<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 27, 1997
ITEQ, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-10668 41-1667001
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
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<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its current report on Form 8-K dated
August 23, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro forma financial information.
See index.
(b) Financial statements of business acquired. See index.
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. ITEQ, INC. - UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION:
Unaudited Pro Forma Combined Financial Information Headnote............................................. 3
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1997.......................................... 4
Unaudited Pro Forma Combined Statements of Operations for the Year Ended
December 31, 1996, and the Six Months Ended June 30, 1997............................................. 5-6
II. EXELL, INC.:
Report of Independent Public Accountants................................................................ 7
Balance Sheets as of September 30, 1996, and June 30, 1997 (Unaudited).................................. 8
Statements of Operations for the Year Ended September 30, 1996, and the Nine Months
Ended June 30, 1996 (Unaudited) and 1997 (Unaudited).................................................. 9
Statements of Stockholders' Equity for the Year Ended September 30, 1996, and the
Nine Months Ended June 30, 1997 (Unaudited)........................................................... 10
Statements of Cash Flows for the Year Ended September 30, 1996, and the
Nine Months Ended June 30, 1996 (Unaudited) and 1997 (Unaudited)...................................... 11
Notes to Financial Statements........................................................................... 12
</TABLE>
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<PAGE> 4
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect to
the acquisition by ITEQ, Inc. (ITEQ), of Exell, Inc. (Exell), on August 13,
1997, effective August 1, 1997 (the Acquisition). The unaudited pro forma
combined financial statements presented were prepared utilizing the historical
audited financial statements and the unaudited interim financial statements of
ITEQ and Exell. The unaudited pro forma combined financial statements should be
read in conjunction with the audited historical financial statements and notes
thereto of Exell included elsewhere herein, ITEQ's audited consolidated
financial statements and notes thereto included in ITEQ's Annual Report filed
with the Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1996, as amended by Form 10-K/A dated May 2, 1997, and ITEQ's
unaudited consolidated financial statements and notes thereto included in
ITEQ's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. ITEQ
will account 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
balance sheet assumes the Acquisition occurred on June 30, 1997. The unaudited
pro forma combined statements of operations for the year ended December 31,
1996, and the six months ended June 30, 1997, assume the Acquisition occurred
at January 1, 1996. The pro forma combined financial statements may not be
indicative of ITEQ's financial position or results of operations that would
have occurred had the Acquisition been completed as of or at the beginning of
the periods presented, nor do such statements purport to indicate ITEQ's
financial condition or results of operations at any future date or for any
future period.
No expected benefits and cost reductions anticipated by ITEQ, corporate
allocations, additional costs from association with a public company or
additional revenues related to selling Exell products through ITEQ's
international marketing network have been reflected in these unaudited pro
forma combined financial statements.
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<PAGE> 5
ITEQ, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(In Thousands)
<TABLE>
ITEQ, Exell, Pro Forma Adjusted
Inc. Inc. Adjustments Balance
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,766 $ 146 $ 7,865 (1) $ 4,912
(7,865)(1)
Due on contracts and other receivables, net 36,474 2,758 -- 39,232
Costs and estimated earnings in excess of billings on
uncompleted contracts 18,956 598 -- 19,554
Inventories 6,264 957 -- 7,221
Prepaid expenses, deposits and other assets 1,719 111 -- 1,830
Deferred tax asset 1,149 410 -- 1,559
--------- --------- -------- ---------
Total Current assets 69,328 4,980 -- 74,308
Property and equipment, net 13,751 1,394 -- 15,145
Other assets, net 46,369 -- 5,391 (2) 51,760
--------- --------- ------- ---------
Total assets $ 129,448 $ 6,374 $ 5,391 $ 141,213
========= ========= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,023 $ 1,052 $ -- $ 15,075
Accrued liabilities 15,157 1,360 300 (1) 16,817
Billings in excess of costs and estimated earnings on
uncompleted contracts 963 5 -- 968
Progress billings 5,332 80 -- 5,412
Accrued remediation costs -- 1,000 -- 1,000
Current maturities of long-term obligations 4,752 -- -- 4,752
--------- --------- ------- ---------
Total current liabilities 40,227 3,497 300 44,024
LONG-TERM LIABILITIES:
Long-term obligations, less current maturities 17,184 -- 7,865 (1) 25,049
Subordinated notes 12,879 -- -- 12,879
Long-term deferred tax liability 1,026 103 -- 1,129
--------- --------- ------- ---------
Total liabilities 71,316 3,600 8,165 83,081
STOCKHOLDERS' EQUITY:
Common stock 17 68 (68)(3) 17
Additional paid-in capital 56,518 -- -- 56,518
Retained earnings 1,982 2,706 (2,706)(3) 1,982
Translation adjustment (385) -- -- (385)
--------- --------- ------- ---------
Total stockholders' equity 58,132 2,774 (2,774) 58,132
--------- --------- ------- ---------
Total liabilities and stockholders' equity $ 129,448 $ 6,374 $ 5,391 $ 141,213
========= ========= ======= =========
</TABLE>
(1) Reflects cash received from the Company's lenders, payment of the $7,865
cash purchase price and the accrual of approximately $300 in direct
expenses.
(2) Represents the excess of costs paid over the net assets acquired
which will be amortized over 40 years.
(3) Reflects the elimination of the historical stockholders' equity of
Exell, Inc., as the acquisition has been accounted for using the purchase
method of accounting.
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<PAGE> 6
ITEQ, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
ITEQ, Exell,
Inc. Inc.
--------- ---------
Year Ended Year Ended
December 31, September 30, Pro Forma Adjusted
1996 1996 Adjustments Balance
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 110,804 $ 26,779 $ -- $ 137,583
COST OF REVENUES 88,230 19,098 -- 107,328
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 14,732 6,213 -- 20,945
DEPRECIATION AND AMORTIZATION 1,865 236 135 (1) 2,236
RESTRUCTURING CHARGES AND OTHER NONRECURRING COSTS
3,704 -- -- 3,704
--------- --------- --------- ---------
Operating profit 2,273 1,232 (135) 3,370
INTEREST EXPENSE, net (2,660) (98) (629)(2) (3,387)
OTHER INCOME 305 236 -- 541
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE PROVISION FOR INCOME TAXES (82) 1,370 (764) 524
PROVISION FOR INCOME TAXES 4 541 (341)(3) 204
--------- --------- --------- ---------
NET EARNINGS (LOSS) $ (86) $ 829 $ (423) $ 320
========= ========= ========= =========
NET EARNINGS (LOSS) PER COMMON SHARE $ (0.01) $ 0.03
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 11,481 11,604
========= =========
</TABLE>
(1) Represents the increase in amortization of goodwill.
(2) Additional interest at the ITEQ, Inc., borrowing rate on amounts
borrowed to fund the purchase price of Exell, Inc.
(3) Represents the pro forma income tax effect of 39 percent.
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<PAGE> 7
ITEQ, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
ITEQ, Exell, Pro Forma Adjusted
Inc. Inc. Adjustments Balance
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 92,299 $ 12,927 $ -- $ 105,226
COST OF REVENUES 73,481 8,365 -- 81,846
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,872 2,748 -- 13,620
DEPRECIATION AND AMORTIZATION 1,551 162 67 (1) 1,780
ENVIRONMENTAL REMEDIATION COSTS - 1,000 - 1,000
--------- --------- --------- ---------
Operating profit 6,395 652 (67) 6,980
INTEREST EXPENSE, net (3,291) (20) (315)(2) (3,626)
OTHER INCOME (EXPENSE) 217 188 -- 405
--------- --------- --------- ---------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 3,321 820 (382) 3,759
PROVISION FOR INCOME TAXES 1,295 320 (149)(3) 1,466
--------- --------- --------- ---------
NET EARNINGS $ 2,026 $ 500 $ (233) $ 2,293
========= ========= ========= =========
NET EARNINGS PER COMMON SHARE $ 0.15 $ 0.17
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 13,639 13,639
========= =========
</TABLE>
(1) Represents the increase in amortization of goodwill.
(2) Additional interest at the ITEQ, Inc., borrowing rate on amounts
borrowed to fund the purchase price of Exell, Inc.
(3) Represents the pro forma income tax effect.
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<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Exell, Inc.:
We have audited the balance sheet of Exell, Inc. (the Company), a Texas
corporation, as of September 30, 1996, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. 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 Exell, Inc. as of September
30, 1996, and the results of its operations and cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 15, 1997
<PAGE> 9
EXELL, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996, AND JUNE 30, 1997
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 87,964 $ 146,096
Due on contracts and other receivables, net of reserves of $22,027,
as of September 30, 1996, and June 30, 1997, respectively 3,066,351 2,758,030
Costs and estimated earnings in excess of billings on uncompleted
contracts 2,037,000 598,084
Inventories 401,697 956,740
Prepaid expenses 106,398 110,753
Deferred tax asset -- 410,151
----------- -----------
Total current assets 5,699,410 4,979,854
PROPERTY AND EQUIPMENT, at cost:
Transportation equipment 261,943 339,051
Furniture and fixtures 440,306 463,502
Machinery and equipment 2,272,252 2,269,597
Buildings and improvements 726,831 871,478
----------- -----------
3,701,332 3,943,628
Less- Accumulated depreciation (2,313,505) (2,549,437)
----------- -----------
Property and equipment, net 1,387,827 1,394,191
----------- -----------
Total assets $ 7,087,237 $ 6,374,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 163,200 $ --
Notes payable to officers 625,793 --
Accrued remediation costs -- 1,000,000
Accounts payable 2,389,276 1,051,860
Billings in excess of costs and estimated earnings on uncompleted
contracts 215,000 5,706
Accrued liabilities 894,633 726,003
Progress billings -- 79,852
Income taxes payable 184,527 633,764
Deferred tax liability 117,000 --
----------- -----------
Total current liabilities 4,589,429 3,497,185
LONG-TERM LIABILITIES:
Long-term obligations, less current maturities 166,910 --
Long-term deferred tax liability 103,000 103,000
----------- -----------
Total liabilities 4,859,339 3,600,185
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock ($1 par value, 500,000 shares authorized, 101,000 and
67,500 shares issued, respectively 101,000 67,500
Retained earnings 2,394,898 2,706,360
Treasury stock (268,000) --
----------- -----------
Total stockholders' equity 2,227,898 2,773,860
----------- -----------
Total liabilities and stockholders' equity $ 7,087,237 $ 6,374,045
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 10
EXELL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
AND THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30
September 30, -------------------------------
1996 1996 1997
-------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
REVENUES $ 26,778,806 $ 19,696,750 $ 18,412,805
COST OF REVENUES 19,097,860 13,790,305 12,238,376
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,212,694 4,713,799 4,190,408
DEPRECIATION 236,217 177,588 235,932
ENVIRONMENTAL REMEDIATION COSTS -- -- 1,000,000
------------ ------------ ------------
Operating profit 1,232,035 1,015,058 748,089
OTHER INCOME (EXPENSE):
Scrap sales 153,950 139,826 101,656
Inspection income 49,682 49,362 85,648
Interest expense (98,291) (76,895) (40,880)
Miscellaneous 32,763 -- --
------------ ------------ ------------
138,104 112,293 146,424
------------ ------------ ------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES 1,370,139 1,127,351 894,513
PROVISION FOR INCOME TAXES 541,287 439,668 348,551
------------ ------------ ------------
NET EARNINGS $ 828,852 $ 687,683 $ 545,962
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 11
EXELL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1996
AND THE NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Total
Common Treasury Retained Stockholders'
Stock Stock Earnings Equity
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1995 $ 101,000 $(268,000) $ 1,566,046 $1,399,046
Net earnings -- -- 828,852 828,852
--------- --------- ----------- ----------
BALANCE, September 30, 1996 101,000 (268,000) 2,394,898 2,227,898
Retirement of treasury stock (unaudited) (33,500) 268,000 (234,500) --
Net earnings (unaudited) -- -- 545,962 545,962
--------- --------- ----------- ----------
BALANCE, June 30, 1997 (Unaudited) $ 67,500 $ -- $ 2,706,360 $2,773,860
========= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 12
EXELL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
AND THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30
September 30, -----------------------------------
1996 1996 1997
------------- ------------------ -----------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 828,852 $ 687,683 $ 545,962
Adjustments to reconcile net earnings to net cash provided
by operating activities-
Depreciation 236,217 177,588 235,932
Provision (benefit) for deferred income taxes 213,000 (134,015) (527,151)
Changes in assets and liabilities-
Due or contracts and other receivables, net (866,448) (691,599) 308,321
Costs and estimated earnings in excess of billings on
uncompleted contracts (1,592,000) (103,258) 1,438,916
Inventories 812,184 611,651 (555,043)
Prepaid expenses (58,665) (5,459) (4,355)
Accrued remediation costs -- -- 1,000,000
Accounts payable 1,321,360 (90,056) (1,337,416)
Billings in excess of costs and estimated earnings
on uncompleted contracts 103,000 (110,370) (209,294)
Progress billings (138,349) 107,808 79,852
Accrued liabilities 203,750 795,271 (168,630)
Income taxes payable 74,800 371,691 449,237
----------- ----------- -----------
Net cash provided by operating activities 1,137,701 1,616,935 1,256,331
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (527,004) (479,149) (242,296)
Proceeds from the sale of property and equipment 4,515 -- --
----------- ----------- -----------
Net cash used in investing activities (522,489) (479,149) (242,296)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit (780,000) (780,000) --
Payments on long-term obligations (163,200) (122,400) (330,110)
Proceeds from (payments to) officers, net 175,793 (450,000) (625,793)
Proceeds from additional borrowings 199,983 199,983 --
----------- ----------- -----------
Net cash used in financing activities (567,424) (1,152,417) (955,903)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 47,788 (14,631) 58,132
CASH, beginning of period 40,176 40,176 87,964
----------- ----------- -----------
CASH, end of period $ 87,964 $ 25,545 $ 146,096
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 98,213 $ 89,059 $ 40,880
=========== =========== ===========
Cash paid for income taxes $ 219,499 $ 192,059 $ 340,517
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-11-
<PAGE> 13
EXELL, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND ACQUISITION:
Exell, Inc. (Exell or the Company), is a Texas corporation specializing in the
manufacture and maintenance of shell and tube heat exchangers. The Company is
headquartered in Beaumont, Texas. The majority of the Company's customers are
within the United States and are concentrated within refineries in close
proximity to the Company's plant.
On August 13, 1997 (effective August 1, 1997), ITEQ, Inc., purchased all of the
outstanding stock of Exell for approximately $8.8 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Reporting
These financial statements have been prepared to present the financial position
and results of operations of Exell in conformity with generally accepted
accounting principles. There are no adjustments related to the purchase price
allocation of ITEQ reflected in these financial statements.
Interim Financial Statements
The accompanying unaudited 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 June 30, 1997, the results of
operations for the nine months ended June 30, 1996 and 1997, and the cash flows
for the nine months ended June 30, 1996 and 1997.
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.
"Costs and estimated earnings in excess of billings on uncompleted contracts"
represents revenues recognized in excess of amounts billed on contracts using
the percentage-of-completion method. 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 on percentage-of-completion contracts.
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<PAGE> 14
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.
Progress billings represent amounts billed prior to contract completion on
contracts using the completed-contract method. These amounts will be recognized
as revenue upon substantial completion of the contract, at which time the
appropriate cost of the contract is also recognized.
Inventory
Raw materials are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method. Work in process includes materials, labor
and overhead cost allocations.
Property and Equipment
Property and equipment are recorded at cost, including costs to ready assets
for use. Improvements or betterments of a permanent nature are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Losses resulting from property disposals are included in other
expense.
Depreciation is computed using the straight-line method over the following
recovery periods:
Transportation equipment 3-7 years
Furniture and fixtures 3-8 years
Machinery and equipment 5-12 years
Buildings and improvements 5-40 years
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.
Federal Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (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 bases of assets and liabilities using presently
enacted tax rates.
Estimates
The preparation 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 notes payable is estimated
based on the Company's current financing agreement and approximates carrying
value.
-13-
<PAGE> 15
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 one financial institution. Accounts receivable at any
given time are concentrated in a relatively small number of primarily domestic
customers that operate in the petroleum industry. To mitigate this risk, the
Company often requires customers to make advance payments.
For the year ended September 30, 1996, the Company purchased over 10 percent of
its component parts from one vendor. The Company believes other viable
suppliers are available to supply these component parts.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
------------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $ 95,898 $ 71,743
Work in process 305,799 884,997
--------- ----------
Total $ 401,697 $ 956,740
========= ==========
</TABLE>
Contracts are performed to customer specifications and shipped upon completion;
consequently, there are no finished goods inventories.
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.
Costs incurred to date, estimated earnings and the related progress billings to
date on long-term contracts in progress for the year ended September 30, 1996,
are as follows:
<TABLE>
<S> <C>
Costs incurred to date $ 2,351,000
Estimated earnings 664,000
------------
Revenue recognized 3,015,000
Less- Progress billings to date (1,193,000)
------------
$ 1,822,000
============
</TABLE>
The preceding is included in the accompanying consolidated balance sheet at
September 30, 1996, as follows:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 2,037,000
Less- Billings in excess of costs and estimated earnings on
uncompleted contracts (215,000)
-----------
$ 1,822,000
===========
</TABLE>
-14-
<PAGE> 16
5. LONG-TERM OBLIGATIONS:
Long-term obligations represent a term promissory note with Texas Commerce
Bank. This note bears interest at the bank's prime rate plus .0125 percent and
is repayable in monthly installments of $6,800. Under terms of the note
agreement, the Company maintains certain financial covenants. The Company was
in compliance with these covenants at September 30, 1996. This note was repaid
during the nine months ended June 30, 1997.
In addition to the bank financing, the Company had notes payable due the
officers of the Company. This debt was repaid during the nine months ended June
30, 1997.
6. INCOME TAXES:
The income tax provision for 1996 consists of a $213,000 deferred provision and
a $328,287 current provision. The effective income tax provision differs from
the U.S. statutory federal income tax rate for the year ended September 30,
1996, due to the following:
<TABLE>
<S> <C>
Tax provision at the federal statutory income tax rate $ 465,847
State income taxes, net of federal benefit 50,026
Nondeductible expenses 25,414
----------
Total tax provision $ 541,287
==========
</TABLE>
The significant temporary differences between financial and tax reporting
income result from differences in depreciation and revenue recognition methods
and accrued expenses which are not deductible until paid.
7. COMMITMENTS AND CONTINGENCIES:
Employee Benefit Plan
The Exell, Inc. Profit Sharing Plus Plan (the Plan) is a combination defined
contribution and 401(k) plan. The Plan covers substantially all employees not
covered by collective bargaining agreements who have accumulated one year of
service prior to the semiannual enrollment dates. Employees may elect to
contribute a percentage of their wages subject to certain limitations. Employer
contributions to the Plan are at the discretion of the board of directors and
are set by the employer prior to the end of each Plan year. Management has made
provisions for contributions to the Plan in the amount of approximately
$187,000 for the year ended September 30, 1996.
Environmental Matters
The Company's policy is to accrue remediation costs when it is probable that
such efforts will be required and the related costs can be reasonably
estimated. Subsequent to fiscal year-end 1996, an environmental exposure was
discovered related to groundwater contamination and the Company has accrued for
certain noncapital remediation costs. At June 30, 1997, such accrual amounted
to $1,000,000 and, in management's opinion, is appropriate based on existing
facts and circumstances. The Company does not expect that any sums it may have
to pay in connection with these environmental matters in excess of the amount
the Company currently has accrued would be material to the Company. These costs
have not been discounted, as these obligations will be fulfilled within the
next year.
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Claims and Lawsuits
The Company is subject to claims and lawsuits arising in the normal course of
business. In the opinion of management, any losses resulting from the ultimate
resolution of these matters will not be material to the Company's financial
position and results of operations.
Letter of Credit
The Company has a contingent liability in respect of a performance bond in the
amount of approximately $185,000 as of September 30, 1996, which was entered
into in the normal course of business.
8. COMMON STOCK:
During 1997, the Company canceled 33,500 shares of treasury stock that were
purchased at a cost of $268,000 by the Company (unaudited).
9. RELATED-PARTY TRANSACTIONS:
The Company pays rent to the partnership of Babel, Miller and Blackwell (a
partnership entered into by certain officers of the Company) for the use of
real property on which Exell's offices and manufacturing facilities are
located. The total rent paid for the year ended September 30, 1996, was
$240,000.
The Company owed notes payable to certain officers which are reflected on the
accompanying September 30, 1996, balance sheet.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 27, 1997
ITEQ, Inc.
By: /s/ Lawrance W. McAfee
-----------------------------
Lawrance W. McAfee
Executive Vice President and
Secretary
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
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<S> <C>
23.1 Consent of Independent Public Accountants
</TABLE>
<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 incorporation
of our report dated May 15, 1997 related to the financial statements of Exell,
Inc. included in this Form 8-K/A into ITEQ's previously filed Registration
Statement File no. 33-09051 on Form S-8.
ARTHUR ANDERSEN LLP
Houston, Texas
October 27, 1997
