EXHIBIT 99.3
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
BASIS OF PRESENTATION
Innovative Valve Technologies, Inc. ("Invatec") was incorporated in
Delaware in March 1997 to create the leading single-source provider of
comprehensive maintenance, repair, replacement and value-added distribution
services for industrial valves and related process-system components throughout
North America. Except for its purchase of Steam Supply and Rubber Co., Inc. and
three related entities (collectively, "Steam Supply") in July 1997, Invatec
conducted no operations of its own prior to the closing on October 28, 1997 of
(i) its initial public offering (the "IPO") of its common stock, par value
$.001 per share ("Common Stock"), (ii) its purchase of Industrial Controls &
Equipment, Inc. and three related entities (collectively, "ICE/VARCO") and
Southern Valve Services, Inc. and a related entity (collectively, "SSV") and
(iii) a merger (the "SSI Merger") in which The Safe Seal Company, Inc.
("SSI") became its subsidiary. Earlier in 1997, SSI had purchased Harley
Industries, Inc. ("Harley"), GSV, Inc. ("GSV") and Plant Specialties, Inc.
("PSI"). SSI and its subsidiaries were affiliates of Invatec prior to the SSI
Merger.
For financial reporting purposes, SSI is presented as the "accounting
acquirer" of Steam Supply, ICE/VARCO, SVS, Harley, GSV and PSI (collectively,
the "Initial Acquired Businesses"), and, as used herein, the term "Company"
means (i) SSI and its consolidated subsidiaries prior to October 31, 1997 and
(ii) Invatec and its consolidated subsidiaries (including SSI) on that date and
thereafter.
For accounting purposes, the effective dates of the acquisitions of the
Initial Acquired Businesses in 1997 are as follows: (i) Harley -- January 31;
(ii) GSV -- February 28; (iii) PSI -- May 31, (iv) Steam Supply -- July 31, and
(v) ICE/VARCO and SVS -- October 31. Following the IPO, the Company acquired
Dalco, Inc. ("Dalco") and three other additional businesses in 1997. The
effective date of the acquisitions of Dalco and the three other additional
businesses acquired in 1997 is November 30, 1997. In the first quarter of 1998,
the Company acquired three businesses, including Cypress Industries Inc.
("Cypress") and IPS Holding, Ltd., ("IPSCO") (together with the Initial
Acquired Businesses, Dalco and the other businesses acquired during 1997, the
"Acquired Businesses"). The Company accounted for the Acquired Businesses in
accordance with the purchase method of accounting. The allocation of the
purchase prices paid to the assets acquired and the liabilities assumed in the
acquisitions of the Acquired Businesses has been recorded initially on the basis
of preliminary estimates of fair value and may be revised, within one year of
acquisition, as additional information concerning the valuation of those assets
and liabilities becomes available. In management's opinion, the preliminary
allocation of the purchase prices is not expected to differ materially from the
final allocation. To date, there have not been any material changes to goodwill
as a result of purchase price allocations being finalized.
The unaudited pro forma consolidated statement of operations on page 4
presents historical information as adjusted to give effect to the following
events and transactions as if they had occurred on January 1, 1997: (i) the
formation and organizational financing of Invatec; (ii) the SSI Merger; (iii)
the acquisitions of Acquired Businesses in 1997 and the financing of those
acquisitions; (iv) reverse stock splits of the outstanding Common Stock and the
SSI common stock effected in connection with the IPO; (v) the IPO and Invatec's
application of its net proceeds therefrom; and (vi) the issuance of shares of
Common Stock to repay indebtedness the Company owed to subsidiaries of Philip
Services Corp. (collectively with its subsidiaries, "Philip"). The unaudited
pro forma combined statement of operations on pages 3 and 5 condenses the
unaudited pro forma consolidated statement of operations information on page 4
under the caption "The Company" and adjusts that information to give effect to
the acquisitions of Acquired Businesses in 1998 (through March 31) and the
financing of these acquisitions. All the pro forma statements convert the
results of operations of the Acquired Businesses whose historical fiscal periods
were not on a calendar-year basis and include pro forma adjustments consisting
principally of the following: (i) the
1
adjustments to selling, general and administrative expenses described below;
(ii) adjustments for pro forma goodwill amortization using a 40-year estimated
life; (iii) eliminations of historical interest expense resulting from the
application of proceeds from the IPO and the use of Common Stock to retire
outstanding indebtedness; and (iv) adjustments to federal and state income tax
provisions.
The unaudited pro forma combined statements of operations include
preliminary pro forma adjustments to selling, general and administrative
expenses to reflect: (i) salary differentials associated with certain owners and
managers of the Acquired Businesses; (ii) the elimination of certain excess
administrative support service fees charged by ICE/VARCO's former parent
company: and (iii) the reversal of the special non-cash, non-recurring
compensation expense attributable to certain stock awards made by SSI and
certain sales of Common Stock and issuances of options to purchase Common Stock
by Invatec.
The integration of the Acquired Businesses may present opportunities to
reduce other costs through the elimination of duplicative functions and
operating locations and the development of economies of scale, particularly as a
result of the Company's ability to (i) consolidate insurance programs, (ii)
borrow at lower interest rates than the Acquired Businesses, (iii) obtain
greater discounts from suppliers and (iv) generate savings in other general and
administrative areas. The Company cannot currently quantify these anticipated
savings and expects these savings will be partially offset by incremental costs
that the Company expects to incur, but also cannot currently quantify
accurately. These costs include those associated with corporate management and
administration, being a public company, systems integration and facilities
expansions and consolidations. The unaudited pro forma financial information
herein reflects neither unquantifiable expected savings nor unquantifiable
expected incremental costs.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH MARCH 31, 1998)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE
COMPANY
PRO OTHER PRO FORMA PRO FORMA
FORMA CYPRESS IPSCO ACQUISITION ADJUSTMENTS COMBINED
-------- -------- ------- ------------ ----------- ----------
REVENUES............................. $116,670 $ 20,061 $22,895 $2,633 $-- $162,259
COST OF OPERATIONS................... 79,790 14,791 14,100 1,696 -- 110,377
-------- -------- ------- ------------ ----------- ----------
Gross profit.................... 36,880 5,270 8,795 937 -- 51,882
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 30,434 4,440 7,119 856 (1,034)(aa) 42,520
705(bb)
-------- -------- ------- ------------ ----------- ----------
Income from operations.......... 6,446 830 1,676 81 329 9,362
OTHER INCOME (EXPENSE):
Interest, net................... (1,383) (475) (397) 9 (1,385)(cc) (3,631)
Other........................... (20) 6 161 8 -- 155
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTEREST........................... 5,043 361 1,440 98 (1,056) 5,886
PROVISION FOR INCOME TAXES........... 2,168 15 590 27 (269) (dd) 2,531
-------- -------- ------- ------------ ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST........... 2,875 346 850 71 (787) 3,355
-------- -------- ------- ------------ ----------- ----------
MINORITY INTEREST.................... -- -- 94 -- (94)(ee) --
-------- -------- ------- ------------ ----------- ----------
NET INCOME........................... $ 2,875 $ 346 $ 756 $ 71 $ (693) $ 3,355
======== ======== ======= ============ =========== ==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS -- BASIC..... $ 0.39
==========
PRO FORMA INCOME PER SHARE
FROM CONTINUING
OPERATIONS -- DILUTED.............. $ 0.38
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATIONS -- BASIC................ 8,702(ff)
==========
SHARES USED IN COMPUTING
PRO FORMA INCOME PER
SHARE FROM CONTINUING
OPERATONS -- DILUTED............... 8,851(ff)
==========
See accompanying notes to unaudited pro forma combined financial statements.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH DECEMBER 31, 1997)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
ICE/VARCO
PLANT STEAM JANUARY
THE HARLEY GSV SPECIALTIES SUPPLY 1 -
COMPANY JANUARY 1 - JANUARY 1 - JANUARY 1 - JANUARY 1 - OCTOBER
HISTORICAL JANUARY 31 FEBRUARY 28 MAY 31 JULY 31 31
---------- ----------- ----------- ----------- ----------- ---------
REVENUES............................. $ 58,621 $ 1,853 $ 1,637 $ 5,087 $ 9,592 $12,446
COST OF OPERATIONS................... 39,821 1,338 1,258 3,061 6,671 9,227
---------- ----------- ----------- ----------- ----------- ---------
Gross profit..................... 18,800 515 379 2,026 2,921 3,219
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 16,805 640 243 1,203 2,782 2,811
SPECIAL COMPENSATION EXPENSE......... 7,613 -- -- -- -- --
---------- ----------- ----------- ----------- ----------- ---------
Income (loss) from operations.... (5,618) (125) 136 823 139 408
OTHER INCOME (EXPENSE):
Interest, net.................... (2,901) (52) (17) (110) (223) (3)
Other............................ (3) -- (3) 12 9 16
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (8,522) (177) 116 725 (75) 421
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (1,022) (69) -- 272 (29) --
---------- ----------- ----------- ----------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (7,500) $ (108) $ 116 $ 453 $ (46) $ 421
========== =========== =========== =========== =========== =========
SVS DALCO OTHER THE
JANUARY 1 - JANUARY 1 - SUBSEQUENT PRO FORMA COMPANY
OCTOBER 31 NOVEMBER 30 ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ----------- ------------- ----------- ----------
REVENUES............................. $ 3,545 $ 8,830 $15,059 $-- $116,670
COST OF OPERATIONS................... 2,458 6,327 9,629 -- 79,790
----------- ----------- ------------- ----------- ----------
Gross profit..................... 1,087 2,503 5,430 -- 36,880
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 826 1,713 4,256 (1,239)(gg) 30,434
724(hh)
(330)(ii)
SPECIAL COMPENSATION EXPENSE......... -- -- -- (7,613)(jj) --
----------- ----------- ------------- ----------- ----------
Income (loss) from operations.... 261 790 1,174 8,458 6,446
OTHER INCOME (EXPENSE):
Interest, net.................... (135) 12 (206) 2,252(kk) (1,383)
Other............................ -- (30) (21) -- (20)
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 126 772 947 10,710 5,043
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 54 46 356 2,560(ll) 2,168
----------- ----------- ------------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 72 $ 726 $ 591 $ 8,150 $ 2,875
=========== =========== ============= =========== ==========
See accompanying notes to unaudited pro forma combined financial statements.
4
INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
(FOR BUSINESSES ACQUIRED THROUGH MARCH 31, 1998)
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CYPRESS IPSCO
THE COMPANY JANUARY 1 - JANUARY 1 - OTHER PRO FORMA PRO FORMA
HISTORICAL FEBRUARY 28 FEBRUARY 28 ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ --------------- ------------ ------------ ----------
REVENUES............................. $ 33,504 $1,721 $ 3,898 $192 $-- $ 39,315
COST OF OPERATIONS................... 22,548 1,294 2,393 108 -- 26,343
------------ ------------ ------- ------------ ------------ ----------
Gross Profit..................... 10,956 427 1,505 84 -- 12,972
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,059 613 1,215 91 (180)(aa) 9,899
101(bb)
------------ ------------ ------- ------------ ------------ ----------
Income from operations........... 2,897 (186) 290 (7) 79 3,073
OTHER INCOME (EXPENSE):
Interest, net.................... (709) (56) (69) -- (274)(cc) (1,108)
Other............................ 13 44 12 -- -- 69
------------ ------------ ------- ------------ ------------ ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTEREST........................... 2,201 (198) 233 (7) (195) 2,034
PROVISION FOR INCOME TAXES........... 946 -- 95 -- (167)(dd) 874
------------ ------------ ------- ------------ ------------ ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST........... 1,255 (198) 138 (7) (28) 1,160
------------ ------------ ------- ------------ ------------ ----------
MINORITY INTEREST.................... -- -- 15 -- (15)(ee) --
------------ ------------ ------- ------------ ------------ ----------
NET INCOME (LOSS).................... $ 1,255 $ (198) $ 123 $ (7) $ (13) $ 1,160
============ ============ ======= ============ ============ ==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS--BASIC....... $ 0.13
==========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS--DILUTED..... $ 0.13
==========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS--BASIC.................. 8,702(ff)
==========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS--DILUTED................ 8,994(ff)
==========
See accompanying notes to unaudited pro forma combined financial statements.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
1. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (FOR BUSINESSES ACQUIRED
THROUGH MARCH 31, 1998)
(aa) Adjusts selling, general and administrative expenses to reflect the
decrease in salaries and benefits associated with certain owners and managers of
the Acquired Businesses who either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed
prospectively to the decrease prior to acquisition of their Acquired Businesses.
(bb) Records pro forma goodwill amortization expense over 40 years.
(cc) Records the adjustment to interest expense resulting from borrowings
under the Credit Facility and pro forma adjustments to debt.
(dd) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.
(ee) Records the elimination of minority interest in one of the Acquired
Businesses.
(ff) Pro forma weighted average shares outstanding are computed as follows
(in thousands):
1997 1998
--------- ---------
Assumed shares outstanding at January
1.................................... 8,702 8,702
Dilutive effect of stock options, net
of assumed repurchases of common
shares............................. 149 292
--------- ---------
Shares used in computing pro forma
income per share from continuing
operations -- diluted.............. 8,851 8,994
========= =========
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (FOR BUSINESSES
ACQUIRED THROUGH
DECEMBER 31, 1997)
(gg) Adjusts selling, general and administrative expenses to reflect (i)
the decrease in salaries and benefits associated with certain owners of the
Acquired Businesses who either were not employed by the Company after the
acquisition of their Acquired Businesses and will not be replaced or agreed to
prospectively to the decrease prior to acquisition of their Acquired Businesses,
and (ii) the elimination of certain excess administrative support service fees
charged by ICE/VARCO's former parent.
(hh) Records pro forma goodwill amortization expense over 40 years.
(ii) Records the elimination of non-recurring IPO bonuses.
(jj) Records the elimination of non-cash, non-recurring special
compensation expense of $7.6 million attributable to certain awards of stock,
stock options and certain stock sales.
(kk) Records the pro forma adjustment to interest expense resulting from
(i) the application of the net proceeds of the IPO, (ii) borrowings under the
Credit Facility and, (iii) the elimination of certain financing fees paid to
Philip.
(ll) Records the incremental provision for income taxes as if all Acquired
Businesses had been subject to federal and state income taxes during the period
presented, using an effective tax rate of 43%. In its assumption of the
effective tax rate, management has not considered the utilization of net
operation losses or other tax attributes previously generated by or existing at
certain of the Acquired Businesses.
6