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FORM 8-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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MARCH 21, 2000 (JANUARY 6, 2000)
Date of Report (Date of earliest event reported)
Commission File Number 1-13179
FLOWSERVE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
31-0267900
(I.R.S. Employer Identification Number)
222 W. LAS COLINAS BLVD., SUITE 1500, IRVING, TEXAS 75039
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 443-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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FLOWSERVE CORPORATION
INDEX
Page
No.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The Company hereby amends the following financial statements and pro
forma financial information of its Current Report on Form 8-K filed
January 6, 2000, as set forth below and in the following pages.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Amended to include audited financial statements of Innovative Valve
Technologies, Inc., (Invatec).
Report of Independent Public Accountants 3
Consolidated Balance Sheets-
December 31, 1998 and December 31, 1999 4
Consolidated Statements of Operations -
For The Years Ended December 31, 1997, December 31, 1998 and
December 31, 1999 5
Consolidated Statements of Shareholders' Equity (Deficit) -
For The Years Ended December 31, 1997, December 31, 1998 and
December 31, 1999 6
Consolidated Statements of Cash Flows -
For The Years Ended December 31, 1997, December 31, 1998 and
December 31, 1999 7
Notes to Consolidated Financial Statements 8
(b) PRO FORMA FINANCIAL INFORMATION
Amended to include unaudited Pro Forma Condensed Combined Financial
Statements
Introduction 25
Pro Forma Condensed Combined Statement of Operations -
For the Year Ended December 31, 1999 26
Pro Forma Condensed Combined Balance Sheet
As of December 31, 1999 27
Notes to Pro Forma Condensed Combined Financial Statements 28
SIGNATURE 30
INDEX TO EXHIBITS 31
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ITEM 7(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innovative Valve Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Innovative Valve
Technologies, Inc. and Subsidiaries, (a Delaware corporation), as of December
31, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our 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
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 3, 2000
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------------------
1998 1999
--------------- -----------------
ASSETS
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
============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
--------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
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
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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INNOVATIVE VALVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
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, net ...................... (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
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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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
business.
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.
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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
"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.
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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 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
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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.
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
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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 acquisitions
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
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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.
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
13
14
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 payment being made to the
shareholders in cash by January 31, 2000. The discounted amount was paid to the
former shareholders on January 6, 2000.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
ESTIMATED ------------------------------
USEFUL LIVES 1998 1999
----------------- ------------ ------------
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
============ ============
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31
---------------------------------------------------
1997 1998 1999
----------- ------------ ------------
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
=========== ============ ============
Inventory consists of the following:
DECEMBER 31
-----------------------------------
1998 1999
------------- -------------
Finished goods.................................................................. $ 21,785,485 $ 22,271,942
Work in process................................................................. 4,222,319 3,819,788
------------- -------------
$ 26,007,804 $ 26,091,730
============= =============
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15
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
-------------------------------------
1998 1999
--------------- ---------------
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
=============== ===============
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
15
16
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 BlackScholes 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.
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:
DECEMBER 31,
---------------------------
1998 1999
---------- ----------
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 $ --
========== ==========
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.
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17
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.
9. INCOME TAXES:
The provision (benefit) for income taxes consisted of:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
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
============ ============ ============
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate tax rate to income before income taxes as
follows:
YEAR ENDED DECEMBER 31
----------------------------------
1997 1998 1999
-------- -------- --------
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%
======== ======== ========
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18
Net deferred tax assets consist of the following:
DECEMBER 31
----------------------------
1998 1999
------------ ------------
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
============ ============
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:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------ ------------ ------------
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
============ ============ ============
Certain deferred tax assets and liabilities were recorded with respect to
purchase accounting for the Acquired Business during the year ended December 31,
1998.
18
19
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
19
20
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 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:
WEIGHTED-
SHARES UNDER AVERAGE
OPTION EXERCISE PRICE
------------------------ -----------------------
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
===========
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21
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.
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:
YEAR ENDED
DECEMBER 31
------------------------------------------------------------
1997 1998 1999
---- ---- ----
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)
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 information regarding
warrants issued to the Company's syndicate of lenders.
21
22
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:
1997 1998 1999
------------ ------------ ------------
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
============ ============ ============
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 $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.
22
23
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:
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
=============
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.
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
23
24
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 misrepresentations. 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.
24
25
ITEM 7(b) PRO FORMA FINANCIAL INFORMATION
The following pages set forth unaudited pro forma condensed financial
information for Flowserve Corporation, (the "Company") in connection with the
Company's acquisition of Innovative Valve Technologies, Inc., ("Invatec"). The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 gives effect to the acquisition of Invatec as if it had
occurred on January 1, 1999. The unaudited pro forma condensed combined balance
sheet as of December 31, 1999 has been prepared as if the acquisition of Invatec
had occurred on December 31, 1999.
The purchase method of accounting has been used in the preparation of the
unaudited pro forma condensed combined financial statements. Under this method
of accounting, the aggregate purchase price is allocated to assets acquired and
liabilities assumed based on their estimated fair values. For purposes of the
unaudited pro forma condensed combined financial statements, the purchase price
of the company acquired has been allocated primarily on information furnished by
management of the acquired company. The final allocation of the purchase price
of the company acquired will be determined in a reasonable time after
consummation and will be based on a complete evaluation of the assets acquired
and liabilities assumed, including the amounts allocable to identifiable
intangible assets and goodwill. Accordingly, the information presented herein
may differ from the final purchase price allocation.
In the opinion of the Company's management, all adjustments have been made
that are necessary to present fairly the pro forma data.
The unaudited pro forma condensed combined financial information does not
purport to present actual results of operations or financial position of the
Company had the transactions and events assumed therein in fact occurred on the
dates indicated, nor is it necessarily indicative of the results of operations
that may be achieved in the future. The unaudited pro forma condensed combined
financial information is based on certain assumptions and adjustments described
in the notes thereto and should be read in conjunction therewith. The unaudited
pro forma condensed combined financial information should also be read in
conjunction with the historical consolidated financial statements, including the
notes thereto, of the Company and Invatec.
25
26
Flowserve Corporation
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1999
(In Thousands, Except Per Share Amounts)
Historical (Unaudited)
---------------------------- -------------------------------
Innovative Pro Forma
Flowserve Valve Pro Forma Combined
Corporation Technologies Adjustments Company
------------ ------------ ------------ ------------
Net Sales $ 1,061,272 $ 160,991 $ -- $ 1,222,263
Cost of Sales 697,928 115,956 -- 813,884
------------ ------------ ------------ ------------
Gross Profit 363,344 45,035 -- 408,379
Selling and administrative expense 275,884 40,368 (1,554)(a) 314,642
(56)(b)
Research, engineering and development expense 25,645 -- -- 25,645
Merger transaction and restructuring expense 15,860 -- -- 15,860
Merger integration expense 14,207 -- -- 14,207
------------ ------------ ------------ ------------
Operating Income 31,748 4,667 1,610 38,025
Interest expense 15,504 12,724 (6,928)(c) 21,300
Loss on assets held for sale -- 3,810 -- 3,810
Impairment of goodwill -- 39,073 (39,073)(d) --
Other (income) expense, net (2,001) (174) -- (2,175)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 18,245 (50,766) 47,611 15,090
Provision (Benefit) for Income Taxes 6,068 6,372 (7,234)(e) 5,206
------------ ------------ ------------ ------------
Net Income (Loss) $ 12,177 $ (57,138) $ 54,845 $ 9,884
============ ============ ============ ============
Earnings (Loss) Per Share (Basic and Diluted) $ 0.32 $ (5.90) $ -- $ 0.26
Weighted Average Shares Outstanding (Basic and Diluted) 37,856 9,692 -- 37,856
26
27
Flowserve Corporation
Pro Forma Condensed Combined Balance Sheet
As of December 31, 1999
(In Thousands)
Historical (Unaudited)
---------------------------- -------------------------------
Innovative Pro Forma
Flowserve Valve Pro Forma Combined
Corporation Technologies Adjustments Company
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 30,463 $ 951 $ (16,556)(a) $ 12,724
(1,748)(b)
(386)(c)
Accounts receivable, net 213,625 28,921 -- 242,546
Inventories 168,356 26,092 -- 194,448
Prepaids and other current assets 41,344 4,703 (197)(d) 45,785
(65)(e)
------------ ------------ ------------ ------------
Total current assets 453,788 60,667 (18,952) 495,503
Property, plant and equipment, net 209,976 18,212 -- 228,188
Intangible assets, net 96,435 52,924 (4,279)(f) 145,080
Other assets 77,952 455 1,968 (g) 80,375
------------ ------------ ------------ ------------
Total Assets $ 838,151 $ 132,258 $ (21,263) $ 949,146
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 3,125 $ 88,607 $ (88,607)(h) $ 3,125
Accounts and notes payable 72,837 9,604 -- 82,441
Income taxes 7,878 -- -- 7,878
Accrued expenses and other liabilities 111,820 11,434 5,705 (i) 122,889
(1,628)(j)
(4,442)(k)
Makeup amount obligation -- 5,616 (5,616)(l) --
------------ ------------ ------------ ------------
Total current liabilities 195,660 115,261 (94,588) 216,333
Long-term debt due after one year 198,010 -- 86,435 (m) 287,891
3,446 (n)
Post-retirement benefits and deferred items 136,207 -- -- 136,207
Other noncurrent liabilities -- 441 -- 441
Shareholders' Equity:
Serial preferred stock -- -- -- --
Common stock 51,856 10 (10)(o) 51,856
Capital in excess of par value 67,963 85,450 (85,450)(p) 67,963
Retained earnings 344,254 (68,904) 68,904 (q) 344,254
Treasury stock, at cost (93,448) -- -- (93,448)
Accumulated other comprehensive income (62,351) -- -- (62,351)
------------ ------------ ------------ ------------
Total shareholders' equity 308,274 16,556 (16,556) 308,274
------------ ------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 838,151 $ 132,258 $ (21,263) $ 949,146
============ ============ ============ ============
27
28
Flowserve Corporation
Notes to Pro Forma Condensed Combined Financial Statements
(In Thousands)
(Unaudited)
The acquisition of Invatec has been accounted for using the purchase method of
accounting. The components of the purchase price and the preliminary allocation
of the purchase price to the assets acquired and liabilities assumed are
summarized below:
Components of purchase price:
Cash paid for shares tendered $ 16,556
Cash paid for direct acquisition costs, including financial advisory, accounting and legal costs 1,748
------------
Total purchase price $ 18,304
Invatec net book value of assets acquired 16,556
------------
Excess of cost over net book value of assets acquired 1,748
Adjustments to record assets and liabilities at fair market values:
Severance, facility closing costs and other exit costs 5,705
Tax at pro forma effective tax rate of 34.5% (1,968)
------------
Severance, facility closing costs and other exit costs, net of tax 3,737
Payment of Invatec's outstanding letters of credit 386
Negotiated forgiveness of various Invatec obligations (10,412)
Write off of Invatec deferred issue costs 65
Forgiveness of Invatec note receivable 197
------------
Total adjustments (6,027)
------------
Net Goodwill Adjustment $ (4,279)
============
Pro Forma Adjustments - Condensed Combined Statement of Operations
Selling and administrative expense:
(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. $ (1,554)
(b) 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. (56)
Interest expense:
(c) Represents net reduction in consolidated interest expense related to debt financing. (6,928)
Impairment of goodwill:
(d) Represents reversal of goodwill impairment charge. (39,073)
Provision (benefit) for income taxes:
(e) Represents income tax adjust required to arrive at a combined company pro forma effective tax
rate of 34.5% (7,234)
28
29
Pro Forma Adjustments - Condensed Combined Balance Sheet
Cash and cash equivalents:
(a) Payment to Invatec shareholders for purchase of outstanding common stock $ (16,556)
(b) Payment for direct acquisition costs, including financial advisory, accounting and legal costs (1,748)
(c) Payment of Invatec's outstanding letters of credit (386)
Prepaids and other current assets:
(d) Forgiveness of Invatec note receivable (197)
(e) Write-off of Invatec deferred debt issue costs (65)
Intangible assets, net:
(f) Net adjustment to goodwill (4,279)
Other assets:
(g) Recognition of deferred tax on severance, facility closing costs and other exit costs at
estimated assumed pro forma tax rate of 34.5% 1,968
Current portion of long-term debt:
(h) Represents payment of Invatec debt obligations and negotiated forgiveness of debt (88,607)
Accrued expenses and other liabilities:
(i) To reflect accrual of severance, facility closing costs and other exit costs 5,705
(j) Represents payment of Invatec accrued interest and Steam preferred stock liability (1,628)
(k) Represents forgiveness of accrued Invatec bank fees and a portion of Steam preferred
stock liability (4,442)
Makeup amount obligation:
(l) Represents elimination of Makeup Obligation associated with former owners of certain
Invatec companies which was discounted in contemplation of the acquisition (5,616)
Long-term debt due after one year:
(m) Represents additional borrowings under the Company's credit facility for payment of Invatec
debt obligations, less forgiveness of debt 86,435
(n) Represents additional borrowings under the Company's credit facility for payment of Makeup
Obligation, less negotiated discount 3,446
Shareholders' equity:
(o) Elimination of Invatec common stock (10)
(p) Elimination of Invatec capital in excess of par value (85,450)
(q) Elimination of Invatec accumulated deficit 68,904
29
30
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOWSERVE CORPORATION
(Registrant)
/s/ Renee J. Hornbaker
-------------------------------------------
Renee J. Hornbaker
Vice President and Chief Financial Officer
Date: March 21, 2000
- --------------------------
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
27 Financial Data Schedule