... 130,855 51,603 3,834 -- 186,292
Total Inter-company loans payable........... 52,610 63,405 88,881 (204,896) --
Post-retirement benefits and deferred
items..................................... 76,466 27,440 16,109 -- 120,015
Shareholder's Equity:
Serial preferred stock, $1.00 par value... -- -- -- -- --
Common shares, $1.25 par value............ 51,856 1 32,680 (32,681) 51,856
Capital in excess of par value............ 70,698 10,148 130,779 (140,927) 70,698
Retained earnings......................... 353,249 293,013 22,628 (315,641) 353,249
-------- -------- -------- --------- --------
475,803 303,162 186,087 (489,249) 475,803
Treasury stock at cost...................... (90,404) 613 (125) (488) (90,404)
Accumulated other comprehensive income...... (40,635) (10,112) (15,296) 25,408 (40,635)
-------- -------- -------- --------- --------
Total shareholders' equity........ 344,764 293,663 170,666 (464,329) 344,764
-------- -------- -------- --------- --------
Total liabilities and shareholders'
equity.................................... $696,198 $557,450 $423,509 $(806,960) $870,197
======== ======== ======== ========= ========
</TABLE>
F-32
<PAGE> 196
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows -- Operating Activities:
Net earnings................................. $ 12,177 $ (19,746) $ 30,661 $ (10,915) $ 12,177
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation............................... 2,771 18,003 14,271 -- 35,045
Amortization............................... 450 1,484 2,620 -- 4,554
Loss on sale of fixed assets............... 232 294 (86) -- 440
Change in operating assets and liabilities,
net of effects of acquisitions and
dispositions:
Accounts receivable................... (2,159) 14,459 423 -- 12,723
Inventories........................... 13,276 18,047 (2,964) -- 28,359
Intercompany receivable and
payables............................ 161,256 (340,917) (80,885) 260,546 --
Loss on impairment of facilities and
equipment........................... 2,834 -- -- -- 2,834
Prepaid expenses...................... (15,236) 6,359 (4,033) -- (12,910)
Other assets.......................... 18,232 (28,125) 10,329 -- 436
Accounts payable...................... 1,610 (13,123) 3,852 5,742 (1,919)
Accrued liabilities................... (18,633) 24,460 506 -- 6,333
Income taxes.......................... 24,051 (28,483) (7,963) -- (12,395)
Post-retirement benefits and deferred
items............................... (29,941) 47,176 (9,163) -- 8,072
Net deferred taxes.................... 13,037 (11,695) (3,159) -- (1,817)
--------- --------- -------- --------- --------
Net cash provided by (used in)
operating activities................ 183,957 (311,807) (45,591) 255,373 81,932
--------- --------- -------- --------- --------
Cash Flows -- Investing Activities:
Capital expenditures, net of disposals....... (3,940) (14,580) (22,015) -- (40,535)
Payments for acquisitions, net of cash
acquired................................... (5,743) -- -- -- (5,743)
--------- --------- -------- --------- --------
Net cash flows used in investing
activities.......................... (9,683) (14,580) (22,015) -- (46,278)
--------- --------- -------- --------- --------
Cash Flows -- Financing Activities:
Net repayments under lines of credit......... 638 (8,403) (5,880) -- (13,645)
Payments on long-term debt................... (8,333) -- 1,963 -- (6,370)
Proceeds from long-term debt................. (117,912) 138,397 (1,709) -- 18,776
Repurchase of common stock................... (5,250) -- -- -- (5,250)
Proceeds from issuance of common stock....... (529) -- -- -- (529)
Dividends paid............................... (21,172) -- -- -- (21,172)
Other........................................ -- 241,460 7,329 (249,631) (842)
--------- --------- -------- --------- --------
Net cash flows used in financing activities.... (152,558) 371,454 1,703 (249,631) (29,032)
--------- --------- -------- --------- --------
Effect of exchange rate changes................ (21,716) (44,178) 64,807 -- (1,087)
--------- --------- -------- --------- --------
Net change in cash and cash equivalents........ -- 889 (1,096) 5,742 5,535
Cash and cash equivalents at beginning of
year......................................... -- -- 31,062 (6,134) 24,928
--------- --------- -------- --------- --------
Cash and cash equivalents at end of year....... $ -- $ 889 $ 29,966 $ (392) $ 30,463
========= ========= ======== ========= ========
</TABLE>
F-33
<PAGE> 197
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows -- Operating Activities:
Net earnings.................................. $ 48,875 $ 20,706 $ 28,581 $(49,287) $ 48,875
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation............................... 3,213 16,647 15,250 -- 35,110
Amortization............................... (1,153) 1,842 3,500 -- 4,189
Gain on sale of subsidiary, net of income
taxes.................................... -- -- -- -- --
Loss on sale of fixed assets............... -- (71) 128 -- 57
Cumulative effect of change in accounting
principle................................ (1,220) -- -- -- (1,220)
Change in operating assets and liabilities,
net of effects of acquisitions and
dispositions:
Accounts receivable...................... 7,530 (8,755) 4,240 -- 3,015
Inventories.............................. (769) (10,458) (280) -- (11,507)
Intercompany receivable and payables..... (48,682) 20,804 (54,576) 82,454 --
Prepaid expenses......................... 3,233 1,377 4,108 -- 8,718
Other assets............................. 10,296 13,817 (35,179) -- (11,066)
Accounts payable......................... 315 16,780 (5,308) (6,133) 5,654
Accrued liabilities...................... (20,102) (10,349) 4,603 -- (25,848)
Income taxes............................. (1,820) 16,160 (13,289) -- 1,051
Post-retirement benefits and deferred
items................................. 23,063 (5,080) (21,692) -- (3,709)
Net deferred taxes....................... (12,353) 4,157 9,229 -- 1,033
Other.................................... -- -- (248) -- (248)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities................ 10,426 77,577 (60,933) 27,034 54,104
-------- -------- -------- -------- --------
Cash Flows -- Investing Activities:
Capital expenditures, net of disposals........ 15,871 (16,804) (37,316) -- (38,249)
Payments for acquisitions, net of cash
acquired................................... (19,951) -- -- -- (19,951)
Other......................................... -- -- (427) -- (427)
-------- -------- -------- -------- --------
Net cash flows used in investing
activities.......................... (4,080) (16,804) (37,743) -- (58,627)
-------- -------- -------- -------- --------
Cash Flows -- Financing Activities:
Net repayments under lines of credit.......... (4,678) 410 1,954 -- (2,314)
Payments on long-term debt.................... -- -- (20,212) -- (20,212)
Proceeds from long-term debt.................. 73,153 (14,600) 18,397 -- 76,950
Repurchase of common stock.................... (64,508) -- -- -- (64,508)
Proceeds from issuance of common stock........ 4,764 -- -- -- 4,764
Dividends paid................................ (22,307) -- -- -- (22,307)
Other......................................... (6,492) (44,968) 84,628 (33,168) --
-------- -------- -------- -------- --------
Net cash flows provided by (used in) financing
activities.................................... (20,068) (59,158) 84,767 (33,168) (27,627)
-------- -------- -------- -------- --------
Effect of exchange rate changes................. (9,621) (7,328) 15,425 -- (1,524)
-------- -------- -------- -------- --------
Net change in cash and cash equivalents......... (23,343) (5,713) 1,516 (6,134) (33,674)
Cash and cash equivalents at beginning of
year.......................................... 23,343 5,713 29,546 -- 58,602
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year........ $ -- $ -- $ 31,062 $ (6,134) $ 24,928
======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE> 198
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows -- Operating Activities:
Net earnings.................................. $ 51,566 $ 51,497 $ 20,213 $(71,710) $ 51,566
Adjustments to reconcile net earnings to cash
provided by operating activities:.......... --
Depreciation............................... 5,098 7,775 22,404 -- 35,277
Amortization............................... -- 777 2,879 -- 3,656
Gain on sale of subsidiary, net of income
taxes.................................... (7,417) -- -- -- (7,417)
Loss on sale of fixed assets............... 33 -- -- -- 33
Change in operating assets and liabilities,
net of effects of acquisitions and
dispositions:
Accounts receivable................... 3,464 (22,322) 457 -- (18,401)
Inventories........................... (3,966) (4,982) (995) -- (9,943)
Intercompany receivable and
payables............................ (46,930) 61,126 (8,609) (5,587) --
Prepaid expenses...................... (20,003) (2,933) 12,649 -- (10,287)
Other assets.......................... (1,486) 9,213 (20,959) -- (13,232)
Accounts payable...................... 71 1,473 30 -- 1,574
Accrued liabilities................... 41,880 (21,328) 28,254 -- 48,806
Income taxes.......................... (1,605) 9,428 (9,828) -- (2,005)
Post-retirement benefits and deferred
items............................... 19,776 (7,037) 456 -- 13,195
Net deferred taxes.................... 195 (9,297) 7,625 -- (1,477)
Other................................. (1,342) -- -- -- (1,342)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ 39,334 73,390 54,576 (77,297) 90,003
-------- -------- -------- -------- --------
Cash Flows -- Investing Activities:
Capital expenditures, net of disposals........ (6,667) (9,367) (23,526) -- (39,560)
Payments for acquisitions, net of cash
acquired................................... (10,461) -- -- -- (10,461)
Proceeds from sale of subsidiary.............. 18,793 -- -- -- 18,793
Other......................................... 1,777 -- -- -- 1,777
-------- -------- -------- -------- --------
Net cash flows used in investing
activities............................ 3,442 (9,367) (23,526) -- (29,451)
-------- -------- -------- -------- --------
Cash Flows -- Financing Activities:
Net repayments under lines of credit.......... 2,027 (458) (993) -- 576
Payments on long-term debt.................... (15,760) -- -- -- (15,760)
Proceeds from long-term debt.................. 26,956 (14,706) (11,321) -- 929
Proceeds from issuance of common stock........ 2,584 -- -- -- 2,584
Dividends paid................................ (26,121) -- -- -- (26,121)
Other......................................... 2,668 (42,181) (37,784) 77,297 --
-------- -------- -------- -------- --------
Net cash flows used in financing activities..... (7,646) (57,345) (50,098) 77,297 (37,792)
-------- -------- -------- -------- --------
Effect of exchange rate changes................. (24,048) (2,784) 23,741 -- (3,091)
-------- -------- -------- -------- --------
Net change in cash and cash equivalents......... 11,082 3,894 4,693 -- 19,669
Cash and cash equivalents at beginning of
year.......................................... 12,261 1,819 24,853 -- 38,933
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year........ $ 23,343 $ 5,713 $ 29,546 $ -- $ 58,602
======== ======== ======== ======== ========
</TABLE>
F-35
<PAGE> 199
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,495 $ 30,463
Accounts receivable, net.................................. 246,331 213,625
Inventories............................................... 210,617 168,356
Prepaids and other current assets......................... 37,094 41,344
-------- --------
Total current assets.............................. 508,537 453,788
Property, plant and equipment, net.......................... 221,336 209,976
Intangible assets, net...................................... 151,352 96,435
Other assets................................................ 80,851 77,952
-------- --------
Total assets...................................... $962,076 $838,151
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 76,802 $ 72,103
Notes payable............................................. 531 734
Income taxes.............................................. 8,904 7,878
Accrued liabilities....................................... 96,957 111,820
Long-term debt due within one year........................ 44 3,125
-------- --------
Total current liabilities......................... 183,238 195,660
Long-term debt due after one year........................... 315,348 198,010
Postretirement benefits and deferred items.................. 146,963 136,207
Commitments and contingencies
Shareholders' equity:
Serial preferred stock, $1.00 par value
Shares authorized -- 1,000............................. -- --
Shares issued and outstanding -- None
Common stock, $1.25 par value
Shares authorized -- 120,000
Shares issued and outstanding -- 41,484................ 51,856 51,856
Capital in excess of par value.............................. 67,697 67,963
Retained earnings........................................... 368,754 344,254
-------- --------
488,307 464,073
Treasury stock at cost - 4,065 and 4,071 shares............. (93,226) (93,448)
Accumulated other comprehensive expense..................... (78,554) (62,351)
-------- --------
Total shareholders' equity........................ 316,527 308,274
-------- --------
Total liabilities and shareholders' equity........ $962,076 $838,151
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 200
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Sales....................................................... $584,462 $544,583
Cost of sales............................................... 382,070 353,903
-------- --------
Gross profit................................................ 202,392 190,680
Selling and administrative expense........................ 142,220 133,314
Research, engineering and development expense............. 12,353 13,199
Merger integration expense................................ -- 7,838
-------- --------
Operating income............................................ 47,819 36,329
Interest expense.......................................... 13,576 7,203
Other (income) expense, net............................... (3,161) 525
-------- --------
Earnings before income taxes................................ 37,404 28,601
Provision for income taxes.................................. 12,905 9,724
-------- --------
Net earnings................................................ $ 24,499 $ 18,877
======== ========
Earnings per share (basic and diluted)...................... $ 0.65 $ .50
======== ========
Average shares outstanding.................................. 37,810 37,771
======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net earnings................................................ $24,499 $18,877
Foreign currency translation adjustments.................. 16,202 3,878
------- -------
Comprehensive income........................................ $ 8,297 $14,999
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 201
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net earnings.............................................. $ 24,499 $ 18,877
Adjustments to reconcile net earnings to net cash (used)
provided by operating activities:
Depreciation........................................... 16,474 19,187
Amortization........................................... 3,902 2,008
Net (Gain) Loss on the sale of fixed assets............ (148) 55
Change in assets and liabilities, net of effects of
acquisitions:
Accounts receivable.................................. (7,773) 757
Inventories.......................................... (19,651) 12,570
Prepaid expenses..................................... 9,191 925
Other assets......................................... (6,935) (1,148)
Accounts payable..................................... (6,537) (7,485)
Accrued liabilities.................................. (30,946) (12,140)
Income taxes......................................... 5,071 (7,794)
Postretirement benefits and deferred items........... 6,773 (3,636)
Net deferred taxes................................... (474) (31)
-------- --------
Net cash flows (used) provided by operating activities...... (6,554) 22,145
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of disposals.................... (12,434) (20,201)
Payment for acquisitions, net of cash acquired............ (21,703) --
-------- --------
Net cash flows used by investing activities................. (34,137) (20,201)
CASH FLOWS -- FINANCING ACTIVITIES:
Net (repayments) borrowings under short-term debt......... (3,079) 729
Payments on long-term debt including revolving credit
facility............................................... (96,405) (9,256)
Proceeds from long-term debt including revolving credit
facility............................................... 125,134 11,890
Treasury share purchases.................................. -- (3,333)
Other stock activity...................................... 239 (679)
Dividends paid............................................ -- (10,575)
-------- --------
Net cash flows provided (used) by financing activities...... 25,889 (11,224)
Effect of exchange rate changes............................. (1,166) (952)
-------- --------
Net change in cash and cash equivalents..................... (15,968) (10,232)
Cash and cash equivalents at beginning of year.............. 30,463 24,928
-------- --------
Cash and cash equivalents at end of period.................. $ 14,495 $ 14,696
======== ========
Taxes paid.................................................. $ 8,205 $ 17,905
Interest paid............................................... $ 12,107 $ 8,276
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 202
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. ACCOUNTING POLICIES -- BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2000, and the
related consolidated statements of income and comprehensive income for the three
months and six months ended June 30, 2000 and 1999, and the statements of cash
flows for the six months ended June 30, 2000 and 1999, are unaudited. In
management's opinion, all adjustments comprising normal recurring adjustments
necessary for a fair presentation of such financial statements have been made.
The accompanying consolidated financial statements and notes in this Form 10-Q
are presented as permitted by Regulation S-X and do not contain certain
information included in the Company's annual financial statements and notes to
the financial statements. Accordingly, the accompanying consolidated financial
information should be read in conjunction with the Company's 1999 Annual Report.
Interim results are not necessarily indicative of results to be expected for a
full year.
2. INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined for
certain inventories by the last-in, first-out (LIFO) method and for other
inventories by the first-in, first-out (FIFO) method.
Inventories and the method of determining costs were:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials............................................... $ 31,839 $ 29,674
Work in process and finished goods.......................... 230,810 182,493
Less: Progress billings..................................... (14,213) (5,746)
-------- --------
248,436 206,421
LIFO reserve................................................ (37,819) (38,065)
-------- --------
Net inventory............................................... $210,617 $168,356
======== ========
Percent of inventory accounted for by LIFO.................. 62% 64%
Percent of inventory accounted for by FIFO.................. 38% 36%
</TABLE>
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1999, the Financial Accounting Standards Board issued one Statement of
Financial Accounting Standard (SFAS) that was applicable to the Company -- SFAS
No. 137, "Deferral of the Effective Date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is now effective
for fiscal years beginning after June 15, 2000. In June 2000, in conjunction
with this standard, the Board also issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS No. 138 amends the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and certain hedging activities which have caused implementation
difficulties. These standards are not expected to materially impact Flowserve's
reported financial position, results of operations or cash flows.
In addition, in December 1999, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This SAB does not change any of the existing rules on revenue
recognition. Rather, the SAB provides additional guidance for transactions not
addressed by existing rules. The Company is required to review its revenue
recognition policies by the fourth quarter of fiscal year 2000 to determine that
its recognition criteria is in compliance with the SAB interpretations. Any
change in accounting principle required in order to comply with the SAB may be
reported as a cumulative catch-up adjustment at that time. The Company is
currently
F-39
<PAGE> 203
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
reviewing its revenue recognition policies and does not feel that any change in
accounting required would have a material impact Flowserve's reported financial
position, results of operations or cash flows.
4. RESTRUCTURING
In the fourth quarter of 1999, the Company initiated a restructuring
program that included a one-time charge of $15,860 recorded as restructuring
expense. The restructuring charge related to the planned closure of 10
facilities and a corresponding reduction in workforce at those locations, as
well as at other locations that are part of the restructuring.
The restructuring program is expected to result in a net reduction of
approximately 300 employees at a cost of $12,900. In addition, exit costs
associated with the facilities closings are estimated at $2,960. As of June 30,
2000, the program had resulted in a net reduction of 149 employees.
Expenditures charged to the 1999 restructuring reserve were:
<TABLE>
<CAPTION>
OTHER EXIT
SEVERANCE COSTS TOTAL
--------- ---------- -------
<S> <C> <C> <C>
Balance at December 24, 1999........................... $12,900 $ 2,960 $15,860
Cash expenditures...................................... (102) -- (102)
------- ------- -------
Balance at December 31, 1999........................... 12,798 2,960 15,758
Cash expenditures...................................... (1,693) (583) (2,276)
------- ------- -------
Balance at March 31, 2000.............................. 11,105 2,377 13,482
Cash expenditures...................................... (1,311) (1,013) (2,324)
------- ------- -------
Balance at June 30, 2000............................... $ 9,794 $ 1,364 $11,158
======= ======= =======
</TABLE>
5. ACQUISITION
On January 13, 2000, the Company acquired Innovative Valve Technologies,
Inc. (Invatec), a company which is principally engaged in providing
comprehensive maintenance, repair, replacement and value-added distribution
services for valves, piping systems, instrumentation and other process-system
components for industrial customers.
The purchase involved acquiring all of the outstanding stock of Invatec and
assuming Invatec's existing debt and related obligations. The transaction was
accounted for under the purchase method of accounting and was financed by
utilizing funds from the Company's working capital. The results of operations
for Invatec are included in the Company's condensed consolidated financial
statements from the date of acquisition. The purchase price was approximately
$18.3 million in cash. Liabilities of $94.9 million were simultaneously paid off
through borrowings under Flowserve's revolving credit agreement.
The purchase price has been allocated to the net assets acquired based
primarily on information furnished by management of the acquired company.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition occurred on January 1, 1999, after
giving effect to certain adjustments, including, goodwill amortization, interest
and related income tax effects. The pro forma information does not purport to
represent what the Company's results of operations actually would have been had
such transactions or events occurred on the dates specified, or to project the
Company's results of operations for any future period. Pro forma information has
not been presented for 2000 as results prior to the acquisition, (January 1,
2000 to January 12, 2000), are not material.
F-40
<PAGE> 204
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
------------------------
INNOVATIVE PRO FORMA
FLOWSERVE VALVE PRO FORMA COMBINED
CORP. TECHNOLOGIES ADJUSTMENTS COMPANY
--------- ------------ ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales...................................... $544,583 $87,103 $ -- $631,686
Cost of Sales.................................. 353,903 60,902 -- 414,805
-------- ------- ------- --------
Gross Profit................................... 190,680 26,201 -- 216,881
Selling and administrative expense........... 133,314 22,062 (28)(a) 155,348
Research, engineering and development
expense................................... 13,199 -- -- 13,199
Merger integration expense................... 7,838 -- -- 7,838
-------- ------- ------- --------
Operating Income............................... 36,329 4,139 28 40,496
Interest expense............................. 7,203 6,197 (3,464)(b) 9,936
Loss on assets held for sale................. -- 3,810 3,810
Other expense (income), net.................. 525 (60) -- 465
-------- ------- ------- --------
Earnings before income taxes................... 28,601 (5,808) 3,492 26,285
Provision for income taxes..................... 9,724 (547) (109)(c) 9,068
-------- ------- ------- --------
Net income (loss).............................. $ 18,877 $(5,261) $ 3,601 $ 17,217
======== ======= ======= ========
Earnings per share (basic and diluted)......... $ 0.50 $ -- $ -- $ 0.46
Weighted average shares outstanding (basic and
diluted)..................................... 37,771 9,665 -- 37,771
</TABLE>
PRO FORMA ADJUSTMENTS
<TABLE>
<S> <C>
Selling and administrative expense:
(a) Represents incremental decrease in annual goodwill
amortization based on decrease of $4,279 in estimated
goodwill originating from the acquisition and the
reduction of the amortization period from 40 to 20
years................................................. (28)
Interest expense:
(b) Represents reduction in consolidated interest expense
related to debt financing prior to the acquisition
date.................................................. (3,464)
Provision for income taxes:
(c) Represents income tax adjustment required to arrive at
a combined company pro forma effective tax rate of
34.5%................................................. (109)
</TABLE>
6. SEGMENT INFORMATION
The Company has three divisions, each of which constitutes a business
segment. Each division manufactures different products and is defined by the
type of products and services provided. Each division has a President, who
reports directly to the Chief Executive Officer, and a Division Controller. For
decision-making purposes, the Chief Executive Officer, Chief Financial Officer
and other members of upper management use financial information generated and
reported at the division level. The Company also has a corporate headquarters
that does not constitute a separate division or business segment.
F-41
<PAGE> 205
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Amounts classified as All Other include Corporate Headquarters costs and
other minor entities that are not considered separate segments. The Company
evaluates segment performance and allocates resources based on profit or loss
excluding merger integration, interest expense, other income or expense and
income taxes. Intersegment sales and transfers are recorded at cost plus a
profit margin. Minor reclassifications have been made to certain previously
reported information to conform to the current business configuration.
<TABLE>
<CAPTION>
ROTATING FLOW FLOW CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
------------------------------ --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers............ $152,854 $129,754 $298,732 $ 3,122 $584,462
Intersegment sales..................... 2,891 5,448 9,700 (18,039) --
Segment operating income............... 10,108 16,195 35,350 (13,834) 47,819
Identifiable assets.................... $238,745 $210,143 $428,899 $ 84,289 $962,076
</TABLE>
<TABLE>
<CAPTION>
ROTATING FLOW FLOW CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1999 EQUIPMENT CONTROL SOLUTIONS ALL OTHER TOTAL
------------------------------ --------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sales to external customers............ $187,077 $143,694 $210,341 $ 3,471 $544,583
Intersegment sales..................... 2,632 7,998 7,573 (18,203) --
Segment operating income (before
special items)....................... 11,548 15,094 27,945 (10,420) 44,167
Identifiable assets.................... $248,850 $212,684 $271,506 $111,968 $845,008
</TABLE>
Reconciliation of the total segment operating income before special items
to consolidated earnings before income taxes follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Total segment operating income (before special items)....... $61,653 $54,587
Corporate expenses and other................................ 13,834 10,420
Merger integration expense.................................. -- 7,838
Interest expense............................................ 13,576 7,203
Other (income) expense...................................... (3,161) 525
------- -------
Earnings before income taxes................................ $37,404 $28,601
======= =======
</TABLE>
7. SUBSEQUENT EVENT
On November 18, 1999, the Company announced that it had signed a definitive
agreement to acquire all outstanding stock of Innovative Valve Technologies,
Inc. (Invatec) for $1.62 per share, or about $15.7 million. In addition, the
Company would assume Invatec's projected debt and related obligations of about
$84.0 million, plus certain transaction-related expenses. Invatec, headquartered
in Houston, Texas, had unaudited 1999 net revenues of $161.0 million and is
principally engaged in providing comprehensive maintenance, repair, replacement
and value-added distribution services for valves, piping systems,
instrumentation and other process-system components for industrial customers. On
January 6, 2000, the Company's offer to purchase all outstanding shares of
common stock expired with approximately 92.3% of the total outstanding shares
tendered. The Company then implemented a statutory merger of Invatec and
acquired all of the remaining outstanding shares.
F-42
<PAGE> 206
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
On February 9, 2000, the Company announced that it had signed a definitive
agreement to acquire Ingersoll-Dresser Pump Company (IDP) for $775 million in
cash. The Acquisition closed August 8, 2000. IDP is a wholly owned business unit
of Ingersoll-Rand Company and recorded 1999 sales of $838.0 million and
operating income of $62.4 million after special items. The transaction was
accounted for as a purchase and was financed with a combination of bank
financing and senior subordinated notes. Flowserve received $1,425 million of
financing in connection with the acquisition and repaid its existing
indebtedness at the date of the acquisition. In connection with the acquisition,
the Company announced that it would be closing certain operating facilities and
reducing its workforce.
8. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
In connection with the IDP acquisition and as part of the related
financing, the Company and a newly formed Dutch subsidiary, Flowserve Finance
B.V. issued an aggregate of $375 million of dollar-denominated senior
subordinated notes (the dollar notes) and euro-denominated senior subordinated
notes (the euro Notes, and together with the dollar Notes, the Notes) in private
placements pursuant to Rule 144A and Regulation S. The Notes contain
registration rights, as defined. The dollar Notes and the euro Notes are to be
general unsecured obligations of the Company and Flowserve Finance B.V.,
respectively. Subordinated in right of payment to all existing and future senior
indebtedness of the Company and Flowserve Finance B.V., respectively, and
guaranteed on a full, unconditional, join and several basis by the Company's
wholly owned domestic subsidiaries and, in the case of the euro Notes, by the
Company.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of June 30, 2000 and
December 31, 1999 and the related statements of income and cash flows for
the six months ended June 30, 2000 and 1999, of (a) Flowserve Corporation,
the parent; (b) the guarantor subsidiaries; (c) the nonguarantor
subsidiaries; and the Company on a consolidated basis, and
(2) Elimination entries necessary to consolidate Flowserve
Corporation, the parent, with guarantor and nonguarantor subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions. Separate
financial statements for the guarantor subsidiaries and the nonguarantor
subsidiaries are not presented because management believes that such financial
statements would not be meaningful.
F-43
<PAGE> 207
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales.............................. $ 83,031 $336,255 $207,945 $(42,769) $584,462
Cost of sales...................... 53,698 234,367 136,774 (42,769) 382,070
-------- -------- -------- -------- --------
Gross Profit....................... 29,333 101,888 71,171 -- 202,392
Selling and administrative
expense....................... 23,918 74,485 43,817 -- 142,220
Research, engineering and
development expense........... 3,099 7,423 1,831 -- 12,353
-------- -------- -------- -------- --------
Operating income................... 2,316 19,980 25,523 -- 47,819
Interest expense................. 96 13,224 1,326 (1,070) 13,576
Other income, net................ (3,584) (5,153) 4,506 1,070 (3,161)
Equity in (earnings) loss of
subsidiaries.................. (20,181) -- -- 20,181 --
-------- -------- -------- -------- --------
Earnings before income taxes....... 25,985 11,909 19,691 (20,181) 37,404
Provision for income taxes......... 1,486 4,716 6,703 -- 12,905
-------- -------- -------- -------- --------
Net earnings....................... $ 24,499 $ 7,193 $ 12,988 $(20,181) $ 24,499
======== ======== ======== ======== ========
</TABLE>
F-44
<PAGE> 208
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales............................ $ 74,020 $275,287 $236,641 $(41,365) $544,583
Cost of sales.................... 53,454 183,600 158,214 (41,365) 353,903
-------- -------- -------- -------- --------
Gross Profit..................... 20,566 91,687 78,427 -- 190,680
Selling and administrative
expense..................... 30,415 54,956 47,943 -- 133,314
Research, engineering and
development expense......... 2,443 8,865 1,891 -- 13,199
Merger integration expense..... -- 6,767 1,071 -- 7,838
-------- -------- -------- -------- --------
Operating income................. (12,292) 21,099 27,522 -- 36,329
Interest expense............... 1,079 5,309 1,420 (605) 7,203
Other income, net.............. (1,005) (3,098) 4,023 605 525
Equity in (earnings) loss of
subsidiaries................ (26,003) -- -- 26,003 --
-------- -------- -------- -------- --------
Earnings before income taxes..... 13,637 18,888 22,079 (26,003) 28,601
Provision for income taxes....... (5,240) 7,053 7,911 -- 9,724
-------- -------- -------- -------- --------
Net earnings..................... $ 18,877 $ 11,835 $ 14,168 $(26,003) $ 18,877
======== ======== ======== ======== ========
</TABLE>
F-45
<PAGE> 209
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEETS
FOR THE PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ -- $ -- $ 25,457 $ (10,962) $ 14,495
Inter-company receivables.......... -- 33,151 10,622 (43,773) --
Accounts receivable, net........... 22,804 121,924 101,603 -- 246,331
Inventories........................ 13,921 125,905 70,791 -- 210,617
Prepaids and other current
assets.......................... 12,594 16,549 7,951 -- 37,094
-------- ---------- ------------ ----------- --------
Total current assets....... 49,319 297,529 216,424 (54,735) 508,537
Property, plant and equipment, net... 35,682 130,804 54,850 -- 221,336
Investment in subsidiaries........... 409,796 241,677 -- (651,473) --
Inter-company receivables............ 118,065 224,678 14,784 (357,527) --
Intangible assets, net............... 7,994 88,347 55,011 -- 151,352
Other assets......................... 30,615 47,947 2,289 -- 80,851
-------- ---------- ------------ ----------- --------
Total assets............... $651,471 $1,030,982 $ 343,358 $(1,063,735) $962,076
======== ========== ============ =========== ========
Current liabilities:
Accounts payable................... $ 4,831 $ 49,727 $ 33,207 $ (10,963) $ 76,802
Inter-company payables............. 18,574 2,325 22,873 (43,772) --
Notes payable...................... 15 473 43 -- 531
Income taxes....................... 19 4,842 4,043 -- 8,904
Accrued Liabilities................ 13,408 53,522 30,027 -- 96,957
Long-term debt due within one
year............................ -- -- 44 -- 44
-------- ---------- ------------ ----------- --------
Total current
liabilities.............. 36,847 110,889 90,237 (54,735) 183,238
Long-term debt due after one year.... 90 313,009 2,249 -- 315,348
Inter-company payables............... 250,625 21,645 85,256 (357,526) --
Post-retirement benefits and deferred
items.............................. 47,382 81,972 17,609 -- 146,963
Shareholders' equity:
Serial preferred stock, $1.00 par
value........................... -- -- -- -- --
Common shares, $1.25 par value..... 51,856 1 84,463 (84,464) 51,856
Capital in excess of par value..... 67,697 185,423 81,438 (266,861) 67,697
Retained earnings.................. 368,754 361,918 52,158 (414,076) 368,754
-------- ---------- ------------ ----------- --------
488,307 547,342 218,059 (765,401) 488,307
Treasury stock at cost............... (93,226) (612) -- 612 (93,226)
Accumulated other comprehensive
income............................. (78,554) (43,263) (70,052) 113,315 (78,554)
-------- ---------- ------------ ----------- --------
Total shareholders'
equity................... 316,527 503,467 148,007 (651,474) 316,527
Total liabilities and
shareholders' equity..... $651,471 $1,030,982 $ 343,358 $(1,063,735) $962,076
======== ========== ============ =========== ========
</TABLE>
F-46
<PAGE> 210
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ -- $ 889 $ 29,966 $ (392) $ 30,463
Inter-company receivables...... 194,594 930 7,640 (203,164) --
Accounts receivable, net....... 16,702 94,639 102,284 -- 213,625
Inventories.................... 17,811 76,580 73,965 -- 168,356
Prepaids and other current
assets...................... -- 34,639 11,733 (5,028) 41,344
-------- -------- -------- ----------- --------
Total current assets... 229,107 207,677 225,588 (208,584) 453,788
Property, plant and equipment,
net............................ 33,223 118,356 58,397 -- 209,976
Investment in subsidiaries....... 403,643 273,430 -- (677,073) --
Inter-company receivables........ 60,432 209,138 20,674 (290,244) --
Intangible assets, net........... 2,744 39,045 54,646 -- 96,435
Other assets..................... 40,954 35,175 1,823 -- 77,952
-------- -------- -------- ----------- --------
Total assets........... $770,103 $882,821 $361,128 $(1,175,901) $838,151
======== ======== ======== =========== ========
Current liabilities:
Accounts payable............... $ 12,481 $ 31,659 $ 32,164 $ (4,201) $ 72,103
Inter-company payables......... 159,578 21,494 22,092 (203,164) --
Notes payable.................. 734 -- -- -- 734
Income taxes................... 3,592 -- 5,505 (1,219) 7,878
Accrued liabilities............ 11,813 64,963 35,044 -- 111,820
Long-term debt due within one
year........................ 870 387 1,868 -- 3,125
-------- -------- -------- ----------- --------
Total current
liabilities.......... 189,068 118,503 96,673 (208,584) 195,660
Long-term debt due after one
year........................... 4,610 190,000 3,400 -- 198,010
Total Inter-company loans
payable........................ 233,473 16,479 40,292 (290,244) --
Post-retirement benefits and
deferred items................. 34,678 86,640 14,889 -- 136,207
Shareholder's Equity:
Serial preferred stock, $1.00
par value................... -- -- -- -- --
Common shares, $1.25 par
value....................... 51,856 1 71,933 (71,934) 51,856
Capital in excess of par
value....................... 67,963 168,495 91,238 (259,733) 67,963
Retained earnings.............. 344,254 357,605 46,468 (404,073) 344,254
-------- -------- -------- ----------- --------
464,073 526,101 209,639 (735,740) 464,073
Treasury stock at cost........... (93,448) (612) 1,837 (1,225) (93,448)
Accumulated other comprehensive
income......................... (62,351) (54,290) (5,602) 59,892 (62,351)
-------- -------- -------- ----------- --------
Total shareholders'
equity............... 308,274 471,199 205,874 (677,073) 308,274
-------- -------- -------- ----------- --------
Total liabilities and
shareholders' equity........... $770,103 $882,821 $361,128 $(1,175,901) $838,151
======== ======== ======== =========== ========
</TABLE>
F-47
<PAGE> 211
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net earnings........................... $ 24,499 $ 7,193 $ 12,988 $(20,181) $ 24,499
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation........................... 3,193 8,669 4,612 -- 16,474
Amortization........................... 220 2,536 1,146 -- 3,902
Loss on sale of fixed assets........... -- 4 (152) -- (148)
Change in operating assets and
liabilities, net of effects of
acquisitions and dispositions:
Accounts Receivable.................... (6,102) 2,656 (4,327) -- (7,773)
Inventories............................ 3,891 (22,846) (696) -- (19,651)
Intercompany receivable and payables... 6,956 (30,011) 48,655 (25,600) --
Prepaid expenses....................... (12,594) 22,974 3,839 (5,028) 9,191
Other assets........................... 5,309 133 (12,377) -- (6,935)
Accounts payable....................... (7,650) 5,084 2,790 (6,761) (6,537)
Accrued liabilities.................... 1,595 (28,844) (3,697) -- (30,946)
Income taxes........................... (3,573) 4,643 2,782 1,219 5,071
Post-retirement benefits and deferred
items................................ 12,705 (5,357) (575) -- 6,773
Net deferred taxes..................... -- (973) 499 -- (474)
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................. 28,449 (34,139) 55,487 (56,351) (6,554)
-------- -------- -------- -------- --------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures, net of
disposals............................ (5,651) (2,908) (3,875) -- (12,434)
Payments for acquisitions, net of cash
acquired............................. (21,703) -- -- -- (21,703)
-------- -------- -------- -------- --------
Net cash flows used in investing
activities............................. (27,354) (2,908) (3,875) -- (34,137)
-------- -------- -------- -------- --------
CASH FLOWS -- FINANCING ACTIVITIES:
Net repayments under lines of credit... (1,589) 86 (1,576) -- (3,079)
Payments on long-term debt............. (4,520) (88,716) (3,169) -- (96,405)
Proceeds from long-term debt........... -- 123,009 2,125 -- 125,134
Proceeds from issuance of common
stock................................ 239 2,370 (2,370) -- 239
Dividends paid......................... -- 286 (286) -- --
Other.................................. (13,063) (11,905) (20,813) 45,781 --
-------- -------- -------- -------- --------
Net cash flows used by financing
activities............................. (18,933) 25,130 (26,089) 45,781 25,889
-------- -------- -------- -------- --------
Effect of exchange rate changes.......... 17,838 11,028 (30,032) -- (1,166)
-------- -------- -------- -------- --------
Net change in cash and cash
equivalents............................ -- (889) (4,509) (10,570) (15,968)
Cash and cash equivalents at beginning of
year................................... -- 889 29,966 (392) 30,463
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ -- $ -- $ 25,457 $(10,962) $ 14,495
======== ======== ======== ======== ========
</TABLE>
F-48
<PAGE> 212
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS -- OPERATING
ACTIVITIES:
Net earnings..................... $ 18,877 $ 11,835 $ 14,168 $(26,003) $ 18,877
Adjustments to reconcile net
earnings to cash provided by
operating activities:
Depreciation................... 2,567 8,111 8,509 -- 19,187
Amortization................... 215 1,393 400 -- 2,008
Loss on sale of fixed assets... -- (104) 159 -- 55
Change in operating assets and
liabilities, net of effects of
acquisitions and dispositions:
Accounts Receivable............ (2,745) 15,320 (11,818) -- 757
Inventories.................... 6,217 9,522 (3,169) -- 12,570
Intercompany receivable and
payables.................... 25,588 (70,556) 3,590 41,378 --
Prepaid expenses............... 23,380 (385) (1,611) (20,459) 925
Other assets................... 20,006 (19,509) (1,645) -- (1,148)
Accounts payable............... (857) (7,785) (888) 2,045 (7,485)
Accrued liabilities............ (11,740) 2,281 (2,681) -- (12,140)
Income taxes................... 403 (26,973) (1,683) 20,459 (7,794)
Post-retirement benefits and
deferred items.............. (42,989) 40,537 (1,184) -- (3,636)
Net deferred taxes............. (6,622) 6,197 394 -- (31)
-------- -------- -------- -------- --------
Net cash provided by operating
activities..................... 32,300 (30,116) 2,541 17,420 22,145
-------- -------- -------- -------- --------
CASH FLOWS -- INVESTING
ACTIVITIES:
Capital expenditures, net of
disposals................... (4,101) (10,547) (5,553) -- (20,201)
-------- -------- -------- -------- --------
Net cash flows used in investing
activities..................... (4,101) (10,547) (5,553) -- (20,201)
-------- -------- -------- -------- --------
CASH FLOWS -- FINANCING
ACTIVITIES:
Net repayments under lines of
credit...................... (64) 2,552 (1,759) -- 729
Payments on long-term debt..... (9,256) -- -- -- (9,256)
Proceeds from long-term debt... -- 15,922 (4,032) -- 11,890
Repurchase of common stock..... (3,333) (1,225) 1,225 -- (3,333)
Proceeds from issuance of
common stock................ (679) -- -- -- (679)
Dividends paid................. (10,575) -- -- -- (10,575)
Other.......................... (301) 23,681 (8,005) (15,375) --
-------- -------- -------- -------- --------
Net cash flows used by financing
activities..................... (24,208) 40,930 (12,571) (15,375) (11,224)
-------- -------- -------- -------- --------
Effect of exchange rate
changes........................ (3,876) (267) 3,191 -- (952)
-------- -------- -------- -------- --------
Net change in cash and cash
equivalents.................... 115 -- (12,392) 2,045 (10,232)
Cash and cash equivalents at
beginning of year.............. -- -- 31,062 (6,134) 24,928
-------- -------- -------- -------- --------
Cash and cash equivalents at end
of period...................... $ 115 $ -- $ 18,670 $ (4,089) $ 14,696
======== ======== ======== ======== ========
</TABLE>
F-49
<PAGE> 213
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Valve Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Innovative Valve
Technologies, Inc., (a Delaware corporation) and subsidiaries (collectively, the
"Company"), as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 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
Innovative Valve Technologies, Inc. and subsidiaries, as of December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 3, 2000
F-50
<PAGE> 214
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ -- $ 951,060
Accounts receivable, net of allowance of $1,562,104 and
$2,178,511............................................. 29,524,687 28,921,174
Inventories, net.......................................... 26,007,804 26,091,730
Prepaid expenses and other current assets................. 2,476,351 3,229,498
Deferred tax asset........................................ 4,481,256 1,473,849
------------ ------------
Total current assets.............................. 62,490,098 60,667,311
PROPERTY AND EQUIPMENT, net................................. 19,469,804 18,212,576
GOODWILL, net............................................... 96,175,294 52,497,739
PATENT COSTS, net........................................... 490,552 426,160
OTHER NONCURRENT ASSETS, net................................ 5,074,090 454,640
------------ ------------
$183,699,838 $132,258,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 580,140 $ 633,754
Credit facility........................................... -- 76,304,741
Convertible subordinated debt............................. -- 11,668,875
Accounts payable and accrued expenses..................... 19,364,587 21,037,808
Makeup amount obligation.................................. -- 5,616,105
------------ ------------
Total current liabilities......................... 19,944,727 115,261,283
CREDIT FACILITY............................................. 70,570,584 --
LONG-TERM DEBT, net of current maturities................... 400,834 --
CONVERTIBLE SUBORDINATED DEBT............................... 11,668,875 --
OTHER LONG-TERM LIABILITIES................................. 1,909,774 440,554
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 30,000,000 shares
authorized, 9,664,562 and 10,220,117 issued and
outstanding............................................ 9,665 10,220
Additional paid-in capital................................ 90,960,972 85,450,413
Retained deficit.......................................... (11,765,593) (68,904,044)
------------ ------------
Total stockholders' equity........................ 79,205,044 16,556,589
------------ ------------
$183,699,838 $132,258,426
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE> 215
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
REVENUES............................................ $58,620,946 $154,616,945 $160,991,139
COST OF OPERATIONS.................................. 40,987,435 107,568,111 115,956,154
----------- ------------ ------------
Gross profit...................................... 17,633,511 47,048,834 45,034,985
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........ 15,638,815 40,479,744 40,367,906
SPECIAL COMPENSATION EXPENSE........................ 7,613,386 -- --
NONRECURRING COSTS.................................. -- 2,189,599 --
----------- ------------ ------------
Income (loss) from operations....................... (5,618,690) 4,379,491 4,667,079
OTHER INCOME (EXPENSE):
Interest income (expense), net.................... (2,901,039) (5,621,182) (12,724,071)
Loss on assets held for sale...................... -- -- (3,809,712)
Impairment of goodwill............................ -- -- (39,073,380)
Other............................................. (2,957) 246,654 174,003
----------- ------------ ------------
(2,903,996) (5,374,528) (55,433,160)
----------- ------------ ------------
LOSS BEFORE INCOME TAX.............................. (8,522,686) (995,037) (50,766,081)
PROVISION (BENEFIT) FOR INCOME TAX.................. (1,022,722) 419,936 6,372,370
----------- ------------ ------------
NET LOSS............................................ $(7,499,964) $ (1,414,973) $(57,138,451)
=========== ============ ============
NET LOSS BEFORE DIVIDENDS APPLICABLE TO PREFERRED
STOCK............................................. $(7,499,964) $ (1,414,973) $(57,138,451)
PREFERRED STOCK DIVIDENDS........................... (156,957) -- --
----------- ------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES................ $(7,656,921) $ (1,414,973) $(57,138,451)
=========== ============ ============
Loss per share:
Basic and Diluted................................. $ (2.25) $ (0.16) $ (5.90)
=========== ============ ============
Weighted average common shares outstanding -- Basic
and Diluted....................................... 3,397,980 9,024,915 9,691,959
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE> 216
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, 1996....... 1,481,919 $ 1,482 $ 1,298,471 $ (2,693,699) $ (1,393,746)
SSI preferred stock
dividends................... -- -- -- (156,957) (156,957)
Issuance 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
Issuances of common stock in
acquisitions................ 1,749,052 1,749 20,483,297 -- 20,485,046
Exercise of stock options...... 25,312 26 265,640 -- 265,666
Net loss....................... -- -- -- (1,414,973) (1,414,973)
---------- ------- ----------- ------------ ------------
BALANCE, December 31, 1998....... 9,664,562 9,665 90,960,972 (11,765,593) 79,205,044
Makeup amount obligation....... -- -- (6,516,104) -- (6,516,104)
Warrants issued to the
syndicate of lenders........ -- -- 106,101 -- 106,101
Issuances of stock in partial
payment of makeup
obligation.................. 555,555 555 899,444 -- 899,999
Net loss....................... -- -- -- (57,138,451) (57,138,451)
---------- ------- ----------- ------------ ------------
BALANCE, December 31, 1999....... 10,220,117 $10,220 $85,450,413 $(68,904,044) $ 16,556,589
========== ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE> 217
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (7,499,964) $ (1,414,973) $(57,138,451)
Adjustments to reconcile net loss to net cash
used in operating activities --
Depreciation and amortization................ 1,235,940 4,321,854 4,851,098
Deferred taxes............................... 4,982,917 (1,690,870) 6,019,892
Special compensation expense................. 7,613,386 -- --
Nonrecurring costs........................... -- 1,989,599 --
Loss on assets held for sale................. -- -- 3,809,712
Impairment of goodwill....................... -- -- 39,073,380
Gain on sale of property and equipment....... -- (18,345) (18,233)
(Increase) decrease in --
Accounts receivable........................ (1,219,537) (3,600,442) 712,993
Inventories, net........................... (4,187,410) (4,485,014) (2,299,053)
Prepaid expenses and other current
assets.................................. 424,535 (755,654) (1,386,958)
Other noncurrent assets, net............... 1,141,616 (1,208,550) 527,218
Increase (decrease) --
Accounts payable and accrued expenses...... (2,806,726) (5,518,177) 2,886,275
------------ ------------ ------------
Net cash used in operating activities...... (315,243) (12,380,572) (2,962,127)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............. (1,062,366) (4,707,457) (2,391,516)
Proceeds from sale of property and equipment.... 17,137 168,619 957,762
Business acquisitions, net of cash acquired of
$499,436, $818,416 and $ --.................. (51,555,833) (39,438,029) --
------------ ------------ ------------
Net cash used in investing activities... (52,601,062) (43,976,867) (1,433,754)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt.............................. 29,348,272 209,425 --
Repayments of debt.............................. (27,981,507) (5,209,853) (366,316)
Net borrowings under Credit Facility............ 11,750,000 58,820,584 5,734,157
Repayments of convertible subordinated debt..... -- (81,396) --
Payments on non-compete obligations............. (152,662) (134,268) (20,900)
Repayment of debt of Philip..................... (2,981,789) -- --
Proceeds from sale/exercise of SSI common stock
warrant...................................... 1,216,855 -- --
Proceeds from exercise of Invatec stock
options...................................... -- 208,497
Proceeds from sale of common stock, net of
offering costs............................... 44,021,906 -- --
Preferred stock dividends....................... (156,957) -- --
------------ ------------ ------------
Net cash provided by financing
activities............................ 55,064,118 53,812,989 5,346,941
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH................... 2,147,813 (2,544,450) 951,060
CASH, beginning of period......................... 396,637 2,544,450 --
------------ ------------ ------------
CASH, end of period............................... $ 2,544,450 $ -- $ 951,060
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE> 218
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. Subsequent to the IPO, Invatec has acquired thirteen
businesses.
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
through 1999, the Company's business was negatively impacted by significant
slowdowns experienced by its customers in the 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 1999 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 (the
"Old 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. The Company
remained in default under the Old Credit Facility from July 20, 1998 through
March 25, 1999. 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 under the Old Credit Facility. See further
discussion of the Company's Credit Facility at Footnote 6.
The Company amended its Old Credit Facility on March 26, 1999 to provide
for a new credit facility (the "New Credit Facility") expiring on April 20, 2000
and consisting of a $35 million stationary term component and up to a $45
million revolving line of credit from its existing bank group. The New Credit
Facility prohibited the Company from making acquisitions and provided for
increasingly high overall borrowing costs. As a result, the Company began
working with an investment banking firm in April 1999 to develop a financial
restructuring plan for the Company and otherwise explore strategic alternatives.
After numerous discussions with private investors regarding an infusion of
equity capital and with potential acquirors of the Company regarding a sale of
stock or assets of the Company or certain of its subsidiaries, on November 18,
1999, the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Flowserve Corporation ("Flowserve") and a wholly-owned
subsidiary of Flowserve. Flowserve is a publicly-traded U.S. corporation. The
Merger Agreement provided for the acquisition of Invatec for a price of $1.62
per share in cash pursuant to a tender offer (the "Tender Offer") made by the
Flowserve subsidiary for all outstanding shares of Invatec Common Stock, par
value $.001 per share (the
F-55
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Flowserve Transaction"). The Tender Offer commenced on November 22, 1999, and
closed on January 6, 2000. See further discussion of the Merger at Footnote 18.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
For financial reporting purposes, SSI is presented as the "accounting
acquiror" 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
thirteen businesses (together with the Initial Acquired Businesses, the
"Acquired Businesses") in 1997 and 1998. The Company accounted for the Acquired
Businesses in accordance with the purchase method of accounting.
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.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the
current year presentation.
INVENTORY
Inventories are valued at the lower of cost or market utilizing the
first-in, first-out 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.
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. Goodwill amortization expense was
approximately $467,000, $2,163,000, and $2,466,000 for the years ended December
31, 1997, 1998, and 1999 respectively.
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 and assuming the acquired business continues to be owned.
During 1998, Company management designed and implemented a restructuring
plan to improve 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
F-56
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of such operations for the applicable periods were
approximately ($0.1) million, ($0.3) million, and ($0.4) million, respectively.
An analysis in accordance with 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," was performed by comparing the Company's
net book value to the price offered in the Tender Offer previously described in
Footnote 1. The Tender Offer for all of the outstanding Invatec shares totaled
approximately $16.6 million, which is approximately $39.0 million below the
Company's historical cost basis in its net assets (total stockholders' equity of
$55.6 million as of December 31, 1999, prior to recording the following impact
of the goodwill impairment.) Since the Company's evaluation of other long-lived
assets for impairment did not indicate that they were impaired, goodwill has
been reduced by approximately $39.0 million. This provision is reflected in the
December 31, 1999, consolidated statements of operations. The acquisition of
Invatec by Flowserve subsequent to December 31, 1999 (see Footnote 18) was
accounted for by Flowserve using the purchase method of accounting, which
requires an allocation of the purchase price to the assets acquired and
liabilities assumed based on fair value as determined by Flowserve. The
Company's consolidated financial statements have been prepared on the historical
cost basis of accounting in accordance with generally accepted accounting
principles which may be greater or less than the fair value of the assets and
liabilities as determined by Flowserve. See Footnote 18 for a description of
certain terms, conditions and termination events relating to the Merger.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 6) are
included in other noncurrent assets at December 31, 1998, and in prepaid
expenses and other current assets at December 31, 1999, and are amortized to
interest expense over the scheduled maturity of the debt. Debt issue costs, net
of accumulated amortization were approximately $412,000 and $65,000 at December
31, 1998 and 1999, respectively.
EARNINGS PER SHARE
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 shares and common
equivalent shares outstanding.
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 Footnote 10 of these consolidated
financial statements the pro forma effect on those costs using the fair value
approach that SFAS No. 123 otherwise requires.
F-57
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 filed consolidated federal income tax returns that
include the operations of the Acquired Businesses for periods subsequent to
their respective acquisition dates.
REVENUE RECOGNITION
Revenue is recognized as products are sold and as services are performed.
CASH FLOW RELATED ITEMS
Cash payments for interest during 1997, 1998 and 1999 were approximately
$1,954,000, $4,628,000 and $8,158,000, respectively. Cash payments for taxes
during 1997, 1998 and 1999 were $306,000, $1,695,000, and $879,000,
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. Noncash activities for the
year ended December 31, 1998 consisted of approximately $1.2 million reduction
of convertible subordinated debt in connection with finalization of the purchase
consideration of a 1997 acquisition and the issuance of warrants to the
Company's syndicate of lenders. Noncash activities for the year ended December
31, 1999 consisted of the issuance of 555,555 shares of Common Stock to former
owners of one of the Acquired Businesses as partial payment of a contractual
obligation discussed in footnote 3.
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 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, which was the fair market
value of the shares at the time of issuance.
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.
F-58
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NONRECURRING COSTS
During 1998, the Company recorded nonrecurring costs of approximately $1.4
million in write-offs of capitalized costs of abandoned projects, including a
friction welding system, and $0.8 million of accrued severance costs.
3. ACQUISITIONS:
1997
The aggregate consideration paid by the Company to purchase Acquired
Businesses in 1997 (as described in Footnote 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 was
allocated to net assets acquired, and the remaining $48.9 million was recorded
as goodwill.
1998
The aggregate consideration paid by the Company to purchase Acquired
Businesses in 1998 (as described in Footnote 1) was $38.2 million in cash and
assumed debt, $0.4 million in the form of subordinated notes convertible into
common shares and 1,749,052 shares of Common Stock.
Of the total purchase price paid for the Acquisitions, $13.4 million was
allocated to net assets acquired, and the remaining $44.9 million was recorded
as goodwill. Purchase accounting for these acquisitions has been finalized.
Three of the acquisition agreements for the Additional 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 and was recorded as a
liability with a corresponding offset to additional paid in capital. Effective
December 13, 1999, 555,555 shares were issued to the former shareholders of one
of the Acquired Businesses in partial payment of the Makeup Amount, thereby
reducing the Makeup Amount to approximately $5.6 million. As of December 31,
1999, no additional shares of Invatec Common Stock had been issued to the former
shareholders of the other two Acquired Businesses, and the Company's management
negotiated a discount in the payment of the Makeup Amount with the former
shareholders contingent upon such cash payment being made to the shareholders by
January 31, 2000. The discounted amount was paid to the former shareholders on
January 6, 2000.
F-59
<PAGE> 223
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED ---------------------------
USEFUL LIVES 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Land......................................... -- $ 1,716,839 $ 1,390,898
Buildings.................................... 30 years 6,635,878 6,254,880
Leasehold improvements....................... 30 years 2,910,874 3,127,346
Furniture and fixtures....................... 3-5 years 4,884,500 4,818,073
Machinery and equipment...................... 5 years 23,249,259 24,488,437
------------ ------------
39,397,350 40,079,634
Less -- Accumulated depreciation........... (19,927,546) (21,867,058)
------------ ------------
Property and equipment, net................ $ 19,469,804 $ 18,212,576
============ ============
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Balance, at beginning of year.................... $ 25,000 $1,079,857 $1,562,104
Additions........................................ 102,243 107,787 1,012,572
Deductions....................................... (80,810) (413,151) (396,165)
Allowance for doubtful accounts at acquisition
dates.......................................... 1,033,424 787,611 --
---------- ---------- ----------
Balance, at end of year.......................... $1,079,857 $1,562,104 $2,178,511
========== ========== ==========
</TABLE>
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Finished goods..................................... $21,785,485 $22,271,942
Work in process.................................... 4,222,319 3,819,788
----------- -----------
$26,007,804 $26,091,730
=========== ===========
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accounts payable, trade............................ $ 8,086,157 $ 9,603,813
Accrued compensation and benefits.................. 1,357,717 2,417,973
Accrued insurance.................................. 1,733,133 652,365
Interest and fees payable.......................... 1,067,020 5,161,722
Other accrued expenses............................. 7,120,560 3,201,935
----------- -----------
$19,364,587 $21,037,808
=========== ===========
</TABLE>
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<PAGE> 224
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CREDIT FACILITY:
The Company's Old Credit Facility was a $90 million three-year revolving
credit facility the Company used for acquisitions and general corporate
purposes. Declining earnings during 1998 ultimately resulted in the Company
defaulting in July 1998 on its Old Credit Facility as a result of failing to
meet certain financial covenants requiring specific levels of earnings in
relation to debt. This default left the Company unable to borrow funds for
acquisitions. The Company remained in default under the loan agreement from July
20, 1998 through March 25, 1999. 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.
In March 1999, the Company and its existing syndicate of lenders agreed to
amend the Company's credit facility to put into place the New Credit Facility.
The Company's credit facility was reduced from $90 million to $80 million and
restructured to be comprised of a stationary term component of $35 million and a
revolving credit facility of up to $45 million up to a maximum loan amount of
$76.5 million, the proceeds of which may be used only for general corporate and
working capital purposes. 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 New 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, amortization,
certain levels of cash flows as defined by the New Credit Facility and other
items specified in the loan agreement. The amount of availability under the New
Credit Facility is now 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 now required to (i) meet substantially more
stringent reporting covenants, (ii) submit to collateral audits and (iii)
deposit all revenues and receipts into lockbox accounts. Interest accrues at the
prime rate as in effect from time to time, plus 2%, payable monthly. On October
22, 1999, and in contemplation of the Company's entering into the Merger
Agreement, the syndicate of lenders entered into the Third Amendment to Loan
Agreement (the "Third Amendment") with the Company, waiving certain defaults and
suspending the breach of certain other covenants constituting an event of
default until January 31, 2000. The Third Amendment also reduced the maximum
aggregate loan amount under the Credit Facility to $76.0 million and revised the
maturity date to January 31, 2000. However, at December 31, 1999, the Company
exceeded the limit by approximately $0.3 million. In addition, fees accrue each
quarter at the rate of 1.5% of the unpaid principal balance under the New Credit
Facility. These fees of approximately $4.3 million are accrued at December 31,
1999, but, as provided in the Third Amendment, the fees will be waived if the
Company repays all obligations under the Credit Facility by January 31, 2000.
The entire Credit Facility was repaid on January 6, 2000, and the contingent
fees were waived.
In connection with the New Credit Facility, the syndicate of lenders were
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. Under the Third Amendment, if
the Company repays all obligations under the Credit Facility by January 31,
2000, the syndicate of lenders has agreed to return these warrants to the
Company for cancellation. The entire Credit Facility was repaid on January 6,
2000, and the warrants were returned to the Company.
F-61
<PAGE> 225
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999 the Company's outstanding borrowings under the Credit
Facility were $76.3 million, bearing interest at 10.50%.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
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................................................. $280,906 $200,000
Installment notes payable; interest ranging from 5.09% to
10%, payable in monthly installments through 2006; secured
by certain assets......................................... 700,068 433,754
-------- --------
980,974 633,754
Less: current maturities.................................... 580,140 633,754
-------- --------
$400,834 $ --
======== ========
</TABLE>
Notes payable outstanding at December 31, 1999, were subsequently paid in
January 2000 (see Footnote 18). Therefore, the notes payable are classified as
current liabilities in the accompanying December 31, 1999 consolidated balance
sheet.
8. CONVERTIBLE SUBORDINATED DEBT:
At December 31, 1999, outstanding convertible subordinated debt consisted
of approximately $5.1 million aggregate principal amount of 5.0% notes due in
2002, $1.6 million aggregate principal amount of 5.5% notes due in 2004, $4.6
million aggregate principal amount of 5.5% notes due in 2002 and $0.4 million
aggregate principal amount of 5.0% notes due 2003. These notes are convertible
into shares of Common Stock at initial conversion prices ranging from $16.90 to
$22.20 per share at the option of the holder in whole at any time. In connection
with the proposed Merger, the Company's management negotiated a discount in the
payment of the convertible subordinated notes with the holders of the notes if
such payment was made by January 31, 2000. The discounted payments were made to
the holders on January 6, 2000, therefore, the convertible subordinated debt is
classified as current liabilities in the accompanying December 31, 1999
consolidated balance sheet.
F-62
<PAGE> 226
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal................................ $(1,026,565) $(1,089,396) $(2,031,653)
State....................................... 513,854 661,728 284,949
----------- ----------- -----------
Total current benefit....................... (512,711) (427,668) (1,746,704)
Deferred:
U.S. Federal................................ (478,127) 711,237 7,794,214
State....................................... (31,884) 136,367 324,860
----------- ----------- -----------
Total deferred provision (benefit).......... (510,011) 847,604 8,119,074
----------- ----------- -----------
Total income tax provision (benefit).......... $(1,022,722) $ 419,936 $ 6,372,370
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax benefit........................ (34)% (34)% (34)%
Special compensation charge................................. 22% -- --
Nondeductible goodwill...................................... 2% 43% 25%
Other nondeductible expenses................................ 3% -- (5)%
State taxes, net of federal benefit of 34%.................. 4% 33% 1%
Other....................................................... 1% (1)% 4%
Allowance for valuation of deferred tax assets.............. (10)% -- 21%
--- --- ---
Effective income tax rate................................... (12)% 41% 12%
=== === ===
</TABLE>
F-63
<PAGE> 227
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1999
---------- ------------
<S> <C> <C>
Current deferred tax assets:
Accrued liabilities and valuation allowances not
currently deductible.......................... $4,481,256 $ 4,266,563
---------- ------------
4,481,256 4,266,563
Noncurrent deferred tax assets:
Net operating losses............................. 3,025,914 5,721,664
Special compensation charge...................... 802,050 802,050
Amortization of intangibles...................... -- 1,272,787
Other............................................ -- --
---------- ------------
3,827,964 7,796,501
Valuation allowance................................ -- (10,589,215)
---------- ------------
Total deferred tax assets.......................... $8,309,220 $ 1,473,849
========== ============
Noncurrent deferred tax liabilities:
Depreciation of property, plant and equipment.... $ (700,812) $ (246,482)
Amortization of intangibles...................... (206,734) --
---------- ------------
(907,546) (246,482)
---------- ------------
Net deferred tax assets............................ $7,401,674 $ 1,227,367
========== ============
</TABLE>
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 has recorded a valuation allowance for this deferred tax asset as of
December 31, 1999. The net operating loss carryforwards of approximately $15.4
million will only be realizable to the extent that the operating facilities
generate income in the future.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
--------- -------- -----------
<S> <C> <C> <C>
Deferred tax provision (benefit) during the year
Net operating loss.............................. $ 644,022 $ -- $ --
Special compensation charge..................... (802,050) -- --
Depreciation.................................... 128,843 302,804 (1,079,422)
Accrued expenses................................ 366,400 544,800 (1,390,719)
Valuation allowance............................. (847,226) -- 10,589,215
--------- -------- -----------
Total................................... $(510,011) $847,604 $ 8,119,074
========= ======== ===========
</TABLE>
Certain deferred tax assets and liabilities were recorded with respect to
purchase accounting for the Acquired Business during the year ended December 31,
1998.
F-64
<PAGE> 228
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKHOLDERS' EQUITY:
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 Services Corp. (collectively, with its
subsidiaries), totaled $44.0 million.
At December 31, 1999, the Company had reserved 600,769 shares of Common
Stock for issuance on conversion of its outstanding convertible subordinated
notes described in Note 8, 1,650,000 shares of Common Stock for issuance on the
exercise of stock options under Invatec's 1997 Incentive Plan, of which options
to purchase a total of 1,145,670 shares then were exercisable at exercise prices
ranging from $1.00 per share to $17.00 per share and 482,262 for warrants issued
to the Company's syndicate of lenders. The Company has not reserved a specific
number of shares of Common Stock for issuance in payment of any Makeup Amount
that may be due to certain former shareholders of the three 1998 Additional
Acquired Businesses discussed in Note 3 because the Company has the option of
paying the obligation in cash.
Invatec's certificate of incorporation authorizes the issuance of up to
30.0 million shares of Common Stock, of which 10,220,117 shares were issued and
outstanding as of December 31, 1999, 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). Prior to 1996, the Company had, from time to time, granted options
to key employees
F-65
<PAGE> 229
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999,
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 became 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, 1999 and changes during the three years then ended:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------ --------------
<S> <C> <C>
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
Granted.......................................... 586,236 3.40
Exercised........................................ (23,500) 8.87
Cancelled........................................ (502,500) 11.51
---------
Balance at December 31, 1998....................... 1,455,984 6.81
Granted.......................................... -- --
Exercised........................................ -- --
Cancelled........................................ (24,500) 11.16
---------
Balance at December 31, 1999....................... 1,431,484 6.74
=========
Available for grant at December 31, 1999........... 195,016
=========
</TABLE>
The options outstanding at December 31, 1999 have exercise prices from
$1.00 to $17.00 per share and a weighted average remaining contractual life of
5.02 years.
At December 31, 1997, 1998, and 1999, the number of options exercisable was
533,873, 558,198, and 1,145,670, respectively, and the weighted average exercise
price of those options was $9.97, $7.96, and $6.70, respectively. Subsequent to
December 31, 1999, options with $1 exercise price were redeemed for the value of
the options and the remaining options were cancelled.
The Company accounts for options by applying APB Opinion No. 25, under
which no compensation expense (other than described in Footnote 2) has been
recognized. No options were granted in 1999.
F-66
<PAGE> 230
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had recorded 1997, 1998 and 1999 compensation cost for
option grants consistent with SFAS No. 123, net loss and loss per share would
have been resulted by the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net Loss:
As Reported................................ $(7,499,964) $(1,414,973) $(57,138,451)
Pro forma.................................. $(8,350,661) $(3,001,219) $(65,045,306)
Loss Per Share:
Basic
As Reported............................. $ (2.25) $ (0.16) $ (5.90)
Pro forma............................... $ (2.50) $ (0.33) $ (6.71)
</TABLE>
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 and 1998 respectively: dividend yield of 0%
and 0%; expected volatility of 48.43% and 50.27%; risk-free interest rate of
6.09% and 4.94%; and expected lives of 6.92 years and 7.0 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. See footnote 6 for the information
regarding warrants issued to the Company's syndicate of lenders.
11. EARNINGS PER SHARE:
The computation of earnings (loss) per share of Common Stock is presented
in accordance with SFAS No. 128, "Earnings Per Share," based on the following
shares of Common Stock outstanding:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Issued and outstanding at January 1.................. 1,481,919 7,890,198 9,664,562
Issued to acquire businesses (weighted).............. 25,016 1,116,316 --
Issued in connection with the Company's IPO
(weighted)......................................... 726,445 -- --
Issued in redemption of SSI Preferred Stock
(weighted)......................................... 228,192 -- --
Issued in connection with SSI and Invatec merger
(weighted)......................................... 170,105 -- --
Issued in partial payment of the Makeup Amount
(weighted)......................................... -- -- 27,397
Issued for stock options exercised and warrants
exercised (weighted)............................... 766,303 18,401 --
--------- --------- ---------
Weighted average shares outstanding -- Basic and
Diluted............................................ 3,397,980 9,024,915 9,691,959
========= ========= =========
</TABLE>
Common share equivalents including options to purchase 10,301 shares of
Common Stock and $12.5 million of subordinated debt convertible into Common
Stock at prices ranging from $16.90 to
F-67
<PAGE> 231
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$22.20 per share, outstanding at December 31, 1997, were not included in the
computation of diluted EPS as their effect on EPS was antidilutive.
Common share equivalents including options to purchase 258,583 shares of
Common Stock, approximately 2.5 million shares of Common Stock assumed to be
issued for guaranteed stock prices, and $11.7 million of subordinated debt
convertible into Common Stock at prices ranging between $16.90 and $22.20 per
share, outstanding at December 31, 1998, were not included in the computation of
diluted EPS as their effect on EPS was antidilutive.
Common share equivalents including options to purchase 201,589 shares of
Common Stock, warrants to purchase 482,262 shares of Common Stock, approximately
3.5 million shares of Common Stock assumed to be issued for guaranteed stock
prices, and $11.7 million of subordinated debt convertible into Common Stock at
prices ranging between $16.90 and $22.20 per share, outstanding at December 31,
1999, were not included in the computation of diluted EPS as their effect on EPS
was antidilutive.
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 in 1997,
these shares, together with accrued dividends thereon, were 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 1997, 1998 and 1999 was approximately
$822,400, $2,765,553, and $3,105,000 respectively. The following represents
future minimum rental payments under noncancelable operating leases:
<TABLE>
<S> <C>
Year ending December 31 --
2000................................................... $3,007,486
2001................................................... 2,382,838
2002................................................... 1,406,691
2003................................................... 523,289
2004................................................... 399,462
Thereafter............................................. 1,317,372
----------
$9,037,138
==========
</TABLE>
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 1997 was approximately $353,000.
This agreement terminated in 1997.
F-68
<PAGE> 232
INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The
Company contributed approximately $59,000, $596,000 and $793,000 to its plans
during the years ended December 31, 1997, 1998, and 1999 respectively.
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 cancellation of these agreements.
18. SUBSEQUENT EVENTS (UNAUDITED):
On November 18, 1999, the Company entered into an Agreement and Plan of
Merger with Flowserve. On November 22, 1999, Flowserve commenced the Tender
Offer to purchase all shares of Common Stock at a price of $1.62 per share. The
Tender Offer was successfully completed on January 6, 2000 and the Merger was
effective as of January 13, 2000.
In connection with the proposed merger, Company management negotiated
discounted amounts (which are not reflected in the accompanying consolidated
financial statements) with certain holders of convertible subordinated debt, its
syndicate of lenders, holders of preferred stock of one of the Acquired
Businesses, and former owners in regard to Makeup Amount obligations. The total
amount discounted was approximately $10.8 million as follows: $3.8 million
reduction in convertible subordinated debt, $4.3 million in waived bank fees,
$2.2 million reduction in the Makeup Amount obligation, and $0.5 million in
other obligations. The obligations were discounted contingent upon the
discounted payments being made by January 31, 2000. The discounted obligations
were paid prior to January 31, 2000. Post-merger costs such as employment
agreements, severance and other employee- or restructuring-related costs are not
reflected in the accompanying consolidated financial statements. Also, in
connection with the Tender Offer, all options with $1 exercise price were
redeemed for the value of the options and the remaining options were cancelled.
Subsequent to December 31, 1999, the Company and two of its principal
officers were named as defendants in a lawsuit alleging misrepresentation.
Management believes that this lawsuit is without merit and, accordingly, no
provision has been made in the accompanying financial statements for this
matter. The outcome of this lawsuit is not determinable at this time.
F-69
<PAGE> 233
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Management Committee of
Ingersoll-Dresser Pump Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of partners' equity
present fairly, in all material respects, the financial position of
Ingersoll-Dresser Pump Company and its subsidiaries (the "Company") at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, NJ
February 18, 2000, except for Note 1
"Acquisition of Halliburton's Interest" and
Note 16 for which the dates are September 12,
2000 and June 22, 2000, respectively.
F-70
<PAGE> 234
INGERSOLL-DRESSER PUMP COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 49,859 $ 28,456
Marketable securities..................................... 3,268 3,607
Accounts and notes receivable, less allowance for doubtful
accounts of $7,928 in 1999 and $6,631 in 1998.......... 200,215 209,352
Due from partners......................................... 1,924 56,293
Inventories, net of progress payments..................... 110,220 116,055
Prepaid expenses.......................................... 4,888 8,978
Deferred income taxes..................................... 12,600 10,474
Other current assets...................................... 3,244 3,966
--------- ---------
386,218 437,181
Investments in and advances with partially-owned equity
companies................................................. 12,279 12,686
Due from partners........................................... -- 227,534
Property, plant and equipment, at cost:
Land, buildings and improvements.......................... 108,574 113,964
Machinery and equipment................................... 179,924 240,592
Less -- accumulated depreciation.......................... (114,094) (243,714)
--------- ---------
174,404 110,842
Intangible assets, net...................................... 78,090 381
Goodwill, net............................................... 141,447 8,198
Other assets................................................ 4,004 3,730
--------- ---------
Total assets...................................... $ 796,442 $ 800,552
========= =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals....................... $ 195,043 $ 224,827
Due to partners........................................... 14,125 9,602
Customers' advance payments............................... 886 4,512
Short-term borrowings..................................... 1,302 733
--------- ---------
211,356 239,674
Deferred income taxes....................................... 25,307 1,914
Postemployment liabilities.................................. 67,159 79,727
Other non-current liabilities............................... 99 141
--------- ---------
Total liabilities................................. 303,921 321,456
--------- ---------
Commitments and contingencies (Note 8)
Partners' equity:
Contributed capital.................................... 425,953 377,357
Accumulated earnings................................... 92,446 131,733
--------- ---------
518,399 509,090
Accumulated other comprehensive loss................... (25,878) (29,994)
--------- ---------
Partners' equity.................................. 492,521 479,096
--------- ---------
Total liabilities and partners' equity............ $ 796,442 $ 800,552
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE> 235
INGERSOLL-DRESSER PUMP COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $838,390 $907,168 $865,092
Cost of goods sold.......................................... 610,745 661,067 637,173
Selling, general and administrative expenses................ 165,031 172,719 166,749
Restructuring charges....................................... 200 3,600 19,500
-------- -------- --------
Operating income.......................................... 62,414 69,782 41,670
Interest expense............................................ 1,362 1,620 1,316
Other income, net........................................... 7,446 7,061 4,202
-------- -------- --------
Earnings before income taxes.............................. 68,498 75,223 44,556
Provision for income taxes.................................. 18,965 16,573 13,228
-------- -------- --------
Net earnings.............................................. $ 49,533 $ 58,650 $ 31,328
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 236
INGERSOLL-DRESSER PUMP COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 49,533 $ 58,650 $ 31,328
Adjustments to arrive at net cash provided by operating
activities:
Depreciation and amortization.......................... 18,251 18,971 20,096
Loss(gain) on sale of property, plant and equipment.... 508 (695) (192)
Equity earnings/losses, net of dividends............... (284) 136 352
Deferred income taxes.................................. (214) (874) (1,095)
Other non-cash activity................................ 2,500 1,453 1,392
Changes in assets and liabilities
(Increase) decrease in:
Accounts and notes receivable..................... (2,320) (9,838) (19,639)
Inventories....................................... 4,383 (762) (4,270)
Other current and noncurrent assets............... 810 437 5,281
(Decrease) increase in:
Accounts payable and accruals..................... (13,880) 6,030 36,697
Other current and noncurrent liabilities.......... (5,742) 3,920 (6,645)
-------- -------- --------
Net cash provided by operating activities................. 53,545 77,428 63,305
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (18,218) (20,285) (16,326)
Proceeds from sales of property, plant and equipment...... -- 1,728 505
Increase in marketable securities......................... (178) (369) (294)
Cash (invested in) or advances (to) from equity
companies.............................................. 700 704 (673)
-------- -------- --------
Net cash used in investing activities.................. (17,696) (18,222) (16,788)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings.............. 684 (510) 160
Increase in Due from partners............................. (12,643) (69,320) (43,138)
-------- -------- --------
Net cash used in financing activities.................. (11,959) (69,830) (42,978)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (2,487) 680 (4,143)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents... 21,403 (9,944) (604)
Cash and cash equivalents -- beginning of year.............. 28,456 38,400 39,004
-------- -------- --------
Cash and cash equivalents -- end of year.................... $ 49,859 $ 28,456 $ 38,400
======== ======== ========
Cash paid during the year for:
Interest.................................................. $ 1,274 $ 1,322 $ 959
======== ======== ========
Taxes..................................................... $ 22,591 $ 15,424 $ 8,604
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE> 237
INGERSOLL-DRESSER PUMP COMPANY
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
CONTRIBUTED ACCUMULATED COMPREHENSIVE COMPREHENSIVE
CAPITAL EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL
----------- ----------- -------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
At January 1, 1997............ $ 377,357 $ 41,755 $(18,066) $ 401,046
Net income.................... 31,328 $ 31,328 31,328
Other comprehensive income
Foreign currency translation
adjustment............... (16,018) (16,018) (16,018)
--------
Total comprehensive income.... 15,310
--------- -------- -------- -------- ---------
At December 31, 1997.......... 377,357 73,083 (34,084) 416,356
Net income.................... 58,650 58,650 58,650
Other comprehensive loss
Foreign currency translation
adjustment............... 4,090 4,090 4,090
--------
Total comprehensive income.... 62,740
--------- -------- -------- -------- ---------
At December 31, 1998.......... 377,357 131,733 (29,994) 479,096
Net income.................... 49,533 49,533 49,533
Offset of Due from partners... (282,312) (282,312)
Other comprehensive income
Foreign currency translation
adjustment............... (20,747) (20,747) (20,747)
--------
Total comprehensive income.... $ 28,786
========
Effect of push-down accounting
for Ingersoll-Rand's
purchase of Halliburton's
interest.................... 330,908 (88,820) 24,863 266,951
--------- -------- -------- ---------
At December 31, 1999.......... $ 425,953 $ 92,446 $(25,878) $ 492,521
========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-74
<PAGE> 238
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF FORMATION AND OPERATIONS
BACKGROUND AND FORMATION
On October 1, 1992, Ingersoll-Rand Company ("Ingersoll-Rand") and Dresser
Industries, Inc. ("Dresser Industries") (collectively the "Original Partners")
entered into a partnership agreement for the formation of Ingersoll-Dresser Pump
Company (the "Company"), a general partnership owned 51 percent by
Ingersoll-Rand Company and 49 percent by Dresser Industries, Inc. Upon
formation, the Original Partners contributed substantially all of the operating
assets (excluding domestic cash) and certain related liabilities which comprised
their worldwide centrifugal and reciprocating pumps businesses. The Original
Partners retained certain liabilities arising prior to the formation of the
partnership and guaranteed receivables contributed at inception. In September
1998, Dresser Industries completed a merger with Halliburton Company
("Halliburton") and transferred its interest in the Company to Halliburton.
On December 30, 1999, IDP Acquisition, LLC, a wholly-owned subsidiary of
Ingersoll-Rand, acquired Halliburton's interest in the Company. Indirectly,
Ingersoll-Rand wholly-owns the Company. During 1999, Ingersoll-Rand announced
its plans to sell the Company.
OPERATIONS
The Company principally serves the oil production and refining, chemical
process, marine, agricultural, electric utility and general manufacturing
industries. The Company was managed by a committee, on which, prior to the
acquisition of the Halliburton interest, the partners had proportionate
representation, based on their respective interest in the Company.
ACQUISITION OF HALLIBURTON'S INTEREST
As described above, on December 30, 1999, IDP Acquisition, LLC, a
wholly-owned subsidiary of Ingersoll-Rand, acquired Halliburton's interest in
the Company for $377,480. The cost of this acquisition in excess of the book
value of Halliburton's 49% interest, $266,951, has been recorded by the Company
using push-down accounting. Accordingly, the excess of the purchase price over
the book value of Halliburton's interest was allocated to the net tangible and
identifiable intangible assets based on their respective fair values and the
balance charged to goodwill. In addition, Halliburton's 49% interest in
accumulated earnings and foreign currency translation adjustment were eliminated
and charged to contributed capital.
The excess of Ingersoll-Rand's basis over the book value of Halliburton's
49% interest has been allocated to the assets and liabilities of the Company as
follows:
<TABLE>
<S> <C>
Total consideration...................................... $377,480
Book value of Halliburton's 49% interest................. 110,529
--------
Basis in excess of book value.......................... 266,951
Fair value greater(less) than book value of Halliburton's
49% interest:
Inventory.............................................. 3,430
Other current assets................................... (572)
Property, plant and equipment.......................... 71,276
Intangible assets...................................... 76,884
Non-current liabilities................................ (17,528)
--------
Goodwill............................................ $133,461
========
</TABLE>
F-75
<PAGE> 239
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PROFORMA INFORMATION (UNAUDITED)
If Ingersoll-Rand had acquired Halliburton's interest in the Company as of
January 1, 1999 or January 1, 1998, operating income would have been decreased
by $11,146 per year due to increased depreciation and amortization expense.
There would be no effect on net sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements of the Company include all domestic
and foreign wholly-owned and majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated. Partially-owned
equity companies are accounted for under the equity method.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, management has
used estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments consisting primarily of
treasury bills and notes, time deposits and commercial paper with a maturity of
three months or less when purchased, to be cash equivalents. Marketable
securities consist primarily of treasury bills, which are carried at cost, which
approximates market value.
INVENTORIES
Inventories are generally stated at cost, which is not in excess of market.
Cost is based on the first-in, first-out (FIFO) method or average cost.
PROPERTY AND DEPRECIATION
Property, plant and equipment is recorded at cost. The Company principally
uses accelerated depreciation methods for assets placed in service prior to
December 31, 1994 and the straight-line method for assets acquired subsequent to
that date. Property, plant and equipment are depreciated over the assets' useful
lives of 3-40 years. See Note 1 for a discussion of IDP Acquisition, LLC's
acquisition of the 49% interest owned by Halliburton and its impact on property,
plant and equipment. Depreciation expense was $17,910, $18,580 and $19,859 in
1999, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
short-term borrowings, and accounts payable are a reasonable estimate of their
fair value due to the short-term maturities of these instruments. See Note 13
for fair value of foreign exchange contracts.
INTANGIBLE ASSETS AND GOODWILL
Goodwill, which is the excess of the purchase price of acquisitions over
the fair value of the net assets acquired, is being amortized on a straight-line
basis over various periods not exceeding 40 years. Intangible assets represent
costs allocated to patents, tradenames, drawings, assembled workforce and other
specifically identifiable assets arising from business acquisitions. These
assets are amortized on a straight-
F-76
<PAGE> 240
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
line basis over their estimated useful lives ranging from 9 to 40 years, with a
weighted average life of 20 years. Goodwill and intangible assets relate
primarily to the acquisition by IDP Acquisition, LLC of the 49% interest in the
Company owned by Halliburton as described in Note 1. Intangible assets are
evaluated for impairment whenever circumstances indicate that the carrying
amounts may not be recoverable. Any impairment would be recognized when the
expected future operating cash flows derived from such intangible asset is less
than their carrying value.
INCOME TAXES
The Company is a partnership and generally does not provide for U.S.
federal and state income taxes since all partnership income and losses are
allocated to the partners for inclusion in their respective income tax returns.
Income taxes are provided on the taxable earnings of foreign subsidiaries. The
Company applies Statement of Financial Accounting Standards ("SFAS") No. 109 for
determining deferred income taxes. Deferred taxes are provided on temporary
differences between assets and liabilities for financial reporting and tax
purposes as measured by enacted tax rates expected to apply when temporary
differences are settled or realized. A valuation allowance is established for
deferred tax assets for which realization is not likely.
ENVIRONMENTAL COSTS
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to existing conditions caused
by past operations, which do not contribute to current or future revenues, are
expensed. Costs to prepare environmental site evaluations and feasibility
studies are accrued when the Company commits to perform them. Any liabilities
for remediation costs would be recorded when they are probable and reasonably
estimable, generally the earlier of completion of feasibility studies or the
Company's commitment to a plan of action. The assessment of the liability is
calculated based on existing technology, does not reflect any offset for
possible recoveries from insurance companies and is not discounted. The only
environmental liabilities known to exist were caused prior to formation of the
partnership and remain the responsibility of the Original Partners.
RESEARCH, ENGINEERING AND DEVELOPMENT COSTS
Research and development expenditures, including some engineering costs,
are expensed when incurred and amounted to $2,984, $3,768 and $3,602 in 1999,
1998 and 1997, respectively.
FOREIGN CURRENCY
Assets and liabilities of foreign entities, where the local currency is the
functional currency, have been translated at year-end exchange rates, and income
and expenses have been translated using weighted average-for-the-year exchange
rates. Adjustments resulting from translation have been recorded in partners'
equity and are included in net earnings only upon sale or liquidation of the
underlying foreign investment.
For foreign subsidiaries where the U.S. dollar is the functional currency,
inventory and property balances and related income statement accounts have been
translated using historical exchange rates and resulting gains and losses have
been credited or charged to net earnings.
Foreign currency transactions and translations increased (decreased) other
income by $86, $(1,094) and $887 in 1999, 1998 and 1997, respectively.
The Company hedges certain foreign currency transactions and firm foreign
currency commitments by entering into forward foreign exchange contracts
(forward contracts). Gains and losses associated with currency rate changes on
forward contracts hedging foreign currency transactions are recorded currently
in
F-77
<PAGE> 241
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
income. Gains and losses on forward contracts hedging firm foreign currency
commitments are deferred off-balance sheet and included as a component of the
related transaction; however, a loss is not deferred if deferral would lead to
the recognition of a loss in future periods. Cash flows resulting from forward
contracts are accounted for as hedges of identifiable transactions or events and
classified in the same category as the cash flows from the items being hedged.
REVENUE RECOGNITION AND WARRANTIES
Sales of products are recorded for financial reporting purposes generally
when the products are shipped. Estimated provisions for warranties are recorded
based on known problems and past experience.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to measure employee stock compensation plans based on the fair value method of
accounting or to continue to apply APB No. 25, "Accounting for Stock Issued to
Employees," and provide pro forma footnote disclosures under the fair value
method in SFAS No. 123. The Company continues to apply the principles of APB No.
25 and has provided pro forma fair value disclosures in Note 14.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." As amended, this
Statement will become effective for the Company beginning January 1, 2001. The
Statement requires all derivatives to be recognized as assets or liabilities on
the balance sheet and measured at fair value. Changes in the fair value of
derivatives will be recognized in earnings or other comprehensive income,
depending on the designated purpose of the derivative. The Company is currently
evaluating the impact of adopting the standard and will comply as required.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." As amended in June 2000, this bulletin will become effective in the
fourth quarter of 2000. SAB 101 expresses the SEC staff's view regarding the
application of generally accepted accounting principles to revenue recognition
in financial statements. The Company is currently evaluating the impact of
adopting the bulletin and will comply as required.
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing activity of $266,951 for the year ended December 31,
1999 relates to the acquisition by IDP Acquisition, LLC of Halliburton's
interest in the Company as described in Note 1. Non-cash financing activity for
the year ended December 31, 1999 relates to the reclassification of the Due from
Partners of $282,312 to equity as a result of the announced plans to sell the
Company.
F-78
<PAGE> 242
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
3. INVENTORIES
At December 31, inventories were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials and supplies.................................. $ 17,430 $ 19,348
Work-in-process............................................. 46,671 50,806
Finished goods.............................................. 46,119 45,901
-------- --------
Total............................................. $110,220 $116,055
======== ========
</TABLE>
Work-in-process inventory is stated after deducting customer progress
payments of $11,498 and $12,177 in 1999 and 1998, respectively.
4. INTANGIBLES AND GOODWILL
At December 31, intangibles were as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Assembled Workforce......................................... $18,400 $ --
Computer Software........................................... 4,100 --
Drawings.................................................... 31,100 --
Distribution Network........................................ 7,100 --
Trademarks.................................................. 15,800 --
Other....................................................... 2,362 1,248
Less -- amortization........................................ (772) (867)
------- ------
Total............................................. $78,090 $ 381
======= ======
</TABLE>
Amortization of intangible assets was $133, $183 and $29 in 1999, 1998 and
1997, respectively.
At December 31, goodwill was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Goodwill.................................................... 142,661 9,214
Less -- amortization........................................ (1,214) (1,016)
-------- -------
Total............................................. $141,447 $ 8,198
======== =======
</TABLE>
Amortization of goodwill was $208 in 1999, 1998 and 1997.
F-79
<PAGE> 243
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. TRADE ACCOUNTS PAYABLE AND ACCRUALS
At December 31, trade accounts payable and accruals were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 81,268 $ 98,695
Accrued:
Compensation.............................................. 35,622 33,912
Vacation.................................................. 10,433 11,084
Income taxes.............................................. 9,693 10,758
Taxes other than income................................... 6,719 8,294
Warranty expense.......................................... 11,255 13,178
Commissions............................................... 10,786 13,540
Other..................................................... 29,267 35,366
-------- --------
$195,043 $224,827
======== ========
</TABLE>
6. INVESTMENTS IN PARTIALLY-OWNED EQUITY COMPANIES
The Company has three investments, 50 percent in Niigata Worthington, 36.6
percent in Industrias Medina and 25 percent in Thompsons, Kelly & Lewis Pty.
Ltd., which operate in similar lines of business. The Company's investments in
and amounts due (to) from partially-owned equity companies amounted to $12,409
and $(130), respectively, at December 31, 1999 and $12,125 and $561,
respectively, at December 31, 1998. The Company's investment in Industrias
Medina is valued at zero at December 31, 1999 and 1998. The Company's equity in
the net earnings of its partially-owned equity companies was $756, $286, and
$795 in 1999, 1998 and, 1997, respectively. The Company received dividends based
on its equity interests in these companies of $472, $422, and $1,147 in 1999,
1998, and 1997, respectively. The Company received royalties from
partially-owned equity companies, included in other income, of $992, $875 and
$1,200 in 1999, 1998 and 1997, respectively.
In 1997, the Company established a reserve of $2.5 million for the
estimated impact on outstanding receivables of the economic crisis in the
Asia-Pacific region. During 1999, this reserve was released and recorded as
other income as management believes the situation has now sufficiently improved
and no reserve is considered necessary.
Summarized financial information for these partially-owned equity companies
at December 31, was:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current assets.............................................. $42,189 $43,317
Property, plant and equipment, net.......................... 23,567 24,317
Other assets................................................ 3,365 750
------- -------
Total assets...................................... $69,121 $68,384
======= =======
Current liabilities......................................... $26,934 $32,048
Long-term debt.............................................. 5,933 2,813
Other liabilities........................................... 1,222 821
Total shareowners' equity......................... 35,032 32,702
------- -------
Total liabilities and shareowners' equity......... $69,121 $68,384
======= =======
</TABLE>
F-80
<PAGE> 244
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Net sales.............................................. $84,349 $82,380 $104,308
======= ======= ========
Gross profit........................................... $19,489 $18,788 $ 24,650
======= ======= ========
Net earnings........................................... $ 2,617 $ 1,536 $ 2,449
======= ======= ========
</TABLE>
7. CREDIT FACILITIES
Credit facilities have been arranged with banks outside the United States
under which the Company's foreign operating units may borrow on an overdraft or
short-term note basis. Available foreign lines of credit were $14,827, of which
$13,525 was unused at December 31, 1999.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation, claims and administrative
proceedings, including environmental matters, arising in the normal course of
business. Amounts recorded for identified contingent liabilities are estimates,
which are reviewed periodically and adjusted to reflect additional information
when it becomes available. Subject to the uncertainties inherent in estimating
future costs for contingent liabilities, management believes that recovery or
liability with respect to these matters would not have a material effect on the
financial condition or the results of operations of the Company for any year.
In the normal course of business, the Company has issued several direct and
indirect guarantees, including performance letters of credit, totaling
approximately $97,308 at December 31, 1999. Management believes these guarantees
will not adversely affect the consolidated financial statements.
As of December 31, 1999 and 1998, the Company had no significant
concentrations of credit risk in trade receivables due to the large number of
customers which comprise its receivable base and their dispersion across
different industries and countries.
All principal manufacturing facilities are owned by the Company. Certain
office and warehouse facilities, transportation vehicles and data processing
equipment are leased. Total rental expense was $4,067, $5,033 and $5,375 in
1999, 1998 and 1997, respectively. Minimum lease payments required under
noncancellable operating leases with terms in excess of one year for the next
five years and thereafter, are as follows: $3,005 in 2,000, $1,794 in 2001,
$1,471 in 2002, $919 in 2003, $591 in 2004 and $256 thereafter.
The Company has entered into employment contracts with a number of its key
executives and employees providing severance and stay bonuses, which become
effective upon the sale of the Company by Ingersoll-Rand.
9. INCOME TAXES
Earnings before income taxes for the years ended December 31 were
attributable to the following jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States........................................... $30,808 $48,315 $17,461
Foreign................................................. 37,690 26,908 27,095
------- ------- -------
Total......................................... $68,498 $75,223 $44,556
======= ======= =======
</TABLE>
F-81
<PAGE> 245
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The provision for income taxes is summarized for the years ended December
31 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
United States......................................... $ 195 $ 516 $ 572
Foreign............................................... 18,984 16,931 13,751
------- ------- -------
Total current......................................... 19,179 17,447 14,323
------- ------- -------
Deferred tax expense (benefit):
Foreign............................................... 2,106 (874) (1,095)
Valuation allowance................................... (2,320) -- --
------- ------- -------
Total deferred........................................ (214) (874) (1,095)
------- ------- -------
Total provision for income taxes...................... $18,965 $16,573 $13,228
======= ======= =======
</TABLE>
During the year, the Company experienced a change in circumstances
regarding the realizability of the net operating loss carryforward deferred tax
asset associated with the Company's German operations. As a result of a
significant, positive trend in the level of profitability of these German
operations, a full reversal of the $2,320 valuation allowance against this
deferred tax asset was deemed appropriate.
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory income tax rate to pretax
income as a result of the following differences:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. rates........................................ 35.0% 35.0% 35.0%
Increase (decrease) in rates resulting from:
U.S. tax on partnership earnings not provided............. (15.2) (22.1) (11.8)
Foreign operations........................................ 11.2 9.1 6.5
Valuation allowance....................................... (3.3) -- --
----- ----- -----
Effective tax rate.......................................... 27.7% 22.0% 29.7%
===== ===== =====
</TABLE>
The primary reason for the difference is that no U.S. federal or state
taxes are levied upon the Company because it is a partnership for U.S. tax
purposes. Under U.S. tax law, such taxes are levied upon the partners rather
that the partnership.
F-82
<PAGE> 246
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A summary of the deferred tax accounts at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Current deferred assets and (liabilities):
Differences between book and tax bases in inventory and
receivables............................................ $ (73) $ 587
Differences between book and tax expense for other
employee related benefits and allowances............... 560 902
Other reserves and valuation allowances in excess of tax
deductions............................................. 6,876 3,339
Other differences between tax and financial statement
values................................................. 5,237 5,646
-------- -------
Gross current deferred net tax assets............. 12,600 10,474
-------- -------
Noncurrent deferred tax assets and (liabilities):
Book depreciation in excess of tax depreciation........... (2,413) (2,925)
Difference between book and tax basis in plant and
equipment and identifiable intangibles resulting from
pushdown accounting.................................... (23,458) --
Net operating loss carryforwards.......................... 564 3,331
-------- -------
Gross noncurrent deferred net tax (liabilities) and
assets............................................... (25,307) 406
Less: deferred tax valuation allowances................ -- (2,320)
-------- -------
Total net deferred tax (liabilities) and assets... $(12,707) $ 8,560
======== =======
</TABLE>
10. RESTRUCTURING
In the first quarter of 1996, the Company decided to close a steel foundry
at one of its operations. In connection with this restructuring of its
operations, the Company charged $4,500 to operating income for the year ended
December 31, 1996, primarily for severance payments and pension benefits
associated with work force reductions of 43 foundry employees, of which 35 were
hourly and 8 were salaried. Other exit costs associated with the shutdown of
$100, $500 and $200 were charged to operating income in 1997, 1998 and 1999,
respectively.
<TABLE>
<S> <C>
Operational restructuring reserve at March 31, 1996....... $ 4,500
Payments applied against restructuring reserve in
1996................................................. (405)
-------
Operational restructuring reserve at December 31, 1996.... 4,095
Payments applied against restructuring reserve in
1997................................................. (4,095)
-------
Operational restructuring reserve at December 31, 1997.... $ --
=======
</TABLE>
In the first quarter of 1997, the Company approved a restructuring plan to
close the pattern makers operations and to consolidate the administration of two
of its operations. Pattern maker and administrative personnel were reduced by 18
employees, of which 6 were hourly and 12 were salaried. Restructuring expense of
$1,600 was charged to operating income for the year ended December 31, 1997. The
main components of the restructuring were termination benefits of $1,300 and
other expenses of $300, all of which was paid during 1997.
In the fourth quarter of 1997, the Company approved another restructuring
plan to reduce administrative and sales personnel, consolidate repair and
service operations and discontinue certain product lines. Personnel were reduced
by 226 employees, of which 127 were hourly and 99 were salaried. The Company
recognized charges of $17,800 to operating income for the year ended December
31, 1997, primarily for severance payments, pension and medical payments and
$1,200 for inventory write-offs. Other exit costs associated with the shutdown
of $3,100 and $2,400 of inventory write-offs were charged to
F-83
<PAGE> 247
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
operating income in 1998. The inventory write-offs have been included in cost of
goods sold in the respective years.
In connection with the plan described above, the Company has incurred
expenses associated with the operational restructuring as follows:
<TABLE>
<S> <C>
Operational restructuring reserve at November 20, 1997.... $ 17,800
Payments applied against restructuring reserve in
1997................................................. (1,045)
--------
Operational restructuring reserve at December 31, 1997.... 16,755
Payments applied against restructuring reserve in
1998................................................. (15,385)
--------
Operational restructuring reserve at December 31, 1998.... 1,370
Payments applied against restructuring reserve in
1999................................................. (1,370)
--------
Operational restructuring reserve at December 31, 1999.... $ --
========
</TABLE>
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors both pension and postretirement plans that cover most
domestic employees and certain employees in other countries.
PENSION
The Company's domestic salaried pension plans principally provide benefits
based on a career-average earnings formula. The Company's domestic hourly
pension plans provide benefits under flat-benefit formulas. Foreign plans
provide benefits based on earnings and years of service. Some of the foreign
plans require employee contributions based on the employee's earnings. The
Company's policy is to fund an amount which could be in excess of the pension
cost expensed, subject to the limitations posed by current statutes or tax
regulations.
Assets of the domestic pension plans are invested in equity securities,
cash equivalents and debt securities. Assets of foreign pension plans are
invested principally in equity securities.
OTHER POSTRETIREMENT BENEFITS
The Company funds other postretirement benefit costs principally on a
pay-as-you-go basis, with the retiree paying a portion of the costs. In
situations where full-time employees retire from the Company between age 55 and
65, most are eligible to receive, at a cost to the retiree, certain health care
benefits identical to those available to active employees. After attaining age
65, an eligible retiree's health care benefit coverage becomes coordinated with
Medicare, with the retiree paying a portion of the cost of the coverage.
F-84
<PAGE> 248
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Summary information on the Company's plans at December 31, was as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of
year.................................. $ 92,830 $ 84,096 $ 37,923 $ 30,083
Service cost............................. 6,920 6,584 891 822
Interest cost............................ 6,332 5,957 2,587 2,478
Plan participants' contributions......... 1,041 1,111 207 168
Amendments............................... 20 915 -- --
Plan transfers........................... 1,348 -- -- --
Actuarial (gain) loss.................... (1,532) (1,689) (2,339) 6,582
Benefits paid............................ (4,353) (4,330) (2,417) (2,210)
Expenses paid............................ (265) (288) -- --
Special termination benefit.............. -- 39 -- --
Foreign exchange translation............. (2,613) 435 -- --
-------- -------- -------- --------
Benefit obligation at end of year........ 99,728 92,830 36,852 37,923
-------- -------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of
year.................................. 68,096 54,489 -- --
Actual return on plan assets............. 7,454 8,496 -- --
Employer contribution.................... 11,203 7,046 -- --
Plan participants' contributions......... 1,041 1,111 -- --
Benefits paid............................ (3,530) (2,451) -- --
Expenses paid............................ (265) (288) -- --
Foreign exchange translation............. (561) (307) -- --
-------- -------- -------- --------
Fair value of plan assets at end of
year.................................. 83,438 68,096 -- --
Funded status............................ (16,290) (24,734) (36,852) (37,923)
Unrecognized net actuarial (gain)........ (4,797) (7,763) (3,902) (5,407)
Unrecognized prior service cost.......... 4,470 8,780 (3,603) (7,695)
Unrecognized transition obligation....... 1,660 3,798 -- --
-------- -------- -------- --------
Net amount recognized.................... $(14,957) $(19,919) $(44,357) $(51,025)
======== ======== ======== ========
Amounts recognized in the balance sheet
consist of:
Prepaid (accrued) benefit cost........... $ 408 $ (2,244) $ -- $ --
Accrued benefit liability................ (16,049) (17,918) (44,357) (51,025)
Intangible asset......................... 684 243 -- --
-------- -------- -------- --------
Net amount recognized.................... $(14,957) $(19,919) $(44,357) $(51,025)
======== ======== ======== ========
</TABLE>
F-85
<PAGE> 249
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Weighted-average assumptions as of December 31 were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Discount rate
U.S. plans.......................................... 7.5% 6.8% 7.5% 6.8%
Foreign plans....................................... 6.0% 6.3% -- --
Expected return on plan assets
U.S. plans.......................................... 9.0% 9.0% -- --
Foreign plans....................................... 7.8% 8.0% -- --
Rate of compensation increase
U.S. plans.......................................... 5.3% 4.5% -- --
Foreign plans....................................... 3.5% 3.9% -- --
</TABLE>
For measurement purposes, the per capita cost of covered health care
benefits was assumed to increase at 6.0 percent for pre-65 benefits and 5.7
percent for post-65 benefits from 1999 to 2000. The rate was assumed to decrease
gradually to 4.5 percent by 2003 and remain at that level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
--------------------------- ------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost................. $ 6,920 $ 6,584 $ 6,327 $ 891 $ 822 $ 630
Interest cost................ 6,332 5,957 5,420 2,587 2,478 2,024
Expected return on net
assets.................... (6,020) (5,015) (3,609) -- -- --
Amortization of transition
obligation................ 701 713 709 -- -- --
Amortization of prior service
cost...................... 1,232 1,016 1,063 (589) (589) (589)
Recognized net actuarial
gain...................... (42) (162) (52) (96) (232) (790)
------- ------- ------- ------ ------ ------
Net periodic benefit cost.... $ 9,123 $ 9,093 $ 9,858 $2,793 $2,479 $1,275
======= ======= ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $73,203, $60,456, and $50,284, respectively, as of
December 31, 1999, and $70,258, $59,916, and $41,871, respectively, as of
December 31, 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percent-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components............................................. $ 250 $ 186
Effect on postretirement benefit obligation.............. $2,948 $2,690
</TABLE>
Most of the Company's domestic employees are covered by savings and other
defined contribution plans. Employer contributions are determined based on
criteria specific to the individual plans and amounted to $3,301, $3,384 and
$3,367 in 1999, 1998 and 1997, respectively.
F-86
<PAGE> 250
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company's contribution relating to foreign defined contribution plans,
insured plans and other foreign benefit plans were $1,726, $2,514 and $2,320 in
1999, 1998 and 1997 respectively.
12. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company engaged in sales and
purchases of manufactured products with the Original Partners. Ingersoll-Rand
provides services, such as accounting, legal and tax services to the Company.
For this the Company paid a flat fee of $3,600 in 1999, 1998 and 1997. The fee
was determined by mutual agreement of the Original Partners based on the
estimated costs of the services provided. Management believes that the fee is
reasonable, but may not necessarily be indicative of the costs that would have
been incurred had the Company performed these functions.
The Company recorded sales of $1,185, $1,979 and $3,124 and purchases of
$5,087, $5,550 and $4,409 with the Original Partners and their affiliates in
1999, 1998 and 1997, respectively. They received rent from the Original Partners
and their affiliates of $688, $749 and $668 in 1999, 1998 and 1997,
respectively. The Company performs accounting services for several foreign
locations of Ingersoll-Rand for a fee of $647, $1,003 and $1,197 in 1999, 1998
and 1997, respectively.
Due to Ingersoll-Rand's intent to sell the Company, Ingersoll-Rand does not
plan to reimburse the Company for advances and loans from the Company. Therefore
the advances and loans due from Ingersoll-Rand have been offset and charged to
Contributed Capital at December 31, 1999.
Amounts due (to) from Original Partners are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------
INGERSOLL-RAND HALLIBURTON TOTAL
-------------- ----------- --------
<S> <C> <C> <C>
Trade accounts receivable......................... $ 1,885 $ 39 $ 1,924
======== ======== ========
Accounts payable.................................. $(14,125) $ -- $(14,125)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
INGERSOLL-RAND HALLIBURTON TOTAL
-------------- ----------- --------
<S> <C> <C> <C>
Trade accounts receivable......................... $ 1,406 $ 64 $ 1,470
Advances and loans................................ $ 35,834 $ 18,989 $ 54,823
-------- -------- --------
$ 37,240 $ 19,053 $ 56,293
======== ======== ========
Advances -- non-current........................... $109,098 $118,436 $227,534
======== ======== ========
Accounts payable.................................. $ (9,602) $ -- $ (9,602)
======== ======== ========
</TABLE>
Foreign loans, included in advances above, bear interest at rates from 2.5%
to 4.75%. Interest income from these advances of $2,696, $4,601 and $3,025 have
been included in other income in 1999, 1998 and 1997. Other third party interest
income, also included in other income, was $1,315, $2,130 and $2,437 in 1999,
1998 and 1997.
13. FINANCIAL INSTRUMENTS
The Company maintains significant operations in foreign countries. As a
result of these global activities, the Company is exposed to changes in foreign
currency exchange rates, which affect the results of operations and financial
condition. The Company manages exposure to changes in foreign currency exchange
rates through its normal operating and financing activities, as well as through
the use of financial instruments.
F-87
<PAGE> 251
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Generally, the only financial instruments the Company utilizes are forward
exchange contracts.
The purpose of the Company's hedging activities is to mitigate the impact
of changes in foreign currency exchange rates. The Company attempts to hedge
transaction exposures through natural offsets. To the extent that this is not
practicable, major exposure areas considered for hedging include foreign
currency denominated receivables and payables, intercompany loans, firm
committed transactions, anticipated sales and purchases, and dividends relating
to foreign subsidiaries. The following table summarizes by major currency the
contractual amounts of the Company's forward contracts in U.S. dollars. Foreign
currency amounts are translated at year-end rates at the respective reporting
date. The "buy" amounts represent the U.S. equivalent of commitments to purchase
foreign currencies, and the "sell" amounts represent the U.S. equivalents of
commitments to sell foreign currencies. Some of the forward contracts involve
the exchange of two foreign currencies according to local needs in foreign
subsidiaries.
At December 31, the contractual amounts were:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
BUY SELL BUY SELL
------- ------ ------- -------
<S> <C> <C> <C> <C>
British pounds.................................. $26,719 $3,359 $12,647 $ 4,112
Deutsche marks.................................. 748 -- 3,501 878
Dutch guilders.................................. -- -- 969 969
French francs................................... 2,105 -- -- 313
Italian lire.................................... 11,797 -- 9,785 --
Euros........................................... 26,649 3,096 -- --
Spanish pesetas................................. 4,421 1,386 540 4,571
Others.......................................... 5,191 -- 398 2,654
------- ------ ------- -------
Total................................. $77,630 $7,841 $27,840 $13,497
======= ====== ======= =======
</TABLE>
Forward contracts utilized by the Company had maturities of one to twelve
months.
The Company's forward contracts that hedge transactions or firm commitments
do not subject the Company to risk due to foreign exchange rate movement, since
gains and losses on these contracts generally offset losses and gains on the
assets, liabilities or other transactions being hedged. Contracts purchased to
mitigate the variability of future cash flows of foreign subsidiaries bear
market risk to the extent actual transacted amounts vary from the forecasted
amounts. All gains and losses on these contracts have been included in earnings.
The counterparties to the Company's forward contracts consist of a number
of major international financial institutions. The credit ratings and
concentration of risk of these financial institutions are monitored on a
continuing basis and present no significant credit risk to the Company.
F-88
<PAGE> 252
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following table summarizes the estimated fair value of the Company's
remaining financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Forward contracts
Contract (notional) amounts:
Buy contracts.......................................... $77,630 $27,840
Sell contracts......................................... 7,841 13,497
Fair (market) values:
Buy contracts.......................................... 77,910 21,312
Sell contracts......................................... 7,884 14,493
</TABLE>
Fair value of forward contracts are based on dealer quotes at the
respective reporting dates.
14. STOCK BASED COMPENSATION PLANS
The Company offers two stock based compensation plans to certain eligible
employees. These programs -- the Ingersoll-Dresser Pump Phantom Stock Option
Plan (the "Phantom Stock Plan") and the Ingersoll-Dresser Pump Long-Term
Incentive Performance Plan (the "Long-Term Incentive Plan") -- are designed to
reward the executive management of the Company for their contribution to the
long term success of the Company and its Original Partners.
Under the terms of the Phantom Stock Plan eligible employees receive
phantom options, the exercise price of which is based on the fair market value
of the common stock of the Original Partners. These phantom options vest ratably
over a three-year period and expire 10 years after the date of the grant. Upon
exercise, the phantom option holder is entitled to a cash payment equal to the
difference between the fair market value of the Original Partners' common stock
at the date of grant and the date the phantom option is exercised. The Company
made an initial grant of phantom options to eligible employees on January 1,
1995, although the grant was deemed to have taken place on January 1, 1994 for
vesting purposes. The maximum number of shares of common stock, with respect to
which phantom options may be exercised pursuant to the Phantom Stock Option
Plan, is 5,000,000 each of Ingersoll-Rand and Halliburton (formerly Dresser
Industries). The phantom options based on the fair market value of the
Ingersoll-Rand common stock can be exercised independently of the phantom
options based on the Halliburton common stock, and vice versa. The Phantom Stock
Plan does not issue shares, or options to purchase shares, in the common stock
of the Original Partners. Subsequent to the purchase of Halliburton's interest
in the Company by IDP Acquisition, LLC, the Phantom Stock Plan continues to be
based on the common stock values of the Original Partners.
F-89
<PAGE> 253
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Changes in phantom options outstanding under the Phantom Stock Plan were as
follows:
<TABLE>
<CAPTION>
SHARES ON WHICH PHANTOM OPTION PRICE
OPTIONS ARE BASED RANGE PER SHARE
---------------------------- ------------------------------
INGERSOLL-RAND HALLIBURTON INGERSOLL-RAND HALLIBURTON
-------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
As of December 31, 1996......... 241,905 340,226 $21.25-$23.25 $19.13-$24.32
Granted....................... 155,296 127,886 29.88 31.19
Exercised..................... (134,254) (197,395) 21.25- 23.25 19.13- 24.32
-------- --------
As of December 31, 1997......... 262,947 270,717 $21.25-$29.88 $19.13-$31.19
Granted....................... 147,917 169,463 40.69 41.81
Exercised..................... (100,270) (89,440) 21.25- 29.88 19.13- 31.19
-------- --------
As of December 31, 1998......... 310,594 350,740 $21.25-$40.69 $19.13-$41.81
Granted....................... 90,007 84,899 47.31 29.66
Exercised..................... (133,331) (51,316) 21.25- 40.69 19.13- 41.81
-------- --------
As of December 31, 1999......... 267,270 384,323 $21.25-$47.31 $19.13-$41.81
======== ========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable phantom options:
<TABLE>
<CAPTION>
INGERSOLL-RAND
------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS
OUTSTANDING AT OPTIONS EXERCISABLE AT
OPTION DECEMBER 31, REMAINING DECEMBER 31,
PRICE 1999 LIFE 1999
------ -------------- ----------- --------------
<S> <C> <C> <C>
$21.25 4,473 5 4,473
23.25 21,049 6 21,049
29.88 38,037 7 2,800
40.69 113,704 8 19,848
47.31 90,007 9 29,972
</TABLE>
<TABLE>
<CAPTION>
HALLIBURTON
------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS
OUTSTANDING AT OPTIONS EXERCISABLE AT
OPTION DECEMBER 31, REMAINING DECEMBER 31,
PRICE 1999 LIFE 1999
------ -------------- ----------- --------------
<S> <C> <C> <C>
$19.13 4,637 5 4,637
24.31 60,868 6 60,868
31.19 70,324 7 44,221
41.81 163,595 8 50,741
29.66 84,899 9 28,271
</TABLE>
Under the terms of the Long-Term Incentive Plan, qualifying employees were
awarded Ingersoll-Dresser Performance Units, which were based upon the value of
one share of Ingersoll-Rand common stock and one share of Halliburton common
stock. Cash payments were awarded to participants based on increases in the
value of the Original Partners' common stock, and the return on invested capital
of the Company. The Plan was based on a four-year cycle that ended on December
31, 1998. An interim payment was made after two years and the final payment was
paid in February 1999. In the period between payouts, the increase in the value
of the units was credited to individual participant accounts in the form of
so-called common stock equivalents. The number of common stock equivalents
credited to participants' accounts at December 31, 1998, was 42,238. The
Long-Term Incentive Plan does not issue shares, or options to purchase shares,
in the common stock of the Original Partners.
F-90
<PAGE> 254
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"), the Company continues to account for its stock-based compensation
plans in accordance with Accounting Principles Board Option No. 25, "Accounting
for Stock Issued to Employees," and its related interpretations. Accordingly,
compensation expense of $4,163, $4,257 and $10,100 has been recognized in
operating income for the years ended December 31, 1999, 1998 and 1997,
respectively. Due to the nature of the plans, as described above, the Company
determined that had compensation cost been determined consistent with the
methodology presented under SFAS 123, there would be no impact on the Company's
net income.
15. BUSINESS SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosure
About Segments of an Enterprise and Related Information.," SFAS No. 131 requires
disclosure of certain financial and descriptive information about operating
segments. In addition, SFAS No. 131 requires disclosures about products and
services, and geographic areas. Operating segments are defined as components of
a Company engaging in business activities for which separate financial
information is available and evaluated regularly by the chief operating decision
maker in assessing performance and allocating resources.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies, except that the
operating segments results are prepared on a management basis that is consistent
with the manner in which the Company desegregates financial information for
internal review and decision making. The Company evaluates performance based on
operating income contribution rates.
INDUSTRIAL PRODUCTS
The Industrial Products Segment refers to operations that produce standard
products typically furnished to customers requiring a low level of
customization. These pumps are largely sold through distributors and serve a
variety of general manufacturing applications.
ENGINEERED PRODUCTS
The Engineered Products Segment refers to operations that produce custom
engineered pumps based on client specifications. These pumps service the oil
production and refining, chemical process, marine, agricultural and electric
utility markets.
F-91
<PAGE> 255
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A summary of operations by reportable segments for the years ended December
31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INDUSTRIAL PRODUCTS
Sales.............................................. $268,656 $330,084 $331,075
======== ======== ========
Operating income................................... $ 11,907 $ 30,331 $ 33,973
======== ======== ========
Operating income as a percentage of sales.......... 4.4% 9.2% 10.3%
======== ======== ========
Depreciation and amortization...................... $ 11,184 $ 7,802 $ 8,078
======== ======== ========
ENGINEERED PRODUCTS
Sales.............................................. $569,734 $577,084 $534,017
======== ======== ========
Operating income................................... $ 48,431 $ 47,522 $ 31,121
======== ======== ========
Operating income as a percentage of sales.......... 8.5% 8.2% 5.8%
======== ======== ========
Depreciation and amortization...................... $ 7,067 $ 11,169 $ 12,018
======== ======== ========
TOTAL
Sales.............................................. $838,390 $907,168 $865,092
======== ======== ========
Operating income from reportable segments.......... 60,338 77,853 65,094
Restructuring expense.............................. 200 3,600 19,500
Unallocated corporate (income) expenses............ (2,276) 4,471 3,924
-------- -------- --------
Total operating income............................. $ 62,414 $ 69,782 $ 41,670
======== ======== ========
Operating income as a percentage of sales.......... 7.4% 7.7% 4.8%
======== ======== ========
Depreciation and amortization...................... $ 18,251 $ 18,971 $ 20,096
======== ======== ========
</TABLE>
Geographic customer sales by destination for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SALES
United States...................................... $353,756 $344,923 $291,100
Foreign............................................ 484,634 562,245 573,992
-------- -------- --------
Total...................................... $838,390 $907,168 $865,092
======== ======== ========
</TABLE>
Long-lived asset information by geographic area as of December 31 was as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Long-lived assets
United States............................................. $268,214 $ 68,337
Foreign................................................... 142,010 67,500
Due from partners......................................... -- 227,534
-------- --------
Total............................................. $410,224 $363,371
======== ========
</TABLE>
F-92
<PAGE> 256
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS
On August 8, 2000, Flowserve Corporation ("Flowserve") acquired the Company
from the Partners. In connection with its purchase of the Company, Flowserve
issued unsecured senior subordinated notes. The notes will be unconditionally
guaranteed, jointly and severally, by certain subsidiaries of Flowserve,
including its existing and subsequently acquired domestic subsidiaries.
Accordingly, the following condensed consolidating financial information
presents:
(1) Condensed consolidating financial statements at December 31, 1999
and 1998 and for the years ended December 31, 1999, 1998 and 1997, of (a)
the guarantor subsidiaries ("domestic"); (b) the nonguarantor subsidiaries
("foreign"); and (c) the Company on a consolidated basis, and
(2) Elimination entries necessary to consolidate the guarantor and
nonguarantor subsidiaries.
Investments in subsidiaries are accounted for by the parent using the
equity method of accounting. The guarantor and nonguarantor subsidiaries are
presented on a combined basis. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
F-93
<PAGE> 257
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Separate financial statements for the guarantor subsidiaries and the
nonguarantor subsidiaries are not presented because management believes that
such financial statements would not be meaningful to investors.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 6,038 $ 43,821 $ -- $ 49,859
Marketable securities......................... -- 3,268 -- 3,268
Accounts and notes receivable, net............ 81,168 119,047 -- 200,215
Accounts receivable from affiliates........... 3,765 50,984 (54,749) --
Due from partners............................. 1,547 377 -- 1,924
Inventories, net of progress payments......... 61,930 47,240 1,050 110,220
Other current assets.......................... 2,724 18,008 -- 20,732
-------- -------- ------------ ---------
157,172 282,745 (53,699) 386,218
Investment in affiliates........................ 180,437 -- (180,437) --
Property, plant and equipment, at cost:......... 145,237 143,330 (69) 288,498
Less -- accumulated depreciation.............. (55,248) (58,869) 23 (114,094)
-------- -------- ------------ ---------
89,989 84,461 (46) 174,404
Intangibles..................................... 65,943 12,147 -- 78,090
Goodwill........................................ 112,783 28,664 -- 141,447
Other assets.................................... 11,064 3,666 1,553 16,283
-------- -------- ------------ ---------
Total assets.......................... $617,388 $411,683 $ (232,629) $ 796,442
======== ======== ============ =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals........... $ 72,292 $122,593 $ 158 $ 195,043
Accounts payable from affiliates.............. 48,589 5,245 (53,834) --
Due to partners............................... 13,538 587 -- 14,125
Other current liabilities..................... -- 2,188 -- 2,188
-------- -------- ------------ ---------
134,419 130,613 (53,676) 211,356
Deferred income taxes........................... -- 25,307 -- 25,307
Postemployment liabilities...................... 50,689 16,470 -- 67,159
Other non-current liabilities................... 99 -- -- 99
-------- -------- ------------ ---------
Total liabilities..................... 185,207 172,390 (53,676) 303,921
-------- -------- ------------ ---------
Partners' equity:
Capital Stock................................. -- 96,374 (96,374) --
Contributed capital........................... 377,562 121,032 (72,641) 425,953
Accumulated earnings.......................... 54,619 37,657 170 92,446
-------- -------- ------------ ---------
432,181 255,063 (168,845) 518,399
Accumulated other comprehensive loss.......... -- (15,770) (10,108) (25,878)
-------- -------- ------------ ---------
Partners' equity...................... 432,181 239,293 (178,953) 492,521
-------- -------- ------------ ---------
Total liabilities and partners'
equity.............................. $617,388 $411,683 $ (232,629) $ 796,442
======== ======== ============ =========
</TABLE>
F-94
<PAGE> 258
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ -- $ 28,456 $ -- $ 28,456
Marketable securities....................... -- 3,607 -- 3,607
Accounts and notes receivable, net.......... 86,460 122,892 -- 209,352
Accounts receivable from affiliates......... (16,314) 39,343 (23,029) --
Due from partners........................... 1,246 55,047 -- 56,293
Inventories, net of progress payments....... 64,921 50,541 593 116,055
Other current assets........................ 4,897 18,521 -- 23,418
--------- --------- --------- ---------
141,210 318,407 (22,436) 437,181
Investment in affiliates...................... 180,437 (180,437) --
Due from partners............................. 227,534 -- -- 227,534
Property, plant and equipment, at cost:....... 175,499 179,125 (68) 354,556
Less -- accumulated depreciation............ (117,743) (126,017) 46 (243,714)
--------- --------- --------- ---------
57,756 53,108 (22) 110,842
Other assets.................................. 14,471 8,972 1,552 24,995
--------- --------- --------- ---------
Total assets........................ $ 621,408 $ 380,487 $(201,343) $ 800,552
========= ========= ========= =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals......... $ 86,544 $ 138,443 $ (160) $ 224,827
Accounts payable to affiliates.............. 30,410 (8,548) (21,862) --
Due to partners............................. 8,963 639 -- 9,602
Other current liabilities................... -- 5,245 -- 5,245
--------- --------- --------- ---------
125,917 135,779 (22,022) 239,674
Postemployment liabilities.................... 57,529 22,198 -- 79,727
Other non-current liabilities................. 112 1,943 -- 2,055
--------- --------- --------- ---------
Total liabilities................... 183,558 159,920 (22,022) 321,456
--------- --------- --------- ---------
Partners' equity:
Capital Stock............................... -- 96,374 (96,374) --
Contributed capital......................... 360,301 89,195 (72,139) 377,357
Accumulated earnings........................ 77,549 54,884 (700) 131,733
--------- --------- --------- ---------
437,850 240,453 (169,213) 509,090
Accumulated other comprehensive loss........ -- (19,886) (10,108) (29,994)
--------- --------- --------- ---------
Partners' equity.................... 437,850 220,567 (179,321) 479,096
--------- --------- --------- ---------
Total liabilities and partners'
equity............................ $ 621,408 $ 380,487 $(201,343) $ 800,552
========= ========= ========= =========
</TABLE>
F-95
<PAGE> 259
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales........................................ $442,593 $430,593 $(34,796) $838,390
Cost of goods sold............................... 339,526 305,687 (34,468) 610,745
Selling, general and administrative expenses..... 89,994 75,093 (56) 165,031
Restructuring charges............................ 200 -- -- 200
-------- -------- -------- --------
Operating income............................... 12,873 49,813 (272) 62,414
Interest expense................................. -- 1,362 -- 1,362
Dividend Income.................................. 9,562 -- (9,562) --
Other income (expense), net...................... 7,984 (538) -- 7,446
-------- -------- -------- --------
Earnings before income taxes................... 30,419 47,913 (9,834) 68,498
Provision for income taxes....................... 872 18,093 -- 18,965
-------- -------- -------- --------
Net earnings................................... $ 29,547 $ 29,820 $ (9,834) $ 49,533
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales........................................ $466,081 $476,693 $ (35,606) $907,168
Cost of goods sold............................... 353,540 343,093 (35,566) 661,067
Selling, general and administrative expenses..... 94,693 78,026 -- 172,719
Restructuring charges............................ 2,200 1,440 (40) 3,600
-------- -------- ------------ --------
Operating income............................... 15,648 54,134 -- 69,782
Interest expense................................. -- 1,620 -- 1,620
Dividend Income.................................. 27,085 -- (27,085) --
Other income (expense), net...................... 6,501 560 -- 7,061
-------- -------- ------------ --------
Earnings before income taxes................... 49,234 53,074 (27,085) 75,223
Provision for income taxes....................... 515 16,058 -- 16,573
-------- -------- ------------ --------
Net earnings................................... $ 48,719 $ 37,016 $ (27,085) $ 58,650
======== ======== ============ ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales........................................ $443,404 $460,683 $ (38,995) $865,092
Cost of goods sold............................... 337,637 338,416 (38,880) 637,173
Selling, general and administrative expenses..... 85,735 81,176 (162) 166,749
Restructuring charges............................ 4,804 14,696 -- 19,500
-------- -------- ------------ --------
Operating income............................... 15,228 26,395 47 41,670
Interest expense................................. -- 1,316 -- 1,316
Dividend income.................................. 713 -- (713) --
Other income (expense), net...................... 2,196 2,006 -- 4,202
-------- -------- ------------ --------
Earnings before income taxes................... 18,137 27,085 (666) 44,556
Provision for income taxes....................... 572 12,656 -- 13,228
-------- -------- ------------ --------
Net earnings................................... $ 17,565 $ 14,429 $ (666) $ 31,328
======== ======== ============ ========
</TABLE>
F-96
<PAGE> 260
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................... $ 29,547 $ 29,820 $ (9,834) $ 49,533
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization............... 9,775 8,476 -- 18,251
Loss (gain) on sale of property, plant and
equipment................................. 508 -- -- 508
Equity earnings/losses, net of dividends.... (284) -- -- (284)
Deferred income taxes....................... -- (214) -- (214)
Other non-cash activity..................... 2,500 -- -- 2,500
Changes in assets and liabilities
(Increase) decrease in assets............. (7,836) (20,554) 31,263 2,873
(Decrease) increase in liabilities........ 3,890 7,479 (30,991) (19,622)
-------- -------- -------- --------
Net cash provided by operating activities... 38,100 25,007 (9,562) 53,545
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (8,788) (9,430) -- (18,218)
Increase in marketable securities.............. -- (178) -- (178)
Cash (invested in) or advances (to) from equity
companies................................... (61) 761 -- 700
-------- -------- -------- --------
Net cash used in investing activities....... (8,849) (8,847) -- (17,696)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings... -- 684 -- 684
Dividends paid by affiliates................... -- (9,562) 9,562 --
(Increase) decrease in Due from partners....... (23,213) 10,570 -- (12,643)
-------- -------- -------- --------
Net cash used in financing activities....... (23,213) 1,692 9,562 (11,959)
-------- -------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents.......................... -- (2,487) -- (2,487)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 6,038 15,365 -- 21,403
Cash and cash equivalents -- beginning of year... -- 28,456 -- 28,456
-------- -------- -------- --------
Cash and cash equivalents -- end of year......... $ 6,038 $ 43,821 $ -- $ 49,859
======== ======== ======== ========
</TABLE>
F-97
<PAGE> 261
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................... $ 48,719 $ 37,016 $(27,085) $ 58,650
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization............... 9,649 9,322 -- 18,971
Loss(gain) on sale of property, plant and
equipment................................. (210) (485) -- (695)
Equity earnings/losses, net of dividends.... 136 -- -- 136
Deferred income taxes....................... -- (874) -- (874)
Other non-cash activity..................... 621 832 -- 1,453
Changes in assets and liabilities
(Increase) decrease in assets............. 7,469 (19,459) 1,827 (10,163)
(Decrease) increase in liabilities........ 26,652 (14,875) (1,827) 9,950
-------- -------- -------- --------
Net cash provided by operating activities... 93,036 11,477 (27,085) 77,428
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (6,731) (13,554) -- (20,285)
Proceeds from sales of property, plant and
equipment................................... 518 1,210 -- 1,728
Increase in marketable securities.............. -- (369) -- (369)
Cash (invested in) or advances (to) from equity
companies................................... 329 375 -- 704
-------- -------- -------- --------
Net cash used in investing activities....... (5,884) (12,338) -- (18,222)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings... -- (510) -- (510)
Dividends paid by affiliates................... -- (27,085) 27,085 --
(Increase) decrease in Due from partners....... (87,500) 18,180 -- (69,320)
-------- -------- -------- --------
Net cash used in financing activities....... (87,500) (9,415) 27,085 (69,830)
-------- -------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents.......................... -- 680 -- 680
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... (348) (9,596) -- (9,944)
Cash and cash equivalents -- beginning of year... 348 38,052 -- 38,400
-------- -------- -------- --------
Cash and cash equivalents -- end of year......... $ -- $ 28,456 $ -- $ 28,456
======== ======== ======== ========
</TABLE>
F-98
<PAGE> 262
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................... $ 17,559 $ 14,435 $ (666) $ 31,328
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization............... 11,395 8,701 -- 20,096
Loss(gain) on sale of property, plant and
equipment................................. (192) -- -- (192)
Equity earnings/losses, net of dividends.... 352 -- -- 352
Deferred income taxes....................... -- (1,095) -- (1,095)
Other non-cash activity..................... -- 1,392 -- 1,392
Changes in assets and liabilities
(Increase) decrease in assets............. (11,133) (8,304) 809 (18,628)
(Decrease) increase in liabilities........ 8,311 22,567 (826) 30,052
-------- -------- ------ --------
Net cash provided by operating activities... 26,292 37,696 (683) 63,305
-------- -------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (9,065) (7,261) -- (16,326)
Proceeds from sales of property, plant and
equipment................................... 505 -- -- 505
Increase in marketable securities.............. -- (294) -- (294)
Sale (purchase) of investment in affiliates,
net......................................... 640 -- (640) --
Cash (invested in) or advances (to) from equity
companies................................... (1,788) 1,115 -- (673)
-------- -------- ------ --------
Net cash used in investing activities....... (9,708) (6,440) (640) (16,788)
-------- -------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings... -- 160 -- 160
Return of affiliate capital.................... -- (610) 610 --
Dividends paid by affiliates................... -- (713) 713 --
(Increase) decrease in Due from partners....... (16,236) (26,902) -- (43,138)
-------- -------- ------ --------
Net cash used in financing activities....... (16,236) (28,065) 1,323 (42,978)
-------- -------- ------ --------
Effect of exchange rate changes on cash and
cash equivalents.......................... -- (4,143) -- (4,143)
-------- -------- ------ --------
Net increase (decrease) in cash and cash
equivalents............................... 348 (952) -- (604)
Cash and cash equivalents -- beginning of year... -- 39,004 -- 39,004
-------- -------- ------ --------
Cash and cash equivalents -- end of year......... $ 348 $ 38,052 $ -- $ 38,400
======== ======== ====== ========
</TABLE>
F-99
<PAGE> 263
INGERSOLL-DRESSER PUMP COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,566 $ 49,859
Marketable securities..................................... 2,043 3,268
Accounts and notes receivable, less allowance for doubtful
accounts of $9,517 in 2000 and $7,928 in 1999.......... 178,848 200,215
Due from partners......................................... 1,965 1,924
Inventories, net of progress payments..................... 122,117 110,220
Prepaid expenses.......................................... 9,390 4,888
Deferred income taxes..................................... 8,800 12,600
Other current assets...................................... 4,548 3,244
--------- ---------
351,277 386,218
Investments in and advances with partially-owned equity
companies................................................. 14,145 12,279
Property, plant and equipment, at cost:..................... 281,546 288,498
Less -- accumulated depreciation.......................... (116,683) (114,094)
--------- ---------
Net property, plant and equipment...................... 164,863 174,404
Intangible assets, net...................................... 75,622 78,090
Goodwill, net............................................... 139,675 141,447
Other assets................................................ 3,017 4,004
--------- ---------
Total assets...................................... $ 748,599 $ 796,442
========= =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals....................... $ 187,420 $ 195,043
Due to partners........................................... 188 14,125
Customers' advance payments............................... 2,502 886
Short-term borrowings..................................... 768 1,302
--------- ---------
190,878 211,356
Deferred income taxes....................................... 24,789 25,308
Postemployment liabilities.................................. 67,688 67,158
Other non-current liabilities............................... 90 99
--------- ---------
Total liabilities................................. 283,445 303,921
--------- ---------
Partners' equity:
Contributed capital....................................... 414,558 425,953
Accumulated earnings...................................... 89,982 92,446
--------- ---------
504,540 518,399
Accumulated other comprehensive loss...................... (39,386) (25,878)
--------- ---------
Partners' equity.................................. 465,154 492,521
--------- ---------
Total liabilities and partners' equity............ $ 748,599 $ 796,442
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-100
<PAGE> 264
INGERSOLL-DRESSER PUMP COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $363,409 $399,490
Cost of goods sold.......................................... 279,792 295,575
Selling, general and administrative expense................. 77,672 81,317
-------- --------
Operating income.......................................... 5,945 22,598
Interest expense............................................ 530 765
Other income, net........................................... 712 3,167
-------- --------
Earnings before income taxes.............................. 6,127 25,000
Provision for income taxes.................................. 8,591 10,005
-------- --------
Net earnings (loss)....................................... $ (2,464) $ 14,995
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-101
<PAGE> 265
INGERSOLL-DRESSER PUMP COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ (2,464) $ 14,995
Adjustments to arrive at net cash provided by operating
activities:
Depreciation and amortization.......................... 14,909 9,934
Loss(gain) on sale of property, plant and equipment.... (52) (67)
Equity earnings/losses, net of dividends............... 588 286
Changes in assets and liabilities:
(Increase) decrease in assets........................ (2,764) 35,895
(Decrease) increase in liabilities................... (11,920) (34,642)
-------- --------
Net cash (used in) provided by operating activities.... (1,703) 26,401
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (4,804) (5,886)
Proceeds from sales of property, plant and equipment...... 348 243
Decrease in marketable securities......................... 975 1,470
Cash (invested in) or advances (to) from equity
companies.............................................. (2,430) 314
-------- --------
Net cash used in investing activities.................. (5,911) (3,859)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings.............. (532) 145
Cash transferred to Partners.............................. (16,355) --
Increase in Due to (from) partners........................ -- (26,368)
-------- --------
Net cash used in financing activities.................. (16,887) (26,223)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents........................................... (1,792) (2,333)
-------- --------
Net increase (decrease) in cash and cash equivalents... (26,293) (6,014)
Cash and cash equivalents -- beginning of year.............. 49,859 28,456
-------- --------
Cash and cash equivalents -- end of year.................... $ 23,566 $ 22,442
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-102
<PAGE> 266
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1
The accompanying unaudited interim financial statements and related notes
should be read in conjunction with the consolidated financial statements of
Ingersoll-Dresser Pump Company (the "Company") and related notes for the year
ended December 31, 1999. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments (all of
which are of a normal recurring nature) necessary to present fairly the
consolidated unaudited financial position and results of operations for the six
months ended June 30, 2000, and 1999.
NOTE 2
On December 30, 1999, IDP Acquisition, LLC, a wholly-owned subsidiary of
Ingersoll-Rand, acquired Halliburton's interest in the Company for $377,480. The
cost of this acquisition in excess of the book value of Halliburton's 49%
interest, $266,951, has been recorded by the Company using pushdown accounting.
Accordingly, the excess of the purchase price over the book value of
Halliburton's interest was allocated to the net tangible and identifiable
intangible assets based on their respective fair values and the balance charged
to goodwill. In addition, Halliburton's 49% interest in accumulated earnings and
foreign currency translation adjustment were eliminated and charged to
contributed capital. The step up in the basis of property, plant and equipment
as a result of pushdown accounting are being depreciated over the asset's useful
lives of 3-40 years. Identifiable intangibles and goodwill resulting from
pushdown accounting are being amortized over their useful lives of 9-40 years,
with a weighted average life of 20 years for identifiable intangibles.
NOTE 3
Inventories are generally stated at cost, which is not in excess of market.
Cost is based on the first-in, first-out (FIFO) method or average cost. The
composition of inventories follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials and supplies.................................. $ 23,944 $ 17,430
Work-in-process............................................. 55,583 46,671
Finished goods.............................................. 42,590 46,119
-------- --------
Total............................................. $122,117 $110,220
======== ========
</TABLE>
Work-in-process inventory is stated after deducting customer progress
payments of $13,902 and $11,498 in 2000 and 1999, respectively.
NOTE 4
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net earnings................................................ $ (2,464) $ 14,995
Other comprehensive income -- foreign currency translation
adjustment................................................ (13,508) (19,371)
-------- --------
Comprehensive income (loss)................................. $(15,972) $ (4,376)
======== ========
</TABLE>
F-103
<PAGE> 267
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 5
The decrease in earnings (loss) for the six months ended June 30, 2000 of
($2,464) as compared to the six months ended June 30, 1999 is primarily the
result of a decrease in sales for the period and the following:
- Operating income for the six months ended June 30, 2000 is negatively
impacted by a $3,400 adjustment to increase inventory at December 31,
1999 resulting from pushdown accounting for Ingersoll-Rand's acquisition
of the remaining 49% interest in the Company.
- Increased depreciation and amortization expense as a result of applying
pushdown accounting as described in Note 2 of $5,573.
- Increase in effective tax rate as a result of earnings in foreign
jurisdictions with higher tax rates and losses in the domestic business,
which has no tax impact as a result of the Company being a United States
partnership (approximate $6,100 impact).
- Benefit of the change in the Company's vacation policy, effective January
1, 2000, for certain employees such that vacation is earned ratably over
the year. Accordingly, included in administrative, selling and service
engineering expense for the six months ended June 30, 2000 is a $2,547
reduction in the vacation accrual recorded at December 31, 1999.
NOTE 6
A summary of operations by reportable segment is as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Sales
Engineered products....................................... $235,616 $262,450
Industrial products....................................... 127,793 137,040
-------- --------
Total............................................. $363,409 $399,490
======== ========
Operating Income
Engineered products....................................... $ 5,936 $ 15,276
Industrial products....................................... 3,505 7,749
Unallocated corporate income (expenses)................... (3,496) (427)
-------- --------
Total............................................. $ 5,945 $ 22,598
======== ========
</TABLE>
The increase in the unallocated corporate expense is primarily due to the
amortization of goodwill and identifiable intangibles related to the pushdown
accounting for Ingersoll-Rand's acquisition of the remaining 49% interest in the
Company as described in Note 2.
No significant changes in assets by geographic area have occurred since
December 31, 1999.
NOTE 7
The Company is involved in various litigations, claims and administrative
proceedings, including environmental matters, arising from the normal course of
business. Amounts recorded for identified contingent liabilities are estimates,
which are reviewed periodically and adjusted to reflect additional
F-104
<PAGE> 268
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
information when it becomes available. Subject to the uncertainties inherent in
estimating future costs for contingent liabilities, management believes that
recovery or liability with respect to these matters would not have a material
effect on the financial condition or the results of operations of the Company
for any year.
The Company has entered into employment contacts with a number of key
executive and employees providing severance and stay bonuses, which become
effective upon the sale of the Company by Ingersoll-Rand.
NOTE 8
On August 8, 2000, Flowserve Corporation ("Flowserve") acquired the Company
from Ingersoll-Rand for $775,000. In connection with its purchase of the
Company, Flowserve issued unsecured senior subordinated notes. The notes will be
unconditionally guaranteed, jointly and severally, by certain subsidiaries of
Flowserve, including its existing and subsequently acquired domestic
subsidiaries.
Accordingly, the following condensed consolidating financial information
presents:
(1) Condensed consolidating financial statements at June 30, 2000 and
December 31, 1999 and for the six months ended June 30, 2000 and 1999, of
(a) the guarantor subsidiaries ("domestic"); (b) the nonguarantor
subsidiaries ("foreign"); and (c) the Company on a consolidated basis, and
(2) Elimination entries necessary to consolidate the guarantor and
nonguarantor subsidiaries.
F-105
<PAGE> 269
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 113 $ 23,453 $ -- $ 23,566
Marketable securities......................... -- 2,043 -- 2,043
Accounts and notes receivable, net............ 68,575 110,273 -- 178,848
Accounts receivable from affiliates........... 4,164 43,855 (48,019) --
Due from partners............................. 1,756 209 -- 1,965
Inventories, net of progress payments......... 63,003 59,293 (179) 122,117
Other current assets.......................... 4,288 18,450 -- 22,738
-------- -------- --------- ---------
141,899 257,576 (48,198) 351,277
Investment in affiliates........................ 180,437 -- (180,437) --
Property, plant and equipment, at cost:......... 146,387 135,227 (68) 281,546
Less -- accumulated depreciation.............. (60,754) (55,949) 20 (116,683)
-------- -------- --------- ---------
85,633 79,278 (48) 164,863
Intangibles..................................... 64,152 11,470 -- 75,622
Goodwill........................................ 111,363 28,312 -- 139,675
Other assets.................................... 10,655 4,954 1,553 17,162
-------- -------- --------- ---------
Total assets.......................... $594,139 $381,590 $(227,130) $ 748,599
======== ======== ========= =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals........... $ 81,908 $107,975 $ (2,463) $ 187,420
Accounts payable from affiliates.............. 42,561 5,101 (47,662) --
Due to partners............................... 18 170 -- 188
Other current liabilities..................... -- 3,270 -- 3,270
-------- -------- --------- ---------
124,487 116,516 (50,125) 190,878
Deferred income taxes........................... -- 24,789 -- 24,789
Postemployment liabilities...................... 51,323 16,365 -- 67,688
Other non-current liabilities................... 90 -- -- 90
-------- -------- --------- ---------
Total liabilities..................... 175,900 157,670 (50,125) 283,445
-------- -------- --------- ---------
Partners' equity:
Capital Stock................................. -- 96,374 (96,374) --
Contributed capital........................... 371,507 119,509 (76,458) 414,558
Accumulated earnings.......................... 46,732 37,319 5,931 89,982
-------- -------- --------- ---------
418,239 253,202 (166,901) 504,540
Accumulated other comprehensive loss.......... -- (29,282) (10,104) (39,386)
-------- -------- --------- ---------
Partners' equity...................... 418,239 223,920 (177,005) 465,154
-------- -------- --------- ---------
Total liabilities and partners'
equity.............................. $594,139 $381,590 $(227,130) $ 748,599
======== ======== ========= =========
</TABLE>
F-106
<PAGE> 270
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 6,038 $ 43,821 $ -- $ 49,859
Marketable securities......................... -- 3,268 -- 3,268
Accounts and notes receivable, net............ 81,168 119,047 -- 200,215
Accounts receivable from affiliates........... 3,765 50,984 (54,749) --
Due from partners............................. 1,547 377 -- 1,924
Inventories, net of progress payments......... 61,930 47,240 1,050 110,220
Other current assets.......................... 2,724 18,008 -- 20,732
-------- -------- --------- ---------
157,172 282,745 (53,699) 386,218
Investment in affiliates........................ 180,437 -- (180,437) --
Property, plant and equipment, at cost:......... 145,237 143,330 (69) 288,498
Less -- accumulated depreciation.............. (55,248) (58,869) 23 (114,094)
-------- -------- --------- ---------
89,989 84,461 (46) 174,404
Intangibles..................................... 65,943 12,147 -- 78,090
Goodwill........................................ 112,783 28,664 -- 141,447
Other assets.................................... 11,064 3,666 1,553 16,283
-------- -------- --------- ---------
Total assets.......................... $617,388 $411,683 $(232,629) $ 796,442
======== ======== ========= =========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Trade accounts payable and accruals........... $ 72,292 $122,593 $ 158 $ 195,043
Accounts payable from affiliates.............. 48,589 5,245 (53,834) --
Due to partners............................... 13,538 587 -- 14,125
Other current liabilities..................... -- 2,188 -- 2,188
-------- -------- --------- ---------
134,419 130,613 (53,676) 211,356
Deferred income taxes........................... -- 25,307 -- 25,307
Postemployment liabilities...................... 50,689 16,470 -- 67,159
Other non-current liabilities................... 99 -- -- 99
-------- -------- --------- ---------
Total liabilities..................... 185,207 172,390 (53,676) 303,921
-------- -------- --------- ---------
Partners' equity:
Capital Stock................................. -- 96,374 (96,374) --
Contributed capital........................... 377,562 121,032 (72,641) 425,953
Accumulated earnings.......................... 54,619 37,657 170 92,446
-------- -------- --------- ---------
432,181 255,063 (168,845) 518,399
Accumulated other comprehensive loss.......... -- (15,770) (10,108) (25,878)
-------- -------- --------- ---------
Partners' equity...................... 432,181 239,293 (178,953) 492,521
-------- -------- --------- ---------
Total liabilities and partners'
equity.............................. $617,388 $411,683 $(232,629) $ 796,442
======== ======== ========= =========
</TABLE>
F-107
<PAGE> 271
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 2000
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales........................................ $192,040 $186,730 $(15,361) $363,409
Cost of goods sold............................... 156,922 138,228 (15,358) 279,792
Selling, general and administrative expenses..... 47,518 35,919 (5,765) 77,672
Restructuring charges............................ -- -- -- --
-------- -------- -------- --------
Operating income............................... (12,400) 12,583 5,762 5,945
Interest expense................................. -- 530 -- 530
Dividend Income.................................. 2,154 -- (2,154) --
Other income (expense), net...................... 2,626 (1,914) -- 712
-------- -------- -------- --------
Earnings before income taxes................... (7,620) 10,139 3,608 6,127
Provision for income taxes....................... 263 8,328 -- 8,591
-------- -------- -------- --------
Net earnings................................... $ (7,883) $ 1,811 $ 3,608 $ (2,464)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1999
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales........................................ $214,588 $199,253 $(14,351) $399,490
Cost of goods sold............................... 168,049 141,877 (14,351) 295,575
Selling, general and administrative expenses..... 44,291 37,463 (437) 81,317
Restructuring charges............................ -- -- -- --
-------- -------- -------- --------
Operating income............................... 2,248 19,913 437 22,598
Interest expense................................. -- 765 -- 765
Dividend Income.................................. 8,993 -- (8,993) --
Other income (expense), net...................... 3,376 (209) -- 3,167
-------- -------- -------- --------
Earnings before income taxes................... 14,617 18,939 (8,556) 25,000
Provision for income taxes....................... 669 9,336 -- 10,005
-------- -------- -------- --------
Net earnings................................... $ 13,948 $ 9,603 $ (8,556) $ 14,995
======== ======== ======== ========
</TABLE>
F-108
<PAGE> 272
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................... $(7,883) $ 1,811 $ 3,608 $ (2,464)
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization................... 10,420 8,308 (3,819) 14,909
Loss(gain) on sale of property, plant and
equipment..................................... (52) -- -- (52)
Equity earnings/losses, net of dividends........ 588 -- -- 588
Changes in assets and liabilities
(Increase) decrease in assets................. 9,757 (7,020) (5,501) (2,764)
(Decrease) increase in liabilities............ (7,469) (8,009) 3,558 (11,920)
------- -------- ------- --------
Net cash provided by operating activities....... 5,361 (4,910) (2,154) (1,703)
------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (1,044) (3,760) -- (4,804)
Proceeds from sales of property, plant and
equipment....................................... 272 76 -- 348
Increase in marketable securities.................. -- 975 -- 975
Cash (invested in) or advances (to) from equity
companies....................................... (2,430) -- -- (2,430)
------- -------- ------- --------
Net cash used in investing activities........... (3,202) (2,709) -- (5,911)
------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings....... -- (532) -- (532)
Dividends paid by affiliates....................... -- (2,154) 2,154 --
Cash transferred to Partners....................... (8,084) (8,271) -- (16,355)
------- -------- ------- --------
Net cash used in financing activities........... (8,084) (10,957) 2,154 (16,887)
------- -------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents................................... -- (1,792) -- (1,792)
------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... (5,925) (20,368) -- (26,293)
Cash and cash equivalents -- beginning of year....... 6,038 43,821 -- 49,859
------- -------- ------- --------
Cash and cash equivalents -- end of year............. $ 113 $ 23,453 $ -- $ 23,566
======= ======== ======= ========
</TABLE>
F-109
<PAGE> 273
INGERSOLL-DRESSER PUMP COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------
DOMESTIC FOREIGN ELIMINATIONS TOTAL
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................... $ 13,948 $ 9,603 $(8,556) $ 14,995
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and amortization................. 5,157 4,777 -- 9,934
Loss(gain) on sale of property, plant and
equipment.................................. -- (67) -- (67)
Equity earnings/losses, net of dividends...... 286 -- -- 286
Changes in assets and liabilities
(Increase) decrease in assets.............. (7,560) 41,966 1,489 35,895
(Decrease) increase in liabilities......... (16,526) (16,190) (1,926) (34,642)
-------- -------- ------- --------
Net cash provided by operating activities..... (4,695) 40,089 (8,993) 26,401
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (3,148) (2,738) -- (5,886)
Proceeds from sales of property, plant and
equipment..................................... 243 -- -- 243
Increase in marketable securities............... -- 1,470 -- 1,470
Cash (invested in) or advances (to) from equity
companies..................................... 314 -- -- 314
-------- -------- ------- --------
Net cash used in investing activities......... (2,591) (1,268) -- (3,859)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings.... -- 145 -- 145
Dividends paid by affiliates.................... -- (8,993) 8,993 --
Cash transferred to Partners.................... -- -- --
(Increase) decrease in Due from partners........ 7,304 (33,672) -- (26,368)
-------- -------- ------- --------
Net cash used in financing activities......... 7,304 (42,520) 8,993 (26,223)
-------- -------- ------- --------
Effect of exchange rate changes on cash and
cash equivalents........................... -- (2,333) -- (2,333)
-------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................ 18 (6,032) -- (6,014)
Cash and cash equivalents -- beginning of year.... -- 28,456 -- 28,456
-------- -------- ------- --------
Cash and cash equivalents -- end of year.......... $ 18 $ 22,424 $ -- $ 22,442
======== ======== ======= ========
</TABLE>
F-110
<PAGE> 274
PRINCIPAL EXECUTIVE OFFICE OF FLOWSERVE FINANCE B.V.
Parallelweg 6
Etten-Leur 4870 AA
The Netherlands
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
2001 Ross Avenue, Suite 1800
Dallas, Texas 75201
LEGAL ADVISORS
To the Company
SHEARMAN & STERLING
599 Lexington Avenue
New York, New York 10022-6069
As to Dutch Law
DE BRAUW BLACKSTONE WESTBROEK N.V.
LINKLATERS & ALLIANCE
Tripolis 300
Burgerweeshuispad 301
Postbus 75084
1070 AB Amsterdam, The Netherlands
TRUSTEE, REGISTRAR, PRINCIPAL PAYING AND TRANSFER AGENT
THE BANK OF NEW YORK
101 Barclay Street, Floor 21 West
New York, New York 10286
LISTING AGENT, PAYING AGENT AND TRANSFER AGENT
BANQUE INTERNATIONALE A LUXEMBOURG S.A.
69 route d'Esch
L-1470 Luxembourg
<PAGE> 275
FLOWSERVE LOGO
Offer To Exchange
12 1/4% Senior Subordinated Notes due 2010
for all Outstanding
12 1/4% Senior Subordinated Notes due 2010
($290,000,000 aggregate principal amount outstanding)
and
Offer To Exchange
12 1/4% Senior Subordinated Notes due 2010
for all Outstanding
12 1/4% Senior Subordinated Notes due 2010
(E100,000,000 aggregate principal amount outstanding)
-----------------
PROSPECTUS
-----------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS EXCHANGE
OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FLOWSERVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY THE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
<PAGE> 276
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 722 through 726 of the New York Business Corporation Law (the
"BCL) grant New York corporations broad powers to indemnify their present and
former directors and officers and those of affiliated corporations against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with threatened,
pending or completed actions, suits or proceedings to which they are parties or
are threatened to be made parties by reason of being or having been such
directors or officers, subject to specified conditions and exclusions; give a
director or officer who successfully defends an action the right to be so
indemnified; and permit a corporation to buy directors' and officers' liability
insurance. Such indemnification is not exclusive of any other rights to which
those indemnified may be entitled under any by-laws, agreement, vote of
shareholders or otherwise.
Section 402(b) of the BCL permits a New York corporation to include in its
certificate of incorporation a provision eliminating the potential monetary
liability of a director to the corporation or its stockholders for breach of
fiduciary duty as a director, provided that such provision shall not eliminate
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation 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 improper payment of dividends, improper purchase of the shares of the
corporation, improper distribution of assets to shareholders after dissolution
of the corporation and improper making of any loan, or (iv) for any transaction
from which the director receives an improper personal benefit or other
advantage.
Flowserve's Restated Certificate of Incorporation includes the provision
permitted by Section 402(b) of the BCL.
Flowserve's By-Laws provide that Flowserve shall indemnify its present or
future directors and officers from and against any and all liabilities and
expenses to the maximum extent permitted by the BCL as the same presently exists
or to the greater extent permitted by any amendment hereafter adopted.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See the index to exhibits appears immediately following the signature
pages of this Amendment to the Registration Statement.
(b) Financial Statement Schedules
Not applicable
ITEM 22. UNDERTAKINGS
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 Securities and Exchange 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 securities (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 the
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.
II-1
<PAGE> 277
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of Form S-4 within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction that was not
the subject of and included in the Registration Statement when it became
effective.
II-2
<PAGE> 278
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Irving, Texas on the
26th day of September, 2000.
FLOWSERVE CORPORATION, as Registrant
By: /s/ C. SCOTT GREER
----------------------------------
Name: C. Scott Greer
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 26th day of September, 2000. Each person whose
signature appears below hereby authorizes Ronald F. Shuff and Renee J. Hornbaker
and each of them, with full power of substitution, to execute in the name and on
behalf of such person any amendment or any post-effective amendment to this
Registration Statement and to file the same, with any exhibits thereto and other
documents in connection therewith, making such changes in this Registration
Statement as the Registrant deems appropriate, and appoints Ronald F. Shuff and
Renee J. Hornbaker and each of them, with full power of substitution,
attorney-in-fact to sign any amendment and any post-effective amendment to this
Registration Statement and to file the same, with any exhibits thereto and other
documents in connection therewith.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ C. SCOTT GREER Chairman, President and Chief Executive Officer
----------------------------------------------------- (Principal Executive Officer)
C. Scott Greer
/s/ RENEE J. HORNBAKER Vice President and Chief Financial Officer (Principal
----------------------------------------------------- Financial Officer)
Renee J. Hornbaker
/s/ RICK L. JOHNSON Vice President Business Development and Controller
----------------------------------------------------- (Principal Accounting Officer)
Rick L. Johnson
/s/ WILLIAM C. RUSNACK Director, Chairman of Audit/Finance Committee
-----------------------------------------------------
William C. Rusnack
/s/ DIANE C. HARRIS Director, Member Audit/Finance Committee
-----------------------------------------------------
Diane C. Harris
/s/ CHARLES M. RAMPACEK Director, Member Audit/Finance Committee
-----------------------------------------------------
Charles M. Rampacek
/s/ JAMES O. ROLLANS Director, Member Audit/Finance Committee
-----------------------------------------------------
James O. Rollans
</TABLE>
II-3
<PAGE> 279
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1* -- Agreement and Plan of Merger dated as of May 6, 1997,
among the Registrant, Bruin Acquisition Corp. and BW/IP,
Inc. ("BW/IP") was filed as Annex 1 to the Joint Proxy
Statement/Prospectus which is part of the Registration
Statement on Form S-4, dated June 19, 1997.
2.2* -- Agreement and Plan of Merger among Flowserve Corporation,
Forrest Acquisition Sub., Inc. and Innovative Valve
Technologies, Inc., dated as of November 18, 1999, was
filed as Exhibit 99(c)(1) to the Schedule 14D-1 Tender
Offer Statement and Statement on Schedule 13D dated
November 22, 1999.
2.3* -- Purchase Agreement among the Registrant, Flowserve RED
Corporation, IDP Acquisition, LLC and Ingersoll-Rand
Company dated as of February 9, 2000 was filed as Exhibit
2.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.
2.4* -- Amendment No. 1 dated as of July 14, 2000 to the Purchase
Agreement dated as of February 9, 2000 by and among the
Registrant, Flowserve Red Corporation, IDP Acquisition,
LLC and Ingersoll-Rand Company was filed as Exhibit 2.1
to the Registrant's Form 8-A on July 20, 2000
3.1* -- 1988 Restated Certificate of Incorporation of The Duriron
Company, Inc. was filed as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988.
3.2* -- 1989 Amendment to Certificate of Incorporation was filed
as Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989.
3.3* -- By-Laws of The Duriron Company, Inc. (as restated) were
filed as Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987.
3.4* -- 1996 Certificate of Amendment of Certificate of
Incorporation was filed as Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
3.5* -- Amendment No. 1 to Restated Bylaws was filed as Exhibit
3.5 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
3.6* -- April 1997 Certificate of Amendment of Certificate of
Incorporation was filed as part of Annex VI to the Joint
Proxy Statement/Prospectus which is part of the
Registration Statement on Form S-4, dated June 19, 1997.
3.7* -- July 1997 Certificate of Amendment of Certificate of
Incorporation was filed as Exhibit 3.6 to the
Registrant's Quarterly Report on Form 10-Q, for the
Quarter ended June 30, 1997.
4.1* -- Lease agreement and indenture, dated as of January 1,
1995 and bond purchase agreement dated January 27, 1995,
in connection with an 8% Taxable Industrial Development
Revenue Bond, City of Albuquerque, New Mexico. (Relates
to a class of indebtedness that does not exceed 10% of
the total assets of the Registrant. The Registrant will
furnish a copy of the documents to the SEC upon request.)
4.2* -- Rights Agreement dated as of August 1, 1986 between the
Registrant and BankOne, N.A., as Rights Agent, which
includes as Exhibit B thereto the Form of Rights
Certificate which was filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A on August
13, 1986.
4.3* -- Amendment dated August 1, 1996, to Rights Agreement was
filed as Exhibit 4.5 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
4.4* -- Amendment No. 2 dated as of June 1, 1998, to the Rights
Agreement dated as of August 13, 1986, and amended as of
August 1, 1996, was filed as Exhibit 1 to the
Registrant's Form 8-A/A dated June 11, 1998.
</TABLE>
<PAGE> 280
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.5* -- Rate Swap Agreement in the amount of $25,000,000 between
the Registrant and National City Bank dated November 14,
1996 was filed as Exhibit 4.9 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
4.6* -- Rate Swap Agreement in the amount of $25,000,000 between
the Registrant and Key Bank National Association dated
October 28, 1996 was filed as Exhibit 4.10 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
4.7 -- Indenture dated as of August 8, 2000, between the
Registrant, the guarantors identified therein and The
Bank of New York, as trustee for $290,000,000 aggregate
principal amount of 12.25% Senior Subordinated Notes due
August 15, 2000.
4.8 -- Indenture dated as of August 8, 2000, between Flowserve
Finance B.V., the guarantors identified therein and The
Bank of New York, as Trustee for #100,000,000 aggregate
principal amount of 12.25% Senior Subordinated Notes due
August 15, 2000.
4.9** -- Form of Exchange Note.
4.10 -- Dollar Notes Registration Rights Agreement dated August
3, 2000, among the Registrant, the Dollar Notes
Guarantors, Credit Suisse First Boston, Bank of America
Securities Inc, ABN AMRO Incorporated and Banc One
Capital Markets, Inc.
4.11 -- Euro Notes Registration Rights Agreement dated August 3,
2000, among FFBV, the Euro Notes Guarantors, Credit
Suisse First Boston (Europe) Limited, Bank of America
International Limited, ABN AMRO International Limited and
First Chicago Limited.
5.1** -- Opinion and Consent of Shearman & Sterling regarding
validity of the exchange notes.
8.1** -- Opinion and Consent of Shearman & Sterling regarding tax
matters.
10.1* -- Flowserve Corporation Incentive Compensation Plan for
Senior Executives, as amended and restated effective
January 1, 1994 (the "Incentive Plan"), was filed as
Exhibit 10.1 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
10.2* -- Amendment No. 1 to the Incentive Plan was filed as
Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
10.3* -- Amendment No. 2 to the Incentive Plan was filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
10.4* -- Amendment No. 3 to the Incentive Plan was filed as
Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
10.5* -- Supplemental Pension Plan for Salaried Employees was
filed as Exhibit 10.4 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987.
10.6* -- Flowserve Corporation amended and restated Director
Deferral Plan was filed as Attachment A to the
Registrant's definitive 1996 Proxy Statement filed on
March 10, 1996.
10.7* -- Form of Change in Control Agreement between all executive
officers and the Registrant was filed as Exhibit 10.6 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.8* -- First Master Benefit Trust Agreement dated October 1,
1987 was filed as Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1987.
10.9* -- Amendment No. 1 to the first Master Benefit Trust
Agreement dated October 1, 1987 was filed as Exhibit
10.24 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993.
</TABLE>
<PAGE> 281
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.10* -- Amendment No. 2 to First Master Benefit Trust Agreement
was filed as Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
10.11* -- Second Master Benefit Trust Agreement dated October 1,
1987 was filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1987.
10.12* -- First Amendment to Second Master Benefit Trust Agreement
was filed as Exhibit 10.26 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
10.13* -- Long-Term Incentive Plan (the "Long-Term Plan"), as
amended and restated effective November 1, 1993 was filed
as Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
10.14* -- Amendment No. 1 to the Long-Term Plan was filed as
Exhibit 10.13 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
10.15* -- Flowserve Corporation 1989 Stock Option Plan as amended
and restated effective January 1, 1997 was filed as
Exhibit 10.14 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
10.16* -- Flowserve Corporation Second Amendment to the 1989 Stock
Option Plan as previously amended and restated was filed
as Exhibit 10.14 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.17* -- Flowserve Corporation 1989 Restricted Stock Plan (the
"1989 Restricted Stock Plan") as amended and restated
effective January 1, 1997 was filed as Exhibit 10.15 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.18* -- Amendment No. 1 to the 1989 Restricted Stock Plan as
amended and restated was filed as Exhibit 10.33 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.19* -- Flowserve Corporation Retirement Compensation Plan for
Directors ("Director Retirement Plan") was filed as
Exhibit 10.15 to the Registrant's Annual Report to Form
10-K for the year ended December 31, 1988.
10.20* -- Amendment No. 1 to Director Retirement Plan was filed as
Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
10.21* -- The Registrant's Benefit Equalization Pension Plan (the
"Equalization Plan") was filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989.
10.22* -- Amendment # 1 dated December 15, 1992 to the Equalization
Plan was filed as Exhibit 10.18 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.
10.23* -- Flowserve Corporation Executive Equity Incentive Plan as
amended and restated effective July 21, 1999, was filed
as Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
10.24* -- Flowserve Corporation Deferred Compensation Plan for
Executives was filed as Exhibit 10.19 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.
10.25* -- Executive Life Insurance Plan of Flowserve Corporation
was filed as Exhibit 10.29 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.26* -- Executive Long-Term Disability Plan of The Duriron
Company, Inc. was filed as Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
</TABLE>
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.27* -- Flowserve Corporation 1997 Stock Option Plan was included
as Exhibit A to the Registrant's 1997 Proxy Statement
which was filed on March 17, 1997.
10.28* -- First Amendment to the Flowserve Corporation 1997 Stock
Option Plan was filed as Exhibit 10.28 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
10.29* -- Amendment No. 2 to the Flowserve Corporation 1997 Stock
Option Plan was filed as Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.30* -- Flowserve Corporation 1999 Stock Option Plan was included
as Exhibit A to the Registrant's 1999 Proxy Statement
which was filed on March 15, 1999.
10.31* -- Amendment No. 1 to the Flowserve Corporation 1999 Stock
Option Plan was filed as Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.32* -- BW/IP International, Inc. Supplemental Executive
Retirement Plan as amended and restated was filed as
Exhibit 10.27 to the Registrant's Quarterly Report on
Form 10-Q for the quarter entered March 31, 1998.
10.33* -- Flowserve Corporation 1998 Restricted Stock Plan was
included as Exhibit A to the Registrant's 1999 Proxy
Statement which was filed on April 9, 1998.
10.34* -- Amendment No. 1 to the Flowserve Corporation 1998
Restricted Stock Plan was filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.35* -- Amendment No. 2 to the Flowserve Corporation 1998
Restricted Stock Plan was filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
10.36* -- Amendment No. 1 to the amended and restated Director
Deferral Plan was filed as Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.37* -- Amendment No. 2 to the amended and restated Director
Deferral Plan was filed as Exhibit 10.34 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
10.38* -- Form of Employment Agreement between the Registrant and
certain executive officers was filed as Exhibit 10.31 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.39* -- Employment Agreement, effective July 22, 1997, between
the Registrant and Bernard G. Rethore was filed as
Exhibit 10.53 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.40* -- Amended Employment Agreement, effective November 24,
1999, between the Registrant and Bernard G. Rethore.
10.41* -- Amendment No. 1 to Amended Employment Agreement,
effective February 29, 2000, between the Registrant and
Bernard G. Rethore was filed Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.42* -- Employment Agreement, effective July 1, 1999, between the
Registrant and C. Scott Greer was filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
10.43* -- Loan Agreement between the Registrant and C. Scott Greer
was filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.
10.44* -- Amendments to form of change in control agreement between
all executive officers and the Registrant was filed as
Exhibit 10.44 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000.
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<PAGE> 283
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EXHIBIT NO. DESCRIPTION
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<C> <S>
10.45 -- Credit Agreement among the Registrant, certain of its
subsidiaries referred to therein, the lenders referred to
therein, Credit Suisse First Boston, New York branch, as
syndication agent, Bank of America, N.A., as
administrative agent, collateral agent and swingline
lender, and ABN-AMRO Bank N.V., Bank One, N.A. and
Salomon Smith Barney, Inc., as co-documentation agents,
dated August 8,2000.
10.46 -- Security Agreement among the Registrant, certain of its
subsidiaries referred to therein and Bank of America,
N.A. dated as of August 8, 2000.
12.1 -- Statements regarding computation of ratios.
13.1* -- 1999 Annual Report to Shareholders was filed on the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of Arthur Andersen.
23.4** -- Consent of Shearman & Sterling (included in Exhibit 5.1).
25.1** -- Statement of Eligibility of the Trustee, on Form T-1.
27.1* -- Financial Data Schedule was filed as Exhibit 27 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
99.1* -- Press Release dated July 24, 2000, was filed as Exhibit
99.1 on Form 8-K as filed August 2, 2000.
99.2* -- Press Release dated July 28, 2000, was filed as Exhibit
99.1 on Form 8-K as filed August 2, 2000.
99.3** -- Form of Letter of Transmittal.
99.4** -- Form of Notice of Guaranteed Delivery.
99.5** -- Form of Exchange Agent Agreement.
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* Previously filed.
** To be filed by amendment.
