Form 8-K Amendment No. 2

0001193125-15-198554.txt : 20150522 0001193125-15-198554.hdr.sgml : 20150522 20150522150805 ACCESSION NUMBER: 0001193125-15-198554 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20150313 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20150522 DATE AS OF CHANGE: 20150522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSTER L B CO CENTRAL INDEX KEY: 0000352825 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 251324733 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-10436 FILM NUMBER: 15886272 BUSINESS ADDRESS: STREET 1: 415 HOLIDAY DR CITY: PITTSBURGH STATE: PA ZIP: 15220 BUSINESS PHONE: 4129283431 MAIL ADDRESS: STREET 1: 415 HOLIDAY DR CITY: PITTSBURGH STATE: PA ZIP: 15220 8-K/A 1 d932518d8ka.htm FORM 8-K AMENDMENT NO. 2 Form 8-K Amendment No. 2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 2)

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) May 22, 2015 (March 13, 2015)

L.B. Foster Company

(Exact name of registrant as specified in its charter)

Pennsylvania

000-10436

25-1324733

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification No.)


415 Holiday Drive, Pittsburgh, Pennsylvania		15220
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (412) 928-3400

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

EXPLANATORY NOTE

As previously announced and reported in the Current Report on Form 8-K (“the Original Filing”) filed by L.B. Foster Company (the “Company”) on March 13, 2015, the Company completed the acquisition of IOS Holdings, Inc. (“IOS”) on March 13, 2015.

This Form 8-K/A, Amendment No. 2, is being filed to amend Item 9.01 of the Original Filing. This Amendment No. 2 provides the audited consolidated historical financial statements as of December 31, 2013, and for the year ended December 31, 2013 and the unaudited consolidated interim historical financial statements as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 of IOS as required by Item 9.01(a) and the unaudited pro forma condensed combined financial information required by Item 9.01(b), of the Company and IOS described below which were not included in the initial Form 8-K filed on March 13, 2015.

Forward-Looking Statements

This Current Report on Form 8-K/A may contain “forward looking” statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Sentences containing words such as “believe,” “intend,” “may,” “expect,” “should,” “could,” “anticipate,” “plan,” “estimate,” “predict,” “project,” or their negatives, or other similar expressions generally should be considered forward-looking statements. The Company cautions readers that various factors could cause the actual results of the Company to differ materially from those indicated by forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: an economic slowdown in the markets we serve, the risk of doing business in international markets, a decrease in freight or passenger rail traffic, sustained declines in energy prices, a lack of state or federal funding for new infrastructure projects, increased regulation including conflict minerals, an increase in manufacturing or material costs, our ability to effectuate our strategy including evaluating potential opportunities such as strategic acquisitions, joint ventures, and other initiatives, and our ability to effectively integrate new businesses and realize anticipated benefits, the timeliness and availability of material from major suppliers, labor disputes, the impact of competition, variances in current accounting estimates and their ultimate outcomes, the seasonality of the Company’s business, the adequacy of internal and external sources of funds to meet financing needs, the Company’s ability to curb its working capital requirements and manage indebtedness, domestic and international income taxes, foreign currency fluctuations, inflation, the ultimate number of concrete ties that will have to be replaced pursuant to product warranty claims, an overall resolution of the related contract claims, the outcome of a lawsuit filed by Union Pacific Railroad as well as a reduction of future business with the Union Pacific Railroad, risk inherent in litigation, and domestic and foreign governmental regulations. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” section of our Annual Report on Form 10-K and our other periodic filings with the Securities and Exchange Commission.

The forward looking statements in this report are made as of the date of this report and we assume no obligation to update or revise any forward looking statement, whether as a result of new information, future developments, or otherwise.

Item 9.01

Financial Statements and Exhibits

(a)	Financial statements of business acquired

The required audited consolidated financial statements of IOS as of and for the year ended December 31, 2013 are attached hereto as Exhibit 99.2 and are incorporated in their entirety herein by reference.

The required unaudited consolidated financial statements of IOS as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013 are attached hereto as Exhibit 99.3 and are incorporated in their entirety herein by reference.

(b)	Pro forma financial information

The required unaudited pro forma condensed combined balance sheet as of September 30, 2014, and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2014 and for the year ended December 31, 2013 are attached hereto as Exhibit 99.4 and are incorporated in its entirety herein by reference.

(d)	The following exhibits are furnished with this report on Form 8-K/A.

Exhibits


2.1		Agreement and Plan of Merger dated March 13, 2015 among IOS Holdings, Inc., L.B. Foster Company, L.B. Foster Raven Merger Company and IOS Holding Company LLC, solely in its capacity as the representative of IOS’s shareholders is incorporated herein by reference to that Current Report on Form 8-K/A, filed on March 16, 2015. Exhibits to the Agreement and Plan of Merger identified in the Table of Contents to the Agreement and Plan of Merger and the following schedules are not being filed but will be furnished supplementally to the Securities and Exchange Commission upon request:

		Schedule 2.02(e)(viii) - Consents and Approvals
		Schedule 2.02(e)(xi) - Termination of Agreements Schedule 3.01 - Organization and Power Schedule 3.02 - Subsidiaries Schedule 3.03(b) - Authorization; No Breach; Valid and Binding Agreement Schedule 3.04(a) - Capitalization Schedule 3.04(b) - Options Outstanding Schedule 3.06(a) - Absence of Certain Developments; Undisclosed Liabilities Schedule 3.07(a), (b) & (d) - Real Property Schedule 3.09(a) - Contracts and Commitments Schedule 3.10(a) & (b) - Intellectual Property Schedule 3.11 - Litigation Schedule 3.12 - Government Consents Schedule 3.13(a) - Employee Benefit Plans Schedule 3.13(f) - Change in Control Payments or Benefits Schedule 3.14 - Insurance Schedule 3.16(a), (b), (c) & (f) - Environmental Matters Schedule 3.17 - Affiliated Transactions Schedule 3.19 - Brokerage Schedule 3.21 - Customers and Suppliers

10.1		$335,000,000 Amended and Restated Credit Agreement dated March 13, 2015, between Registrant and PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company is incorporated herein by reference to that Current Report on Form 8-K/A, filed on March 16, 2015.

23.1		Consent of independent registered public accounting firm.

99.1		Press release dated March 13, 2015 is incorporated herein by reference to that Current Report on Form 8-K, filed on March 13, 2015

99.2		Audited consolidated financial statements of IOS Holdings, Inc. and independent auditors’ report, as of and for the year ended December 31, 2013.

99.3		Unaudited condensed consolidated financial statements of IOS Holdings, Inc. as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013.

99.4		Unaudited pro forma combined financial information.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


		L.B. FOSTER COMPANY
		(Registrant)

Date:	May 22, 2015	By:	/s/ David J. Russo
		David J. Russo
		Senior Vice President,
		Chief Financial Officer and Treasurer

EXHIBIT INDEX


Exhibit Number		Description

2.1		Agreement and Plan of Merger dated March 13, 2015 among IOS Holdings, Inc., L.B. Foster Company, L.B. Foster Raven Merger Company and IOS Holding Company LLC, solely in its capacity as the representative of IOS’s shareholders is incorporated herein by reference to that Current Report on Form 8-K/A, filed on March 16, 2015. Exhibits to the Agreement and Plan of Merger identified in the Table of Contents to the Agreement and Plan of Merger and the following schedules are not being filed but will be furnished supplementally to the Securities and Exchange Commission upon request:

		Schedule 2.02(e)(viii) - Consents and Approvals
		Schedule 2.02(e)(xi) - Termination of Agreements
		Schedule 3.01 - Organization and Power
		Schedule 3.02 - Subsidiaries
		Schedule 3.03(b) - Authorization; No Breach; Valid and Binding Agreement
		Schedule 3.04(a) - Capitalization
		Schedule 3.04(b) - Options Outstanding
		Schedule 3.06(a) - Absence of Certain Developments; Undisclosed Liabilities
		Schedule 3.07(a), (b) & (d) - Real Property
		Schedule 3.09(a) - Contracts and Commitments
		Schedule 3.10(a) & (b) - Intellectual Property
		Schedule 3.11 - Litigation
		Schedule 3.12 - Government Consents
		Schedule 3.13(a) - Employee Benefit Plans
		Schedule 3.13(f) - Change in Control Payments or Benefits
		Schedule 3.14 - Insurance
		Schedule 3.16(a), (b), (c) & (f) - Environmental Matters
		Schedule 3.17 - Affiliated Transactions
		Schedule 3.19 - Brokerage
		Schedule 3.21 - Customers and Suppliers

10.1		$335,000,000 Amended and Restated Credit Agreement dated March 13, 2015, between Registrant and PNC Bank, N.A., Bank of America, N.A., Wells Fargo Bank, N.A., Citizens Bank of Pennsylvania, and Branch Banking and Trust Company is incorporated herein by reference to that Current Report on Form 8-K/A, filed on March 16, 2015.

23.1		Consent of independent registered public accounting firm.

99.1		Press release dated March 13, 2015 is incorporated herein by reference to that Current Report on Form 8-K, filed on March 13, 2015

99.2		Audited consolidated financial statements of IOS Holdings, Inc. and independent auditors’ report, as of and for the year ended December 31, 2013.

99.3		Unaudited condensed consolidated financial statements of IOS Holdings, Inc. as of September 30, 2014 and for the nine months ended September 30, 2014 and 2013.

99.4		Unaudited pro forma combined financial information.

EX-23.1 2 d932518dex231.htm EX-23.1 EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 333-65885, 333-81535, 333-60488, 333-135002, 333-159470, and 333-180118) of our report dated April 30, 2014, with respect to the consolidated financial statements of IOS Holdings, Inc. as of and for the year ended December 31, 2013, appearing in this Form 8-K/A of L.B. Foster Company.

/s/ Postlethwaite & Netterville

Postlethwaite & Netterville

Lafayette, Louisiana

May 22, 2015

EX-99.2 3 d932518dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

LOGO

IOS HOLDINGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

IOS HOLDINGS, INC

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

TABLE OF CONTENTS


	Page

INDEPENDENT AUDITORS’ REPORT		1

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet		2

Consolidated Statement of Operations		3

Consolidated Statement of Changes in Stockholder’s Equity		4

Consolidated Statement of Cash Flows		5

Notes to Consolidated Financial Statements		6

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of

IOS Holdings, Inc.

We have audited the accompanying consolidated financial statements of IOS Holdings, Inc. (a Delaware corporation) (the Company) and its subsidiaries which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of operations, changes in stockholder’s equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the fair preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IOS Holdings, Inc. and its subsidiaries as of December 31, 2013, and the results of their consolidated statements of operations, changes in stockholder’s equity and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Postlethwaite & Netterville

Lafayette, Louisiana

April 30, 2014

IOS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2013


ASSETS

Current assets:
Cash and cash equivalents	$	510,731
Accounts receivable, net		20,557,557
Other receivables		348,321
Inventory		760,306
Prepaid expenses and other assets		1,398,544

Total current assets		23,575,459

Property, plant and equipment, net (note 3)		50,571,877
Debt issuance costs		2,308,208
Deposits		50,676
Goodwill (notes 1 and 2)		54,768,270
Intangible assets (notes 1 and 2)		43,617,685

Total assets	$	174,892,175

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	4,373,014
Accrued expenses and taxes		2,788,273
Current portion of deferred tax liability, net (note 5)		230,771
Current portion of notes payable (note 4)		9,946,888

Total current liabilities		17,338,946

Notes payable, net of current portion (note 4)		98,370,531
Deferred tax liability, net of current portion (note 5)		10,509,939


Total liabilities		126,219,416


Stockholder’s equity (note 6):
Common stock, Class A, par value $100 per share, 280,000 shares authorized; 270,052 shares issued and outstanding		27,052,200
Common stock, Class B, par value $100 per share, 150,000 shares authorized; none issued and outstanding		—
Common stock, Class C, par value $100 per share, 500,000 shares authorized; 111,098 shares issued and outstanding		11,109,800
Additional paid-in-capital (note 7)		12,847,653
Retained earnings (deficit)		(2,336,894	)

Total stockholder’s equity		48,672,759

Total liabilities and stockholder’s equity	$	174,892,175

The accompanying notes are an integral part of the consolidated financial statement.

IOS HOLDINGS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2013


Revenues	$	106,255,960


Operating expenses
Salary, burden and related expenses (note 7)		48,319,163
Supplies and tools		15,591,385
Depreciation and amortization (note 3)		8,777,471
Other operating expenses		17,796,838

Total operating expenses		90,484,857


Income from operations		15,771,103

Other income (expense)
Interest expense (note 4)		(10,114,677	)
Loss on the sale of assets		(66,621	)
Management and board fees (note 9)		(1,215,137	)
Acquisition related expenses		(1,313,538	)

Total other income (expense), net		(12,709,973	)


Income before income taxes		3,061,130

Income tax expense (note 5)		1,791,220

Net income	$	1,269,910

The accompanying notes are an integral part of the consolidated financial statement.

IOS HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2013


	Common Stock
	Class A				Class B				Class C				Additional
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Paid-in Capital		Retained Earnings			Total

Balance at January 1, 2013		261,984	$	26,198,400		—	$	—		111,098	$	11,109,800	$	10,926,353	$	(3,606,804	)	$	44,627,749

Issuance of stock		8,538		853,800		—		—		—		—		1,646,638		—			2,500,438

Stock option awards (note 7)		—		—		—		—		—		—		274,662		—			274,662

Net Income		—		—		—		—		—		—		—		1,269,910			1,269,910


Balance at December 31, 2013		270,522	$	27,052,200		—	$	—		111,098	$	11,109,800	$	12,847,653	$	(2,336,894	)	$	48,672,759

The accompanying notes are an integral part of the consolidated financial statement.

IOS HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE YEAR ENDED DECEMBER 31, 2013


Operating activities
Net income	$	1,269,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,777,471
Amortization of deferred issuance costs		469,228
Provision for doubtful accounts		98,568
Non-cash compensation		274,662
Deferred income tax expense		1,296,575
Loss on disposal of assets		66,621
Changes in operating assets and liabilities:
Trade accounts and other receivables		(3,662,023	)
Prepaid expenses		453,189
Inventory and other assets		(293,407	)
Accounts payable		15,399
Accrued expenses and tax liabilities		(824,810	)

Net cash provided by operating activities		7,941,383


Investing activities
Capital expenditures		(11,795,022	)
Acquisition of businesses, net of cash and working capital acquired		(6,262,857	)

Net cash used in investing activities		(18,057,879	)


Financing activities
Proceeds from notes payable		13,062,735
Payments of notes payable		(6,023,865	)
Debt issuance costs		(533,628	)
Proceeds from issuance of stock		2,500,438

Net cash provided by financing activities		9,005,680


Net decrease in cash and cash equivalents		(1,110,816	)
Cash and cash equivalents at beginning of year		1,621,547

Cash and cash equivalents at end of year	$	510,731


Non cash transactions:
Non-cash note payable, related to OTI transaction	$	2,600,000
Non-cash in-kind PIK interest	$	951,823
Supplemental disclosure:
Interest paid	$	8,042,267
Income tax paid	$	325,620

The accompanying notes are an integral part of the consolidated financial statement.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies

Nature of Business

IOS Holdings, Inc. (Holdings) and its wholly-owned subsidiary, IOS Acquisitions, Inc. (Acquisition) (collectively, the Company), were formed on December 2, 2010 and incorporated under the laws of the State of Delaware. On December 27, 2012, the shareholders of IOS Holdings, Inc. exchanged their shares in Holdings for an equal number of membership units in IOS Holding Company, LLC (the Parent). As of December 31, 2013, the Parent owns 97.8% of the outstanding shares of Holdings.

On January 14, 2011, the Company acquired all of the outstanding membership units of IOS/PCI, LLC (IOS/PCI), a Louisiana-based company providing non-destructive testing (NDT), inspection and cleaning services for oil country tubular goods (OCTG) and drill tools, from locations in Louisiana, Texas and Pennsylvania.

On May 31, 2011, the Company acquired all of the outstanding common shares of Mike’s Pipe Inspection, Inc. (MPI), a Kansas-based company providing mobile, on-site NDT, inspection and related services on drill tools, drill pipe, casing and other tubular goods, from locations in Kansas, Texas, West Virginia and Pennsylvania.

On September 16, 2011, the Company acquired substantially all of the assets of Don Thorpe, Inc. (DTI), a Texas-based provider of inspection, cleaning and storage services for used tubing.

On January 31, 2012, the Company acquired all of the outstanding membership units of Castronics, LLC (Castronics), a Nebraska-based company providing OCTG threading, repair and storage services to pipe mills, distributors and oil and gas companies operating in the Rocky Mountains and Upper Midwest.

On September 26, 2012, the Company acquired all of the outstanding common shares of Permian NDT, Inc. (Permian), a Texas-based company providing NDT examinations of various metals, ceramics, plastics, fiberglass composites, and concrete used in the transportation, refining, and production of oil and gas products as well as in nuclear, civil infrastructure and defense industries. On December 28, 2012, the Company issued a dividend to its parent company, IOS Holding Company, LLC (Parent), to transfer the common shares of Permian to the Parent. As of December 31, 2013, the Company did not have any equity interest related to Permian and therefore the financial statements presented herein exclude the operations of Permian.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies (continued)

Nature of Business (continued)

On December 27, 2012, the Company acquired all of the outstanding common shares of James Clark Inspections, Inc. (JCI), a Texas-based provider of NDT, inspection and repair services for drill tools, drill pipe and other tubular products and specialty fabrication and machine shop services for a variety of oil and gas customers.

On December 27, 2012, the Company acquired substantially all of the assets of Xxtreme Pipe Services, LLC (Xxtreme), a Texas-based provider of OCTG NDT, inspection, threading, repair and storage services for oil and gas companies, manufacturers and distributors.

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of IOS Holdings, Inc. and its wholly-owned subsidiary, IOS Acquisitions, Inc., and IOS Acquisitions, Inc.’s wholly owned subsidiaries, IOS/PCI, LLC, Mike’s Pipe Inspection, Inc., Castronics, LLC, James Clark Inspections, Inc., and OTI Operating Inc. All material intercompany transactions and balances have been eliminated.

Basis of Accounting

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures 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.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies (continued)

Cash and Cash Equivalents

Cash and cash equivalents are defined by the Company as holdings of highly liquid investments with original maturities of three months or less. The Company periodically maintains cash at financial institutions in excess of federally insured limits. The Company has not experienced any losses and does not believe that significant credit risk exists as a result of this practice.

Accounts Receivable and Revenue Recognition

Accounts receivable arise in the normal course of business of inspection and related services. The Company ages its trade receivables using the invoice date. The Company has established an allowance for doubtful accounts based upon a progressively increasing reserve percentage corresponding to the age of the receivable. Accounts receivable are written off when the account is deemed uncollectible. As of December 31, 2013, the Company had an allowance for doubtful accounts of approximately $402,000.

Revenues are recognized upon completion of services rendered. As of December 31, 2013, the Company had accrued approximately $1,199,000, of unbilled revenue related to services provided but not yet invoiced.

Goodwill

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (ASC 350). Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. The Company does not amortize goodwill but rather reviews the carrying value for impairment annually, and whenever an impairment indicator is identified.

The measurement of goodwill impairment requires management to make estimates of cash flows as well as other fair value determinations. If the fair value of the Company’s assets and liabilities is less than its book value, an impairment loss is recorded to write down the goodwill to estimated fair value. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. It has been determined that no impairment of goodwill exists as of December 31, 2013.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies (continued)

Intangibles and Other Long-Term Assets

Intangible assets other than goodwill include customer relationships, non-compete agreements and trade names resulting from the acquisitions of IOS/PCI, MPI, Castronics, JCI, Xxtreme, and OTI. The customer relationships, non-compete agreements and trade names were valued based on an independent valuation using the Company’s estimate of the future value to be derived from these intangibles under the excess earnings method, the probability adjusted lost cash flows method and the relief from royalty method.

The Company amortizes customer relationships over their estimated useful lives of 15 to 20 years. The Company amortizes non-compete intangibles over their estimated useful lives of 2 to 5 years. The Company amortizes trade names over their estimated useful lives of 1 to 5 years.

The Company evaluates the recoverability of its identifiable intangible assets at least annually or whenever events or changes in circumstances indicate that its intangible assets’ carrying amounts may not be recoverable. Such circumstances could include, but are not limited to, a significant decrease in the market value of an asset, a significant adverse change in the extent or manner in which an asset is used, or an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The carrying value of an identifiable intangible asset is considered impaired when its carrying value exceeds its fair value. In such an event, an impairment loss is recognized equal to the amount of that excess. The evaluation of intangible asset impairment requires the Company to make assumptions about future cash flows, discounted at a rate commensurate with the risk involved, over the estimated useful life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. It has been determined that no impairment of the identifiable intangible assets exists as of December 31, 2013.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies (continued)

Intangibles and Other Long-Term Assets (continued)

Amortization expense (exclusive of debt issuance costs) was approximately $4,087,545 for the year ended December 31, 2013. Intangible assets consist of the following at December 31, 2013:


	Gross Amount		Accumulated Amortization		Net Balance
Customer relationships	$	43,790,000	$	4,222,726	$	39,567,274
Trade names		1,835,000		967,340		867,660
Non-compete agreements		5,000,000		1,817,249		3,182,751

Total	$	50,625,000	$	7,007,315	$	43,617,685

Debt issuance costs are amortized primarily using the effective interest method over the life of the related debt agreements with a weighted average useful life of 5 years. Amortization of debt issuance costs is recorded in interest expense. As part of the November 2013 acquisition of OTI and related additional financing, the Company added $533,628 of debt issuance costs. Future amortization of these intangibles assets is expected to be as follows over the next five years: 2014, $4,251,756; 2015, $4,180,513; 2016, $3,817,207; 2017, $3,477,745 and 2018, $2,917,204.

Property, Plant, and Equipment

Property, plant and equipment are stated at cost. Expenditures for property and equipment and items that substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred. The cost and related accumulated depreciation of property and equipment disposed of are eliminated from the accounts, and any resulting gain or loss is recognized. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets capitalized. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives:


Buildings and improvements		15 to 30 years
Machinery, equipment and vehicles		2 to 15 years
Furniture and fixtures		2 to 15 years

There was no interest capitalized in the year ended December 31, 2013.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

1.	Nature of Business and Significant Accounting Policies (continued)

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized.

ASC 740, Income Taxes (ASC 740), prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return as well as guidance on de-recognition, classification, interest and penalties and financial statement reporting disclosures. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

The Company recognizes interest and penalties accrued on any unrecognized tax exposures as a component of income tax expense. The Company does not have any amounts accrued relating to interest and penalties as of December 31, 2013.

Stock Based Compensation

Stock-based compensation expense is based on the estimated grant-date fair value of all stock-based awards, net of an estimated forfeiture rate, over the requisite service period of the awards, which is generally equivalent to the vesting term. Stock-based compensation expense is recorded only for those awards expected to vest. The Company will periodically revise the estimated forfeiture rate if actual forfeitures differ from the estimates.

Excess tax benefits from the exercise of stock options will be recorded as financing cash flows. For the year ended December 31, 2013, no excess tax benefits were reported in the statement of cash flows as the Company was in a net operating loss carryforward position. No stock options were exercised during 2013.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

2.	Acquisition

On November 1, 2013, the Company acquired all of the outstanding common shares of OTI Operating Inc. (OTI), an Oklahoma-based company providing mobile, on-site NDT, inspection and related services on drill pipe and casing. The Company paid approximately $9.3 million for the purchase of OTI, including consideration of the settlement of amounts post acquisition. Identifiable intangible assets include goodwill of approximately $1 million and other amortizable intangibles, such as trademarks, non-compete agreements and customer relationships, of approximately $4.9 million. The other assets acquired in the transaction included working capital and property, plant and equipment.

3.	Property, Plant, and Equipment

As of December 31, 2013, property, plant and equipment consisted of the following:


	Life
Land and land improvements		$	5,400,298
Building and leasehold improvements	15 – 30 years		18,069,051
Machinery, equipment, and vehicles	2 – 15 years		34,221,323
Furniture and fixture	2 – 15 years		211,190
Construction in progress			780,634

Total			58,682,496
Less: accumulated depreciation			(8,110,619	)

Net property, plant, and equipment		$	50,571,877

Property, plant, and equipment are pledged as collateral on notes payable.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

4.	Notes Payables

As of December 31, 2013, outstanding notes payable consisted of a senior revolving loan (with $2,138,000 drawn), a senior term loan (with an original amount of $57.5 million) and a mezzanine loan (with an original amount of $40.0 million and an amended additional amount of $4.925 million). The Company also had access to a senior capital expenditures loan (with borrowings of $4.7 million). These credit facilities were entered into on December 27, 2012 in connection with the acquisitions of JCI and Xxtreme and the refinancing of the existing credit facilities, and amended on November 1, 2013 in connection with the acquisition of OTI. A summary of the outstanding long-term debt as of December 31, 2013 is as follows:


Senior revolving loan, with maximum borrowings of $7,500,000, payable on demand, monthly interest payments based on a combination of LIBOR plus 4.5% or prime plus 3.5% (as of December 31, 2013, the applicable rate was 6.75%), maturity of December 27, 2017, secured by Company assets.	$	2,138,000

Senior capital expenditures loan, with original principal amount of $4,700,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of December 31, 2013, the applicable rate was 5.75%), quarterly principal payments of $235,000 beginning in March 2014, maturity of December 27, 2017, secured by Company assets.		4,700,000

Senior term loan, with original principal amount of $57,500,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of December 31, 2013, the applicable rate was 7%), quarterly principal payments beginning in March 2013, with amounts ranging from $1,437,000 to $1,796,875, maturity of December 27, 2017, secured by Company assets.		51,750,000

Note payable, financing insurance premiums, payable over 12 months with a maturity of October 1, 2014, with an interest of 3.39%, unsecured.		1,052,016

Note payable, secured by equipment, monthly payment of $5,573, payable over 36 months with a maturity of November 5, 2016, with fixed interest rate of 0.0%.		189,470

Note payable to previous owners of OTI, at fixed rate of 8% per annum, commencing on November 1, 2013, due November 1, 2015, unsecured.		2,600,000

Mezzanine notes, with original principal amount of $40,000,000, monthly interest payments of 12% cash and quarterly variable PIK rate currently at 3.5% at December 31, 2013, no amortization, maturity of June 26, 2018. Interest accruing to principal as of December 31, 2013 was $125,035. Effective November 1, 2013, PIK rate is based on the total leverage calculation at the end of the prior quarter.		45,887,933

Total notes payable		108,317,419
Less: current maturities of notes payable		(9,946,888	)

Long-term notes payable	$	98,370,531

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

4.	Notes Payables (continued)

Maturities on notes payable due in future years as of December 31, 2013 are as follows:


	Year Ending
	2014		2015		2016		2017		Total
Senior revolving loan	$	2,138,000	$	—	$	—	$	—	$	2,138,000
Senior capex loan		940,000		940,000		940,000		1,880,000		4,700,000
Senior term loan		5,750,000		7,187,500		7,187,500		31,625,000		51,750,000
Note payable (insurance)		1,052,016		—		—		—		1,052,016
Note payable (equipment)		66,872		66,872		55,726		—		189,470
Note payable (OTI)		—		2,600,000		—		—		2,600,000
Mezzanine notes		—		—		—		45,887,933		45,887,933

	$	9,946,888	$	10,794,372	$	8,183,226	$	79,392,933	$	108,317,419

Also as described above, the Company’s considers that the carrying value of the notes payable reflected the estimated fair value as of December 31, 2013.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

5.	Income Taxes

The Company follows the provisions of ASC Topic 740 which provides for recognition of deferred tax assets and liabilities for deductible temporary timing differences, operating loss carryforwards, and tax credit carryforwards, net of a valuation allowance for any asset for which it is more-likely-than-not will not be realized in the Company’s tax return.

The components of deferred income taxes were as follows as of December 31, 2013:


Deferred Tax Liabilities:
Intangible assets	$	(5,281,340	)
Fixed assets		(5,584,338	)
Section 481 adjustment		(497,830	)
Prepaid expenses		(456,908	)

Deferred tax liabilities, total		(11,820,416	)


Deferred Tax Assets:
Net operating loss		252,775
Contributions carryover		12,914
Accrued liabilities and stock compensation		659,184
Bad debt allowance		154,833

Deferred tax assets, total		1,079,706

Deferred tax liability, net	$	(10,740,710	)

Current tax liability included in accrued expenses as of December 31, 2013 was $406,261. The composition of income tax expense for the year ended December 31, 2013 was as follows:


Current	$	494,643
Deferred		1,296,577

Income tax expense	$	1,791,220

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

5.	Income Taxes (continued)

The reconciliation of elements of income tax expense provided for the year ended December 31, 2013 was as follows:


Amount using statutory rate	$	1,040,784
State related income taxes		304,523
Impact of effective rate change on deferred items		(153,130	)
Nondeductible costs		175,054
Transaction costs		394,956
Other		29,033

Income tax expense	$	1,791,220

As of December 31, 2013, the Company had concluded that there were no material uncertain tax positions. As of the date of this report, the Company has filed the applicable extensions related to its Federal and/or state income tax returns for fiscal year 2013. Federal, state, and local taxing authorities generally have the right to examine and audit the 2011 and 2012 tax returns filed.

6.	Stockholder’s Equity

IOS Holdings, Inc. (Holdings) has three classes of stock as follows:

Common stock, Class A, par value $100 per share: Holdings has authorized 280,000 shares. As of December 31, 2013, 270,052 shares were issued and outstanding. These are voting shares.

Common stock, Class B, par value $100 per share: Holdings has authorized 150,000 shares. As of December 31, 2013, no shares were issued and outstanding. These are non-voting shares. These shares are used for stock-based compensation awards.

Common stock, Class C par value $100 per share: Holdings has authorized 500,000 shares. As of December 31, 2013, 111,098 shares were issued and outstanding. These are voting shares.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

6.	Stockholder’s Equity (continued)

On December 27, 2012, the shareholders of IOS Holdings, Inc. exchanged their shares in Holdings for an equal number of membership units in IOS Holding Company, LLC (Parent). As of December 31, 2013, the Parent owns 97.8% of the outstanding shares of the Holdings. As described in note 7, stock options have been issued by Holdings.

7.	Stock Compensation

During 2011, the Company established the 2011 Equity Incentive Plan (the Stock Option Plan) whereby employees, consultants and directors of the Company and its affiliates are eligible to be granted stock options. As of December 31, 2013, a total of 150,000 authorized shares of the Company’s Class B common stock are reserved under the Stock Option Plan. Stock options are granted at exercise prices not less than the fair value of the stock at the date of grant. The Company determines fair value through internal valuations based on historical financial and projected information, and if available, independent valuations of the Company’s common shares.

Options vest a) over a service period of 4 years (tenured options) or b) upon meeting certain performance thresholds in a disposition event as defined in the Stock Option Plan agreement (disposition options). Options expire ten years from the date of grant. As of December 31, 2013, the Company had 15,110, tenured options outstanding with strike prices ranging from $100 to $240 per share, which will expire on various dates through 2021. As of December 31, 2013, the Company had 14,110, disposition options outstanding with strike prices ranging from $100 to $240 per share, which will expire on various dates through 2023. No compensation expense is recognized in the financial statements for the disposition options.

The fair value of tenured options is estimated as of the date granted using the Black-Scholes model with the following weighted average assumptions used as of December 31, 2013:


Dividend yield	-0-	%
Expected volatility	50.23	%
Risk free interest rate	2.15	%
Expected life (in years)	10 years

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

7.	Stock Compensation (continued)

For the year ended December 31, 2013, the Company recognized approximately $274,700, of compensation expense related to its stock option program. As of December 31, 2013, there was approximately $638,000, of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Option Plan. The remaining cost is expected to be recognized over a weighted-average period of 2 years. A summary of the status of the Company’s tenured stock options for the year ended December 31, 2013 was follows:


	Number of Shares			Exercise Price Range	Average Exercise Price
Outstanding, January 1, 2013		13,609		$100 - $211.24	$	138.03
Granted		1,875		$232.41 - $239.97	$	235.43
Forfeited		(374	)	$100	$	100.00
Exercised		—		—		—

Outstanding, December 31, 2013		15,110			$	151.06

8.	Concentration Risk

At December 31, 2013, the balance due from the top five customers accounted for approximately $5,218,000 or 32% of the accounts receivable balance, and sales to the top five customers represented approximately $29,500,000 or 43% of the Company’s revenues for the year ended December 31, 2013.

Changes in the relationship with any of these customers could materially and adversely affect the Company’s financial performance.

IOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013

9.	Related Party Transactions

For the year ended December 31, 2013, the Company paid approximately $548,000, for management fees and reimbursable expenses to a company related to its majority stockholder. The management fee agreement relates to supervisory and business planning services provided to the Company and required the payment of an annual management fee of $475,000 in 2013, plus reimbursement of all reasonable expenses incurred in the performance of such services and transactions. The management agreement will continue until the majority stockholder no longer holds common stock in the Company. For the year ended December 31, 2013, the Company paid $450,000 to a Board Member as part of a contract services agreement entered into with the acquisition of Xxtreme. This agreement was fulfilled in its entirety in 2013.

10.

Commitments and Contingencies

Operating Leases. At December 31, 2013, the Company was obligated under various non-cancelable operating leases for a number of properties. Certain leases contain escalation clauses providing for increased rentals if extended. Rent expense for operating leases was approximately $2,936,987 for the year ended December 31, 2013. Future minimum lease payments as of December 31, 2013 were as follows:


2014	$	1,201,230
2015		938,110
2016		831,506
2017		676,536
2018		60,512

	$	3,707,894

Bonus Compensation Arrangements. Annual discretionary performance bonuses, including those governed by employment agreements with certain members of management, are determined and authorized at the discretion of the Company’s Board of Directors.

11.

Subsequent Events

Management has evaluated subsequent events through the date that the financial statements were available to be issued, April 30, 2014, and determined that there were no subsequent events requiring disclosure.

EX-99.3 4 d932518dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

IOS HOLDINGS, INC

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and DECEMBER 31, 2013

TABLE OF CONTENTS


		Page

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets		1

Consolidated Statements of Operations		2

Consolidated Statements of Changes in Stockholder’s Equity		3

Consolidated Statements of Cash Flows		4

Notes to Consolidated Financial Statements		5

IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2014		December 31, 2013
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	836,212	$	510,731
Accounts receivable, net		23,528,841		20,557,557
Other receivables		190,080		348,321
Inventory		1,223,570		760,306
Prepaid expenses and other assets		123,570		1,398,544
Deferred tax asset (note 5)		1,276,766		—

Total current assets		27,179,039		23,575,459

Property, plant and equipment, net (note 3)		49,853,577		50,571,877
Debt issuance costs		1,892,267		2,308,208
Deposits		80,768		50,676
Goodwill (notes 1 and 2)		54,807,971		54,768,270
Intangible assets (notes 1 and 2)		40,436,001		43,617,685

Total assets	$	174,249,623	$	174,892,175


LIABILITIES AND STOCKHOLDER’S EQUITY

Current liabilities:
Accounts payable	$	2,957,295	$	4,373,014
Accrued expenses and taxes		6,801,779		2,788,273
Current portion of deferred tax liability, net (note 5)		—		230,771
Current portion of notes payable (note 4)		8,029,578		9,946,888

Total current liabilities		17,788,652		17,338,946

Notes payable, net of current portion (note 4)		92,370,683		98,370,531
Deferred tax liability (note 5)		12,099,452		10,509,939


Total liabilities		122,258,787		126,219,416


Stockholder’s equity (note 6):
Common stock, Class A, par value $100 per share, 280,000 shares authorized; 270,052 shares issued and outstanding		27,052,200		27,052,200
Common stock, Class B, par value $100 per share, 150,000 shares authorized; none issued and outstanding		—		—
Common stock, Class C, par value $100 per share, 500,000 shares authorized; 111,098 shares issued and outstanding		11,109,800		11,109,800
Additional paid-in-capital (note 7)		13,144,391		12,847,653
Retained earnings (deficit)		684,445		(2,336,894	)

Total stockholder’s equity		51,990,836		48,672,759

Total liabilities and stockholder’s equity	$	174,249,623	$	174,892,175

The accompanying notes are an integral part of the consolidated financial statements.

IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Nine months ended September 30,
	2014			2013

Revenues	$	89,921,214		$	79,378,203


Operating expenses
Salary, burden and related expenses (note 7)		40,718,796			35,970,932
Supplies and tools		13,084,307			11,591,261
Depreciation and amortization (note 3)		7,851,016			6,314,121
Other operating expenses		13,602,789			13,505,626

Total operating expenses		75,256,908			67,381,940


Income from operations		14,664,306			11,996,263

Other income (expense)
Interest expense (note 4)		(8,464,120	)		(7,343,837	)
Gain (Loss) on the sale of assets		46,091			(55,801	)
Management and board fees (note 9)		(615,081	)		(935,506	)
Acquisition related expenses		(281,664	)		(239,236	)

Total other expense, net		(9,314,774	)		(8,574,380	)


Income before income taxes		5,349,532			3,421,883

Income tax expense (note 5)		2,328,193			1,543,556

Net income	$	3,021,339		$	1,878,327

The accompanying notes are an integral part of the consolidated financial statements.

IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013


	Common Stock
	Class A				Class B				Class C				Additional Paid-in Capital
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Additional Paid-in Capital		Retained Earnings			Total
Balance at December 31, 2012		261,984	$	26,198,400		—	$	—		111,098	$	11,109,800	$	10,926,353	$	(3,606,804	)	$	44,627,749

Issuance of stock		—		—		—		—		—		—		—		—			—

Stock option awards (note 7)		—		—		—		—		—		—		205,996		—			205,996

Net Income		—		—		—		—		—		—		—		1,878,327			1,878,327


Balance at September 30, 2013		261,984	$	26,198,400		—	$	—		111,098	$	11,109,800	$	11,132,349	$	(1,728,477	)	$	46,712,072


Balance at December 31, 2013		270,522	$	27,052,200		—	$	—		111,098	$	11,109,800	$	12,847,653	$	(2,336,894	)	$	48,672,759

Issuance of stock		—		—		—		—		—		—		—		—			—

Stock option awards (note 7)		—		—		—		—		—		—		296,738		—			296,738

Net Income		—		—		—		—		—		—		—		3,021,339			3,021,339


Balance at September 30, 2014		270,522	$	27,052,200		—	$	—		111,098	$	11,109,800	$	13,144,391	$	684,445		$	51,990,836

The accompanying notes are an integral part of the consolidated financial statements.

IOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended September 30,
	2014			2013

Operating activities
Net income	$	3,021,339		$	1,878,327
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,851,016			6,314,121
Amortization of deferred issuance costs		415,941			336,203
Non-cash compensation		296,738			205,996
Deferred income tax expense		78,368			1,182,887
(Gain) Loss on disposal of assets		(46,091	)		55,801
Changes in operating assets and liabilities:
Trade accounts and other receivables		(2,813,043	)		(5,414,617	)
Prepaid expenses		1,274,974			1,150,836
Inventory and other assets		(493,356	)		(263,271	)
Accounts payable		(1,415,719	)		1,942,776
Accrued expenses and tax liabilities		5,224,481			188,500

Net cash provided by operating activities		13,394,648			7,577,559


Investing activities
Capital expenditures		(3,321,197	)		(10,539,905	)
Acquisition of businesses, net of cash and working capital acquired		(35,996	)		—

Net cash used in investing activities		(3,357,193	)		(10,539,905	)


Financing activities
Proceeds from notes payable		—			5,918,000
Payments of notes payable		(9,711,974	)		(4,312,500	)

Net cash (used in) provided by financing activities		(9,711,974	)		1,605,500


Net increase (decrease) in cash and cash equivalents		325,481			(1,356,846	)
Cash and cash equivalents, beginning of period		510,731			1,621,547

Cash and cash equivalents, end of period	$	836,212		$	264,701


Non cash transactions:
Non-cash in-kind PIK interest	$	1,211,072		$	610,927
Non-cash stock issuance	$	205,996		$	205,996
Supplemental disclosure:
Interest paid	$	6,847,616		$	5,760,709
Income tax paid	$	603,675		$	248,248

The accompanying notes are an integral part of the consolidated financial statements.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies

Nature of Business

IOS Holdings, Inc. (Holdings) and its wholly-owned subsidiary, IOS Acquisitions, Inc. (Acquisition) (collectively, the Company), were formed on December 2, 2010 and incorporated under the laws of the State of Delaware. On December 27, 2012, the shareholders of IOS Holdings, Inc. exchanged their shares in Holdings for an equal number of membership units in IOS Holding Company, LLC (the Parent). As of September 30, 2014, the Parent owns 97.8% of the outstanding shares of Holdings.

On September 16, 2011, the Company acquired substantially all of the assets of Don Thorpe, Inc. (DTI), a Texas-based provider of inspection, cleaning and storage services for used tubing.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Nature of Business (continued)

Basis of Presentation and Consolidation

The condensed consolidated financial statements include the accounts of IOS Holdings, Inc. and its wholly-owned subsidiary, IOS Acquisitions, Inc., and IOS Acquisitions, Inc.’s wholly owned subsidiaries, IOS/PCI, LLC, Mike’s Pipe Inspection, Inc., Castronics, LLC, James Clark Inspections, Inc., and OTI Operating Inc. All material intercompany transactions and balances have been eliminated.

Basis of Accounting

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Cash and Cash Equivalents

Accounts Receivable and Revenue Recognition

Accounts receivable arise in the normal course of business of inspection and related services. The Company ages its trade receivables using the invoice date. The Company has established an allowance for doubtful accounts based upon a progressively increasing reserve percentage corresponding to the age of the receivable. Accounts receivable are written off when the account is deemed uncollectible. As of September 30, 2014 and December 31, 2013, the Company had an allowance for doubtful accounts of approximately $301,000 and $402,000, respectively.

Revenues are recognized upon completion of services rendered. As of September 30, 2014 and December 31, 2013, the Company had accrued approximately $2,789,000 and $1,199,000, respectively, of unbilled revenue related to services provided but not yet invoiced.

Goodwill

The measurement of goodwill impairment requires management to make estimates of cash flows as well as other fair value determinations. If the fair value of the Company’s assets and liabilities is less than its book value, an impairment loss is recorded to write down the goodwill to estimated fair value. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Management has determined that no impairment of goodwill exists as of September 30, 2014 and December 31, 2013.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Intangibles and Other Long-Term Assets

The Company evaluates the recoverability of its identifiable intangible assets at least annually or whenever events or changes in circumstances indicate that its intangible assets’ carrying amounts may not be recoverable. Such circumstances could include, but are not limited to, a significant decrease in the market value of an asset, a significant adverse change in the extent or manner in which an asset is used, or an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The carrying value of an identifiable intangible asset is considered impaired when its carrying value exceeds its fair value. In such an event, an impairment loss is recognized equal to the amount of that excess. The evaluation of intangible asset impairment requires the Company to make assumptions about future cash flows, discounted at a rate commensurate with the risk involved, over the estimated useful life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Management has determined that no impairment of the identifiable intangible assets exists as of September 30, 2014 and December 31, 2013.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Intangibles and Other Long-Term Assets (continued)

Amortization expense (exclusive of debt issuance costs) was approximately $3,181,683 and $3,002,427 for the nine month periods ended September 30, 2014 and 2013, respectively. Intangible assets consist of the following at September 30, 2014 and December 31, 2013:


2014	Gross Amount		Accumulated Amortization		Net Balance
Customer relationships	$	43,790,000	$	6,395,617	$	37,394,383
Trade names		1,835,000		1,267,585		567,415
Non-compete agreements		5,000,000		2,525,797		2,474,203

Total	$	50,625,000	$	10,188,999	$	40,436,001


2013	Gross Amount		Accumulated Amortization		Net Balance
Customer relationships	$	43,790,000	$	4,222,726	$	39,567,274
Trade names		1,835,000		967,340		867,660
Non-compete agreements		5,000,000		1,817,249		3,182,751

Total	$	50,625,000	$	7,007,315	$	43,617,685

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Property, Plant, and Equipment


Buildings and improvements		15 to 30 years
Machinery, equipment and vehicles		2 to 15 years
Furniture and fixtures		2 to 15 years

There was no interest capitalized for the nine month periods ended September 30, 2014 and 2013.

Income Taxes

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Nature of Business and Significant Accounting Policies (continued)

Income Taxes (continued)

Stock Based Compensation

Excess tax benefits from the exercise of stock options will be recorded as financing cash flows. For the nine month periods ended September 30, 2014 and 2013, no excess tax benefits were reported in the statement of cash flows as the Company was in a net operating loss carryforward position. No stock options were exercised during the nine month periods ended September 30, 2014 and 2013.

2.	Acquisitions

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.	Property, Plant, and Equipment

As of September 30, 2014 and December 31, 2013, property, plant and equipment consisted of the following:


	Life	2014			2013
Land and land improvements		$	8,396,426		$	5,400,298
Building and leasehold improvements	15 – 30 years		15,230,496			18,069,051
Machinery, equipment and vehicles	2 – 15 years		37,569,076			34,221,323
Furniture and fixture	2 – 15 years		233,392			211,190
Construction in progress			1,165,052			780,634

Total			62,594,442			58,682,496
Less: accumulated depreciation			(12,740,865	)		(8,110,619	)

Net property, plant, and equipment		$	49,853,577		$	50,571,877

Property, plant and equipment are pledged as collateral on notes payable.

4.	Notes Payables

As of September 30, 2014, outstanding notes payable consisted of a senior revolving loan (with $0 drawn), a senior term loan (with an original amount of $57.5 million) and a mezzanine loan (with an original amount of $40.0 million and an amended additional amount of $4.925 million). The Company also had access to a senior capital expenditures loan (with borrowings of $3.5 million). These credit facilities were entered into on December 27, 2012 in connection with the acquisitions of JCI and Xxtreme and the refinancing of the existing credit facilities, and amended on November 1, 2013 in connection with the acquisition of OTI. A summary of the outstanding long-term debt as of September 30, 2014 and December 31, 2013 is as follows:


	2014		2013
Senior revolving loan, with maximum borrowings of $7,500,000, payable on demand, monthly interest payments based on a combination of LIBOR plus 4.5% or prime plus 3.5% (as of September 30, 2014, the applicable rate was 6.75%), maturity of December 27, 2017, secured by Company assets.	$	—	$	2,138,000

Senior capital expenditures loan, with original principal amount of $4,700,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of September 30, 2014, the applicable rate was 7%), quarterly principal payments of $235,000 beginning in March 2014, maturity of December 27, 2017, secured by Company assets.		3,500,000		4,700,000

Senior term loan, with original principal amount of $57,500,000, monthly interest payments based on LIBOR plus 4.75% or prime plus 3.75% (as of September 30, 2014, the applicable rate was 7%), quarterly principal payments beginning in March 2013, with amounts ranging from $1,437,000 to $1,796,875, maturity of December 27, 2017, secured by Company assets.		46,519,293		51,750,000

Note payable, financing insurance premiums, payable over 12 months with a maturity of October 1, 2014, with an interest of 3.39%, unsecured.		—		1,052,016

Note payable, secured by equipment, monthly payment of $5,573, payable over 36 months with a maturity of November 5, 2016.		133,743		189,470

Note payable, secured by equipment, monthly payment of $48,645, payable over 36 months with a maturity of September 30, 2017.		548,220		—

Note payable to previous owners of OTI, at fixed rate of 8% per annum, commencing on November 1, 2013, due November 1, 2015, unsecured.		2,600,000		2,600,000

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.	Notes Payables (continued)


	2014			2013
Mezzanine notes, with original principal amount of $40,000,000, monthly interest payments of 12% cash and quarterly variable PIK rate currently at 3.5% at September 30, 2014, no amortization, maturity of June 26, 2018. Effective November 1, 2013, PIK rate is based on the total leverage calculation at the end of the prior quarter.	$	47,099,005		$	45,887,933


Total notes payable		100,400,261			108,317,419
Less: current maturities of notes payable		(8,029,578	)		(9,946,888	)

Long-term notes payable	$	92,370,683		$	98,370,531

Maturities on notes payable due in future years as of September 30, 2014 are as follows:


	Year Ending
	2014		2015		2016		2017		2018
Senior capex loan	$	235,000	$	940,000	$	940,000	$	1,385,000	$	—
Senior term loan		1,437,500		7,187,500		7,187,500		30,706,793		—
Note payable (equipment)		65,363		261,453		244,735		110,412		—
Note payable (OTI)		—		2,600,000		—		—		—
Mezzanine notes		—		—		—		—		47,099,005

	$	1,737,863	$	10,988,953	$	8,372,235	$	32,202,205	$	47,099,005

Also as described above, the Company considers that the carrying value of the notes payable reflected the estimated fair value as of September 30, 2014.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Income Taxes

The components of deferred income taxes are as follows as of September 30, 2014 and December 31, 2013:


	2014			2013
Deferred Tax Liabilities:
Intangible assets	$	(6,366,270	)	$	(5,281,340	)
Fixed assets		(5,649,639	)		(5,584,338	)
Section 481 adjustment		(224,709	)		(497,830	)
Prepaid expenses		(33,676	)		(456,908	)

Deferred tax liabilities, total	$	(12,274,294	)	$	(11,820,416	)


Deferred Tax Assets:
Net operating loss	$	—		$	252,775
Contributions carryover		—			12,914
Accrued liabilities and stock compensation		1,335,697			659,184
Bad debt allowance		115,911			154,833

Deferred tax assets, total		1,451,608			1,079,706

Deferred tax liability, net	$	(10,822,686	)	$	(10,740,710	)

Net deferred tax liability of $10,822,686 as of September 30, 2014 consists of current net deferred tax assets of $1,276,766 and long-term net deferred tax liabilities of $12,099,452. Net deferred tax liability of $10,740,710 as of December 31, 2013 consists of current net deferred tax liabilities of $230,771 and long-term net deferred tax liabilities of $10,509,939.

Current tax liability included in accrued expenses as of September 30, 2014 and December 31, 2013 was $2,070,778 and $406,261, respectively. The composition of income tax expense for the nine months ended September 30 was as follows:


	2014		2013
Current	$	2,249,825	$	360,669
Deferred		78,368		1,182,887

Income tax expense	$	2,328,193	$	1,543,556

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Income Taxes (continued)

The reconciliation of elements of income tax expense provided for the nine months ended September 30 was as follows:


	2014			2013
Amount using statutory rate	$	1,976,196		$	1,269,620
State related income taxes		303,807			341,658
Impact of effective rate change on deferred items		—			(232,964	)

Nondeductible costs		117,975			131,556
Transaction costs		37,218			33,897
Other		(107,003	)		(211	)

Income tax expense	$	2,328,193		$	1,543,556

As of September 30, 2014 and December 31, 2013, the Company had concluded that there were no material uncertain tax positions. The Company plans to file the applicable extensions related to its Federal and/or state income tax returns for fiscal year 2014. Federal, state, and local taxing authorities generally have the right to examine and audit the 2012 and 2013 tax returns filed.

6.	Stockholder’s Equity

IOS Holdings, Inc. (Holdings) has three classes of stock as follows:

Common stock, Class A, par value $100 per share: Holdings has authorized 280,000 shares. As of September 30, 2014 and December 31, 2013, 270,522 shares were issued and outstanding. These are voting shares.

Common stock, Class B, par value $100 per share: Holdings has authorized 150,000 shares. As of September 30, 2014 and December 31, 2013, no shares were issued and outstanding. These are non-voting shares. These shares are used for stock-based compensation awards.

Common stock, Class C par value $100 per share: Holdings has authorized 500,000 shares. As of September 30, 2014 and December 31, 2013, 111,098 shares were issued and outstanding. These are voting shares.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.	Stock Compensation

During 2011, the Company established the 2011 Equity Incentive Plan (the Stock Option Plan) whereby employees, consultants and directors of the Company and its affiliates are eligible to be granted stock options. As of September 30, 2014 and December 31, 2013, a total of 150,000 authorized shares of the Company’s Class B common stock are reserved under the Stock Option Plan. Stock options are granted at exercise prices not less than the fair value of the stock at the date of grant. The Company determines fair value through internal valuations based on historical financial and projected information, and if available, independent valuations of the Company’s common shares.

Options vest a) over a service period of 4 years (tenured options) or b) upon meeting certain performance thresholds in a disposition event as defined in the Stock Option Plan agreement (disposition options) (Note 11). Options expire ten years from the date of grant (Note 11). As of September 30, 2014 and December 31, 2013, the Company had 16,299 and 15,110, respectively, tenured options outstanding with strike prices ranging from $100 to $296 per share, which will expire on various dates through 2021. As of September 30, 2014 and December 31, 2013, the Company had 14,110 disposition options outstanding with strike prices ranging from $100 to $240 per share, which will expire on various dates through 2023. No compensation expense is recognized in the financial statements for the disposition options.

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.	Stock Compensation (continued)

The fair value of tenured options is estimated as of the date granted using the Black-Scholes model with the following weighted average assumptions used as of December 31:


	2014			2013
Dividend yield		-0-	%		-0-	%
Expected volatility		36.12	%		53.48	%
Risk free interest rate		2.58	%		1.73	%
Expected life (in years)		10 years			10 years

For the nine months ended September 30, 2014 and 2013, the Company recognized approximately $296,738 and $205,996, respectively, of compensation expense related to its stock option program. As of September 30, 2014 and December 31, 2013, there was approximately $974,064 and $638,000, respectively, of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Option Plan. The remaining cost is expected to be recognized over a weighted-average period of 2 years. A summary of the status of the Company’s tenured stock options for the nine months ended September 30, 2014 and year ended December 31, 2013 was as follows:


September 30, 2014	Number of Shares			Exercise Price Range	Average Exercise Price
Outstanding, December 31, 2013		15,110		$100.00 - $239.97	$	151.06
Granted		3,750		$296.93	$	296.93
Forfeited		(2,561	)	$100.00 - $239.97	$	163.62
Exercised		—		—		—

Outstanding, September 30, 2014		16,299			$	182.65


December 31, 2013	Number of Shares			Exercise Price Range	Average Exercise Price
Outstanding, December 31, 2012		13,609		$100.00 - $211.24	$	138.03
Granted		1,875		$232.41 - $239.97	$	235.43
Forfeited		(374	)	$100.00	$	100.00
Exercised		—		—		—

Outstanding, December 31, 2013		15,110			$	151.06

IOS HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.	Concentration Risk

At September 30, 2014 and December 31, 2013, the balance due from the top five customers accounted for approximately $5,104,000 or 22% and $5,218,000 or 32% of the accounts receivable balance, and sales to the top five customers represented approximately $21,500,000 or 24% and $17,700,000 or 22% of the Company’s revenues for the nine month periods ended September 30, 2014 and 2013, respectively.

Changes in the relationship with any of these customers could materially and adversely affect the Company’s financial performance.

9.	Related Party Transactions

For the nine month periods ended September 30, 2014 and 2013, the Company paid approximately $520,000 and $502,000 respectively, for management fees related to supervisory and business planning services. For the nine months ended September 30, 2013, the Company paid $410,000 to a Board Member as part of a contract services agreement entered into with the acquisition of Xxtreme.

10.

Commitments and Contingencies

Operating Leases. At September 30, 2014 and December 31, 2013, the Company was obligated under various non-cancelable operating leases for a number of properties. Certain leases contain escalation clauses providing for increased rentals if extended. Rent expense for operating leases was approximately $2,060,132 and $2,250,432 for the nine month periods ended September 30, 2014 and 2013, respectively. Future minimum lease payments as of September 30, 2014 are as follows:


2014	$	307,530
2015		1,109,485
2016		890,664
2017		815,972
2018		193,775

	$	3,317,426

11.

Subsequent Events

Management has evaluated subsequent events through the date that the financial statements were available to be issued, May 22, 2015, and determined that there were no subsequent events requiring disclosure, except as follows:

On March 13, 2015, L.B. Foster Company (“L.B. Foster”) entered into a merger agreement with IOS Holdings, Inc. L.B. Foster acquired 100% of the outstanding shares of the Company.

EX-99.4 5 d932518dex994.htm EX-99.4 EX-99.4

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following Unaudited Pro Forma Condensed Combined Financial Information (“pro forma financial information”) and related explanatory notes present the historical condensed combined financial information of L.B. Foster Company (“the Company”) and IOS Holdings, Inc. (“IOS”) after giving effect to the Company’s acquisition of IOS that was completed on March 13, 2015.

The Unaudited Pro Forma Condensed Combined Statements of Operations (“pro forma statements of operations”) for the nine months ended September 30, 2014 and the year ended December 31, 2013, give effect to the acquisition as if it was consummated on January 1, 2013, the beginning of the Company’s fiscal year. The Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet (“pro forma balance sheet”) as of September 30, 2014, gives effect to the acquisition as if it was consummated on September 30, 2014.

The historical financial statements were prepared in conformity with U.S. GAAP. The unaudited pro forma condensed combined financial information is presented in accordance with the rules specified by Article 11 of Regulation S-X promulgated by the SEC, and has been prepared using the assumptions described in the notes thereto.

The historical financial information of the Company has been derived from the historical audited consolidated financial statements of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2013 and the unaudited condensed consolidated financial statements of the Company included in the Quarterly Report on Form 10-Q for the nine months ended September 30, 2014.

Assumptions and estimates underlying the unaudited adjustments to the pro forma combined financial information (‘the pro forma adjustments”) are described in the accompanying explanatory notes. The pro forma adjustments give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the pro forma statement of operations, expected to have a continuing impact on the combined results of the Company following the IOS acquisition.

The pro forma financial information has been prepared using the acquisition method of accounting In accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”), with L.B. Foster as the acquirer of IOS. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values as of the acquisition date with any excess purchase price allocated to goodwill. The Company has not completed the detailed valuation studies necessary to arrive at the required estimates of the fair value of the IOS assets acquired and the liabilities assumed and the related allocations of the purchase price. As a result, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The valuation will be finalized as soon as practicable within the required measurement period, but in no event later than one year following completion of the acquisition. Any increases or decreases in the fair value of these assets and liabilities upon completion of the final valuations will result in adjustments to the pro forma balance sheet and/or statement of operations. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.

The historical financial statements of IOS have been adjusted to reflect certain reclassifications and other adjustments in order to conform to the Company’s financial statement presentation and accounting policies. Further review may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the financial statements of the combined company. However, at this time, we are not aware of any accounting policy differences that would have a material impact on the unaudited pro forma condensed combined financial statements of the combined company that are not reflected in the pro forma adjustments.

The pro forma financial information has been presented for illustrative purposes only and do not purport to represent what the results of operations or financial position of the Company would have been had the transaction occurred on the dates noted above, or to project the future results of operations or financial position of the Company for any future periods.

The pro forma financial information, although helpful in illustrating the financial characteristics of the Company under one set of assumptions, does not reflect the benefits of expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the IOS acquisition, and accordingly, does not attempt to predict or suggest future results. Specifically, the unaudited pro forma combined statement of operations excludes projected operating efficiencies and synergies expected to be achieved as a result of the IOS acquisition. The pro forma financial information also excludes the effects of costs associated with any restructuring or integration activities or asset dispositions resulting from the IOS acquisition, as they are not expected or were not incurred as of the closing date of the IOS acquisition. Such costs may be material and no assurance can be given that cost savings or synergies will be realized. However, such costs could affect the combined company following the merger in the period the costs are incurred or recorded.

The pro forma financial information has been developed from and should be in read in conjunction with the accompanying notes to the pro forma financial information, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical financial statements in the Company’s 2013 Annual Report on Form 10-K, the September 30, 2014 Quarterly Report on Form 10-Q, the audited consolidated financial statements of IOS as of and for the year ended December 31, 2013, included as Exhibit 99.2 to the Form 8-K/A filed herewith, and the unaudited consolidated interim financial statements of IOS as of and for the nine months ended September 30, 2014, included as Exhibit 99.3 to the Form 8-K/A filed herewith.

L.B. FOSTER COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF SEPTEMBER 30, 2014

(In thousands)


	Historical Balance Sheet Information					Pro Forma
	L.B. Foster			IOS		Adjustments			Notes	Combined

ASSETS

Current assets:
Cash and cash equivalents	$	86,516		$	836	$	—			$	87,352
Accounts receivable - net		91,178			23,718		(499	)	(h)		114,397
Inventories - net		90,795			1,224		(116	)	(h)		91,903
Current deferred tax assets		461			1,277		263		(i)		2,001
Prepaid income tax		233			34		—				267
Other current assets		3,556			90		55		(h)		3,701
Current assets of discontinued operations		14			—						14

Total current assets		272,753			27,179		(297	)			299,635
Property, plant and equipment - net		63,105			49,854		(118	)	(c)		112,841
Other assets:
Goodwill		59,603			54,808		14,816		(d)		129,227
Other intangibles - net		49,789			40,436		9,313		(e)		99,538
Investments		5,365			—						5,365
Other assets		1,750			1,973		395		(b,h)		4,118

Total Assets	$	452,365		$	174,250	$	24,109			$	650,724

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	60,229		$	2,957	$	987		(f)	$	64,173
Deferred revenue		9,810			—		—				9,810
Accrued payroll and employee benefits		9,333			3,509		—				12,842
Accrued warranty		8,610			—		—				8,610
Current maturities of long-term debt		104			8,030		(8,030	)	(a)		104
Current deferred tax liabilities		179			—						179
Other accrued liabilities		8,885			3,293		(699	)	(a)		11,479

Total current liabilities		97,150			17,789		(7,742	)			107,197
Long-term debt		270			92,371		77,738		(a)		170,379
Deferred tax liabilities		11,086			12,099		3,631		(i)		26,816
Other long-term liabilities		9,378			—		3,460		(f)		12,838
Stockholders’ equity:
Class A Common Stock		111			43,470		(43,470	)	(g)		111
Paid-in capital		47,649			7,837		(7,837	)	(g)		47,649
Retained earnings		317,057			684		(1,671	)	(g)		316,070
Treasury Stock		(23,242	)		—		—				(23,242	)
Accumulated other comprehensive loss		(7,094	)		—		—				(7,094	)

Total stockholders’ equity		334,481			51,991		(52,978	)			333,494

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	452,365		$	174,250	$	24,109			$	650,724

See notes to the unaudited pro forma condensed combined financial information

L.B. FOSTER COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014

(In thousands, except per share data)


	Historical Statement of Operations Information						Pro Forma
	L.B. Foster			IOS			Adjustments			Notes	Combined

Net sales	$	446,043		$	89,921		$	—			$	535,964
Cost of goods sold		356,057			67,058			(637	)	(j)		422,478

Gross profit		89,986			22,863			637				113,486
Selling and administrative expenses		58,268			5,914			(254	)	(j,m,n)		63,928
Amortization expense		3,504			3,182			201		(k)		6,887
Interest expense		375			8,464			(5,706	)	(l)		3,133
Interest income		(431	)		—			—				(431	)
Equity in income of nonconsolidated investments		(823	)		—			—				(823	)
Other income		(297	)		(47	)		—				(344	)

		60,596			17,513			(5,759	)			72,350

Income from continuing operations before income taxes		29,390			5,350			6,396				41,136
Income tax expense		9,774			2,328			2,463		(o)		14,565

Income from continuing operations		19,616			3,022			3,933				26,571

Discontinued operations:
Income from discontinued operations before income taxes		18						—				18
Income tax expense		7						—				7

Income from discontinued operations		11			—			—				11

Net income	$	19,627		$	3,022		$	3,933			$	26,582

Average number of common shares outstanding - Basic		10,220						—				10,220
Average number of common shares outstanding - Diluted		10,325						—				10,325
Basic earnings per common share:
From continuing operations	$	1.92									$	2.60
From discontinued operations		0.00									$	0.00

Basic earnings per common share	$	1.92									$	2.60

Diluted earnings per common share:
From continuing operations	$	1.90									$	2.57
From discontinued operations		0.00									$	0.00

Diluted earnings per common share	$	1.90									$	2.57

See notes to the unaudited pro forma condensed combined financial information

L.B. FOSTER COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2013

(In thousands, except per share data)


	Historical Statement of Operations Information					Pro Forma
	L.B. Foster			IOS		Adjustments			Notes	Combined

Net sales	$	597,963		$	106,256	$	—			$	704,219
Cost of goods sold		482,024			78,595		405		(j)		561,024

Gross profit		115,939			27,661		(405	)			143,195
Selling and administrative expenses		71,256			10,281		28		(j,m,n)		81,565
Amortization expense		3,112			4,088		422		(k)		7,622
Interest expense		485			10,115		(6,438	)	(l)		4,162

Interest income		(659	)		—		—				(659	)
Equity in income of nonconsolidated investment		(1,316	)		—		—				(1,316	)
Other (income) / loss		(1,054	)		116		—				(938	)

		71,824			24,600		(5,988	)			90,436

Income from continuing operations before income taxes		44,115			3,061		5,583				52,759
Income tax expense		14,839			1,791		2,150		(o)		18,780

Income from continuing operations		29,276			1,270		3,433				33,979

Discontinued operations:
Income from discontinued operations before income taxes		23			—		—				23
Income tax expense		9			—		—				9

Income from discontinued operations		14			—		—				14

Net income	$	29,290		$	1,270	$	3,433			$	33,993

Average number of common shares outstanding - Basic		10,175			—		—				10,175
Average number of common shares outstanding - Diluted		10,260			—		—				10,260
Basic earnings per common share:
From continuing operations	$	2.88								$	3.34
From discontinued operations	$	0.00								$	0.00

Basic earnings per common share	$	2.88								$	3.34

Diluted earnings per common share:
From continuing operations	$	2.85								$	3.31
From discontinued operations	$	0.00								$	0.00

Diluted earnings per common share	$	2.85								$	3.31

See notes to the unaudited pro forma condensed combined financial information

Note 1.

Basis of Presentation

(Dollars in thousands, except per share data unless otherwise noted)

The pro forma balance sheet of L.B. Foster Company (“L.B. Foster” or the “Company”) as of September 30, 2014 and the pro forma statements of operations for the year ended December 31, 2013, and for the nine months ended September 30, 2014 give effect to the acquisition of 100% of the outstanding shares of IOS Holdings, Inc. (“IOS”) on March 13, 2015.

The pro forma financial information have been derived from the historical consolidated financial statements of the Company and IOS. The pro forma financial statements of IOS have been adjusted to reflect certain reclassifications in order to conform to L.B. Foster’s financial statement presentation. Further review may identify additional differences between the accounting policies of the two companies, that, when conformed, could have a material impact on the financial statements of the combined company. However, at this time, we are not aware of any accounting policy differences that would have a material impact on the unaudited pro forma financial statements that are not reflected in the pro forma adjustments.

The Company acquired IOS for $167,138, net cash acquired, at closing for IOS, subject to the finalization of the net working capital, indebtedness, cash and transaction expenses adjustments (“transaction adjustments”). Included within the purchase price is a reduction related to the initial transaction adjustments totaling $1,810. The preliminary estimate of additional transaction adjustments is $205 payable to seller for a cumulative $1,605 reduction to purchase price. The acquisition agreement includes an earn-out provision whereby sellers have the ability to earn up to an additional $60,000 dependent upon the acquired business achieving a certain level of EBITDA during the 3-year period beginning on January 1, 2015 and ending on December 31, 2017. The Company has not accrued an estimated earn-out obligation based upon a probability weighted valuation model of the projected EBITDA results, which indicates that the minimum target will not be achieved. The purchase price also included escrowed funds of $7,600 in order to secure potential indemnification obligations from the former IOS owners for a period of 18 months.

The acquisition is recorded within the pro forma financial statements under the acquisition method of accounting, in accordance with business combination accounting guidance under U.S. generally accepted accounting principles. Under these standards, the assets acquired and liabilities assumed are measured at estimated fair value as defined by the applicable guidance. The adjustments included herein are preliminary as the Company has not finalized the detailed valuation studies necessary to arrive at the required estimates of fair value of the IOS assets to be acquired and the liabilities to be assumed and the related allocation of purchase price. The final fair values may differ materially from the information presented. Acquisition transaction costs have not been included as components of consideration, but have been adjusted in the period in which the costs were incurred.

The pro forma financial information were prepared in accordance with U.S. GAAP and pursuant to the U.S. Securities and Exchange Commission Regulation S-X Article 11. The pro forma financial statements of the combined companies are based upon the historical information of the respective companies after giving effect to the acquisition and adjustments as described in the notes to the financial information. The pro forma balance sheet is presented as if the acquisition occurred on September 30, 2014 and the pro forma statements of income for the nine-months ended September 30, 2014 and for the year ended December 31, 2013 give effect to the acquisition as if it had occurred January 1, 2013.

Note 2.

Preliminary purchase consideration and related allocation

The estimated consideration for IOS is as follows:


Agreement purchase price	$	170,000
Preliminary net working capital and estimated cash adjustment		(1,605	)
Other adjustments related to insurance payments		44
Net cash acquired from IOS		(1,301	)

*Estimated consideration, net of cash acquired*	$	167,138

The net working capital adjustment for the purposes of the pro forma condensed consolidated balance sheet is based on the estimated IOS balance sheet as of March 13, 2015. The net working capital adjustment is expected to be settled in the second quarter of 2015, and the preliminary calculation resulted in a reduction in purchase price.

The following table summarizes the preliminary allocation of the fair value of the purchase price for the acquisition assuming the acquisition closed on September 30, 2014:


Current assets, net of cash acquired on the acquisition date	$	25,581
Property, plant and equipment		49,736
Goodwill		69,624
Other intangibles		49,749
Other non-current assets		698
Current liabilities		(9,060	)
Other non-current liabilities		(19,190	)

*Total*	$	167,138

The final estimated consideration paid, net of cash acquired, and amounts allocated to assets acquired and liabilities assumed in the IOS acquisition, could differ materially from the preliminary amounts presented in these Pro Forma Financial Information. In addition, if the value of the acquired assets is higher than the preliminary indication, it may result in higher amortization and depreciation expense than is presented in these Pro Forma Financial Information. See Note 3 for the effects of changes in estimated fair value of property and equipment to be acquired in the IOS acquisition on the calculation of pro forma depreciation and amortization expense.

The following table summarizes the preliminary allocation of the fair value of the other intangibles assets assuming the acquisition closed on September 30, 2014:


Trade name	$	2,641
Customer relationships		40,528
Technology		4,364
Non-competition agreements		2,216

*Total intangible assets*	$	49,749

As part of these preliminary estimates, trade name was valued using the relief-from-royalty method under the income approach, customer relationships were valued using the multi-period excess earnings approach, technology was valued using the relief from royalty method under the income approach, and non-competition agreements were valued using a differential cash flow approach. Amortization expense was calculated using a straight-line method.

The amortization related to these amortizable identifiable intangible assets is reflected as a pro forma adjustment to the pro forma combined statement of operations using the straight-line method. Management has determined the estimated remaining useful life of these assets based on its consideration of relevant factors. A 10-year remaining useful life for the trade names has been estimated based on the period in which the Company expects a market participant would use the name prior to rebranding and the length of time the name is expected to maintain recognition and value in the marketplace. A 15-year remaining useful life for customer relationships has been estimated based on the projected economic benefits associated with this asset. The 15-year estimated useful life represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. A 10-year useful life for the technology based upon the length of time that a market participant would be able to leverage the know-how and internal processed developed by IOS. A 2-year remaining useful life for the non-compete agreements has been estimated, based on the contractual term of the agreements with former shareholders of IOS. These assumptions have been

developed based on discussions with former members of IOS’ management and IOS’ historical customer data. The amount that will ultimately be allocated to these assets, and the related amount of amortization, may differ materially from this preliminary allocation.

The purchase price allocation for property, plant and equipment was based on a preliminary estimate of the fair value of such assets. Depreciation expense in the pro forma combined statement of operations assumes estimated useful lives of 2-39 years based upon asset classification. Goodwill represents the excess of the total purchase price over the fair value of the underlying net assets. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually absent any indicators of impairment.

The excess of the purchase price over the preliminary estimated fair value to the underlying assess acquired and liabilities assumed has been recorded as goodwill. The goodwill resulting from the preliminary allocation of acquisition consideration is primarily attributable to the nationwide energy platform that IOS provides as well as our ability to control the acquired assets. Goodwill resulting from the acquisition is not expected to be deductible for tax purposes. In accordance with ASC 805, goodwill will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.

Note 3.

Pro Forma Condensed Combined Balance Sheet Adjustments

Pro forma adjustments are necessary to reflect the preliminary allocation of the purchase price, including adjusting assets and liabilities to their estimated fair value and recognizing intangible assets, with related changes in amortization expense, and to reflect the effect of the purchase price paid to acquire said assets and assumed liabilities.

The pro forma adjustments included in the Unaudited Pro Forma Condensed Combined Balance Sheet are as follows:

a)	Adjustments related to the extinguishment of IOS debt and L.B. Foster proceeds from revolving credit facility used to acquire IOS.


Proceeds from revolving credit facility	$	168,439
Proceeds to fund deferred financing costs		1,670
Payment of IOS current debt		(8,030	)
Payment of IOS long-term debt		(92,371	)
Payment of accrued interest		(699	)

b)	Adjustments related to the elimination of IOS deferred financing fees and financing fees attributable to the Company’s revolving credit facility.


L.B. Foster deferred financing costs	$	1,670
Eliminate IOS deferred financing costs		(1,892	)

Pro forma adjustment to deferred financing costs		(222	)

c)	Adjustments to eliminate IOS’ property, plant and equipment and record the estimated fair value of property, plant and equipment based upon the September 30, 2014 assumed transaction close.


Preliminary property, plant and equipment fair value	$	49,736
Eliminate historical IOS property, plant and equipment - net		(49,854	)

Pro forma adjustment to fair value property, plant and equipment		(118	)

d)	Adjustments related to the elimination of IOS’ historical goodwill and record the estimated goodwill balance based upon the September 30, 2014 assumed transaction close.


Preliminary goodwill valuation	69,624
Eliminate historical IOS goodwill	(54,808	)

Pro forma adjustment to fair value goodwill	14,816

e)	Adjustments to eliminate IOS’ historical other intangibles and record the estimated fair value of other intangibles based upon the September 30, 2014 assumed transaction close.


Preliminary other intangible valuation	49,749
Eliminate IOS other intangible - net	(40,436	)

Pro forma adjustment to fair value other intangibles	9,313

f)	Adjustment to accrue transaction costs and record preliminary estimate of environmental obligations.


Record accrual for transaction costs incurred subsequent to September 30, 2014			987
Environmental obligation			3,460

g)	Adjustment to eliminate and adjust historical IOS equity balances


Eliminate historical IOS common stock	(43,470	)
Eliminate historical IOS paid in capital	(7,837	)
Eliminate historical IOS retained earnings	(684	)
Record transaction related costs incurred subsequent to September 30, 2014	(987	)

h)	Adjustments to record the fair value of accounts receivable, inventory, and short and long-term prepaid assets.


Adjust accounts receivable to fair value	(499	)
Adjust inventory values to fair value	(116	)
Adjust prepaid assets to fair value	(69	)
Record current portion of representation and warranty insurance	124
Record long-term portion of representation and warranty insurance	617

Adjustment to record deferred income tax assets and liabilities resulting from pro forma fair value adjustments for the assets and liabilities acquired. The estimate of deferred income tax assets and liabilities is preliminary and is subject to change based upon management’s final determination of the fair value of assets acquired and liabilities assumed.


Adjustments to current deferred tax asset			263
Adjustments to non-current deferred tax liability			3,631

Note 4.

Pro Forma Condensed Statements of Operations Adjustments

The pro forma condensed combined consolidated statements of operations assume that the acquisition occurred as of January 1, 2013. The pro forma condensed consolidated statements of operations do not included any costs related to the acquisition. In addition, the pro forma condensed consolidated statements of operations do not assume any impacts from revenue, costs, or other operating synergies that are expected as a result of the acquisition. Pro forma adjustments have been made to reflect amortization of the identified intangible assets for the related periods. Identified intangible assets are being amortized on a basis approximating the economic value derived from those assets.

The pro forma adjustments included in the Unaudited Pro Forma Condensed Combined Consolidated Statements of Operations are as follows:

j)	Adjustments to eliminate IOS’ historical depreciation expense and record the preliminary estimate of depreciation expense. The favorable change in depreciation expense primarily relates to preliminary valuation increases in longer lived assets and reductions in value to shorter lived assets.


	Depreciation expense for the year ended December 31, 2013			Depreciation expense for the nine-months ended September 30, 2014

Preliminary estimate of property, plant and equipment depreciation (cost of sales)		4,815			3,610

Preliminary estimate of property, plant and equipment depreciation (selling and administrative)		476			357
IOS historical depreciation expense (cost of sales)		(4,410	)		(4,247	)
IOS historical depreciation expense (selling and administrative)		(279	)		(422	)

Pro forma adjusted depreciation expense		602			(702	)

k)	Adjustments to eliminate IOS’ historical amortization expense and record the preliminary estimate of amortization expense.


	Amortization expense for the year ended December 31, 2013			Amortization expense for the nine-months ended September 30, 2014
Preliminary estimate of other intangible amortization expense		4,510			3,383
IOS historical amortization expense		(4,088	)		(3,182	)

Pro forma adjusted amortization expense		422			201

l)	Adjustment represents the elimination of historical interest and deferred financing costs of IOS and records estimated costs of the Company.


	Assumed interest rate			Debt		Interest expense for the year ended December 31, 2013			Interest expense for the nine-months ended September 30, 2014
Total new variable rate debt and related interest expense		2.00	%	$	167,138	$	3,343		$	2,507
Amortization of debt issuance costs							334			251

Total							3,677			2,758

IOS interest expense and amortization of debt issuance costs							(10,115	)		(8,464	)

Pro forma interest expense adjustment							(6,438	)		(5,706	)

Adjustment to eliminate transaction related costs and the related tax effects as of December 31, 2013 and September 30, 2014 as these costs are directly related to the acquisition and will not have an ongoing impact. These historical amounts have been eliminated within the statement of operations but are reflected within retained earnings. No transaction costs were incurred by L.B. Foster related to the transaction for the period up to September 30, 2014.


Historical IOS transaction related costs			(293	)			(282	)

n)	Adjustment to record the amortization of the representations and warranty insurance premium.


Record amortization expense related to representations and warranty insurance premium			124				93

Adjustment to record the tax effect of pro forma adjustments. A combined statutory federal and state tax rate of 38.5% was applied to each pro forma adjustment. The effective tax rate of the combined company could be significantly different depending on post-acquisition activities, such as the geographical mix of taxable income affecting state and foreign taxes, among other factors.

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