<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
REGISTRATION NO. 333-23245
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ITEQ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<C> <C> <C>
DELAWARE 3443 41-1667001
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
MARK E. JOHNSON
2727 ALLEN PARKWAY, SUITE 760 CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
HOUSTON, TEXAS 77019 ITEQ, INC.
TELEPHONE: (713) 285-2700 2727 ALLEN PARKWAY, SUITE 760
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE HOUSTON, TEXAS 77019
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE: (713) 285-2700
PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR
SERVICE)
</TABLE>
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COPIES TO:
<TABLE>
<C> <C>
RICHARD L. WYNNE MELISSA M. MARTIN
PORTER & HEDGES, L.L.P. ANDREWS & KURTH L.L.P.
700 LOUISIANA, 35TH FLOOR 4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002-2764 HOUSTON, TEXAS 77002
TELEPHONE: (713) 226-0600 TELEPHONE: (713) 220-4448
FAX: (713) 228-1331 FAX: (713) 220-4285
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 1, 1997
LOGO
- --------------------------------------------------------------------------------
5,050,000 SHARES
COMMON STOCK
- --------------------------------------------------------------------------------
Of the 5,050,000 shares of Common Stock offered hereby (the "Offering"),
4,300,000 shares are being sold by ITEQ, Inc. ("ITEQ" or the "Company") and
750,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"), certain of which shares may be sold in the United
Kingdom or otherwise outside of the United States. The Company will not receive
any of the proceeds from the sale of Common Stock by the Selling Stockholders.
See "Selling Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"ITEQ." On April 28, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $6 1/16 per share. See "Price Range of Common
Stock."
FOR INFORMATION CONCERNING CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(1)(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $550,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 757,500 shares of Common Stock, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
The shares of Common Stock are offered severally by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them and subject to the
approval of certain legal matters by counsel and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York against payment therefor on or
about May , 1997.
DEUTSCHE MORGAN GRENFELL
EVEREN SECURITIES, INC.
SANDERS MORRIS MUNDY
The date of this Prospectus is May , 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information herein and in the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all references to the
"Company" or to "ITEQ" refer to ITEQ, Inc., its predecessors and subsidiaries,
and all information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting."
THE COMPANY
GENERAL
ITEQ is a rapidly growing provider of manufactured equipment, engineered
systems and services used in the processing, treatment and movement of gases and
liquids. It is the leading domestic manufacturer of shell and tube heat
exchangers, principally for petrochemical and refining applications, and a
leading producer of baghouses, scrubbers, fans and other filtration systems and
components for environmental and general industrial applications. ITEQ also
manufactures specialized process equipment, such as reactors, blenders, stacks,
towers, columns and pressure vessels, principally for the refining,
petrochemical and plastics industries. The Company operates internationally,
with its equipment, systems and services sold or utilized in over 30 countries
worldwide.
ITEQ believes that through acquisitions of complementary businesses it has
been able to capitalize on its relationships with existing customers through
cross-selling opportunities. Additionally, through its international
distribution network and broad offering of products and services, the Company
has benefitted from its customers' continuing consolidation of their sources of
supply.
In recent years, annual worldwide capital expenditures for hydrocarbon
process equipment and industrial air filtration equipment have averaged
approximately $40 billion, of which approximately 30% represents the domestic
market. Although there is no dominant manufacturer of equipment and systems for
the highly fragmented domestic markets served by the Company, ITEQ is the
largest domestic manufacturer of shell and tube heat exchangers, with a market
share of approximately 15%. Similarly, ITEQ believes it is one of the largest
domestic producers of certain industrial air filtration products for the
selected niche markets served and that its presence in the hydrocarbon process
equipment market is significant, particularly for thin-wall, large-diameter
vessels.
BUSINESS STRATEGY
The Company aspires to be a leading provider of manufactured equipment,
engineered systems and services used in the niche industrial markets in which it
operates and to expand its markets through acquisitions of complementary product
and service lines. ITEQ has experienced rapid growth since its inception in 1990
through a combination of strategic acquisitions and internal growth.
Acquisition Strategy. ITEQ pursues a strategy of acquiring leading
providers of complementary manufactured products and services in highly
fragmented industrial equipment markets, with a view to further consolidating
those markets. ITEQ believes it is one of the few domestic acquirers and
consolidators of businesses in those markets. In general, ITEQ pursues the
acquisition of businesses which satisfy most of the following criteria:
- Well managed, typically privately-held, domestic companies serving niche
industrial markets.
- Large defensible share of their respective markets, involving proven
technologies.
- Provide complementary products and services which afford cross-selling
opportunities or are direct competitors.
- Significant installed product bases and long operating histories.
- Potential for significant expansion into international markets.
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<PAGE> 5
- Predictable cash flow and earnings potential.
- Potential for internal synergies and economies of scale.
ITEQ has made seven acquisitions to date, including the acquisition of
Ohmstede, Inc. ("Ohmstede") in November 1996, which contributed approximately
$100.2 million to the Company's pro forma 1996 revenues of $193.9 million. The
Company continually screens potential acquisition candidates, and ITEQ believes
that further acquisitions are likely in future periods, although no assurance
can be given that any additional acquisitions will be completed.
Internal Growth. The Company has experienced significant internal growth
in recent years despite operating in mature markets. This growth has resulted
from the Company's strategy of gaining additional market share by selling its
products, and those acquired through acquisitions, to existing and new customers
and industries, introducing new products, and developing its international
markets. In addition, each of the acquired businesses has a substantial
installed base of products, and ITEQ has achieved further revenue increases
through additional emphasis on the maintenance and refurbishment aftermarkets.
Increasingly, and consistent with ITEQ's overall growth strategy, major
industrial concerns are consolidating their sources of supply for goods and
services in an effort to obtain worldwide single-source suppliers for broad
ranges of systems, equipment and services. In fragmented markets such as those
served by the Company, further industry consolidation is to be expected. At
present, the Company believes that no other supplier of products and services to
the niche markets presently served offers as broad an array of products and
services as those offered by the Company. ITEQ believes its current product
lines and its acquisition strategy position it to benefit from this ongoing
trend.
---------------------
The Company was incorporated in Delaware in 1990 under the name Air-Cure
Environmental, Inc. The Company changed its name in 1993 to Air-Cure
Technologies, Inc., and in March 1997, the Company changed its name to ITEQ,
Inc. The ITEQ name stands for "international, technologies and equipment." The
Company's principal executive offices are located at 2727 Allen Parkway, Suite
760, Houston, Texas 77019, and its telephone number is (713) 285-2700.
---------------------
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................... 4,300,000 shares
Common Stock offered by the Selling Stockholders....... 750,000 shares
Common Stock to be outstanding after the Offering(1)... 16,195,793 shares
Use of proceeds by the Company......................... To repay outstanding indebtedness
and to fund the acquisition of
Exell, Inc. See "Use of Proceeds."
Nasdaq National Market symbol.......................... ITEQ
</TABLE>
- ---------------
(1) Does not include 2,754,688 shares of Common Stock issuable upon exercise of
outstanding options and warrants.
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<PAGE> 6
SUMMARY FINANCIAL DATA
The following presents summary historical financial data of the Company as
of the date and for the periods presented, and as adjusted for the sale of the
Common Stock by the Company offered hereby and the application of the net
proceeds therefrom solely to repay indebtedness and not for the proposed
acquisition of Exell, Inc. See "Use of Proceeds" and "Capitalization." The pro
forma financial data set forth below gives effect to the acquisition of Ohmstede
as if it had been consummated on January 1, 1996. The pro forma data is derived
from the historical financial statements of the Company giving effect to the
Ohmstede acquisition under the purchase method of accounting and is based on
assumptions and adjustments described in the Unaudited Pro Forma Combined
Financial Information contained elsewhere in this Prospectus. The results of
Ohmstede are included in the Company's historical results for the three months
ended March 31, 1997, and therefore pro forma financial data for this period is
not included.
<TABLE>
<CAPTION>
THREE
MONTHS
PRO FORMA ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ---------
------------------------------- DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
-------- --------- -------- ------------ ---------
AS AS
RESTATED(1) RESTATED(1) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $61,826 $113,164 $110,804 $193,928 $48,494
Cost of revenues(2)................................... 49,135 93,262 88,949(3) 152,743(3) 38,870
------- -------- -------- -------- -------
Gross profit.......................................... 12,691 19,902 21,855 41,185 9,624
Selling, general and administrative costs............. 8,926 11,645 11,977 21,400 4,807
Sales commissions..................................... 1,327 2,477 2,755 3,092 645
Depreciation and amortization......................... 845 1,009 1,146 2,118 481
Merger costs, restructuring charges and other
nonrecurring costs.................................. -- 1,335 3,704 3,704 --
Interest expense, net................................. 888 1,502 2,660 7,851 1,807
Other income.......................................... 112 326 305 589 102
------- -------- -------- -------- -------
Earnings (loss) before provision for income taxes..... 817 2,260 (82) 3,609 1,986
------- -------- -------- -------- -------
Provision for income taxes............................ 338 1,500 4 1,356 813
------- -------- -------- -------- -------
Net earnings (loss)................................... $ 479 $ 760 $ (86) $ 2,253 $ 1,173
======= ======== ======== ======== =======
Net earnings (loss) per common share.................. $ .04 $ .07 $ (.01) $ .19 $ .10
======= ======== ======== ======== =======
Weighted average common and common equivalent shares
outstanding......................................... 10,891 11,552 11,481 11,604 12,272
OTHER DATA:
EBITDA(4)............................................. $ 3,218 $ 6,728 $ 8,847 $ 19,556 $ 4,274
Capital expenditures.................................. 657 932 991 3,516 490
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
AS
ACTUAL ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 22,169 $ 22,169
Total assets................................................ 128,294 128,294
Total debt.................................................. 63,356 39,237
Stockholders' equity........................................ 25,241 49,360
Percentage of total debt to total capitalization............ 72% 44%
</TABLE>
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(1) See Note 1 to the Consolidated Financial Statements.
(2) Includes depreciation and amortization of $668, $622, $719, $1,574 and $275
for the years ended December 31, 1994, 1995 and 1996, pro forma year ended
December 31, 1996, and the three months ended March 31, 1997, respectively.
(3) Includes $700 of restructuring charges. See Note 3 to the Consolidated
Financial Statements.
(4) EBITDA represents income before interest expense, provision for income
taxes, depreciation and amortization, and merger costs, restructuring
charges and other nonrecurring costs; the manner in which EBITDA is
calculated in this Prospectus may differ from such calculations by other
entities. EBITDA is presented for informational purposes and not as an
alternative measure of operating results or cash flow from operations (as
determined in accordance with generally accepted accounting principles).
5
<PAGE> 7
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus. This Prospectus
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this Prospectus regarding the Company's financial position,
business strategy, and plans and objectives of management for future operations
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed in the risk
factors set forth below, in "Recent Developments" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Prospectus and the documents incorporated herein by reference. All
subsequent written and oral forward-looking statements attributable to the
Company, or persons acting on its behalf, are expressly qualified in their
entirety by the Cautionary Statements.
DEPENDENCE ON INDUSTRY SPENDING; SEASONALITY
The prospects for the Company depend upon the level of capital and
maintenance expenditures by its industrial customers, in particular those by
petrochemical and refining concerns. These industries historically have been
cyclical in nature and vulnerable to general downturns in the economy. Decreases
in industry spending could have a significant adverse effect upon the demand for
the Company's products and services and the Company's results of operations.
The Company historically has experienced quarterly fluctuations in its
operating results. Operating results in any quarter are dependent upon the
timing of equipment and system sales, which may vary considerably among
quarters. In recent years, the Company has experienced greater revenues and net
income in its second and third quarters, partially as a result of the budgetary
and procurement processes of its customers.
ACQUISITIONS; INTEGRATION OF OPERATIONS
Since 1990 the Company has completed seven acquisitions of businesses in
pursuit of its strategic objectives. The Company plans to continue to pursue
acquisitions that complement its existing products and services. The Company's
acquisition strategy involves the potential risks inherent in assessing the
value, strengths, weaknesses, contingent or other liabilities and potential
profitability of acquisition candidates and in integrating the operations of
acquired companies. Although the Company generally has been successful in
pursuing these acquisitions, there can be no assurance that acquisition
opportunities will continue to be available, that the Company will have access
to the capital required to finance potential acquisitions, that the Company will
continue to acquire businesses or that any business acquired will be integrated
successfully or prove profitable.
LEVERAGE AND LIQUIDITY
At March 31, 1997, after giving effect to the issuance of the Common Stock
offered hereby and the application of the net proceeds therefrom to repay
indebtedness, the Company would have had total indebtedness of approximately
$39.2 million and debt as a percentage of total capitalization of 44% ($49.6
million and 50%, assuming the pending acquisition of Exell is consummated
utilizing additional borrowings to fund the purchase). See
"Business -- Acquisition History and Prospects -- Pending Acquisition." The
degree to which the Company will be leveraged could have important consequences,
including the following: (i) the possible impairment of the Company's ability to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes; (ii) the necessity for a substantial portion of the
Company's cash flow from operations to be dedicated to the payment of
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<PAGE> 8
principal and interest on its indebtedness; and (iii) the potential for
increased vulnerability of the Company to economic downturns and possible
limitation of its ability to withstand competitive pressures.
Based on current operations, the Company expects that it will be able to
service the interest and principal obligations on its indebtedness as well as
its working capital needs and to fund its capital expenditures and other
operating expenses out of cash flow from operations and available borrowings
under its principal credit facility. However, there can be no assurance that the
Company's business will continue to generate cash flow at levels sufficient to
meet these requirements. The Company's ability to meet its debt service
obligations will be dependent upon its future performance which, in turn, will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
COMPETITION
The Company's markets are fragmented and highly competitive. The Company
competes with many United States-based and international companies in its global
markets. Although none of the Company's competitors is considered dominant,
there are competitors that have significantly greater resources than the
Company, which, among other things, could be a competitive disadvantage to the
Company in securing certain projects. See "Business -- Market Conditions and
Competition."
INTERNATIONAL EXPANSION
The Company's successful expansion into foreign markets will depend on
numerous factors, many of which are beyond its control. In addition, foreign
expansion may increase the Company's exposure to certain risks inherent in doing
business outside the United States, including currency fluctuations,
restrictions on the repatriation of profits, compliance with foreign laws and
standards and political risks. Although most of the Company's contracts with
respect to international sales to date have been denominated in United States
dollars, no assurance can be made that future contracts will be denominated in
United States dollars; therefore, the Company may be subject to foreign exchange
risks in the future. The Company does not presently hedge exchange rate
fluctuations but in the future may hedge economic exposures. The Company does
not intend to enter into speculative hedge transactions.
POTENTIAL FOR PRODUCT LIABILITY CLAIMS
Certain of the Company's products are used in potentially hazardous
environments. Although the Company has not been required to pay any product
liability claims to date, and the Company carries insurance in amounts that it
considers adequate, catastrophic occurrences at locations where the Company's
products are used could in the future result in significant product liability
claims against the Company.
ENVIRONMENTAL REGULATIONS
The Company is subject to various foreign, federal, state and local laws
and regulations relating to the protection of the environment. These laws may
provide for retroactive, strict liability for damages to natural resources or
threats to public health and safety, rendering a party liable for the
environmental damage without regard to its negligence or fault. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution. The Company's
business involves environmental management and issues typically associated with
historical manufacturing operations. To date, the Company's cost of complying
with environmental laws and regulations has not been material, but the fact that
such laws or regulations are changed frequently makes predicting the cost or
impact of such laws and regulations on its future operations uncertain. The
modification of existing laws or regulations or the adoption of new laws or
regulations affecting the Company's operations could adversely affect the
Company.
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<PAGE> 9
RECENT DEVELOPMENTS
Acquisition of Ohmstede. In November 1996, the Company purchased Ohmstede,
the largest domestic manufacturer of shell and tube heat exchangers with 1996
calendar year revenues of approximately $100.2 million, for an aggregate cash
purchase price of approximately $52.9 million including transaction costs.
Founded in 1905, Ohmstede has been marketing custom designed and manufactured
heat exchangers to the petroleum refining and petrochemical processing
industries for more than 40 years. The acquisition of Ohmstede has resulted in:
(i) increased 1996 earnings on a pro forma basis; (ii) strengthened name
recognition for the Company as a result of Ohmstede's long operating history and
leading position in the domestic heat exchanger market; (iii) additional
customer relationships for the Company, thereby offering potential for increased
cross-selling of Company products; (iv) expanded international sales
opportunities, as Ohmstede's products can be offered through the Company's
international distribution network; (v) increased aftermarket business as a
result of Ohmstede's substantial installed base of products; and (vi) more
efficient use of the Company's Allied Industries' plant capacity, which enables
Ohmstede to manufacture large heat exchangers which it previously did not have
the capacity to produce. As of the acquisition, Ohmstede's operations were
conducted from plants located in Beaumont, Corpus Christi, and LaPorte, Texas
and in Lake Charles and St. Gabriel, Louisiana. The five plants, all of which
are owned, encompass approximately 385,000 square feet of manufacturing space
and employed approximately 600 people at December 31, 1996.
Proposed Acquisition of Exell. In April 1997, the Company entered into an
agreement to purchase Exell, Inc. and an affiliated partnership (collectively,
"Exell") for a combined cash purchase price of approximately $10.4 million,
subject to reduction for certain adjustments. Exell is a manufacturer of shell
and tube heat exchangers and a principal competitor of the Company's Ohmstede
heat exchanger manufacturing operation. If consummated, the acquisition of Exell
will strengthen the Company's leadership position in the domestic shell and tube
heat exchanger market and offer cross-selling opportunities with Exell's
customer base. In addition, ITEQ believes the acquisition may result in cost
savings through economies of scale when combined with Ohmstede's operations. For
its fiscal year ended September 30, 1996, Exell reported revenues of $25.0
million. The Company expects the transaction to be accretive to 1997 earnings
per share. The transaction is presently scheduled to close by June 1997, but
remains subject to the satisfaction of customary contractual conditions and
certain regulatory approvals, and there can be no assurance that the transaction
will be consummated. See "Use of Proceeds" and "Business -- Acquisition History
and Prospects."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $24.1 million ($28.4 million if the over-allotment
option is exercised in full), at an assumed public offering price of $6 1/16 per
share and after deducting the estimated underwriting discount and expenses
payable by the Company. The Company will not receive any of the proceeds from
the sale of the shares of Common Stock by the Selling Stockholders.
Up to $10.4 million of the net proceeds to the Company will be used to fund
the pending acquisition of Exell or repay indebtedness incurred to fund such
acquisition, and the balance of the net proceeds will be used to reduce
indebtedness under its revolving line of credit ("Revolving Credit Facility")
and term loan ("Term Loan"), incurred to fund a portion of the Ohmstede purchase
price and to refinance the Company's then existing credit facilities. Borrowings
under the Revolving Credit Facility and Term Loan bear interest at the
applicable offshore rate or base rate (as defined), plus a spread ranging from
.25% to 3%, depending on the leverage ratio of the Company. At December 31,
1996, the interest rates in effect for the Revolving Credit Facility and Term
Loan were 8.9% per annum and 8.6% per annum, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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<PAGE> 10
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"ITEQ." The high and low bid prices per share for the periods indicated were as
follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................. 3 3/8 2 1/4
Second Quarter............................................ 2 15/16 1 3/4
Third Quarter............................................. 4 3/4 2 5/16
Fourth Quarter............................................ 4 3/8 3 3/16
1996
First Quarter............................................. 4 1/2 3 1/4
Second Quarter............................................ 4 1/4 3 3/8
Third Quarter............................................. 5 1/8 2 7/8
Fourth Quarter............................................ 5 4 1/8
1997
First Quarter............................................. 7 1/2 4 1/2
Second Quarter (through April 28, 1997)................... 6 1/2 5 5/8
</TABLE>
All of the foregoing prices reflect interdealer quotations without retail
markups, markdowns or commissions and may not represent actual transactions.
On April 28, 1997, the last reported sale price for the Common Stock, as
quoted by the Nasdaq National Market, was $6 1/16 per share. As of the same
date, there were approximately 160 holders of record of the Common Stock, and
the Company estimates that there were over 2,000 beneficial owners of Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company intends to retain any future earnings for reinvestment in its
business and does not intend to pay cash dividends in the foreseeable future.
Furthermore, the Company is prohibited from declaring or paying cash dividends
on its capital stock under the terms of certain of the Company's indebtedness.
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<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997, and (ii) as adjusted to reflect the sale by the Company of
4,300,000 shares of Common Stock offered hereby (at an assumed public offering
price of $6 1/16 per share) and the application of the estimated net proceeds
therefrom solely to repay indebtedness and not for the proposed acquisition of
Exell. This table should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term obligations................. $ 6,012 $ 6,012
Borrowings under line of credit............................. 17,000 5,381
Other long-term obligations, less current maturities........ 27,548 15,048
Subordinated notes.......................................... 12,796 12,796
------- -------
Total debt................................................ 63,356 39,237
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.001 par value; 30,000 shares authorized:
Issued and outstanding -- 11,838 shares
As adjusted -- 16,188 shares........................... 12 16
Additional paid-in capital................................ 24,400 48,515
Retained earnings......................................... 1,129 1,129
Translation adjustment.................................... (300) (300)
------- -------
Total stockholders' equity............................. 25,241 49,360
------- -------
Total capitalization.............................. $88,597 $88,597
======= =======
</TABLE>
10
<PAGE> 12
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following selected historical financial data for each of the years
ended March 31, 1992 and 1993, the nine month period ended December 31, 1993,
and the years ended December 31, 1994, 1995 and 1996 is derived from the audited
consolidated financial statements of the Company. The pro forma combined
operating data for the year ended 1996 was prepared utilizing the historical and
unaudited financial statements of the Company and Ohmstede and assumes that the
acquisition of Ohmstede occurred on January 1, 1996. The results of Ohmstede are
included in the Company's historical results of operations for the three months
ended March 31, 1997, and therefore pro forma financial data for this period is
not included. The historical financial data for the three months ended March 31,
1997 is derived from the unaudited consolidated financial statements of the
Company. In the opinion of management, this data contains all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly the
three months ended March 31, 1997. Historical and pro forma results of
operations, percentage fluctuations and any trends that may be inferred from the
data below are not necessarily indicative of the results of operations for any
future period. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Unaudited Pro Forma Combined Financial
Information and the Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL FISCAL YEAR ENDED DECEMBER 31,
YEAR YEAR NINE MONTHS ------------------------------------ PRO FORMA
ENDED ENDED ENDED 1994 1995 YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, AS AS DECEMBER 31,
1992 1993 1993 RESTATED(1) RESTATED(1) 1996 1996
--------- --------- ------------ ----------- ----------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue....................... $7,026 $12,790 $27,859 $61,826 $113,164 $110,804 $193,928
Cost of revenues(2)........... 5,339 9,821 20,725 49,135 93,262 88,949(3) 152,743(3)
------ ------- ------- ------- -------- -------- --------
Gross profit................ 1,687 2,969 7,134 12,691 19,902 21,855 41,185
Selling, general and
administrative expenses..... 1,645 3,843 5,677 8,926 11,645 11,977 21,400
Sales commissions............. -- -- -- 1,327 2,477 2,755 3,092
Depreciation and
amortization................ 123 363 688 845 1,009 1,146 2,118
Merger costs, restructuring
charges and other
nonrecurring costs.......... -- -- -- -- 1,335 3,704 3,704
------ ------- ------- ------- -------- -------- --------
Operating profit(loss)...... (81) (1,237) 769 1,593 3,436 2,273 10,871
Interest expense, net......... (48) (15) (192) (888) (1,502) (2,660) (7,851)
Other income (expense)........ 164 31 128 112 326 305 589
------ ------- ------- ------- -------- -------- --------
Earnings (loss) before
provision (benefit) for
income taxes................ 35 (1,221) 705 817 2,260 (82) 3,609
Provision (benefit) for income
taxes....................... 14 (396) 234 338 1,500 4 1,356
------ ------- ------- ------- -------- -------- --------
Net earnings (loss)......... $ 21 $ (825) $ 471 $ 479 $ 760 $ (86) $ 2,253
====== ======= ======= ======= ======== ======== ========
Net earnings (loss) per common
share....................... $ .01 $ (.22) $ .08 $ .04 $ .07 $ (.01) $ .19
====== ======= ======= ======= ======== ======== ========
Weighted average common and
common equivalent shares
outstanding................. 2,991 3,763 5,928 10,891 11,552 11,481 11,604
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
OPERATING DATA:
Revenue....................... $48,494
Cost of revenues(2)........... 38,870
-------
Gross profit................ 9,624
Selling, general and
administrative expenses..... 4,807
Sales commissions............. 645
Depreciation and
amortization................ 481
Merger costs, restructuring
charges and other
nonrecurring costs.......... --
-------
Operating profit(loss)...... 3,691
Interest expense, net......... (1,807)
Other income (expense)........ 102
-------
Earnings (loss) before
provision (benefit) for
income taxes................ 1,986
Provision (benefit) for income
taxes....................... 813
-------
Net earnings (loss)......... $ 1,173
=======
Net earnings (loss) per common
share....................... $ .10
=======
Weighted average common and
common equivalent shares
outstanding................. 12,272
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1995
MARCH 31, MARCH 31, AS AS MARCH 31,
1992 1993 1993 RESTATED(1) RESTATED(1) 1996 1997
--------- --------- ------------ ----------- ----------- -------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $3,382 $ 4,038 $ 4,197 $ 7,964 $ 17,834 $ 29,851 $ 22,169
Total assets.................. 7,344 26,585 25,887 52,800 70,844 136,388 128,294
Short-term borrowings and
current maturities.......... 1,694 1,569 981 2,468 3,347 6,012 6,012
Long-term obligations and
other, less current
maturities.................. 4 2,129 983 8,305 18,208 67,141 57,344
Stockholders' equity.......... 5,404 14,540 14,627 21,474 21,403 23,253 25,241
</TABLE>
- ---------------
(1) See Note 1 to the Consolidated Financial Statements.
(2) Includes depreciation and amortization of $668, $622, $719, $1,574 and $275
for the years ended December 31, 1994, 1995 and 1996, the pro forma year
ended December 31, 1996, and the quarter ended March 31, 1997, respectively.
(3) Includes $700 in restructuring costs. See Note 3 to the Consolidated
Financial Statements.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical and Pro Forma Combined Financial Data" and the Company's Consolidated
Financial Statements and the notes thereto included elsewhere herein. All
statements other than statements of historical facts included in the following
discussion regarding the Company's financial position, business strategy, and
plans of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.
GENERAL
Since its inception in 1990 the Company has acquired seven businesses. Due
to the magnitude of these acquisitions and the integration of the acquired
operations with the Company's existing businesses, results of operations for
prior periods are not necessarily comparable with or indicative of results of
operations for current or future periods.
The Company acquired Amerex, Inc. and Amerex Industries, Inc.
(collectively, "Amerex") and VIC Environmental Systems, Inc. ("VIC") in May
1994, each of which was accounted for as a purchase. In December 1995, the
Company acquired Allied Industries, Inc. ("Allied") in a transaction that was
accounted for as a pooling-of-interests. Effective November 1, 1996, the Company
completed the Ohmstede acquisition in a transaction that was accounted for as a
purchase.
In 1997, the Company combined the Allied and Ohmstede operations to (i)
permit Ohmstede to efficiently manufacture large heat exchangers at Allied's
plant and thus enter a product class which Ohmstede was not previously equipped
to handle; (ii) encourage a unified cross-selling effort to customers of both
product lines; (iii) utilize Allied's international distribution network to
enhance Ohmstede's international marketing efforts; and (iv) reduce combined
operating costs.
The Company records revenues from long-term contracts using the
percentage-of-completion method. Under this method, the Company recognizes as
revenues that portion of the total contract price which the cost of work
completed to date bears to the estimated total cost of the work included in the
contract. Because contracts may extend over more than one fiscal period,
revisions of cost and profit estimates are made periodically and are reflected
in the accounting period in which they are determined. If the estimate of total
costs on a contract indicates a loss, the total anticipated loss is recognized
immediately. Contract costs include all direct material, labor and
subcontracting costs and those indirect costs related to contract performance,
such as supplies, tools and repairs.
The Company recognizes revenue from certain short-term contracts using the
completed contract method. Revenue is recognized when a project is substantially
complete. The contracts under this revenue recognition method are typically less
than three months in duration.
During the fourth quarter of 1996, effective January 1, 1996, the Company
estimated percentage-of-completion for the materials portion of its long-term
contracts at Allied based on when the material was placed into production,
whereas previously such estimates were based on when the liability for the cost
of the material was legally incurred. The new method of applying the
percentage-of-completion accounting method was adopted to better reflect the
economics of Allied's revenue and profit earnings process, and financial
statements of prior years and interim periods have been restated to apply the
revised method retroactively.
The Company historically has experienced quarterly fluctuations in its
operating results. Operating results in any quarter are dependent upon the
timing of equipment and system sales, which may vary considerably among
quarters. In recent years, the Company has experienced greater revenues and net
income in its second and third quarters, partially as a result of the budgetary
and procurement processes of its customers.
12
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Revenues
Revenues for the three months ended March 31, 1997 increased $26.4 million,
or 119%, to $48.5 million from $22.1 million for the three months ended March
31, 1996. The increase was primarily attributable to the November 1996
acquisition of Ohmstede, which contributed revenues of $30 million for the three
months ended March 31, 1997. This increase was partially offset by the
disposition in November 1996 of Air-Cure, Inc. ("ACI") and Pipkorn, Inc.
("Pipkorn"), both of which were formerly subsidiaries of the Company. In the
first quarter of 1996, ACI and Pipkorn contributed $1.2 million in revenues. The
revenues of the Company's Singapore subsidiary declined $1.0 million in 1997 to
$1.1 million compared to $2.1 million in 1996, due to a temporary decrease in
sales to the microelectronics industry.
Gross Profits
The Company's gross profits for the three months ended March 31, 1997
increased $4.9 million, or 104%, to $9.6 million compared to $4.7 million in
1996. Ohmstede's gross profit of $6.7 million for the three months ended March
31, 1997 was partially offset by (i) the sale of ACI and Pipkorn, which
contributed $0.2 million of gross profits during the three months ended March
31, 1996, and (ii) a decrease in gross profits of $1.8 million at certain of the
Company's other operations.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased by $2.2
million from $2.6 million to $4.8 million, which was attributable to the
Ohmstede acquisition. Ohmstede's SG&A expense for the three months ended March
31, 1997 was $2.5 million, which was partially offset by a $0.2 million
reduction in SG&A expense related to the sale of ACI and Pipkorn.
Sales Commissions
Sales commissions represent commissions paid to third party sales
representatives or distributors. The commissions vary from period to period with
the projects and products sold and the arrangement between the Company and the
sales representative.
Depreciation and Amortization
Depreciation and amortization expense (excluding amounts included in cost
of revenues) for the three months ended March 31, 1997 increased $0.3 million to
$0.5 million. The increase was as a result of the Ohmstede acquisition.
Interest Expense
Interest expense for the three months ended March 31, 1997 and 1996 was
$1.8 million and $0.4 million, respectively. The borrowings required to finance
the Ohmstede acquisition, which aggregated $56.1 million, caused the increase in
interest expense.
Income Taxes
The effective rate for the three months ended March 31, 1997 and 1996 was
41% and 39%, respectively.
Other
As planned when acquired, Ohmstede has initiated foreign sales, which
typically have longer production times and more units per order in production
and shipment than Ohmstede's historical domestic business. Accordingly, such
sales were recognized under the percentage-of-completion
13
<PAGE> 15
revenue recognition method, resulting in revenues and gross margin of $3,564,000
and $658,000, respectively, during the three months ended March 31, 1997. Also,
at March 31, 1997, Ohmstede had more jobs substantially complete but not shipped
than in prior periods, which under the Company's completed contract policy
resulted in revenues and gross margin of $1,961,000 and $627,000, respectively,
during the three months ended March 31, 1997.
In March 1997, a vessel at the Company's Allied subsidiary was damaged by a
subcontractor during the final stages of completion. The Company has entered
into a second contract with the customer to construct a replacement vessel and
expects to recover the cost of the original vessel either from the subcontractor
or from insurance proceeds. The Company does not expect to incur a loss on the
contracts.
1996 COMPARED WITH 1995
Revenues
Revenues for the year ended December 31, 1996 declined $2.4 million, or 2%,
to $110.8 million from $113.2 million for the year ended December 31, 1995. This
decrease resulted primarily from a decrease in total sales of filtration systems
in 1996 compared with 1995 due to the commencement and completion of an $11.8
million order in 1995 which was not replaced in full by other orders in 1996,
and to a $10.9 million decrease in process equipment sales, excluding sales by
Ohmstede. Such aggregate decrease was partially offset by a $17.0 million
revenue increase resulting from the operations of Ohmstede for the two months
following its acquisition.
In 1996, the Company's sales to the petrochemical and refining industries
increased due to the acquisition of Ohmstede, which had sales to these two
industries only. The Company's sales to the microelectronics and the cement and
lime industries also increased during 1996.
Gross Profits
Although revenues declined in 1996 as compared with 1995, gross profits
increased by $2.0 million to $21.9 million. The gross margin also improved to
19.7% in 1996 from 17.6% in 1995. These improvements were primarily the result
of increased sales of higher margin wet scrubbers and fans and the addition of
Ohmstede, which contributed $3.6 million in gross profits, at a 20.9% gross
margin, for the two month period subsequent to its acquisition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 1996 and 1995 were relatively unchanged at $12.0 million and $11.6 million,
respectively.
Sales Commissions
Sales commissions represent commissions paid to third party sales
representatives or distributors. The commissions vary with the project and
products sold and the arrangement between the Company and the sales
representative.
Depreciation and Amortization
Depreciation and amortization expense (excluding amounts included in cost
of revenues) for the year ended December 31, 1996 increased $0.1 million to $1.1
million. The increase was primarily as a result of the Ohmstede acquisition.
Merger Costs, Restructuring Charges and Other Nonrecurring Expenses
During 1996, the Company incurred a restructuring charge of $4.4 million,
of which $3.7 million and $0.7 million were recorded as restructuring charges
and cost of revenues, respectively. The charge included (i) a provision for the
contractually required severance obligations to the former president and chief
executive officer who was replaced in March 1996, and (ii) the cost of
implementing new
14
<PAGE> 16
management's plan to reduce the Company's overall cost structure including
employee severance, lease and other contract buyouts, inventory and other asset
impairments, losses related to termination of unprofitable business lines,
excess machinery disposal and other related costs.
During 1995, the Company recorded a nonrecurring charge of approximately
$1.1 million for acquisition costs related to the Allied acquisition, which is
more fully described in Note 2 to the Consolidated Financial Statements. In
addition, operational consolidation during 1995, and unrelated litigation
settlement costs, resulted in a one-time charge of $0.2 million.
Interest Expense
Interest expense for the years ended December 31, 1996 and 1995 was $2.7
million and $1.5 million, respectively. The borrowings required to finance the
Ohmstede acquisition, which aggregated $56.1 million, accounted for 75% of the
increase. The Company's average interest rate on borrowings for 1996 and 1995
was 9.6% and 8.7%, respectively. As further described in Note 5 to the
Consolidated Financial Statements, the interest rate charged to the Company by
its lenders increases or decreases based on the Company's leverage ratio. As a
result of the Ohmstede acquisition, the Company's leverage increased, resulting
in higher average interest rates.
Income Taxes
The decrease in income tax expense in 1996 resulted from both a decrease in
1996 pre-tax earnings and increased 1995 tax expense resulting from the 1995
acquisition of Allied, as more fully described in Notes 2 and 7 to the
Consolidated Financial Statements. The earnings decrease accounted for
approximately $0.8 million in reduced federal and state tax expenses. The
acquisition of Allied in 1995 resulted in additional 1995 tax expense of
approximately $0.5 million. The majority of the 1995 tax expense increase was
attributable to deferred tax expense incurred when Allied was converted from an
S corporation to a C corporation.
1995 COMPARED WITH 1994
Revenues
Revenues for the year ended December 31, 1995 increased $51.4 million to
$113.2 million, or 83%, from revenues of $61.8 million for the year ended
December 31, 1994. Filtration equipment revenues increased approximately $29.8
million in 1995, partially as the result of an $11.8 million filtration system
job, as well as the inclusion of Amerex and VIC operations in 1995 for the full
year as compared to the seven months of Amerex and VIC operations included in
1994 following their acquisition. Process equipment revenues in 1995 increased
by $21.6 million to $38.7 million. In addition to 1995 sales of process
equipment being unusually high compared to prior years, the increase was also
attributable to 1994 revenues including only the eleven months of Allied
revenues subsequent to its inception.
During 1995, the Company experienced growth in sales to a number of
industry groups, including the steel, chemical, petrochemical, cement, air
separation and microelectronics industries. Petrochemical industry sales
increased both internationally and domestically primarily because of increased
marketing efforts. Similarly, revenue growth from process equipment sales to the
air separation industry reflected the Company's increased marketing to customers
within that industry. The Company's revenues were also positively impacted by
the growth in the Company's filtration sales to the microelectronics industry.
Sales to the utility industry decreased in 1995 from 1994.
Gross Profits
Gross profits for the years ended December 31, 1995 and 1994 were $19.9
million and $12.7 million, respectively. The corresponding gross margins for the
periods were 17.6% and 20.6%, respectively. Filtration equipment margins
improved to 22.8% in 1995 compared with 21.9% in 1994. Processing equipment
margins in 1995 were 8% compared with 17.0% in 1994. This decrease resulted from
15
<PAGE> 17
competitive bidding on several large orders performed at reduced margins and
from losses on several jobs. The job losses related principally to products and
services that the Company discontinued, as reflected in the Company's
restructuring charge taken in 1996, which is more fully described in Note 3 to
the Consolidated Financial Statements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 1995 and 1994 were $11.6 million and $8.9 million, respectively. The
increase is related primarily to the inclusion of the operations of Allied,
Amerex and VIC, which were acquired in 1994, for a full twelve months in 1995
compared with eleven months for Allied and seven months for both Amerex and VIC
in 1994.
Sales Commissions
Sales commissions represent commissions paid to third party sales
representatives or distributors. The commissions vary with the project and
products sold and the arrangement between the Company and the sales
representative.
Depreciation and Amortization
Depreciation and amortization expense (excluding amounts included in cost
of revenues) was $1.0 million and $0.8 million for the years ended December 31,
1995 and 1994, respectively. The increase was primarily a result of the
acquisitions of Amerex and VIC in May 1994. Depreciation and amortization
expense for Amerex and VIC was $0.3 million and $0.2 million for the twelve
months ended December 31, 1995 and the seven months ended December 31, 1994,
respectively.
Merger Costs, Restructuring Charges and Other Nonrecurring Expenses
During 1995, the Company recorded a nonrecurring charge of approximately
$1.1 million for acquisition costs related to the Allied acquisition, which is
more fully described in Note 2 to the Consolidated Financial Statements. In
addition, operational consolidation during 1995, and unrelated litigation
settlement costs, resulted in a one-time charge of $0.2 million.
Interest Expense
Interest expense in 1995 was $1.5 million compared to $0.9 million in 1994.
The corresponding average interest rates were 8.7% and 9.3% in 1995 and 1994,
respectively. The expense increase reflects the additional borrowings required
to finance the Amerex, VIC and Allied acquisitions.
Income Taxes
The increase in income tax expense for 1995 compared to 1994 resulted from
higher pre-tax earnings and the Allied acquisition in 1995, as more fully
described previously and in Notes 2 and 7 to the Consolidated Financial
Statements. The majority of the 1995 tax expense increase was attributable to
deferred tax expense incurred when Allied was converted from an S corporation to
a C corporation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company's cash position was $1.8 million compared
with $6.3 million at December 31, 1996. Typically, the Company maintains cash
levels of $1 million to $3 million for general corporate purposes, with any
additional amounts being used to reduce borrowings under the Company's line of
credit. The cash level at December 31, 1996 resulted from large customer
payments received at year end. Working capital at March 31, 1997 was at $23.0
million compared to $29.9 million at December 31, 1996, which decrease resulted
from the difference in cash position. Working capital at December 31, 1996
increased to $29.9 million from $17.8 million at December 31, 1995, primarily as
a result of the Ohmstede acquisition.
16
<PAGE> 18
The Company's existing capital resources consist of cash balances, cash
provided by its operating activities and funds available under its line of
credit. The Company's operating activities provided $4.5 million in cash during
the three months ended March 31, 1997. Cash provided by operations in 1996 was
$8.1 million. During 1995, the Company's operating activities used $6 million in
cash, while 1994 provided $2.3 million in cash. During 1996, cash provided by
operating activities was approximately $14.1 million greater as compared to
1995, partially as a result of the Company's program to reduce the amount of
accounts receivable, increase progress billings and reduce inventory levels.
The Company's cash requirements consist of its general working capital
needs, capital expenditures, obligations under its leases and promissory notes,
and capital required for future acquisitions. The Company's general working
capital requirements consist of salary costs and related overhead and the
purchase price of materials and components, and may also include subcontract
costs incurred prior to the receipt of corresponding progress payments under the
contract with respect to which such costs are incurred. Management anticipates
that the Company will make capital expenditures of approximately $2.4 million in
1997 as compared to $1.0 million in 1996. The increase in capital expenditures
relates primarily to the ownership of the Ohmstede operations for all of 1997 as
compared to two months during 1996. The capital expenditures at Ohmstede relate
primarily to planned equipment upgrades and replacement. Excluding payments
under the Company's revolving line of credit, principal payments made under
promissory notes totaled approximately $2.5 million for the year ended 1996.
Approximately $6.0 million and $7.3 million in principal will be payable during
1997 and 1998, respectively.
In November 1996, the Company amended its principal credit agreement to
increase its maximum borrowings in conjunction with the Ohmstede acquisition.
The financing consisted of a $35 million term loan and a $38 million revolving
line of credit facility (under which $17.0 million was outstanding at March 31,
1997). In addition to the bank financing, in November 1996, the Company issued
Senior Subordinated Notes ("Subordinated Notes") to two institutional lenders in
an aggregate amount of $15 million. The Subordinated Notes mature November 18,
2003 and bear interest at 12% through December 31, 1997, which rate increases by
0.5% per year for each year the Subordinated Notes remain outstanding. As
additional consideration, the Subordinated Note holders received warrants to
purchase an aggregate of 1,760,000 shares of the Company's common stock at $5.10
per share, subject to adjustment. The warrants may be exercised at any time
prior to expiration on November 18, 2003. The $2.3 million warrant value was
reflected as equity and as debt discount that is being amortized as additional
interest expense over the seven year life of the Subordinated Notes.
The Company's principal credit facility and the Subordinated Notes require
the Company to maintain certain levels of working capital and stockholders'
equity and contain other restrictive covenants. Such instruments also limit the
ability of the Company to incur additional indebtedness and to make acquisitions
and certain investments. At March 31, 1997, the Company was in compliance with
the provisions of its debt agreements.
Except with respect to the funding of any future acquisitions, management
believes that funds available under its credit facilities, together with cash
generated from operations, will be sufficient to meet the Company's anticipated
cash requirements for 1997. Management further believes that the Company could
obtain additional capital to make acquisitions primarily through either
issuances of common or preferred stock, or debt or lease financing, although no
assurance can be given with respect to whether such financing would be available
when required or whether such financing can be obtained on terms acceptable to
the Company.
17
<PAGE> 19
BUSINESS
GENERAL
ITEQ is a rapidly growing provider of manufactured equipment, engineered
systems and services used in the processing, treatment and movement of gases and
liquids. It is the leading domestic manufacturer of shell and tube heat
exchangers, principally for petrochemical and refining applications, and a
leading producer of baghouses, scrubbers, fans and other filtration systems and
components for environmental and general industrial applications. ITEQ also
manufactures specialized process equipment, such as reactors, blenders, stacks,
towers, columns and pressure vessels, principally for the refining,
petrochemical and plastics industries. The Company operates internationally,
with its equipment, systems and services sold or utilized in over 30 countries
worldwide.
ITEQ believes that through acquisitions of complementary businesses it has
been able to capitalize on its relationships with existing customers through
cross-selling opportunities. Additionally, through its international
distribution network and broad offering of products and services, the Company
has benefitted from its customers' continuing consolidation of their sources of
supply.
In recent years, annual worldwide capital expenditures for hydrocarbon
process equipment and industrial air filtration equipment have averaged
approximately $40 billion, of which approximately 30% represents the domestic
market. Although there is no dominant manufacturer of equipment and systems for
the highly fragmented domestic markets served by the Company, ITEQ is the
largest domestic manufacturer of shell and tube heat exchangers, with a market
share of approximately 15%. Similarly, ITEQ believes it is one of the largest
domestic producers of certain industrial air filtration products for the
selected niche markets served and that its presence in the hydrocarbon process
equipment market is significant, particularly for thin-wall, large-diameter
vessels.
BUSINESS STRATEGY
The Company aspires to be a leading provider of manufactured equipment,
engineered systems and services used in each of the niche industrial markets in
which it operates and to expand its markets through acquisitions of
complementary product and service lines. ITEQ has experienced rapid growth since
its inception in 1990 through a combination of strategic acquisitions and
internal growth.
Acquisition Strategy. ITEQ pursues a strategy of acquiring leading
providers of complementary manufactured products and services in highly
fragmented industrial equipment markets, with a view to further consolidating
those markets. ITEQ believes it is one of the few domestic acquirers and
consolidators of businesses in those markets. In general, ITEQ pursues the
acquisition of businesses which satisfy most of the following criteria:
- Well managed, typically privately-held, domestic companies serving niche
industrial markets.
- Large defensible share of their respective markets, involving proven
technologies.
- Provide complementary products and services which afford cross-selling
opportunities or are direct competitors.
- Significant installed product bases and long operating histories.
- Potential for significant expansion into international markets.
- Predictable cash flow and earnings potential.
- Potential for internal synergies and economies of scale.
ITEQ has made seven acquisitions to date, including the acquisition of
Ohmstede in November 1996, which contributed approximately $100.2 million to the
Company's pro forma 1996 revenues of $193.9 million. The Company continually
screens potential acquisition candidates, and ITEQ believes that further
18
<PAGE> 20
acquisitions are likely in future periods, although no assurance can be given
that any additional acquisitions will be completed.
Internal Growth. The Company has experienced significant internal growth
in recent years despite operating in mature markets. This growth has resulted
from the Company's strategy of gaining additional market share by selling its
products, and those acquired through acquisitions, to existing and new customers
and industries, introducing new products, and developing its international
markets. In addition, each of the acquired businesses has a substantial
installed base of products, and ITEQ has achieved further revenue increases
through additional emphasis on the maintenance and refurbishment aftermarkets.
Increasingly, and consistent with ITEQ's overall growth strategy, major
industrial concerns are consolidating their sources of supply for goods and
services in an effort to obtain worldwide single-source suppliers for broad
ranges of systems, equipment and services. In fragmented markets such as those
served by the Company, further industry consolidation is to be expected. At
present, the Company believes that no other supplier of products and services to
the niche markets presently served offers as broad an array of products and
services as those offered by the Company. ITEQ believes its current product
lines and its acquisition strategy position it to benefit from this ongoing
trend.
ACQUISITION HISTORY AND PROSPECTS
Completed Acquisitions. Since its inception in 1990, the Company has
experienced substantial growth through acquisitions. The Company's business was
originally focused on the highly regulated air pollution control industry.
However, in 1995, with the Allied acquisition, the Company began to increase its
focus on the process equipment business. Consistent with this focus, in 1996 the
Company completed the acquisition of Ohmstede and sold Air-Cure, Inc. The
following table sets forth certain information concerning the businesses which
had been acquired by ITEQ through December 31, 1996.
<TABLE>
<CAPTION>
DATE PRINCIPAL
ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED
- ------------------------- -------- ------------------------- -------------------------
<S> <C> <C> <C>
Air-Cure, Inc.(1) 1990 Fabric filters Electric utilities, coal
Interel, Inc. 1991 Dry scrubbers, packed and Waste treatment, foundry,
mini scrubbers, heat smelter
exchangers
Ceilcote Air Pollution 1992 Wet scrubbers, tower Microelectronics,
Control, Inc. internals, FRP fans chemical processing,
waste treatment, food
processing
VIC Environmental 1994 Carbon adsorption systems Pharmaceutical, rubber
Systems, Inc.
Amerex Industries, Inc. 1994 Fabric filters, wet and Steel, cement and lime,
dry scrubbers, heat refining, foundry
exchangers
Allied Industries, 1995 Air separation equipment, Petrochemical, plastics,
Inc.(2) reactors, blenders, refining
stacks, towers and
columns, pressure vessels
Ohmstede, Inc. 1996 Heat exchangers Petrochemical, refining
</TABLE>
- ---------------
(1) Divested in November 1996.
(2) Accounted for as a pooling-of-interests; all other acquisitions accounted
for as purchases.
Pending Acquisition. In April 1997, the Company entered into an agreement
to purchase Exell for a cash purchase price of approximately $10.4 million,
subject to certain adjustments. Exell is a manufacturer of shell and tube heat
exchangers and a principal competitor of the Company's heat exchanger
manufacturing operation. For its fiscal year ended September 30, 1996, Exell
reported revenues of $25 million. The transaction is presently scheduled to
close by June 1997, but remains subject to the satisfaction of customary
contractual conditions and regulatory approvals; accordingly, there can be no
19
<PAGE> 21
assurance that the transaction will be consummated and if it is not consummated,
that the prevailing market prices for the Company's common stock will not be
adversely affected. Assuming consummation of the purchase of Exell, the Company
expects to fund such purchase through use of a portion of the proceeds of the
Offering. See "Use of Proceeds."
PRODUCTS AND SERVICES
The following table sets forth, for the periods indicated, the contribution
to the Company's revenues from its significant classes of products and services:
<TABLE>
<CAPTION>
THREE
FISCAL YEAR FISCAL YEAR NINE MONTHS PRO FORMA MONTHS
ENDED ENDED ENDED YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, ------------------------------ DECEMBER 31, MARCH 31,
1992 1993 1993 1994 1995 1996(1) 1996(1) 1997
----------- ----------- ------------ -------- -------- -------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filtration equipment.... $7,026 $12,790 $27,859 $ 44,713 $ 74,511 $ 64,331 $ 64,331 $13,636
Heat exchangers and
other process
equipment............. -- -- -- 17,113 38,653 46,473 129,597 34,858
------ ------- ------- -------- -------- -------- -------- -------
$7,026 $12,790 $27,859 $ 61,826 $113,164 $110,804 $193,928 $48,494
====== ======= ======= ======== ======== ======== ======== =======
</TABLE>
- ---------------
(1) Ohmstede was acquired effective November 1, 1996 in a transaction accounted
for as a purchase. The "Year Ended December 31, 1996" includes the reported
revenues of Ohmstede for the period subsequent to acquisition, and the "Pro
Forma Year Ended December 31, 1996" includes the revenues of Ohmstede for
the full year on a combined basis.
For information with respect to the Company's financial data by geographic
location, see Note 10 to the Consolidated Financial Statements.
Filtration. Filtration products are marketed by the Company under the
Amerex, VIC Environmental Systems, Ceilcote Air Pollution Control, Interel,
Tellerette(R) and IWS tradenames to engineering and construction firms and
directly to end-users for environmental and general industrial applications.
Such systems operate by filtering air or gas through many large filter bags
("baghouses") that capture ambient particulate matter or by venting a
particulate-laden air stream through an aerosol spray which captures the
particulates ("scrubbers"). Baghouses and scrubbers are custom designed systems
which may be of substantial scale and incorporate a variety of products
manufactured by the Company. These include wet scrubbers, dry scrubbers, axial
and centrifugal fiberglass reinforced plastic fans, heat exchangers, ductwork,
aeration towers (strippers), scrubber packing, tower internals, air washers,
carbon adsorption systems, quenches, cooling and condensing towers, mist
eliminators and pneumatic conveying systems. Such products are sold as
components to other systems fabricators or incorporated into complete systems
designed and constructed by the Company.
Heat Exchangers. The Company's line of custom-built shell and tube heat
exchangers are marketed under the well-established Ohmstede name primarily to
the petrochemical and refining industries in the Gulf Coast area. ITEQ intends
to pursue increased sales of new heat exchangers by marketing its products
throughout the United States and internationally by capitalizing on its existing
distribution network and customer relationships. The Company has a substantial
installed base of heat exchangers, since Ohmstede units were marketed for more
than 40 years by the family-owned business acquired by the Company in November
1996. Aftermarket services are provided both in the field and on Company
premises and may consist of a variety of services ranging from minor field
repair and maintenance to de-coking (i.e., the removal of fouling from tubes) or
complete unit reconstruction.
Shell and tube heat exchangers are used in a variety of temperature
control, heating and cooling, and other plant operation applications and are
integrated into a variety of industrial processes that allow heat to be
transferred from one fluid or gas involved in the process to another. Usually
the fluid being cooled runs through a series of tubes in the heat exchanger,
while the cooling fluid flows simultaneously in the opposite direction in the
void between the outer shell of the units and the tube bundles. In the
20
<PAGE> 22
petrochemical and power industries, this type of exchanger is used as feedwater
heaters and surface condensers for plant operations.
Process Equipment. The Company designs and manufactures custom process and
containment equipment, which are marketed under the Allied Industries name,
primarily to the refining, petrochemical and plastics industries. ITEQ intends
to pursue increased sales of process equipment by cross-selling to Ohmstede's
customers. It emphasizes the engineering and fabrication of large-diameter
vessels, thin-walled aluminum vessels, cryogenic application vessels, and
vessels requiring careful handling for applications in which cleanliness and
corrosion resistance are vital to product purity. The Company has particular
expertise in the fabrication of welded structures and vessels made of aluminum,
stainless steel and such exotic metals as hastelloy, incoloy, and clad composite
metals. Process and containment equipment is used in applications where fluid
flow, heat transfer and mass transfer are employed in continuous batch processes
to convert crude oil, natural gas and coal into fuel, lubricants, petrochemicals
and specialty products, and in the air separation industry to separate component
gases from air using cryogenic, absorption and membrane technologies.
SALES AND MARKETING
The Company's products are marketed primarily through approximately 75
commission-based, independent representative organizations, each operating in an
exclusive territory and serving engineering firms and specialized industrial
customers located in that territory. In addition to sales activities at Company
offices, ITEQ also maintains sales offices in Denver, Pittsburgh and Ontario,
Canada, from which its own marketing support personnel assist the representative
organizations and, in those geographic areas not served by representative
organizations, make direct marketing calls on potential customers. Inquiries
from potential customers are referred to Company engineering personnel for any
necessary product or system design and for job cost estimation and preparation
of price quotations or bid packages for submission to the prospective customer.
The interval between customer inquiry and confirmation of an order or contract
execution varies substantially. In general, orders are filled for components and
small systems on a purchase order basis at fixed prices on normal 30-day trade
terms, and larger, more complex systems involving long lead times are filled on
a contract basis. Though contract terms are subject to considerable variation,
contracts normally provide for progress payments, price adjustment provisions
during periods when metal goods prices are subject to volatility and, except for
sales from certain foreign subsidiaries, are either dollar denominated or
payable in currencies with fixed exchange rates against the dollar. As a result,
working capital, raw material pricing, and currency translation risks are not
significant to the Company. Substantially all contracts for products to be
exported for sale are secured by letters of credit drawn on major commercial
banks. In certain instances, particularly in the performance of aftermarket heat
exchanger services, work may be undertaken on a time and materials basis on
normal 30-day credit terms.
Consistent with emerging industry trends, the Company has also entered into
formal "corporate alliances" with certain of its customers, under which the
Company has been designated a preferred vendor for various products. The Company
intends to continue to pursue additional strategic alliances or other corporate
partnering arrangements. In addition, the Company will continue its emphasis on
aftermarket sales and services in an effort to offset the cyclical nature of
industry capital spending.
MARKET CONDITIONS AND COMPETITION
Market Conditions. The industrial equipment markets in which ITEQ operates
are mature. Worldwide capital expenditures for hydrocarbon processing equipment
and air filtration equipment have averaged about $40 billion per year in recent
years, with approximately 30% attributable to domestic spending. Although the
Company's products and services are utilized in a number of industrial
applications, a majority of its recent annual revenues has been attributable to
the petrochemical and refining industries. A significant portion of ITEQ's
revenues from those markets is attributable to plant expansion and upgrades,
maintenance and the construction of new industrial capacity abroad. In an effort
to minimize the effects of cyclical capital spending, ITEQ intends increasingly
to emphasize greater
21
<PAGE> 23
market penetration in aftermarkets and diversification into less competitive
international markets and other less cyclical domestic markets by capitalizing
on its broad range of product lines with potential customers and through
extension of its "corporate alliance" program into other industries. See " --
Significant Customers." In addition, the Company seeks to carry minimal
inventories of raw materials and components and maintain a reasonable balance
between the manufacture and purchase of product components and subassemblies.
Since virtually all the Company's revenues are attributable to products and
systems manufactured to customer specifications, it carries almost no finished
goods inventory and purchases raw materials, components and subassemblies only
on a job specific, often "just in time" basis. During the year ended December
31, 1996, certain components and subassemblies were purchased from numerous
subcontractors, typically under fixed price arrangements. Should the need arise,
the Company believes that any subcontractor can be replaced without significant
disruption to its business.
Competition. All the markets in which the Company competes in North
America are highly fragmented, and most competitors in these niche markets are
relatively small, privately-held businesses. In North American markets,
competition is based on several competitive factors, including reputation,
manufacturing capabilities, availability of plant capacity, price, performance
and dependability. In foreign markets, competition varies widely. In some
international markets, price competition is more intense than that prevailing in
North America while in others, where prior relationships and product quality
receive more customer emphasis than do marginal pricing differentials, price
competition is less intensive. As a result of innovative design solutions,
quality of product workmanship and dependability of "on time" performance,
ITEQ's product and services are sold, in some circumstances, in situations where
it is not the low bidder. Although the Company does not typically maintain
supply or service contracts with its customers, a significant portion of the
Company's annual revenues represents repeat business from the same customers.
With increasing frequency, the Company is asked by end-users to submit
proposals or bids for entire filtration systems, thus bypassing engineering and
construction firms in the procurement process. When awarded such jobs, the
Company designs the entire system, purchases certain "off-the-shelf" or
fabricated components from vendors or subcontractors, and manufactures those
portions of the system for which it has particular expertise. The partially
completed system is then delivered to the customer's site for final assembly and
installation by field construction personnel who may be subcontractors for or
supervised by the Company.
MANUFACTURING FACILITIES
The Company operates seven manufacturing facilities, all located in the
United States, which range in size from less than 10,000 square feet to
approximately 185,000 square feet of manufacturing and related space, or an
aggregate of approximately 608,600 square feet. Of this total, about 211,000
square feet of manufacturing and related space is located in leased premises
under leases expiring at various dates through 2004. The Company believes its
facilities are suitable for their present and intended purposes and more than
adequate for its current level of operations.
ENVIRONMENTAL MATTERS
ITEQ is subject to numerous federal, state, local and foreign laws and
regulations relating to the storage, handling, emission and discharge of
materials into the environment, including the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"), the Clean Water Act, the
Clean Air Act (including the 1990 Amendments) ("CAA") and the Resource
Conservation and Recovery Act ("RCRA"). Each of these statutes allows the
imposition of substantial civil and criminal penalties, as well as permit
revocation, for violations of the requirements. Although the Company's
operations may involve environmental management issues typically associated with
manufacturing operations, the Company believes that it is in material compliance
with all environmental laws. The Company has no current plans for substantial
capital expenditures in this area. It is not a party to any threatened or
pending legal proceedings or administrative actions relating to the environment.
It is
22
<PAGE> 24
possible that future developments, such as changes in existing laws, regulations
or enforcement practices under environmental laws, could lead to material costs
of environmental compliance and cleanup by the Company.
SIGNIFICANT CUSTOMERS
Historically, the Company's principal customers have been international
refining and petrochemical processors, steel producers, foundries, mining and
waste treatment concerns. Recently, ITEQ's customer base has been expanded to
include steel mini-mills and microelectronics manufacturers. The Company is a
designated preferred vendor for various products under its formal "corporate
alliance" program with certain of its customers, including Amoco Corporation,
Bechtel Group, Chevron Corporation, Lyondell-Citgo, Dow Chemical, E. I. Du Pont,
Olin Corporation and Hoechst Celanese. The Company intends to continue its focus
on entering into additional strategic alliances or other corporate partnering
arrangements. Due to the contractual nature of the Company's operations, it is
anticipated that significant portions of future consolidated revenues may be
attributable to a limited number of customers in any particular year, although
it is likely that the particular customers may vary from year to year.
BACKLOG
At December 31, 1996, the Company's backlog was $56.7 million (which
includes backlog attributable to Ohmstede), compared with $28.1 million at
December 31, 1995. At March 31, 1997, the Company's backlog was $68.9 million.
Such backlog consisted of written orders or commitments believed to be firm.
Contracts for products and services are occasionally varied or modified by
mutual consent and in certain instances may be cancelable by the customer on
short notice without substantial penalty. As a result, the Company's backlog as
of any particular date may not be indicative of the Company's actual operating
results for any subsequent fiscal period. It is, however, anticipated that
substantially all of the orders and commitments included in backlog at March 31,
1997 will be completed within the next twelve months.
EMPLOYEES
At December 31, 1996, the Company employed approximately 1,000 full-time
personnel, including approximately 180 unionized employees at four domestic
manufacturing facilities who are subject to collective bargaining agreements.
The Company considers its relations with its employees to be good.
23
<PAGE> 25
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark E. Johnson........................ 46 Director, chairman of the board, president and chief
executive officer
Lawrance W. McAfee..................... 42 Director, executive vice president, chief financial
officer and secretary
Pierre S. Melcher...................... 37 Director, senior vice president and treasurer
Thomas N. Amonett...................... 52 Director
T. William Porter...................... 55 Director
James L. Rainey, Jr.................... 66 Director
James A. Read.......................... 46 Director
</TABLE>
Mark E. Johnson. Mr. Johnson has been a director of the Company since
December 1995 and chairman of the board, president and chief executive officer
since March 1996. From February 1994 until December 1995, Mr. Johnson was a
shareholder, director and president of Allied Industries, Inc. ("Allied"), a
wholly-owned subsidiary of the Company since December 1995. Prior to that time,
Mr. Johnson was a private investor and was a shareholder and served as chairman
of the board, chief executive officer and president of Semco, Inc. ("Semco"), a
manufacturer of pneumatic conveyancing equipment, and of Stillbrooke
Corporation, a cemetery and funeral home holding company. From 1982 to 1986, Mr.
Johnson served as a partner of KPMG Peat Marwick LLP.
Lawrance W. McAfee. Mr. McAfee has been a director of the Company since
December 1995 and executive vice president and chief financial officer since
January 1993 and secretary since May 1993. From 1991 until the time he joined
the Company in 1993, Mr. McAfee served as a director and chief financial officer
of Waste Processor Industries, Inc., an environmental services company. Prior to
that time, Mr. McAfee served as senior vice president and chief financial
officer of Stillbrooke Corporation from 1989 to 1991. From 1982 to 1989, Mr.
McAfee served as vice president and chief financial officer of U.S. Home
Corporation, a residential builder, developer and financial services company.
Pierre S. Melcher. Mr. Melcher has been a director of the Company since
March 1996 and senior vice president and treasurer since April 1996. From
February 1994 until December 1995, Mr. Melcher was a shareholder and served as
director and senior vice president of Allied. Prior to that time, Mr. Melcher
pursued private investments and was a shareholder and served as a director and
senior vice president of Semco. From 1988 to 1991, Mr. Melcher served as an
investment banker with Texas Commerce Bank.
Thomas N. Amonett. Mr. Amonett has been a director of the Company since
April 1996. Mr. Amonett has served as acting chief executive officer of
Weatherford Enterra, Inc., an energy services company, since July 1996, and a
director since May 1974. From July 1992 to December 1995, he served as president
and a director of Reunion Resources Company (previously known as Buttes Gas and
Oil Company), a Houston-based oil and gas exploration, development and
production company. From 1986 to 1992, he was of counsel with the law firm of
Fulbright & Jaworski L.L.P. Mr. Amonett also currently serves as a director of
American Residential Services, Inc., a residential services company, and of
PetroCorp Incorporated, an oil and gas producer.
T. William Porter. Mr. Porter has served as a director of the Company
since December 1995. Since 1981, Mr. Porter has been a partner of Porter &
Hedges, L.L.P., a Houston-based law firm and the Company's principal outside
legal counsel. Mr. Porter also serves on the board of Gundle/SLT Environmental,
Inc., a manufacturer and supplier of lining systems used in waste and industrial
containment systems.
24
<PAGE> 26
James L. Rainey. Mr. Rainey has served as a director of the Company since
October 1993. He is an independent business consultant. From May 1986 through
April 1991, he served as president and chief executive officer of Farmland
Industries, Inc., the largest domestic agricultural supply cooperative. Prior to
that time, he spent over 20 years with Kerr-McGee Corporation, including serving
as president of Kerr-McGee Chemical Corporation. Mr. Rainey also serves on the
boards of Jacobs Engineering Group, Inc., The Wirthlin Group and Biomat, Inc.
James A. Read. Mr. Read has served as a director of the Company since
January 1997. Since 1988, Mr. Read has served as a managing director of
Mezzanine Management Limited, an independent private debt and equity fund
management and advisory company. Mr. Read also serves on the boards of directors
of Core Laboratories N.V., JJI Lighting Group, Inc. and Western Sky Industries,
Inc. in the United States and British Printing Co. Limited, Page One
Communications Limited, Wellington Holding plc, CF Holdings Ltd. and CB Holdings
SA in Europe.
25
<PAGE> 27
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 14, 1997, as adjusted to
reflect the sale of the shares offered hereby by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Company's Common
Stock, (ii) each of the Company's directors, (iii) all directors and officers as
a group, and (iv) each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED PRIOR TO OFFERING NUMBER OF OFFERING(1)
------------------------ SHARES BEING --------------------
NAME NUMBER(2) PERCENT OFFERED NUMBER(2) PERCENT
---- ----------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Mark E. Johnson(3).............. 1,668,062 14.1% 300,000 1,368,062 8.4%
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Pierre S. Melcher(4)............ 2,019,034 17.0% 400,000 1,619,034 10.0%
2727 Allen Parkway, Suite 760
Houston, Texas 77019
International Mezzanine Capital,
B.V.(5)....................... 1,525,333 11.6% -- 1,525,333 9.4%
Manfield House
376-379 Strand
London WCZR-OLR
United Kingdom
Thomas N. Amonett............... 12,000 * -- 12,000 *
Lawrance W. McAfee.............. 228,000 1.8% -- 228,000 1.4%
T. William Porter............... 15,000 * -- 15,000 *
James L. Rainey, Jr. ........... 30,000 * -- 30,000 *
James A. Read................... 5,000 * -- 5,000 *
OTHER SELLING STOCKHOLDER:
Pennsylvania Merchant Group
Ltd. ......................... 50,000 * 50,000 -- --
All directors and executive
officers as a group (8
persons)(6)................... 4,023,091 33.5% 3,373,091 20.4%
</TABLE>
- ---------------
* Less than 1% of outstanding shares.
(1) Adjusted to reflect the sale of shares of Common Stock offered hereby,
assuming the Underwriters' over-allotment option is not exercised.
(2) Includes shares underlying outstanding stock options, as follows: Mr.
Amonett - 12,000; Mr. McAfee - 213,750; Mr. Porter - 15,000; Mr. Rainey -
30,000; and Mr. Read - 5,000.
(3) Mark E. Johnson is a director of the Company and currently serves as its
chairman of the board, president and chief executive officer. Mr. Johnson
previously served as director, president and chief executive officer of
Allied Industries, Inc., a wholly-owned subsidiary of the Company. See
"Management."
(4) Pierre S. Melcher is a director of the Company and currently serves as its
senior vice president and treasurer. Mr. Melcher previously served as
director and senior vice president of Allied Industries, Inc., a
wholly-owned subsidiary of the Company. See "Management."
(5) Consists of Common Stock which may be acquired upon exercise of outstanding
warrants.
(6) Includes all shares referred to in note (2) above.
26
<PAGE> 28
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), provides for authorized capital stock of 31,000,000 shares,
consisting of 30,000,000 shares of Common Stock, par value $.001 per share, and
1,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock"). The following summary description of the capital stock of the Company
is a summary, does not purport to be complete or to give effect to applicable
statutory or common law, is subject in all respects to the applicable provisions
of the Certificate of Incorporation, and the information is qualified in its
entirety by this reference.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to cumulative voting
rights. Therefore, subject to the voting rights that may be granted to holders
of Preferred Stock, pursuant to the Company's Bylaws (the "Bylaws") holders of a
plurality of the shares of Common Stock present in person or represented by
proxy at the meeting and entitled to vote can elect all of the directors of the
Company. Subject to the terms of any outstanding series of Preferred Stock, the
holders of Common Stock are entitled to dividends in such amounts and at such
times as may be declared by the Company's board of directors out of funds
legally available therefor. The Common Stock is not subject to any calls or
assessments. Upon liquidation or dissolution, holders of Common Stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
Preferred Stock. Holders of Common Stock have no redemption, conversion or
preemptive rights.
PREFERRED STOCK
Shares of Preferred Stock may be issued without stockholder approval. The
board of directors is authorized to issue up to 1,000,000 shares of Preferred
Stock in one or more series and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including, without
limitations (i) the number of shares and the name of the series, (ii) the rate
and times at which dividends will be payable on the shares of the series, and
the status of such dividends as cumulative or non-cumulative and as
participating or non-participating, (iii) the prices, times and terms, if any,
at or upon which shares of the series will be subject to redemption, (iv) the
rights, if any, to convert such shares into, or to exchange such shares for,
shares of any other class of stock of the Company, (v) the terms of the sinking
fund or redemption or purchase account, if any, to be provided for shares of the
series, (vi) the rights and preferences, if any, of shares of the series upon
any liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Company, (vii) the limitations, if any,
applicable while the series is outstanding, on the payment of dividends or
making of distributions on, or the acquisition of, the Common Stock or any other
class of stock which does not rank senior to the shares of the series, and
(viii) the voting rights, if any, to be provided for shares of the series. The
Company has no current plans for issuance of any shares of Preferred Stock. Any
issuance of shares of Preferred Stock may adversely affect the voting powers or
rights of the holders of Common Stock.
WARRANTS
The Company has issued warrants to purchase an aggregate of 1,983,675
shares of Common Stock, of which warrants to purchase an aggregate of 1,760,000
are exercisable at a price of $5.10 per share and expire in November 2003 (the
"Financing Warrants"), warrants to purchase 140,000 shares of Common Stock are
exercisable at a price of $4.42 per share and expire in September 1997 (the
"Advisor Warrants"), warrants to purchase 33,675 shares of Common Stock are
exercisable at a price of $4.72 per share and expire in April 1998, and warrants
to purchase 50,000 shares of Common Stock are exercisable at a price of $4.80
per share and expire in December 1997. The 50,000 shares offered herein by
Pennsylvania Merchant Group Ltd. represent the shares of Common Stock underlying
the 50,000 warrants that expire in December 1997. See "Selling Stockholders."
The exercise price and, if
27
<PAGE> 29
applicable, the number of shares underlying these warrants are subject to
adjustment upon, among other things, the declaration or payment of certain
dividends on the Common Stock (subject to certain exceptions) and stock splits,
combinations and reclassifications of shares. In addition, the exercise price of
the Financing Warrants is subject to adjustment upon the issuance of additional
shares of Common Stock (including the grant of options) and the issuance of
securities convertible into Common Stock, subject to certain exceptions, at
certain price levels. In the case of certain extraordinary transactions
including, without limitation, a merger or consolidation in which the Company is
not the surviving entity, or a sale of all or substantially all of the assets of
the Company, all of the above warrants become exercisable for the number of
shares of stock, securities, or other property which the Common Stock issuable
upon exercise of such warrants would have been entitled upon such transactions,
together with any necessary adjustments.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and the Bylaws contain certain provisions
that could make more difficult the acquisition of the Company by means of a
tender or exchange offer, a proxy contest or otherwise. The description of such
provisions set forth below is intended only as a summary and is qualified in its
entirety by reference to the pertinent sections of the Certificate of
Incorporation and the Bylaws and of the Delaware General Corporation Law (the
"DGCL").
Preferred Stock. Although the board of directors has no intention at the
present time of doing so, it could issue a series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a merger, tender
offer or other takeover attempt. The board of directors will make any
determination to issue such shares based on its judgment as to the best
interests of the Company and its stockholders. The board of directors, in so
acting, could issue Preferred Stock having terms that could discourage an
acquisition attempt through which an acquiror may be otherwise able to change
the composition of the board of directors, including a tender or exchange offer
or other transaction that some, or a majority, of the Company's stockholders
might believe to be in their best interests or in which stockholders might
receive a premium for their stock over the then-market price of such stock.
Special Meetings. The Bylaws provide that special meetings of stockholders
can be called by the directors or by any officer instructed by the directors to
call the special meeting of stockholders. The business permitted to be conducted
at any special meeting of stockholders is limited to the business brought before
the meeting pursuant to the notice of meeting given by the Company. This
provision would prevent non-director stockholders of the Company from forcing
stockholder consideration of a proposal by calling a special meeting of
stockholders before the time the board believes such consideration to be
appropriate.
Anti-Takeover Legislation. As a Delaware corporation, the Company is
subject to Section 203 of the DGCL ("Section 203"). In general, Section 203
prohibits the Company from engaging in a "business combination" (as defined
therein) with an "interested stockholder" (defined generally as a person owning
15% or more of a corporation's outstanding voting stock) for three years
following the time such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
was approved by the board of the corporation and authorized at a meeting of the
stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of
28
<PAGE> 30
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation contains a provision that eliminates, to
the extent currently allowed under Section 102(b)(7) of the DGCL, the personal
monetary liability of a director to the Company and its stockholders for breach
of his fiduciary duty of care as a director. If a director were to breach the
duty of care in performing his duties as a director, neither the Company nor its
stockholders could recover monetary damages from the director, and the only
course of action available to the Company's stockholders would be equitable
remedies, such as an action to enjoin or rescind a transaction involving a
breach of the fiduciary duty of care. To the extent certain claims against
directors are limited to equitable remedies, this provision of the Certificate
of Incorporation may reduce the likelihood of derivative litigation and may
discourage stockholders or management from initiating litigation against
directors for breach of their duty of care. Additionally, equitable remedies may
not be effective in many situations. If a stockholder's only remedy is to enjoin
the completion of a transaction or an event authorized by the board of
directors, the remedy would be ineffective if the stockholder does not become
aware of a transaction or event until after it has been completed. In such a
situation, such stockholder would have no effective remedy against the
directors. Liability for monetary damages remains for (i) any breach of the duty
of loyalty to the Company or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) payment of an improper dividend or improper repurchase or redemption
of the Company's stock under Section 174 of the DGCL or (iv) any transaction
from which the director derived an improper personal benefit. The Certificate of
Incorporation further provides that if Section 102(b)(7) of the DGCL is amended
or supplemented to allow further elimination or limitation of the liability of
directors, then the liability of the Company's directors shall be limited to the
fullest extent permitted by the amended DGCL.
The DGCL permits a corporation to indemnify certain persons, including
officers and directors, who are (or are threatened to be made) parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation), by reason of their being officers or directors of the
corporation. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by an indemnified officer or director, provided he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, in the case of criminal proceedings, provided he had no
reasonable cause to believe that his conduct was unlawful. The Certificate of
Incorporation provides indemnification for the Company's directors and officers
to the fullest extent allowed pursuant to the foregoing provisions of the DGCL.
The DGCL further permits a corporation to indemnify certain persons,
including officers and directors, who are (or are threatened to be made) parties
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of their being officers
or directors of the corporation. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by the indemnified officer or
director, provided he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the corporation's best interests. However, no such
person will be indemnified as to matters for which he is found to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless, and only to the extent that, indemnification is ordered by a court. The
Certificate of Incorporation provides indemnification of the Company's directors
and officers to the fullest extent allowed pursuant to the foregoing provisions
of the DGCL.
Delaware corporations also are authorized to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the corporation cannot indemnify its directors and
29
<PAGE> 31
officers. The foregoing indemnification provisions are not exclusive of any
other right to indemnity to which a director or officer may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, New York, New York.
30
<PAGE> 32
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by a
holder that, for United States Federal income tax purposes, is not a "United
States person" (as defined below) (a "Non-United States Holder"). This
discussion is based upon the Company's review and analysis of the United States
Federal tax law now in effect, which is subject to change, possibly
retroactively. This discussion does not consider any specific facts or
circumstances that may apply to a particular Non-United States Holder.
Prospective investors are urged to consult their tax advisors regarding the
United States Federal tax consequences of acquiring, holding, and disposing of
Common Stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
For purposes of this discussion, a "United States person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity created or organized in the United States or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income is includible in gross income for United States Federal income tax
purposes regardless of its source, or (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has one or
more United States fiduciaries who have the authority to control all substantial
decisions of the trust.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder, in which case the dividend
will be subject to the United States Federal income tax imposed on net income on
the same basis that applies to United States persons generally (and, with
respect to corporate holders and under certain circumstances, the branch profits
tax). Non-United States Holders should consult any applicable income tax
treaties that may provide for a lower rate of withholding or other rules
different from those described above. A Non-United States Holder may be required
to satisfy certain certification requirements in order to claim treaty benefits
or otherwise claim a reduction of or exemption from withholding under the
foregoing rules.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or (ii) in
the case of a Non-United States Holder who is a nonresident alien individual and
holds the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year and certain other requirements
are met. Gain that is effectively connected with the conduct of a trade or
business within the United States by the Non-United States Holder will be
subject to the United States Federal income tax imposed on net income on the
same basis that applies to United States persons generally (and, with respect to
corporate holders and under certain circumstances, the branch profits tax) but
will not be subject to withholding. Non-United States Holders should consult
applicable treaties that may provide for different rules.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States Federal estate tax
purposes) of the United States on the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
31
<PAGE> 33
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the United States Internal Revenue
Service and to each Non-United States Holder the amount of dividends paid to,
and the tax withheld with respect to, such holder, regardless of whether any tax
has been actually withheld. This information may also be made available to the
tax authorities of a country in which the Non-United States Holder resides.
Under temporary United States Treasury regulations, United States
information requirements and backup withholding tax will generally not apply to
dividends paid on the Common Stock to a Non-United States Holder at an address
outside the United States. Payments by a United States office of a broker of the
proceeds of a sale of the Common Stock is subject to both backup withholding at
a rate of 31% and information reporting unless the holder certifies its
Non-United States Holder status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will also apply to payments of the proceeds of sales of the Common
Stock by foreign offices of United States brokers, or foreign brokers with
certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that
certain required information is furnished to the United States Internal Revenue
Service by the Non-United States Holder.
These information reporting and backup withholding rules are under review
by the United States Treasury and their application to the Common Stock could be
changed by future regulations. The United States Internal Revenue Service has
recently issued proposed Treasury regulations concerning these rules which are
presently proposed to be effective for payments made after December 31, 1997.
Prospective investors should consult their tax advisors concerning the potential
adoption of such proposed Treasury regulations and the potential effect on their
ownership and disposition of the Common Stock.
32
<PAGE> 34
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
EVEREN Securities, Inc. and Sanders Morris Mundy are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement (the form of which is filed
as an exhibit to the Company's Registration Statement, of which this Prospectus
is a part), to purchase from the Company and the Selling Stockholders the
respective number of shares of Common Stock indicated below opposite their
respective names. The Underwriters are committed to purchase all of the shares,
if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Deutsche Morgan Grenfell Inc................................
EVEREN Securities, Inc......................................
Sanders Morris Mundy........................................
---------
Total............................................. 5,050,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
(who may include the Underwriters) a concession of not more than $ per
share. The selected dealers may reallow a concession of not more than
$ to certain other dealers. After the Offering, the price, the
concession and the reallowance and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part. The Underwriters do not intend to sell any of
the shares of Common Stock offered hereby to accounts for which they exercise
discretionary authority.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Common Stock in
the open market to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end these activities at any time.
33
<PAGE> 35
The Company has granted an option to the Underwriters to purchase up to a
maximum of 757,500 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price, less the underwriting discount set forth
on the cover page of this Prospectus. Such option may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
Each Underwriter has represented and agreed that: (i) it has not offered or
sold and prior to the date six months after the date of issue of the Common
Stock will not offer or sell any Common Stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
In connection with the Offering, the Selling Stockholders have agreed not
to, directly or indirectly, offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus, without
the prior written consent of Deutsche Morgan Grenfell Inc. In addition, the
Company and its directors and officers have agreed not to, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock for a
period of 120 days after the date of this Prospectus, without the prior written
consent of Deutsche Morgan Grenfell Inc., except for the issuance of shares
pursuant to the exercise of stock options granted under the Company's stock
option plans and except for the issuance of shares in business acquisitions.
Furthermore, the holders of the Financing Warrants and the holder of the Advisor
Warrants and the warrants to purchase 33,675 shares of Common Stock exercisable
at a price of $4.72 per share have agreed not to, directly or indirectly, offer,
sell or otherwise dispose of any shares of Common Stock for a period of 120 days
after the date of this Prospectus, without the prior written consent of Deutsche
Morgan Grenfell Inc.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain liabilities
including civil liabilities under the Securities Act or will contribute to
payments the Underwriters may be required to make in respect thereof. In
addition, the Underwriting Agreement provides that the Company will reimburse
Deutsche Morgan Grenfell Inc. for its itemized, reasonable out-of-pocket
expenses incurred in connection with the Offering not to exceed $200,000.
Sanders Morris Mundy has in the past provided, and may in the future
provide, investment banking services to the Company.
LEGAL MATTERS
Certain legal matters in connection with the Commons Stock offered hereby
are being passed upon for the Company by Porter & Hedges, L.L.P. T. William
Porter, a partner of the firm Porter & Hedges, L.L.P., the Company's principal
outside legal counsel, is a director of the Company. Certain legal matters
relating to this Offering will be passed upon for the Underwriters by Andrews &
Kurth L.L.P.
34
<PAGE> 36
EXPERTS
The audited financial statements of the Company included in this Prospectus
have been audited by Arthur Andersen LLP and KPMG Peat Marwick LLP, independent
auditors, as stated in their reports appearing herein, and have been so included
in reliance upon such reports given upon the authority of those firms as experts
in accounting and auditing.
The audited financial statements of Ohmstede incorporated by reference into
this Prospectus have been audited by Arthur Andersen LLP, Melton & Melton and
KPMG Peat Marwick LLP, independent auditors, as stated in their reports
appearing in Form 8-K/A dated February 3, 1997, and have been so incorporated by
reference in reliance upon such reports given upon the authority of those firms
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and other
information may be inspected and copied or obtained by mail upon the payment of
the Commission's prescribed rates at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and Seven World Trade Center, New York, New York 10048. Copies of such material
can also be obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
the Company is required to file electronic versions of these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock is listed on the Nasdaq National Market, and
reports, proxy statements and other information filed by ITEQ can be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, Washington, D.C.
The Company has filed with the Commission a registration statement on Form
S-2 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying as set forth above. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
such statement being qualified in all respects by such reference.
35
<PAGE> 37
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
Company's (i) Annual Report on Form 10-K for the fiscal year ended December 31,
1996, (ii) Form 8-K/A dated February 3, 1997, (iii) Form 8-K dated March 7,
1997, and (iv) Form 10-Q dated April 30, 1997, all of which have been filed with
the Commission pursuant to the Exchange Act.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offering shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request, a copy of any or all
of the documents incorporated by reference as a part of the Registration
Statement, other than exhibits to such documents. Requests should be directed to
Lawrance W. McAfee, executive vice president and chief financial officer, ITEQ,
Inc., 2727 Allen Parkway, Suite 760, Houston, Texas 77019, telephone number
(713) 285-2700.
36
<PAGE> 38
ITEQ, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Unaudited Pro Forma Combined Financial Information.......... F-2
Unaudited Pro Forma Combined Statement of Operations........ F-3
Notes to Unaudited Pro Forma Combined Statement of
Operations................................................ F-4
Consolidated Balance Sheets as of December 31, 1996 and
March 31, 1997 (unaudited)................................ F-5
Consolidated Statements of Operations for the three months
ended March 31, 1996
(unaudited) and 1997 (unaudited).......................... F-6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996
(unaudited) and 1997 (unaudited).......................... F-7
Notes to Consolidated Financial Statements (unaudited)...... F-8,9,10
Reports of Independent Public Accountants................... F-11,12
Consolidated Balance Sheets -- December 31, 1995 and
December 31, 1996......................................... F-13
Consolidated Statements of Operations -- Years ended
December 31, 1994, 1995 and 1996.......................... F-14
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1994, 1995 and 1996.................... F-15
Consolidated Statements of Cash Flows -- Years ended
December 31, 1994, 1995 and 1996.......................... F-16
Notes to Consolidated Financial Statements.................. F-17
</TABLE>
F-1
<PAGE> 39
ITEQ, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined statement of operations gives
effect to the acquisition (the "Acquisition") by ITEQ, Inc. (the "Company") of
Ohmstede, Inc. ("Ohmstede") on November 20, 1996, which for accounting purposes
was effective November 1, 1996. The unaudited pro forma combined statement of
operations presented was prepared utilizing the historical audited financial
statements of the Company and the unaudited financial statements of Ohmstede,
respectively. The Company accounted for the Acquisition using the purchase
method of accounting. The allocation of the purchase price to the assets
acquired and liabilities assumed is based on estimates of fair market values.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1996 assumes the Acquisition occurred on January 1, 1996. The
results of Ohmstede are included in the Company's historical results for the
three months ended March 31, 1997, and therefore pro forma financial data for
this period is not included. The pro forma combined statement of operations may
not be indicative of the Company's results of operations that would have
occurred had the Acquisition been completed at the beginning of the period
presented, nor do such statements purport to indicate the Company's financial
condition or results of operations at any future date or for any future period.
Other than savings attributable to compensation and benefits for certain
positions of Ohmstede which were required to be eliminated pursuant to the
purchase agreement and which have been eliminated since the Acquisition, no
expected benefits and/or cost reductions anticipated by the Company, corporate
allocations, additional costs from association with a public company or
additional revenues related to selling Ohmstede products through the Company's
international marketing network have been reflected in this unaudited pro forma
combined statement of operations. Also, the following unaudited pro forma
combined statement of operations does not include the effect of the Offering.
F-2
<PAGE> 40
ITEQ, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
OHMSTEDE
FOR TEN
MONTHS
ENDED PRO FORMA
OCTOBER 31, ACQUISITION
COMPANY 1996 ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ---------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $110,804(a) $ 83,124(b) -- $193,928
Cost of revenues(h)................... 88,949(g) 63,794 -- 152,743
-------- ----------- --------- --------
Gross profit..................... 21,855 19,330 -- 41,185
Selling, general and administrative
expenses............................ 11,977 9,964 $ (541)(c) 21,400
Sales commissions..................... 2,755 337 -- 3,092
Depreciation and amortization......... 1,146 144 828(d) 2,118
Restructuring charges and other
nonrecurring costs.................. 3,704(g) -- -- 3,704
-------- ----------- --------- --------
Operating profit................. 2,273 8,885 (287) 10,871
-------- ----------- --------- --------
Other income (expense):
Interest expense, net............... (2,660) (301) (4,890)(e) (7,851)
Other income........................ 305 284 -- 589
-------- ----------- --------- --------
Total other expense......... (2,355) (17) (4,890) (7,262)
-------- ----------- --------- --------
Earnings (loss) before provision for
income taxes........................ (82) 8,868 (5,177) 3,609
Provision for income taxes............ 4 444 908(f) 1,356
-------- ----------- --------- --------
NET EARNINGS (LOSS)......... $ (86) $ 8,424 $ (6,085) $ 2,253
======== =========== ========= ========
Net earnings (loss) per common
share............................ $ (.01) $ .19
======== ========
Weighted average number of common
and common equivalent shares
outstanding...................... 11,481 11,604
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Operations on the
following page.
F-3
<PAGE> 41
ITEQ, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
a) Includes revenues of $17.0 million from the operations of Ohmstede for
the two month period following the date of acquisition.
b) Reflects revenues of $83.2 million from the operations of Ohmstede for
the ten month period ended October 31, 1996, and prior to its acquisition by the
Company.
c) Represents estimated savings attributable to salaries, bonuses and
benefits for positions at Ohmstede that have been eliminated. No anticipated
cost reductions, corporate allocations from ITEQ, Inc., or additional costs
related to association with a public company have been included in this
adjustment.
d) Reflects the additional amortization related to the intangible assets
and the excess of costs over the net assets acquired.
e) Reflects the increase in interest expense related to the additional debt
borrowed for the Ohmstede acquisition and the amortization of both the debt
financing costs and the subordinated debt discount, net of historical interest
expense savings from the paydown of Ohmstede debt related to the transaction.
f) Reflects pro forma income tax expense based on the expected effective
tax rate of the Company (38%) related to the net pro forma adjustments and
conversion of Ohmstede's federal income tax status from an S Corporation to a C
Corporation.
g) During 1996, the Company incurred a restructuring charge of $4.4
million, of which $3.7 million and $0.7 million were recorded as restructuring
charges and cost of revenues, respectively. The charge included (i) a provision
for the contractually required severance obligations to the former president and
chief executive officer who was replaced in March 1996, and (ii) the cost of
implementing new management's plan to reduce the Company's overall cost
structure including employee severance, lease and other contract buyouts,
inventory and other asset impairments, losses related to termination of
unprofitable business lines, excess machinery disposal and other related costs.
h) Includes depreciation and amortization of $719, $855 and $1,574 for the
historical Company, historical Ohmstede and pro forma financial information,
respectively.
F-4
<PAGE> 42
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31,
December 31, 1997
1996 (unaudited)
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $6,331 $1,759
Restricted cash 144 155
Due on contracts and other receivables, net 34,230 33,261
Costs and estimated earnings in excess of billings
on uncompleted contracts 20,690 23,759
Inventories 10,649 6,268
Prepaid expenses, deposits and other assets 881 1,106
Deferred tax asset 1,979 1,166
-------- --------
Total Current Assets 74,904 67,474
-------- --------
Property and Equipment, net 13,661 13,775
Other Assets, net 47,823 47,045
-------- --------
TOTAL ASSETS $136,388 $128,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $14,568 $13,550
Accrued liabilities:
Job costs 8,171 9,004
Warranties 353 343
Compensation 5,067 4,927
Other 4,260 2,978
Billings in excess of costs and estimated earnings
on uncompleted contracts 958 952
Progress billings 5,137 6,496
Current maturities of long-term debt 6,012 6,012
Income taxes payable 527 506
-------- --------
Total Current Liabilities 45,053 44,768
LONG-TERM LIABILITIES:
Borrowings under line of credit 25,400 17,000
Other long-term obligations, less current
maturities 29,029 27,548
Subordinated notes 12,712 12,796
Deferred tax liability 941 941
-------- --------
Total Liabilities 113,135 103,053
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.001 par value; 30,000 shares
authorized, 11,510 and 11,838 shares issued and
outstanding at December 31, 1996 and
March 31, 1997, respectively 11 12
Additional paid-in capital 23,161 24,400
Retained earnings (deficit) (44) 1,129
Translation adjustment 125 (300)
-------- --------
Total Stockholders' Equity 23,253 25,241
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,388 $128,294
======== ========
</TABLE>
See Notes To Consolidated Financial Statements
F-5
<PAGE> 43
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1996
as
restated 1997
--------- -------
<S> <C> <C>
Revenues $22,129 $48,494
Cost of revenues 17,430 38,870
------- -------
Gross profit 4,699 9,624
Selling, general and administrative expenses 2,647 4,807
Sales commissions 1,047 645
Depreciation and amortization 245 481
Merger costs, restructuring charges and
other nonrecurring costs 3,500 --
------- -------
Operating profit (2,740) 3,691
------- -------
Other income (expense):
Interest expense, net (385) (1,807)
Other income 18 102
------- -------
Total other expense (367) (1,705)
------- -------
Earnings (loss) before provision for
income taxes (3,107) 1,986
Provision (benefit) for income taxes (1,210) 813
------- -------
Net earnings (loss) per
common share ($1,897) $1,173
======= =======
Net earnings (loss) per common share ($0.17) $0.10
======= =======
Weighted average common and common
equivalent shares outstanding 11,462 12,272
======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 44
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1996
as restated 1997
----------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,897) $ 1,173
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Non Cash Interest -- 218
Depreciation and amortization 376 730
Provision (benefit) for income taxes (115) 813
Changes in assets and liabilities:
Restricted cash (156) (27)
Due on contracts and other receivables 6,909 780
Inventories 453 4,359
Costs and estimated earnings in excess of
billings on uncompleted contracts (858) (3,523)
Prepaid expenses, deposits and other assets (397) (225)
Refundable income taxes (1,210)
Accounts payable and accrued liabilities (5,377) (1,144)
Billings in excess of costs and estimated earnings
on uncompleted contracts 42 46
Progress Billings -- 1,359
Income taxes payable -- (21)
Other 4 (20)
------- -------
Net cash provided (used) by operating activities (2,226) 4,518
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (44) (490)
------- -------
Net cash used by investing activities (44) (490)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term obligations (4) (9,881)
Net borrowings under line of credit 102 --
Proceeds from exercise of stock options 43 1,240
------- -------
Net cash provided (used) by financing activities 141 (8,641)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16) 41
------- -------
Net decrease in cash and cash equivalents (2,145) (4,572)
Cash and cash equivalents, beginning of period 2,216 6,331
------- -------
Cash and cash equivalents, end of period $ 71 $ 1,759
======= =======
</TABLE>
See Notes To Consolidated Financial Statements
F-7
<PAGE> 45
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with regulation S-X pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited financial statements contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position as of March 31, 1997, the results of
operations for the three months ended March 31, 1996 and 1997, and the cash
flows for the three months ended March 31, 1996 and 1997.
During the fourth quarter of 1996, effective January 1, 1996, the Company
estimated percentage-of-completion for the materials portion of its long-term
contracts at its Allied Industries, Inc. subsidiary, based on when purchased
material was placed into production, whereas previously, such estimates were
based on when the liability for the cost of the material was legally incurred.
The new method of applying the percentage-of- completion accounting principle
was adopted to better reflect the economics of Allied's revenue and profit
earnings process. Financial statements of prior years and interim periods have
been restated to apply the revised method retroactively. The effect of the
accounting change on previously reported March 31, 1996 net earnings is as
follows (in thousands):
<TABLE>
<CAPTION>
Increase/Decrease
-----------------
March 31,
1996
----
<S> <C>
Net earnings (loss) ...................... $12
Net earnings (loss) per common share ..... --
</TABLE>
NOTE 2 - DUE ON CONTRACTS AND OTHER RECEIVABLES
At December 31, 1996 and March 31, 1997, due on contracts and other receivables
consist of (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------- -------
<S> <C> <C>
Billings on completed contracts and contracts in progress ... $34,273 $33,232
Retained contract receivables ............................... 544 628
Other miscellaneous receivables ............................. 125 134
Allowance for doubtful accounts ............................. (712) (733)
------- -------
$34,230 $33,261
======= =======
</TABLE>
F-8
<PAGE> 46
NOTE 3 - INVENTORIES
Inventories consist of costs for which no related revenue has been recognized.
Inventories include materials used in the manufacturing process, purchased
parts and equipment held for resale and are valued at the lower of cost or
market. Cost is determined by the average cost method for materials and the
first-in, first-out (FIFO) method for purchased parts. At December 31, 1996 and
March 31, 1997, inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
----------- ---------
<S> <C> <C>
Raw Materials .................................. $ 3,514 $3,524
Work in Progress................................ 7,135 2,744
------- ------
Total .......................................... $10,649 $6,268
======= ======
</TABLE>
NOTE 4 - OTHER ASSETS
At December 31, 1996 and March 31, 1997, other assets consist of the following
items (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------- -------
<S> <C> <C>
Excess of costs over net assets acquired, net of accumulated amortization, of
$1,789 and $1,995 at December 31, 1996 and March 31, 1997, respectively ........ $32,941 $32,449
Licenses, trademarks and tradenames, net of accumulated amortization of
$878 and $1,050 at December 31, 1996 and March 31, 1997, respectively .......... 11,880 11,708
Debt issuance costs, net of accumulated amortization of $45 and $179 at
December 31, 1996 and March 31, 1997, respectively .............................
2,957 2,843
Other .......................................................................... 45 45
------- -------
Other Assets, net .................................................. $47,823 $47,045
======= =======
</TABLE>
NOTE 5 - BUSINESS ACQUISITIONS
In March 1997, the Company entered into a letter of intent to purchase Exell,
Inc. and an affiliated partnership (collectively, "Exell") for a combined cash
purchase price of approximately $10.4 million, subject to reduction for certain
adjustments. A definitive purchase agreement was entered into in April 1997.
Exell is a manufacturer of shell and tube heat exchangers and a competitor of
the Company's Ohmstede heat exchanger manufacturing operation. For its fiscal
year ended September 30, 1996, Exell reported revenues of $25.0 million. The
transaction, if consummated, will be accounted for using the purchase method of
accounting and is presently scheduled to close by June 1997, but remains subject
to the satisfaction of customary contractual conditions and certain regulatory
approvals, and there can be no assurance that the transaction will be
consummated.
NOTE 6 - RESTRUCTURING COSTS
A restructuring charge of $4,200,000 was taken during the three months ended
March 31, 1996, of which $3.5 million and $0.7 million were recorded as
restructuring charges and cost of revenues, respectively. The charge included
(i) a provision for the contractually required severance obligations to the
former president and chief executive officer who was replaced in March 1996,
and (ii) the cost of implementing new management's plan to reduce the Company's
overall cost structure including employee severance, lease and other contract
buyouts, inventory and other asset impairments, losses related to termination
of unprofitable product lines, excess machinery disposal and other related
costs.
F-9
<PAGE> 47
NOTE 7 - RECENT DEVELOPMENTS
As planned when acquired, Ohmstede has initiated foreign sales, which typically
have longer production times and more units per order in production and shipment
than Ohmstede's historical domestic business. Accordingly, such sales were
recognized under the percentage-of-completion revenue recognition method,
resulting in revenues and gross margin of $3,564,000 and $658,000, respectively,
during the three months ended March 31, 1997. Also, at March 31, 1997, Ohmstede
had more jobs substantially complete but not shipped than in prior periods,
which under the Company's completed contract policy resulted in revenues and
gross margin of $1,961,000 and $627,000, respectively, during the three months
ended March 31, 1997.
In March 1997, a vessel at the Company's Allied subsidiary was damaged by a
subcontractor during the final stages of completion. The Company entered into a
second contract with the customer to construct a replacement vessel and expects
to recover the cost of the original vessel either from the subcontractor or from
insurance proceeds. The Company does not expect to incur a loss on the
contracts.
The Company has filed a registration statement on Form S-2 to register for sale
5.1 million shares of common stock (4.3 million from the Company and 0.8 million
form certain selling stockholders). The primary use of the offering proceeds to
the Company will be to reduce debt incurred in acquisitions and for potential
future acquisitions. Subsequent to March 31, 1997 the Company incurred $117,000
in expenses to date in conjunction with the offering which will be capitalized
and recorded as a reduction of offering proceeds.
F-10
<PAGE> 48
ITEQ, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
ITEQ, Inc.:
We have audited the accompanying consolidated balance sheets of ITEQ, Inc.
(a Delaware corporation, formerly Air-Cure Technologies, Inc.) and subsidiaries
as of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. We did not audit the financial statements of
Allied Industries, Inc., a company acquired during 1995 in a transaction
accounted for as a pooling of interests, as discussed in Note 2, for the period
from January 28, 1994 to December 31, 1994. The statement of operations and cash
flows for Allied Industries, Inc. is included in the 1994 consolidated
statements of operations and cash flows of ITEQ, Inc. and reflects total
revenues of 28% of the consolidated total. These statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to amounts included for Allied Industries, Inc., is based solely
upon the report of other auditors. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ITEQ, Inc. and subsidiaries as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, the
Company has given retroactive effect to the change in accounting for
percentage-of-completion on long-term contracts.
Arthur Andersen LLP
Houston, Texas
February 24, 1997
F-11
<PAGE> 49
ITEQ, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Allied Industries, Inc.:
We have audited the balance sheet of Allied Industries, Inc. (the Company)
as of December 31, 1994, and the related statements of operations, retained
earnings and cash flows for the period from January 28, 1994 (date of inception)
to December 31, 1994 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allied Industries, Inc. as
of December 31, 1994, and the results of its operations and its cash flows for
the period from January 28, 1994 (date of inception) to December 31, 1994 in
conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, the Company has given
retroactive effect to the change in accounting for percentage of completion on
long-term contracts.
KPMG Peat Marwick LLP
Houston, Texas
March 31, 1995, except as to Note 1 which
is as of February 24, 1997
F-12
<PAGE> 50
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
AS RESTATED DECEMBER 31,
(NOTE 1) 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 2,216 $ 6,331
Restricted cash............................................. 83 144
Due on contracts and other receivables including retainages
of $1,279 and $544 at December 31, 1995 and 1996,
respectively, net......................................... 22,926 34,230
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 18,067 20,690
Inventories................................................. 3,944 10,649
Refundable income taxes..................................... 832 --
Prepaid expenses, deposits and other assets................. 502 881
Deferred tax asset.......................................... 240 1,979
------- --------
Total Current Assets............................... 48,810 74,904
PROPERTY AND EQUIPMENT, NET................................. 5,392 13,661
OTHER ASSETS, NET........................................... 16,642 47,823
------- --------
TOTAL ASSETS....................................... $70,844 $136,388
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $11,799 $ 14,568
Accrued liabilities
Job costs................................................. 10,854 8,171
Warranties................................................ 419 353
Compensation.............................................. 2,358 5,067
Other..................................................... 1,260 4,260
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 815 958
Progress billings........................................... -- 5,137
Current maturities of long-term debt........................ 3,347 6,012
Income taxes payable........................................ 124 527
------- --------
Total Current Liabilities.......................... 30,976 45,053
LONG-TERM LIABILITIES
Borrowings under line of credit............................. 11,499 25,400
Other long-term obligations, less current maturities........ 6,709 29,029
Subordinated notes.......................................... -- 12,712
Deferred tax liability...................................... 257 941
------- --------
Total Liabilities.................................. 49,441 113,135
------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000 shares authorized, no
shares issued or outstanding.............................. -- --
Common stock, $.001 par value; 30,000 shares authorized,
11,453 and 11,510 shares issued and outstanding at
December 31, 1995 and 1996, respectively.................. 11 11
Additional paid-in capital.................................. 20,901 23,161
Retained earnings (deficit)................................. 42 (44)
Translation adjustment...................................... 449 125
------- --------
Total Stockholders' Equity......................... 21,403 23,253
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $70,844 $136,388
======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-13
<PAGE> 51
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
AS AS
RESTATED RESTATED
(NOTE 1) (NOTE 1) 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $61,826 $113,164 $110,804
Cost of revenues........................................... 49,135 93,262 88,949
------- -------- --------
Gross profit............................................. 12,691 19,902 21,855
Selling, general and administrative expenses............... 8,926 11,645 11,977
Sales commissions.......................................... 1,327 2,477 2,755
Depreciation and amortization.............................. 845 1,009 1,146
Merger costs, restructuring charges and other nonrecurring
costs.................................................... -- 1,335 3,704
------- -------- --------
Operating profit......................................... 1,593 3,436 2,273
------- -------- --------
Other income (expense):
Interest expense, net.................................... (888) (1,502) (2,660)
Other income............................................. 112 326 305
------- -------- --------
Total other expense.............................. (776) (1,176) (2,355)
------- -------- --------
Earnings (loss) before provision for income taxes.......... 817 2,260 (82)
Provision for income taxes................................. 338 1,500 4
------- -------- --------
Net earnings (loss).............................. $ 479 $ 760 $ (86)
======= ======== ========
Net earnings (loss) per common share....................... $ 0.04 $ 0.07 $ (0.01)
======= ======== ========
Weighted average common and common equivalent shares
outstanding.............................................. 10,891 11,552 11,481
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-14
<PAGE> 52
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------- PAID-IN EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
------ ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.................... 5,906 $ 6 $14,577 $ 236 $(192) $14,627
Stock issued for business combinations........ 1,390 1 5,167 -- -- 5,168
Stock issued for the employee stock purchase
plan........................................ 2 -- 2 -- -- 2
Costs related to issuance of stock............ -- -- (76) -- -- (76)
Change in foreign currency translation
adjustment.................................. -- -- -- -- 335 335
Equity transactions of pooled company......... 4,140 4 935 -- -- 939
Net earnings.................................. -- -- -- 479 -- 479
------ --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1994 As Restated (Note
1).......................................... 11,438 11 20,605 715 143 21,474
Stock issued for the employee stock purchase
plan........................................ 15 -- 46 -- -- 46
Stock issued for the exercise of stock
options..................................... -- -- 1 -- -- 1
Costs related to issuance of stock............ -- -- (14) -- -- (14)
Compensation expense in connection with non-
qualified stock option grants............... -- -- 13 -- -- 13
Change in foreign currency translation
adjustment.................................. -- -- -- -- 306 306
Equity transactions of pooled company......... -- -- 250 (1,433) -- (1,183)
Net earnings.................................. -- -- -- 760 -- 760
------ --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1995 As Restated (Note
1).......................................... 11,453 11 20,901 42 449 21,403
Stock issued for the employee stock purchase
plan........................................ 15 -- 44 -- -- 44
Stock issued for the exercise of stock
options..................................... 42 -- 134 -- -- 134
Warrants issued to Subordinated Lenders, net
of issuance costs........................... -- -- 2,082 -- -- 2,082
Change in foreign currency translation
adjustment.................................. -- -- -- -- (324) (324)
Net loss...................................... -- -- -- (86) -- (86)
------ --- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1996.................... 11,510 $11 $23,161 $ (44) $ 125 $23,253
====== === ======= ======= ===== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-15
<PAGE> 53
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
AS AS
RESTATED RESTATED
(NOTE 1) (NOTE 1) 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ 479 $ 760 $ (86)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................... 1,513 1,631 1,865
Provision (benefit) for deferred income taxes........... (444) 118 (156)
Gain on sale of investment in subsidiary................ -- -- (160)
Non-cash interest....................................... -- -- 302
Changes in assets and liabilities, net of effects of
businesses acquired:
Restricted cash....................................... (293) 552 (61)
Due on contracts and other receivables, net........... (26) (7,537) 6,944
Inventories........................................... 616 (664) 2,863
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. 153 (9,937) (3,409)
Prepaid expenses, deposits and other assets........... (20) (122) (390)
Accounts payable and accrued liabilities.............. 479 11,988 (3,176)
Billings in excess of costs and estimated earnings on
uncompleted contracts.............................. (296) (2,695) 184
Progress billings..................................... -- -- 4,128
Income taxes payable.................................. 147 (26) 21
Other................................................. (6) (27) (817)
-------- ------- --------
Net cash provided (used) by operating activities... 2,302 (5,959) 8,052
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired businesses, net of cash acquired... (2,087) -- (52,786)
Purchases of property and equipment....................... (657) (932) (991)
Proceeds from sale of investment in subsidiary............ -- -- 1,000
-------- ------- --------
Net cash used by investing activities.............. (2,744) (932) (52,777)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations....................... 3,000 10,000 27,499
Proceeds from subordinated debt & warrants................ -- -- 15,000
Payments of long-term obligations......................... (11,247) (9,279) (2,499)
Net borrowings under line of credit....................... 8,906 8,117 11,977
Debt issuance costs....................................... -- -- (3,002)
Capital contributions from (distributions to) shareholders
of pooled company....................................... 939 (1,433) --
Proceeds from exercise of stock options................... 2 47 178
Costs relating to issuance of warrants and stock.......... (75) -- (206)
-------- ------- --------
Net cash provided by financing activities.......... 1,525 7,452 48,947
-------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 72 114 (107)
-------- ------- --------
Net increase in cash and cash equivalents................... 1,155 675 4,115
Cash and cash equivalents, beginning of period.............. 386 1,541 2,216
-------- ------- --------
Cash and cash equivalents, end of period.................... $ 1,541 $ 2,216 $ 6,331
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 729 $ 569 $ 1,718
======== ======= ========
Cash paid for income taxes................................ $ 546 $ 2,168 $ 126
======== ======= ========
Supplemental schedule of non-cash investing & financing
activities:
Financing of non-compete agreements....................... -- -- $ 500
======== ======= ========
Net business assets disposed through Company financing or
non-cash consideration.................................. -- -- $ 950
======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-16
<PAGE> 54
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ITEQ, Inc. (formerly Air-Cure Technologies, Inc.) and its subsidiaries (the
"Company") is a provider of manufactured equipment, engineered systems and
services used in the processing, treatment and movement of gases and liquids. It
is a domestic manufacturer of shell and tube heat exchangers, principally for
petrochemical and refining applications, and a producer of baghouses, scrubbers,
fans and other filtration systems and components for environmental and general
industrial applications. ITEQ also manufactures specialized process equipment,
such as reactors, blenders, stacks, towers, columns and pressure vessels,
principally for the refining, petrochemical and plastics industries. The Company
has operations in the United States, Canada, Germany and Singapore.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITEQ, Inc.
and its wholly-owned subsidiaries. Significant intercompany balances and
transactions have been eliminated. The consolidated financial statements have
also been restated to reflect the merger with Allied Industries, Inc. ("Allied")
on December 28, 1995, which was accounted for as a pooling-of-interests. (See
Note 2).
REVENUE RECOGNITION
The Company records revenues from long-term contracts using the
percentage-of-completion method. Under this method, the Company recognizes as
revenues that portion of the total contract price which the cost of work
completed to date bears to the estimated total cost of the work included in the
contract. Because contracts may extend over more than one fiscal period,
revisions of cost and profit estimates are made periodically and are reflected
in the accounting period in which they are determined. If the estimate of total
costs on a contract indicates a loss, the total anticipated loss is recognized
immediately. Contract costs include all direct material, labor and
subcontracting costs and those indirect costs related to contract performance,
such as supplies, tools and repairs.
The Company recognizes revenue from certain short-term contracts using the
completed contract method. Revenue is recognized when a project is substantially
complete. The contracts under this revenue recognition method are typically less
than three months in duration.
"Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed. Such
revenues are expected to be billed and collected within one year. "Billings in
excess of costs and estimated earnings on uncompleted contracts" represents
billings in excess of revenues recognized.
F-17
<PAGE> 55
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Beginning in 1996, the Company estimated percentage-of-completion for the
materials portion of its long-term contracts at Allied based on when the
material was placed into production, whereas previously such estimates were
based on when the liability for the cost of the material was legally incurred.
The new method of applying the percentage-of-completion accounting principle was
adopted to better reflect the economics of Allied's revenue and profit earnings
process, and financial statements of prior years have been restated to apply the
revised method retroactively. The effect of the accounting change on previously
reported 1994 and 1995 results and net earnings of 1996 is as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------
1994 1995 1996
---- ------- -----
<S> <C> <C> <C>
Net earnings (loss)......................................... $94 $(1,608) $ 321
Net earnings (loss) per common share........................ -- $ (.14) $ .03
</TABLE>
The balances of retained earnings at December 31, 1994 and 1995 have been
increased (reduced) by $94 and $(1,514), respectively, for the effect (net of
income taxes) of applying retroactively the revised method of accounting. The
change in method had no effect on periods prior to 1994, since Allied is
included in the Company's historical financial statements beginning January 28,
1994, the date of inception of Allied.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments including
those with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist primarily of interest bearing accounts.
RESTRICTED CASH
From time to time, the Company pledges cash to financial institutions as
security for bonds.
ACCOUNTS RECEIVABLE
The allowance for doubtful accounts totaled $195 and $712 at December 31,
1995 and 1996, respectively. All retainages as of December 31, 1996 are expected
to be collected by December 31, 1997.
INVENTORIES
Inventories consist of costs for which no related revenue has been
recognized. Inventories include materials used in the manufacturing process,
purchased parts and equipment held for resale and are valued at the lower of
cost or market. Cost is determined by the average cost method for materials and
the first-in, first-out (FIFO) method for purchased parts. Inventory consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Raw Materials............................................ $3,529 $ 3,514
Work in Progress......................................... -- 7,135
Other.................................................... 415 --
------ -------
Total.......................................... $3,944 $10,649
====== =======
</TABLE>
F-18
<PAGE> 56
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including costs to ready assets
for use. Depreciation and amortization of property and equipment are computed on
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
------------
<S> <C>
Furniture and Fixtures...................................... 3 to 15 Years
Machinery and Equipment..................................... 7 to 15 Years
Patterns and Molds.......................................... 5 Years
Transportation Equipment.................................... 3 Years
Buildings and Improvements.................................. 7 to 39 Years
Leasehold Improvements...................................... Life of the lease
</TABLE>
At December 31, 1995 and 1996, Property and Equipment was comprised of the
following items:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Land.................................... $ -- $ 700
Furniture and fixtures.................. 427 668
Machinery and equipment................. 6,341 9,176
Patterns and molds...................... 625 602
Transportation equipment................ 186 540
Buildings and improvements.............. -- 4,382
Leasehold improvements.................. 252 330
------- --------
7,831 16,398
Less accumulated depreciation and
amortization....................... (2,439) (2,737)
------- --------
Net property and equipment.... $ 5,392 $ 13,661
======= ========
</TABLE>
Repair and maintenance costs are expensed as incurred while major renewals
and betterments are capitalized. The cost of assets retired or otherwise
disposed of and the related accumulated depreciation are eliminated from the
accounts in the year of disposal. Gains and losses resulting from property
disposals are included in "Other income."
Under the provisions of Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews certain long-lived assets for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and recognizes an impairment loss under certain circumstances in
the amount by which the carrying value exceeds the fair value of the asset. The
Company's adoption of SFAS No. 121 had no material effect on the Company's
results of operations or financial position.
AMORTIZATION OF INTANGIBLES
The excess of cost over net assets acquired and licenses, trademarks and
tradenames are amortized on a straight-line basis over periods ranging from five
to forty years. The Company maintains separate financial records for each of its
acquired entities and performs periodic strategic and long-range planning for
each entity. This enables the Company to monitor each entity's historical and
expected performance in the context of the value assigned to acquisition
intangibles and to the amortization period applied to each intangible asset. The
Company assesses the recoverability of its goodwill whenever adverse events or
changes in circumstances or business climate indicate that expected future cash
flows (undiscounted and without interest charges) for individual business units
may not be sufficient to support recorded goodwill. The Company modifies the
life and/or the carrying amount of an acquisition intangible if an
F-19
<PAGE> 57
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
impairment is identified. Amortization expense was $0.7 million, $0.8 million
and $0.8 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
At December 31, 1995 and 1996, other assets was comprised of the following
items:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Excess costs over net assets acquired, net of accumulated
amortization, of $1,370 and $1,789 at December 31, 1995
and 1996, respectively................................... $12,191 $32,941
Licenses, trademarks and tradenames, net of accumulated
amortization of $600 and $878 at December 31, 1995 and
1996, respectively....................................... 4,400 11,880
Debt issuance costs, net of accumulated amortization of $45
at December 31, 1996..................................... -- 2,957
Other...................................................... 51 45
------- -------
Net Other Assets................................. $16,642 $47,823
======= =======
</TABLE>
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires deferred taxes to be
provided based on temporary differences between the book and tax basis of assets
and liabilities using presently enacted tax rates.
NET EARNINGS (LOSS) PER COMMON SHARE
Primary and fully diluted earnings per share are computed based upon the
weighted average number of common and dilutive common equivalent shares
outstanding. The dilutive effect of common equivalent shares is calculated
through the use of the Treasury Stock Method. Common Stock equivalents consist
of stock options and warrants.
TRANSLATION ADJUSTMENT
The financial activity of the Company's non-U.S. operations located in
Canada, Germany and Singapore are translated into U.S. dollars in accordance
with SFAS No. 52, "Foreign Currency Translation." Net assets of non-U.S.
operations whose "functional" currencies are other than the U.S. dollar are
translated at year end rates of exchange. Income and expense items are
translated at the average exchange rate for the year.
USE OF ESTIMATES
The presentation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUES
The carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values due to the
short maturities of these instruments. The fair value of long-term obligations
is estimated based on ITEQ's current financing agreement and approximates
carrying value.
F-20
<PAGE> 58
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains its cash with various financial institutions.
Accounts receivable at any given time are concentrated in a number of primarily
domestic customers. An allowance for doubtful accounts has been provided for
estimated losses. To mitigate credit risk the Company may require customers to
make advance payments. At December 31, 1996, the Company had collected
approximately $2,018 in such advance payments which are included in progress
billings.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the December 31, 1996 presentation.
NOTE 2 -- BUSINESS COMBINATIONS
OHMSTEDE
On November 20, 1996 (effective November 1, 1996), the Company purchased
all the outstanding stock (excluding certain assets and liabilities) of
Ohmstede, Inc. ("Ohmstede") for approximately $52.9 million in cash. Assets not
purchased included the majority of receivables due from and a 99 percent equity
investment in C&D Robotics ("C&D"), a partnership formerly consolidated by
Ohmstede; a federal tax deposit made by the owners; and the cash surrender value
of life insurance policies for certain owners. Additionally, the former owners
received approximately $0.6 million in dividends just prior to the transaction,
as set forth in the agreement with the Company. As the Company continues to rent
operating space to C&D, rental fees charged to C&D are included in the financial
statements.
Air-Cure paid $52 million for Ohmstede's stock and $0.9 million for related
acquisition costs. The acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon the estimated fair
values at the date of the acquisition, as follows:
<TABLE>
<S> <C>
Working capital............................................. $14,800
Property and equipment...................................... 8,453
Intangibles................................................. 7,500
Excess of costs over net assets acquired.................... 21,914
Imputed interest expense.................................... 257
-------
Total purchase price.............................. $52,924
=======
</TABLE>
The following unaudited pro forma consolidated results of operations assume
that the purchase occurred on January 1, 1995 and include merger costs,
restructuring charges, and other non-recurring expenses:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Revenues................................................. $201,917 $193,928
Net earnings............................................. $ 699 $ 2,253
Net earnings per share................................... $ .06 $ .19
</TABLE>
F-21
<PAGE> 59
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIED
On December 28, 1995, the Company issued 4,140 shares of its common stock
in exchange for all of the outstanding common stock of Allied. The merger has
been accounted for as a pooling-of-interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of Allied effective January 28, 1994, the date of inception of
Allied.
Effective January 1, 1995, Allied was granted S Corporation tax status.
Accordingly, Allied did not pay U.S. Federal income taxes during 1995. Allied
was included in the Company's income tax return effective December 28, 1995,
and, therefore, a deferred tax liability and corresponding charge to income tax
expense of approximately $0.5 million, or $.04 per share, was recorded upon
closing to reflect Allied's net taxable temporary differences.
Revenues, net earnings and related per share amounts of the merged entities
are presented in the following table. The table includes unaudited pro forma net
earnings and per share amounts reflecting the elimination of the nonrecurring
merger costs and pro forma adjustments to present income taxes on the basis on
which they will be reported in future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
AS RESTATED AS RESTATED
(NOTE 1) (NOTE 1)
----------- -----------
<S> <C> <C>
Net revenues:
ITEQ..................................................... $44,713 $ 74,457
Allied................................................... 17,113 38,707
------- --------
Total............................................ $61,826 $113,164
======= ========
Net earnings:
ITEQ..................................................... $ (298) $ 1,557
Allied................................................... 777 (797)
------- --------
Net earnings, as reported........................ 479 760
Pro forma adjustments:
Allied merger costs, net of tax.......................... -- 973
Allied Subchapter S status............................... -- (321)
Allied deferred tax liability............................ -- 491
Interest on convertible debt............................. -- 12
------- --------
Pro forma net earnings........................... $ 479 $ 1,915
======= ========
Net earnings per common share:
As reported.............................................. $ .04 $ .07
Pro forma................................................ $ .04 $ .17
</TABLE>
The "Allied merger costs, net of tax" balance of $973 related to $1.1
million in nonrecurring merger costs, the majority of which was non-deductible.
AMEREX
On May 25, 1994, Amerex, Inc. and Amerex Industries, Inc. (collectively
"Amerex") were merged into a subsidiary of the Company. In the merger, the
stockholders of Amerex received $4 million and 1,256 shares of Common Stock with
a fair market value of $3.69 per share at the acquisition date. The excess of
the total acquisition costs over the fair value of the net assets acquired in
the amount of
F-22
<PAGE> 60
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
$5.9 million is being amortized on a straight-line basis over 25 years. Amerex
produces and markets filtration, gas cleaning and heat recovery equipment.
The accounts of Amerex have been included in the accompanying financial
statements for the period from the date of acquisition through December 31,
1996. This acquisition has been accounted for as a purchase with the purchase
price allocated to the assets acquired and liabilities assumed based upon their
estimated fair market values.
NOTE 3 -- MERGER COSTS, RESTRUCTURING CHARGES AND OTHER NONRECURRING COSTS
During 1996, the Company incurred a restructuring charge of $4.4 million,
of which $3.7 million and $0.7 million were recorded as restructuring charges
and cost of revenues, respectively. The charge included (i) a provision for the
contractually required severance obligations to the former president and chief
executive officer who was replaced in March 1996, and (ii) the cost of
implementing new management's plan to reduce the Company's overall cost
structure including employee severance, lease and other contract buyouts,
inventory and other asset impairments, losses related to termination of
unprofitable product lines, excess machinery disposal and other related costs.
The following table summarizes the major components of the restructuring
charge:
<TABLE>
<S> <C>
Termination pay and benefits........................ $1,300
Discontinued product lines.......................... 1,656
Office relocation and consolidation................. 564
Legal............................................... 242
Other............................................... 642
------
$4,404
======
</TABLE>
When the Company committed to its restructuring plan during the first
quarter, it made the decision to terminate 15 employees, including the former
president and chief executive officer. By December 31, 1996, all 15 employees
had been terminated. Approximately $0.9 million in severance pay and benefits,
unpaid as of December 31, 1996, was paid during the first quarter of fiscal
1997. Substantially all of the terminated employees were either in management
positions or were professionals including engineers and accountants.
During the fourth quarter of fiscal 1995, the Interel and VIC subsidiaries
were reorganized and combined. The reorganization of these operations and costs
of settling a lawsuit resulted in a one-time charge of approximately $0.2
million. In the fourth quarter of 1995, the Company recorded a nonrecurring
charge of approximately $1.1 million for acquisition costs related to the Allied
merger, which is more fully described in Note 2 to the financial statements.
NOTE 4 -- CONTRACTS IN PROGRESS
The Company obtains substantially all of its contracts through competitive
bids. The Company's prerequisites for billing on contracts vary with individual
contract terms. The Company sometimes has bonds or letters of credit as
collateral on accounts receivable, and generally all amounts are due in the
month following performance under contract except for retainages that are
collected upon completion of the contract. The Company has lien rights on
certain contracts.
F-23
<PAGE> 61
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Costs incurred to date, estimated earnings and the related progress
billings to date on contracts in progress are as follows:
<TABLE>
<CAPTION>
1995
AS RESTATED
(NOTE 1) 1996
----------- --------
<S> <C> <C>
Costs incurred to date...................................... $ 49,137 $ 53,037
Estimated earnings.......................................... 14,801 17,701
-------- --------
Revenue recognized.......................................... 63,938 70,738
Progress billings to date................................... (48,867) (51,961)
Costs incurred for which no revenues were recognized to
date...................................................... 2,181 955
-------- --------
$ 17,252 $ 19,732
======== ========
</TABLE>
The preceding is included in the accompanying consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
1995
AS RESTATED
(NOTE 1) 1996
----------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $18,067 $20,690
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (815) (958)
------- -------
$17,252 $19,732
======= =======
</TABLE>
NOTE 5 -- LONG-TERM OBLIGATIONS
Long-term obligations include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Secured term loan note ("term loan"), maturing October 31,
2001; due in quarterly installments of $1,500 commencing
January 31, 1997 and increasing to $1,813 after the first
four payments, with interest (December 31, 1996 -- 8.6%)
fluctuating with the Offshore Rate or Base Rate defined
below..................................................... $10,000 $35,000
Secured note maturing November 18, 2001, under a revolving
credit facility ("line of credit") totaling $38,000 with
interest (December 31, 1996 -- 8.9%) fluctuating with the
Offshore Rate or Base Rate defined below.................. 11,499 25,400
Unsecured senior subordinated notes maturing November 18,
2003, bearing interest at 12% through 1997 increasing 0.5%
per year through maturity................................. -- 15,000
Less debt discount related to issuance of detachable
warrants in conjunction with senior subordinated notes.... -- (2,288)
Other....................................................... 56 41
------- -------
21,555 73,153
Less current maturities..................................... (3,347) (6,012)
------- -------
Long-term obligations, net of current maturities............ $18,208 $67,141
======= =======
</TABLE>
F-24
<PAGE> 62
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Scheduled maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 6,012
1998........................................................ 7,262
1999........................................................ 7,262
2000........................................................ 7,255
2001........................................................ 32,650
Thereafter.................................................. 12,712
-------
$73,153
=======
</TABLE>
On November 18, 1996, the Company revised its financing agreement to, among
other things, increase its credit facilities with participating financial
institutions ("Lenders"), including Bank of America National Trust and Savings
Association ("BoA"), as agent for the Lenders. The financing consists of a $35
million term loan and a $38 million revolving line of credit facility. The term
loan currently bears interest at the BoA Offshore Rate ("Offshore Rate"), as
defined by BoA, plus a spread, and the line of credit bears interest at the
Offshore Rate or the Base Rate plus spreads. The spread can range from 2% to 3%
above the Offshore Rate and from 0.25% to 1.25% above the Base Rate. The spread
increases or decreases based on the Company's leverage ratio. Substantially all
of the assets of the Company serve as collateral.
In addition to the bank financing, on November 18, 1996, the Company
entered into two Senior Subordinated Notes ("Subordinated Notes") with
International Mezzanine Capital, B.V. and First Commerce Capital, (collectively,
the "Subordinated Note Holders"), for $13 million and $2 million, respectively.
The Subordinated Notes, which mature November 18, 2003, bear interest at 12%
through December 31, 1997 and increase by 0.5% per year for each year they
remain unpaid. As further consideration, the Subordinated Note Holders received
warrants to purchase an aggregate of 1,760 shares of the Company's Common Stock
at $5.10 per share, subject to adjustment. The warrants may be exercised at any
time or from time to time until they expire on November 18, 2003. The warrants
were valued at approximately $2.3 million, which was reflected as equity and as
a debt discount at the date of their issuance, and will be amortized as
additional interest expense over the seven-year life of the Subordinated Notes.
The debt obligations require the Company to maintain certain levels of
working capital and stockholders' equity and contain other provisions, some of
which restrict expenditures for the purchase of the Company's stock, for capital
expenditures and for payment of dividends. Such agreements also limit, subject
to the Lenders' and Subordinated Note Holders' consent, the creation, incurrence
or assumption of indebtedness (as defined by the agreements) and acquisitions
and investments. At December 31, 1996, the Company was in compliance with the
provisions of its debt agreements.
F-25
<PAGE> 63
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- LEASE COMMITMENTS
The Company and its subsidiaries are obligated under various leases for
office and manufacturing facilities and certain machinery, equipment and
fixtures. Certain leases have renewal or escalation clauses or both. The
following is a schedule of minimum rental commitments under all non-cancellable
leases which expire at various dates:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C> <C>
1997........................................................... $ 924
1998........................................................... 795
1999........................................................... 667
2000........................................................... 599
2001........................................................... 571
Thereafter..................................................... 1,579
------
$5,135
======
</TABLE>
The leases provide for payment of maintenance and other expenses by the
Company. Rent expense was $1.1 million, $1.2 million, and $1.2 million for the
years ended December 31, 1994, 1995 and 1996, respectively.
NOTE 7 -- INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................... $ 644 $ 1,069 $ --
State................................. 105 201 --
Foreign............................... 33 112 160
------- ------- -------
782 1,382 160
------- ------- -------
Deferred:
Federal............................... 119 99 (419)
State................................. 6 19 (74)
Foreign............................... (569) -- 337
------- ------- -------
(444) 118 (156)
------- ------- -------
Provision for income taxes.............. $ 338 $ 1,500 $ 4
======= ======= =======
</TABLE>
The earnings before taxes relating to foreign operations totaled
approximately $0.1 million and $1.4 million for the years ended December 31,
1995 and 1996, respectively. The loss before taxes relating to foreign
operations totaled approximately $1.3 million for the year ended December 31,
1994.
F-26
<PAGE> 64
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of the financial reporting and income tax reporting basis
differences which give rise to the deferred income tax asset and liability are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- -------
<S> <C> <C>
Net current deferred income tax assets:
Compensation recognition.............. $ -- $ 382
Accruals and reserves................. 439 1,056
Tax benefit carryforwards............. -- 825
Contract accounting................... (213) (316)
Other................................. 14 32
------- -------
$ 240 $ 1,979
======= =======
Net non-current deferred income tax
liabilities:
Tax benefit carryforwards............. $ 524 $ 208
Property and equipment................ (444) (692)
Intangible assets..................... (197) (313)
Other................................. 6 2
Valuation allowance................... (146) (146)
------- -------
$ (257) $ (941)
======= =======
</TABLE>
The valuation allowance relates to deferred tax assets established under
SFAS No. 109 for losses incurred in foreign subsidiaries. These losses will be
carried forward to future years for utilization and are not expected to expire.
As of December 31, 1995 and 1996, the Company had regular U.S. and foreign
net operating loss carryforwards for tax reporting purposes totaling
approximately $1.3 million and $2.6 million, respectively. The majority of the
foreign net operating loss carryforwards do not have an expiration date.
Differences between the Company's effective income tax rate and the
statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ------- -----
<S> <C> <C> <C>
Tax provision at the federal statutory income tax rate..... $277 $ 768 $(28)
Differences in foreign versus U.S. tax rates............... (79) 7 9
State income taxes, net of federal benefit................. 46 178 (74)
Amortization of intangible assets.......................... 70 104 84
Non-deductible acquisition costs........................... -- 234 --
S Corporation income....................................... -- (202) --
Conversion from S-Corporation.............................. -- 491 --
Valuation allowance........................................ -- (137) --
Other...................................................... 24 57 13
---- ------ ----
Total Tax Provision.............................. $338 $1,500 $ 4
==== ====== ====
</TABLE>
During 1995, the valuation allowance was reduced by $137 in order to
properly recognize the portion of the Company's deferred tax asset which was
more likely than not to be realized.
F-27
<PAGE> 65
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8 -- STOCK WARRANTS AND OPTIONS
STOCK WARRANTS
Following is a summary of the warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
STOCK EXERCISE
OUTSTANDING ISSUABLE PRICE
DATE AND UPON PER EXPIRATION
DESCRIPTION ISSUED EXERCISABLE EXERCISE SHARE DATE
----------- ------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Financial advisor:
Warrants.................... 6/92 100 140 $4.42 6/97
Warrants.................... 4/96 34 34 $4.72 4/98
Underwriter warrants.......... 12/92 50 50 $4.80 12/97
Subordinated debt warrants.... 11/96 1,760 1,760 $5.10 11/03
----- -----
Total............... 1,944 1,984
===== =====
</TABLE>
No warrants have been exercised. The exercise price of the subordinated
debt warrants and the financial advisor warrants issued in June of 1992 are
subject to adjustment.
STOCK OPTIONS
On October 1, 1990, the Company's Board of Directors approved an Employee
Stock Option Plan (the "Plan") which was subsequently amended and which provides
for the issuance of up to 10% of the Company's outstanding shares of Common
Stock shares but initially not less than 1,250 shares of Common Stock (subject
to anti-dilution provisions). Options granted expire in five to ten years, and
the option price, which must be at least the fair market value of the Company's
stock at the date of grant can be paid in cash or in shares of the Company's
Common Stock. Options may not be transferred by the optionee other than by will
or the laws of descent and distribution.
The Company's Board of Directors approved the Directors' Stock Option Plan
on May 19, 1993, which provides for the issuance of up to 200 shares of Common
Stock (subject to anti-dilution provisions). The plan currently provides that
each outside director will be granted an option to purchase 10 shares of Common
Stock at the fair market value of the Common Stock at the date of grant at each
time the director is elected, re-elected or appointed to the Board of Directors.
Options granted under this plan expire after ten years, and the option price
must be paid in cash. Options may not be transferred by the optionee other than
by will or the laws of descent and distribution.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation", the Company's net earnings (loss) and net earnings (loss) per
common share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1995 1996
----- ----
<S> <C> <C>
Net earnings (loss):
As reported............................................... $ 760 $(86)
Pro forma................................................. 730 (199)
Net earnings (loss) per common share:.......................
As reported............................................... .07 (.01)
Pro forma................................................. .06 (.02)
</TABLE>
F-28
<PAGE> 66
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of the pro forma cost to be expected in future years. The
fair value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 GRANTS 1996 GRANTS
--------------- -----------------
<S> <C> <C>
Expected dividend yield....................... 0% 0%
Expected stock price volatility............... 39.74% - 45.09% 42.88% - 44.85%
Risk free interest rate....................... 5.43% - 6.48% 5.38% - 6.93%
Expected life of options...................... 5 to 10 years 4.25 - 10 years
</TABLE>
A summary of the status of the Company's two stock option plans at December
31, 1995 and 1996 and changes during the years then ended is presented in the
table below.
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ 751 $ 4.00 953 $ 3.63
Granted..................................... 249 2.50 385 3.66
Exercised................................... -- (3.38) (42) (3.15)
Forfeited................................... (47) (3.52) (201) (3.42)
Expired..................................... -- -- -- --
----- ------ ----- ------
Outstanding at end of year.................. 953 $ 3.63 1,095 $ 3.70
===== ====== ===== ======
Exercisable at end of year.................. 474 $ 3.96 681 $ 3.88
===== ====== ===== ======
Weighted average fair value of options
granted................................... $1.19 $1.78
===== =====
</TABLE>
The options outstanding at December 31, 1996 have exercise prices between
$2.44 and $4.75 and a weighted average remaining contractual life of 4.44 years.
The Company maintains an Employee Stock Purchase Plan whereby all employees
are eligible for participation after ninety days of service. Under this plan,
employees may purchase stock at 90% of the current market price of the stock.
During the years ended December 31, 1995 and December 31, 1996, 15 and 15
shares, respectively, were issued under the plan.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company is party to certain legal proceedings which are considered by
management to be customary and incidental to its business. In the opinion of
management, after consulting with legal counsel, the ultimate disposition of
these lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
F-29
<PAGE> 67
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10 -- MAJOR CUSTOMERS AND FOREIGN OPERATIONS
Due to the nature of the Company's business, contracts are generally
nonrecurring. For the year ended December 31, 1996, no single customer accounted
for 10% of revenues. For the years ended December 31, 1994 and 1995, a single
customer accounted for revenues of 11% and 10%, respectively.
Financial data by geographical area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995
1994 AS
AS RESTATED RESTATED
(NOTE 1) (NOTE 1) 1996
------------ -------- -----------
<S> <C> <C> <C>
Revenue:
North America................................. $56,764 $101,546 $ 96,024
Europe........................................ 1,913 6,974 8,866
Asia.......................................... 3,149 4,644 5,914
------- -------- --------
Total................................. $61,826 $113,164 $110,804
======= ======== ========
Operating profit (loss):
North America................................. $ 2,558 $ 2,640 1,237
Europe........................................ (1,140) 404 620
Asia.......................................... 175 392 416
------- -------- --------
Total................................. $ 1,593 $ 3,436 $ 2,273
======= ======== ========
Identifiable assets:
North America................................. $47,916 $ 63,983 $128,915
Europe........................................ 3,214 4,276 5,633
Asia.......................................... 1,670 2,585 1,840
------- -------- --------
Total................................. $52,800 $ 70,844 $136,388
======= ======== ========
</TABLE>
Including exports, international sales accounted for approximately 23% of
total revenues in 1996.
NOTE 11 -- SUBSEQUENT EVENT (UNAUDITED)
The Company is in the process of filing a registration statement on Form
S-2 to register for sale 5.1 million shares of common stock (4.3 million from
the Company and 0.8 million from certain selling stockholders). The primary use
of the offering proceeds to the Company will be to reduce debt incurred in the
aforementioned acquisitions and for potential future acquisitions.
F-30
<PAGE> 68
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE
OFFERING COVERED BY THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE COMMON STOCK IN
ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
- -------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Recent Developments................... 8
Use of Proceeds....................... 8
Price Range of Common Stock........... 9
Dividend Policy....................... 9
Capitalization........................ 10
Selected Historical and Pro Forma
Combined Financial Data............. 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 18
Management............................ 24
Principal and Selling Stockholders.... 26
Description of Capital Stock.......... 27
Certain United States Federal Tax
Consequences to Non-United States
Holders............................. 31
Underwriting.......................... 33
Legal Matters......................... 34
Experts............................... 35
Available Information................. 35
Incorporation of Documents by
Reference........................... 36
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ---------------------------------------------------------
[ITEQ LOGO]
5,050,000 SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
EVEREN SECURITIES, INC.
SANDERS MORRIS MUNDY
PROSPECTUS
MAY , 1997
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with this
Offering of the Common Stock to be registered and offered hereby are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 12,267
NASD filing fee............................................. 4,548
Nasdaq National Market listing fee.......................... 10,000
Printing expenses........................................... 150,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 75,000
Transfer Agent and Registrar Fees........................... 5,000
Representatives' accountable expense allowance.............. 100,000
Miscellaneous............................................... 43,185
--------
TOTAL............................................. $550,000
========
</TABLE>
- ---------------
* To be filed by Amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Delaware law, a corporation may include provisions in its certificate
of incorporation that will relieve its directors of monetary liability for
breaches of their fiduciary duty to the corporation, except under certain
circumstances, including a breach of the director's duty of loyalty, acts or
omissions of the director not in good faith or which involve intentional
misconduct or a knowing violation of law, the approval of an improper payment of
a dividend or an improper stock purchase or redemption or any transaction from
which the director derived an improper personal benefit. The Certificate of
Incorporation provides that the Company's directors are not liable to the
Company or its stockholders for monetary damages for breach of their fiduciary
duty, subject to the described exceptions specified by Delaware law.
Section 145(a) of the General Corporation Law of the State of Delaware
("DGCL") grants to the Company the authority to indemnify each officer and
director of the Company against liabilities and expenses incurred by reason of
the fact that he is or was an officer or director of the Company if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
determination as to whether a person seeking indemnification has met the
required standard of conduct is to be made (i) by a majority vote of the
directors who are not parties to such action, suit, or proceeding, even through
less than a quorum, or (ii) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, if such a quorum
does not exist or if the disinterested directors so direct, or (iii) by the
stockholders. The Certificate of Incorporation provides for indemnification of
each officer and director of the Company to the fullest extent permitted by
Delaware law.
In a suit brought to obtain a judgment in the corporation's favor, whether
by the Company itself or derivatively by a stockholder, Section 145(b) of the
DGCL only allows the Company to indemnify for expenses, including attorneys'
fees, actually and reasonably incurred in connection with the defense or
settlement of the case, and the Company may not indemnify for amounts paid in
satisfaction of a judgment or in settlement of the claim. In any such action, no
indemnification may be paid in respect of any claim, issue or matter as to which
such persons shall have been adjudged liable to the Company except as otherwise
approved by the Delaware Court of Chancery or the court in which the claim was
brought. According to the statute, in any other type of proceeding, the
indemnification may extend to
II-1
<PAGE> 70
judgments, fines and amounts paid in settlement, actually and reasonably
incurred in connection with such other proceeding, as well as to expenses
(including attorneys' fees).
Section 145 of the DGCL also allows the Company to purchase and maintain
insurance on behalf of its directors and officers against liabilities that may
be asserted against, or incurred by, such persons in any such capacity, whether
the Company would have the authority to indemnify such person against liability
under the provisions of Section 145. The Company intends to purchase and
maintain a directors' and officers' liability policy for such purposes.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement for certain provisions regarding the
indemnification of the Company, its officers and directors and any controlling
persons by the Underwriters against certain liabilities for information
furnished by the Underwriters.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all the exhibits and financial statement
schedules filed as part of the Registration Statement.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Registrant, as amended
(Filed as an exhibit to Form 10-Q for the quarter ended June
30, 1995 and incorporated herein by reference).
3.2 -- Certificate of Amendment to Certificate of Incorporation of
Registrant (Filed as an exhibit to Form 8-K dated March 7,
1997 and incorporated herein by reference).
3.3 -- Bylaws of the Registrant, as amended (Filed as an exhibit to
Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
4.1 -- Specimen Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.3 for provisions of the Certificate
of Incorporation and Bylaws of the Registrant defining the
rights of holders of Common Stock.
4.3 -- Amended and Restated Credit Agreement dated November 18,
1996, among the Registrant, Bank of America National Trust
and Savings Association, as Agent, The First National Bank
of Boston, as Co-Agent and certain other financial
institutions. (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
4.4 -- Subordination Agreement among the Registrant and various
financial institutions (the "Senior Lenders"), including
Bank of America National Trust and Savings Association, as
Agent, and The First National Bank of Boston, as Co-Agent.
(Filed as an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
4.5 -- Subordinated Note and Purchase Agreement dated November 18,
1996, among the Registrant, International Mezzanine Capital,
B.V. ("Mezzanine") and First Commerce Corporation ("First
Commerce"). (Filed as an exhibit to Form 8-K dated December
5, 1996 and incorporated herein by reference).
4.6 -- Senior Subordinated Note due November 18, 2003, between the
Registrant and Mezzanine, dated November 18, 1996. (Filed as
an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
</TABLE>
II-2
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
4.7 -- Senior Subordinated Note due November 18, 2003, between the
Registrant and First Commerce, dated November 18, 1996.
(Filed as an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
4.8 -- Guaranty dated November 18, 1996, executed by the Registrant
in favor of Mezzanine and First Commerce. (Filed as an
exhibit to Form 8-K dated December 5, 1996 and incorporated
herein by reference).
4.9 -- Warrant Agreement, dated November 18, 1996, between the
Registrant and Mezzanine. (Filed as an exhibit to Form 8-K
dated December 5, 1996 and incorporated herein by
reference).
4.10 -- Warrant Agreement dated November 18, 1996, between the
Registrant and First Commerce. (Filed as an exhibit to Form
8-K dated December 5, 1996 and incorporated herein by
reference).
4.11 -- Registration Rights Agreement dated November 18, 1996, among
the Registrant, Mezzanine, and First Commerce. (Filed as an
exhibit to Form 8-K dated December 5, 1996 and incorporated
herein by reference).
4.12 -- Warrant Agreement, dated April 24, 1996, between the
Registrant and Sanders Morris Mundy, Inc. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference).
4.13 -- Warrant Agreement, dated December 1992, between Registrant
and Pennsylvania Merchant Group, Ltd. (Filed as an exhibit
to Form 10-K for fiscal year ending March 31, 1993 and
incorporated herein by reference).
5.1 -- Opinion of Porter & Hedges, L.L.P. as to the legality of the
securities being registered.
10.1 -- Agreement and Plan of Merger dated September 19, 1996, among
the Registrant, Air-Cure Acquisition, Inc. and Ohmstede,
Inc. (Filed as an exhibit to Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).
10.2 -- Agreement and Plan of Merger dated October 13, 1995, among
the Registrant, Air-Cure Acquisition Corporation, Allied
Industries, Inc., Mark E. Johnson and Pierre S. Melcher.
(Filed as an exhibit to Post-Effective Amendment No. 1 to
Form S-4 Registration Statement (No. 33-92308) and
incorporated herein by reference).
10.3 -- Agreement and Plan of Merger dated April 28, 1994, among the
Registrant., VIC Acquisition Corporation, VIC Environmental
Systems, Inc. and Ronald E. Lewis. (Filed as an exhibit to
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement (No. 33-69524) and incorporated herein by
reference).
10.4 -- Agreement and Plan of Merger dated April 5, 1994, among the
Registrant, Air-Cure Acquisition Corporation, Amerex, Inc.,
Amerex Industries, Inc. and certain other parties. (Filed as
an exhibit to Post-Effective Amendment No. 1 to Form S-1
Registration Statement (No. 33-69524) and incorporated
herein by reference).
10.5 -- Employment Agreement dated March 1, 1996, between the
Registrant and Lawrance W. McAfee. (Filed as an exhibit to
Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
10.6 -- Employment Agreement dated December 29, 1995, between the
Registrant and Mark E. Johnson. (Filed as an exhibit to Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.7 -- Employment Agreement dated December 29, 1995, between the
Registrant and Pierre S. Melcher. (Filed as an exhibit to
Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
</TABLE>
II-3
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
10.8 -- Employment Agreement dated March 1, 1995, between the
Registrant and John P. Fitzpatrick. (Filed as an exhibit to
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10.9 -- Employment Agreement dated December 17, 1992, between the
Registrant and Michael P. Lawlor. (Filed as an exhibit to
Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference).
10.10 -- Employees Stock Purchase Plan, as amended, dated December
15, 1994. (Filed as an exhibit to Form 10-K for year ended
December 31, 1994 and incorporated herein by reference).
10.11 -- Director Stock Option Plan, as amended. (Plan filed as an
exhibit to Proxy Statement for Annual Meeting of
Stockholders held on June 29, 1995, and amendment filed as
an exhibit to Form 10-Q for the quarter ended June 30, 1996,
both of which are incorporated herein by reference).
10.12 -- Amended and Restated 1990 Stock Option Plan, as amended,
dated June 29, 1995. (Filed as an exhibit to Proxy Statement
for Annual Meeting of Stockholders held on June 29, 1995 and
incorporated herein by reference).
10.13 -- Form of Stock Option Agreement. (Filed as an exhibit to Form
10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference).
10.14 -- Lease Agreement dated May 25, 1994, between Halligan and
Labbe Enterprises, L.L.C. and Amerex Industries, Inc. (Filed
as an exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
10.15 -- License and Technical Assistance Agreement dated August 28,
1991, between Interel Environmental Technologies, Inc. and
Heinrich Luhr Staubtechnik GmbH & Co. (Filed as an exhibit
to Form S-1 (No. 33-44205).
*10.16 -- Acquisition Agreement dated as of April 24, 1997, between
the Company and the owners of Exell.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Melton & Melton.
*23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Porter & Hedges, L.L.P. (contained in opinion
filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page).
</TABLE>
- ---------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes:
(1) That for the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and this Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 73
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of Texas, on May 1,
1997.
ITEQ, INC.
By: /s/ MARK E. JOHNSON
-------------------------------------
Mark E. Johnson, Chairman of the
Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the indicated capacities and on the 1st day of May, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MARK E. JOHNSON Director, Chairman of the Board, President
- ----------------------------------------------------- and Chief Executive Officer (Principal
Mark E. Johnson Executive Officer)
* Director, Executive Vice President, Chief
- ----------------------------------------------------- Financial Officer and Secretary
Lawrance W. McAfee (Principal Financial Officer and
Principal Accounting Officer)
* Director and Senior Vice President
- -----------------------------------------------------
Pierre S. Melcher
* Director
- -----------------------------------------------------
Thomas N. Amonett
* Director
- -----------------------------------------------------
T. William Porter
* Director
- -----------------------------------------------------
James L. Rainey
Director
- -----------------------------------------------------
James A. Read
*By: /s/ MARK E. JOHNSON
------------------------------------------------
Mark E. Johnson
Chairman of the Board, President
and Chief Executive Officer
As Attorney-in-Fact
</TABLE>
II-6
<PAGE> 75
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Registrant, as amended
(Filed as an exhibit to Form 10-Q for the quarter ended June
30, 1995 and incorporated herein by reference).
3.2 -- Certificate of Amendment to Certificate of Incorporation of
Registrant (Filed as an exhibit to Form 8-K dated March 7,
1997 and incorporated herein by reference).
3.3 -- Bylaws of the Registrant, as amended (Filed as an exhibit to
Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
4.1 -- Specimen Common Stock Certificate.
4.2 -- See Exhibits 3.1 and 3.3 for provisions of the Certificate
of Incorporation and Bylaws of the Registrant defining the
rights of holders of Common Stock.
4.3 -- Amended and Restated Credit Agreement dated November 18,
1996, among the Registrant, Bank of America National Trust
and Savings Association, as Agent, The First National Bank
of Boston, as Co-Agent and certain other financial
institutions. (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
4.4 -- Subordination Agreement among the Registrant and various
financial institutions (the "Senior Lenders"), including
Bank of America National Trust and Savings Association, as
Agent, and The First National Bank of Boston, as Co-Agent.
(Filed as an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
4.5 -- Subordinated Note and Purchase Agreement dated November 18,
1996, among the Registrant, International Mezzanine Capital,
B.V. ("Mezzanine") and First Commerce Corporation ("First
Commerce"). (Filed as an exhibit to Form 8-K dated December
5, 1996 and incorporated herein by reference).
4.6 -- Senior Subordinated Note due November 18, 2003, between the
Registrant and Mezzanine, dated November 18, 1996. (Filed as
an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
4.7 -- Senior Subordinated Note due November 18, 2003, between the
Registrant and First Commerce, dated November 18, 1996.
(Filed as an exhibit to Form 8-K dated December 5, 1996 and
incorporated herein by reference).
4.8 -- Guaranty dated November 18, 1996, executed by the Registrant
in favor of Mezzanine and First Commerce. (Filed as an
exhibit to Form 8-K dated December 5, 1996 and incorporated
herein by reference).
4.9 -- Warrant Agreement, dated November 18, 1996, between the
Registrant and Mezzanine. (Filed as an exhibit to Form 8-K
dated December 5, 1996 and incorporated herein by
reference).
4.10 -- Warrant Agreement dated November 18, 1996, between the
Registrant and First Commerce. (Filed as an exhibit to Form
8-K dated December 5, 1996 and incorporated herein by
reference).
4.11 -- Registration Rights Agreement dated November 18, 1996, among
the Registrant, Mezzanine, and First Commerce. (Filed as an
exhibit to Form 8-K dated December 5, 1996 and incorporated
herein by reference).
4.12 -- Warrant Agreement, dated April 24, 1996, between the
Registrant and Sanders Morris Mundy, Inc. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference).
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
4.13 -- Warrant Agreement, dated December 1992, between Registrant
and Pennsylvania Merchant Group, Ltd. (Filed as an exhibit
to Form 10-K for fiscal year ending March 31, 1993 and
incorporated herein by reference).
5.1 -- Opinion of Porter & Hedges, L.L.P. as to the legality of the
securities being registered.
10.1 -- Agreement and Plan of Merger dated September 19, 1996, among
the Registrant, Air-Cure Acquisition, Inc. and Ohmstede,
Inc. (Filed as an exhibit to Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).
10.2 -- Agreement and Plan of Merger dated October 13, 1995, among
the Registrant, Air-Cure Acquisition Corporation, Allied
Industries, Inc., Mark E. Johnson and Pierre S. Melcher.
(Filed as an exhibit to Post-Effective Amendment No. 1 to
Form S-4 Registration Statement (No. 33-92308) and
incorporated herein by reference).
10.3 -- Agreement and Plan of Merger dated April 28, 1994, among the
Registrant., VIC Acquisition Corporation, VIC Environmental
Systems, Inc. and Ronald E. Lewis. (Filed as an exhibit to
Post-Effective Amendment No. 1 to Form S-1 Registration
Statement (No. 33-69524) and incorporated herein by
reference).
10.4 -- Agreement and Plan of Merger dated April 5, 1994, among the
Registrant, Air-Cure Acquisition Corporation, Amerex, Inc.,
Amerex Industries, Inc. and certain other parties. (Filed as
an exhibit to Post-Effective Amendment No. 1 to Form S-1
Registration Statement (No. 33-69524) and incorporated
herein by reference).
10.5 -- Employment Agreement dated March 1, 1996, between the
Registrant and Lawrance W. McAfee. (Filed as an exhibit to
Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
10.6 -- Employment Agreement dated December 29, 1995, between the
Registrant and Mark E. Johnson. (Filed as an exhibit to Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference).
10.7 -- Employment Agreement dated December 29, 1995, between the
Registrant and Pierre S. Melcher. (Filed as an exhibit to
Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).
10.8 -- Employment Agreement dated March 1, 1995, between the
Registrant and John P. Fitzpatrick. (Filed as an exhibit to
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10.9 -- Employment Agreement dated December 17, 1992, between the
Registrant and Michael P. Lawlor. (Filed as an exhibit to
Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference).
10.10 -- Employees Stock Purchase Plan, as amended, dated December
15, 1994. (Filed as an exhibit to Form 10-K for year ended
December 31, 1994 and incorporated herein by reference).
10.11 -- Director Stock Option Plan, as amended. (Plan filed as an
exhibit to Proxy Statement for Annual Meeting of
Stockholders held on June 29, 1995, and amendment filed as
an exhibit to Form 10-Q for the quarter ended June 30, 1996,
both of which are incorporated herein by reference).
10.12 -- Amended and Restated 1990 Stock Option Plan, as amended,
dated June 29, 1995. (Filed as an exhibit to Proxy Statement
for Annual Meeting of Stockholders held on June 29, 1995 and
incorporated herein by reference).
10.13 -- Form of Stock Option Agreement. (Filed as an exhibit to Form
10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference).
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
10.14 -- Lease Agreement dated May 25, 1994, between Halligan and
Labbe Enterprises, L.L.C. and Amerex Industries, Inc. (Filed
as an exhibit to Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
10.15 -- License and Technical Assistance Agreement dated August 28,
1991, between Interel Environmental Technologies, Inc. and
Heinrich Luhr Staubtechnik GmbH & Co. (Filed as an exhibit
to Form S-1 (No. 33-44205).
*10.16 -- Acquisition Agreement dated as of April 24, 1997, between
the Company and the owners of Exell.
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Melton & Melton.
*23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Porter & Hedges, L.L.P. (contained in opinion
filed as Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page).
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
DATED MAY ___, 1997
ITEQ, INC.
5,050,000 SHARES
COMMON STOCK
------------------------------
UNDERWRITING
AGREEMENT
------------------------------
<PAGE> 2
ITEQ, INC.
5,050,000 SHARES
PLUS AN OPTION TO PURCHASE UP TO
757,500 ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS
COMMON STOCK
UNDERWRITING AGREEMENT
May ___, 1997
DEUTSCHE MORGAN GRENFELL INC.
EVEREN SECURITIES, INC.
SANDERS MORRIS MUNDY
As Representatives of the several Underwriters
c/o Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Dear Sirs:
ITEQ, Inc., a Delaware corporation (the "Company"), and the
persons and entity named in Schedule 2 hereto (the "Selling Stockholders")
hereby confirm their agreement with the several underwriters named in Schedule
1 hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth
below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be references to the Underwriters.
Section 1. Underwriting. Subject to the terms and conditions contained
herein:
(a) The Company proposes to issue and sell 4,300,000
shares of common stock, par value $0.001 per share (the "Common Stock"), of the
Company, and the Selling Stockholders propose to sell an aggregate of 750,000
shares of Common Stock (said shares to be issued and sold by the Company and
shares to be sold by the Selling Stockholders collectively, the "Firm Shares")
to the several Underwriters. The Company also proposes to issue and sell not
more than 757,500
<PAGE> 3
additional shares of Common Stock (the "Option Shares" and, together with the
Firm Shares, the "Shares") to the several Underwriters if requested by the
Representatives as provided in Section 2(b) hereof.
(b) Upon your authorization of the release of the Firm
Shares, the Underwriters propose to make a public offering (the "Offering") of
the Firm Shares upon the terms set forth in the Prospectus (as defined below)
as soon after the Registration Statement (as defined below) and this Agreement
have become effective as in the Representatives' sole judgment is advisable. As
used in this Agreement, the term "Original Registration Statement" means the
registration statement (File No. 333-23245) initially filed with the Securities
and Exchange Commission (the "Commission") relating to the Shares, as amended
at the time when it was or is declared effective, including all financial
schedules and exhibits thereto and including any information omitted therefrom
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"Securities Act"), and included in the Prospectus; the term "Rule 462(b)
Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Securities Act (including the
Registration Statement and any Preliminary Prospectus (as defined below) or
Prospectus incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
the Original Registration Statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Original Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means:
(i) if the Company relies on Rule 434 under the
Securities Act, the Term Sheet (as defined below)
relating to the Shares that is first filed pursuant
to Rule 424(b)(7) under the Securities Act, together
with the Preliminary Prospectus identified therein
that such Term Sheet supplements;
(ii) if the Company does not rely on Rule 434
under the Securities Act, the prospectus first filed
with the Commission pursuant to Rule 424(b) under the
Securities Act;
(iii) if the Company does not rely on Rule 434
under the Securities Act and if no prospectus is
required to be filed pursuant to Rule 424(b) under
the Securities Act, the prospectus included in the
Registration Statement; or
(iv) for purposes of the representations and
warranties contained in Section 5 hereof, if the
Prospectus is not in existence, the most recent
Preliminary Prospectus;
-2-
<PAGE> 4
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Securities Act. Any reference
herein to the "date" of a Prospectus that includes a Term Sheet shall
mean the date of such Term Sheet.
Section 2. Purchase and Closing.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell, and the
Selling Stockholders propose to sell, to each of the Underwriters, and each of
the Underwriters, severally and not jointly, agrees to purchase from the
Company and the Selling Stockholders, at a purchase price of $___ per Share
(the "Purchase Price"), the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule 1 hereto. Firm Shares shall be registered by
Harris Trust and Savings Bank in the name of the nominee of the Depository
Trust Company ("DTC"), Cede & Co. ("Cede & Co."), and credited to the accounts
of such of its participants as the Representatives shall request, upon notice
to the Company and the Selling Stockholders at least 48 hours prior to the
First Closing Date (as defined below), with any transfer taxes payable in
connection with the transfer of the Firm Shares to the Underwriters duly paid,
against payment by or on behalf of the Underwriters to the account of the
Company and the Selling Stockholders of the aggregate Purchase Price therefor
by wire transfer in immediately available funds. The Company and the Selling
Stockholders will make the certificate or certificates for the Firm Shares
available for checking and packaging by the Representatives at the offices in
New York, New York of the Company's transfer agent or registrar or of the
Representatives at least 24 hours prior to the First Closing Date. Delivery or
registry of and payment for the Firm Shares shall be made at the offices of
Andrews & Kurth L.L.P., 4200 Texas Commerce Tower, Houston, Texas 77002 at 9:30
A.M., New York City time, on May , 1997, or at such other place, time or
date as the Representatives, the Company and the Selling Stockholders may agree
upon. Such time and date of delivery against payment are herein referred to as
the "First Closing Date", and the implementation of all the actions described
in this Section 2(a) is herein referred to as the "First Closing".
(b) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Shares as contemplated by
the Prospectus, the Company hereby grants to the several Underwriters an option
to purchase, severally and not jointly, the Option Shares. The purchase price
to be paid for any Option Shares shall be the same as the Purchase Price for
the Firm Shares set forth above in paragraph (a) of this Section 2. The option
granted hereby may be exercised as to all or any part of the Option Shares from
time to time within thirty days after the date of the Prospectus (or, if such
30th day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange and the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Shares prior to the exercise of such option. The Representatives may from time
to time exercise the option granted hereby by giving notice in
-3-
<PAGE> 5
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are then
exercising the option and the date and time for delivery or registry of and
payment for such Option Shares. Any such date of delivery or registry shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the First Closing Date. The time and date
set forth in such notice, or such other time or date as the Representatives,
the Company and the Selling Stockholders may agree upon or as the
Representatives may determine pursuant to Section 2(a) hereof, is herein called
an "Option Closing Date" with respect to such Option Shares, and the
implementation of all the actions described in this Section 2(b) is herein
referred to as the "Option Closing". As used in this Agreement, the term
"Closing Date" means either the First Closing Date or any Option Closing Date,
as applicable, and the term "Closing" means either the First Closing or any
Option Closing, as applicable. If the option is exercised as to all or any
portion of the Option Shares, then either one or more certificates in
definitive form for such Option Shares shall be delivered or, if such Option
Shares are to be held through DTC, such Option Shares shall be registered and
credited, on the related Option Closing Date in the same manner, and upon the
same terms and conditions, set forth in paragraph (a) of this Section 2, except
that reference therein to the Firm Shares and the First Closing Date shall be
deemed, for purposes of this paragraph (b), to refer to such Option Shares and
Option Closing Date, respectively. Upon exercise of the option as provided
herein, the Company shall become obligated to sell to each of the several
Underwriters, and, on the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total number
of the Option Shares as to which the several Underwriters are then exercising
the option as such Underwriter is obligated to purchase of the aggregate number
of Firm Shares, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
(c) The Company and the Selling Stockholders hereby
acknowledge that the payment of monies pursuant to Section 2(a) hereof (a
"Payment") by or on behalf of the Underwriters of the aggregate Purchase Price
for any Shares does not constitute closing of a purchase and sale of the
Shares. Only execution and delivery, by facsimile or otherwise, of a receipt
for Shares by the Underwriters indicates completion of the closing of a
purchase of the Shares from the Company and the Selling Stockholders.
Furthermore, in the event that the Underwriters make a Payment to the Company
and the Selling Stockholders prior to the completion of the closing of a
purchase of Shares, the Company and the Selling Stockholders hereby acknowledge
that until the Underwriters execute and deliver such receipt for the Shares,
the Company and the Selling Stockholders will not be entitled to the Payment
and shall return the Payment to the Underwriters as soon as practicable (by
wire transfer of same-day funds) upon demand. In the event that the closing of
a purchase of Shares is not completed and the Payment is not returned by the
Company and the Selling Stockholders to the Underwriters on the same day the
Payment was received by the Company and the Selling Stockholders, the Company
and the Selling Stockholders agree to pay to
-4-
<PAGE> 6
the Underwriters in respect of each day the Payment is not returned by them, in
same-day funds, interest on the amount of such Payment in an amount
representing the Underwriters' cost of financing as reasonably determined by
the Representatives, pro rata in proportion to the percentage of such Payment
received by each.
(d) It is understood that any of you, individually and
not as one of the Representatives, may (but shall not be obligated to) make
Payment on behalf of any Underwriter or Underwriters for any of the Shares to
be purchased by such Underwriter or Underwriters. No such Payment shall
relieve such Underwriter or Underwriters from any of its or their obligations
hereunder.
Section 3. Covenants.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will:
(x) use its best efforts to cause the
Registration Statement, if not effective at
the time of execution of this Agreement, and
any amendments thereto to become effective as
promptly as possible. If required, the
Company will file the Prospectus or any Term
Sheet that constitutes a part thereof and any
amendment or supplement thereto with the
Commission in the manner and within the time
period required by Rules 434 and 424(b) under
the Securities Act. During any time when a
prospectus relating to the Shares is required
to be delivered under the Securities Act, the
Company (I) will comply with all requirements
imposed upon it by the Securities Act and the
rules and regulations of the Commission
thereunder to the extent necessary to permit
the continuance of sales of or dealings in
the Shares in accordance with the provisions
hereof and of the Prospectus, as then amended
or supplemented, and (II) will not file with
the Commission the Prospectus, Term Sheet,
any amendment or supplement to such
Prospectus or Term Sheet, any amendment to
the Registration Statement (including the
amendment referred to in the second sentence
of Section 5(a)(i) hereof), any Rule 462(b)
Registration Statement or any amendment or
supplement to any of the documents
incorporated or deemed to be incorporated by
reference in the Registration Statement and
the Prospectus (the "Incorporated Documents")
unless the Representatives previously have
been advised of, and furnished with a copy
within a reasonable period of time prior to,
the proposed filing and the Representatives
shall have
-5-
<PAGE> 7
given their consent to such filing. The
Company will prepare and file with the
Commission, in accordance with the rules and
regulations of the Commission, promptly upon
request by the Representatives or counsel for
the Underwriters, any amendments to the
Registration Statement or amendments or
supplements to the Prospectus or any of the
Incorporated Documents that may be necessary
or advisable in connection with the
distribution of the Shares by the several
Underwriters. The Company will advise the
Representatives, promptly after receiving
notice thereof, of the time when the
Registration Statement or any amendment
thereto has been filed or declared effective
or the Prospectus or Term Sheet or any
amendment or supplement thereto has been
filed and will provide evidence satisfactory
to the Representatives of each such filing or
effectiveness.
(y) without charge, provide (I) to the
Representatives and to counsel for the
Underwriters, an executed and a conformed
copy of the Original Registration Statement
and each amendment thereto or any Rule 462(b)
Registration Statement (in each case
including exhibits thereto and the
Incorporated Documents), (II) to each other
Underwriter, a conformed copy of the Original
Registration Statement and each amendment
thereto or any Rule 462(b) Registration
Statement (in each case without exhibits
thereto), and (III) so long as a prospectus
relating to the Shares is required to be
delivered under the Securities Act, as many
copies of each Preliminary Prospectus or the
Prospectus or any amendment or supplement
thereto as the Representatives may reasonably
request. Without limiting the application of
clause (III) of the preceding sentence, the
Company, not later than (A) 9:00 A.M., New
York City time, on the business day following
the date of determination of the public
offering price, if such determination
occurred at or prior to 12:00 noon, New York
City time, on such date or (B) 6:00 P.M., New
York City time, on the business day following
the date of determination of the public
offering price, if such determination
occurred after 12:00 noon, New York City
time, on such date, will deliver to the
Underwriters, without charge, as many copies
of the Prospectus and any amendment or
supplement thereto as the Representatives may
reasonably request for purposes of confirming
orders that are expected to settle on the
First Closing Date.
-6-
<PAGE> 8
(z) advise the Representatives, promptly
after receiving notice or obtaining knowledge
thereof, of (I) the issuance by the
Commission of any stop order suspending the
effectiveness of the Original Registration
Statement or any amendment thereto or any
Rule 462(b) Registration Statement or any
order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, (II) the
suspension of the qualification of the Shares
for offering or sale in any jurisdiction,
(III) the institution, threatening or
contemplation of any proceeding for any such
purpose, or (IV) any request made by the
Commission for amending the Original
Registration Statement or any Rule 462(b)
Registration Statement, for amending or
supplementing the Prospectus or for
additional information. The Company will use
its best efforts to prevent the issuance of
any such stop order and, if any such stop
order is issued, to obtain the withdrawal
thereof as promptly as possible.
(ii) The Company will arrange for the
qualification of the Shares for offering and sale in
each jurisdiction as the Representatives shall
designate including, but not limited to, pursuant to
applicable state securities ("Blue Sky") laws of
certain states of the United States of America or
other U.S. jurisdictions, and the Company shall
maintain such qualifications in effect for so long as
may be necessary in order to complete the placement
of the Shares; provided, however, that the Company
shall not be obliged to file any general consent to
service of process or to qualify as a foreign
corporation or as a securities dealer in any
jurisdiction or to subject itself to taxation in
respect of doing business in any jurisdiction in
which it is not otherwise so subject.
(iii) If, at any time prior to the final date when
a prospectus relating to the Shares is required to be
delivered under the Securities Act, any event occurs
as a result of which the Prospectus, as then amended
or supplemented, would include any untrue statement
of a material fact or omit to state any material fact
necessary in order to make the statements therein, in
the light of the circumstances under which they were
made, not misleading, or if for any other reason it
shall be necessary at any time to amend or supplement
the Registration Statement or the Prospectus to
comply with the Securities Act or the rules or
regulations of the Commission thereunder or
applicable law, the Company will promptly notify the
Representatives thereof and will promptly, at its own
expense, but subject to the second sentence of
Section 3(a)(i)(x) hereof: (x) prepare and file with
the Commission an amendment or supplement to the
Registration Statement or Prospectus which will
correct such statement or omission or effect such
compliance; and (y) supply any
-7-
<PAGE> 9
amended or supplemented Prospectus to the
Underwriters in such quantities as the Underwriters
may reasonably request.
(iv) The Company will make generally available to
the Company's securityholders and to the
Representatives as soon as practicable an earnings
statement that satisfies the provisions of Section
11(a) of the Securities Act, including Rule 158
thereunder.
(v) The Company will apply the net proceeds from
the sale of the Shares as set forth under "Use of
Proceeds" in the Prospectus.
(vi) The Company will not, and will not allow any
subsidiary to, publicly announce any intention to,
and will not itself, and will not allow any
subsidiary to, without the prior written consent of
the Representatives, on behalf of the Underwriters,
(x) offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase,
purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into, or
exercisable or exchangeable for, Common Stock, or (y)
enter into any swap or other agreement that
transfers, in whole or in part, any of the economic
consequences of ownership of the shares of Common
Stock or securities convertible into, or exercisable
or exchangeable for, shares of Common Stock (whether
any such transaction described in clause (x) or (y)
above is to be settled by delivery of shares of
Common Stock or such other securities, in cash or
otherwise), for a period beginning from the date
hereof and continuing to and including the date 120
days after the date hereof, except pursuant to this
Agreement and other than with respect to (x) shares
of Common Stock to be issued upon the exercise of
warrants to purchase shares of Common Stock which are
outstanding on the date hereof and disclosed in the
Prospectus, (y) shares of Common Stock (or any
securities convertible into or exchangeable for
shares of Common Stock) issued pursuant to any
employee benefit plans, qualified stock option plans
or other employee compensation plans which are
disclosed in the Prospectus and (z) shares of Common
Stock issued in a private transaction involving the
acquisition of or merger with another company (it
being understood that the Company shall not issue
shares of Common Stock for cash to be used to finance
such acquisition or merger).
(vii) Neither the Company nor any of its
affiliates, nor any person acting on behalf of any of
them will, directly or indirectly, (x) take any
action designed to cause or to result in, or that has
constituted or which might
-8-
<PAGE> 10
reasonably be expected to constitute, the
stabilization or manipulation of the price of any
security of the Company to facilitate the sale or
resale of the Shares or (y) (I) sell, bid for,
purchase, or pay anyone any compensation for
soliciting purchases of, the Shares or (II) pay or
agree to pay to any person any compensation for
soliciting another to purchase any other securities
of the Company.
(viii) The Company will obtain the agreements
described in Section 7(i) hereof prior to the First
Closing Date.
(ix) If at any time during the 25-day period after
the Registration Statement becomes effective or
during the period prior to any Closing Date, any
rumor, publication or event relating to or affecting
the Company shall occur as a result of which in the
Representatives' sole judgment the market price of
the Shares has been or is likely to be materially
affected (regardless of whether such rumor,
publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after
notice from the Representatives advising the Company
to the effect set forth above, forthwith prepare,
consult with the Representatives concerning the
substance of, and disseminate a press release or
other public statement reasonably satisfactory to the
Representatives, responding to or commenting on such
rumor, publication or event.
(x) If the Company elects to rely on Rule 462(b),
the Company shall both file the Rule 462(b)
Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable
fees in accordance with Rule 111 promulgated under
the Securities Act by the earlier of (x) 10:00 P.M.
New York City time on the date of this Agreement and
(y) the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act.
(xi) The Company will cause the Shares to be duly
included for quotation on the Nasdaq National Market
prior to the First Closing Date. The Company will
ensure that the Shares remain included for quotation
on the Nasdaq National Market following the First
Closing Date.
(xii) During the period when a prospectus relating
to the Shares is required to be delivered under the
Securities Act, the Company shall file all documents
required to be filed with the Commission pursuant to
the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), within
-9-
<PAGE> 11
the time period required by the Exchange Act and the
regulations of the Commission under the Exchange Act.
(xiii) The Company will comply with all the
provisions of any undertakings contained in the
Registration Statement.
(b) Each Selling Stockholder agrees that:
(i) It will not, and no person acting on behalf
of such Selling Stockholder will, directly or
indirectly, (x) take any action designed to cause or
to result in, or that has constituted or which might
reasonably be expected to constitute, the
stabilization or manipulation of the price of any
security of the Company to facilitate the sale or
resale of the Shares or (y) (I) sell, bid for,
purchase, or pay anyone any compensation for
soliciting purchases of, the Shares or (II) pay or
agree to pay to any person any compensation for
soliciting another to purchase any other securities
of the Company (except for the sale of Shares by the
Selling Stockholders under this Agreement).
(ii) It will not, and will not allow any
subsidiary to, publicly announce any intention to,
and will not itself, and will not allow any
subsidiary to, without the prior written consent of
the Representatives on behalf of the Underwriters,
(x) offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase,
purchase any option to sell, grant any option, right
or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any of the shares
of Common Stock or any securities convertible into,
or exercisable or exchangeable for, Common Stock, or
(y) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic
consequences of ownership of the shares of Common
Stock or any securities convertible into, or
exercisable or exchangeable for, shares of Common
Stock (whether any such transaction described in
clause (x) or (y) above is to be settled by delivery
of shares of Common Stock or such other securities,
in cash or otherwise), in each case, beneficially
owned (within the meaning of Rule 13d-3 under the
Exchange Act) or otherwise controlled by such person
on the date hereof or hereafter acquired, for a
period beginning from the date hereof and continuing
to and including the date 180 days after the date
hereof.
Section 4. Expenses.
(a) The Company shall bear and pay all costs and expenses
incurred incident to the performance of its obligations under this Agreement,
whether or not the transactions
-10-
<PAGE> 12
contemplated herein are consummated or this Agreement is terminated pursuant to
Section 9 hereof, including: (i) fees and expenses of preparation, issuance and
delivery of this Agreement to the Underwriters; (ii) the fees and expenses of
its counsel, accountants and any other experts or advisors retained by the
Company; (iii) the costs of delivering and distributing the Powers of Attorney
(as defined below) and the Custody Agreements (as defined below) and the fees
and expenses of the Custodian (as defined below) (and any other
Attorney-in-Fact (as defined below)); (iv) fees and expenses incurred in
connection with the registration of the Shares under the Securities Act and the
preparation and filing of the Registration Statement, the Prospectus and all
amendments and supplements thereto; (v) the printing and distribution of the
Prospectus and any Preliminary Prospectus and the printing and production of
all other documents connected with the Offering (including this Agreement and
any other related agreements); (vi) expenses related to the qualification of
the Shares under the state securities or Blue Sky laws, including filing fees
and the fees and disbursements of counsel for the Underwriters in connection
therewith and in connection with the preparation of any Blue Sky memoranda;
(vii) the filing fees and expenses, if any, incurred with respect to any filing
with the National Association of Securities Dealers, Inc., including the fees
and disbursements of counsel for the Underwriters in connection therewith;
(viii) all expenses arising from the quoting of the Shares on the Nasdaq
National Market; (ix) all arrangements relating to the preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Shares,
including transfers agent's and registrar's fees; and (x) the costs and
expenses of the "roadshow" and any other meetings with prospective investors in
the Shares (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters). The Company shall
reimburse the Representatives, for the account of the Underwriters, for all of
the reasonable out-of-pocket expenses (excluding fees and expenses of their
counsel) incurred by the Underwriters in connection with the Offering, not to
exceed $200,000.
(b) The Selling Stockholders shall bear and pay all costs
and expenses incurred incident to the performance of their respective
obligations under this Agreement, whether or not the transactions contemplated
herein are consummated or this Agreement is terminated pursuant to Section 9
hereof, including: (i) any stamp duties, capital duties and stock transfer
taxes, if any, payable upon the sale of the Shares of such Selling Stockholders
to the Underwriters and (ii) the fees and disbursements of their respective
counsel, accountants and other advisors.
Section 5. Representations and Warranties.
(a) As a condition of the obligation of the Underwriters
to underwrite and pay for the Shares, the Company represents and warrants to,
and agrees with, each of the several Underwriters as follows:
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<PAGE> 13
Registration Statement and Prospectus
(i) The Company meets the requirements for use of
Form S-2 under the Securities Act. The Original Registration
Statement, including the Preliminary Prospectus, has been
filed by the Company with the Commission under the Securities
Act, and one or more amendments to such Registration Statement
may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either
(x) if such Registration Statement, as it may have been
amended, has been declared by the Commission to be effective
under the Securities Act, either (I) if the Company relies on
Rule 434 under the Securities Act, a Term Sheet relating to
the Shares that shall identify the Preliminary Prospectus that
it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Securities
Act or (II) if the Company does not rely on Rule 434 under the
Securities Act, a prospectus in the form most recently
included in an amendment to such Registration Statement (or,
if no such amendment shall have been filed, in such
Registration Statement), with such changes or insertions as
are required by Rule 430A under the Securities Act or
permitted by Rule 424(b) under the Securities Act, and in the
case of either clause (I) or (II) of this sentence, as have
been provided to and approved by the Representatives prior to
the execution of this Agreement, or (y) if such Registration
Statement, as it may have been amended, has not been declared
by the Commission to be effective under the Securities Act, an
amendment to such Registration Statement, including a form of
prospectus, a copy of which amendment has been furnished to
and approved by the Representatives prior to the execution of
this Agreement. The Company may also file a Rule 462(b)
Registration Statement with the Commission for the purpose of
registering certain additional Shares, which registration
shall be effective upon filing with the Commission.
(ii) The Commission has not issued any order
preventing or suspending the use of any Preliminary
Prospectus. When any Preliminary Prospectus was filed with
the Commission, it (x) contained all statements required to be
stated therein in accordance with, and complied in all
material respects with the requirements of, the Securities Act
and the rules and regulations of the Commission thereunder and
(y) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared
effective, it (I) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of, the Securities Act and the rules and regulations of the
Commission thereunder and (II) did not or will not contain any
untrue statement of a material fact or omit to state any
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<PAGE> 14
material fact required to be stated therein or necessary to
make the statements therein not misleading. When the
Prospectus or any Term Sheet that is a part thereof or any
amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or
such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto
containing the Prospectus or such amendment or supplement to
the Prospectus was or is declared effective) and on the
Closing Date, the Prospectus, as amended or supplemented at
any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements
of, the Securities Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this
paragraph (ii) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any
Underwriter through the Representatives specifically for use
therein.
(iii) If the Company has elected to rely on Rule
462(b) and the Rule 462(b) Registration Statement has not been
declared effective, (x) the Company will file a Rule 462(b)
Registration Statement in compliance with, and that is
effective upon filing pursuant to, Rule 462(b) and (y) the
Company has given irrevocable instructions for transmission of
the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule
111 under the Securities Act, or the Commission has received
payment of such filing fee.
(iv) If the Company has elected to rely on Rule
434 under the Securities Act, the Prospectus is not
"materially different", as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective
amendment thereto (including such information that is
permitted to be omitted pursuant to Rule 430A under the
Securities Act);
(v) The Company and the Selling Stockholders have
not distributed and, prior to the later of (x) any Closing
Date and (y) the completion of the distribution of the Shares,
will not distribute any offering material in connection with
the Offering other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto.
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<PAGE> 15
(vi) Subsequent to the respective dates as of
which information is given in the Registration Statement and
the Prospectus, (x) the Company and its subsidiaries, taken as
a whole, have not incurred any material liability or
obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business;
(y) the Company has not purchased any of its outstanding
capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and
(z) there has not been any material change in the capital
stock, short- term or long-term debt of the Company and its
subsidiaries, taken as a whole, except in each case as
described in or contemplated by the Prospectus.
(vii) Each of the Incorporated Documents heretofore
filed with the Commission, when it was filed (or, if any
amendment with respect to that Incorporated Document has been
filed, when that amendment was filed), conformed in all
material respects with the requirements of the Exchange Act;
each further Incorporated Document filed with the Commission
will, when it is filed, conform in all material respects with
the requirements of the Exchange Act; none of the Incorporated
Documents, when filed with the Commission (or, if an amendment
with respect to that Incorporated Document has been filed,
when that amendment was filed), contained any untrue statement
of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading; and no further
Incorporated Document filed with the Commission will, when it
is filed, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
The Shares
(viii) The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus.
All of the issued shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all
applicable federal and state securities laws and were not
issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase such securities.
The Shares have been duly authorized by all necessary
corporate action of the Company and, after payment therefor in
accordance herewith, will be validly issued, fully paid and
nonassessable at the Closing Date. No holders of outstanding
shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the
Shares, and no holder of securities of the Company has any
right which has not been fully exercised or waived to require
the Company to register the offer or sale of
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<PAGE> 16
any securities owned by such holder under the Securities Act
in the Offering contemplated by this Agreement.
(ix) Except as disclosed in the Prospectus or the
Incorporated Documents, there are no outstanding (x)
securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital
stock of the Company or any such subsidiary, (y) warrants,
rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any
such convertible or exchangeable securities or obligations, or
(z) obligations of the Company or any such subsidiary to issue
any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants,
rights or options.
(x) Except for the shares of capital stock of
each of the subsidiaries owned by the Company and such
subsidiaries, neither the Company nor any such subsidiary owns
any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm,
partnership, association or other entity, except as described
in or contemplated by the Prospectus.
Listing
(xi) All of the Shares have been duly authorized
and accepted for quotation on the Nasdaq National Market,
subject to official notice of issuance.
Market manipulation
(xii) Neither the Company nor any of its
affiliates, nor any person acting on behalf of any of them
has, directly or indirectly, (x) taken any action designed to
cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares, or (y) since the
filing of the Original Registration Statement (I) sold, bid
for, purchased, or paid anyone any compensation for soliciting
purchases of, the Shares or (II) paid or agreed to pay to any
person any compensation for soliciting another to purchase any
other securities of the Company.
Corporate power and authority
(xiii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
law of its jurisdiction of incorporation with full power and
authority to own, lease and operate its properties and assets
and
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<PAGE> 17
conduct its business as described in the Prospectus, is duly
qualified to transact business and is in good standing in each
jurisdiction in which its ownership, leasing or operation of
its properties or assets or the conduct of its business
requires such qualification, except where the failure to be so
qualified does not amount to a material liability or
disability to the Company and its subsidiaries, taken as a
whole, and has full power and authority to execute and perform
its obligations under this Agreement; each subsidiary of the
Company is a corporation duly incorporated and validly
existing as a corporation in good standing under the laws of
its jurisdiction of incorporation and is duly qualified to
transact business and is in good standing in each jurisdiction
in which its ownership, leasing or operation of its properties
or assets or the conduct of its business requires such
qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the
Company and its subsidiaries, taken as a whole, and each has
full power and authority to own, lease and operate its
properties and assets and conduct its business as described in
the Registration Statement and the Prospectus; all of the
issued and outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and are fully
paid and nonassessable and are owned beneficially by the
Company free and clear of any security interests, liens,
encumbrances, equities or claims.
(xiv) The execution and delivery of this Agreement
and the issue and sale of the Shares have been duly authorized
by all necessary corporate action of the Company, and this
Agreement has been duly executed and delivered by the Company
and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(xv) The issuance, offering and sale of the Shares
to the Underwriters by the Company pursuant to this Agreement,
the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions
herein contemplated do not (x) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained or
made or such as may be required by the state securities or
Blue Sky laws of the various states of the United States of
America or other U.S. jurisdictions in connection with the
offer and sale of the Shares by the Underwriters, or (y)
conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of its
subsidiaries, or any statute or any judgment, decree, order,
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<PAGE> 18
rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any
of its subsidiaries.
(xvi) The Company is not, and will conduct its
operations in a manner so that it continues not to be, an
"investment company" and, after giving effect to the Offering
and the application of the proceeds therefrom, will not be an
"investment company", as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
Title, licenses and consents
(xvii) The Company and each of its subsidiaries have
good and marketable title in fee simple to all items of real
property and marketable title to all personal property owned
by each of them, in each case free and clear of any security
interests, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect
the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company or
such subsidiary, and any real property and buildings held
under lease by the Company or any such subsidiary are held
under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the
use made or proposed to be made of such property and buildings
by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus.
(xviii) The Company and its subsidiaries own or
possess, or can acquire on reasonable terms, all material
patents, patent applications, trademarks, service marks, trade
names, licenses, know-how, copyrights, trade secrets and
proprietary or other confidential information necessary to
operate the business now operated by them, and neither the
Company nor any such subsidiary has received any notice of
infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in
the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a materially adverse effect on
or constitute a materially adverse change in, or constitute a
development involving a prospective materially adverse effect
on or change in, the condition (financial or otherwise),
earnings, properties, business affairs or business prospects,
stockholders' equity, net worth or results of operations of
the Company or any of its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
(xix) The Company and its subsidiaries possess all
consents, licenses, certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses.
The Company and its subsidiaries are in compliance with the
terms and conditions of all
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<PAGE> 19
such consents, licenses, certificates, authorizations and
permits, except where the failure so to comply would not,
singly or in the aggregate, have a materially adverse effect
on the condition (financial or otherwise), earnings,
properties, business affairs or business prospects, net worth
or results of operations of the Company or any of its
subsidiaries, taken as a whole. Neither the Company nor any
such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such
consent, license, certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a materially adverse
effect on or constitute a materially adverse change in, or
constitute a development involving a prospective materially
adverse effect on or change in, the condition (financial or
otherwise), earnings, properties, business affairs or business
prospects, net worth or results of operations of the Company
or any of its subsidiaries, taken as a whole.
Financial statements
(xx) Each of Arthur Andersen L.L.P. and KPMG Peat
Marwick LLP, who have certified certain financial statements
of the Company and its consolidated subsidiaries and delivered
their reports with respect to the audited consolidated
financial statements and schedules included in the
Registration Statement and the Prospectus, are independent
public accountants as required by the Securities Act and the
applicable rules and regulations thereunder.
(xxi) The consolidated financial statements and
schedules of the Company and its consolidated subsidiaries
included in the Registration Statement and the Prospectus were
prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the
periods involved (except as otherwise noted therein) and they
present fairly the financial condition of the Company as at
the dates at which they were prepared and the results of
operations of the Company in respect of the periods for which
they were prepared. The selected financial data and the
summary financial information included in the Prospectus have
been compiled on a basis consistent with that of the audited
and unaudited historical financial statements and pro forma
financial statements from which they have been derived. The
pro forma financial statements and the related notes thereto
included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements
(including the applicable accounting requirements of Rule
11-02 of Regulation S-X of the Commission) and have been
properly compiled on the bases described therein, and the
assumptions used in the preparation thereof are, in the
judgment of the Company, reasonable and
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<PAGE> 20
the adjustments used therein are, in the judgment of the
Company, appropriate to give effect to the transactions and
circumstances referred to therein.
Internal Accounting Controls
(xxii) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (w) transactions are
executed in accordance with management's general or specific
authorizations; (x) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability; (y) access to
assets is permitted only in accordance with management's
general or specific authorization; and (z) the recorded
accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with
respect to any differences.
Litigation
(xxiii) No legal or governmental proceedings are
pending or threatened to which the Company or any of its
subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not described therein.
Exhibits
(xxiv) There are no statutes, regulations, contracts
or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
therein or filed as required.
Dividends and Distributions
(xxv) No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends
to the Company, making any other distribution on such
subsidiary's capital stock, repaying to the Company any loans
or advances to such subsidiary from the Company or
transferring any of such subsidiary's property or assets to
the Company or any other subsidiary of the Company, and the
Company is not currently prohibited, directly or indirectly,
from paying any dividends, making any other distribution on
its capital stock, in each case except as described in or
contemplated by the Prospectus.
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<PAGE> 21
Taxes
(xxvi) The Company has filed all foreign, federal,
state and local tax returns that are required to be filed or
has requested extensions thereof (except in any case in which
the failure so to file would not have a materially adverse
effect on the Company and its subsidiaries, taken as a whole)
and all such returns are true, correct and complete in all
material respects. The Company has paid all taxes required to
be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that
is currently being contested in good faith or as described in
or contemplated by the Prospectus.
Insurance
(xxvii) The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or
otherwise), earnings, properties, business affairs or business
prospects, net worth or results of operations of the Company
or any of its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
Pension and Labor
(xxviii) The Company is in compliance in all material
respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to
incur liability under (x) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (y)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is
so qualified in all
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<PAGE> 22
material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such
qualification.
(xxix) No labor dispute with the employees of the
Company or any of its subsidiaries exists or is threatened or
imminent that could have a materially adverse effect on or
constitute a materially adverse change in, or constitute a
development involving a prospective materially adverse effect
on or change in, the condition (financial or otherwise),
properties, management, earnings, business affairs or business
prospects, net worth or results of operations of the Company
or any of its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
Environmental
(xxx) Except as described in the Registration
Statement and except as would not, singly or in the
aggregate, have a materially adverse effect on or constitute a
materially adverse change in, or constitute a development
involving a prospective materially adverse effect on or change
in, the condition (financial or otherwise), earnings,
properties, business affairs or business prospects, net worth
or results of operations of the Company or any of its
subsidiaries, taken as a whole, (w) neither the Company nor
any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial
or administrative order, consent, decree or judgment, relating
to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (x)
the Company and its subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their
requirements, (y) there are no pending or threatened
administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any
of its subsidiaries and (z) there are no events or
circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action,
suit or proceeding by any private party or governmental body
or agency, against or affecting the Company or any of its
subsidiaries relating to Hazardous Materials or any
Environmental Laws.
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<PAGE> 23
Other Agreements
(xxxi) No default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute
a default in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective
properties is bound.
Absence of Materially Adverse Change
(xxxii) Subsequent to the respective dates as of
which information is given in the Registration Statement and
the Prospectus, neither the Company nor any of its
subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal
or governmental proceeding, and there has been no materially
adverse change (including, without limitation, a change in
management or control), or development involving a prospective
materially adverse change, in the condition (financial or
otherwise), management, earnings, property, business affairs
or business prospects, stockholders' equity, net worth or
results of operations of the Company or any of its
subsidiaries, taken as a whole, other than as described in or
contemplated by the Prospectus (exclusive of any amendments or
supplements thereto). Except as otherwise stated in the
Registration Statement and the Prospectus, there have been no
transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of
business, which are material with respect to the Company or
any of its subsidiaries, taken as a whole.
(xxxiii) No receiver or liquidator (or similar
person) has been appointed in respect of the Company or any
subsidiary of the Company or in respect of any part of the
assets of the Company or any subsidiary of the Company; no
resolution, order of any court, regulatory body, governmental
body or otherwise, or petition or application for an order,
has been passed, made or presented for the winding up of the
Company or any subsidiary of the Company or for the protection
of the Company or any such subsidiary from its creditors; and
the Company has not, and no subsidiary of the Company has,
stopped or suspended payments of its debts, become unable to
pay its debts or otherwise become insolvent.
(b) As a further condition of the obligation of the
Underwriters to underwrite and pay for the Shares, each Selling Stockholder
represents and warrants to, and agrees with, each of the several Underwriters
that:
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<PAGE> 24
(i) Such Selling Stockholder has full power
(corporate and other) to enter into this Agreement and to
sell, assign, transfer and deliver to the Underwriters the
Shares to be sold by such Selling Stockholder hereunder in
accordance with the terms of this Agreement; the execution and
delivery of this Agreement have been duly authorized by all
necessary corporate action of such Selling Stockholder in the
case of a Selling Stockholder that is a corporation; and this
Agreement has been duly executed and delivered by such Selling
Stockholder.
(ii) Such Selling Stockholder has duly executed
and delivered a power of attorney and custody agreement (with
respect to such Selling Stockholder, the "Power-of-Attorney"
and the "Custody Agreement", respectively), each in the form
heretofore delivered to the Representatives, appointing an
attorney-in-fact (the "Attorney-in-Fact") with authority to
execute, deliver and perform this Agreement on behalf of such
Selling Stockholder and appointing Harris Trust and Savings
Bank, as custodian thereunder (the "Custodian"). Certificates
in negotiable form, endorsed in blank or accompanied by blank
stock powers duly executed, with signatures appropriately
guaranteed, representing the Shares to be sold by such Selling
Stockholder hereunder have been deposited with the Custodian
pursuant to the Custody Agreement for the purpose of delivery
pursuant to this Agreement. Such Selling Stockholder has full
power (corporate and other) to enter into the Custody
Agreement and the Power-of-Attorney and to perform its
obligations under the Custody Agreement. The execution and
delivery of the Custody Agreement and the Power-of-Attorney
have been duly authorized by all necessary corporate action of
such Selling Stockholder in the case of a Selling Stockholder
that is a corporation; the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by
such Selling Stockholder and, assuming due authorization,
execution and delivery by the Custodian, are the legal, valid,
binding and enforceable instruments of such Selling
Stockholder. Such Selling Stockholder agrees that each of the
Shares represented by the certificates on deposit with the
Custodian is subject to the interests of the Underwriters
hereunder, that the arrangements made for such custody, the
appointment of the Attorney-in-Fact and the right, power and
authority of the Attorney-in-Fact to execute and deliver this
Agreement, to agree on the price at which the Shares
(including such Selling Stockholder's Shares) are to be sold
to the Underwriters, and to carry out the terms of this
Agreement, are to that extent irrevocable and that the
obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or the
Custody Agreement, by any act of such Selling Stockholder, by
operation of law or otherwise, whether in the case of any
individual Selling Stockholder by the death or incapacity of
such Selling Stockholder, in the case of a trust or estate by
the death of the trustee or trustees or the executor or
executors or the termination of such trust or estate, or in
the case of a corporate or partnership Selling Stockholder by
its liquidation or dissolution or by
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the occurrence of any other event. If any individual Selling
Stockholder, trustee or executor should die or become
incapacitated or any such trust should be terminated, or if
any corporate or partnership Selling Stockholder shall
liquidate or dissolve, or if any other event should occur,
before the delivery of such Shares hereunder, the certificates
for such Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the respective
terms and conditions of this Agreement as if such death,
incapacity, termination, liquidation or dissolution or other
event had not occurred, regardless of whether or not the
Custodian or the Attorney-in-Fact shall have received notice
thereof.
(iii) Such Selling Stockholder is the lawful owner
of the Shares to be sold by such Selling Stockholder hereunder
and upon sale and delivery of, and payment for, such Shares,
as provided herein, such Selling Stockholder will convey good
and marketable title to such Shares, free and clear of any
security interests, liens, encumbrances, equities, claims or
other defects.
(iv) Neither such Selling Stockholder nor any
person acting on behalf of it has, directly or indirectly, (x)
taken any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale
of the Shares or (y) since the filing of the Original
Registration Statement (I) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the
Shares or (II) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Shares by
the Selling Stockholders under this Agreement).
(v) To the extent that any statements or
omissions are made in the Prospectus or any Term Sheet that is
a part thereof or any amendment or supplement to the
Prospectus (or, if the Prospectus or such amendment or
supplement is not required to be filed, the Original
Registration Statement or the amendment thereto containing the
Prospectus or such amendment or supplement to the Prospectus)
in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder
specifically for use therein, such Prospectus or Term Sheet or
amendment or supplement to the Prospectus (or, if the
Prospectus or such amendment or supplement is not required to
be filed, the Original Registration Statement or the amendment
thereto containing the Prospectus or such amendment or
supplement to the Prospectus) (x) contained or will contain
all statements required to be stated therein in accordance
with, and complied or will comply in all material respects
with the requirements of, the Securities Act and the rules and
regulations of the Commission thereunder and (y) did not or
will not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
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<PAGE> 26
statements therein, in the light of the circumstances under
which they were made, not misleading. Such Selling
Stockholder has reviewed the Prospectus and the Registration
Statement, and the information regarding such Selling
Stockholder set forth therein under the caption "Principal and
Selling Stockholders" is complete and accurate.
(vi) The sale by such Selling Stockholder of
Shares pursuant hereto is not prompted by any adverse
information concerning the Company or its subsidiaries that is
not set forth in the Registration Statement or the Prospectus.
(vii) The sale of the Shares to the Underwriters by
such Selling Stockholder pursuant to this Agreement, the
compliance by such Selling Stockholder with the other
provisions of this Agreement, the Custody Agreement and the
consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the
registration statement filed with respect to the Shares (as
amended) is not effective under the Securities Act as of the
time of execution hereof, such as may be required (and shall
be obtained as provided in this Agreement) under the
Securities Act, or (ii) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which such Selling
Stockholder or any of its subsidiaries is a party or by which
such Selling Stockholder or any of its subsidiaries or any of
such Selling Stockholder's properties are bound, or the
charter documents or by-laws of such Selling Stockholder or
any of its subsidiaries or any statute or any judgment,
decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to such
Selling Stockholder or any of its subsidiaries.
(viii) Such Selling Stockholder has not distributed,
and prior to the later of (x) any Closing Date and (y) the
completion of the distribution of the Shares, will not
distribute any offering material in connection with the
Offering other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto.
(c) The above representations and warranties shall be
deemed to be repeated at each Closing, and all references therein to the Shares
and the Closing Date shall be deemed to refer to the Firm Shares or the Option
Shares and the First Closing Date or the applicable Option Closing Date, each
as applicable.
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<PAGE> 27
Section 6. Indemnity.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, against any and all losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon:
(i) any untrue statement or alleged untrue
statement made by the Company or such Selling
Stockholder in Section 5 hereof,
(ii) any untrue statement or alleged untrue
statement of any material fact contained in the
Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or
(iii) the omission or alleged omission to state in
the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto a material fact
required to be stated therein or necessary to make
the statements therein not misleading,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other costs or expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and
provided further, that the Company will not be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement
or omission made in any Preliminary Prospectus that is corrected in the
Prospectus (or any amendment or supplement thereto) if the person asserting any
such loss, claim, damage or liability purchased Shares from such Underwriter
but was not sent or given a copy of the Prospectus (as amended or supplemented)
in any case where such delivery of the Prospectus (as amended or supplemented)
was required by the Securities Act, unless such failure to deliver the
Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 3(a) hereof. The indemnity provided for in this Section 6
shall be in addition to any liability which the Company may otherwise have.
The Company will not, without the prior written consent of the Representatives,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
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<PAGE> 28
Representatives or any person who controls any such Representatives is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of all of the Underwriters and
such controlling persons from all liability arising out of such claim, action,
suit or proceeding.
(b) Each Selling Stockholder, severally and not jointly,
agrees to indemnify and hold harmless the Company, each of its directors, each
of its officers who signs the Registration Statement, each Underwriter and each
person, if any, who controls the Company or any Underwriter within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act against
any and all losses, claims, damages or liabilities, joint or several, to which
the Company, any such director, officer, such Underwriter or any such
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue
statement of any material fact contained in the
Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or
(ii) the omission or the alleged omission to state
in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto a material
fact required to be stated or necessary to make the
statements therein not misleading,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other costs or expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that such
Selling Stockholder will be liable in any such case to the extent, but only to
the extent, that any untrue statement or alleged untrue statement or omission
or alleged omission in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto
was made in reliance upon and in conformity with written information furnished
to the Company by such Selling Stockholder specifically for use therein; and
provided further, that the Selling Stockholders will not be liable to any
Underwriter or any person controlling such Underwriter with respect to any such
untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) in any case where such delivery of the Prospectus (as
amended or supplemented) was required by the Securities Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 3(a) hereof. The indemnity provided
for in this
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<PAGE> 29
Section 6 shall be in addition to any liability which the Selling Stockholders
may otherwise have. The Selling Stockholders will not, without the prior
written consent of the Representatives, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Representatives or any person who controls any such
Representatives is a party to such claim, action, suit or proceeding), unless
such settlement, compromise or consent includes an unconditional release of all
of the Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.
(c) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, each Selling Stockholder and
each person, if any, who controls the Company or such Selling Stockholder
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director or officer of the Company, such Selling
Stockholder or any such controlling person of the Company or such Selling
Stockholder may become subject under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and, subject to the limitation
set forth immediately preceding this clause, will reimburse, as incurred, any
legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person or such Selling Stockholder or
controlling person of such Selling Stockholder in connection with investigating
or defending any such loss, claim, damage, liability or any action in respect
thereof. The remedies provided for in this Section 6 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraph (a), (b), or (c) of this Section
6, such person (for purposes of this paragraph (d), the "indemnified party")
shall, promptly after receipt by such party of notice of the commencement of
such action, notify the person against whom such indemnity may be sought (for
purposes of this paragraph (d), the "indemnifying party"), but the omission so
to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party otherwise than under this Section 6. In
case any such action is brought against any indemnified party, and it notifies
the indemnifying
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<PAGE> 30
party of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense of any such action and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 6 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated in writing by the Representatives in
the case of paragraph (a) or (b) of this Section 6, representing the
indemnified parties under such paragraph (a) or (b) who are parties to such
action or actions), or (ii) the indemnifying party does not promptly retain
counsel satisfactory to the indemnified party, or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. All fees and expenses reimbursed pursuant
to this paragraph (d) shall be reimbursed as they are incurred. After such
notice from the indemnifying party to such indemnified party, the indemnifying
party will not be liable for the costs and expenses of any settlement of such
action effected by such indemnified party without the consent of the
indemnifying party.
(d) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 6 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
(i) the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party on the other from the Offering or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant
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<PAGE> 31
equitable considerations. The relative benefits received by the Company and
the Selling Stockholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total proceeds from the
Offering (before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Selling Stockholders and the Underwriters
agree that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (e). Notwithstanding any other provision of this paragraph
(e), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total public offering price of the Shares purchased by
such Underwriter under this Agreement, less the aggregate amount of any damages
that such Underwriter has otherwise been required to pay in respect of the same
or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Deutsche Morgan Grenfell Inc. Master
Agreement Among Underwriters. For purposes of this paragraph (e), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement and each person,
if any, who controls the Company or any Selling Stockholder within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company or such Selling
Stockholder, as the case may be.
Section 7. Conditions Precedent. The obligations of the several
Underwriters to purchase and pay for the Shares shall be subject, in the
Representatives' sole discretion, to the accuracy of the representations and
warranties of the Company and the Selling Stockholders contained herein as of
the date hereof and as of each Closing Date, as if made on and as of each
Closing Date, to the accuracy of the statements of the Company's officers and
the Selling Stockholders made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
covenants and agreements hereunder and to the following additional conditions:
(a) (i) If the Original Registration Statement or any
amendment thereto filed prior to the First Closing Date has not been declared
effective as of the time of execution hereof, the
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Original Registration Statement or such amendment shall have been declared
effective not later than 6:00 P.M. New York City time on the date of
determination of the public offering price, if such determination occurred at
or prior to 4:30 P.M. New York City time on such date, or 12:00 Noon New York
City time on the business day following the day on which the public offering
price was determined, if such determination occurred after 4:30 P.M. New York
City time on such date, and (ii) if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have been declared
effective not later than the time confirmations are sent or given as specified
by Rule 462(b)(2), or such later time and date as shall have been consented to
by the Representatives; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period
required by Rules 434 and 424(b) under the Securities Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received a legal
opinion from Porter & Hedges, L.L.P., counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Registration Statement is effective under
the Securities Act; any required filing of the
Prospectus, or any Term Sheet that constitutes a part
thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period
required by Rules 434 and 424(b); and no stop order
suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued
and, to the best knowledge of such counsel, no
proceedings for that purpose are pending or
threatened by the Commission;
(ii) the Original Registration Statement and each
amendment thereto, any Rule 462(b) Registration
Statement, the Prospectus and each of the
Incorporated Documents (in each case, other than the
financial statements and other financial information
contained therein, as to which such counsel need
express no opinion) comply as to form in all material
respects with the applicable requirements of the
Securities Act and the rules and regulations of the
Commission thereunder;
(iii) such counsel has no reason to believe that
(in each case, other than the financial statements
and other financial information contained therein, as
to which such counsel need express no opinion) (x)
the Registration Statement, as of its effective date,
contained any untrue statement of a material fact or
omitted to state a material fact required to be
stated therein or necessary to
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<PAGE> 33
make the statements therein not misleading or (y) the
Prospectus, as of its date or the date of such
opinion, included or includes any untrue statement of
a material fact or omitted or omits to state any
material fact necessary in order to make the
statements therein, in the light of the circumstances
under which they were made, not misleading;
(iv) if the Company elects to rely on Rule 434
under the Securities Act, the Prospectus is not
"materially different", as such term is used in Rule
434, from the prospectus included in the Registration
Statement at the time of its effectiveness or an
effective post-effective amendment thereto (including
such information that is permitted to be omitted
pursuant to Rule 430A under the Securities Act);
(v) the Company has an authorized, issued and
outstanding capitalization as set forth in the
Prospectus; all of the issued shares of capital stock
of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have
been issued in compliance with all applicable federal
and state securities laws and were not issued in
violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities;
the Shares have been duly authorized by all necessary
corporate action of the Company and, when issued and
delivered to and paid for by the Underwriters
pursuant to this Agreement, will be validly issued,
fully paid and nonassessable; no holders of
outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other
rights to subscribe for any of the Shares; and no
holder of securities of the Company has any right
which has not been fully exercised or waived to
require the Company to register the offer or sale of
any securities owned by such holder under the
Securities Act in the Offering contemplated by this
Agreement;
(vi) all of the Shares have been duly authorized
and accepted for quotation on the Nasdaq National
Market, subject to official notice of issuance;
(vii) the Company and each of its subsidiaries have
been duly organized and are validly existing as
corporations in good standing under the laws of their
respective jurisdictions of incorporation and are
duly qualified to transact business as foreign
corporations and are in good standing under the laws
of all other jurisdictions where the ownership,
leasing or operation of their respective properties
or assets or the conduct of their respective
businesses requires such qualification, except where
the failure to be so qualified does not amount to a
material liability or disability to the Company and
its subsidiaries, taken as a whole; the Company and
each of its
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<PAGE> 34
subsidiaries have full power and authority to own,
lease and operate their respective properties and
assets and conduct their respective businesses as
described in the Registration Statement and the
Prospectus, and the Company has corporate power to
enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it;
all of the issued and outstanding shares of capital
stock of each of the Company's subsidiaries have been
duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the
Company free and clear of any perfected security
interests or, to the best knowledge of such counsel,
any other security interests, liens, encumbrances,
equities or claims;
(viii) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus,
insofar as such statements purport to summarize
certain provisions of the capital stock of the
Company, provide a fair summary of such provisions;
and the statements set forth under the heading
"Description of Capital Stock" and Item 15 of Part II
of the Registration Statement in the Prospectus,
insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred
to therein, have been reviewed by such counsel and
fairly present the information called for with
respect to such legal matters, documents and
proceedings in all material respects as required by
the Securities Act and the rules and regulations
thereunder;
(ix) the execution and delivery of this Agreement
have been duly authorized by all necessary corporate
action of the Company and this Agreement has been
duly executed and delivered by the Company;
(x) the issuance, offering and sale of the Shares
to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company with the
other provisions of this Agreement and the
consummation of the other transactions herein
contemplated do not (x) require the consent,
approval, authorization, registration or
qualification of or with any governmental authority,
except such as have been obtained or made (and
specified in such opinion) or such as may be required
by the securities or Blue Sky laws of the various
states of the United States of America and other U.S.
jurisdictions in connection with the offer and sale
of the Shares by the Underwriters, or (y) conflict
with or result in a breach or violation of any of the
terms and provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, lease
or other agreement or instrument, known to such
counsel, to which the Company or any of its
subsidiaries is a party or by which the Company or
any of its subsidiaries or any of their respective
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properties are bound, or the charter documents or
by-laws of the Company or any of its subsidiaries, or
any statute or any judgment, decree, order, rule or
regulation of any court or other governmental
authority or any arbitrator known to such counsel and
applicable to the Company or its subsidiaries;
(xi) the Company is not an "investment company"
and, after giving effect to the Offering and the
application of the proceeds therefrom, will not be an
"investment company", as such term is defined in the
1940 Act; and
(xii) such counsel does not know of any legal or
governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a
party or to which the property of the Company or any
of its subsidiaries is subject that are required to
be described in the Registration Statement or the
Prospectus and are not described therein or any
statutes, regulations, contracts or other documents
that are required to be described in the Registration
Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not
described therein or filed as required.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (b) shall include any amendment or supplement thereto at the
date of such opinion. The opinions of issuer's counsel described herein shall
be rendered to the Underwriters at the request of the Company and shall so
state therein.
(c) The Representatives shall have received a legal
opinion from Porter & Hedges, L.L.P., counsel for Mark E. Johnson and Pierre S.
Melcher as Selling Stockholders, dated the Closing Date, to the effect that:
(i) each such Selling Stockholder has full power
to enter into this Agreement, the Custody Agreement
and the Power-of-Attorney and to sell, assign,
transfer and deliver the Shares being sold by such
Selling Stockholder hereunder in the manner provided
in this Agreement and to perform its obligations
under the Custody Agreement; this Agreement, the
Custody Agreement and the Power-of-Attorney have been
duly executed and delivered by each such Selling
Stockholder; assuming due authorization, execution
and delivery by the Custodian, the Custody Agreement
and the Power-of-Attorney are the legal, valid,
binding and enforceable instruments of each such
Selling Stockholder, subject to applicable
bankruptcy, insolvency and
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<PAGE> 36
similar laws affecting creditors' rights generally
and subject, as to enforceability, to general
principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at
law);
(ii) the delivery by each such Selling Stockholder
to the several Underwriters of certificates for the
Shares being sold hereunder by such Selling
Stockholder against payment therefor as provided
herein, will convey good and marketable title to such
Shares to the several Underwriters, free and clear of
all security interests, liens, encumbrances,
equities, claims or other defects;
(iii) the sale of the Shares to the Underwriters by
each such Selling Stockholder pursuant to this
Agreement, the compliance by each such Selling
Stockholder with the other provisions of this
Agreement and the Custody Agreement and the
consummation of the other transactions herein
contemplated do not (x) require the consent,
approval, authorization, registration or
qualification of or with any governmental authority,
except such as have been obtained and such as may be
required under state securities or blue sky laws, or
(y) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to
which such Selling Stockholder is a party or by which
such Selling Stockholder or any of such Selling
Stockholder's properties are bound, or any statute or
any judgment, decree, order, rule or regulation of
any court or other governmental authority or any
arbitrator applicable to such Selling Stockholder.
References to the Registration Statement and the Prospectus in
this paragraph (c) shall include any amendment or supplement thereto at the
date of such opinion.
(d) The Representatives shall have received a legal
opinion from ___________________________________
________________________________, counsel for Pennsylvania Merchant Group, Ltd.
as Selling Stockholder, dated the Closing Date, to the effect that:
(i) such Selling Stockholder has full power
(corporate and other) to enter into this Agreement,
the Custody Agreement and the Power-of-Attorney and
to sell, assign, transfer and deliver the Shares
being sold by such Selling Stockholder hereunder in
the manner provided in this Agreement and to perform
its obligations under the Custody Agreement; the
execution and delivery of this Agreement, the Custody
Agreement and the Power-of-Attorney have been duly
authorized by all necessary corporate action of each
Selling Stockholder; this Agreement, the Custody
Agreement and the Power-
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<PAGE> 37
of-Attorney have been duly executed and delivered by
such Selling Stockholder; assuming due authorization,
execution and delivery by the Custodian, the Custody
Agreement and the Power-of- Attorney are the legal,
valid, binding and enforceable instruments of such
Selling Stockholder, subject to applicable
bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to
enforceability, to general principles of equity
(regardless of whether enforcement is sought in a
proceeding in equity or at law);
(ii) the delivery by such Selling Stockholder to
the several Underwriters of certificates for the
Shares being sold hereunder by such Selling
Stockholder against payment therefor as provided
herein, will convey good and marketable title to such
Shares to the several Underwriters, free and clear of
all security interests, liens, encumbrances,
equities, claims or other defects;
(iii) the sale of the Shares to the Underwriters by
such Selling Stockholder pursuant to this Agreement,
the compliance by such Selling Stockholder with the
other provisions of this Agreement and the Custody
Agreement and the consummation of the other
transactions herein contemplated do not (x) require
the consent, approval, authorization, registration or
qualification of or with any governmental authority,
except such as have been obtained and such as may be
required under state securities or blue sky laws, or
(y) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to
which such Selling Stockholder or any of its
subsidiaries is a party or by which such Selling
Stockholder or any of its subsidiaries or any of such
Selling Stockholder's properties are bound, or the
charter documents or by-laws of such Selling
Stockholder or any of its subsidiaries or any statute
or any judgment, decree, order, rule or regulation of
any court or other governmental authority or any
arbitrator applicable to such Selling Stockholder or
any of its subsidiaries.
In rendering such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of such Selling Stockholder and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (d) shall include any amendment or supplement thereto at the
date of such opinion.
(e) The Representatives shall have received a legal
opinion from Andrews & Kurth L.L.P., counsel for the Underwriters, dated the
Closing Date, covering the issuance and sale
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<PAGE> 38
of the Shares, the Registration Statement and the Prospectus, and such other
related matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received from Arthur
Andersen LLP a letter or letters dated, respectively, the date hereof and the
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect
to the Company and its consolidated subsidiaries
within the meaning of the Securities Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the consolidated financial
statements and schedules audited by them and included
and incorporated by reference in the Registration
Statement and the Prospectus comply in form in all
material respects with the applicable accounting
requirements of the Securities Act and the related
published rules and regulations;
(iii) on the basis of a reading of the unaudited
amounts for revenues, gross profit, operating profit
and total and per share amounts of net earnings for
the three month period ended March 31, 1997 and of
the unaudited consolidated financial statements of
the Company and its consolidated subsidiaries for the
periods from which such amounts are derived, carrying
out certain specified procedures (which do not
constitute an examination made in accordance with
generally accepted auditing standards) that would not
necessarily reveal matters of significance with
respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the
stockholders, the board of directors and any
committees thereof of the Company and each of its
consolidated subsidiaries, and inquiries of certain
officials of the Company and its consolidated
subsidiaries who have responsibility for financial
and accounting matters, nothing came to their
attention that caused them to believe that:
(x) the unaudited amounts for revenues,
operating profit and total and per share
amounts of net earnings included in the
Registration Statement and the Prospectus do
not agree with the amounts set forth in any
unaudited consolidated financial statements
for those same periods or were not determined
on a basis substantially consistent with that
of the corresponding amounts in the audited
consolidated
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<PAGE> 39
financial statements included in the
Registration Statement and the Prospectus; and
(y) at a specific date not more than
five business days prior to the date of such
letter, there were any changes in the capital
stock or long-term debt of the Company and
its consolidated subsidiaries or any
decreases in net current assets or
stockholders' equity of the Company and its
consolidated subsidiaries, in each case
compared with amounts shown on the December
31, 1996 consolidated balance sheet included
in the Registration Statement and the
Prospectus, or for the period from January 1,
1997 to such specified date there were any
decreases, as compared with the corresponding
period in the preceding year, in revenues,
earnings before income taxes or total or per
share amounts of net earnings of the Company
and its consolidated subsidiaries, except in
all instances for changes, decreases or
increases set forth in such letter.
(iv) they have carried out certain specified
procedures, not constituting an audit, with respect
to certain amounts, percentages and financial
information that are derived from the general
accounting records of the Company and its
consolidated subsidiaries and are included in the
Registration Statement and the Prospectus, and have
compared such amounts, percentages and financial
information with such records of the Company and its
consolidated subsidiaries and with information
derived from such records and have found them to be
in agreement, excluding any questions of legal
interpretation; and
(v) on the basis of a reading of the unaudited
pro forma consolidated condensed financial statements
included in the Registration Statement and the
Prospectus, carrying out certain specified procedures
that would not necessarily reveal matters of
significance with respect to the comments set forth
in this paragraph (v), inquiries of certain officials
of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting
matters and proving the arithmetic accuracy of the
application of the pro forma adjustments to the
historical amounts in the unaudited pro forma
consolidated condensed financial statements, nothing
came to their attention that caused them to believe
that the unaudited pro forma consolidated condensed
financial statements do not comply in form in all
material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly
applied to the historical amounts in the compilation
of such statements.
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<PAGE> 40
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (I) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (II) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery of
the Shares as contemplated by the Registration Statement, as amended as of the
date hereof. References to the Registration Statement and the Prospectus in
this paragraph (e) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
(g) The Company shall have furnished or caused to be
furnished to the Underwriters at the Closing a certificate of its President,
its Chief Financial Officer, and its Senior Vice-President and Treasurer
satisfactory to the Underwriters to the effect that:
(i) the representations and warranties of the
Company in this Agreement are true and correct as if
made on and as of the Closing Date; the Registration
Statement, as amended as of the Closing Date, does
not include any untrue statement of a material fact
or omit to state any material fact necessary to make
the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the
Closing Date, does not include any untrue statement
of a material fact or omit to state any material fact
necessary in order to make the statements therein, in
the light of the circumstances under which they were
made, not misleading; and the Company has performed
all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose
have been instituted or threatened or, to the best of
the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of
which information is given in the Registration
Statement and the Prospectus, neither the Company nor
any of its subsidiaries has sustained any material
loss or interference with their respective businesses
or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any
materially adverse change (including, without
limitation, a change in management or control), or
development involving a prospective materially
adverse change, in the condition (financial or
otherwise), management, earnings, properties,
business affairs or business prospects, stockholders'
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<PAGE> 41
equity, net worth or results of operations of the
Company or any of its subsidiaries, except in each
case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement
thereto).
(h) The Representatives shall have received from each
Selling Stockholder a certificate, signed by such Selling Stockholder, dated
the Closing Date, to the effect that:
(i) the representations and warranties of such
Selling Stockholder in this Agreement are true and
correct as if made on and as of the Closing Date;
(ii) the Registration Statement, as amended as of
the Closing Date, does not include any untrue
statement of a material fact or omit to state any
material fact necessary to make the statements
therein not misleading, and the Prospectus, as
amended or supplemented as of the Closing Date, does
not include any untrue statement of a material fact
or omit to state any material fact necessary in order
to make the statements therein, in the light of the
circumstances under which they were made, not
misleading; and
(iii) such Selling Stockholder has performed all
covenants and agreements on its part to be performed
or satisfied at or prior to the Closing Date.
(i) The Representatives shall have received from each of
the Selling Stockholders, from each person who is a director or officer of the
Company and from International Mezzanine Capital, B.V., First Commerce
Corporation and Sanders Morris Mundy an agreement dated on or before the date
of this Agreement to the effect that such person will not publicly announce any
intention to and will not, without the prior written consent of the
Representatives on behalf of the Underwriters, (i) offer, pledge, sell, offer
to sell, contract to sell, sell any option or contract to purchase, purchase
any option to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any of the shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, Common Stock, or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership
of the shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, shares of Common Stock (whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of shares of Common Stock or such other securities, in cash or otherwise), in
each case, beneficially owned (within the meaning of Rule 13d-3 under the
Exchange Act) or otherwise controlled by such person on the date hereof or
hereafter acquired, for a period beginning from the date hereof and continuing
to and including the date 180 days after the date hereof with respect to the
Selling Stockholders and 120 days after the date hereof with respect to such
other persons executing such agreements.
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<PAGE> 42
(j) Prior to the commencement of the Offering, the
Company shall have made an application for the quotation of the Shares on the
Nasdaq National Market and the Shares shall have been included for trading on
the Nasdaq National Market, subject to official notice of issuance.
(k) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, there shall not have occurred any
downgrading, nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating organization", as
such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(l) On or before the Closing Date, the Representatives
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company and the Selling Stockholders.
All opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are satisfactory in all material respects to the Representatives and counsel
for the Underwriters. The Company and the Selling Stockholders shall furnish
to the Representatives such conformed copies of such opinions, certificates,
letters and documents in such quantities as the Representatives and counsel for
the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to
purchase and pay for any Shares shall be subject, in their discretion, to each
of the foregoing conditions to purchase the Shares, except that all references
therein to the Shares and the Closing Date shall be deemed to refer to the Firm
Shares or the Option Shares and the First Closing Date or the related Option
Closing Date, each as applicable.
Section 8. Default of Underwriters. If, at any Closing, any one or more
of the Underwriters shall fail or refuse to purchase Shares that it has or they
have agreed to purchase hereunder on such date, and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is ten percent or less of the aggregate number of the
Shares to be purchased on such date, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Shares by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the First Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in the proportions
that the number of Firm Shares set forth opposite their respective names in
Schedule 1 hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as the Representatives may specify, to purchase the Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date. If, at the First Closing, any
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<PAGE> 43
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and
the aggregate number of Firm Shares with respect to which such default occurs
is more than ten per cent of the aggregate number of Firm Shares to be
purchased, and arrangements satisfactory to the Representatives, the Company
and the Selling Stockholders for the purchase of such Firm Shares are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or any
Selling Stockholder. In any such case either the Representatives or the
Company shall have the right to postpone the Closing, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, at any Option Closing, any Underwriter or
Underwriters shall fail or refuse to purchase Option Shares, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase Option Shares or (ii) purchase not less than the number of Option
Shares that such non- defaulting Underwriters would have been obligated to
purchase in the absence of such default. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
Section 9. Termination. This Agreement shall be subject to termination
in the sole discretion of the Representatives by notice to the Company and the
Selling Stockholders given prior to any Closing Date in the event that the
Company or any Selling Stockholder shall have failed, refused or been unable to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder at or prior thereto or, if at or prior to any Closing
Date, (a) trading in securities generally on the New York Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited or
minimum or maximum prices shall have been established by or on, as the case may
be, the Commission or the New York Stock Exchange or the Nasdaq National
Market; (b) trading of any securities of the Company shall have been suspended
on any exchange or in any over-the-counter market; (c) a general moratorium on
commercial banking activities shall have been declared by either Federal or New
York State authorities; (d) there shall have occurred (i) an outbreak or
escalation of hostilities between the United States and any foreign power, (ii)
an outbreak or escalation of any other insurrection or armed conflict involving
the United States, or (iii) any other calamity or crisis or materially adverse
change in general economic, political or financial conditions having an effect
on the U.S. financial markets that, in the sole judgment of the
Representatives, makes it impractical or inadvisable to proceed with the public
offering or the delivery of the Shares as contemplated by the Registration
Statement, as amended as of the date hereof; or (e) the Company or any of its
subsidiaries shall have, in the sole judgment of the Representatives, sustained
any material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, or there shall have been any materially adverse change
(including, without limitation, a change in management or control), or
constitute a development involving a prospective materially adverse change, in
the condition (financial or otherwise), management, earnings, properties,
business affairs or business
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<PAGE> 44
prospects, stockholders' equity, net worth or results of operations of the
Company or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or supplement
thereto). Termination of this Agreement pursuant to this Section 9 shall be
without liability of any party to any other party except for the liability of
the Company in relation to expenses as provided in Sections 4 and 10 hereof,
the liability of the Selling Stockholders in relation to expenses as provided
in Sections 4 and 10 hereof, the indemnity provided in Section 6 hereof and any
liability arising before or in relation to such termination.
Section 10. Reimbursement of Expenses. If the sale of the Shares provided
for herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 7 hereof is not satisfied or because of any
termination pursuant to Section 9 hereof (other than by reason of a default by
any of the Underwriters), the Company shall reimburse the Underwriters,
severally upon demand, for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Shares. If the Company is required
to make any payments to the Underwriters under this Section 10 because of any
Selling Stockholder's refusal, inability or failure to satisfy any condition to
the obligations of the Underwriters set forth in Section 7 hereof, such
defaulting Selling Stockholder, pro rata in proportion to the percentage of
Shares to be sold by each, shall reimburse the Company on demand for all
amounts so paid.
Section 11. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page and under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by any Underwriter through the Representatives to the Company for the
purposes of Section 5(a)(ii) and Section 6 hereof. The Underwriters confirm
that such statements (to such extent) are correct.
Section 12. Notices. In all dealings hereunder, you shall act on behalf
of each of the Underwriters, and the parties hereto shall be entitled to act
and rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by the Representatives. Any notice or notification
in any form to be given under this Agreement may be delivered in person or sent
by telex, facsimile or telephone (subject in the case of a communication by
telephone to confirmation by telex or facsimile) addressed to:
in the case of the Company:
ITEQ, Inc.
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Facsimile: (713) 522-1758
Attention: Mark E. Johnson
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<PAGE> 45
in the case of the Underwriters:
Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Facsimile:
Attention:
In the case of the Selling Stockholders, any such notice shall be addressed to
the Selling Stockholders at the addresses set forth in Schedule 2 hereto. Any
notice under this Section 12 shall take effect, in the case of delivery, at the
time of delivery and, in the case of telex or facsimile, at the time of
dispatch.
Section 13. Miscellaneous.
(a) Time shall be of the essence of this Agreement.
(b) The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect, the meaning or
interpretation of this Agreement.
(c) For purposes of this Agreement, (a) "business day"
means any day on which the New York Stock Exchange is open for trading, and (b)
"subsidiary" has the meaning set forth in Rule 405 under the Securities Act.
(d) This Agreement may be executed in any number of
counterparts, all of which, taken together, shall constitute one and the same
Agreement and any party may enter into this Agreement by executing a
counterpart.
(e) This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, the Selling
Stockholders and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person, except that (i) the indemnities of the
Company and the Selling Stockholders contained in Section 6 hereof shall also
be for the benefit of any person or persons who control any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act and (ii) the indemnities of the Underwriters contained in Section 6 hereof
shall also be for the benefit of the directors of the Company, the officers of
the Company who have signed the Registration Statement, each Selling
Stockholder and any person or persons who control the
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<PAGE> 46
Company or such Selling Stockholder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act. No purchaser of Shares from
any Underwriter shall be deemed a successor because of such purchase.
(f) The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Stockholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, the Selling Stockholders, any Underwriter or any controlling person
referred to in Section 6 hereof and (ii) delivery of and payment for the
Shares. The respective agreements, covenants, indemnities and other statements
set forth in Sections 4, 6 and 10 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
Section 14. Severability. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the law and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, in the event that any provision of this
Agreement would be held in any jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provision, as to such jurisdiction, shall be
ineffective, without invalidating the remaining provisions of this Agreement or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 15. Governing Law. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
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<PAGE> 47
If the foregoing is in accordance with your understanding,
please sign and return to us ten counterparts hereof, and upon the acceptance
hereof by you, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement among each of the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Deutsche Morgan Grenfell Inc. Master Agreement Among Underwriters,
the form of which shall be submitted to the Company for examination upon
request, but without warranty on your part as to the authority of the signers
thereof.
Very truly yours,
ITEQ, Inc.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
Selling Stockholders:
-----------------------------
Mark E. Johnson
-----------------------------
Pierre S. Melcher
Pennsylvania Merchant
Group, Ltd.
By:
------------------------
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
DEUTSCHE MORGAN GRENFELL
EVEREN SECURITIES, INC.
SANDERS MORRIS MUNDY
By: DEUTSCHE MORGAN GRENFELL
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
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For itself and on behalf of the Representatives.
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<PAGE> 49
SCHEDULE 1
The Underwriters
<TABLE>
<CAPTION>
Underwriter Underwriting commitment
----------- -----------------------
<S> <C>
Deutsche Morgan Grenfell Inc. . . . . . . . . . . . . . . . . . . . . . .
EVEREN Securities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Sanders Morris Mundy . . . . . . . . . . . . . . . . . . . . . . . . . .
-----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,050,000
</TABLE>
S-1
<PAGE> 50
SCHEDULE 2
The Selling Stockholders
<TABLE>
<CAPTION>
Number of Shares
Selling Stockholders To be Sold
-------------------- ----------
<S> <C>
Mark E. Johnson 300,000
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Pierre S. Melcher 400,000
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Pennsylvania Merchant Group, Ltd. 50,000
4 Fall Corporate Center
West Conshohocken, Pennsylvania 19428
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,000
</TABLE>
S-2
<PAGE> 1
EXHIBIT 10.16
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT is entered into on this 24th day of
April, 1997, among William R. Miller, Leo G. Babel, Robert L. Blackwell, II,
William Russel Miller, Fabian Howard Babel and Robert Blackwell, III
(collectively, the "Sellers" or the "Shareholders"), the holders of 100% of the
capital stock of Exell, Inc., a Texas corporation ("Exell"), and ITEQ, Inc., a
Delaware corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, Exell is engaged in the business of manufacturing and
repairing heat exchangers and providing related products and services (the
"Business"); and
WHEREAS, Sellers are the general partners of Babel, Miller & Blackwell
Partnership (the "Partnership"), the owner of certain real property and
improvements (the "Real Estate"), and as of the date hereof, the Partnership
and Buyer have entered into a Purchase and Sale Agreement (the "Real Estate
Contract") with respect to the acquisition by Buyer of the Real Estate; and
WHEREAS, Sellers desire to sell to Buyer, and Buyer desires to
purchase from Sellers, all of the issued and outstanding capital stock of Exell
on the terms and conditions herein set forth.
NOW, THEREFORE, for and in consideration of the premises, and the
mutual and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE
1.1 CERTAIN DEFINITIONS. As used in this Agreement, each
parenthetically capitalized term in the introduction, recitals and other
Sections of this Agreement has the meaning assigned to it, and other
capitalized terms have the meaning given them in Section 9.1.
1.2 PURCHASE AND SALE OF EXELL STOCK. Subject to the terms and
conditions of this Agreement, at the Closing, Sellers agree to sell and convey
to Buyer, free and clear of all Encumbrances, and Buyer agrees to purchase and
accept from Sellers, all of the Exell Shares, as hereinafter provided. In
consideration of the sale of the Exell Shares, Buyer shall pay to Sellers an
aggregate of __________ (the "Consideration") [$10,364,958, less the amount
allocated to purchase of Real Estate]. Subject to the terms of Sections 1.3
and 1.4 hereof, the Consideration shall be paid by wire transfer of
immediately available funds to the Sellers in the percentages set forth in
Schedule A hereto. Not less than one day prior to the Closing, Sellers shall
provide wire transfer instructions to Buyer.
1.3 POST-CLOSING ADJUSTMENT WITH RESPECT TO EXELL NET ASSETS.
(a) Preparation of Closing Balance Sheet. Not later than
60 days following the Closing Date, Buyer shall prepare and deliver to
the Shareholders for their review in accordance with this section a
balance sheet (the "Closing Balance Sheet") of Exell prepared as of
the Closing Date and
<PAGE> 2
prepared in accordance with generally accepted accounting principles
("GAAP") in a manner consistent with the financial statements
described in Section 2.6(a) hereof. All of the parties hereto shall
cooperate fully with each other in the preparation of the Closing
Balance Sheet, and the Shareholders shall have access at all
reasonable times to review workpapers, books and records relating to
the preparation of the Closing Balance Sheet.
(b) Right to Dispute Closing Balance Sheet. Any
Shareholder shall have the right to dispute the Closing Balance Sheet
by giving notice of dispute to Buyer within 30 days after the Closing
Balance Sheet has been given to that Shareholder. Such notice shall
set forth in detail the reasons for the dispute and the Shareholder's
proposed adjustments to the Closing Balance Sheet. If a Shareholder
does not give notice of dispute to Buyer within such 30 day period in
accordance with the foregoing, the Closing Balance Sheet as prepared
by Buyer shall become final and binding upon that Shareholder. If a
Shareholder does give notice of dispute to Buyer within such 30 day
period, Buyer and the Shareholder shall endeavor in good faith to
reach agreement on all of the disputed items. If the parties are
unable to reach an agreement on the disputed items during such 30 day
period, then the disputed items which have not been resolved shall be
submitted to the accounting firm of Coopers & Lybrand or Price
Waterhouse, Houston, Texas (and if for any reason it is unwilling or
unable to serve, then another independent accounting firm mutually
agreed upon by the Shareholders and Buyer will serve) for
determination and resolution on the basis of such procedures as such
accounting firm, in its sole judgement, deems applicable and
appropriate, taking into account GAAP and the terms of this Agreement.
Such accounting firm shall review the disputed matters and as promptly
as practicable deliver to Buyer and to the Shareholder a statement
setting forth its determination as to the proper treatment of the
matters in dispute, and such determination shall be final and binding
upon that Shareholder and Buyer without any further right of appeal;
provided, however, neither such determination nor any other provisions
of this Section 1.3 shall affect Buyer's right to seek indemnification
for any breaches of representations and warranties by Sellers pursuant
to Article 7 hereof. In the event all Shareholders give notices of
disputed items and those notices are in any way in conflict or
inconsistent with each other as to any disputed item, then such items
shall not be considered as disputed hereunder unless the Shareholders
resolve the conflict or inconsistency between themselves and give a
new notice to Buyer with respect to that item. All charges of such
accounting firm and other expenses directly incurred in making such
determination shall be borne equally by Buyer and the Shareholders.
The Shareholders shall determine among themselves how the charges of
such accounting firm shall be borne.
(c) Adjustment of Consideration. In the event that
Exell's tangible assets net of liabilities ("Net Assets") as shown on
the Closing Balance Sheet, as finally prepared and binding upon the
parties in accordance with Sections 1.3(a) and (b) is less than
$2,750,000, then Buyer shall have the right to give notice thereof to
the Shareholders, whereupon the Shareholders shall have 10 days to
refund to Buyer a cash amount equal to the amount by which $2,750,000
exceeds the amount of the Net Assets as shown on the Closing Balance
Sheet. In order to secure the Shareholders' obligations under this
Section 1.3, at Closing Buyer shall withhold $200,000 of the
Consideration. In the event of a post-closing adjustment hereunder,
the Shareholders may elect to have any amount owed to Buyer applied
from such withholding by written notice to Buyer. Any balance
remaining of the withheld amount shall be immediately paid over to the
Shareholders upon final resolution of the post-closing adjustment,
together with interest on the balance at a rate of 10% per annum. The
withholding described herein is not the exclusive remedy or security
of Buyer with respect to satisfaction by the Shareholders of the
post-closing adjustment; the Shareholders agree that they
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<PAGE> 3
shall be jointly and severally liable for all amounts owed to Buyer
under this section, including any amounts in excess of those withheld
hereunder.
1.4 ESCROW AGREEMENT. At the Closing, Buyer shall deposit the
amount of $500,000 of the Consideration in an interest-bearing account with
Lawrence Blackburn Meeks Maxey & Co., Beaumont, Texas, as escrow agent, in
order to secure the indemnification obligation of Sellers contained in Article
7 hereof. The form of escrow agreement (the "Escrow Agreement") shall be
mutually agreed upon by the parties prior to Closing, which shall provide that
in the event there are no unresolved claims for indemnification by Buyer upon
the expiration of one year from the Closing Date, the escrowed funds shall be
distributed to Sellers.
1.5 PAYMENT OF CERTAIN OBLIGATIONS. On or prior to the Closing
Date, Sellers shall cause Exell to pay and discharge the indebtedness for
borrowed money of Exell as set forth on Schedule B, and Sellers shall cause
Exell to be released from any liens granted to secure such indebtedness.
1.6 CLOSING. Consummation of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Porter &
Hedges, L.L.P., 700 Louisiana Street, Suite 3500, Houston, Texas 77002, on or
prior to June 30, 1997, or at such other time and place as all parties hereto
may mutually agree in writing. The date upon which the Closing occurs is
referred to herein as the "Closing Date."
1.7 CLOSING DELIVERIES. At the Closing, (a) Sellers shall deliver
to Buyer duly and validly issued certificates representing all the Exell
Shares, each such certificate to be duly endorsed in blank and in good form for
transfer, or accompanied by stock powers duly executed in blank, sufficient and
in good form to properly transfer such shares to Buyer as set forth in Section
1.2, (b) Buyer shall deliver the Consideration to Sellers (subject to the
provisions of Section 1.3), and (c) Sellers and Buyer shall deliver to one
another all other documents, instruments and agreements required under this
Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF SELLERS
Sellers jointly and severally represent and warrant to Buyer that the
following representations and warranties are true and correct as of the date
hereof, except with respect to representations and warranties which are made
with reference to another specific date and except as otherwise described in
the Disclosure Schedule by reference to the applicable section of this Article
2. The Disclosure Schedule shall be delivered by Sellers to Buyer within 20
days of the date hereof. Sellers acknowledge that Buyer may reject any
disclosure contained therein for any reason within 30 days after receipt
thereof, and unless the parties agree in writing on the contents of the
Disclosure Schedule within 15 days after the expiration of such 30 day period,
Buyer shall have the right to terminate this Agreement as provided in Article
6. If Buyer does not reject the Disclosure Schedule during such 30-day period,
Buyer's right to terminate pursuant to Section 6(c) shall cease, and Buyer
shall be deemed to have approved the Disclosure Schedule.
2.1 ORGANIZATION. Exell is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Texas. Exell has
all necessary corporate power and authority to own, operate, and lease its
properties and to carry on its business as now owned or leased and operated by
it. Exell is qualified to do business under the laws of any jurisdiction in
which such qualification is required. Exell does
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<PAGE> 4
not own, directly or indirectly, any interest or investment (whether debt or
equity) in any other Person. True, correct and complete copies of the charter
documents, and the bylaws of Exell, as amended, will be attached as Exhibit 2.1
to the Disclosure Schedule.
2.2 AUTHORITY AND CONSENT. Sellers have the requisite power and
authority to enter into, and perform their obligations under this Agreement,
and no approval or consent of any Person is necessary in connection therewith.
This Agreement, together with all other agreements, documents and instruments
executed in connection herewith by Sellers constitute valid and legally-binding
obligations of Sellers, and are enforceable against Sellers in accordance with
their terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or other similar laws affecting or relating to creditors' rights
generally and subject to general principles of equity.
2.3 NO VIOLATIONS OR CONFLICTS. Neither the execution and
delivery of this Agreement by Sellers nor the performance by Sellers of their
obligations hereunder will (a) violate or conflict with any provision of the
charter documents, or bylaws, as amended, of Exell; (b) violate or conflict
with any provision of any Laws applicable to Exell or its business or assets;
(c) result in a breach of, or constitute a default (or with notice or lapse of
time or both result in a breach of or constitute a default) under or otherwise
give any Person the right to terminate or accelerate payment under or
performance of any note, bond, loan agreement, contract, lease, license,
franchise, permit, or other agreement or instrument to which Sellers or Exell
is a party or to which any of their respective assets are subject; or (d)
result in, or require the creation or imposition of any Encumbrance of any
nature upon or with respect to any of the assets of Sellers or Exell.
2.4 CAPITALIZATION OF EXELL. The authorized capital stock of
Exell consists of 500,000 shares of common stock, $1.00 par value per share,
67,500 of which are issued and outstanding, and none of which are held as
treasury shares. All the Exell Shares are validly issued, fully paid and
non-assessable and are owned beneficially and of record by Sellers. No shares
of Exell Stock have been issued in violation of Exell's charter documents or
bylaws, or the preemptive rights of any Person. There are no outstanding
subscriptions, options, rights, warrants, calls, preemptive rights, convertible
securities, or other agreements or commitments of any kind obligating Sellers
or Exell to sell, convey, issue, exchange, transfer from treasury, or otherwise
dispose of, any additional shares of any class of Exell's capital stock, or any
other equity or debt security of Exell.
2.5 TITLE TO EXELL SHARES. Sellers hold good and valid title to
all of the Exell Shares, free and clear of all Encumbrances. Sellers possess
full authority and legal right to sell, transfer and assign to Buyer the Exell
Shares, free and clear of all Encumbrances. Upon transfer to Buyer by Sellers
of the Exell Shares, Buyer will own the Exell Shares free and clear of all
Encumbrances. There are no Claims pending or, to Sellers' knowledge,
threatened against Exell or Sellers that concern or affect title to any of
Exell's capital stock, or that seek to compel the issuance of capital stock or
other securities of Exell.
2.6 FINANCIAL INFORMATION.
(a) Attached as Section 2.6 of the Disclosure Schedule
will be a true and correct copy of the balance sheets and related
statements of income and changes in stockholders equity for Exell,
which have been compiled by Lawrence Blackburn Meeks Maxey & Co., as
of and for each of the periods ended September 30, 1995 and 1996 (the
"Annual Statements"), and the unaudited balance sheet and related
statement of income as of and for March 31, 1997 (the "1997
Statement," and
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together with the Annual Statements collectively referred to as the
"Financial Information"). The Financial Information (a) is true,
correct and complete and fairly presents the financial position of
Exell as of and for the periods indicated and (b) has been prepared in
accordance with GAAP applied on a basis consistent with prior periods.
Since December 31, 1996, Exell has not changed any significant
accounting method or practice.
(b) Exell's accounts receivable as reflected in the 1997
Statement or which have been thereafter acquired by Exell are valid
and existing, represent invoices due for goods sold and delivered or
services rendered, have been collected or are fully collectible within
90 days of the respective invoice date without resort to legal
proceedings, and are not subject to any refunds or other adjustments,
defenses, rights of setoff, assignments, Encumbrances, or conditions
enforceable by third parties, except to the extent reserved against in
the 1997 Statement.
(c) Exell's inventories reflected in the 1997 Statement,
or which thereafter have been acquired by Exell, consist of items of a
quality and quantity usable and salable in the normal course of its
business, except to the extent reserved against in the 1997 Statement.
2.7 LIABILITIES. Exell has no liabilities or obligations, whether
absolute, accrued, contingent or otherwise, except (a) as reflected or reserved
against in the 1997 Statement, (b) obligations to perform services or deliver
goods in the ordinary course of business that are not delinquent, (c)
obligations or liabilities incurred in accordance with the terms of this
Agreement after the date of the 1997 Statement and prior to the Closing Date,
(d) warranty claims not inconsistent with Exell's prior operating experience,
and (e) as disclosed in the Disclosure Schedule or any such other liabilities
or obligations not exceeding $5,000 individually or $25,000 in the aggregate.
2.8 DEFAULTS. Exell is not in default under, or in breach or
violation of, and no event has occurred which, with notice or lapse of time or
action by a third party, could reasonably be expected to result in a default
under, breach or violation of, or conflict with: (a) Exell's charter
documents, or bylaws, as amended; (b) any lease, license, permit, Encumbrance,
or other agreement or instrument to which Exell is a party, or to which any of
its assets is subject; or (c) any Laws applicable to Exell or its business or
assets, including, without limitation, Business Laws and Laws respecting labor,
employment and employment practices. Exell has all permits, certificates,
licenses, approvals and other authorizations required in connection with the
operation of its business.
2.9 LITIGATION. There is no lawsuit, action, arbitration,
mediation, administrative proceeding, investigation by a Governmental
Authority, or other legal proceeding pending or, to the knowledge of Sellers,
threatened against Exell. Exell is not subject to any court order, writ,
injunction, court decree, settlement agreement or judgment.
2.10 ADDITIONAL INFORMATION. Section 2.10 of the Disclosure
Schedule will set forth a true, complete and correct list and/or summary of the
following items:
(a) Real Property. A legal description of all real
property owned in fee or leased by Exell or for which it has an option
to purchase, and includes, with respect to each property whether such
property is owned or leased and, a description of each Encumbrance to
which such property is subject (excluding Permitted Encumbrances);
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(b) Vehicles, Equipment and Machinery. All vehicles,
tractors, trailers, material equipment and machinery owned by Exell,
indicating whether such item is owned or leased, and if leased, the
name of the lessor;
(c) Intellectual Property. All patents, trademarks,
service marks, copyrights and other intellectual property rights, and
applications therefor or registrations thereof, wherever issued or
pending; and all trade names used by Exell, and with respect to each
of the foregoing, whether is same owned, licensed or used by Exell;
(d) Licenses and Permits. All governmental licenses,
governmental permits, and similar rights held by Exell and relating to
Exell's business;
(e) Material Contracts. All material contracts to which
Exell is a party, by which it is bound or to which its assets or
properties are subject, and any other single contract pursuant to
which any party thereto is obligated to make payments after the date
of this Agreement aggregating more than $10,000, whether or not any of
the foregoing were made in the ordinary course of business
(collectively "MATERIAL CONTRACTS");
(f) Employee Agreements. Any collective bargaining
agreements of Exell with any labor union or other representative of
employees, including amendments, supplements, and all employment and
consulting agreements of Exell, specifically identifying any
arrangement which cannot be terminated on notice of 30 or fewer days
without liability to Exell or that entitles the beneficiary thereof to
receive any salary continuation or severance payment or retain any
position with Exell;
(g) Receivables. All accounts, notes and contracts
receivables of Exell in a 30, 60, 90 and over 90 day aged receivables
format as of March 31, 1997;
(h) Payables. All accounts and notes payable by Exell in
a 30, 60, 90 and over 90 day aged payables format as of March 31,
1997;
(i) Indebtedness. All indebtedness for borrowed money
owed by Exell or to which any of its assets are subject, and
specifying all assets collateralizing such indebtedness;
(j) Guaranties. All indebtedness, liabilities and
commitments of others and as to which Exell is a guarantor, endorser,
co-maker, surety, or accommodation maker, or is contingently liable
therefor (excluding liabilities as an endorser of checks and the like
in the ordinary course of business) and all letters of credit, whether
stand-by or documentary, issued by any third party;
(k) Insurance. All insurance policies or bonds carried
by Exell or for its benefit or the benefit of its employees,
including, without limitation, property, casualty, liability, workers
compensation and auto policies;
(l) Personnel. A corporate organizational chart and the
name, current salary, current bonus arrangements, last bonus date and
amount, and any other compensation arrangements with Exell (excluding
employee insurance and benefit plans described pursuant to Section
2.12(k)), of each employee of Exell;
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(m) Employee Plans. All bonus, incentive compensation,
deferred compensation, profit-sharing, retirement, pension, welfare,
group insurance, death benefit, or other fringe benefit plans,
arrangements or trust agreements of Exell together with copies of the
most recent reports with respect to such plans, arrangements, or trust
agreements filed with any Governmental Authority; and
(n) Bank Accounts. The name, address and contact person
of each bank or other financial institution in which Exell has an
account or safe deposit box, the account number, account name and type
of account, the names of all persons authorized to draw thereon or
have access thereto.
2.11 TITLE TO AND QUIET POSSESSION OF ASSETS. Exell has good and
valid title to all of its respective assets and interests in assets, whether
real, personal, mixed, tangible or intangible, that are disclosed herein, are
reflected in the 1997 Statement, or that are acquired after March 31, 1997,
except for inventory items sold or consumed in the ordinary course of business
after March 31, 1997. All such assets are free and clear of all Encumbrances
other than Permitted Encumbrances. Without limiting the generality of the
foregoing, Exell has the exclusive right, title and interest in and to any
trademarks, service marks, trade names, and copyrights currently used, and the
continued use of any logo, trade name, license, or other intangible by Exell
does not and will not violate or infringe upon the rights of any third party.
2.12 CONDITION OF ASSETS.
(a) Exell's buildings, premises, fixtures, vehicles, and
material equipment and machinery are in a condition satisfactory to
continue to operate Exell's business in the manner conducted prior to
the Closing. There is no change in the zoning or building ordinances
directly affecting the real property or leasehold interests of Exell,
pending or, to the knowledge of Sellers, threatened.
(b) All material contracts, leases, plans or other
arrangements to which Exell is a party, by which it is bound or to
which it or its assets are subject are in full force and effect, and
constitute valid and binding obligations of Exell. Exell is not, and
to the knowledge of Sellers, no other party to any such material
contract, lease, plan or other arrangement is in default thereunder,
and no event has occurred which (with or without notice, lapse of
time, or the happening of any other event) would constitute a default
thereunder. Sellers have received no information which would cause
Sellers to conclude that any customer of Exell will (or is likely to)
cease doing business with Exell as a result of the consummation of the
transactions contemplated hereby.
2.13 ENVIRONMENTAL MATTERS. With respect to Exell's use, operation
or ownership of property used, owned or leased by it (the "Property"), (a) all
handling, manufacture, processing, distribution, use, treatment, storage,
transport and disposal of Hazardous Substances and non-hazardous waste has been
conducted in accordance with applicable Environmental Laws; (b) all emissions,
discharges or releases into the environment of Hazardous Substances have either
been made in accordance with applicable Environmental Laws, including without
limitation all permits, licenses, exemptions, variances and other
authorizations thereunder, or have been reported to the appropriate
Governmental Authority in accordance with applicable Environmental Laws, and
the Disclosure Schedule will set forth a list of all such written reported
releases; (c) there are not underground storage tanks on any Property; (d) all
permits, licenses, exemptions, variances and other authorizations required
under applicable Environmental Laws for the use of the Property and the
operation of the business thereon have been obtained, are being complied with,
and
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all fees and assessments in association therewith have been timely paid and, to
the knowledge of Sellers, no additional permits or licenses are or will be
required by Exell to continue the operation of its business; and (e) with
respect to the disposal of any Hazardous Substance generated on, or removed
from, any Property, neither the Sellers nor Exell have received notice of an
administrative proceeding, violation, citation, administrative or consent
order, lawsuit, action, claim, demand, or decree which allege any violation of
any applicable Environmental Law, and have no knowledge that such disposal or
removal has been conducted without compliance with any applicable Environmental
Law.
2.14 TAXES.
(a) Proper and accurate federal, state and local income,
sales, use, franchise, gross revenue, turnover, excise, payroll,
property, employment, customs duties and any and all other tax
returns, reports, and estimates have been filed with appropriate
governmental agencies, domestic and foreign, by Exell for each period
for which any returns, reports, or estimates were due. All taxes
shown by such returns to be payable have been paid. All sales taxes
have been properly collected and accounted for through the date hereof
by Exell, and Exell has made all required deposits of such taxes with
all taxing authorities. The tax provision reflected in Exell's
financial statements as of March 31, 1997 is adequate to cover
liabilities of Exell at the date thereof for all taxes of any
character whatsoever applicable to Exell or its assets or business.
No waiver of any statute of limitations executed by Exell with respect
to federal or state income or other tax is in effect for any period.
(b) No deficiencies for any taxes have been proposed,
asserted or assessed against Exell and no requests or waivers of the
time to assess any such tax are pending. Except as set forth on in
the Disclosure Schedule, the federal and state income tax returns of
Exell have never been audited by the Internal Revenue Service or state
income tax authority. No audit of any federal or state or other tax
return of Exell is presently in process nor has an appointment for or
notice of any such audit been requested or given by any taxing
authority.
2.15 COMPLIANCE WITH ERISA. Each benefit plan set forth in the
Disclosure Schedule (the "Benefit Plans") complies currently, and has complied
in the past, in form and operation, with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the
Internal Revenue Code of 1986, as amended (the "Code"), and other applicable
laws. All contributions required to be made to each Benefit Plan under the
terms of such Benefit Plans, ERISA or other applicable laws have been timely
made.
(a) Prohibited Transactions. Exell has not engaged in a
transaction in connection with which it could be subject (either
directly or indirectly) to a material liability for either a civil
penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed
by Section 4975 of the Code.
(b) Plan Termination; Material Liabilities. There has
been no termination of an "employee pension benefit plan" as defined
in ERISA which is subject to Title IV of ERISA (a "Statutory Plan") or
trust created under any Statutory Plan that would give rise to a
material liability to the Pension Benefit Guaranty Corporation
("PBGC") on the part of Exell. All Statutory Plans intended to be
tax-qualified under Section 401(a) or 403(a) of the Code have complied
in the past, both in form and operation, with every provision of the
Code, regulation promulgated pursuant thereto, and every ruling,
notice or announcement issued by the Internal Revenue Service
necessary
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to maintain the qualified status of such Statutory Plans. No material
liability to the PBGC has been or is expected to be incurred with
respect to any Statutory Plan. The PBGC has not instituted
proceedings to terminate any Statutory Plan. There exists no
condition or set of circumstances that presents a material risk of
termination or partial termination of any Statutory Plan by the PBGC.
(c) Accumulated Funding Deficiency. Full payment has
been made of all amounts that are required under the terms of each
Statutory Plan, ERISA or other applicable laws to have been paid as
contributions to such Statutory Plan as of March 31, 1995, and no
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, exists with respect
to any Statutory Plan.
(d) Relationship of Benefits to Pension Plan Assets. The
current value of all accrued benefits, both vested and unvested, under
all Statutory Plans does not exceed the current value of the assets of
such Statutory Plans allocable to such accrued benefits, except as
disclosed in the Financial Information. For purposes of the
representation in this paragraph, the term "current value" has the
meaning specified in Section 4062(b)(1)(A) of ERISA, the term "accrued
benefit" has the meaning specified in Section 3 of ERISA and "current
value" is based on the same actuarial assumptions used by Exell for
funding.
(e) Execution of Agreements. The execution and delivery
of this Agreement and the consummation of the transactions
contemplated hereby will not involve any transaction that is subject
to the prohibitions of Section 406 of ERISA or in connection with
which a tax could be imposed pursuant to Section 4975 of the Code.
(f) Fiduciary Liability. There have been no acts,
failures to act, omissions or transactions involving a Statutory Plan
or the assets thereof that could result in imposition on Exell
(whether direct or indirect) of damages or liability in actions
brought under Section 502 or Sections 404 through 409 of ERISA.
(g) Pending Claims. There are no claims, pending or
overtly threatened, involving any of the Benefit Plans by any current
or former employee (or beneficiary thereof) of Exell that allege any
violation of ERISA or the terms of the Benefit Plans, nor is there any
reasonable basis to anticipate any claims involving such Benefit Plans
that would likely be successfully maintained against Exell.
(h) Multiemployer Plans. Neither Exell nor any trade or
business (whether or not incorporated) which, together with Exell,
would be deemed to be a "single employer" within the meaning of
Section 4001(b) of ERISA or Subsections 414(b), (c), (m) or (o) of the
Code sponsors, maintains, or contributes to, or has at any time in the
six-year period preceding the date of this Agreement sponsored,
maintained or contributed to, any plan (not exempt from the provisions
of ERISA), including, but not limited to, any plan which is a
"multiemployer plan" as such term is defined in Section 3(37) or
4001(a)(3) of ERISA.
(i) No Reportable Event. There has been no "reportable
event" (within the meaning of Section 4043(b) of ERISA with respect to
a Statutory Plan) or any "prohibited transaction" (as such term is
defined in Section 406 of ERISA and Section 4975(c) of the Code) with
respect to any
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of the Employee Plans. All reporting and disclosure requirements
under Title I of ERISA have been met.
2.16 BROKERS. Neither Sellers nor Exell nor any of their
respective Affiliates have employed any broker, agent or finder, or incurred
any liability for any brokerage fees, agent's fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement.
2.17 UNTRUE STATEMENTS. This Agreement, the agreements and
instruments to be entered into in connection herewith and the Disclosure
Schedule furnished by Sellers do not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements made
herein and therein not misleading in any material respect.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Sellers that as of the date
hereof and the Closing Date:
3.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, and has all the
necessary powers to own its business as now owned and operated by it.
3.2 AUTHORITY. Buyer has the requisite power and authority to
enter into and perform its obligations under this Agreement, and except as
otherwise provided herein, no approval or consent of any Person is necessary in
connection therewith. This Agreement, together with all other agreements,
documents, certificates and instruments executed by Buyer in connection
herewith, constitute valid and legally-binding obligations of Buyer, and are
enforceable against Buyer in accordance with their terms, subject to
bankruptcy, receivership, insolvency, reorganization, moratorium or other
similar Laws affecting or relating to creditors' rights generally and subject
to general principles of equity.
3.3 NO VIOLATIONS OR CONFLICTS. Neither the execution and
delivery of this Agreement by Buyer nor the performance by Buyer of its
obligations hereunder will: (a) violate or conflict with any provision of the
charter documents, or bylaws, as amended, of Buyer; (b) violate or conflict
with any provision of any Laws applicable to Buyer, or its businesses or
assets; (c) except as otherwise provided herein, result in a breach of, or
constitute a default (or with notice or lapse of time or both result in a
breach of or constitute a default) under or otherwise give any Person the right
to terminate or accelerate payment under or performance of any note, bond, loan
agreement, contract, lease, license, franchise, permit, or other agreement or
instrument to which Buyer is a party or to which any of its assets are subject;
or (d) result in, or require the creation or imposition of any Encumbrance of
any nature upon or with respect to any of the assets of Buyer.
3.4 BROKERS. Neither Buyer nor any of its respective Affiliates
have employed any broker, agent, or finder, or incurred any liability for any
brokerage fees, agent's fees, commissions or finder's fees in connection with
the transactions contemplated herein.
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ARTICLE 4
OBLIGATIONS PENDING CLOSING
From the date hereof through the Closing or earlier termination of
this Agreement pursuant to ARTICLE 6:
4.1 INSPECTION OF EXELL. Buyer and its respective officers,
attorneys, accountants and authorized representatives shall have the right,
during normal business hours, to inspect Exell's properties, books and records,
and to consult with Exell's officers, directors, employees, suppliers,
customers, lenders, agents and attorneys concerning the ownership and operation
of Exell. Such inspections may reasonably include, for example, environmental
and other physical inspections of Exell's properties; review of Exell's books,
records of account and tax records; and a review of records of corporate
proceedings, contracts, trademarks, licenses, permits, and other business
activities and matters in which Buyer may have an interest in light of the
transactions contemplated by this Agreement. Buyer agrees to maintain all
information it learns from such inspections and consultations in confidence and
will not disclose such information except to its officers, directors,
employees, bankers, investors, attorneys, accountants and other authorized
representatives unless such information is or becomes public knowledge through
no fault of Buyer and prior to Closing will not use such information except in
connection with this Agreement. In the event that the transaction contemplated
hereby is not consummated, Buyer shall return all materials obtained in its due
diligence investigation without retaining any copies of such materials.
4.2 ACQUISITION PROPOSALS. Sellers shall not, and shall not
permit Exell, any of Sellers' Affiliates or any of their respective officers,
directors or representatives to directly or indirectly (i) solicit, initiate or
encourage any inquiries or Acquisition Proposals from any Person or (ii)
participate in any discussions or negotiations regarding, furnish to any person
other than Buyer or its representatives any information with respect to, or
otherwise assist, facilitate or encourage any Acquisition Proposal by any other
Person. "Acquisition Proposal" means any proposal for a merger, consolidation
or other business combination involving Exell or the Business or for the
acquisition or purchase of any equity interest in, or a material portion of the
assets of, Exell or the Business. Sellers shall promptly communicate to Buyer
the terms of any such Acquisition Proposals which it may receive or any
inquiries made to it or its directors, officers, representatives or agents.
4.3 ADDITIONAL AGREEMENTS OF SELLERS. Sellers agree that from the
date hereof until the Closing Date, Sellers will cause Exell to:
(a) Maintenance of Present Business. Except as
contemplated by this Agreement or set forth on the Disclosure
Schedule, operate its business only in the usual, regular, and
ordinary manner so as to maintain the goodwill it now enjoys and, to
the extent consistent with such operation, preserve intact its present
business organization, keep available the services of its present
officers and employees, and preserve its relationship with customers,
suppliers, jobbers, distributors and others having business dealings
with it;
(b) Maintenance of Properties. At its expense, maintain
all of its material properties and assets in customary repair, order
and condition, reasonable wear and use excepted;
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(c) Maintenance of Books and Records. Maintain its books
of account and records in the usual, regular, and ordinary manner, in
accordance with its customary accounting principles applied on a
consistent basis;
(d) Compliance with Law. Comply with all Laws applicable
to, and having a material effect on, it and to the conduct of its
business;
(e) Prohibition of Certain Contracts. Except as set
forth on the Disclosure Schedule and for orders made and contracts
entered into in the ordinary course of business, not enter into any
contracts which involve the payment of more than $25,000 each;
(f) Prohibition of Loans. Except with respect to
borrowings in the ordinary course of business under its revolving
credit facility not exceeding $1,000,000, not incur any obligations
for borrowed money, except for loans in the usual and ordinary course
of business;
(g) Prohibition of Certain Commitments. Except as set
forth on the Disclosure Schedule (which shall include a list of
planned capital expenditures) and for orders made and contracts
entered into in the ordinary course of business, not enter into a
commitment for expenditures or incur any liability exceeding $100,000
in the aggregate;
(h) Disposal of Assets. Except for the assignment of
term life insurance policies as described in the Disclosure Schedule
and except as otherwise set forth in the Disclosure Schedule, not
sell, dispose of, or encumber any property or assets having a value in
excess of $50,000 in the aggregate, except in the usual and ordinary
course of business;
(i) Maintenance of Insurance. Maintain insurance upon
all its properties and with respect to the conduct of its business of
such kinds and in such amounts as is not less than that presently
carried by it, which is adequate for the business operated by Exell,
which insurance may be added to from time to time in its discretion;
(j) No Amendment to Charter Documents and Related
Matters. Not amend its charter documents, or merge or consolidate
with or into any Person, change in any manner the rights of its
capital stock or the character of its business;
(k) No Issuance, Sale, or Purchase of Securities. Not
issue or sell, or issue options or rights to subscribe to, or enter
into any contract or commitment to issue or sell (upon conversion or
otherwise), any shares of its capital stock, or subdivide or in any
way reclassify any shares of its capital stock, or acquire, or agree
to acquire, any shares of its capital stock;
(l) Prohibition on Dividends. Not declare any dividend
which is payable after Closing on shares of its capital stock or make
any other non-cash distribution of assets to the holders thereof; and
(m) Employment Matters. Except as set forth on the
Disclosure Schedule, not (i) increase its compensation expense for
officers, directors, employees and consultants from the level of such
expense on the date hereof, (ii) hire or employ any additional
management personnel, without the consent of the Buyer, or (iii) enter
into any severance arrangement with any officer,
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director, employee or consultant; provided, the foregoing shall not
prohibit Exell from repaying indebtedness owed to Sellers as of
December 31, 1996, in the amount of $450,000.
4.4 H-S-R ACT COMPLIANCE. Each of Buyer and Sellers shall file,
within 20 days after the date of this Agreement, such materials as are required
under the H-S-R Act and shall (a) cooperate with the other party to the extent
necessary to assist the other party in the preparation of such filings, and (b)
request early termination of the waiting period required by the H-S-R Act.
4.5 ENVIRONMENTAL INVESTIGATION. Prior to the Closing Date, at
the equally shared cost of Buyer and Sellers, the parties shall engage a
mutually acceptable environmental auditing firm to conduct an investigation and
study of the real property upon which the operations of Exell are conducted
(herein, a "Phase I Investigation"). If, as a result of the Phase I
Investigation, the engaged firm shall recommend further investigation, the
parties will similarly cause to be conducted such additional environmental
analysis, which may include such work as is typically involved in a Phase II
Investigation. If the recommended remedial work (a) exceeds an estimated
$300,000, then either Buyer or Sellers shall have the right to terminate this
Agreement, (b) is greater than an estimated $150,000 but less than $300,000,
then Buyer shall have the option of (i) terminating this Agreement or (ii)
notifying Sellers that the remedial work shall be completed with the first
$150,000 of expense being paid by Sellers, with any additional cost being borne
by Buyer, or (c) is less than an estimated $150,000, then Sellers shall cause
the remedial work to be completed at their expense.
ARTICLE 5
CONDITIONS
5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligations
of Buyer to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction of the following conditions, or to the waiver
thereof by Buyer in the manner contemplated by Section 6.2 at or before the
Closing:
(a) Representations and Warranties of Sellers True on
Closing Date. The representations and warranties of Sellers herein
contained shall be true as of and at the Closing Date in all material
respects with the same effect as though made at such date, except as
affected by transactions permitted or contemplated by this Agreement;
no event or events shall have occurred since the date hereof which,
individually or in the aggregate, will have a material adverse effect
upon the financial condition or results of operations of Exell;
Sellers shall have performed and complied in all material respects
with all covenants required by this Agreement to be performed or
complied with by Sellers before the Closing Date; and Sellers shall
have delivered to Buyer a certificate, dated the Closing Date, to such
effects;
(b) Certificates of Public Officials. Sellers shall have
delivered to Buyer certificates of existence and good standing of a
recent date with respect to Exell in each jurisdiction where such
company owns property or conducts operations;
(c) No Litigation. No suit, action, or other proceeding
brought by any Person shall be pending or threatened in which it will
be, or it is, sought to restrain or prohibit or to obtain damages or
other relief in connection with this Agreement or the consummation of
the transactions
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contemplated hereby or which could reasonably be expected to result in
a material adverse effect on the financial condition or results of
operations of Exell.;
(d) Opinion of Sellers' Counsel. Buyer shall have
received a favorable opinion, dated as of the Closing Date, from
Orgain, Bell & Tucker, L.L.P., counsel for the Sellers, in form and
substance reasonably acceptable to Buyer;
(e) Tender of Stock. Sellers shall have delivered to
Buyer all certificates or other documents or instruments representing
all of the Exell Shares, duly endorsed for transfer or accompanied by
duly executed stock powers, free and clear of any Encumbrance;
(f) Resignations. All directors and officers of Exell
shall have tendered their written resignations as such effective upon
the Closing;
(g) Financing. Buyer shall have obtained financing to
fund the payment of the Consideration on the Closing Date;
(h) Real Property Transaction. Buyer and the Partnership
shall have concurrently closed the Real Property Contract;
(i) H-S-R Compliance. The waiting period (and any
extension thereof) under the H-S-R Act applicable to the transactions
contemplated hereby shall have expired or been terminated;
(j) Consents and Approvals. Sellers shall have provided
any consents or approvals from third parties (including Governmental
Authorities) which are required in order to consummate the
transactions contemplated hereby, and Buyer shall have obtained the
consent of its senior and subordinated debt lenders with respect to
the transactions contemplated by this Agreement;
(k) Repayment of Debt. Exell shall have satisfied the
provisions of Section 1.5 hereof;
(l) Escrow Agreement. The parties shall have entered
into the Escrow Agreement described in Section 1.4 hereof; and
(m) Other. All other items required to be delivered
hereunder or as may be reasonably requested by Buyer to facilitate the
Closing, in form and substance reasonably satisfactory to Buyer and
its financing sources.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS. The
obligations of Sellers to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction of the following conditions, or
to the waiver thereof by Sellers in the manner contemplated by Section 6.2 at
or before the Closing:
(a) Representations and Warranties of Buyer True on
Closing Date. The representations and warranties of Buyer herein
contained shall be true as of and at the Closing Date in all material
respects with the same effect as though made at such date, except as
affected by transactions permitted or contemplated by this Agreement;
Buyer shall have performed and complied in all material respects with
all covenants required by this Agreement to be performed or
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complied with by it before the Closing Date; and Buyer shall have
delivered to the Sellers a certificate, dated the Closing Date and
signed by a duly authorized officer of Buyer, to both such effects;
(b) Tender of Consideration. On the Closing Date, Buyer
shall have tendered to the Sellers the Consideration, subject to the
provisions of Section 1.3 hereof;
(c) H-S-R Compliance. The waiting period (and any
extension thereof) under the H-S-R Act applicable to the transactions
contemplated hereby shall have expired or been terminated;
(d) Consents and Approvals. Any consents and approvals
required under any Laws in order to legally consummate the
transactions contemplated by this Agreement shall have been obtained;
and
(e) Other. All other items required to be delivered
hereunder or as may be reasonably requested by Sellers to facilitate
the Closing, in form and substance reasonably satisfactory to Sellers.
ARTICLE 6
TERMINATION AND ABANDONMENT OR WAIVER
6.1 TERMINATION. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time before the Closing Date:
(a) By Mutual Consent. By mutual consent of Buyer and
Sellers; or
(b) By Buyer or Sellers. By Buyer or Sellers if the
terminating party is not in material breach of any of its obligations
hereunder and if the transactions contemplated by this Agreement have
not been consummated on or before June 30, 1997, except such date
shall be extended for an additional 60 days to the extent necessary to
comply with the H-S-R Act; or
(c) As a Result of Disclosure Schedule Matters. By Buyer
in accordance with Article 2 hereof with respect to the approval by
Buyer of the Disclosure Schedule during the time period provided
therein; or
(d) As a Result of Environmental Matters. By Buyer or
Sellers in accordance with Section 4.5 hereof.
6.2 WAIVER. Subject to the requirements of any applicable Law,
any of the terms or conditions of this Agreement may be waived at any time by
the party which is entitled to the benefit thereof. The failure of any party
at any time or times to require performance of any provision hereof shall in no
manner affect the right to enforce the same. No waiver by any party of any
condition, or of the breach of any provision of this Agreement in one or more
instances shall be deemed to be or construed as a further or continuing waiver
of any such condition or breach or a waiver of any other condition or the
breach of any other provision.
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6.3 EXPENSE ON TERMINATION. If the transactions contemplated
hereby are abandoned pursuant to and in accordance with the provisions of
Section 6.1 hereof, all expenses will be paid by the party incurring them;
provided, this provision shall not limit any claim resulting from the breach of
this Agreement by any party hereto.
ARTICLE 7
INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained herein or any instrument or document
delivered or to be delivered pursuant to or in connection with this Agreement,
shall survive the execution and delivery of this Agreement and the Closing
notwithstanding any investigation or due diligence theretofore made by or on
behalf of any party hereto; provided, however, that all representations and
warranties of Sellers and Buyer shall terminate on the one year anniversary of
the Closing Date except (a) as to the representations and warranties contained
in Sections 2.5 (Title to Stock) and 2.11 (Title to and Quiet Possession of
Assets) which shall continue and survive indefinitely, and (b) as to the
representations and warranties contained in 2.14 (Taxes), which shall continue
and survive for the full period of the applicable statutes of limitations
(giving effect to any waiver, mitigation or extension thereof). All claims for
indemnification by Sellers or Buyer with respect to a breach of a
representation or warranty must be asserted prior to the expiration of the
applicable survival period. All covenants and agreements contained herein
shall survive the Closing without limitation, except as otherwise provided
herein.
7.2 INDEMNIFICATION OF BUYER. In addition to any other remedies
available to Buyer under this Agreement, at law or in equity, Sellers shall
indemnify, defend and hold harmless Buyer and its Affiliates against and in
respect of any and all Claims that such indemnified persons shall incur or
suffer, which arise, result from or relate to any breach of, or failure by
Sellers to perform, any of their representations, warranties, covenants or
agreements in or under this Agreement.
7.3 INDEMNIFICATION OF SELLERS. In addition to any other remedies
available to Sellers under this Agreement, at law or in equity, Buyer shall
indemnify, defend and hold harmless Sellers against and in respect of any and
all Claims that Sellers shall incur or suffer, which arise, result from or
relate to any breach of, or failure by Buyer to perform, any of its
representations, warranties, covenants or agreements in or under this
Agreement.
7.4 INDEMNIFICATION PROCEDURE. Promptly upon the discovery of
facts giving rise to a claim for indemnity under this Article 7 or the receipt
of notice of any Claim, judicial or otherwise, with respect to any matter as to
which indemnification may be claimed under this Article 7, the indemnified
party shall give written notice thereof to the indemnifying party together with
such information respecting such matter as the indemnified party shall then
have; provided, however, that the failure of the indemnified party to give
notice as provided herein shall not relieve the indemnifying party of any
obligations, to the extent the indemnifying party is not materially prejudiced
thereby. If indemnification is sought with respect to a third-party (i.e., one
who is not a party to this Agreement) Claim asserted or brought against an
indemnified party, the indemnifying party shall be entitled to participate in
and to assume the defense thereof, jointly with any other indemnifying party
similarly notified, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party. After such notice from the
indemnifying party to such indemnified party of its election to so assume the
defense of such a third-party Claim, the indemnifying party shall not
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be liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense thereof,
other than reasonable and necessary costs of investigation, unless the
indemnifying party has failed to assume and diligently prosecute the defense of
such third-party Claim and to employ counsel reasonably satisfactory to such
indemnified person. An indemnifying party who elects not to assume the defense
of a third-party Claim shall not be liable for the fees and expenses of more
than one counsel in any single jurisdiction for all parties indemnified by such
indemnifying party with respect to such Claim or with respect to Claims
separate but similar or related in the same jurisdiction arising out of the
same general allegations. Notwithstanding any of the foregoing to the
contrary, the indemnified party will be entitled to select its own counsel and
assume the defense of any action brought against it if the indemnifying party
fails to select counsel reasonably satisfactory to the indemnified party or if
counsel fails to diligently defend, the expenses of such defense to be paid by
the indemnifying party. No indemnifying party shall consent to entry of any
judgment or enter into any settlement with respect to a claim without the
consent of the indemnified party, which consent shall not be unreasonably
withheld. No indemnified party shall consent to entry of any judgment or enter
into any settlement of any such action the defense of which has been assumed by
an indemnifying party without the consent of such indemnifying party, which
consent shall not be unreasonably withheld.
ARTICLE 8
NON-COMPETITION AGREEMENTS
8.1 COVENANTS NOT TO COMPETE OR INTERFERE. In consideration of
the agreement of the Buyer contained herein, for a period of (i) one year
following from the Closing Date for any Seller not employed by Exell
immediately following the Closing, and (ii) for one year following the
termination of employment for any reason of any Seller who is employed by Exell
subsequent to the Closing Date, none of such Sellers or any of their Affiliates
shall:
(a) directly or indirectly, engage or invest in, finance,
own, manage, operate, control or participate in the ownership,
management, operation or control of, any Competing Business (as
defined below);
(b) directly or indirectly, either as principal, agent,
independent contractor, consultant, advisor (whether paid or unpaid),
stockholder, partner or in any other representative capacity
whatsoever, either for his own benefit or for the benefit of any other
Person, solicit, divert or take away from Exell or Buyer any Persons
who, at any time prior to the Closing Date, were customers or clients
of Exell with respect to any Competing Business;
(c) for himself or on behalf of any other Person use or
disclose to any Person any of the following relating in any way to
Exell, Buyer or their respective businesses: trade secrets;
proprietary information; "know-how;" marketing, distribution and
advertising plans and techniques; the existence or terms of contracts
or potential contracts with, or other information identifying or
relating to past, existing or prospective customers, distributors or
vendors; cost data, pricing policies, and financial and accounting
information; or matters pertaining to pending or threatened
litigation; provided, however, that (after reasonable measures have
been taken to maintain confidentiality and after giving reasonable
notice to Buyer specifying the information involved and the manner and
extent of the proposed disclosure thereof) any disclosure of such
information may be made to the extent required by applicable Laws or
judicial or regulatory process.
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"Competing Business" means any Person (other than Buyer and its Affiliates)
engaged, in whole or in part, in any business that involves the design,
manufacture, maintenance, field service or repair of shell and tube heat
exchangers.
8.2 NECESSITY AND REASONABLENESS. Sellers hereby specifically
acknowledge, agree and represent to Buyer as a material inducement for Buyer to
enter into this Agreement:
(a) the covenants and agreements of Sellers in this
Article 8 are necessary and essential to the protection of the
business which will be conducted by Exell and Buyer after the Closing
Date, and to enable Buyer to realize and derive all of the benefits,
rights and expectations associated with this Agreement;
(b) Buyer will suffer great loss and irreparable harm if
Sellers directly or indirectly enters into a Competing Business;
(c) the restrictions contained in this Article 8 are in
all respects reasonable and necessary to protect the business
goodwill, trade secrets, prospects and other business interests of
Buyer in respect of Exell;
(d) the enforcement of this Agreement in general, and of
this Article 8 in particular, will not work an undue or unfair
hardship on Sellers or otherwise be oppressive to them;
(e) the enforcement of this Agreement in general, and of
this Article 8 in particular, will neither deprive the public of
needed goods or services nor otherwise be injurious to the public; and
(f) good, independent and valuable consideration exists
for the agreement of Sellers to be bound by the covenants and
agreements contained in this Article 8.
8.3 ENFORCEMENT. Sellers agree that Buyer shall, in addition to
any other remedies available to it at law or in equity, be entitled to
temporary, preliminary, and permanent injunctive relief and specific
performance to enforce the terms of this Article 8 without the necessity of
proving inadequacy of legal remedies or irreparable harm, or posting bond.
ARTICLE 9
MISCELLANEOUS
9.1 CERTAIN DEFINITIONS. As used in this Agreement, each of the
following terms has the meanings set forth below:
(a) "Affiliate" when used to indicate a relationship
with any Person, means: (i) any corporation or organization of which
such Person is an officer, director or partner or is directly or
indirectly the beneficial owner of at least 10% of the outstanding
shares of any class of equity securities or financial interest
therein; (ii) any trust or other estate in which such Person has a
beneficial interest or as to which such Person serves as trustee or in
any similar fiduciary capacity; or (iii) any Person that directly, or
indirectly through one or more intermediaries, controls, or is
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controlled by, or is under common control with, or is acting as agent
on behalf of, or as an officer or director of, such Person. As used
in the definition of Affiliate, the term "control" (including the
terms "controlling," "controlled by" or "under common control with")
means the possession, direct or indirect, of the power to direct,
cause the direction of or influence the management and policies of a
Person, whether through the ownership of voting securities, by
contract, through the holding of a position as a director or officer
of such Person, or otherwise.
(b) "Agreement" means and includes this Agreement and
the schedules and exhibits hereto, including the Disclosure Schedule.
(c) "Business Laws" means all Laws relating to the
establishing, owning, operating, managing, maintaining, improving or
conducting the business operated by Exell prior to the Closing.
(d) "Claims" means any claims, demands, actions, costs,
damages, losses, diminution in value, expenses, obligations,
liabilities, recoveries, judgments, settlements, suits, proceedings,
causes of action or deficiencies, including interest, penalties
(including civil and criminal penalties) and reasonable attorneys'
fees.
(e) "Encumbrance" means any security interest,
mortgage, deed of trust, pledge, lien, or other encumbrance of any
nature whatsoever.
(f) "Environmental Laws" mean all Laws relating to
protection of the environment, including, without limitation, health
and chemical use Laws, and Laws governing the on or off-site use,
storage, treatment, recycling, generation, transportation, processing,
handling, production or disposal of Hazardous Substances or sanitary
(non-hazardous) substances or waste, including, without limitation,
garbage, refuse or other similar substances.
(g) "Exell Shares" means at any date all of the shares of
Exell Stock issued and outstanding on such date.
(h) "Exell Stock" means the capital stock of Exell as
authorized by its charter documents, as amended.
(i) "Governmental Authority" means any federal, state,
county, municipal, or other local governmental body, legislature,
agency, commission, board, department, court or other governmental
authority, and includes, without limitation, the Federal Trade
Commission, the Environmental Protection Agency, the Interstate
Commerce Commission, the Occupational Safety and Health
Administration, and the Internal Revenue Service.
(j) "Hazardous Substance" means, without limitation, (i)
any flammable explosives, radon, radioactive materials, asbestos,
polychlorinated biphenyls, benzene, petroleum and petroleum products,
methane, or (ii) hazardous materials, hazardous wastes, biomedical
wastes, hazardous or toxic substances or related materials defined as
such in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.),
the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Sections 6901 et seq.), or any other Environmental Laws.
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(k) "H-S-R Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(l) "Laws" mean any applicable statute, law, code,
ordinance, rule, regulation, order, permit, license, certificate,
writ, judgment, injunction or decree promulgated by any Governmental
Authority.
(m) "Person" means an individual, corporation, limited
liability company, partnership, limited partnership, joint venture,
joint stock company, firm, company, syndicate, trust, estate,
association, Governmental Authority, business, organization or any
other incorporated or unincorporated entity.
(n) "Permitted Encumbrances" means:
(i) Encumbrances described in the Disclosure
Schedule;
(ii) inchoate common law, statutory or
constitutional liens, and liens for taxes and assessments
which are not due or are being contested in good faith; and
(iii) Encumbrances set forth on the Disclosure
Schedule.
9.2 FURTHER ASSURANCES. From time to time, as and when requested
by any party hereto, any other party hereto shall execute and deliver, or cause
to be executed and delivered, such documents and instruments and shall take, or
cause to be taken, such further or other actions as may be reasonably necessary
to effectuate the transactions contemplated hereby, including, without
limitation, the transfer to Buyer of the entire legal and beneficial ownership
of the Exell Shares, free and clear of all Encumbrances.
9.3 PUBLIC ANNOUNCEMENTS. Neither Sellers nor any of their
respective Affiliates or agents shall issue any press release or public
announcement regarding the execution of this Agreement or the transactions
contemplated hereby.
9.4 EXPENSES. Each of Buyer and Sellers shall bear their own
legal and accounting fees, and other costs and expenses with respect to the
negotiation, execution and delivery of this Agreement, and consummation of the
transactions contemplated hereby.
9.5 NOTICES AND WAIVERS. Any notice, instruction, authorization,
request, demand or waiver hereunder shall be in writing, and shall be delivered
either by personal delivery, by telegram, telex, telecopy or similar facsimile
means, by certified or registered mail, return receipt requested, or by courier
or delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement,
or at such other address and number as a party shall have previously designated
by written notice given to the other parties in the manner hereinabove set
forth. Notices shall be deemed given when received, if sent by facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by facsimile means); and when delivered and
receipted for (or upon the date of attempted delivery where delivery is
refused), if hand-delivered, sent by express courier or delivery service, or
sent by certified or registered mail, return receipt requested.
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<PAGE> 21
9.6 CERTAIN REFERENCES. Whenever the context requires, the gender
of all words used herein shall include the masculine, feminine and neuter.
References to Articles or Sections shall be to Articles or Sections of this
Agreement unless otherwise specified. The headings and captions used in this
Agreement are solely for convenient reference and shall not affect the meaning
or interpretation of any article, section or paragraph herein, or this
Agreement. The terms "hereof," "herein" or "hereunder" shall refer to this
Agreement as a whole and not to any particular article, section or paragraph.
The terms "including" or "include" are used herein in an illustrative sense and
not to limit a more general statement. When computing time periods described
by a number of days before or after a stated date or event, the stated date or
date on which the specified event occurs shall not be counted and the last day
of the period shall be counted.
9.7 SUCCESSORS AND ASSIGNS. This Agreement shall bind, inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns, and if an individual, by his executors,
administrators, and beneficiaries of his estate by will or the laws of descent
and distribution. This Agreement and the rights and obligations hereunder
shall not be assignable or delegable by any party.
9.8 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas and of the United
States applicable in Texas. Each party hereto hereby acknowledges and agrees
that it has consulted legal counsel in connection with the negotiation of this
Agreement and that it has bargaining power equal to that of the other parties
hereto in connection with the negotiation and execution of this Agreement.
Accordingly, the parties hereto agree that the rule that an agreement shall be
construed against the draftsman shall have no application in the construction
or interpretation of this Agreement.
9.9 AMENDMENT AND ENTIRETY. This Agreement may be amended,
modified, or superseded only by written instrument executed by all parties
hereto. This Agreement and the exhibits and schedules hereto (including the
Disclosure Schedule) sets forth the entire agreement and understanding of the
parties with respect to the transactions contemplated hereby and supersedes all
prior agreements, arrangements, and understandings relating to the subject
matter hereof. In the event of any conflict or inconsistency between the
provisions of this Agreement and the contents or provisions of any schedule or
exhibit hereto, the provisions of this Agreement shall control.
9.10 RIGHTS OF PARTIES. Nothing in this Agreement, whether express
or implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any Persons other than the parties hereto and their
respective successors and assigns, nor shall any provision give any third
Persons any right of subrogation or action over against any party to this
Agreement. Without limiting the generality of the foregoing, it is expressly
understood that this Agreement does not create any third party beneficiary
rights.
9.11 TIME OF ESSENCE. Time is of the essence in the performance of
this Agreement.
9.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all which together
shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 22
IN WITNESS WHEREOF, this Stock Purchase Agreement is executed and
delivered as of the date first above written.
BUYER:
ITEQ, INC.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
Address: 2727 Allen Parkway, Suite 706
Houston, Texas 77019
Telecopy No. (713) 520-8228
SELLERS:
---------------------------------------------
William R. Miller
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
---------------------------------------------
Leo G. Babel
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
---------------------------------------------
Robert L. Blackwell, II, by Ellen Dee
Blackwell, Individually and as Surviving
Marital Partner
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
---------------------------------------------
William Russel Miller
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
---------------------------------------------
Fabian Howard Babel
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
---------------------------------------------
Robert Blackwell, III
Address: P. O. Box 3726
Beaumont, Texas 77704
Telecopy No. (409) 833-4731
22
<PAGE> 23
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT ("AGREEMENT") is entered into as of the
Effective Date (as hereinafter defined) between BABEL, MILLER & BLACKWELL
PARTNERSHIP, a Texas general partnership ("SELLER") and ITEQ, INC., a Delaware
corporation ("PURCHASER").
W I T N E S S E T H:
In consideration of the mutual covenants set forth herein and in
consideration of the earnest money deposit herein called for, the receipt and
sufficiency of which are hereby acknowledged by Seller, the parties hereto
hereby agree as follows:
Section 1. Sale and Purchase. Seller shall sell, convey, and assign
to Purchaser, and Purchaser shall purchase and accept from Seller, for the
Purchase Price (hereinafter defined) and on and subject to the terms and
conditions herein set forth, the following:
a. the tracts or parcels of land situated in Jefferson
County, Texas described in EXHIBIT A hereto together with all rights and
interests appurtenant thereto, including all of Seller's right, title,
and interest in and to adjacent streets, alleys, rights-of-way, and any
adjacent strips or gores of real estate (the "LAND"); all fixtures and
improvements located on the Land (the "IMPROVEMENTS"); and all rights,
titles, and interests appurtenant to the Land and Improvements;
b. all (i) contracts or agreements, such as maintenance,
service, or utility contracts (the, "PROPERTY AGREEMENTS"), to the
extent Purchaser elects to take assignment thereof, (ii) warranties,
guaranties, indemnities and claims, (iii) licenses, permits or similar
documents, (iv) telephone exchanges, trade names, marks and other
identifying material, (v) plans, drawings, specifications, surveys,
engineering reports and other technical information, (vi) insurance
contracts or policies, to the extent Purchaser elects to take assignment
thereof, and (vii) other property (real, personal, or mixed), owned or
held by Seller that relates, in any way, to the design, construction,
ownership, use, leasing, maintenance, service or operation of the Land
or Improvements.
The above listed items are herein collectively called the "PROPERTY". All of
the Property shall be conveyed, assigned, and transferred to Purchaser at
Closing (hereinafter defined) free and clear of all liens, claims, easements,
and encumbrances whatsoever except for the Permitted Encumbrances (hereinafter
defined).
Section 2. Purchase Price. The price for which Seller shall sell and
convey the Property to Purchaser, and which Purchaser shall pay to Seller, is
[$10,364,958, less amount allocated to purchase price under stock purchase
agreement] Dollars ($__________) ("PURCHASE PRICE"). The Purchase Price shall
be payable in cash or cash equivalent at the Closing (hereinafter defined).
Section 3. Earnest Money. Within five (5) business days after the
execution hereof, Purchaser shall deliver to Stewart Title Company, 2390 North
Dowlen Road, Beaumont, Texas
<PAGE> 24
77706 Attn: ____________________ ("TITLE COMPANY") a check in the amount of
$100.00 which the Title Company shall immediately deposit for collection. As
used in this Agreement, the term "EARNEST MONEY" shall mean the amount so
deposited by Purchaser, together with all interest earned thereon while in the
custody of Title Company. The "EFFECTIVE DATE" of this Agreement shall be the
date the Earnest Money and a fully executed copy of this Agreement is delivered
to the Title Company and such delivery is acknowledged by the Title Company.
Section 4. Independent Consideration. Contemporaneously with the
delivery of the Earnest Money, Purchaser shall deliver to Seller and Seller
hereby acknowledges the receipt of, a check in the amount of FIFTY AND NO/100
DOLLARS ($50.00) ("INDEPENDENT CONSIDERATION"), which amount the parties
bargained for and agreed to as consideration for the Seller's grant to
Purchaser of Purchaser's exclusive right to purchase the Property pursuant to
the terms hereof and for Seller's execution, delivery and performance of this
Agreement. This Independent Consideration is in addition to and independent of
any other consideration or payment provided in this Agreement, is nonrefundable
under any circumstances, and shall be retained by Seller notwithstanding any
other provisions of this Agreement.
Section 5. Delivery of Information by Seller.
a. Within THIRTY (30) DAYS after the Effective Date, Seller,
at its sole cost and expense, shall deliver or cause to be delivered to
Purchaser the following:
i. commitment for Title Insurance ("TITLE COMMITMENT")
from the Title Company setting forth the status of the title of
the Land and Improvements and showing all liens, claims,
encumbrances, easements, rights-of-way, encroachments,
reservations, restrictions, and all other matters of record
affecting the Land or Improvements; and
ii. a true, complete, and legible copy of all documents
referred to in the Title Commitment ("TITLE COMMITMENT
DOCUMENTS").
b. Within thirty (30) days after the Effective Date of this
Agreement, Seller, at the equally shared cost and expense of Seller and
Purchaser, shall deliver to Purchaser a survey ("SURVEY") consisting of
a plat and field notes prepared by a licensed surveyor acceptable to
Purchaser and Title Company, which Survey shall (i) reflect the actual
dimensions of, and area within, the Land, the location of any easements,
setback lines, encroachments, or overlaps thereon or thereover, and the
outside boundary lines of all Improvements, (ii) identify by recording
reference all easements, set back lines, and other matters referred to
in the Title Commitment, (iii) include the surveyor's registered number
and seal, the date of the Survey, and a certificate satisfactory to
Purchaser, (iv) reflect that there is access to and from the Land from a
publicly dedicated street or road, (v) be sufficient to cause the Title
Company to delete (except for "shortages in area") the printed exception
for "discrepancies, conflicts or shortages in area or boundary lines, or
encroachments, or any overlapping of improvements" in the Owner's Title
Policy to be delivered pursuant to Section
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<PAGE> 25
9 hereof, (vi) reflect any area within the Land that has been designated
by the Federal Insurance Administration, the Army Corps of Engineers, or
any other governmental agency or body as being subject to special or
increased flooding hazards, and (vii) in general, comply with the
requirements of the Texas Surveyor's Association for a Category 1A
Condition II. For purposes of the property description to be included in
the general warranty deed to be delivered pursuant to Section 9 hereof,
the field notes prepared by the surveyor shall control any conflicts or
inconsistencies with EXHIBIT A hereto, and such field notes shall be
incorporated herein by this reference upon their completion and approval
by Purchaser.
c. Within thirty (30) days after the Effective Date of this
Agreement, Seller, at its sole cost and expense, shall deliver to
Purchaser current searches of all Uniform Commercial Code financing
statements filed with the Office of the Secretary of State of Texas and
the County Clerk of Jefferson County, Texas against Seller and Seller's
predecessors in title reflecting all effective financing statements then
of record relating to the Property or any part thereof.
d. Within thirty (30) days after the Effective Date of this
Agreement, Seller, at its sole cost and expense, shall deliver to
Purchaser (i) legible copies of all Property Agreements; (ii) copies of
all engineering and technical reports in the possession of Seller or its
representatives that concern the Land or Improvements, including oils
testing reports and reports of environmental or hazardous waste
inspections or surveys; (iii) copies of all plans and specifications
that describe or relate to the Improvements; and (iv) profit and loss
statements reflecting the results of operation of the Property for the
preceding year. The documents described in this Section 5(d) are herein
collectively called the "DOCUMENTS", and the information contained in
the Documents is herein collectively called the "INFORMATION".
Section 6. Right of Inspection; Contingency Period.
a. From the Effective Date to the Closing Date, Seller shall
afford Purchaser and its representatives a continuing right to inspect,
at reasonable hours, the Property, and all books, records, contracts,
and other documents or data pertaining to the ownership, operation, or
maintenance of the Property; provided, however, that in conducting its
inspection Purchaser shall not unreasonably interfere with the business
and operations of the Seller.
b. If for any reason Purchaser, in its sole and absolute
discretion, is not satisfied with the physical condition of the
Improvements, or any matter in the Documents, or any part of the
Information, or is otherwise not satisfied with the Property, then
Purchaser shall have the right to terminate this Agreement in accordance
with Section 12(b) hereof by delivering to Seller a notice of
termination at any time within 30 days after receipt by Purchaser of the
Title Commitment, Title Commitment Documents and Survey. If Purchaser
does not so terminate this Agreement prior to the expiration of the
Contingency Period, Purchaser shall have waived its right to terminate
this Agreement under this Section 6.
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<PAGE> 26
Section 7. Title. Purchaser shall have the right, at any time during
the Contingency Period, to object in writing to any liens and encumbrances
reflected by the Title Commitment or Survey. All liens and encumbrances to
which Purchaser so objects are hereinafter referred to as the "NON-PERMITTED
ENCUMBRANCES"; if no such notice of objection is given during the Contingency
Period, then it shall be deemed that all matters reflected by the Survey and
Title Commitment are "PERMITTED ENCUMBRANCES". Seller shall use reasonable
efforts, at its sole cost, to cure or remove all Non-Permitted Encumbrances and
give Purchaser written notice thereof before the end of the Contingency Period;
provided, however, that Seller, at its sole cost, shall be obligated to cure or
remove at or before Closing all mortgages, deeds of trust, judgment liens,
mechanics and materialmen's liens, and other liens against the Property,
whether or not Purchaser objects thereto during the Contingency Period.
Further, Seller shall cause any leases relating to the Land and Improvements to
be terminated on or before Closing. If Seller does not timely cause all of the
Non-Permitted Encumbrances to be removed or cured, and timely written notice
thereof to be given to Purchaser, then Purchaser shall have the right to either
(i) terminate this Agreement in accordance with Section 12(b) hereof by
delivering notice to Seller, or (ii) attempt to remove or cure the Non-
Permitted Encumbrances and deduct the cost of such removal or cure from the
Purchase Price, or (iii) elect to purchase the Property subject to the Non-
Permitted Encumbrances, other than liens that Seller is obligated to cure or
remove, and the Non-Permitted Encumbrances (other than liens that Seller is
obligated to cure or remove) subject to which Purchaser elects to purchase the
Property shall thereafter be Permitted Encumbrances.
Section 8. Seller's Representations, Warranties, and Covenants.
Seller hereby represents and warrants to, and covenants with, Purchaser that:
a. Seller has full right, power, and authority to execute and
deliver this Agreement and to consummate the purchase and sale
transactions provided for herein without obtaining any further consents
or approvals from, or the taking of any other actions with respect to,
any third parties. This Agreement, when executed and delivered by Seller
and Purchaser, will constitute the valid and binding agreement of
Seller, enforceable against Seller in accordance with its terms.
b. Seller has good, marketable and indefeasible title in fee
simple to the Land and Improvements, free and clear of all liens (except
those liens that will be released at or before Closing), and no party,
except as herein set forth, has or shall have on the Closing Date any
rights in, or to acquire, the Property.
c. The Land is not located within an area that has been
designated by the Federal Insurance Administration, the Army Corps of
Engineers, or any other governmental agency or body as being subject to
special flooding hazards.
d. The Improvements (i) have been constructed in a good and
workmanlike manner, free from defects in workmanship and material and,
to the best of Seller's knowledge, do not require any repair or
replacement other than minor, routine maintenance not aggregating in
excess of $100,000; and (ii) have been constructed and are being
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<PAGE> 27
occupied, maintained, and operated in compliance with all applicable
laws, regulations, insurance requirements, contracts, leases, permits,
licenses, ordinances, restrictions, building setback lines, covenants,
reservations, and easements, and Seller has received no notice, written
or oral, claiming any violation of any of the same or requesting or
requiring the performance of any repairs, alterations, or other work in
order to so comply.
e. The copies of all Documents, Title Commitment Documents,
and other documents delivered by or on behalf of Seller to Purchaser
pursuant to this Agreement shall be true and complete in all material
respects and, to the best of Seller's knowledge and belief, the
information shall be true and complete in all material respects.
f. There are no actions, suits, claims, assessments, or
proceedings pending or, to the knowledge of Seller, threatened that
could materially adversely affect the ownership, operation, or
maintenance of the Property or Seller's ability to perform hereunder.
g. All bills and other payments due with respect to the
ownership, operation, and maintenance of the Property have been paid or
to be paid prior to Closing in the ordinary course of business.
h. From the Effective Date until the Closing Date, Seller
shall: (i) maintain and operate the Property in a good and businesslike
manner in accordance with good and prudent business practices; (ii)
continue all Property Agreements, and insurance policies or contracts
relative to the Property in full force and effect and neither cancel,
amend, nor renew any of the same without Purchaser's prior written
consent; (iii) not commit or permit to be committed any waste to the
Property; and (iv) not, without the prior written consent of Purchaser,
enter into any agreement or instrument or take any action that would
encumber the Property after Closing, that would bind Purchaser or the
Property after Closing, or that would be outside the normal scope of
maintaining and operating the Property.
i. There are no labor disputes, organizational campaigns, or
union contracts existing or under negotiation with respect to the
Property or the operation thereof. There are no employees engaged in the
operation or maintenance of the Property for whom Purchaser will be
responsible after Closing.
j. Attached hereto as EXHIBIT B is a complete and correct
list of all Property Agreements setting forth the identity of the
parties thereto, the date of such agreement, the consideration payable
thereunder, the services to be rendered thereunder, and the expiration
date thereof. Except as otherwise expressly indicated on EXHIBIT B, all
of the Property Agreements are cancelable on thirty (30) or fewer days
notice, without payment of any cancellation consideration.
k. All financial statements, reports and other data,
including but not limited to information concerning gross rental income,
operating expenses, debt service, and cash flow statements heretofore
furnished by Seller to Purchaser relative to the Property are true and
5
<PAGE> 28
correct in all material respects and fully and accurately present the
financial condition, the financial results, or other subject matter
thereof as of the dates thereof. All such statements, reports,
information, and other data hereafter furnished by Seller to Purchaser
shall be true and correct in all material respects and shall fully and
accurately present the financial condition, the financial results, or
other subject matter thereof as of the dates thereof.
l. During the period that Seller has owned the Property, the
Property has not been the site of any activity that would violate any
past or present environmental law or regulation of any governmental body
or agency having jurisdiction over the Property. Specifically, but
without limitation, (i) solid waste, petroleum, or petroleum products
have not been handled on the Property such that they may have leaked or
spilled onto the Property or contaminated the Property, (ii) there is no
on-site contamination resulting from activities on the Property or
adjacent tracts, and (iii) the Property contains no "hazardous
materials" which shall mean any flammables, explosives, radioactive
materials, asbestos, or other hazardous waste including without
limitation substances defined as "hazardous substances", "hazardous
materials", or "toxic substances" in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980; the Hazardous
Materials Transportation Act; and the Resources Conversation and
Recovery Act, all as amended.
m. The current zoning classification of the Property is LI
(Light Industrial); the Improvements have been constructed and are being
occupied and maintained in compliance therewith; and there are no
proceedings pending or contemplated to alter such zoning classification.
If (i) any of Seller's representations and warranties set forth in this Section
8 are untrue in any material respect, or (ii) at any time at or before Closing
there is any material change with respect to the matters represented and
warranted by Seller pursuant to this Section 8, then Seller shall give
Purchaser prompt written notice thereof, and Purchaser shall have the right to
terminate this Agreement in accordance with Section 12(b) hereof by delivering
notice to Seller at any time at or before the Closing. All of Seller's
representations and warranties shall survive the Closing.
Section 9. Closing. The closing ("CLOSING") of the sale of the
Property by Seller to Purchaser shall occur on or before June 30, 1997
("CLOSING DATE"). Time is of the essence with regard to the Closing Date. The
Closing shall occur in the offices of Porter & Hedges, L.L.P., 700 Louisiana,
35th Floor, Houston, Texas 77002 commencing at 10:00 AM on the Closing Date.
At the Closing the following, which are mutually concurrent conditions, shall
occur:
a. Purchaser, at its sole cost and expense, shall deliver or
cause to be delivered to Seller the following:
i. Cashier's check, or the check of the Title Company,
made payable to the order of Seller, or immediately available
cash funds, in the amount of the Purchase Price as specified in
Section 2 hereof, adjusted in accordance with Section 9(c)
hereof; and
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<PAGE> 29
ii. Evidence satisfactory to Seller and Title Company
that the person executing the Closing documents on behalf of
Purchaser has full right, power, and authority to do so.
b. Seller, at its sole cost and expense, shall deliver or
cause to be delivered to Purchaser the following:
i. Special Warranty Deed in the form of EXHIBIT C
hereto, fully executed and acknowledged by Seller, conveying to
Purchaser the Land and Improvements, subject only to the
Permitted Encumbrances;
ii. Owner's Policy of Title Insurance in the amount of
the Purchase Price issued by Title Company (with such reinsurance
as Purchaser may require), insuring that Purchaser is the owner
of the Land and Improvements subject only to the Permitted
Encumbrances and the standard printed exceptions included in a
Texas standard form owner's policy of title insurance; provided,
however, that (A) the standard exception for discrepancies,
conflicts, or shortages in area shall be deleted except for
"shortages in area"; (B) such policy shall have "None of Record"
endorsed regarding restrictions except for restrictions that are
Permitted Encumbrances; (C) the rights of parties in possession
shall be limited only to those holding under written leases; and
(D) the standard exception for taxes shall be limited to the year
in which the Closing occurs, marked "not yet due and payable",
and subsequent years and subsequent assessments for prior years
due to change in land usage or ownership;
iii. Current certificate issued by company acceptable to
Purchaser reflecting that since the date of the searches
furnished pursuant to Section 5(c) hereof no Uniform Commercial
Code filings, chattel mortgages, assignments, pledges, or other
encumbrances have been filed in the offices of the Secretary of
State of the State of Texas or the County Clerk of Jefferson
County with reference to the Property;
iv. Certificates issued by the applicable taxing
authorities, pursuant to Section 31.08 of the Texas Tax Code,
stating that no delinquent taxes, penalties and interest are due
and payable on the Property;
v. Evidence satisfactory to Purchaser and the Title
Company that the persons executing and delivering the Closing
documents on behalf of Seller have full right, power and
authority to do so;
vi. Certificate executed by Seller stating that, as of
the Closing Date, each of Seller's representations and warranties
set forth in Section 8 hereof is true and correct;
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<PAGE> 30
vii. Certificate meeting the requirements of Section
1445 of the Internal Revenue Code of 1986, as amended, executed
and sworn to by Seller; and
viii. Such other instruments as are customarily executed
in Texas to effectuate the conveyance of property similar to the
Property, with the effect that, after the Closing, Purchaser will
have succeeded to all of the rights, titles, and interests of
Seller related to the Property and Seller will no longer have any
rights, titles, or interests in and to the Property.
c. All normal and customarily proratable items, including
without limitation real estate and personal property taxes, utility
bills, rents, interest, and Property Agreement payments shall be
prorated as of the Closing Date, Seller being charged and credited for
all of same up to such date and Purchaser being charged and credited for
all of same on and after such date. If the actual amounts to be prorated
are not known as of the Closing Date, the prorations shall be made on
the basis of the best evidence then available, and thereafter, when
actual figures are received, a cash settlement will be made between
Seller and Purchaser. The provisions of this Section 9(c) shall survive
the Closing.
d. Seller shall pay all costs and liabilities relating to the
Property that arise out of or are attributable to the period prior to
the Closing Date, and shall indemnify and hold harmless Purchaser from
such costs and liabilities and from all reasonable attorneys' fees
expended by Purchaser in connection therewith. Seller shall have the
right to receive all proceeds relating to the Property that are properly
allocable to the period before the Closing Date, and Purchaser shall
have the right to receive all proceeds relating to the Property that are
properly allocable to the period from and after the Closing Date.
Purchaser shall pay all costs and liabilities relating to the Property
that arise out of or are attributable to the period from and after the
Closing Date, except such costs and liabilities that arise out of or
result from a breach by Seller of its representations and warranties set
forth in Section 8 hereof, and Purchaser shall indemnify and hold
harmless Seller from such costs and liabilities and from all reasonable
attorneys' fees expended by Seller in connection therewith. This Section
9(d) shall survive the Closing.
e. Upon completion of the Closing, Seller shall deliver to
Purchaser possession of the Property free and clear of all tenancies of
every kind and parties in possession, with all parts of the Property
(including without limitation the Improvements) in the same condition as
on the date hereof, normal wear only excepted.
Section 10. Commissions. Seller shall defend, indemnify, and hold
harmless Purchaser, and Purchaser shall defend, indemnify, and hold harmless
Seller, from and against all claims by third parties for brokerage, commission,
finders, or other fees relative to this Agreement or the sale of the Property,
and all court costs, attorneys' fees, and other costs or expenses arising
therefrom, and alleged to be due by authorization of the indemnifying party.
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Section 11. Destruction, Damage or Taking Before Closing. If, before
Closing, all or any part of the Land or Improvements are destroyed or damaged,
or become subject to condemnation or eminent domain proceedings, then Seller
shall promptly notify Purchaser thereof. Purchaser shall have the right to
elect to proceed with the Closing (subject to the other provisions of this
Agreement) by delivering notice thereof to Seller within five (5) business days
of receipt of Seller's notice respecting the damage, destruction, or taking,
but Purchaser shall be entitled to all insurance proceeds or condemnation
awards payable as a result of such damage or taking and, to the extent the same
may be necessary or appropriate, Seller shall assign to Purchaser at Closing
Seller's rights to such proceeds or awards. If, within five (5) business days
of receipt of Seller's notice respecting the damage, destruction, or taking,
Purchaser notifies Seller of its intent to terminate this Agreement, or if
Purchaser gives no notice within such period, then Purchaser shall be deemed to
have terminated this Agreement pursuant to Section 12(b) hereof.
Section 12. Termination and Remedies.
a. If Purchaser fails to consummate the purchase of the
Property pursuant to this Agreement for any reason other than
termination hereof pursuant to a right granted to Purchaser in Sections
6, 7, 8, 11 and 13 hereof, then Seller, shall have the right to
terminate this Agreement by notifying Purchaser thereof, in which event
Title Company shall deliver the Earnest Money to Seller, and Seller
shall have all rights and remedies available under applicable law.
b. If Purchaser terminates this Agreement pursuant to Section
6, 7, 8, 11 or 13 hereof, then Title Company shall return the Earnest
Money to Purchaser, whereupon neither party hereto shall have any
further rights or obligations hereunder.
c. If Seller fails to consummate the sale of the Property
pursuant to this Agreement for any reason other than termination hereof
pursuant to Section 13, Purchaser's failure to perform its obligations
hereunder or termination hereof by Purchaser in accordance with Section
12(b), then Purchaser shall have all rights and remedies available under
applicable law, and Title Company shall return the Earnest Money to
Purchaser.
Section 13. Conditions to Closing. This Agreement is expressly
conditioned upon the consummation of a Stock Purchase Agreement dated April 24,
1997 between the stockholders of Exell, Inc., a Texas corporation and Purchaser
(the "EXELL AGREEMENT"). In the event the Exell Agreement is not consummated
for any reason, Seller shall have no further obligation to sell and Purchaser
shall have no further obligation to purchase the Property and this Agreement
shall be automatically terminated and of no further force and effect.
Section 14. Notices. All notices provided or permitted to be given
under this Agreement must be in writing and may be served by depositing same in
the United States mail, addressed to the party to be notified, postage prepaid
and registered or certified with return receipt requested; by delivering the
same in person to such party; transmitted by Federal Express or a similar
generally recognized overnight carrier generally providing proof of delivery;
by prepaid telegram or telex; or
9
<PAGE> 32
by facsimile copy transmission. Notice given in accordance herewith shall be
effective upon receipt at the address of the addressee. For purposes of notice,
the addresses of the parties shall be as follows:
If to Seller, to: Babel, Miller & Blackwell
P.O. Box 3726
Beaumont, Texas 77704
Attn: William R. Miller
(409) 838-3400
FAX: (409) 833-4731
If to Purchaser, to: ITEQ, Inc.
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Attn: Mr. Lawrence W. McAfee
(713) 285-2700
FAX: (713) 520-8228
Either party hereto may change its address for notice by giving three (3) days
prior written notice thereof to the other party.
Section 15. Assigns; Beneficiaries. This Agreement shall inure to the
benefit of and be binding on the parties hereto and their respective heirs,
legal representatives and successors; provided, this Agreement is not
assignable by either party, except Purchaser may assign this Agreement to any
of its subsidiaries or affiliates. This Agreement is for the sole benefit of
Seller and Purchaser, and no third party is intended to be a beneficiary of
this Agreement.
Section 16. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Texas.
Section 17. Entire Agreement. This Agreement is the entire agreement
between Seller and Purchaser concerning the sale of the Property, and no
modification hereof or subsequent agreement relative to the subject matter
hereof shall be binding on either party unless reduced to writing and signed by
the party to be bound. Exhibits A through C, inclusive, attached hereto, are
incorporated herein by this reference for all purposes.
10
<PAGE> 33
IN WITNESS WHEREOF, Purchaser and Seller have executed this Agreement as
of the date first set forth above.
SELLER:
BABEL, MILLER & BLACKWELL PARTNERSHIP
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
PURCHASER:
ITEQ, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Schedule of Exhibits
A - Description of Land
B - List of Property Agreements
C - Form of Special Warranty Deed
11
<PAGE> 34
JOINDER BY TITLE COMPANY
The undersigned, STEWART TITLE COMPANY, referred to in this Agreement as
the "TITLE COMPANY," hereby acknowledges that it received this Agreement
executed by Seller and Purchaser on the ____ day of _____________, 1997, and
accepts the obligations of the Title Company as set forth herein. The
undersigned further acknowledges that it received the Earnest Money on the ___
day of _______________, 1997. The Title Company hereby agrees to hold the
Earnest Money as directed in this Agreement, and to distribute the Earnest
Money in accordance with the terms and provisions of this Agreement.
STEWART TITLE COMPANY
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 2390 North Dowlen Road.
Beaumont, Texas 77006
(409) 866-8880
Fax (409) 866-9137
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of
Directors of ITEQ, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated February 24, 1997 related to the consolidated financial statements
of ITEQ, Inc. and subsidiaries for the year ended December 31, 1996 and to all
references to our Firm included in or made a part of this Registration
Statement.
We hereby consent to the incorporation by reference in this registration
statement of our reports related to the separate financial statements of
Ohmstede, Inc. dated January 30, 1997 for the two months ended December 31, 1996
and December 13, 1996 for the seven months ended October 31, 1996 included in
ITEQ, Inc.'s Form 8-K/A dated February 3, 1997.
ARTHUR ANDERSEN LLP
Houston, Texas
April 30, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our reports related to the
separate financial statements of Ohmstede, Inc. dated December 13, 1996 for the
year ended March 31, 1996 included in ITEQ, Inc.'s Form 8-K/A dated February 3,
1997.
MELTON & MELTON
Houston, Texas
April 30, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors
ITEQ, Inc. and Subsidiaries:
We consent to the use of our reports included and incorporated by reference
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Houston, Texas
April 30, 1997
