<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
ITEQ, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common shares, $.001 per share par value, of ITEQ, Inc. ("ITEQ Common Stock")
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
10,040,049 Common Shares
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
One-fiftieth of one percent of $104,165,512.10 ($104,165,512.10 is the product
of (1) the average of the high and low prices of ITEQ Common Stock quoted on
the Nasdaq National Market on July 31, 1997 ($10.375) multiplied by (2) the
total number of outstanding shares of ITEQ Common Stock to be received in the
transaction (10,040,049)).
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$104,165,512
- --------------------------------------------------------------------------------
(5) Total fee paid:
$20,834
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ITEQ, INC.
2727 ALLEN PARKWAY, SUITE 760
HOUSTON, TEXAS 77019
August , 1997
Dear ITEQ Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of ITEQ, Inc. ("ITEQ") at the offices of ITEQ on Tuesday,
September 30, 1997, at 10:00 a.m., local time.
At the Special Meeting, stockholders will be asked, among other things, to
consider and vote on a proposal (the "Merger Proposal") to adopt a merger
agreement (the "Merger Agreement") pursuant to which Astrotech International
Corporation ("Astrotech") would be merged (the "Merger") into ITEQ, the
surviving corporation in the Merger.
The Merger Agreement, which provides for (i) the appointment of two
additional members to the ITEQ board of directors, and (ii) adoption of an
Amended and Restated Certificate of Incorporation which, among other things,
increases the authorized ITEQ common stock, $.001 par value per share, from
30,000,000 to 40,000,000 shares, is described in the accompanying Joint Proxy
Statement. In addition, at the Special Meeting the stockholders will be asked to
approve an amendment and restatement to the ITEQ 1990 Stock Option Plan (the
"Restated Plan") to, among other things, increase the maximum number of shares
available for issuance under the plan to 3,000,000.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER AGREEMENT, WHICH WAS
APPROVED UNANIMOUSLY BY THE BOARD, IS IN THE BEST INTERESTS OF THE STOCKHOLDERS
OF ITEQ AND RECOMMENDS THAT YOU VOTE FOR THE MERGER PROPOSAL. The board of
directors has received the opinion of Simmons & Co. International, financial
advisor to ITEQ, that the consideration to be paid by ITEQ in the Merger is
fair, from a financial point of view, to the holders of ITEQ common stock. A
copy of the opinion is included in the Joint Proxy Statement as Appendix B
thereto.
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the shares of ITEQ common stock outstanding. Adoption
of the Merger Proposal will constitute adoption of the Merger Agreement and the
issuance of shares of ITEQ common stock pursuant to the Merger. Under Delaware
law, ITEQ stockholders do not have appraisal rights in connection with the
Merger Proposal. Approval of the Restated Plan requires the affirmative vote of
a majority of the shares of ITEQ common stock present at the Special Meeting.
You are urged to read carefully the Joint Proxy Statement and the
Appendices thereto in their entirety for a complete description of the Merger
Proposal and Restated Plan. Whether or not you plan to be at the Special
Meeting, please be sure to sign, date and return the enclosed proxy card in the
enclosed envelope as promptly as possible so that your shares may be represented
at the Special Meeting and voted in accordance with your wishes. Your vote is
important regardless of the number of shares you own.
On behalf of the Board of Directors,
Mark E. Johnson
Chairman and Chief Executive Officer
<PAGE> 3
ASTROTECH INTERNATIONAL CORPORATION
960 PENN AVENUE, SUITE 800
PITTSBURGH, PA 15222
August , 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Astrotech International Corporation ("Astrotech") to be
held on September 30, 1997, at , . At the Special Meeting,
you will be asked to consider and vote upon a proposal to adopt a Plan and
Agreement of Merger dated as of June 30, 1997 (the "Merger Agreement"), by and
between Astrotech and ITEQ, Inc. ("ITEQ"), providing for the merger (the
"Merger") of Astrotech with and into ITEQ, pursuant to which (a) ITEQ will be
the corporation surviving the Merger, (b) each share of Astrotech's common
stock, par value $.01 per share (the "Astrotech Common Stock") issued and
outstanding immediately prior to the consummation of the Merger will be
converted into 0.93 of a share of ITEQ common stock, par value $.001 per share
(the "ITEQ Common Stock"), and (c) all outstanding options to purchase Astrotech
Common Stock will be converted into options to purchase shares of ITEQ Common
Stock, all in accordance with the Merger Agreement. No certificates for
fractional share interests of ITEQ Common Stock will be issued, but in lieu
thereof, ITEQ will settle all such fractional share interests in cash as
described in the attached Joint Proxy Statement.
The Merger Agreement has been approved by the Board of Directors. In
addition, Rauscher Pierce Refsnes, Inc. has rendered its opinion that the
consideration to be paid in the Merger is fair, from a financial point of view,
to the holders of Astrotech Common Stock. A copy of the Opinion of Rauscher
Pierce Refsnes, Inc. is included as Appendix C to the attached Joint Proxy
Statement.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
HAS DETERMINED THAT IT IS FAIR AND IN THE BEST INTERESTS OF ASTROTECH AND THE
HOLDERS OF ASTROTECH COMMON STOCK. AFTER CAREFUL CONSIDERATION, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF ASTROTECH COMMON STOCK VOTE
FOR ADOPTION OF THE MERGER AGREEMENT.
THE MERGER AGREEMENT MUST BE ADOPTED BY THE HOLDERS OF AT LEAST A MAJORITY
OF OUTSTANDING SHARES OF ASTROTECH COMMON STOCK, AND IT IS THEREFORE IMPORTANT
THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING. ALL COMMON
STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER OR NOT
YOU ARE ABLE TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE. THIS ACTION WILL NOT LIMIT YOUR
RIGHT TO VOTE IN PERSON AT THE SPECIAL MEETING IF YOU WISH TO DO SO.
Sincerely yours,
S. Kent Rockwell
Chairman of the Board
and Chief Executive Officer
<PAGE> 4
ITEQ, INC.
2727 ALLEN PARKWAY, SUITE 760
HOUSTON, TEXAS 77019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 30, 1997
---------------------
Notice is hereby given that a special meeting of the stockholders (the
"Special Meeting") of ITEQ, Inc. ("ITEQ") will be held at the offices of ITEQ,
2727 Allen Parkway, Suite 760, Houston, Texas 77019 at 10:00 a.m., local time,
on September 30, 1997, for the following purposes:
1. To consider and act upon a proposal to adopt the Plan and Agreement
of Merger (the "Merger Agreement") pursuant to which Astrotech
International Corporation ("Astrotech") would merge into ITEQ, with ITEQ
being the surviving corporation. The Merger Agreement, which provides for
(i) the appointment of two additional members to the ITEQ board of
directors, and (ii) the adoption of an Amended and Restated Certificate of
Incorporation which, among other things, increases the authorized ITEQ
common stock, $.001 par value per share, from 30,000,000 to 40,000,000
shares, is described in the accompanying Joint Proxy Statement;
2. To consider and act upon a proposal to amend and restate the ITEQ
1990 Stock Option Plan to, among other things, increase the maximum number
of shares available for issuance under the plan to 3,000,000; and
3. To consider and act upon such other business as may properly be
presented to the Special Meeting.
A record of stockholders has been taken as of the close of business on
August 25, 1997, and only those stockholders of record on that date will be
entitled to notice of and to vote at the Special Meeting. A stockholders' list
will be available commencing September 19, 1997, and may be inspected during
normal business hours prior to the Special Meeting at the offices of ITEQ, 2727
Allen Parkway, Suite 760, Houston, Texas 77019.
Your participation in ITEQ's affairs is important. To ensure your
representation, if you do not expect to be present at the Special Meeting,
please sign and date the enclosed proxy and return it promptly in the enclosed,
stamped envelope which has been provided for your convenience. The prompt return
of proxies will ensure a quorum and save ITEQ the expense of further
solicitation. If you do attend the Special Meeting and wish to vote in person,
you may withdraw your proxy and vote in person.
By Order of the Board of Directors,
Lawrance W. McAfee
Executive Vice President, Chief
Financial Officer
and Secretary
Houston, Texas
, 1997
<PAGE> 5
ASTROTECH INTERNATIONAL CORPORATION
960 PENN AVENUE, SUITE 800
PITTSBURGH, PA 15222
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 30, 1997
---------------------
To the Stockholders of Astrotech International Corporation:
A Special Meeting of Stockholders (the "Special Meeting") of Astrotech
International Corporation, a Delaware corporation ("Astrotech"), will be held on
Tuesday, September 30, 1997 at 10:00 a.m., local time, at , for the
following purposes:
1. To consider and vote upon a proposal to adopt the Plan and
Agreement of Merger dated as of June 30, 1997 (the "Merger Agreement") by
and between ITEQ, Inc. ("ITEQ"), a Delaware Corporation, and Astrotech.
Pursuant to the Merger Agreement, Astrotech would be merged with and into
ITEQ (the "Merger") and, among other things, each share of common stock,
par value $.01 per share, of Astrotech ("Astrotech Common Stock")
outstanding at the effective time of the Merger would be converted into
0.93 of one share of common stock, par value $.001 per share, of ITEQ, all
as more fully set forth in the accompanying Joint Proxy Statement and in
the Merger Agreement, a copy of which is included as Appendix A thereto;
and
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors of Astrotech has fixed the close of business on
August 22, 1997 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the Special Meeting and any adjournment
thereof. Only holders of record of shares of Astrotech Common Stock at the close
of business on the record date are entitled to notice of, and to vote at, the
Special Meeting. A complete list of such stockholders will be available for
examination at the offices of Astrotech in Pittsburgh, Pennsylvania during
normal business hours by any Astrotech stockholder, for any purpose germane to
the Special Meeting for a period of 10 days prior to the meeting. Stockholders
of Astrotech are not entitled to appraisal rights under the Delaware General
Corporation Law in respect of the Merger.
YOUR VOTE IS IMPORTANT. THE AFFIRMATIVE VOTE BY THE HOLDERS OF AT LEAST A
MAJORITY OF THE OUTSTANDING SHARES OF ASTROTECH COMMON STOCK IS REQUIRED FOR
ADOPTION OF THE MERGER AGREEMENT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED PROXY OR VOTING
INSTRUCTION CARD AND THUS ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE
SPECIAL MEETING IF YOU ARE UNABLE TO ATTEND. IF YOU DO ATTEND THE SPECIAL
MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN
PERSON.
By Order of the Board of Directors,
Raymond T. Royko,
Secretary
Pittsburgh, Pennsylvania
, 1997
<PAGE> 6
ITEQ, INC.
ASTROTECH INTERNATIONAL CORPORATION
JOINT PROXY STATEMENT
---------------------
This Joint Proxy Statement relates to the proposed merger (the "Merger") of
ITEQ, Inc., a Delaware corporation ("ITEQ"), and Astrotech International
Corporation, a Delaware corporation ("Astrotech"), pursuant to a Plan and
Agreement of Merger between ITEQ and Astrotech dated as of June 30, 1997 (the
"Merger Agreement"). As a result of the Merger, Astrotech will be merged with
and into ITEQ, with ITEQ being the surviving corporation.
This Joint Proxy Statement is being furnished to holders of ITEQ common
stock, $.001 par value per share ("ITEQ Common Stock"), and holders of Astrotech
common stock, $.01 par value per share ("Astrotech Common Stock"), in connection
with the solicitation of proxies by the respective boards of directors of ITEQ
and Astrotech for use at the special meetings of the stockholders of each
company to be held on September 30, 1997. This Joint Proxy Statement and the
accompanying forms of proxy are first being mailed to stockholders of ITEQ and
Astrotech on or about August , 1997.
At the ITEQ special meeting, holders of ITEQ Common Stock will be asked to
vote on (i) a proposal to adopt the Merger Agreement (the "Merger Proposal") and
(ii) a proposal to amend and restate the ITEQ 1990 Stock Option Plan. At the
Astrotech special meeting, the holders of Astrotech Common Stock will be asked
to adopt the Merger Agreement.
FOR A DISCUSSION OF RISK FACTORS REGARDING THE BUSINESS AND OPERATIONS OF
ITEQ AND ASTROTECH THAT SHOULD BE EVALUATED BEFORE VOTING ON THE PROPOSALS
DESCRIBED HEREIN AT THE ITEQ SPECIAL MEETING OR THE ASTROTECH SPECIAL MEETING,
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
<PAGE> 7
AVAILABLE INFORMATION
ITEQ and Astrotech are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file 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, ITEQ and Astrotech are 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. In addition, certain information filed by
ITEQ can be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, Washington, D.C. 20006. In addition, certain
information concerning Astrotech is available for inspection at the offices of
the American Stock Exchange, 86 Trinity Place, 14th Floor, New York, New York
10006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement incorporates documents by reference that are not
presented herein or delivered herewith. These documents will be available upon
request from (a) with respect to ITEQ, Lawrance W. McAfee, executive vice
president, chief financial officer and secretary, ITEQ, Inc., 2727 Allen
Parkway, Suite 760, Houston, Texas 77019, telephone number (713) 285-2700 and
(b) with respect to Astrotech, Raymond T. Royko, vice president, secretary and
general counsel, Astrotech International Corporation, 960 Penn Avenue, Suite
800, Pittsburgh, Pennsylvania 15222, telephone number (412) 391-1896. In order
to ensure timely delivery of the documents, any request should be made by
, 1997.
ITEQ hereby incorporates by reference its (a) Annual Report on Form 10-K
for the year ended December 31, 1996, as amended by Form 10-K/A dated May 2,
1997, (b) Form 8-K/A dated February 3, 1997 and (c) Form 8-K dated March 7,
1997. Astrotech hereby incorporates by reference its (a) Annual Report on Form
10-K for the fiscal year ended September 30, 1996, as amended by Form 10-K/A
dated January 27, 1997 and (b) Form 8-K filed on May 14, 1997, as amended by its
Form 8-K/A filed on July 11, 1997.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY........................................ 1
The Companies................................ 1
The Meetings................................. 2
The Merger................................... 3
No Appraisal Rights.......................... 5
Certain Federal Income Tax Consequences...... 5
Risk Factors................................. 5
Disclosure Regarding Forward Looking
Statements................................. 5
SUMMARY COMBINED UNAUDITED CONDENSED PRO FORMA
FINANCIAL DATA............................... 6
SUMMARY HISTORICAL FINANCIAL DATA
ITEQ......................................... 7
Astrotech.................................... 8
COMPARATIVE PER SHARE DATA..................... 9
COMPARATIVE MARKET PRICE DATA.................. 10
RISK FACTORS................................... 12
Fixed Exchange Ratio......................... 12
Dependence on Industry Spending;
Seasonality................................ 12
Acquisitions; Integration of Operations...... 12
Potential Obstacles to Integration of the
Combined Company........................... 12
Leverage and Liquidity....................... 13
Competition.................................. 13
International Expansion...................... 13
Potential for Product Liability Claims....... 13
Environmental Regulations.................... 13
THE MEETINGS................................... 14
Matters to be Considered at the Meetings..... 14
Recommendations of the Boards of Directors... 14
Voting at the Meetings; Record Dates......... 14
Proxies...................................... 14
Solicitation of Proxies...................... 15
THE MERGER..................................... 16
Background................................... 16
Reasons for the Merger....................... 17
Opinion of Simmons........................... 19
Opinion of RPR............................... 22
Certain Federal Income Tax Consequences...... 26
Anticipated Accounting Treatment............. 28
Listing on the Nasdaq National Market........ 28
No Appraisal Rights.......................... 28
Interest of Certain Persons in the Merger.... 28
THE MERGER AGREEMENT........................... 30
Effective Date of the Merger................. 30
Manner and Basis of Converting Astrotech
Shares..................................... 30
Management After the Merger.................. 30
Amendment and Restatement of Certificate of
Incorporation.............................. 31
Amendment and Restatement of Bylaws.......... 32
Terms of the Merger Agreement................ 32
COMBINED UNAUDITED CONDENSED PRO FORMA
FINANCIAL INFORMATION........................ 36
BUSINESS OF ITEQ............................... 43
General...................................... 43
Business Strategy............................ 43
Acquisition History.......................... 44
Products and Services........................ 45
Sales and Marketing.......................... 46
Market Conditions and Competition............ 46
Manufacturing Facilities..................... 47
Environmental Matters........................ 47
Significant Customers........................ 47
Backlog...................................... 48
Employees.................................... 48
Executive Officers and Directors of ITEQ..... 48
ITEQ SELECTED FINANCIAL DATA................... 50
ITEQ MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 51
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
General...................................... 51
Results of Operations........................ 52
Liquidity and Capital Resources.............. 55
BUSINESS OF ASTROTECH.......................... 57
General...................................... 57
Growth Opportunities and Strategies.......... 57
Acquisition History.......................... 58
Products and Services........................ 58
Customers and Marketing...................... 60
Competition.................................. 61
Foreign Operations........................... 61
Raw Materials................................ 61
Patents, Trademarks, and Licenses............ 61
Backlog...................................... 61
Employment................................... 61
Environmental................................ 62
Properties................................... 62
Legal Proceedings............................ 63
Executive Officers and Directors of
Astrotech.................................. 63
ASTROTECH SELECTED FINANCIAL DATA.............. 65
ASTROTECH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 66
Results of Operations........................ 66
Liquidity and Capital Resources.............. 70
PRINCIPAL STOCKHOLDERS OF ITEQ................. 73
PRINCIPAL STOCKHOLDERS OF ASTROTECH............ 74
DESCRIPTION OF ITEQ CAPITAL STOCK.............. 75
Common Stock................................. 75
Preferred Stock.............................. 75
Warrants..................................... 75
Certain Anti-Takeover Provisions............. 76
Limitation on Directors' Liability and
Indemnification of Directors and
Officers................................... 77
Transfer Agent and Registrar................. 78
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ITEQ
AND ASTROTECH................................ 78
Authorized Capital........................... 78
Voting Requirements and Quorums of
Stockholder Meetings....................... 79
Election of Directors........................ 79
Vacancies on the Board of Directors.......... 79
Number and Term of Directors................. 79
Removal of Directors......................... 80
Amendment of Bylaws.......................... 80
Action by Written Consent and Special
Meetings of Stockholders................... 80
Indemnification of Directors and Officers.... 80
PROPOSAL TO ADOPT ITEQ RESTATED STOCK OPTION
PLAN......................................... 81
General...................................... 81
Eligibility.................................. 81
Administration............................... 82
Types of Awards.............................. 82
Amendment.................................... 82
Other Matters................................ 82
Tax Consequences............................. 83
INDEX TO FINANCIAL STATEMENTS.................. F-1
Appendix A -- Plan and Agreement of Merger..... A-1
Appendix B -- Opinion of Simmons & Co.
International................................ B-1
Appendix C -- Opinion of Rauscher Pierce
Refsnes, Inc................................. C-1
Appendix D -- Amended and Restated ITEQ 1990
Stock Option Plan............................ D-1
Appendix E -- Amended and Restated Certificate
of Incorporation of ITEQ..................... E-1
</TABLE>
i
<PAGE> 9
GLOSSARY OF TERMS
"Astrotech" means Astrotech International Corporation, a Delaware
corporation.
"Astrotech Common Stock" means the common stock, par value $.01 per share,
of Astrotech.
"Astrotech Meeting" means the special meeting of stockholders of Astrotech
to be held with respect to adoption by the Astrotech Stockholders of the Merger
Agreement.
"Astrotech Record Date" means August 22, 1997.
"Astrotech Stockholders" means the holders of Astrotech Common Stock.
"Closing" means the consummation of the Merger.
"Closing Date" means September 30, 1997, or such other date as may be
determined by ITEQ and Astrotech.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Company" means the combined company of ITEQ and Astrotech
resulting from the Merger.
"Commission" means the United States Securities and Exchange Commission.
"DGCL" means the Delaware General Corporation Law, as amended.
"Effective Date" means the date the certificate of merger is filed by ITEQ
pursuant to the Merger Agreement with the Secretary of State of the State of
Delaware in accordance with the DGCL.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Agent" means Harris Trust and Savings Bank, New York, New York,
the exchange agent selected by ITEQ to facilitate the exchange of Astrotech
Common Stock in the Merger.
"Exchange Ratio" means 0.93, the number of shares of ITEQ Common Stock to
be exchanged for each share of Astrotech Common Stock pursuant to the Merger
Agreement.
"GAAP" means generally accepted accounting principles.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"ITEQ" means ITEQ, Inc., a Delaware corporation.
"ITEQ Common Stock" means the common stock, $.001 par value per share, of
ITEQ.
"ITEQ Meeting" means the special meeting of stockholders of ITEQ to be held
with respect to adoption by the ITEQ Stockholders of the Merger Agreement and
approval by the ITEQ Stockholders of the Restated Plan.
"ITEQ Record Date" means August 25, 1997.
"ITEQ Restated Bylaws" means the Amended and Restated Bylaws of ITEQ to
become effective on the consummation of the Merger.
"ITEQ Restated Certificate" means the Amended and Restated Certificate of
Incorporation of ITEQ to be adopted pursuant to the Merger Agreement, a copy of
which is attached hereto as Appendix E.
"ITEQ Stockholders" means the holders of ITEQ Common Stock.
"Joint Proxy Statement" means this document relating to the ITEQ Meeting
and Astrotech Meeting.
"Merger" means the merger of Astrotech with and into ITEQ, as contemplated
by the Merger Agreement.
ii
<PAGE> 10
"Merger Agreement" means the Plan and Agreement of Merger by and between
ITEQ and Astrotech dated effective June 30, 1997, a copy of which is attached
hereto as Appendix A.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq National Market" means the National Market System of the Nasdaq
Stock Market, Inc.
"Restated Plan" means the proposal to amend and restate the ITEQ 1990 Stock
Option Plan, a copy of which is attached hereto as Appendix D.
"RPR" means Rauscher Pierce Refsnes, Inc., financial advisor to Astrotech.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Simmons" means Simmons & Co. International, financial advisor to ITEQ.
iii
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement. The information contained in this summary is
qualified in its entirety by and should be read in conjunction with more
detailed information contained in this Joint Proxy Statement and the Appendices
hereto. Unless otherwise indicated, capitalized terms used in this summary are
defined in the Glossary of Terms or elsewhere in this Joint Proxy Statement.
Stockholders are urged to carefully read this Joint Proxy Statement and the
Appendices in their entirety.
THE COMPANIES
ITEQ, Inc.................. ITEQ is a provider of manufactured equipment,
engineered systems and services used in the
processing, treatment, storage and movement of
gases and liquids. It manufactures shell and tube
heat exchangers, principally for petrochemical and
refining applications, and produces 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. ITEQ operates internationally,
with its equipment, systems and services sold or
utilized in over 30 countries worldwide. ITEQ's
principal executive offices are located at 2727
Allen Parkway, Suite 760, Houston, Texas 77019, and
its telephone number is (713) 285-2700. See
"Business of ITEQ."
Astrotech International
Corporation.............. Astrotech provides engineering, design, fabrication
and maintenance services and constructs steel
structures for a variety of industries, including
refining, petrochemical, water storage, pulp and
paper, mining, alcohol, agriculture, wastewater
treatment, power generation and process systems.
Astrotech's products include large aboveground
storage tanks, pressure vessels, bins, silos,
stacks and liners, scrubbers and shop built tanks.
Astrotech also provides non-destructive testing and
inspection services for large aboveground storage
tanks, pressure vessels and piping and also offers
mobile storage tank leasing services. Astrotech's
principal executive offices are located at 960 Penn
Avenue, Suite 800, Pittsburgh, Pennsylvania 15222,
and its telephone number is (412) 391-1896. See
"Business of Astrotech."
1
<PAGE> 12
THE MEETINGS
DATE, TIME AND PLACE
ITEQ. The ITEQ Meeting will be held on Tuesday, September 30, 1997, at 2727
Allen Parkway, Suite 760, Houston, Texas 77019, at 10:00 a.m. (local time).
Astrotech. The Astrotech Meeting will be held on Tuesday, September 30,
1997, at , at 10:00 a.m. (local time).
PURPOSES OF THE MEETINGS
ITEQ. The purpose of the ITEQ Meeting is to consider and act upon (i) a
proposal to adopt the Merger Agreement, (ii) a proposal to approve the Restated
Plan and (iii) such other business as may be properly presented to the meeting.
Astrotech. The purpose of the Astrotech Meeting is to consider and act upon
a proposal to adopt the Merger Agreement and such other business as may be
properly presented to the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
ITEQ. Only holders of record of shares of ITEQ Common Stock at the close of
business on August 25, 1997, are entitled to notice of and to vote at the ITEQ
Meeting. On such date, there were shares of ITEQ Common Stock
outstanding, each of which will be entitled to one vote on each matter to be
acted upon at the ITEQ Meeting.
Astrotech. Only holders of record of Astrotech Common Stock at the close of
business on August 22, 1997, are entitled to notice of and to vote at the
Astrotech Meeting. On such date, there were shares of Astrotech Common
Stock outstanding, each of which will be entitled to one vote on each matter to
be acted upon at the Astrotech Meeting.
QUORUM; VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER
PERSONS
ITEQ. The presence, in person or by proxy, at the ITEQ Meeting of the
holders of a majority of the outstanding shares of ITEQ Common Stock is
necessary to constitute a quorum at the meeting. The affirmative vote of the
holders of (i) at least a majority of the outstanding shares of ITEQ Common
Stock is required to adopt the Merger Agreement and (ii) at least a majority of
the shares of ITEQ Common Stock present at the ITEQ Meeting is required to
approve the Restated Plan.
As of the ITEQ Record Date, directors and executive officers of ITEQ and
their affiliates owned beneficially approximately of the outstanding shares
of ITEQ Common Stock.
Astrotech. The presence, in person or by proxy, at the Astrotech Meeting of
the holders of a majority of the outstanding shares of Astrotech Common Stock is
necessary to constitute a quorum at the meeting. The affirmative vote of the
holders of at least a majority of the outstanding shares of Astrotech Common
Stock is required to adopt the Merger Agreement.
As of the Astrotech Record Date, the directors and executive officers of
Astrotech and their affiliates owned beneficially approximately of the
shares of Astrotech Common Stock.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
ITEQ. The board of directors of ITEQ believes the Merger and the
transactions contemplated thereby and the Restated Plan to be in the best
interests of ITEQ and the ITEQ Stockholders and unanimously recommends that the
ITEQ Stockholders vote to (i) adopt the Merger Agreement and (ii) approve the
Restated Plan.
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<PAGE> 13
Astrotech. The board of directors of Astrotech believes that the Merger and
the transactions contemplated thereby are in the best interests of the Astrotech
Stockholders and unanimously recommends that the Astrotech Stockholders vote to
adopt the Merger Agreement.
See "The Meetings -- Recommendations of the Boards of Directors."
OPINIONS OF FINANCIAL ADVISORS
Simmons has rendered an opinion to the board of directors of ITEQ that the
consideration to be paid in the Merger is fair, from a financial point of view,
to the ITEQ Stockholders. See "The Merger -- Opinion of Simmons" and the full
text of the opinion set forth in Appendix B.
RPR has rendered an opinion to the board of directors of Astrotech that the
consideration to be received by the Astrotech Stockholders in the Merger is fair
to such stockholders from a financial point of view. See "The Merger -- Opinion
of RPR" and the full text of the opinion set forth in Appendix C.
THE MERGER
The board of directors of each of ITEQ and Astrotech have approved, subject
to the approval of their respective stockholders and satisfaction or waiver of
conditions to Closing, the Merger Agreement and the transactions contemplated
thereby. Under the Merger Agreement, Astrotech will be merged with and into
ITEQ, the separate existence of Astrotech will cease, and ITEQ will continue as
the surviving corporation. See "The Merger -- "Background" and -- "Reasons for
the Merger."
EXCHANGE OF ASTROTECH COMMON STOCK AND RELATED MATTERS
Under the terms of the Merger Agreement, each share of Astrotech Common
Stock will be exchanged for 0.93 of a share of ITEQ Common Stock (the "Exchange
Ratio"), resulting in the issuance of approximately 9,265,500 shares of ITEQ
Common Stock upon consummation of the Merger. Astrotech Stockholders will be
entitled to exchange their share certificates for ITEQ Common Stock certificates
upon completing and returning a letter of transmittal to the Exchange Agent.
Upon exchange of all of the Astrotech Common Stock, the former holders of
Astrotech Common Stock will own approximately 35% of ITEQ's outstanding Common
Stock as of the Effective Date.
At the Effective Date, each outstanding option to purchase Astrotech Common
Stock will be modified to become an option to purchase that number of shares of
ITEQ Common Stock determined by multiplying the number of shares of Astrotech
Common Stock subject to such Astrotech stock option at the Effective Date by the
Exchange Ratio, at an exercise price per share of ITEQ Common Stock equal to the
exercise price per share of such option to purchase Astrotech Common Stock
immediately prior to the Effective Date, divided by the Exchange Ratio. The
term, exercisability, vesting schedule and all other terms and conditions of
such options to purchase Astrotech Common Stock will otherwise be unchanged.
See "The Merger Agreement -- Manner and Basis of Converting Astrotech
Shares."
BOARD OF DIRECTORS AFTER THE MERGER
If the Merger is consummated, ITEQ's board of directors will be expanded to
nine members, seven of whom will be the persons who are currently directors of
ITEQ. In addition, S. Kent Rockwell and Nathan M. Avery, each of whom has been
designated by Astrotech under the Merger Agreement, will become directors of
ITEQ on the Effective Date. See "The Merger Agreement -- Management After the
Merger."
EFFECTIVE DATE OF THE MERGER
The Merger will become effective on the date the certificate of merger is
filed by ITEQ with the Secretary of State of the State of Delaware pursuant to
the Merger Agreement. The Effective Date is expected to occur as soon as
practicable after all conditions to the obligations of ITEQ and Astrotech to
consummate the Merger have been satisfied or waived.
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<PAGE> 14
CONDITIONS TO THE MERGER
The obligations of ITEQ and Astrotech to consummate the Merger are subject
to the satisfaction or waiver of certain conditions including (i) the requisite
stockholder approvals of the Merger; (ii) all waiting periods required under the
HSR Act must have expired, or early termination with respect thereto must have
been obtained; (iii) the shares of ITEQ Common Stock issued in the Merger shall
be listed on the Nasdaq National Market; (iv) ITEQ must have consummated a
refinancing of Astrotech's debt, subject to the terms of the Merger Agreement;
(v) receipt of various opinions, including a tax opinion from ITEQ's counsel;
and (vi) certain other conditions customary in transactions similar to the
Merger. See "The Merger Agreement -- Terms of the Merger Agreement -- Conditions
to the Merger."
TERMINATION OF THE MERGER
The Merger Agreement may be terminated by mutual consent of the parties or
by either ITEQ or Astrotech, before or after stockholder adoption, if (i) any
condition precedent to the Merger has not been met by the other party; (ii)
there has been a material adverse change since March 31, 1997 with respect to
the other party; (iii) any legal action regarding the Merger has been brought by
any federal or state governmental entity; (iv) the Merger has not been
consummated by November 30, 1997, other than as a result of a breach of the
Merger Agreement by the terminating party; or (v) if the Merger cannot be
accounted for as a "pooling of interests," except if the terminating party
engaged in a transaction after June 30, 1997 which disqualified the Merger from
such accounting treatment. In addition, Astrotech may terminate the Merger
Agreement if the Astrotech board of directors receives a Superior Astrotech
Transaction Proposal (as defined) and as a result of such proposal, withdraws or
modifies adversely to ITEQ its recommendation to stockholders to vote in favor
of the Merger Agreement and the transactions contemplated thereby. See "The
Merger Agreement -- Terms of the Merger Agreement -- Termination; Agreement Not
To Solicit Other Proposals."
REGULATORY REQUIREMENTS
Consummation of the Merger is contingent upon obtaining clearance from
United States federal antitrust authorities under the HSR Act. There are no
other federal or state regulatory requirements that must be complied with or
obtained in connection with the consummation of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Messrs. S. Kent Rockwell and T. Richard Mathews, each of whom is currently
a director and executive officer of Astrotech, have entered into arrangements
with ITEQ to continue their employment from the Effective Date through December
31, 1997 at their current base salary and benefits. Thereafter, each of Messrs.
Rockwell and Mathews will serve as a consultant for one year on an "as-needed"
basis at a rate of $2,000 per day. Beginning on the Effective Date, Mr. Rockwell
will serve as one of the nine directors of ITEQ. In addition, each of Messrs.
Rockwell and Mathews have entered into two-year non-competition agreements that
commence on the date their employment is terminated, currently anticipated to be
January 1, 1998, and for which they will be paid a total of $450,000 and
$300,000, respectively, and they will be conveyed the automobiles currently
provided to them by Astrotech.
Raymond T. Royko and Helen Vardy Gricks, each of whom currently serves as
an officer of Astrotech, have entered into arrangements with ITEQ to continue
their employment for the three-month period subsequent to the Effective Date
(the "Transition Period") at their current base salary and benefits. As an
incentive for each of them to continue their employment through the Transition
Period, ITEQ has agreed to pay them a one-time bonus of $77,860 and $39,460,
respectively, upon expiration of the Transition Period. In addition, Mr. Royko
and Ms. Gricks will receive a one-time severance payment of $155,720 and
$78,920,
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<PAGE> 15
respectively, upon termination of their employment on the expiration of the
Transition Period, and they will be conveyed the automobiles currently provided
to them by Astrotech.
Based on their ownership of Astrotech Common Stock, Messrs. Rockwell,
Mathews and Royko and Ms. Gricks will become the beneficial owners of 1,350,501,
623,474, 41,106 and 7,594 shares of ITEQ Common Stock, respectively, upon
consummation of the Merger.
See "The Merger -- Interests of Certain Persons in the Merger."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a pooling of interests in accordance
with GAAP. See "The Merger -- Anticipated Accounting Treatment."
NO APPRAISAL RIGHTS
Neither the ITEQ Stockholders nor the Astrotech Stockholders have the right
to seek the appraisal of their shares under the DGCL. See "The Merger -- No
Appraisal Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to constitute a tax-free reorganization under
Section 368(a)(1)(A) of the Code, such that the Astrotech Stockholders will
recognize no gain or loss for federal income tax purposes as a result of the
Merger, except to the extent they receive cash in lieu of fractional shares. See
"The Merger -- Certain Federal Income Tax Consequences."
RISK FACTORS
For a discussion of certain considerations with respect to the business and
operations of ITEQ and Astrotech that should be considered by a stockholder
before determining how to vote at the meetings, see "Risk Factors."
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Joint Proxy Statement includes "forward looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact included in this
Joint Proxy Statement are forward looking statements. Such forward looking
statements include, without limitation, statements under (a) "Business of ITEQ,"
(b) "Business of Astrotech," (c) "ITEQ Management's Discussion and Analysis of
Financial Condition and Results of Operations," (d) "Astrotech Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
(e) "Risk Factors." Although ITEQ and Astrotech believe that the expectations
reflected in such forward looking statements are reasonable, they can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from ITEQ's and
Astrotech's expectations are disclosed in this Joint Proxy Statement under the
heading "Risk Factors" and elsewhere.
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<PAGE> 16
SUMMARY COMBINED UNAUDITED CONDENSED PRO FORMA FINANCIAL DATA
The following presents summary unaudited pro forma financial data of ITEQ
and Astrotech as of the date and for the periods presented. The unaudited pro
forma financial results set forth below give effect to the Merger of ITEQ and
Astrotech as if it had been consummated on January 1, 1994. The unaudited pro
forma balance sheet data gives effect to the Merger as if it had been
consummated on March 31, 1997. The as adjusted pro forma financial data is
derived from the historical financial statements of ITEQ and Astrotech giving
effect to the Ohmstede, Graver and Trusco acquisitions under the purchase method
of accounting, as well as the May 20, 1997 ITEQ equity offering and is based on
assumptions and adjustments described in the Combined Unaudited Condensed Pro
Forma Financial Information contained elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------------------- AS ADJUSTED PRO FORMA
THREE MONTHS ----------------------------
YEAR ENDED ENDED YEAR THREE
DECEMBER 31, MARCH 31, ENDED MONTHS ENDED
------------------------------ ----------------- DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997 1996 1997
-------- -------- -------- ------- ------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $130,552 $213,367 $232,994 $46,148 $77,912 $351,316 $83,468
Cost of revenues.................. 97,662 166,291 179,332(1) 34,650(1) 60,058 271,519(1) 64,585
Selling, general and
administrative
expenses........................ 24,217 32,117 34,436 8,125 10,800 48,569 11,543
Depreciation and amortization..... 4,282 4,835 5,717 1,242 1,819 7,985 1,930
Merger costs, restructuring
charges and other nonrecurring
costs........................... -- 1,355 3,704 3,500 -- 3,704 --
-------- -------- -------- ------- ------- -------- -------
Operating profit (loss)........... 4,391 8,789 9,805 (1,369) 5,235 19,539 5,410
Interest expense, net............. (2,121) (2,835) (3,991) (656) (2,144) (7,476) (1,692)
Other income...................... 206 807 634 52 161 1,378 174
-------- -------- -------- ------- ------- -------- -------
Earnings (Loss) from continuing
operations before change in
accounting principle and
provision (benefit) for income
taxes........................... 2,476 6,761 6,448 (1,973) 3,252 13,441 3,892
Provision (Benefit) for income
taxes........................... 1,201 3,270 2,524 (772) 1,347 5,242 1,518
-------- -------- -------- ------- ------- -------- -------
Net earnings (loss) from
continuing operations before
change in accounting
principle....................... $ 1,275 $ 3,491 $ 3,924 $(1,201) $ 1,905 $ 8,199 $ 2,374
======== ======== ======== ======= ======= ======== =======
Net earnings (loss) from
continuing operations before
change in accounting principle
per common share................ $ 0.07 $ 0.17 $ 0.19 $ (0.06) $ 0.09 $ 0.32 $ 0.09
======== ======== ======== ======= ======= ======== =======
Weighted average number of common
and common equivalent shares
outstanding(2).................. 19,407 20,746 20,881 20,775 21,805 25,988 26,912
======== ======== ======== ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
PRO FORMA PRO FORMA
--------- -----------
<S> <C> <C>
MARCH 31, 1997
-----------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $213,755 $233,851
Working capital............................................. 31,279 34,627
Long-term obligations....................................... 80,446 63,314
Stockholders' equity........................................ 64,411 96,711
</TABLE>
- ---------------
(1) Includes $700 of restructuring charges. See Note 3 to the ITEQ Consolidated
Financial Statements.
(2) Unaudited pro forma per share information is based on the combined average
number of shares of ITEQ and Astrotech Common Stock adjusted for the
Exchange Ratio for the respective period.
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<PAGE> 17
SUMMARY HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical financial data
for ITEQ and Astrotech. The financial data for the periods indicated have been
derived from the "ITEQ Selected Financial Data" and the "Astrotech Selected
Financial Data" included elsewhere in this Joint Proxy Statement. The
information below should also be read in conjunction with "ITEQ Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Astrotech Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the respective ITEQ and Astrotech consolidated
financial statements and related notes appearing elsewhere in this Joint Proxy
Statement.
ITEQ
<TABLE>
<CAPTION>
FISCAL FISCAL YEAR ENDED DECEMBER 31, THREE
YEAR YEAR NINE MONTHS ------------------------------------ MONTHS
ENDED ENDED ENDED 1994 1995 ENDED
MARCH 31, MARCH 31, DECEMBER 31, AS AS MARCH 31,
1992 1993 1993 RESTATED(1) RESTATED(1) 1996 1997
--------- --------- ------------ ----------- ----------- -------- -----------
(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 $48,494
Operating profit (loss)...... (81) (1,237) 769 1,593 3,436 2,273(2) 3,691
Earnings (Loss) before
provision (benefit) for
income taxes............... 35 (1,221) 705 817 2,260 (82) 1,986
Provision (Benefit) for
income taxes............... 14 (396) 234 338 1,500 4 813
------ ------- ------- ------- -------- -------- -------
Net earnings (loss).......... 21 (825) 471 479 760 (86) 1,173
====== ======= ======= ======= ======== ======== =======
Net earnings (loss) per
common share............... $ .01 $ (.22) $ .08 $ .04 $ .07 $ (.01) $ .10
====== ======= ======= ======= ======== ======== =======
Weighted average common and
common equivalent shares
outstanding................ 2,991 3,763 5,928 10,891 11,552 11,481 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:
Total assets......................... $7,344 $26,585 $25,887 $52,800 $70,844 $136,388 $128,294
Working capital...................... 3,382 4,038 4,197 7,964 17,834 29,851 22,706
Long-term obligations................ 1,698 3,698 1,964 10,773 21,555 73,153 63,356
Stockholders' equity................. 5,404 14,540 14,627 21,474 21,403 23,253 25,241
</TABLE>
- ---------------
(1) See Note 1 to the ITEQ Consolidated Financial Statements.
(2) Includes $4,404 in restructuring charges. See Note 3 to the ITEQ
Consolidated Financial Statements.
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<PAGE> 18
ASTROTECH
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
--------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................................... $50,954 $39,549 $68,726 $100,203 $122,190 $63,222
Operating profit................................... 4,315 1,277 2,798 5,353 7,532 3,712
Earnings from continuing operations before change
in accounting principle and provision for income
taxes............................................ 3,741 771 1,659 4,501 6,530 3,223
Provision for income taxes......................... 550 184 863 1,770 2,520 1,309
Earnings from continuing operations before change
in accounting principle.......................... 3,191 587 796 2,731 4,010 1,914
Earnings from discontinued operations.............. 379 564 154 -- -- --
Cumulative effect of change in accounting principal
for income taxes................................. -- -- 2,931 -- -- --
Net earnings....................................... 3,570 1,151 3,881 2,731 4,010 1,914
Net earnings applicable to common shares........... 3,326 1,151 3,881 2,731 4,010 1,914
======= ======= ======= ======== ======== =======
Earnings from continuing operations before change
in accounting principle per common share......... $ .40(1) $ .07 $ .09 $ .28 $ .40 $ .19
Cumulative effect of change in accounting principle
per common share................................. -- -- .32 -- -- --
Net earnings per common share...................... .46 .14 .42 .28 .40 .19
======= ======= ======= ======== ======== =======
Weighted average common and common equivalent
shares outstanding............................... 7,292 8,053 9,157 9,886 10,108 10,232
======= ======= ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $32,506 $34,012 $64,906 $66,551 $88,364 $85,461
Working capital......................................... 5,381 7,161 8,928 10,283 12,722 8,573
Long-term obligations................................... 4,760 5,731 12,334 12,482 20,917 17,090
Stockholders' equity.................................... 19,551 21,133 30,005 33,318 37,053 39,170
</TABLE>
- ---------------
(1) Astrotech paid $244 of preferred stock dividends in 1992.
See Notes 1, 2 and 9 of Notes to the Astrotech Consolidated Financial
Statements included herein for a discussion of change in accounting principle
for income taxes, acquisitions and discontinued operations, respectively, which
affected comparability among years.
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<PAGE> 19
COMPARATIVE PER SHARE DATA
The following table sets forth (a) the historical earnings (loss) per
common share and the historical book value per common share for ITEQ Common
Stock, (b) the historical earnings per common share and the historical book
value per common share data of Astrotech Common Stock; (c) the combined
unaudited pro forma earnings per share and the combined unaudited pro forma book
value per share for ITEQ after giving effect to the proposed Merger on a pooling
of interests basis; and (d) the combined unaudited pro forma earnings per common
share and the unaudited pro forma book value per share attributable to the .93
share of ITEQ Common Stock that will be received by the Astrotech Stockholders
for each share of Astrotech Common Stock (as if Astrotech would be the surviving
corporation). No cash dividends were paid by ITEQ or Astrotech during any of the
periods presented. The information presented in the table should be read in
conjunction with the combined unaudited condensed pro forma financial statements
and the separate historical consolidated financial statements of ITEQ and
Astrotech and the related notes contained elsewhere or incorporated by reference
in this Joint Proxy Statement. See "Combined Unaudited Condensed Pro Forma
Financial Information," "Incorporation of Certain Information by Reference" and
the ITEQ and Astrotech Consolidated Financial Statements.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
----------------- --------------------
ITEQ ASTROTECH COMBINED ASTROTECH
----- --------- -------- ---------
(A) (B) (C) (D)
(UNAUDITED)
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING
OPERATIONS BEFORE CHANGE IN ACCOUNTING PRINCIPLE:
Unaudited three months ended March 31, 1997.............. $ .10 $ .07 $ .09 $ .08
Year ended December 31 for ITEQ and
September 30 for Astrotech:
1996................................................ (.01) .40 .19 .17
1995................................................ .07 .28 .17 .16
1994................................................ .04 .09 .07 .21
BOOK VALUE PER SHARE AS OF:
Unaudited March 31, 1997 for ITEQ and Astrotech.......... $2.13 $3.94 $3.06 $2.84
December 31, 1996 for ITEQ and September 30, 1996 for
Astrotech.............................................. 2.02 3.75 2.92 2.71
</TABLE>
- ---------------
(1) Unaudited pro forma per share information is based on the combined average
number of shares or combined number of shares of ITEQ and Astrotech Common
Stock adjusted by the Exchange Ratio for, or as of, the respective period
then ended, as applicable. The information is also based on the historical
ITEQ results or financial position combined with the historical Astrotech
results or financial position.
9
<PAGE> 20
COMPARATIVE MARKET PRICE DATA
ITEQ COMMON STOCK
ITEQ Common Stock is quoted on the Nasdaq National Market under the symbol
"ITEQ." The following table shows the high and low closing sale prices by
quarter for the ITEQ Common Stock as reported by the Nasdaq National Market. On
July 23, 1997, the last full trading day prior to the public announcement of the
signing of the Merger Agreement, the last sale price per share of ITEQ Common
Stock was $11 3/4. On August , 1997, the last full trading day for which
quotations were available prior to the date of this Joint Proxy Statement, the
last sale price per share of ITEQ Common Stock was $ . As of August 25,
1997, there were approximately holders of record of the ITEQ Common Stock.
Stockholders are urged to obtain current quotations for ITEQ Common Stock. ITEQ
has never paid dividends on its common stock, and it is anticipated that
financing agreements in place after the Merger will restrict ITEQ's ability to
pay dividends in the future.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................. 33/8 21/4
Second Quarter............................................ 215/16 13/4
Third Quarter............................................. 43/4 25/16
Fourth Quarter............................................ 43/8 33/16
1996
First Quarter............................................. 41/2 31/4
Second Quarter............................................ 41/4 33/8
Third Quarter............................................. 51/8 27/8
Fourth Quarter............................................ 5 41/8
1997
First Quarter............................................. 71/2 41/2
Second Quarter............................................ 91/2 513/16
Third Quarter (through August 4, 1997).................... 113/4 95/8
</TABLE>
10
<PAGE> 21
ASTROTECH COMMON STOCK
Astrotech Common Stock is traded on the American Stock Exchange under the
symbol "AIX." The high and low sales prices for the Astrotech Common Stock for
each fiscal quarter as reported in the consolidated transaction reporting system
are shown below for the periods indicated. No dividends have been paid on the
Astrotech Common Stock during the periods indicated. On August , 1997, the
last full trading day for which quotations were available prior to the date of
this Joint Proxy Statement, the last sale price per share of the Astrotech
Common Stock was $ . As of August 22, 1997, there were approximately
holders of record of Astrotech Common Stock.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
1995
First Quarter............................................. 27/8 29/16
Second Quarter............................................ 31/2 211/16
Third Quarter............................................. 37/16 211/16
Fourth Quarter............................................ 315/16 31/8
1996
First Quarter............................................. 43/8 31/16
Second Quarter............................................ 413/16 35/8
Third Quarter............................................. 9 41/8
Fourth Quarter............................................ 61/8 43/8
1997
First Quarter............................................. 61/16 41/2
Second Quarter............................................ 63/4 51/2
Third Quarter............................................. 63/4 51/8
Fourth Quarter (through August 4, 1997)................... 101/8 53/4
</TABLE>
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<PAGE> 22
RISK FACTORS
The following risk factors should be considered by ITEQ Stockholders and
Astrotech Stockholders in evaluating whether to approve the Merger. These risk
factors should be considered in conjunction with the other information included
in this Joint Proxy Statement.
FIXED EXCHANGE RATIO
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the market price of either ITEQ Common Stock or
Astrotech Common Stock. The price of ITEQ Common Stock at the Effective Date
will likely vary from its price at the date of this Joint Proxy Statement. Such
variation may be the result of changes in the business, operations or prospects
of ITEQ or Astrotech, market assessments of the likelihood that the Merger will
be consummated and the timing thereof, general market and economic conditions
and other factors. See "The Merger Agreement -- Manner and Basis of Converting
Astrotech Shares and -- Terms of the Merger Agreement."
DEPENDENCE ON INDUSTRY SPENDING; SEASONALITY
The prospects for the Combined Company depend upon the level of capital and
maintenance expenditures by its industrial customers, in particular those by
petroleum, 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 Combined Company's products and services and its results of
operations. ITEQ historically has experienced quarterly fluctuations in its
operating results, and historically Astrotech's second fiscal quarter results
have tended to fluctuate, principally due to climatic conditions affecting some
of Astrotech's operations and the timing of maintenance budgets at some of its
customers. Consequently, Astrotech's second fiscal quarter historically includes
lower revenues than the other three quarters. Operating results for the Combined
Company in any quarter will be dependent upon the timing of equipment and system
sales, which may vary considerably among quarters.
ACQUISITIONS; INTEGRATION OF OPERATIONS
Since 1990 ITEQ has completed eight acquisitions of businesses. ITEQ plans
to continue to pursue acquisitions of businesses whose products and services
complement those of ITEQ. ITEQ'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 ITEQ generally has
been successful in pursuing these acquisitions, there can be no assurance that
acquisition opportunities will continue to be available, that it will have
access to the capital required to finance potential acquisitions, that it will
continue to acquire businesses or that any business acquired will be integrated
successfully or prove profitable.
POTENTIAL OBSTACLES TO INTEGRATION OF THE COMBINED COMPANY
In evaluating the terms of the Merger, ITEQ and Astrotech each analyzed
their respective businesses and made certain assumptions concerning their
respective future operations and operations of the Combined Company. One
principal assumption was that through consolidation of operations, the Merger
would produce a Combined Company with operating results better than those
historically experienced by either company in the absence of the Merger. There
can be no assurance, however, that these benefits will be achieved. These
anticipated benefits of the Merger will not be achieved unless the companies are
successfully combined in a timely manner. The process of combining the
organizations could cause the interruption of, or a loss of momentum in, the
activities of the Combined Company's businesses, which could have an adverse
effect on their combined operations.
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LEVERAGE AND LIQUIDITY
At March 31, 1997, after giving effect to the repayment of indebtedness
subsequent to ITEQ's equity offering that was completed in May 1997, ITEQ would
have had total indebtedness of approximately $31.1 million and debt as a
percentage of total capitalization of 35%. On a pro forma basis after giving
effect to the Merger, the acquisition by Astrotech of Trusco Tank, Inc. and the
ITEQ equity offering, at March 31, 1997, the Combined Company would have had
total indebtedness of approximately $63.3 million and debt as a percentage of
total capitalization of 40%. The degree to which the Combined Company will be
leveraged could have important consequences, including the following: (i) the
possible impairment of the Combined 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 Combined Company's cash flow
from operations to be dedicated to the payment of principal and interest on its
indebtedness; and (iii) the potential for increased vulnerability of the
Combined Company to economic downturns and possible limitation of its ability to
withstand competitive pressures.
COMPETITION
The Combined Company's markets are fragmented and highly competitive. The
Combined Company will compete with many United States-based and international
companies in its global markets. Although none of the Combined Company's
competitors is considered dominant, there are competitors that have
significantly greater resources than the Combined Company, which, among other
things, could be a competitive disadvantage to the Combined Company in securing
certain projects.
INTERNATIONAL EXPANSION
The Combined 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 Combined 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 ITEQ's and
Astrotech's contracts with respect to international export 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 Combined
Company may be subject to foreign exchange risks in the future.
POTENTIAL FOR PRODUCT LIABILITY CLAIMS
Certain of the Combined Company's products are used in potentially
hazardous environments. Although neither ITEQ nor Astrotech has been required to
pay any product liability claims to date, and each company carries insurance in
amounts that it considers adequate, catastrophic occurrences at locations where
the Combined Company's products are used could in the future result in
significant product liability claims against the Combined Company.
ENVIRONMENTAL REGULATIONS
Each of ITEQ and Astrotech 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
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. Each company's
business involves environmental management and issues typically associated with
historical manufacturing operations. To date, neither ITEQ's nor Astrotech's
cost of complying with environmental laws and regulations has 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 either company's operations could adversely
affect the Combined Company.
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THE MEETINGS
MATTERS TO BE CONSIDERED AT THE MEETINGS
ITEQ Meeting. At the ITEQ Meeting, holders of ITEQ Common Stock will be
asked to consider and act upon:
1. a proposal to adopt the Merger Agreement;
2. a proposal to approve the Restated Plan; and
3. to consider and act upon such other business as may properly be
presented to the ITEQ Meeting.
Astrotech Meeting. At the Astrotech Meeting, holders of Astrotech Common
Stock will be asked to consider and vote upon the adoption of the Merger
Agreement and such other matters as may properly be presented to the Astrotech
Meeting.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
ITEQ. The board of directors of ITEQ has unanimously approved the Merger
Agreement and the Restated Plan and unanimously recommends that the stockholders
of ITEQ vote FOR approval and adoption of such matters.
Astrotech. The board of directors of Astrotech has unanimously approved the
Merger Agreement and recommends that the stockholders of Astrotech vote FOR
approval and adoption of such matter.
VOTING AT THE MEETINGS; RECORD DATES
ITEQ. ITEQ has established August 25, 1997, as the record date for the
determination of stockholders entitled to notice of and to vote at the ITEQ
Meeting. Only holders of record of ITEQ Common Stock at the close of business on
such date are entitled to notice of and to vote at the ITEQ Meeting. On the
record date for the ITEQ Meeting, there were shares of ITEQ Common
Stock outstanding. A majority of such shares, present in person or represented
by proxy, is necessary to constitute a quorum at the ITEQ Meeting, and each
issued and outstanding share of ITEQ Common Stock is entitled to one vote with
respect to adoption of the Merger Agreement and approval of the Restated Plan.
The affirmative vote of the holders of (i) at least a majority of the
outstanding shares of ITEQ Common Stock is required to adopt the Merger
Agreement and (ii) at least a majority of the shares of ITEQ Common Stock
present at the ITEQ Meeting is required to approve the Restated Plan.
Astrotech. Astrotech has established August 22, 1997, as the record date
for the determination of stockholders entitled to notice of and to vote at the
Astrotech Meeting. Only holders of record of Astrotech Common Stock at the close
of business on such date are entitled to notice of and to vote at the Astrotech
Meeting. On the record date for the Astrotech Meeting, there were
shares of Astrotech Common Stock outstanding. A majority of such shares, present
in person or represented by proxy, is necessary to constitute a quorum at the
Astrotech Meeting, and each issued and outstanding share of Astrotech Common
Stock is entitled to one vote with respect to the adoption of the Merger
Agreement. The affirmative vote of holders of at least a majority of the
outstanding shares of Astrotech Common Stock is required to adopt the Merger
Agreement.
PROXIES
ITEQ. Shares of ITEQ Common Stock represented by a proxy in the form
enclosed, duly executed and returned to ITEQ prior to or at the ITEQ Meeting,
and not revoked, will be voted at the ITEQ Meeting in accordance with the voting
instructions contained therein. Shares of ITEQ Common Stock represented by
proxies for which no voting instructions are given will be voted FOR adoption of
the Merger Agreement and approval of the Restated Plan.
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Holders of ITEQ Common Stock are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted at the ITEQ
Meeting. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by (i) the
execution and delivery of a later-dated proxy with respect to the same shares,
(ii) giving notice thereof in writing to the Secretary of ITEQ at any time prior
to the vote on the matters to be considered at the ITEQ Meeting or (iii)
attending the ITEQ Meeting and voting in person. Attendance at the ITEQ Meeting
by a stockholder who signed a proxy will not in itself revoke the proxy.
If a holder of ITEQ Common Stock does not return a signed proxy card (and
does not vote in person at the ITEQ Meeting), his or her shares will not be
voted at the ITEQ Meeting. Such failure to vote will have the effect of a vote
against the adoption and approval of the Merger Agreement and Restated Plan.
Since adoption of the Merger Agreement requires the affirmative vote of at least
a majority of the outstanding shares of ITEQ Common Stock, abstentions and
broker non-votes with respect to shares of ITEQ Common Stock will also have the
effect of voting against adoption of the Merger Agreement.
The board of directors of ITEQ knows of no matters to be presented at the
ITEQ Meeting other than those described in this Joint Proxy Statement. If other
matters are properly brought before the ITEQ Meeting, it is the intention of the
persons named as proxies to vote with respect to such matters in accordance with
their judgment.
Astrotech. Shares of Astrotech Common Stock represented by a proxy in the
form enclosed, duly executed and returned to Astrotech prior to the Astrotech
Meeting, and not revoked, will be voted at the Astrotech Meeting in accordance
with the voting instructions contained therein. Shares of Astrotech Common Stock
represented by proxies for which no voting instructions are given will be voted
FOR adoption of the Merger Agreement.
Holders of Astrotech Common Stock are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted at the Astrotech
Meeting. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be made by (i) the execution and
delivery of a later-dated proxy with respect to the same shares, (ii) giving
notice thereof in writing to the Secretary of Astrotech at any time prior to the
vote on the matters to be considered at the Astrotech Meeting or (iii) attending
the Astrotech Meeting and voting in person. Attendance at the Astrotech Meeting
by a stockholder who signed a proxy will not in itself revoke the proxy.
If a holder of Astrotech Common Stock does not return a signed proxy card
(and does not vote in person at the Astrotech Meeting), his or her shares will
not be voted at the Astrotech Meeting. Such failure to vote will have the effect
of a vote against the adoption of the Merger Agreement. Since adoption of the
Merger Agreement requires the affirmative vote of a majority of the outstanding
shares of Astrotech Common Stock, abstentions and broker non-votes with respect
to shares of Astrotech Common Stock will also have the effect of voting against
the adoption of the Merger Agreement.
The board of directors of Astrotech knows of no matters to be presented at
the Astrotech Meeting other than those described in this Joint Proxy Statement.
If other matters are properly brought before the Astrotech Meeting, it is the
intention of the persons named as proxies to vote with respect to such matters
in accordance with their judgment.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the ITEQ Meeting and the Astrotech
Meeting may be made in person or by mail, telephone, telecopy or telegram. ITEQ
and Astrotech will each bear the cost of the solicitation of proxies from their
respective stockholders. Officers and employees of ITEQ and Astrotech, who will
receive no compensation in excess of their regular salaries for their services,
may solicit proxies from stockholders of
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ITEQ and Astrotech, respectively, in person or by mail, telephone, telecopy or
telegram. Each of ITEQ and Astrotech has requested banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of ITEQ Common Stock and
Astrotech Common Stock held of record by such entities, and ITEQ and Astrotech
will, upon request of such holders, reimburse reasonable forwarding expenses.
THE MERGER
BACKGROUND
ITEQ's objective is to become 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. Astrotech initially came to the attention of ITEQ's
management in late 1996 in connection with a competitive bidding contract award
for which the two companies were among the leading contenders. After
establishing that Astrotech's product and service offerings were complementary
to those offered by ITEQ, ITEQ's management conducted an internal evaluation of
Astrotech's publicly available information and determined that Astrotech might
be an attractive candidate for a possible business combination with ITEQ.
However, no contact was made with Astrotech, and no further action was taken at
that time.
At ITEQ's initiative, senior executives of the two companies met on June 9
and 12, 1997, to discuss the possibility of a business combination and to
establish the general outlines of a transaction, but both meetings ended
inconclusively. During a regularly scheduled board meeting on June 19, 1997, the
ITEQ board was advised of the preliminary discussions and authorized management
to proceed with further negotiations with respect to a possible transaction with
Astrotech.
Discussions between the parties were renewed on June 27, 1997, and,
although no agreement was reached on substantive issues of a proposed
transaction, the parties concluded that continuing discussions would be
facilitated by the preparation of documentation that provided for a merger of
Astrotech with and into ITEQ at an exchange ratio of 0.93 of an ITEQ share for
each outstanding Astrotech share.
Initial drafts of the Merger Agreement and related documents containing
comprehensive proposed terms for the transaction were circulated during the week
of June 30, 1997, and telephone discussions concerning numerous aspects of the
proposed transaction continued throughout that week. A negotiation session
between the parties was held on July 9, 1997. Further negotiations concerning
the transaction continued through the week of July 14, 1997. On July 18, 1997
final drafts of all proposed merger documents were sent to the ITEQ board and
the Astrotech board, and extensive financial and business information concerning
the proposed transaction was forwarded by the parties to their respective boards
for review.
At a meeting commencing at the opening of business on July 23, 1997 the
ITEQ board of directors considered the proposed Merger. At the meeting, ITEQ's
management presented a comprehensive analysis of the proposed transaction. The
presentation included an overview of Astrotech, as well as a description of
various aspects of its operations, financial condition and competitive position.
The board also discussed the anticipated business efficiencies that might be
realized from a combination with ITEQ including certain manufacturing
efficiencies, management synergies and enhanced opportunities for expansion and
improvement of the combined enterprise's business through distribution
efficiencies and greater marketing opportunities associated with the geographic
distribution of the two entities' operations.
During the July 23, 1997 ITEQ board meeting, Simmons described the
valuation methodologies used in connection with its evaluation of the fairness,
from a financial point of view, of the consideration proposed to be paid by ITEQ
for Astrotech (see "-- Opinion of Simmons"). The ITEQ board also conducted a
lengthy review with counsel of the provisions of the Merger Agreement, including
the "break-up fee" to be payable by Astrotech in the event that the board of
Astrotech were to abandon the transaction for a "superior offer" from a third
party. The ITEQ board also received final due diligence reports and then
unanimously approved the Merger Agreement in its final form, contingent upon
approval by the Astrotech board at a meeting scheduled later in the day.
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At a meeting on July 23, 1997, the Astrotech board of directors met to
consider and vote upon the Merger Agreement. At the meeting, Astrotech's
management described various aspects of the proposed transaction, including a
discussion of ITEQ's business operations and financial condition and the
potential marketing and operating efficiencies resulting from the Merger. The
board discussed at length the nature of the proposal as a strategic combination
of complementary businesses. The board also discussed the increased liquidity
and diversity of investment that would be realized by Astrotech Stockholders as
a result of the Merger.
At the meeting, RPR offered a detailed account of the factors considered in
rendering its opinion regarding the fairness, from a financial point of view, of
the consideration to be received by the Astrotech Stockholders in the Merger.
Coopers & Lybrand L.L.P. presented the results of its limited financial due
diligence of ITEQ that it was directed to perform by Astrotech management. The
general counsel of Astrotech reported to the board on the results of the due
diligence review of ITEQ conducted by Astrotech personnel. The board reviewed
the final version of the Merger Agreement, and counsel to Astrotech discussed
generally the terms of the Merger Agreement and specifically the provisions
relating to the "break-up fee" payable by Astrotech should the board elect to
pursue a superior offer from a third party.
The Astrotech board concluded its review of the proposed transaction and
voted unanimously to approve the Merger Agreement in the form presented at the
meeting. Thereafter, the Merger Agreement and all related documents were
executed by the appropriate Astrotech personnel and were delivered to ITEQ.
After the close of business on July 23, 1997, ITEQ was advised by Astrotech
that the requisite approval of the transaction had been given by the Astrotech
board. Immediately thereafter, the ITEQ board meeting was briefly reconvened by
telephone, Simmons delivered its written "fairness opinion" confirming its
earlier oral report, the ITEQ board reaffirmed its previous conditional
approval, and the Merger Agreement and all related documents were signed and
delivered by ITEQ.
REASONS FOR THE MERGER
ITEQ
The ITEQ board has unanimously determined that the Merger is in the best
interests of ITEQ and its stockholders and has approved the Merger Agreement.
The ITEQ board unanimously recommends that the stockholders of ITEQ vote in
favor of the Merger at the ITEQ Meeting.
The ITEQ board believes that the Merger represents an opportunity to create
a stronger company with broader complementary product lines in the niche
industrial markets in which it operates, with potential for enhanced
international business opportunities through the introduction of Astrotech's
products and services into ITEQ's distribution network. For the ITEQ
Stockholders, on a pro forma basis, the Merger would also have had an accretive
effect on earnings per share for the fiscal year ended December 31, 1996 (from
($.01) to $.19) and a dilutive effect for the three month period ended March 31,
1997 (from $.10 to $.09) and an accretive effect on book value per share at both
December 31, 1996 (from $2.02 to $2.92) and March 31, 1997 (from $2.13 to
$3.06). The ITEQ board believes the Merger will bring additional opportunities
for cost savings, economies of scale and other synergies, resulting in improved
earnings and cash flow potential for the long term growth of ITEQ and its
stockholder value.
For the foregoing reasons, the ITEQ board believes that the terms and
conditions of the Merger Agreement are in the best interest of ITEQ and its
stockholders. The following are the material factors considered by the ITEQ
board in reaching its conclusions, certain of which factors contain both
positive and negative elements:
(i) the judgment, advice and analyses of ITEQ's management with
respect to the strategic, financial and potential operational benefits of
the Merger, based in part on the business, financial, accounting and legal
due diligence investigations performed with respect to Astrotech;
(ii) information concerning the financial condition, results of
operations, business prospects and stock price performance of ITEQ and
Astrotech;
(iii) current industry, economic and market conditions;
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(iv) the synergies, cost reduction and operating efficiencies that may
become available to the combined enterprise as a result of the Merger, as
well as the management challenges associated with successfully integrating
the businesses, cultures and managements of two corporations;
(v) the fact that the currently favorable conditions in the markets
served by the two companies would make the integration of the two companies
easier at this time than in a negative economic climate;
(vi) the advice, and financial analyses prepared by, Simmons (see
"-- Opinion of Simmons");
(vii) historical market prices and trading information with respect to
the ITEQ Common Stock and the Astrotech Common Stock;
(viii) the advice of ITEQ's independent auditors with respect to the
ability to account for the Merger as a pooling of interests;
(ix) the advice of counsel that the Merger should be treated as a
tax-free reorganization;
(x) the corporate governance aspects of the Merger, including that
ITEQ directors would continue to constitute a majority of the ITEQ board
and that ITEQ's management would continue in the same capacities with the
Combined Company;
(xi) the number of shares of ITEQ Common Stock to be issued to the
Astrotech Stockholders in the Merger, and the percentage of ownership of
the Combined Company represented by such issuance; and
(xii) the likelihood of obtaining regulatory approvals for the Merger
quickly.
The foregoing discussions of the information and factors considered and
given weight by the ITEQ board is not intended to be exhaustive. In view of the
variety of the factors considered in connection with its evaluation of the
Merger, the ITEQ board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. In addition, individual members of the ITEQ board may have
given different weight to different factors.
Astrotech
The Astrotech board has unanimously determined that the Merger is in the
best interests of Astrotech and its stockholders and has approved the Merger
Agreement. The Astrotech board unanimously recommends that the Astrotech
Stockholders vote in favor of the Merger at the Astrotech Meeting.
The Astrotech board has determined that the terms and conditions of the
Merger are in the best interests of Astrotech and its stockholders. In making
such determination, the Astrotech board considered, among other things, the
following factors:
(i) Astrotech is not for sale, but was approached by ITEQ regarding a
strategic combination of the two companies;
(ii) both companies have been pursuing a consolidation strategy in the
markets they serve;
(iii) the Merger would combine complementary businesses and present
substantial opportunities for cross-selling and operating efficiencies;
(iv) the Merger would allow Astrotech to utilize ITEQ's strong
international distribution network to capitalize on the international
markets in Astrotech's core businesses, which are expanding at a
significantly faster rate than the analogous domestic markets;
(v) the Combined Company would possess greater financial resources
with which to continue consolidation and internal growth in Astrotech's
traditional core businesses;
(vi) the historical and recent market prices of shares of Astrotech
Common Stock and the Merger would enable the holders of such shares to
realize a significant premium over the prices at which such shares had been
trading;
(vii) the Merger will provide the stockholders of Astrotech a
significant increase in liquidity as a result of ownership of a larger,
more diverse company with greater market capitalization and exposure;
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(viii) the opinion of RPR dated July 22, 1997 that, based on certain
matters set forth therein, the consideration to be paid pursuant to the
Merger Agreement is fair to the holders of Astrotech Common Stock from a
financial point of view;
(ix) the Board of Directors of ITEQ would be expanded from seven to
nine members, with the two new members selected by Astrotech, so that the
stockholders of Astrotech would be ensured continued representation in the
leadership of the Combined Company; and
(x) the structuring of the proposed transaction as a tax-free
reorganization and the ability to account for the Merger as a pooling of
interests.
The Astrotech board also considered the following negative factors: (i) the
execution of the Merger Agreement would contractually prohibit it from
soliciting or initiating other offers from third parties and may discourage
additional offers initiated by third parties due to Astrotech's obligation to
pay a significant break-up fee to ITEQ should such a third party offer be
accepted; (ii) there is no guarantee that the operations and strategies of the
two companies would be successfully integrated; and (iii) the current high price
of ITEQ Common Stock relative to its historical price range.
OPINION OF SIMMONS
ITEQ retained Simmons to act as its financial advisor and to render a
fairness opinion in connection with the Merger. Simmons rendered its oral
opinion (which was subsequently confirmed in writing) to the board of directors
of ITEQ to the effect that, as of July 23, 1997, the Merger was fair from a
financial point of view to the holders of ITEQ Common Stock.
Simmons is a specialized energy-related investment banking firm engaged in,
among other things, the valuation of businesses and their securities in
connection with mergers and acquisitions, the management and underwriting of
sales of equity and debt to the public and private placements of equity and
debt.
The full text of Simmons' opinion to the ITEQ board of directors dated July
23, 1997 is attached as Appendix B to this Joint Proxy Statement. Holders of
ITEQ Common Stock are urged to read such opinion carefully in its entirety in
conjunction with the Joint Proxy Statement for assumptions made, matters
considered and limits of the review by Simmons. Simmons' opinion addresses only
the fairness of the Merger from a financial point of view and does not
constitute a recommendation to any holder of ITEQ Common Stock as to how such
stockholder should vote on the Merger. The summary of Simmons' opinion set forth
in this Joint Proxy Statement is qualified in its entirety by reference to the
full text of such opinion.
In connection with rendering its opinion, Simmons has reviewed and
analyzed, among other things, the following: (i) the Merger Agreement; (ii) the
financial statements and other information concerning ITEQ, including the Annual
Reports on Form 10-K of ITEQ for each of the years in the three-year period
ended December 31, 1996, the Quarterly Report on Form 10-Q of ITEQ for the
quarter ended March 31, 1997, ITEQ interim financial statements for periods
subsequent to March 31, 1997, the Current Reports on Form 8-K dated February 3,
1997 and March 7, 1997, the Proxy Solicitation Materials on Schedule 14A dated
April 30, 1997, and the Registration Statement on Form S-2 of ITEQ related to
the registration of ITEQ Common Stock on May 20, 1997; (iii) certain near-term
forecasts and other internal information, primarily financial in nature,
concerning the business and operations of ITEQ for purposes of Simmons'
analysis; (iv) certain publicly available information concerning the trading of,
and the trading market for, ITEQ Common Stock; (v) the financial statements and
other information concerning Astrotech, including the Annual Reports on Form
10-K of Astrotech for each of the fiscal years in the three-year period ended
September 30, 1996, the Quarterly Reports on Form 10-Q of Astrotech for the
quarters ended December 31, 1996 and March 31, 1997, Astrotech interim financial
statements for periods subsequent to March 31, 1997, the Current Report on Form
8-K dated May 1, 1997, and the Proxy Solicitation Materials on Schedule 14A
dated April 16, 1997; (vi) certain near-term forecasts and other internal
information, primarily financial in nature, concerning the business and
operations of Astrotech furnished by Astrotech for purposes of Simmons'
analysis; (vii) certain publicly available information concerning the trading
of, and the trading market for, Astrotech Common Stock; (viii) certain publicly
available information with respect to certain other
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companies that Simmons believes to be comparable to ITEQ or Astrotech and the
trading markets for certain of such other companies' securities; (ix) certain
publicly available information concerning the estimate of the future operating
performance of ITEQ, Astrotech and the comparable companies prepared by industry
experts unaffiliated with either ITEQ or Astrotech; and (x) certain publicly
available information concerning the nature and terms of certain other
transactions considered relevant to the inquiry. Simmons has also met with
certain officers and employees of ITEQ and Astrotech to discuss the foregoing,
as well as other matters believed relevant to the inquiry.
In arriving at its opinion, Simmons assumed and relied upon the accuracy
and completeness of all of the financial and other information provided or
publicly available, including, without limitation, information with respect to
the amount and timing of cost savings provided by ITEQ and Astrotech pursuant to
the Merger, and did not attempt independently to verify any of such information.
Simmons has not conducted a physical inspection of any of the assets, properties
or facilities of ITEQ or Astrotech, nor did Simmons make or obtain any
independent evaluations or appraisals of any such assets, properties or
facilities. Simmons also assumed that the Merger will be accounted for as a
pooling of interests for accounting purposes and as a tax-free reorganization
for federal income tax purposes. In addition, although Simmons discussed the
prospects of ITEQ and Astrotech with certain representatives of their respective
managements, Simmons was only provided with limited financial projections from
both ITEQ and Astrotech.
In conducting its analysis and arriving at its opinion, Simmons considered
such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of ITEQ and Astrotech; (ii) the business
prospects of ITEQ and Astrotech; (iii) estimates of pro forma combination
benefits pursuant to the Merger prepared by ITEQ and Astrotech; (iv) the
historical and current market for ITEQ Common Stock and Astrotech Common Stock
and for the equity securities of certain other companies believed to be
comparable to ITEQ or Astrotech; (v) the respective contributions in terms of
various financial measures of ITEQ and Astrotech to the Combined Company, and
the relative ownership of ITEQ after the Merger by the current holders of ITEQ
Common Stock and Astrotech Common Stock; (vi) the pro forma effect of the
transaction on ITEQ's capitalization ratios, earnings per share and cash flow
per share; and (vii) the nature and terms of certain other acquisition
transactions that Simmons believes to be relevant. Simmons has also taken into
account its assessment of general economic, market and financial conditions and
its experience in connection with similar transactions and securities' valuation
generally. Simmons' opinion necessarily is based upon conditions as they existed
and could be evaluated on, and on the information made available at, the date of
its opinion. Simmons does not express any opinion as to the price or range of
prices at which the shares of ITEQ Common Stock will trade subsequent to the
date of its opinion or the consummation of the Merger.
In connection with its fairness opinion, Simmons performed a variety of
financial analyses with respect to ITEQ and Astrotech, including those described
below:
Analysis of Selected Publicly Traded Comparable Companies. Simmons reviewed
certain publicly available financial, operating and stock market information as
of July 22, 1997 for ITEQ, Astrotech and certain publicly traded companies (the
"Comparable Companies") that Simmons considers to be comparable to ITEQ or
Astrotech. For ITEQ, Astrotech and each of the Comparable Companies, Simmons
calculated, among other things, multiples of market stock price to trailing
twelve months' ("TTM") earnings per share and cash flow per share, and estimated
earnings and cash flow per share (derived from publicly available information
concerning the estimates of the future operating and financial performance of
ITEQ, Astrotech and the Comparable Companies prepared by industry experts
unaffiliated with either ITEQ or Astrotech) for 1997 and 1998, and multiples of
Adjusted Market Value (total market capitalization less cash in excess of five
percent of revenues) to TTM revenues and TTM earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and estimated EBITDA (derived from
publicly available information concerning the estimates of the future operating
and financial performance of ITEQ, Astrotech and the Comparable Companies
prepared by industry experts unaffiliated with either ITEQ or Astrotech) for
1997 and 1998. Historical multiples calculated for ITEQ and Astrotech were based
on the most recent available results of ITEQ and Astrotech for the TTM period,
including certain adjustments for non-recurring and/or extraordinary items, and
pro forma adjustments for recent ITEQ and Astrotech acquisitions and ITEQ's May
20, 1997 common
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stock offering. In addition, the multiples related to the acquisition of
Astrotech were based on an acquisition price (the "Implied Consideration")
calculated using the net number of additional shares to be issued and ITEQ's
closing share price at July 22, 1997 ($10.75 per share), plus the estimated
Astrotech debt to be assumed. Astrotech's results were also adjusted to reflect
the benefits associated with the cost savings estimated by the managements of
ITEQ and Astrotech.
An analysis of the multiples of market stock price to TTM earnings per
share, to projected 1997 earnings per share and to projected 1998 earnings per
share yielded averages (excluding the high and low value) for the Comparable
Companies of 17.9x, 17.5x and 14.9x, respectively. This compared to 20.6x TTM
earnings per share, 18.5x projected 1997 earnings per share and 16.1x projected
1998 earnings per share for Astrotech at the Implied Consideration (15.2x TTM
earnings per share, 13.7x projected 1997 earnings per share and 12.4x projected
1998 earnings per share at the Implied Consideration including the cost savings
estimated by ITEQ and Astrotech). An analysis of the multiples of market stock
price to TTM cash flow per share, to projected 1997 cash flow per share and to
projected 1998 cash flow per share yielded averages (excluding the high and low
value) for the Comparable Companies of 11.1x, 11.7x and 10.0x, respectively.
This compared to 10.1x TTM cash flow per share, 9.8x projected 1997 cash flow
per share and 8.8x projected 1998 cash flow per share for Astrotech at the
Implied Consideration (8.6x TTM cash flow per share, 8.3x projected 1997 cash
flow per share and 7.6x projected 1998 cash flow per share at the Implied
Consideration including the cost savings estimated by ITEQ and Astrotech). An
analysis of the multiples of Adjusted Market Value to TTM revenues yielded an
average (excluding the high and low value) of 0.8x for the Comparable Companies,
compared to 0.8x for Astrotech at the Implied Consideration. An analysis of the
multiples of Adjusted Market Value to TTM EBITDA, to projected 1997 EBITDA and
to projected 1998 EBITDA yielded averages (excluding the high and low value) for
the Comparable Companies of 8.5x, 7.8x and 7.2x, respectively. This compared to
8.3x TTM EBITDA, 8.1x projected 1997 EBITDA and 7.6x projected 1998 EBITDA for
Astrotech at the Implied Consideration (7.0x TTM EBITDA, 6.9x projected 1997
EBITDA and 6.5x projected 1998 EBITDA for Astrotech at the Implied Consideration
including some of the cost savings estimated by ITEQ and Astrotech).
Analysis of Selected Comparable Transactions. Simmons reviewed several
transactions involving the acquisition of oil service and equipment companies.
Simmons calculated multiples of acquisition price, or transaction value, to the
revenues, EBITDA and net income generated in the 12 months prior to the
acquisition. These calculations yielded a range of acquisition price to net
income of 8.8x to 27.0x, with an average (excluding the high and low value) of
15.5x, a range of acquisition price to EBITDA of 5.1x to 10.6x, with an average
(excluding the high and low value) of 7.7x, and a range of acquisition price to
revenues of 0.2x to 15.1x, with an average (excluding the high and low value) of
1.1x. The average transaction net income multiple of 15.5x (excluding the high
and low value) compared to a 20.6x multiple for Astrotech at the Implied
Consideration (15.2x for Astrotech at the Implied Consideration including the
cost savings estimated by ITEQ and Astrotech). The average transaction EBITDA
multiple of 7.7x (excluding the high and low value) compared to an 8.3x multiple
for Astrotech at the Implied Consideration (7.0x for Astrotech at the Implied
Consideration including the cost savings estimated by ITEQ and Astrotech), and
the average transaction revenue multiple of 1.1x (excluding the high and low
value) compared to a 0.8x multiple for Astrotech at the Implied Consideration.
Relative Contribution Analysis. Simmons analyzed the relative contributions
of ITEQ and Astrotech to, among other things, the combined pro forma historical
revenues, EBITDA, net income, cash flow, total assets and total tangible assets.
Simmons also analyzed the relative contributions of ITEQ and Astrotech to total
market capitalization and market equity value based on the Implied
Consideration. The analysis assumes certain pro forma adjustments for recent
acquisitions and non-recurring or extraordinary items in the historical
financial statements of ITEQ and Astrotech. Based on the most recent available
data for the companies, Simmons calculated contributions by Astrotech of
approximately 43% of combined revenues, 42% of combined EBITDA, 41% of combined
net income, 48% of combined cash flow, 43% of combined total assets and 47% of
combined total tangible assets.
Based on the Implied Consideration, Simmons calculated pro forma
contributions by Astrotech of approximately 38% of combined total market
capitalization and 35% of combined market equity value.
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Discounted Cash Flow Analysis. Simmons performed various discounted cash
flow calculations of Astrotech. Net present values were based on the projected
unlevered cash flows for five years and employed an estimated terminal value
derived as a multiple range of 6.0x to 7.0x EBITDA. Cost savings estimated by
ITEQ and Astrotech were not incorporated into the analysis.
Simmons discounted to present value projected future cash flows and
terminal values of Astrotech by applying after-tax discount rates ranging from
12 to 15 percent. Based on these calculations, Simmons derived net present
values of Astrotech of approximately $129 to $156 million.
The foregoing summary does not purport to be a complete description of the
analyses performed by Simmons. The preparation of financial analyses and
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Simmons believes that its analyses (and
the summary set forth above) must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Simmons, without
considering all of such analyses and factors, could create an incomplete view of
the process underlying its opinion. Simmons made no attempt to assign specific
weights to particular analyses. Any estimates contained in Simmons' analyses are
not necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth herein. Estimates of values of companies do no
purport to be appraisals or necessarily reflect the prices at which companies
may actually be sold. Because such estimates are inherently subject to
uncertainty, Simmons does not assume any responsibility for their accuracy.
Simmons confirmed, as of September , 1997 its opinion dated July 23,
1997. In rendering such confirmation, Simmons performed certain procedures
related to its opinion and reviewed the assumptions on which such opinion was
based and the factors considered in connection therewith. Simmons considered,
among other things, ITEQ's and Astrotech's recent financial performance and
recent market conditions and developments based on the foregoing.
As compensation for rendering its fairness opinion and other financial
advisory services, ITEQ has agreed to pay Simmons as its financial advisor total
fees of approximately $1,300,000 upon consummation of the Merger. ITEQ has also
agreed to reimburse Simmons for certain expenses incurred in connection with its
engagement and to indemnify Simmons and certain related persons against certain
liabilities and expenses relating to or arising out of its engagement, including
certain liabilities under federal securities laws. Simmons has from time to time
been engaged by Astrotech to provide general corporate finance advisory
services. In addition, in the ordinary course of business, Simmons may actively
trade the securities of ITEQ and Astrotech for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Simmons did not negotiate the terms of the Merger
between ITEQ and Astrotech.
OPINION OF RPR
At its meeting on July 23, 1997 to consider and vote on entering into the
Merger Agreement, the Astrotech board received the opinion of RPR that, as of
such date, the consideration to be received pursuant to the terms of the Merger
Agreement, is fair to the common stockholders of Astrotech from a financial
point of view. RPR's opinion related only to the consideration to be paid by
ITEQ pursuant to the Merger Agreement and does not constitute a recommendation
to any Astrotech Stockholder as to whether to vote his or her shares for or
against the Merger. The full text of RPR's written opinion, which summarizes the
assumptions made, procedures followed and matters considered in connection with
such opinion, is attached as Appendix C to this Joint Proxy Statement and the
following discussion is qualified in its entirety by reference to the full text
of such opinion. Astrotech Stockholders are urged to read the opinion in its
entirety, especially with regard to the assumptions made and matters considered
by RPR.
In connection with their opinion, RPR reviewed, among other things: (i) the
draft Plan and Agreement of Merger dated July 17, 1997; (ii) Astrotech's annual
report on Form 10-K for the year ended September 30, 1996; (iii) Astrotech's
quarterly reports on Form 10-Q for the periods ended December 31, 1996 and
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March 31, 1997; (iv) Astrotech's proxy statement dated April 15, 1997; (v)
Astrotech's current report on Forms 8-K and 8-K/A-1 dated May 14, 1997 and July
11, 1997, respectively; (vi) research reports on Astrotech dated May 22, 1996,
January 7, 1997 and March 25, 1997 issued by First Analysis Corporation, Emerald
Research and GunnAllen Financial, respectively; (vii) ITEQ's annual report on
Form 10-K for the year ended December 31, 1996; (viii) ITEQ's quarterly report
on Form 10-Q for the period ended March 31, 1997; (ix) research reports on ITEQ
dated May 23, 1997, May 27, 1997 and June 5, 1997 issued by EVEREN Securities,
Inc., Williams MacKay Jordan & Co. and Deutsche Morgan Grenfell, respectively;
(x) certain materials relating to the Merger prepared by Simmons; (xi) ITEQ's
prospectus dated May 20, 1997 relating to the sale of stock by ITEQ and certain
ITEQ Stockholders; (xii) ITEQ's proxy statement dated May 21, 1997; and (xiii)
ITEQ's current report on Form 8-K/A dated February 3, 1997. RPR also held
discussions with members of the senior management of Astrotech regarding its
assets and liabilities, past and current business operations, financial
condition and future prospects. In addition, RPR reviewed the reported price and
trading activity for the Astrotech Common Stock, compared certain financial and
stock market information for Astrotech with similar information for certain
other companies and performed such other analyses and studies as RPR deemed
appropriate.
RPR relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by them for
purposes of their opinion and assumed that the financial forecasts provided to
them were reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of Astrotech as to its expected future
financial performance as currently configured and after giving effect to the
Merger. In addition, RPR has not made an independent evaluation or appraisal of
the assets and liabilities of Astrotech and RPR has not been furnished with any
such evaluation or appraisal.
The following is a summary of certain financial analyses performed by RPR
in connection with providing their written opinion dated July 22, 1997 to the
Astrotech board. RPR reviewed these financial analyses with the Astrotech board
at its meeting on July 23, 1997.
Market Price for Common Stock. RPR reviewed the trading history of
Astrotech Common Stock and determined that the Exchange Ratio represented a
significant premium over recent historic market prices for Astrotech Common
Stock. In arriving at this conclusion, RPR examined the average daily market
price per share of Astrotech Common Stock at the following dates and for the
following periods: (i) July 9, 1997, the date of a negotiation session between
ITEQ and Astrotech ($6.00); (ii) average for 10 days prior to July 10, 1997
($6.10 for Astrotech, $9.63 for ITEQ, 63.4% ratio of Astrotech Common Stock to
ITEQ Common Stock (the "Ratio")); (iii) average for 20 days prior to July 10,
1997 ($5.82 for Astrotech, $8.92 for ITEQ, 65.3% Ratio); (iv) average for 30
days prior to July 10, 1997 ($5.70 for Astrotech, $8.67 for ITEQ, 65.7% Ratio);
(v) average for 60 days prior July 10, 1997 ($5.61 for Astrotech, $7.63 for
ITEQ, 73.5% Ratio); (vi) average for 90 days prior to July 10, 1997 ($5.74 for
Astrotech, $7.26 for ITEQ, 79.1% Ratio); (vii) July 21, 1997, the date two days
prior to the announcement of the proposed merger ($6.40 for Astrotech, $10.47
for ITEQ, 61.1% Ratio); (viii) average for 10 days prior to July 21, 1997 ($6.40
for Astrotech, $10.47 for ITEQ, 61.1% Ratio); (ix) average for 20 days prior to
July 21, 1997 ($6.21 for Astrotech, $9.94 for ITEQ, 62.5% Ratio); (x) average
for 30 days prior to July 21, 1997 ($5.96 for Astrotech, $9.32 for ITEQ, 64.0%
Ratio); (xi) average for 60 days prior to July 21, 1997 ($5.70 for Astrotech,
$8.17 for ITEQ, 69.8% Ratio); and (xii) average for 90 days prior to July 21,
1997 ($5.70 for Astrotech, $7.56 for ITEQ, 75.4% Ratio). RPR concluded (i) that
the Exchange Ratio represented a premium of approximately 52% over the average
daily market price per share for Astrotech Common Stock on July 9, 1997, and
(ii) that the Exchange Ratio represented a premium of approximately 42.8% over
the closing price for Astrotech Common Stock on July 21, 1997, two days
immediately preceding the announcement of the Merger. While acknowledging the
existence of higher and lower premiums, RPR considered the recent trading
history of Astrotech Common Stock as favorable to its opinion as to the fairness
of the consideration to be received by the Astrotech Stockholders pursuant to
the Merger Agreement.
Discounted Cash Flow Analysis. RPR created a discounted cash flow analysis
for Astrotech which indicated current values per share ranging from $6.75 to
$9.06. Net present values were based on projected
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cash flows through 2001 and employed an estimated terminal value based on a
multiple of 6x EBITDA. After tax discount rates of 15, 20 and 25 percent were
used in calculating net present values.
Market Value of Astrotech Common Stock. RPR noted that it was unlikely that
Astrotech's Common Stock was worth significantly more than $10.00 per share (the
valuation of Astrotech Common Stock at the Implied Consideration). In reaching
this conclusion, RPR indicated that Astrotech's most successful product lines
have been well known both to the oil industry and the stock market for many
years, making it unlikely that Astrotech's stock price fails to reflect the
value of material hidden assets. RPR also noted that oil companies are currently
less concerned with environmental liabilities associated with above-ground
storage tanks, that Astrotech management does not anticipate a dramatic change
in government requirements or oil company expenditures on such tanks.
Market Value of ITEQ Common Stock. RPR noted that the market value of ITEQ
Common Stock market at July 21, 1997 ($10.75 per share) was 41.3 times ITEQ's
trailing 12 months earning per share of $0.26 per share. While acknowledging the
relatively high level of this price/earnings multiple, RPR noted that ITEQ had
completed a public offering on May 27, 1997 and that the process of the
registration of ITEQ's offering as well as the road show created widespread
awareness of relevant information concerning ITEQ. RPR noted that it has no
reason to believe that material adverse information concerning ITEQ was not
revealed during the public offering process or that its current trading price
fails to reflect all currently available public information.
Comparative Company Analysis of ITEQ Price Earnings Ratio. RPR noted that
ITEQ is one of many public companies trading at a price/earnings ratio whose
high level appears to be primarily justified by the outlook for acquisitions.
RPR reviewed the price/earnings ratios of sixteen companies viewed as "industry
consolidators." The price/earnings ratios reviewed had a range of 45.7x to 11.0x
with an average of 28.5x. Companies included in this comparison included
Affiliated Computer Services, American Residential Services, Carriage Services,
Inc., Central Parking Corporation, Coach USA, Inc., Consolidated Graphics, Inc.,
Corporate Express, Inc., F.Y.I. Incorporated, Iron Mountain Incorporated, Miller
Industries, Inc., Rural/Metro Corporation, Stewart Enterprises, Inc., Suiza
Foods Corporation, Tracor, Inc., Universal Outdoor Holdings, Inc. and USA Waste
Services, Inc.
Enhanced Liquidity. RPR examined Astrotech's market capitalization and
trading volume. RPR noted that ITEQ had a market capitalization of equity nearly
3.7 times larger than Astrotech. In addition, ITEQ Common Stock is more actively
traded and, accordingly, would offer greater liquidity to holders than Astrotech
Common Stock.
Current Research Reports on ITEQ Common Stock. RPR examined a number of
research reports, each of which indicated that ITEQ was an attractive
investment. Reports reviewed included a May 27, 1997 report issued by Williams
MacKay Jordan & Co., a May 23, 1997 report issued by EVEREN Securities and a
June 5, 1997 report published by Deutsche Morgan Grenfell.
Analysis of Comparable Mergers and Acquisitions. RPR reviewed several
transactions involving the acquisition of oil service companies. RPR developed
multiples of transaction value to sales (range of 1.0x to 1.5x), enterprise
value to EBITDA (range of 9.8x to 12.4x), transaction value to net income (range
of 37.1x to 61.3x), transaction value to cash flow (range of 8.2x to 10.1x) and
transaction value to tangible book value (range of 2.3x to 3.10x). RPR indicated
that this analysis was of limited relevance in rendering the fairness opinion to
the extent that none of the acquired companies examined had businesses
substantially similar to Astrotech's.
Arm's Length Transaction. RPR noted that the price and other terms of the
Merger were the result of arm's length negotiations. Astrotech's management
investigated the attractiveness and fairness of the proposed offer from the
standpoint of Astrotech Stockholders and found the price to be fair and likely
to be higher than any competing offer that could be arranged in the reasonably
near future.
Analyses of Selected Publicly Traded Somewhat Comparable Companies. RPR
compared selected historical stock, financial and operating ratios of Astrotech
to Chicago Bridge & Iron, Daniel Industries, Lufkin Industries, Matrix Service
Company, Pitt-Des Moines, Inc. and Powell Industries, each of which are
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public companies RPR considered to be somewhat comparable to Astrotech. An
analysis of the ratio of the market capitalization (defined as market value of
equity plus book value of preferred stock, short-term and long-term debt, less
excess cash and equivalents) (the "Market Capitalization") of the comparable
companies to calendar 1996 sales yielded a range of 0.2x to 1.7x with a mean of
0.7x, which compares with a ratio of 0.6x for Astrotech for the same period. An
analysis of the ratio of Market Capitalization to EBITDA of the comparable
companies yielded a range of 4.6x to 8.9x, with a mean of 7.3x, which compares
with a ratio of 6.5x for Astrotech. An analysis of the ratio of Market
Capitalization to Net Income of the comparable companies yielded a range of 9.6x
to 39.4x, with a mean of 22.3x, which compares with a ratio of 15.2x for
Astrotech.
Other Analyses. RPR considered other factors in arriving at its opinion
that the consideration to be received by the Astrotech Stockholders is fair to
such stockholders from a financial point of view. These considerations included:
potential synergies resulting from the Merger; the probable tax-free nature of
the exchange contemplated by the Merger; potential risks associated with ITEQ's
acquisition strategy; the lack of an auction to sell Astrotech; that Astrotech
Stockholders currently receive no dividends and no cash dividends are expected
to be paid by ITEQ; and the absence of material changes in Astrotech's financial
condition or results of operations since June 30, 1997.
Taken together, RPR determined that these other analyses supported the
reasonableness of its determination of the fairness of the Exchange Ratio.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. While RPR
considered many factors, none were dispositive and none were given any
particular weight in rendering its fairness opinion. Selecting portions of the
analyses or of the summary set forth above, without considering the analyses as
a whole, could create an incomplete view of the processes underlying RPR's
opinion. In arriving at their fairness determination, RPR considered the results
of all such analyses. The analyses were prepared solely for purposes of RPR
providing its opinion to the Astrotech Board as to the fairness of the
consideration to Astrotech Stockholders and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of Astrotech, RPR or
any other person assumes responsibility if future results are materially
different from forecasted results. As described above, RPR's opinion and
presentation to the Astrotech Board was one of many factors taken into
consideration by the Astrotech Board in making its determination to approve the
Merger Agreement. The foregoing summary does not purport to be a complete
description of the analyses performed by RPR and is qualified by reference to
the written opinion of RPR set forth in Appendix C to this Joint Proxy
Statement.
RPR, as part of their investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. RPR is familiar with
Astrotech, having acted as its financial advisor in connection with the Merger
Agreement. The Astrotech board selected RPR as its financial advisor because RPR
is a nationally recognized investment banking firm that has substantial
experience in transactions similar to the Merger.
RPR provides a full range of financial, advisory and brokerage services
and, in the course of their normal trading activities, may from time to time
effect transactions and hold positions in the securities or options on
securities of Astrotech for their own account and for the account of customers.
Pursuant to a letter agreement dated July 10, 1997 (the "Engagement
Letter"), the Astrotech board engaged RPR to act as the Astrotech board's
financial advisor. Pursuant to the terms of the Engagement Letter, Astrotech
agreed to pay RPR a fee of $60,000 on the date of the Engagement Letter, plus an
additional $140,000 upon delivery of the opinion. Astrotech has agreed to
reimburse RPR for their reasonable out-of-
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pocket expenses, including the fees and disbursements of attorneys, and to
indemnify RPR against certain liabilities in connection with the engagement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the opinion of Porter & Hedges, L.L.P.,
counsel to ITEQ, as to the material federal income tax consequences associated
with participation in the Merger, particularly with respect to Astrotech, ITEQ
and the holders of (i) Astrotech Common Stock, (ii) options to acquire Astrotech
Common Stock, and (iii) ITEQ Common Stock (such holders collectively referred to
as the "Participants"). Copies of the opinion issued by Porter & Hedges, L.L.P.
is included as an exhibit to the Registration Statement filed with the
Commission of which this Joint Proxy Statement is a part. Participants should be
aware that such opinions are not binding on the Internal Revenue Service ("IRS")
or the courts, nor are the IRS or the courts precluded from adopting contrary
positions. The IRS does not issue rulings with respect to statutory mergers and
accordingly no ruling has been requested from the IRS with respect to any of the
opinions and statements set forth herein. Accordingly, there can be no assurance
that such opinions and statements will be sustained by the IRS or by a court if
challenged by the IRS.
This summary and the opinion of counsel do not discuss all aspects of
federal income taxation that may be relevant to a Participant in light of his or
her particular circumstances, or to certain types of Participants which are
subject to special treatment under federal income tax laws (including dealers in
securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, S corporations, and foreign corporations and
persons who are not citizens or residents of the United States nor does it
include persons who hold Astrotech capital stock as part of a hedge, straddle,
"synthetic security" or other integrated investment). In addition, this summary
and the opinion of counsel do not describe any tax consequences under state,
local or foreign tax laws. This summary and the opinion of counsel are based on
the Code, Treasury Regulations, IRS rulings and pronouncements, and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a Participant.
The Taxpayer Relief Act of 1997 was enacted in August of 1997. It contains
an assortment of sometimes complex changes to the Code, some of which could
effect the Participants. In particular, net gains of individuals from the sale
or exchange of capital assets held for more than 18 months are taxed at a
maximum rate of 20%. Net capital gains of individuals from capital assets held
more than one year, but less than 18 months are taxed at a maximum rate of 28%.
THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT FROM THE
MERGER. PROSPECTIVE PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO THEM IN
CONNECTION WITH PARTICIPATING IN THE MERGER, PARTICULARLY IN LIGHT OF RECENT
LEGISLATIVE TAX CHANGES AS WELL AS THE APPLICATION TO THEM OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
Based on certain factual representations by ITEQ, Astrotech and certain of
the ITEQ Stockholders and Astrotech Stockholders, as well as certain assumptions
set forth in its opinion, Porter & Hedges, L.L.P. has rendered the following
opinions as to the material federal income tax consequences of the Merger:
(i) The Merger will qualify as a "reorganization" under Section
368(a)(1)(A) of the Code and each of ITEQ and Astrotech will constitute a
"party to the reorganization" within the meaning of Section 368(b) of the
Code;
(ii) Neither ITEQ nor Astrotech will recognize any income, gain or
loss as a result of the Merger;
(iii) No income, gain, or loss will be recognized by any ITEQ
Stockholder as a result of the Merger, and the tax basis and holding period
of their ITEQ Common Stock will remain unchanged after giving effect to the
Merger;
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(iv) No income, gain or loss will be recognized by any Astrotech
Stockholder as a result of the Merger with respect to the exchange of their
Astrotech Common Stock for ITEQ Common Stock as a result of the Merger,
except in the case of cash paid in lieu of issuing fractional shares of
ITEQ Common Stock;
(v) The payment of cash to an Astrotech Stockholder in lieu of a
fractional share interest in ITEQ Common Stock will be treated as if the
fractional share interest was distributed as part of the Merger and then
redeemed by ITEQ. Accordingly, the tax consequences of such a cash payment
will be determined in accordance with Section 302 of the Code. Unless the
redemption is essentially equivalent to a dividend, such a redemption will
be treated as a sale or exchange under Section 302 of the Code and gain or
loss (which will constitute capital gain or loss if the related Astrotech
Common Stock was held as a capital asset) will be recognized by the
Astrotech Stockholder measured by the difference between the cash received
in lieu of the fractional share and the portion of the Astrotech
Stockholder's tax basis that is allocated to such fractional share.
A redemption of Astrotech Stockholders' fractional share interest in
ITEQ will not be essentially equivalent to a dividend if such stockholder
incurs a "meaningful reduction" in his proportionate equity interest in
ITEQ by reason of the redemption. Although the determination of whether
there has been a meaningful reduction is a factual matter on which no
opinion of counsel has been rendered, generally a redemption of public
company shares held by a minority stockholder will be treated as a
meaningful reduction where such stockholder's proportionate equity interest
in the corporation has been reduced.
(vi) The aggregate tax basis of ITEQ Common Stock received by an
Astrotech Stockholder in the Merger will be the same as the aggregate tax
basis of the Astrotech Common Stock exchanged for the ITEQ Common Stock
(less any portion of such basis allocable to fractional shares redeemed for
cash);
(vii) The holding period of ITEQ Common Stock (including any
fractional shares deemed issued and then redeemed) received by an Astrotech
Stockholder in exchange for Astrotech Common Stock pursuant to the Merger
will include the holding period of the Astrotech Common Stock that was
converted into the ITEQ Common Stock; provided that such Astrotech Common
Stock was held as a capital asset at the Effective Date of the Merger;
(viii) No gain or loss will be recognized by the holders of options to
purchase Astrotech Common Stock upon the receipt of options to purchase
ITEQ Common Stock due to the conversion of their Astrotech options. See
"Proposal to Adopt ITEQ Restated Stock Option Plan -- Tax Consequences"
regarding post-Merger taxation of such non-qualified stock options.
If the Merger failed to qualify under Section 368(a)(1)(A) of the Code,
Astrotech would recognize gain equal to the excess of the fair market value of
the ITEQ Common Stock distributed to the Astrotech Stockholders in the Merger
over Astrotech's basis in the assets transferred to ITEQ pursuant thereto. Any
resulting corporate income tax on such gain would be payable by ITEQ, as the
successor to Astrotech. Further, if the Merger is ultimately determined not to
constitute a reorganization under the Code, Astrotech Stockholders will
recognize gain or loss equal to the difference between such stockholder's basis
in his Astrotech Common Stock exchanged in the Merger and the sum of the fair
market values at the Effective Date of the ITEQ Common Stock received by such
holder. Such gain or loss will qualify as capital gain or loss, assuming the
Astrotech Stockholder holds the Astrotech Common Stock as a capital asset at the
Effective Date of the Merger.
Under the backup withholding rules, a Astrotech Stockholder may be subject
to backup withholding at the rate of 31% with respect to dividends and proceeds
of redemption unless such Astrotech Stockholder (a) is a domestic corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a correct taxpayer identification number, certifies
as to no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Any amount withheld
under these rules will be credited against the Astrotech Stockholder's federal
income tax liability. Astrotech may require Astrotech Stockholders to establish
an exemption from backup withholding or to make arrangements satisfactory to
Astrotech with respect to the payment of backup withholding. An
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Astrotech Stockholder who does not provide Astrotech with his, her or its
current taxpayer identification number may be subject to penalties imposed by
the IRS.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling of interests for
accounting and financial reporting purposes. Under the pooling of interests
method of accounting, the recorded assets and liabilities of ITEQ and Astrotech
will be aggregated to the consolidated financial statements of the surviving
corporation at their current recorded amounts, the consolidated earnings of the
Combined Company will include earnings of ITEQ and Astrotech for the entire
fiscal year in which the Merger occurs and the reported operating results and
financial position of ITEQ and Astrotech for prior periods will be combined and
restated as if both the companies had been merged during all periods presented.
See "Unaudited Pro Forma Financial Statements." ITEQ has been advised by its
independent public accountant, Arthur Andersen LLP ("Arthur Andersen"), that the
Merger should qualify for treatment as a pooling of interests in accordance with
generally accepted accounting principles based on the understanding of Arthur
Andersen of the terms and conditions of the Merger Agreement.
LISTING ON THE NASDAQ NATIONAL MARKET
ITEQ Common Stock is currently listed for trading on the Nasdaq National
Market, and ITEQ intends to file with the National Association of Securities
Dealers, Inc. with respect to the listing on the Nasdaq National Market of the
ITEQ Common Stock to be issued in connection with the Merger. The consummation
of the Merger is conditioned upon the approval of the listing of such additional
shares for trading on the Nasdaq National Market.
NO APPRAISAL RIGHTS
Neither ITEQ Stockholders nor the Astrotech Stockholders will be afforded
the opportunity to dissent from the Merger or receive an agreed or judicially
appraised value for their respective shares of ITEQ Common Stock or Astrotech
Common Stock. Under Delaware law, no appraisal rights exist for shares listed on
a national securities exchange or designated as a national market security on an
interdealer quotation system by the NASD, provided, that pursuant to the terms
of the Merger Agreement such stockholders are not required to accept on the
exchange of such shares consideration other than shares of stock of the
surviving company, cash in lieu of fractional shares or a combination thereof.
Accordingly, no appraisal rights exist with respect to the Merger since the ITEQ
Common Stock and Astrotech Common Stock are listed on the Nasdaq National Market
and the American Stock Exchange, respectively, and under the terms of the Merger
Agreement, Astrotech Stockholders will receive in exchange for their Astrotech
Common Stock solely ITEQ Common Stock and cash in lieu of fractional shares.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Messrs. S. Kent Rockwell and T. Richard Mathews, each of whom is currently
a director and executive officer of Astrotech, have entered into arrangements
with ITEQ to continue their employment from the Effective Date through December
31, 1997 at their current base salary and benefits. Thereafter each of Messrs.
Rockwell and Mathews will serve as a consultant for one year on an "as-needed"
basis at a rate of $2,000 per day. Beginning on the Effective Date, Mr. Rockwell
will serve as one of the nine directors of ITEQ. In addition, each of Messrs.
Rockwell and Mathews have entered into two-year non-competition agreements that
commence on the date their employment is terminated, currently anticipated to be
January 1, 1998, and for which they will be paid a total of $450,000 and
$300,000, respectively, and they will be conveyed the automobiles currently
provided to them by Astrotech.
Raymond T. Royko and Helen Vardy Gricks, each of whom currently serves as
an officer of Astrotech, have entered into arrangements with ITEQ to continue
their employment for the three-month period subsequent to the Effective Date
(the "Transition Period") at their current base salary and benefits. As an
incentive for each of them to continue their employment through the full
Transition Period, ITEQ has agreed
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to pay them a one-time bonus of $77,860 and $39,460, respectively, upon
expiration of the Transition Period. In addition, Mr. Royko and Ms. Gricks will
receive a one-time severance payment of $155,720 and $78,920, respectively, upon
termination of their employment on the expiration of the Transition Period, and
they will be conveyed the automobiles currently provided to them by Astrotech.
Based on their ownership of Astrotech Common Stock, Messrs. Rockwell,
Mathews and Royko and Ms. Gricks will become the beneficial owners of 1,350,501,
623,474, 41,106 and 7,594 shares of ITEQ Common Stock upon consummation of the
Merger.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is included in this Joint Proxy Statement as Appendix
A. The following discussion is qualified in its entirety by reference to the
Merger Agreement, which is incorporated herein by reference.
EFFECTIVE DATE OF THE MERGER
The Merger Agreement provides that the Merger will become effective as of
the date of filing by ITEQ of a certificate of merger with the Secretary of
State of the State of Delaware with respect to the Merger. It is anticipated
that, if the Merger Agreement is approved and adopted by the stockholders of
ITEQ and Astrotech and all of the other conditions to the Merger have been
satisfied or waived, the Effective Date will occur as soon as practicable after
the ITEQ Meeting and Astrotech Meeting.
MANNER AND BASIS OF CONVERTING ASTROTECH SHARES
On the Effective Date, each share of outstanding Astrotech Common Stock
will automatically be converted into the right to receive 0.93 fully paid and
nonassessable shares of ITEQ Common Stock. As a result of the conversion, the
former holders of Astrotech Common Stock will own approximately 35% of the
outstanding ITEQ Common Stock as of the Effective Date. As soon as practicable
after the Effective Date, ITEQ will cause the Exchange Agent to mail to each
record holder of Astrotech Common Stock a letter of transmittal and other
information advising such holder of the consummation of the Merger and for use
in exchanging certificates representing Astrotech Common Stock for ITEQ Common
Stock. After the Effective Date, there will be no further registration of
transfers on the stock transfer books of Astrotech with respect to Astrotech
Common Stock outstanding prior to the Effective Date. ASTROTECH COMMON STOCK
CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY ASTROTECH STOCKHOLDERS
PRIOR TO THE EFFECTIVE DATE AND THE RECEIPT OF A LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT.
No fractional shares of ITEQ Common Stock will be issued in the Merger, and
in lieu thereof, ITEQ will make cash payments attributable to such fractional
share based on the closing price per share for the ITEQ Common Stock on the
Nasdaq National Market on the last trading day before the Effective Date. Until
such time as a holder of Astrotech Common Stock surrenders his outstanding
certificate to the Exchange Agent, together with a letter of transmittal, such
certificate shall be deemed from and after the Effective Date to represent the
right to receive a certificate representing ITEQ Common Stock to be issued in
exchange therefor.
In addition, on the Effective Date, each of the then outstanding options to
purchase shares of Astrotech Common Stock will automatically be converted into
an option to purchase that number of shares of ITEQ Common Stock determined by
multiplying the number of shares of Astrotech Common Stock subject to such
converted option by 0.93. The exercise price per share of such option to
purchase ITEQ Common Stock will be adjusted to take into account the conversion
rate. In all other respects, the term, exercisability, vesting schedule and
other terms and conditions of such option will be the same as the options so
converted. If the foregoing calculation results in the option being exercisable
for a fractional share of ITEQ Common Stock, then the number of shares covered
by such option will be rounded down to the nearest whole share, and the
aggregate exercise price thereof will be reduced by the exercise price
attributable to such fractional share. All shares of ITEQ Common Stock to be
issued upon exercise of any option which was formerly an option to purchase
Astrotech Common Stock will be registered on an effective Form S-8 registration
statement filed with the Commission.
MANAGEMENT AFTER THE MERGER
On the Effective Date, the persons named in the Merger Agreement will
constitute the board of directors of the Combined Company and will hold office
until their successors are elected and qualified. Mark E. Johnson, Lawrance W.
McAfee, Pierre S. Melcher, Thomas N. Amonett, T. William Porter, James L.
Rainey, Jr., James A. Read, all of whom are currently directors or executive
officers of ITEQ, and S. Kent Rockwell, who is currently an executive officer
and director of Astrotech, and Nathan M. Avery, who was
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designated by Astrotech, will serve as the directors of the Combined Company.
For information concerning the backgrounds of Messrs. Johnson, McAfee, Melcher,
Amonett, Porter, Rainey, Read and Rockwell see Business of ITEQ -- Executive
Officers and Directors of ITEQ," and "Business of Astrotech -- Executive
Officers and Directors of Astrotech." Certain information concerning Mr. Avery
is set forth below:
Nathan M. Avery, age 62, has served since 1972 as the chairman of the
board, president and chief executive officer of Galveston-Houston Company, a
manufacturer in the construction and mining industries and producer of custom
steel castings for other industrial markets. Since December 1996, Mr. Avery has
served as advisory director of Cooper Cameron Corporation, a manufacturer of
petroleum production, compressor and power equipment. From June 1995 to December
1996, Mr. Avery served as a director of Cooper Cameron Corporation. Mr. Avery
also serves as a director and member of the executive committee of Daniel
Industries, Inc., a provider of products and services in the oil and gas
industry.
On the Effective Date, the current executive officers of ITEQ will remain
the executive officers of the Combined Company. In connection with the Merger,
Messrs. S. Kent Rockwell and T. Richard Mathews will resign their officer
positions with Astrotech on or prior to the Effective Date but will remain as
employees of the Combined Company through December 31, 1997 to assist ITEQ with
the transition. If relocation packages cannot be mutually agreed upon, certain
other officers of Astrotech will be retained for the three month period
following consummation of the Merger to assist in the transition. Messrs.
Rockwell and Mathews have entered into a two-year non-competition agreement with
ITEQ which is to take effect upon the termination of their employment with ITEQ,
which is expected to occur on January 1, 1998. See "The Merger -- Interests of
Certain Persons in the Merger." After the consummation of the Merger, the
Combined Company's headquarters will be located at 2727 Allen Parkway, Suite
760, Houston, Texas 77019, the current headquarters of ITEQ.
AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION
The Merger Agreement provides that upon consummation of the Merger, the
Certificate of Incorporation of ITEQ will be amended and restated as described
below. Approval of the Merger Agreement will constitute approval of the
amendment and restatement to the Certificate of Incorporation. The only manner
in which an ITEQ Stockholder may vote against the amendment and restatement of
the Certificate of Incorporation is to vote against the Merger Proposal.
ITEQ's Certificate of Incorporation currently authorizes the issuance of
30,000,000 shares of ITEQ Common Stock. If the Merger Agreement is adopted by
the ITEQ Stockholders and Astrotech Stockholders and is consummated, the
Certificate of Incorporation of ITEQ will be amended and restated by operation
of law and without further action on the part of the stockholders, to increase
the number of authorized shares of ITEQ Common Stock to 40,000,000 shares.
Except with respect to the shares of ITEQ Common Stock issuable in connection
with the Merger or in connection with stock-based employee benefit plans, ITEQ
has no present plans for any particular issuance of additional shares of ITEQ
Common Stock. The additional shares of ITEQ Common Stock will be available for
issuance at any time in the future without further stockholder approval, unless
otherwise required by law.
Under the DGCL, unless otherwise provided in a company's certificate of
incorporation, stockholders may take action by written consent. ITEQ's
Certificate of Incorporation currently does not provide otherwise. The ITEQ
Restated Certificate expressly denies stockholder action by written consent.
Accordingly, stockholders of the Combined Company will be permitted to take
action only at an annual or special meeting of stockholders. These provisions
may make it more difficult to effect stockholder action, including a change in
control, by the majority stockholders who would otherwise be able to take action
by written consent and without calling a special meeting of stockholders.
While ITEQ's Certificate of Incorporation currently provides
indemnification of ITEQ directors and officers to the full extent permitted
under DGCL, the ITEQ Restated Certificate makes explicit several rights and
powers with regard to the indemnification of directors and officers for
liabilities incurred while acting in their respective capacities. First, any
expenses incurred by a director or officer in defending against a liability are
to be prepaid to such director or officer by ITEQ, subject to repayment in the
event that the officer or
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director is ultimately unsuccessful in defending against the liability. Second,
an officer or director who is entitled to indemnification from ITEQ may file
suit against ITEQ if ITEQ fails to reimburse the officer or director within
thirty days of receiving a claim for indemnification. ITEQ also has the power to
purchase and maintain insurance, create a trust fund, or establish any credit,
guaranty, or surety arrangement on behalf of any officer, director, or employee
of ITEQ for the purpose of protecting against indemnification expenses incurred
by ITEQ.
AMENDMENT AND RESTATEMENT OF BYLAWS
The Merger Agreement provides that upon consummation of the Merger, the
Bylaws of ITEQ will be amended and restated as described below. The ITEQ board
of directors has adopted the amended and restated Bylaws to take effect on
consummation of the Merger. In the event the Merger Agreement is terminated, the
amended and restated Bylaws will not become effective.
If the Merger Agreement is adopted by the ITEQ Stockholders and Astrotech
Stockholders and is consummated, the Bylaws of ITEQ will be amended and restated
by operation of law and without further action on the part of the stockholders,
to increase the number of directors that constitute the whole board, from seven
to nine until a different number is fixed by board resolution. In any event, the
board will consist of at least three, but no more than twelve, directors.
The Bylaws of ITEQ currently do not address the procedures for bringing
proposals to vote at an annual and special meeting of stockholders. To properly
bring a proposal up for a vote before the ITEQ Stockholders at an annual or
special meeting under the ITEQ Restated Bylaws, the proposing ITEQ Stockholder
must give timely written notice of such proposal to the secretary of ITEQ
between 60 and 180 days before the annual or special meeting at which such
proposal is to be submitted. Such notice must set forth the general terms of the
proposal, as well as specific information about the ITEQ Stockholder making the
proposal. These provisions would prevent non-director stockholders of ITEQ 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. In addition, under the ITEQ Restated Bylaws, ITEQ Stockholders must
also give timely written notice to the Secretary of ITEQ of any nominations of
directors to be elected at an annual or special meeting and ITEQ election of
directors must be by written ballot.
The ITEQ Restated Bylaws also give certain powers to the board of directors
and chairman of board relating to postponing and adjourning stockholder
meetings. Under the ITEQ Restated Bylaws, the board of directors may, at any
time prior to the holding of a meeting of ITEQ Stockholders, postpone such
meeting to such time and place as is specified in the notice of postponement. In
addition, the chairman of the board has the power to adjourn a meeting of ITEQ
Stockholders at any time if he or she deems such adjournment to be a reasonable
course of action under the circumstances.
TERMS OF THE MERGER AGREEMENT
Representations and Warranties. In the Merger Agreement, ITEQ and Astrotech
each made various customary representations and warranties as to, among other
things, their respective corporate organizations and compliance with law, their
respective capitalizations, the authority and validity of the Merger Agreement,
their respective businesses and financial condition, required approvals or
conflicts, financial statements, litigation, employee benefit matters, tax
matters and environmental matters. The representations and warranties of each of
ITEQ and Astrotech will expire upon consummation of the Merger.
Conditions to the Merger. The obligations of ITEQ and Astrotech to
consummate the Merger and the related transactions are subject to satisfaction
of certain conditions or the waiver thereof on or prior to the Effective Date,
including (i) the representations and warranties of ITEQ and Astrotech must be
true in all material respects as of the Effective Date, and ITEQ and Astrotech
must have complied with their respective covenants set forth in the Merger
Agreement; (ii) no action or proceeding may be pending or threatened before any
court or other governmental entity in connection with the Merger which might
result in a material adverse effect (as defined in the Merger Agreement) on ITEQ
or Astrotech; (iii) ITEQ and Astrotech shall have received opinions of counsel
covering such matters as are customarily covered in opinions delivered in
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transactions of the type contemplated by the Merger Agreement, including a tax
opinion delivered by counsel to ITEQ; (iv) the Merger Agreement and the related
transactions must have been approved by a majority of the outstanding shares of
common stock of ITEQ and Astrotech; (v) all waiting periods required by the HSR
Act must have expired with respect to the transactions contemplated by the
Merger Agreement, or early termination with respect thereto must have been
obtained, without the imposition of any governmental request or order requiring
the sale or disposition or holding separate of particular assets or business of
ITEQ or Astrotech; (vi) a joint proxy/prospectus must have been declared
effective under the Securities Act and the shares of ITEQ Common Stock issued in
connection with the Merger must have become eligible for trading on the Nasdaq
National Market; (vii) the holders of any material indebtedness of ITEQ and
Astrotech and the parties to any other material agreements to which ITEQ or
Astrotech is a party must have consented to the Merger; (viii) ITEQ must have
consummated a refinancing of Astrotech's debt, subject to the terms of the
Merger Agreement; and (ix) ITEQ must make effective provision for the assumption
of outstanding stock options under plans maintained by Astrotech or its
subsidiaries and for certain other matters set forth under the Merger Agreement
with respect to other Astrotech employee plans.
Obligations of the Parties Pending Effective Date. Each of ITEQ and
Astrotech has agreed that for the period between July 23, 1997 to the Effective
Date, it will (i) continue its present business in the usual, regular, and
ordinary manner so as to preserve its present business organization; (ii)
maintain all of its material properties and assets in customary repair and
condition, reasonable wear and tear and damage by unavoidable casualty excepted;
(iii) maintain its books and records in the ordinary course, in accordance with
GAAP applied on a consistent basis; (iv) comply in all material respects with
all laws applicable to it or the conduct of its business; (v) permit the other
party to inspect its records and consult with its officers, employees, attorneys
and agents for the purpose of determining the accuracy of the representations
and warranties contained in the Merger Agreement; (vi) file such materials as
are required under the HSR Act with respect to the Merger and cooperate with the
other party to the extent necessary to assist in the preparation of such
filings; (vii) cooperate in the preparation and filing of a joint proxy to
obtain the required approval of the Merger by the stockholders of ITEQ and
Astrotech pursuant to the Merger Agreement; (viii) call and hold a stockholder
meeting of ITEQ and Astrotech within 45 days after the joint proxy/prospectus is
declared effective under the Securities Act to act on a proposal to approve the
Merger Agreement and the transactions contemplated thereby; and (ix) promptly
notify the other party in writing of any material adverse effect (as defined in
the Merger Agreement) in the financial condition, business or affairs of such
party, whether or not occurring in the ordinary course of business. A material
adverse effect, as used in the Merger Agreement, means any event, change or
effect which would reasonably be expected to result in a loss having the effect
of adversely affecting the business, results of operations or financial
prospects of such party and its subsidiaries, taken as a whole, so that the
benefits reasonably expected to be obtained by the other party to the Merger
more likely than not would be jeopardized. However, a material adverse effect
will not result from any adverse effect resulting from changes in general
economic conditions or conditions generally affecting the industries of the
parties, any change in trading prices of the equity securities of either party,
in and of itself, or any effect resulting from the compliance by ITEQ or
Astrotech with the terms of the Merger Agreement.
Each of ITEQ and Astrotech has also agreed that for the period between July
23, 1997 to the Effective Date it will: (i) not enter into any employment
contracts which cannot be terminated on notice of 14 days or less or provide for
any severance payments or benefits extending for a period beyond the termination
date for such employment, except as may be required by applicable law; (ii) not
incur any borrowings except the refinancing of indebtedness now outstanding or
additional borrowings under existing revolving credit facilities, the prepayment
by customers of amounts due for goods sold or services rendered, trade payables
or other borrowings incurred in the ordinary course of business, or as otherwise
approved in writing by the other party;
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(iii) not enter into any contracts which would require capital expenditures or
incur any contingent liability which would exceed $1,000,000 in the aggregate,
except as may be necessary for the maintenance of facilities or equipment in the
ordinary course of its business, as may be required by law, or as otherwise
approved in writing by the other party; (iv) not sell, dispose of, or encumber,
any property or assets except in the ordinary course of business or as approved
in writing by the other party; (v) maintain insurance upon all of its respective
properties and with respect to the conduct of its respective businesses of such
kinds and amounts as is customary in the type of business in which it is
engaged; (vi) except as otherwise provided by the Merger Agreement, not amend
its certificate of incorporation or bylaws or other material organizational
documents or merge or consolidate with any other corporation or change in any
manner the rights of its capital stock or the character of its business; (vii)
not issue or sell, directly or indirectly, or enter into any contract to issue
or sell, any shares of its capital stock or in any way subdivide, combine or
reclassify any shares of its capital stock, or acquire, or agree to acquire, any
shares of its capital stock, subject to limited exceptions; and (viii) not
declare or pay any dividend on shares of its capital stock or make any other
distribution of assets to its stockholders.
In addition, ITEQ has agreed for the period between July 23, 1997 and the
Effective Date to: (i) take all steps reasonably necessary to register the ITEQ
Common Stock to be issued in connection with Merger under the Securities Act and
other action required under state securities laws; (ii) take steps required to
file the notice of additional listing of such ITEQ Common Stock on the Nasdaq
National Market and (iii) use all reasonable commercial efforts to arrange for
the assumption or payment of the outstanding Astrotech indebtedness as of the
Effective Date, on such terms as could not reasonably expected to have a
material adverse effect on ITEQ.
Termination; Agreement Not To Solicit Other Proposals. The Merger Agreement
may be terminated by mutual consent of the parties or by either ITEQ or
Astrotech individually if (i) any condition precedent to the Merger has not been
met by the other party, (ii) there has been a material adverse change since
March 31, 1997 with respect to the other party, (iii) any legal action regarding
the Merger has been brought by any federal or state governmental entity, (iv)
the Merger has not been consummated by November 30, 1997, other than as a result
of a breach of the Merger Agreement by the terminating party, or (v) if the
Merger cannot be accounted for as a "pooling of interests," except if the
terminating party engaged in a transaction after June 30, 1997 which
disqualified the Merger from such accounting treatment. In addition, Astrotech
may individually terminate the Merger Agreement, if its board of directors
receives a Superior Transaction Proposal (as defined below) and as a result of
such proposal, withdraws or modifies adversely to ITEQ its recommendation to
stockholders to vote in favor of the Merger Agreement and the transactions
contemplated thereby.
The Merger Agreement provides that Astrotech may not, nor may it authorize
or permit any of its respective agents to: (i) solicit or take any other action
to facilitate any inquiry or the making of any proposal which constitutes, or
may reasonably be expected to lead to any acquisition or purchase of a
substantial amount of assets of, or 30% or more of the equity interest in,
Astrotech or any merger, consolidation, business combination, sale of
substantially all assets, sale of securities, recapitalization, liquidation,
dissolution or similar transaction involving Astrotech (other than the
transactions contemplated by the Merger Agreement) or any other material
corporate transaction, the consummation of which would or could reasonably be
expected to impede the Merger (collectively, "Astrotech Transaction Proposals"),
or agree to or endorse any Astrotech Transaction Proposal or (ii) propose, enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to another person any information with respect to its
business, provided however, that the foregoing clauses (i) and (ii) do not
prohibit Astrotech from (A) furnishing information pursuant to an appropriate
confidentiality letter to a third party who has made a Superior Astrotech
Transaction Proposal, (B) engaging in discussions or negotiations with such a
third party who has made a Superior Astrotech Transaction Proposal or (C)
following receipt of a Superior Astrotech Transaction Proposal, taking and
disclosing to its stockholders a position with respect thereto or changing the
recommendation by its board of directors or the vote of its stockholders in
favor of the Merger Agreement, but in each case referred to in the foregoing
clauses (A) through (C) only after the board of directors of Astrotech concludes
in good faith following advice of its outside counsel that such action is
reasonably necessary for the board of directors to comply with its fiduciary
obligations to stockholders under applicable law. A "Superior Astrotech
Transaction Proposal" is a bona fide Astrotech Transaction Proposal that the
board of directors of
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Astrotech determines in good faith after consultation with (and based in part on
the advice of) its independent financial advisors to be more favorable to its
stockholders than the Merger, is reasonably capable of being financed and is not
subject to any material contingencies relating to financing.
If (i) (A) the Merger Agreement is terminated by Astrotech because of
receipt of a Superior Astrotech Transaction Proposal, (B) Astrotech violates the
covenant not to solicit Astrotech Transaction Proposals, or (C) Astrotech
withdraws or modifies its board of directors' recommendation to the stockholders
to vote in favor of the transactions contemplated by the Merger Agreement or
(ii) Astrotech enters into an agreement which provides for Another Astrotech
Transaction (as defined in the Merger Agreement) or Another Astrotech
Transaction is consummated (with any third party which before termination of the
Merger Agreement has communicated to it an Astrotech Transaction Proposal), in
either case within twelve months after the date of termination of the Merger
Agreement, then in any such event, Astrotech shall pay to ITEQ a break-up fee in
an amount equal to $2,500,000.
Indemnification by ITEQ as to Joint Proxy/Prospectus. The Merger Agreement
provides that ITEQ will indemnify Astrotech and its officers and directors and
each person who controls Astrotech within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act from all losses, expenses
(including reasonable attorneys' fees and expenses) or liabilities, arising out
of acts or omissions occurring at or prior to the Effective Date, that are based
on (i) any actual or alleged false, misleading or untrue statement of material
fact relating to ITEQ contained in the joint proxy/prospectus mailed to the
stockholders of ITEQ or (ii) actual or alleged omissions to state in such joint
proxy/prospectus a material fact required to be stated therein or to make the
statements therein not misleading, except to the extent made in reliance and in
conformity with written disclosure provided by Astrotech specifically for use in
the joint proxy/prospectus.
Registration of Certain Astrotech Control Person Shares. The Merger
Agreement further provides that promptly following the Effective Date, ITEQ will
file with the Commission on Form S-3, a shelf registration statement (the "Shelf
Registration Statement") covering the resale by former stockholders of
Astrotech, who as of the Effective Date constitute "affiliates" within the
meaning of Rule 145 promulgated under the Securities Act, of all ITEQ Common
Stock issued to them in the Merger or upon exercise of options to purchase
Astrotech Common Stock converted in the Merger. ITEQ is to maintain the Shelf
Registration Statement in effect for the maximum period allowed under
regulations promulgated by the Commission, but at least through December 31,
2002. These registration rights granted under the Merger Agreement are non-
transferable, except in limited circumstances.
35
<PAGE> 46
COMBINED UNAUDITED CONDENSED PRO FORMA FINANCIAL INFORMATION
The following pro forma financial statements have been prepared assuming
the Merger is accounted for as a pooling of interests. In the Merger, shares of
Astrotech Common Stock will be exchanged for shares of ITEQ Common Stock. These
statements are based on the historical consolidated financial statements of ITEQ
and Astrotech, which include, in the opinion of ITEQ and Astrotech managements,
all adjustments necessary to present fairly the results of such periods.
The pro forma financial statements include the combined unaudited condensed
pro forma pooled balance sheet as of March 31, 1997 as if the Merger had
occurred on that date and the combined unaudited condensed pro forma pooled
statement of operations as if the Merger had occurred on January 1, 1994.
The pro forma financial statements also include the combined unaudited
adjusted condensed pro forma pooled balance sheet as if the Merger and other
transactions described below had occurred on March 31, 1997 and the combined
unaudited adjusted condensed pro forma pooled statements of operations as if the
Merger and such other transactions had occurred on January 1, 1996.
On March 28, 1996, Astrotech purchased the outstanding common stock of
Graver Tank & Mfg. Co. ("Graver") and on May 1, 1997 Astrotech purchased the
outstanding common stock of Trusco Tank, Inc. ("Trusco"). On November 20, 1996
(effective November 1, 1996), ITEQ purchased all of the outstanding stock
(excluding certain assets and liabilities) of Ohmstede, Inc. ("Ohmstede"). Each
of Graver, Trusco and Ohmstede (collectively, the "Acquisitions") were accounted
for using the purchase method of accounting and their results of operations were
included from the date of acquisition forward. In May 1997, ITEQ sold 5.1
million shares of ITEQ Common Stock, realizing net proceeds of approximately
$32.3 million. The combined unaudited adjusted condensed pro forma pooled
balance sheet gives effect to the purchase of Trusco by Astrotech and the sale
by ITEQ of such common stock and the application of the net proceeds therefrom
as though these transactions had occurred on March 31, 1997. The combined
unaudited adjusted condensed pro forma pooled statement of operations for the
three months ended March 31, 1997 and the combined unaudited adjusted condensed
pro forma pooled statement of operations for the year ended December 31, 1996
assume that the Acquisitions had occurred on January 1, 1996. The adjusted
statement of operations for each period gives effect to the sale by ITEQ of 5.1
million shares of ITEQ Common Stock and the application of the net proceeds
therefrom as if the offering had occurred on January 1, 1996. These adjusted pro
forma financial statements were prepared utilizing the consolidated financial
statements of ITEQ and Astrotech and the historical financial statements of the
Acquisitions, respectively.
The pro forma financial statements may not be indicative of the Combined
Company's actual results had the above transactions occurred on the indicated
dates, nor do such statements purport to indicate the Combined 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 since been eliminated, no expected
benefits and/or cost reductions anticipated by ITEQ and Astrotech or additional
revenues related to selling the Acquisitions' products through the ITEQ and
Astrotech international marketing networks have been reflected in the combined
unaudited adjusted condensed pro forma statement of operations.
36
<PAGE> 47
ITEQ AND ASTROTECH
COMBINED UNAUDITED CONDENSED PRO FORMA POOLED BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA COMBINED
ITEQ ASTROTECH ADJUSTMENTS COMPANY
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,759 $ 1,706 $ $ 3,465
Restricted cash................................... 155 -- 155
Due on contracts and other receivables, net....... 33,261 21,267 54,528
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ 23,759 6,165 29,924
Inventories....................................... 6,268 5,488 11,756
Prepaid expenses, deposits and other assets....... 1,106 902 2,008
Deferred tax asset................................ 1,166 1,726 2,892
-------- -------- ---- --------
Total Current Assets.................... 67,474 37,254 -- 104,728
Property and equipment, net....................... 13,775 25,998 39,773
Other assets, net................................. 47,045 22,209 69,254
-------- -------- ---- --------
TOTAL ASSETS...................................... $128,294 $ 85,461 $ -- $213,755
======== ======== ==== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 13,550 $ 5,358 $ $ 18,908
Accrued liabilities............................... 17,758 9,999 27,757
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 952 7,944 8,896
Progress billings................................. 6,496 -- 6,496
Earn-outs payable................................. -- 2,000 2,000
Current maturities of long-term debt.............. 6,012 3,380 9,392
-------- -------- ---- --------
Total Current Liabilities............... 44,768 28,681 -- 73,449
LONG-TERM LIABILITIES:
Long-term obligations, less current maturities.... 44,548 13,710 58,258
Subordinated notes................................ 12,796 -- 12,796
Deferred tax liability............................ 941 3,900 4,841
-------- -------- ---- --------
Total Liabilities....................... 103,053 46,291 -- 149,344
STOCKHOLDERS' EQUITY:
Common stock...................................... 12 99 (90)(1) 21
Additional paid-in capital........................ 24,400 59,937 90(1) 84,427
Retained earnings (deficit)....................... 1,129 (20,866) (19,737)
Translation adjustment............................ (300) -- (300)
-------- -------- ---- --------
Total Stockholders' Equity.............. 25,241 39,170 -- 64,411
-------- -------- ---- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $128,294 $ 85,461 $ -- $213,755
======== ======== ==== ========
</TABLE>
- ---------------
(1) Pro forma adjustment to Astrotech common stock to reflect the pooling of
interest based on a conversion rate of .93 and to reflect the par value of
ITEQ Common Stock.
37
<PAGE> 48
ITEQ AND ASTROTECH
COMBINED UNAUDITED CONDENSED PRO FORMA
POOLED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................... $130,552 $213,367 $232,994 $46,148 $77,912
Cost of revenues........................... 97,662 166,291 179,332(1) 34,650(1) 60,058
Selling, general and administrative
expenses................................. 24,217 32,117 34,436 8,125 10,800
Depreciation and amortization.............. 4,282 4,835 5,717 1,242 1,819
Restructuring charges and other
nonrecurring costs....................... -- 1,335 3,704 3,500 --
-------- -------- -------- ------- -------
Operating profit........................... 4,391 8,789 9,805 (1,369) 5,235
Interest expense, net...................... (2,121) (2,835) (3,991) (656) (2,144)
Other income............................... 206 807 634 52 161
-------- -------- -------- ------- -------
Earnings (Loss) from continuing operations
before change in accounting principle and
provision (benefit) for income taxes..... 2,476 6,761 6,448 (1,973) 3,252
Provision (Benefit) for income taxes....... 1,201 3,270 2,524 (772) 1,347
-------- -------- -------- ------- -------
Net earnings (loss) from continuing
operations before change in accounting
principle................................ $ 1,275 $ 3,491 $ 3,924 $(1,201) $ 1,905
======== ======== ======== ======= =======
Net earnings (loss) from continuing
operations before change in accounting
principle per common share............... $ 0.07 $ 0.17 $ 0.19 $ (0.06) $ 0.09
======== ======== ======== ======= =======
Weighted average number of common and
common equivalent shares outstanding..... 19,407 20,746 20,881 20,775 21,805
======== ======== ======== ======= =======
</TABLE>
- ---------------
(1) Includes $700 of restructuring charges. See Note 3 to ITEQ Consolidated
Financial Statements.
Nonrecurring merger costs, resulting from the merger of ITEQ and Astrotech,
will be included in ITEQ's statement of operations for the year ended December
31, 1997. These costs will include financial advisor, legal and accounting fees,
severance costs, etc.
Astrotech's historical statement of operations for the fiscal years ended
September 30, 1994, 1995 and 1996 were combined with ITEQ's historical statement
of operations for the years ended December 31, 1994, 1995 and 1996 to prepare
the unaudited condensed pro forma pooled statement of operations for the years
ended December 31, 1994, 1995 and 1996, respectively. Accordingly, Astrotech's
historical operating results for the three months ended December 31, 1996 were
excluded from the combined unaudited condensed pro forma pooled statement of
operations for the 1996 period presented. Astrotech's revenues and net income
for that three-month period were $33,804 and $1,182, respectively.
The potential interest rate differential, if any, for refinancing existing
debt is not reflected in the above combined unaudited condensed pro forma pooled
statement of operations.
38
<PAGE> 49
ITEQ AND ASTROTECH
COMBINED UNAUDITED ADJUSTED CONDENSED PRO FORMA
POOLED BALANCE SHEET
(IN THOUSANDS)
AS OF MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED PRO FORMA ADJUSTED
COMPANY TRUSCO ADJUSTMENTS BALANCE
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 3,465 $ 62 $ 309(1) $ 3,836
Restricted cash.............................. 155 -- 155
Due on contracts and other receivables,
net........................................ 54,528 4,933 59,461
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... 29,924 584 30,508
Inventories.................................. 11,756 2,518 14,274
Prepaid expenses, deposits and other
assets..................................... 2,008 382 2,390
Deferred tax asset........................... 2,892 -- 2,892
-------- ------- -------- --------
Total Current Assets............... 104,728 8,479 309 113,516
Property and equipment, net.................. 39,773 2,770 856(1) 43,399
Other assets, net............................ 69,254 59 7,623(1) 76,936
-------- ------- -------- --------
TOTAL ASSETS................................. $213,755 $11,308 $ 8,788 $233,851
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................. $ 18,908 $ 1,664 $ $ 20,572
Accrued liabilities.......................... 27,757 1,907 500(1) 30,164
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... 8,896 857 9,753
Progress billings............................ 6,496 -- 6,496
Earn-outs payable............................ 2,000 -- 2,000
Current maturities of long-term debt......... 9,392 2,297 (1,785)(1) 9,904
-------- ------- -------- --------
Total Current Liabilities.......... 73,449 6,725 (1,285) 78,889
LONG-TERM LIABILITIES:
Long-term obligations, less current
maturities................................. 58,258 2,000 (19,925)(1) 40,333
Subordinated notes........................... 12,796 281 13,077
Deferred tax liability....................... 4,841 -- 4,841
-------- ------- -------- --------
Total Liabilities.................. 149,344 9,006 (21,210) 137,140
STOCKHOLDERS' EQUITY:
Common stock................................. 21 54 (49)(1) 26
Additional paid-in capital................... 84,427 203 32,092(1) 116,722
Retained earnings (deficit).................. (19,737) 2,045 (2,045)(1) (19,737)
Translation adjustment....................... (300) -- (300)
-------- ------- -------- --------
Total Stockholders' Equity................... 64,411 2,302 29,998 96,711
-------- ------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $213,755 $11,308 $ 8,788 $233,851
======== ======= ======== ========
</TABLE>
See Notes to Combined Unaudited Adjusted Condensed Pro Forma Pooled Balance
Sheet.
39
<PAGE> 50
NOTES TO COMBINED UNAUDITED ADJUSTED
CONDENSED PRO FORMA POOLED BALANCE SHEET
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1. Adjustments to the Combined Unaudited Adjusted Condensed Pro Forma
Pooled Balance Sheet as of March 31, 1997 are as follows.
a. The fair value of Trusco's net assets has been estimated in
accordance with Accounting Principles Board Opinion No. 16 as follows:
<TABLE>
<CAPTION>
<S> <C>
Net assets of Trusco at March 31, 1997...................... $ 2,302
Adjustments for net liabilities not assumed................. 677
Fair value adjustment:
Adjustment to fixed assets to estimated fair value........ 856
Costs in excess of fair value of net assets acquired...... 7,623
-------
Total purchase price........................................ $11,458
=======
Total purchase price consisted of:
Cash paid................................................. $10,958
Direct expenses incurred.................................. 500
-------
$11,458
=======
</TABLE>
b. Eliminate Trusco's historical stockholders' equity.
c. In accordance with the Trusco Stock Purchase Agreement, affiliate
receivables, the majority of which were classified as prepaid expenses,
were eliminated by cash exchange at the time of acquisition, which is
reflected on a pro forma basis.
d. Proceeds from a bank loan agreement used to finance the cash
portion of the purchase price, repay existing bank obligations of Trusco
and refinance existing bank obligations of Astrotech.
e. Represents the ITEQ equity offering of 5.1 million shares with the
net proceeds of $32,300 used solely to repay debt.
<TABLE>
<CAPTION>
A. B. C. D. E. TOTAL
------- ------ ---- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents........... (10,958) 309 10,958 309
Prepaid expenses........ 356 (356) 0
Property and equipment,
net................... 856 856
Other assets, net....... 7,623 7,623
Accrued liabilities..... 500 500
Current maturities of
long-term debt........ 15 (47) (1,753) (1,785)
Long-term obligations,
less current
maturities............ (336) 12,711 (32,300) (19,925)
Common stock............ (54) 5 (49)
Additional paid-in
capital............... (203) 32,295 32,092
Retained earnings
(deficit)............. (2,045) (2,045)
</TABLE>
40
<PAGE> 51
ITEQ AND ASTROTECH
COMBINED UNAUDITED ADJUSTED CONDENSED PRO FORMA
POOLED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED PRO FORMA ADJUSTED
COMPANY TRUSCO ADJUSTMENTS BALANCE
-------- ------ ----------- --------
<S> <C> <C> <C> <C>
Revenues......................................... $77,912 $5,556 $ $83,468
Cost of revenues................................. 60,058 4,527 64,585
Selling, general and administrative expenses..... 10,800 743 11,543
Depreciation and amortization.................... 1,819 142 (79)(1) 1,930
48(2)
------- ------ ------ -------
Operating profit................................. 5,235 144 31 5,410
Interest expense, net............................ (2,144) (111) (242)(3) (1,692)
98(4)
707(6)
Other income..................................... 161 13 174
------- ------ ------ -------
Earnings before provision for
income taxes................................... 3,252 46 594 3,892
Provision for income taxes....................... 1,347 171(5) 1,518
------- ------ ------ -------
Net Earnings..................................... $ 1,905 $ 46 $ 423 $ 2,374
======= ====== ====== =======
Net earnings per common share.................... $ 0.09 $ 0.09
======= =======
Weighted average number of common and common
equivalent shares outstanding(a)............... 21,805 26,912(6)
======= =======
</TABLE>
- ---------------
(a) Unaudited pro forma per share information is based on the combined average
number of shares of ITEQ and Astrotech Common Stock adjusted by the Exchange
Ratio for the respective period.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
INCOME
----------
<S> <C> <C>
(1) Decrease in depreciation related to recording the Trusco
fixed assets at fair market value, assigning new useful
lives and using straight line depreciation method........... 79
(2) Amortization of goodwill related to Trusco.................. (48)
(3) Interest at the Astrotech borrowing rate on amounts borrowed
to fund the purchase price of Trusco and repay certain
existing outstanding indebtedness........................... (242)
(4) To eliminate interest expense on Trusco's existing debt
which was repaid by Astrotech............................... 98
(5) Represents the pro forma income tax effect.................. (171)
(6) Represents interest savings resulting from the ITEQ equity
offering of 5.1 million shares with the proceeds used to
repay ITEQ indebtedness as of January 1, 1997............... 707
</TABLE>
41
<PAGE> 52
ITEQ AND ASTROTECH
COMBINED UNAUDITED ADJUSTED CONDENSED PRO FORMA
POOLED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED PRO FORMA ADJUSTED
COMPANY GRAVER TRUSCO OHMSTEDE ADJUSTMENTS BALANCE
------------- ---------- ------------ ----------- ----------- --------
YEAR ENDED TEN
DECEMBER 31, SIX MONTHS YEAR MONTHS
1996 AND ENDED ENDED ENDED
SEPTEMBER 30, MARCH 31, DECEMBER 31, OCTOBER 31,
1996 1996 1996 1996
------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $232,994 $10,389 $24,809 $ 83,124 $ $351,316
Cost of revenues................. 179,332(a) 9,879 19,369 62,939 271,519
Selling, general and
administrative expenses........ 34,436 1,735 2,638 10,301 (541)(4) 48,569
Depreciation and amortization.... 5,717 115 521 999 (356)(1) 7,985
989(2)
Restructuring charges and other
nonrecurring costs............. 3,704 3,704
-------- ------- ------- -------- ------- --------
Operating profit (loss).......... 9,805 (1,340) 2,281 8,885 (92) 19,539
Interest expense, net............ (3,991) (86) (273) (301) (5,654)(5) (7,476)
2,829(6)
Other income..................... 634 340 120 284 1,378
-------- ------- ------- -------- ------- --------
Earnings (Loss) before provision
for income taxes............... 6,448 (1,086) 2,128 8,868 (2,917) 13,441
Provision for income taxes....... 2,524 30 444 2,244(3) 5,242
-------- ------- ------- -------- ------- --------
Net earnings (loss).............. 3,924 (1,086) 2,098 8,424 (5,161) 8,199
======== ======= ======= ======== ======= --------
Net earnings per common share.... $ 0.19 $ 0.32
======== ========
Weighted average number of common
and common equivalent shares
outstanding(b)................. 20,881 25,988(6)
======== ========
</TABLE>
- ---------------
(a) Includes $700 in restructuring charges. See Note 3 to ITEQ Consolidated
Financial Statements.
(b) Unaudited pro forma per share information is based on the combined average
number of shares of ITEQ and Astrotech Common Stock adjusted by the Exchange
Ratio for the respective period.
<TABLE>
<CAPTION>
GRAVER TRUSCO OHMSTEDE TOTAL
------ ------ -------- -------
INCREASE (DECREASE) INCOME
<S> <C> <C> <C> <C>
(1) Decrease in depreciation related to recording the fixed
assets at fair market value, assigning new useful lives
and using straight line depreciation method............. 62 294 356
(2) Increase in amortization of goodwill.................... (161) (828) (989)
(3) Represents the pro forma income tax effect.............. (2,244)
(4) 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 or additional costs
related to association with a public company have been
included in this adjustment............................. 541 541
(5) Reflects the increase in interest expense at the
applicable ITEQ or Astrotech borrowing rates related to
the additional debt borrowed for the Graver, Trusco and
Ohmstede acquisition and the amortization of both the
debt financing costs and the subordinated debt discount
related to Ohmstede, net of historical expense savings,
from the paydown of historical debt..................... (61) (703) (4,890) (5,654)
(6) Represents interest savings resulting from the ITEQ
equity offering of 5.1 million shares with the proceeds
used to repay ITEQ indebtedness as of January 1,
1996.................................................... 2,829
</TABLE>
42
<PAGE> 53
BUSINESS OF ITEQ
GENERAL
ITEQ is a provider of manufactured equipment, engineered systems and
services used in the processing, treatment, storage 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. ITEQ 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, ITEQ 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
ITEQ's objective is to become 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 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.
Internal Growth. ITEQ has experienced significant internal growth in recent
years despite operating in mature markets. This growth has resulted from ITEQ'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
43
<PAGE> 54
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 ITEQ, further industry consolidation is to be expected. At present,
ITEQ 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
Since its inception in 1990, ITEQ has experienced substantial growth
through acquisitions. ITEQ business was originally focused on the highly
regulated air pollution control industry. However, in 1995, with the Allied
acquisition, ITEQ began to increase its focus on the process equipment business.
Consistent with this focus, in 1996 ITEQ completed the acquisition of Ohmstede
and sold Air-Cure, Inc. In addition, ITEQ completed the acquisition of Exell,
Inc. ("Exell") in August 1997. The following table sets forth certain
information concerning the businesses which have been acquired by ITEQ through
the date hereof.
<TABLE>
<CAPTION>
DATE
ACQUIRED COMPANY ACQUIRED PRINCIPAL 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 Control,
Inc............................. 1992 Wet scrubbers, tower Microelectronics, chemical
internals, FRP fans processing, waste
treatment, food processing
VIC Environmental Systems, Inc.... 1994 Carbon adsorption systems Pharmaceutical, rubber
Amerex Industries, Inc............ 1994 Fabric filters, wet and dry Steel, cement and lime,
scrubbers, heat exchangers refining, foundry
Allied Industries, Inc.(2)........ 1995 Air separation equipment, Petrochemical, plastics,
reactors, blenders, stacks, refining
towers and columns,
pressure vessels
Ohmstede, Inc..................... 1996 Heat exchangers Petrochemical, refining
Exell, Inc........................ 1997 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.
44
<PAGE> 55
PRODUCTS AND SERVICES
The following table sets forth, for the periods indicated, the contribution
to ITEQ's revenues from its significant classes of products and services:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR NINE MONTHS
ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
MARCH 31, MARCH 31, DECEMBER 31, -----------------------------
1992 1993 1993 1994 1995 1996(1)
----------- ----------- ------------ ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Filtration equipment............. $7,026 $12,790 $27,859 $44,713 $ 74,511 $ 66,007
Heat exchangers and other process
equipment...................... -- -- -- 17,113 38,653 44,797
------ ------- ------- ------- -------- --------
$7,026 $12,790 $27,859 $61,826 $113,164 $110,804
====== ======= ======= ======= ======== ========
</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.
For information with respect to ITEQ's financial data by geographic
location, see Note 10 to the ITEQ Consolidated Financial Statements.
Heat Exchangers. ITEQ's line of custom-built shell and tube heat exchangers
are marketed under the well-established Ohmstede and Exell names 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. ITEQ has a substantial
installed base of heat exchangers, since Ohmstede units were marketed for more
than 40 years and Exell units were marketed for more than 20 years prior to
acquisition. Aftermarket services are provided both in the field and on ITEQ
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
petrochemical and power industries, this type of exchanger is used as feedwater
heaters and surface condensers for plant operations.
Process Equipment. ITEQ 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. ITEQ 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.
Filtration. Filtration products are marketed by ITEQ 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").
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<PAGE> 56
Baghouses and scrubbers are custom designed systems which may be of substantial
scale and incorporate a variety of products manufactured by ITEQ. 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 ITEQ.
SALES AND MARKETING
ITEQ'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 ITEQ
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 ITEQ 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 ITEQ. 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, ITEQ has also entered into formal
"corporate alliances" with certain of its customers, under which ITEQ has been
designated a preferred vendor for various products. ITEQ intends to continue to
pursue additional strategic alliances or other corporate partnering
arrangements. In addition, ITEQ 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 ITEQ'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 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, ITEQ 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 ITEQ'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
subcontrac-
46
<PAGE> 57
tors, typically under fixed price arrangements. Should the need arise, ITEQ
believes that any subcontractor can be replaced without significant disruption
to its business.
Competition. All the markets in which ITEQ 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 ITEQ does not typically maintain supply or
service contracts with its customers, a significant portion of ITEQ's annual
revenues represents repeat business from the same customers.
With increasing frequency, ITEQ 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, ITEQ
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
ITEQ.
MANUFACTURING FACILITIES
ITEQ operates eight 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 696,600 square feet. Of this total, about 299,000 square feet of
manufacturing and related space is located in leased premises under leases
expiring at various dates through 2004. ITEQ 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 ITEQ's operations may
involve environmental management issues typically associated with manufacturing
operations, ITEQ believes that it is in material compliance with all
environmental laws. ITEQ 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
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 ITEQ.
SIGNIFICANT CUSTOMERS
Historically, ITEQ'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. ITEQ 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. ITEQ intends to continue its focus on entering
into additional strategic alliances or other corporate partnering arrangements.
Due to the contractual nature of
47
<PAGE> 58
ITEQ'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, ITEQ's backlog was $56.7 million compared with $28.1
million at December 31, 1995. At June 30, 1997, ITEQ's backlog was $65.5
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, ITEQ's backlog as of any
particular date may not be indicative of ITEQ'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 June 30, 1997 will be
completed within the next twelve months.
EMPLOYEES
At June 30, 1997, ITEQ employed approximately 1,000 full-time personnel,
including approximately 180 unionized employees at four domestic manufacturing
facilities who are subject to collective bargaining agreements. ITEQ considers
its relations with its employees to be good.
EXECUTIVE OFFICERS AND DIRECTORS OF ITEQ
The table below sets forth certain information regarding the current
executive officers and directors of ITEQ:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Mark E. Johnson...................... Director, chairman of the board and chief 46
executive officer
John Camardella...................... President and chief operating officer 53
Lawrance W. McAfee................... Director, executive vice president, chief 42
financial officer and secretary
Pierre S. Melcher.................... Director, senior vice president and treasurer 37
Thomas N. Amonett.................... Director 52
T. William Porter.................... Director 55
James L. Rainey, Jr.................. Director 66
James A. Read........................ Director 46
</TABLE>
Mark E. Johnson. Mr. Johnson has been a director of ITEQ since December
1995 and chairman of the board 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 ITEQ 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.
John Camardella. Mr. Camardella has been president and chief operating
officer of ITEQ since May 1997. From 1995 until May 1997, Mr. Camardella served
as executive vice president of Transportation & Transit Associates, Inc., a
railcar manufacturer and assembler. From 1994 to 1995, Mr. Camardella served as
chairman of the board of ITP Corporation, an oil restoration and filtration
systems concern. From 1984 until 1994, he served in a series of progressively
more responsible positions with ABB (Asea Brown Boveri), including president and
chief executive officer of a worldwide business unit from 1991 until 1994.
Lawrance W. McAfee. Mr. McAfee has been a director of ITEQ 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 ITEQ in 1993,
Mr. McAfee served as a director and chief financial officer of Waste
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<PAGE> 59
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 ITEQ 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 ITEQ since April
1996. Mr. Amonett served as acting chief executive officer of Weatherford
Enterra, Inc., an energy services company, from July 1996 until June 1997, and
has been 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. 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 ITEQ since
December 1995. Since 1981, Mr. Porter has been a partner of Porter & Hedges,
L.L.P., a Houston-based law firm and ITEQ'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, and Metals USA, Inc., a metals processing/service center
operator.
James L. Rainey. Mr. Rainey has served as a director of ITEQ 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 ITEQ 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 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.
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<PAGE> 60
ITEQ SELECTED 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 ITEQ. The historical financial data for the
three months ended March 31, 1997 is derived from the unaudited consolidated
financial statements of ITEQ. 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. The selected financial
data set forth below should be read in conjunction with "ITEQ Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the ITEQ Consolidated Financial Statements and notes thereto included elsewhere
in this Joint Proxy Statement.
<TABLE>
<CAPTION>
FISCAL FISCAL NINE YEAR ENDED DECEMBER 31, THREE
YEAR YEAR MONTHS ------------------------------------ MONTHS
ENDED ENDED ENDED 1994 1995 ENDED
MARCH 31, MARCH 31, DECEMBER 31, AS AS MARCH 31,
1992 1993 1993 RESTATED(1) RESTATED(1) 1996 1997
--------- --------- ------------ ----------- ----------- -------- -----------
(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 $48,494
Cost of revenues(2).............. 5,339 9,821 20,725 49,135 93,262 88,949(3) 38,870
Gross profit................... 1,687 2,969 7,134 12,691 19,902 21,855 9,624
Selling, general and
administrative expenses........ 1,645 3,843 5,677 8,926 11,645 11,977 4,807
Sales commissions................ -- -- -- 1,327 2,477 2,755 645
Depreciation and amortization.... 123 363 688 845 1,009 1,146 481
Merger costs, restructuring
charges and other nonrecurring
costs.......................... -- -- -- -- 1,335 3,704 --
------ ------- ------- ------- -------- -------- -------
Operating profit (loss)...... (81) (1,237) 769 1,593 3,436 2,273 3,691
Interest expense, net............ (48) (15) (192) (888) (1,502) (2,660) (1,807)
Other income (expense)........... 164 31 128 112 326 305 102
------ ------- ------- ------- -------- -------- -------
Earnings (Loss) before provision
(benefit) for income taxes..... 35 (1,221) 705 817 2,260 (82) 1,986
Provision (Benefit) for income
taxes.......................... 14 (396) 234 338 1,500 4 813
------ ------- ------- ------- -------- -------- -------
Net earnings (loss).......... $ 21 $ (825) $ 471 $ 479 $ 760 (86) $ 1,173
====== ======= ======= ======= ======== ======== =======
Net earnings (loss) per common
share.......................... $ .01 $ (.22) $ .08 $ .04 $ .07 $ (.01) $ .10
====== ======= ======= ======= ======== ======== =======
Weighted average common and
common equivalent shares
outstanding.................... 2,991 3,763 5,928 10,891 11,552 11,481 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:
Total assets.......................... $7,344 $26,585 $25,887 $52,800 $70,844 $136,388 $128,294
Working capital....................... 3,382 4,038 4,197 7,964 17,834 29,851 22,706
Long-term obligations................. 1,698 3,698 1,964 10,773 21,555 73,153 63,356
Stockholders' equity.................. 5,404 14,540 14,627 21,474 21,403 23,253 25,241
</TABLE>
- ---------------
(1) See Note 1 to ITEQ Consolidated Financial Statements.
(2) Includes depreciation and amortization of $668, $622, $719 and $275 for the
years ended December 31, 1994, 1995 and 1996, and the three months ended
March 31, 1997, respectively.
(3) Includes $700 in restructuring charges. See Note 3 to ITEQ Consolidated
Financial Statements.
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<PAGE> 61
ITEQ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "ITEQ
Selected Historical Financial Data" and ITEQ'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
ITEQ's financial position, business strategy, and plans of management for future
operations are forward-looking statements. Although ITEQ 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 ITEQ has acquired seven businesses. Due to the
magnitude of these acquisitions and the integration of the acquired operations
with ITEQ'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.
ITEQ 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, ITEQ acquired Allied
Industries, Inc. ("Allied") in a transaction that was accounted for as a
pooling-of-interests. ITEQ completed the acquisition of Ohmstede and Exell in
November 1996 and August 1997, respectively, each of which was accounted for as
a purchase.
In 1997, ITEQ 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.
ITEQ records revenues from long-term contracts using the
percentage-of-completion method. Under this method, ITEQ 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.
ITEQ 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, ITEQ
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.
ITEQ 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.
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<PAGE> 62
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 $30.0 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 ITEQ. In the first
quarter of 1996, ACI and Pipkorn contributed $1.2 million in revenues. The
revenues of ITEQ'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
ITEQ'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 ITEQ'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 ITEQ 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 revenue recognition
method, resulting in revenues and gross margin of $3.6 million and $0.7 million,
respectively, during the three months
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<PAGE> 63
ended March 31, 1997. Also, at March 31, 1997, Ohmstede had more jobs
substantially complete but not shipped than in prior periods, which under ITEQ's
completed contract policy resulted in revenues and gross margin of $2.0 million
and $0.6 million, respectively, during the three months ended March 31, 1997.
In March 1997, a vessel at ITEQ's Allied subsidiary was damaged by a
subcontractor during the final stages of completion. ITEQ has entered into a
second contract with the customer to construct a replacement vessel. The direct
cost of the original and replacement vessels will be recovered from the
customer. ITEQ expects to recover additional amounts from either the
subcontractor or from insurance proceeds, which have not been recognized in the
accompanying financial statements.
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, ITEQ's sales to the petrochemical and refining industries
increased due to the acquisition of Ohmstede, which had sales to these two
industries only. ITEQ'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 ITEQ 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, ITEQ 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 ITEQ's overall
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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, ITEQ 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 ITEQ 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. ITEQ'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 ITEQ Consolidated
Financial Statements, the interest rate charged to ITEQ by its lenders increases
or decreases based on ITEQ's leverage ratio. As a result of the Ohmstede
acquisition, ITEQ'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 ITEQ
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, ITEQ 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 ITEQ's increased marketing to customers within
that industry. ITEQ's revenues were also positively impacted by the growth in
ITEQ'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
competitive bidding on several large orders performed at reduced margins and
from losses on several jobs. The job losses related principally to
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products and services that ITEQ discontinued, as reflected in ITEQ's
restructuring charge taken in 1996, which is more fully described in Note 3 to
the ITEQ 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 ITEQ 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, ITEQ 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 ITEQ's cash position was $1.8 million compared with $6.3
million at December 31, 1996. Typically, ITEQ maintains cash levels of $1
million to $3 million for general corporate purposes, with any additional
amounts being used to reduce borrowings under ITEQ'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 $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.
ITEQ's existing capital resources consist of cash balances, cash provided
by its operating activities and funds available under its line of credit. ITEQ'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,
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ITEQ's operating activities used $6.0 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 ITEQ's program to reduce the amount of accounts receivable, increase progress
billings and reduce inventory levels.
ITEQ'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. ITEQ'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 ITEQ 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 ITEQ'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, ITEQ 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, ITEQ 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 1.8 million shares of ITEQ'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.
ITEQ's principal credit facility and the Subordinated Notes require ITEQ to
maintain certain levels of working capital and stockholders' equity and contain
other restrictive covenants. Such instruments also limit the ability of ITEQ to
incur additional indebtedness and to make acquisitions and certain investments.
At March 31, 1997, ITEQ was in compliance with the provisions of its debt
agreements.
Pursuant to the terms of the Merger, ITEQ will amend or replace its
principal credit facility, which will include the refinancing of Astrotech's
indebtedness.
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 ITEQ's anticipated cash
requirements for 1997. Management further believes that ITEQ 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 ITEQ.
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BUSINESS OF ASTROTECH
GENERAL
Astrotech provides engineering, design, fabrication and maintenance
services and constructs steel structures for a variety of industries, including
refining, petrochemical, water storage, pulp and paper, mining, alcohol,
agriculture, wastewater treatment, power generation and process systems.
Astrotech's broad range of products includes large aboveground storage tanks
(and related parts and constituent products), pressure vessels, bins, silos,
stacks and liners, scrubbers and shop built tanks (both underground and
aboveground). Astrotech also provides non-destructive testing and inspection
services for large aboveground storage tanks ("ASTs"), pressure vessels and
piping and also offers mobile storage tank leasing services. The industrial
storage industry is the only business segment in which Astrotech operates.
GROWTH OPPORTUNITIES AND STRATEGIES
Approximately, 60% of Astrotech's revenues are derived from the petroleum
and petrochemical industries. The American Petroleum Institute (the "API")
estimates that there are approximately 100,000 large ASTs in the United States,
i.e., those ASTs with a capacity in excess of 1,000 barrels used in the storage
of petroleum and petrochemical liquids. These tanks are owned primarily by large
integrated oil companies and petrochemical companies and are typically located
at petroleum and petrochemical terminals, refineries, marketing outlets and
pipeline facilities. Astrotech estimates that there are at least 200,000 large
ASTs located outside the United States, although Astrotech believes that the
average maintenance budget for these tanks is substantially less than the
average maintenance budget for similar tanks in the United States.
According to the API, over 50% of large, domestic ASTs were constructed
more than 30 years ago, and over 90% are over 10 years old. However, as oil and
gas production and refining increase outside the United States, Astrotech
believes that the increased activity will require the construction of new ASTs
as part of the construction of new terminals, refineries and pipeline
facilities.
ASTs require periodic maintenance as a result of the corrosive effects of
weather and the storage of petroleum and volatile organic liquids. For most of
its history, much of the petroleum industry's maintenance of ASTs has been
non-systematic and conducted on an as-needed basis. In recent years, however,
heightened awareness and concern for the environment and the need to comply with
the increasingly stringent domestic safety and environmental laws, together with
tightening industry standards, have increased the demand for storage tank repair
and maintenance services. These factors have prompted the need for new products
and design methods that render product storage more efficient and permit more
precise and comprehensive leak detection. The principal environmental laws and
regulations that affect AST owners and operators have been promulgated by
federal, state and local authorities generally in two areas: air pollution and
soil and water contamination. These laws and regulations encourage owners and
operators of ASTs to maintain and inspect their tanks on a regular basis and, in
many cases, to install primary and secondary seals, double tank bottoms and
other secondary containment systems to reduce the incidence of leakage and allow
for early detection of leaks. In addition, such laws and regulations require
that ASTs be equipped with roof and seal assemblies that substantially decrease
atmospheric emissions from petroleum products, petrochemicals and other volatile
organic liquids. Increasing costs of compliance with these laws and regulations,
however, may lead to decreased utilization of ASTs if domestic refineries and
other petroleum storage facilities are partially or completely closed.
In January 1991, the API adopted API Standard 653 ("API 653"), which sets
forth industry standards for storage tank inspection, repair, alteration and
reconstruction. API 653 also provides standards for continued service
suitability of ASTs, materials, design considerations, tank dismantling and
reconstruction, welding, examination and testing, and recordkeeping. Under the
standards of API 653, any storage tank leaks are unacceptable, regardless of
size, and tank inspections are required at intervals not longer than five, ten
or 20 years, depending on the type of inspection. Many storage tank owners have
adopted the standards set forth in API 653, and Astrotech expects more storage
tank owners to adopt API 653 in the future, both in
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recognition of changing industry standards and to decrease liability in the
event of a storage tank leak or rupture.
AST repair and maintenance have historically been provided primarily by
in-house maintenance crews and by small, regional service companies. However, as
the service and product requirements for ASTs have become more sophisticated,
creating greater numbers of more complicated engineering options, owners of
large ASTs have begun more frequently to engage outside contractors and upgrade
the quality of their outside service providers and product vendors. As a result,
technical engineering and environmental expertise, dependable quality products
and service have become important factors in awarding contracts for the repair
and maintenance of ASTs.
Astrotech's operations also include service to other industries that
require controlled storage of a variety of solids, liquids and gasses. Other
industries serviced by Astrotech include water, wastewater treatment, pulp and
paper, electrical production, alcohol, agriculture, mining, power generation and
process industries.
ACQUISITION HISTORY
Astrotech was originally incorporated in 1973 as a non-diversified,
closed-end investment company registered under the Investment Company Act of
1940, as amended. Beginning in late 1983, with the approval of its stockholders,
Astrotech began its conversion to an operating company. In August 1988,
Astrotech underwent a recapitalization, which was the culmination of its efforts
to completely restructure Astrotech and its operations.
After the 1988 recapitalization, the management of Astrotech searched for
potential acquisition candidates that would be compatible with Astrotech's goals
of growth and stability. In February 1989, Astrotech acquired HMT Inc. ("HMT"),
a provider of proprietary products and maintenance and construction services for
large ASTs. In December 1989, Astrotech acquired HMT Thermal Systems, Inc., a
specialty manufacturer of portable vapor thermal oxidation units and other
products. In September 1991, Astrotech acquired Tonkawa Tank Company, Inc.
("Tonkawa"), which provides maintenance and construction services for ASTs. In
January 1992, Astrotech acquired Texoma Tank Company, Inc. ("Texoma"), a company
that leases mobile storage tanks. During fiscal 1994, Astrotech acquired HMT
Rubbaglas Limited ("Rubbaglas") and Brown-Minneapolis Tank & Fabricating Company
("BMT"). BMT fabricates and erects ASTs as well as other various steel
structures, including bins, stacks, vessels and shop-built tanks. Rubbaglas
designs, manufactures and installs equipment for the AST industry in the
European, African and Middle East markets. On March 28, 1996, Astrotech acquired
Graver. Graver designs, manufactures and erects storage tanks and pressure
vessels for the petroleum and process industries. Graver also provides
nickel-clad installations for the air pollution and power generation industries,
including fabrication and erection of scrubbers, chimneys, and stack liners.
On May 1, 1997, Astrotech acquired the capital stock of Trusco and two
parcels of real property used in Trusco's business and owned by two of Trusco's
shareholders. Trusco is a full-range designer, fabricator and field erector of
steel structures, including storage tanks, pressure vessels and shop-built tanks
(both aboveground and underground). Trusco's customers include municipal water
districts, wastewater treatment facilities, oil companies, industrial
facilities, wineries, and various process industries.
PRODUCTS AND SERVICES
New Tank Construction. Astrotech designs, fabricates and erects storage
tanks, bins, silos, vessels and shop-built tanks. These shop-built tanks include
both aboveground and underground tanks used primarily for the storage of
petrochemical products. With the acquisition of Trusco, Astrotech now provides
new tank construction for the municipal water storage industry. Astrotech has
been involved in state of the art wastewater treatment projects in the United
States. In addition, Astrotech is involved in the construction of proven
conservation and air pollution control structures suited for the storage of
methane, nitrogen and related gasses. Primary users of this product have been
the coal and steel industries.
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Tank Inspection, Engineering, Reconstruction and Repair. Astrotech provides
"total solution" tank maintenance and repair. As a first step, Astrotech's
personnel offer sophisticated inspection and engineering services of the type
required to determine AST compliance with environmental regulations and industry
standards, including API 653. These services include ultrasonic thickness
testing and magnetic flux exclusion testing (both designed to test AST
structural integrity), primary and secondary seal inspection and gap
measurement, floating roof pontoon inspection and leak detection, weld seam
testing, and visual site inspection. In addition, Astrotech's personnel will
prepare condition reports and assist tank owners in the preparation of repair
option recommendations based on inspection results. Relying on the engineering
experience and technical abilities of its employees, Astrotech is able to offer
detailed recommendations for reconstruction and repair of ASTs, including
specifications and drawings, budgeting and pricing options and tank maintenance
programs.
Astrotech offers a broad range of repair and reconstruction services,
including emergency welding work, firefighting foam systems installations, fixed
cone roof construction, external and internal floating roof construction and
installation (often including the installation of Astrotech's own floating roof
seals and floating roof drain system products) and tank foundation repair.
Astrotech also offers its customers a fully integrated tank maintenance
management program, including the development of a tank database for maintenance
and repair history, the scheduling of on-site in-service and out-of-service
inspections, the preparation of detailed tank inspection and tank condition
reports (including governmental reports), recommendations for annual and
emergency tank maintenance and repair budgets, development of product
specifications, and management of repair planning, scheduling and subcontractor
selection and supervision.
Chimneys and Scrubbers. Astrotech fabricates and erects a broad range of
scrubbers, chimneys and stack liners for the air pollution and power generation
industries.
Pressure Vessels. Astrotech fabricates "in-shop" and field erected vessels
for the petroleum and process industries. Shop vessels range up to 22 feet in
diameter, 300 feet in length and up to 600 tons in weight and field erected
vessels are limited in size only by on site conditions.
Floating Roof Seals. Astrotech designs, manufactures, markets and installs
primary and secondary tank seals for all types of floating roof ASTs. A floating
roof consists of a circular welded steel or aluminum roof that floats on the
surface of stored petroleum product. A floating roof minimizes vapor emissions
and losses of stored petroleum products. The tank seal spans the gap between the
rim of the roof and the tank wall, thereby minimizing vapor emissions from the
perimeter of the roof. Because the seal is attached to the floating roof and not
to the tank, the roof and seal are free to move up and down as the level of
product in the tank changes. In addition, the seal, together with a roof
drainage system (another of Astrotech's products, as described below), prevents
substantially all of the rain water captured on the floating roof from mixing
with the product stored in the tank. The most popular type of seal sold by
Astrotech consists of both a primary and a secondary seal. In addition to
producing many proprietary primary and secondary seal systems, Astrotech also
produces several specialty seal products, including the foam log primary seal,
the double wiper seal and, under license, the S.M.I. Mobil Seal for riveted
shell tanks.
Floating Roof Drain Systems. Astrotech designs, manufactures and installs
floating roof drain systems, which are needed to drain rainwater out of floating
roof ASTs. Traditionally, roof drain systems have consisted either of flexible
hoses or of fixed pipes connected by rigid swivel joints. Astrotech's patented
HMT Pivot Master is a combination of both, using steel pipes connected by
flexible composite hose joints. Unlike traditional fixed pipe systems, the Pivot
Master is designed for submerged use, requires no maintenance or lubrication,
and contains no O-rings, bearings or seals, the deterioration of which causes
leaks and requires repair. The Pivot Master can also be designed for dual-use as
part of a fire-fighting foam delivery system.
The Pivot Master roof drain system is complemented by Astrotech's patented
Check Mate(R) Hydrocarbon Sensing Valve, which is designed to detect the
presence of hydrocarbons in the water passing through the valve. Connected to
the drain gate valve at the end of the Pivot Master (or any other roof drain
system), the Check Mate(R) permits rainwater to drain freely. Should
hydrocarbons leak into the drain system, however, an
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internal sensing device in the Check Mate(R) will cause the valve to shut
automatically and will trigger both visual and remote indicators of the
shutdown. The Check Mate(R) requires no external power source and permits
year-round unrestricted draining, thereby reducing wintertime drain system
freeze-ups and floating roof collapse caused by severe rainstorms.
Internal Floating Roof. Astrotech fabricates an aluminum internal floating
roof marketed worldwide under the Aluminator(R) trademark. Astrotech introduced
this product to the petroleum industry in 1993 after several years of
development and testing. The Aluminator(R) floating roof is installed inside
covered roof tanks and floats on the stored product. This roof, together with
Astrotech's patented seal system, greatly reduce evaporation losses on tanks
containing volatile organic compounds. Astrotech believes that its roof design
contains several unique features that eliminate problems encountered with this
type of roof in the past, improve vapor containment and provide longer service
life in severe operating conditions.
Secondary Containment and Leak Detection. Astrotech constructs and installs
secondary containment systems that help control AST leaks and permit tank owners
to detect them before soil or groundwater contamination occurs. While Astrotech
constructs a variety of secondary containment systems, including those designed
by its customers, the system most commonly installed by Astrotech is a
"double-bottom" system, consisting of the installation of a new tank bottom
approximately four inches above the existing tank bottom. The space between the
two tank bottoms is filled with a liner membrane composed of either high density
polyethylene or polyurethane installed over the tank bottom and a layer of
concrete or sand containing zinc or magnesium anodes to prevent corrosion of the
new tank bottom. Leak detection channels and openings between the two tank
bottoms are constructed to allow visual or electronic detection of leaks,
permitting the containment of those leaks when they do occur, and when they do
not, providing assurance that the tank is not the source of contamination that
may be present in the area.
Astrotech also markets a fiber optic fluid detection and control system for
various applications, including use in virtually any secondary containment
system to provide continuous leak monitoring. This system employs
non-electrical, safe fiber optic sensors that discriminate between various
fluids based upon their particular refractive index. These sensors are highly
resistant to corrosion and do not require replacement, resetting or
re-calibration after exposure.
Tank Leasing Services. Astrotech leases mobile tanks for the storage of
fluids. Such tanks may be transported to and from refineries and petroleum
facilities to handle the temporary storage needs of such facilities.
CUSTOMERS AND MARKETING
The majority of Astrotech's customers are major integrated oil companies.
Astrotech also services power generation facilities, independent petroleum
refining and marketing companies, major petrochemical companies, independent
terminal operating companies, and the mining, alcohol, sugar processing, pulp
and paper, agricultural, municipal water and specialty construction industries.
Most of Astrotech's major customers operate at multiple locations and through
various divisions and subsidiaries. No customer accounted for more than 10% of
revenues during the last three fiscal years.
Astrotech's marketing efforts are primarily through the efforts of regional
and area offices and in-house salespeople. Astrotech maintains offices and/or
manufacturing facilities throughout the United States in close proximity to the
operating facilities of existing and potential customers so that Astrotech's
regional and area personnel can maintain frequent personal contact with the
individuals who make purchasing decisions. Astrotech also maintains operations
in Australia and Singapore, which service the Pacific Rim, while Astrotech's
United Kingdom subsidiary, headquartered in London, sells products in Europe,
Africa and the Middle East. HMT Canada Ltd. services the Canadian market.
Decisions to utilize Astrotech's products or services are generally made on
a project-by-project basis as construction specific upgrade, maintenance or
repair projects are identified. In most cases, potential customers request bids
for a specific project from Astrotech and one or more of its competitors.
Although most of
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Astrotech's work is obtained through a competitive bid process, many contracts
are obtained without bids through direct negotiation or through various alliance
agreements with customers.
COMPETITION
Astrotech's competitors include a number of nationally recognized, large
firms as well as operators that service a limited geographic area and that are
generally smaller than Astrotech in terms of scope of operations. Such smaller
operators compete primarily on the basis of price and generally do not offer the
proprietary product features, technical expertise, quality and safety programs
offered by Astrotech. Astrotech believes that it obtains business primarily
because of its reputation for high quality products and services, the technical
expertise of its regional and area personnel, its relationships with existing
customers, and its ability to respond quickly and effectively to customer needs
in various locations. Astrotech believes that it can continue to compete
effectively with its larger competitors by emphasizing its leadership in
construction services and products.
FOREIGN OPERATIONS
Astrotech maintains offices in Australia, Canada, Singapore and England and
has sales representatives in other countries. Internationally, Astrotech's
revenues are derived primarily from product sales without installation.
Astrotech's current international sales strategy is to emphasize product sales
rather than maintenance and construction services due to the higher margins
provided by product sales and the limited availability of, transportation costs
associated with providing, qualified service personnel in foreign countries.
RAW MATERIALS
The principal raw materials used in the manufacture of Astrotech's products
are steel, aluminum and various elastomeric materials. Raw materials are
obtained from a number of commercial sources at prevailing prices, and Astrotech
does not depend on any single supplier for any substantial portion of raw
materials. Astrotech does not anticipate any problems in obtaining its raw
materials.
PATENTS, TRADEMARKS, AND LICENSES
Astrotech utilizes certain patents, including (i) a secondary seal for the
floating roof of welded tanks, (ii) a maintenance-free roof drain system
marketed under the name "Pivot Master" and (iii) a primary shoe seal for
floating roof tanks, which expire in 1999, 2005 and 2009, respectively.
Astrotech also holds a U.S. patent on its Check Mate(R) Hydrocarbon Sensing
Valve, which expires in 2008. In addition to its patents, Astrotech holds
distribution rights for a patented secondary seal for riveted shell tanks, an
exclusive license for its Tank Sentry fiber optic detection and control system
and has patent applications pending for an aluminum internal floating roof
marketed under the name Aluminator(R). Astrotech believes that, while these
patents and distribution rights are advantageous to its marketing efforts, they
are not critical to the operation of its business. Accordingly, Astrotech
believes that the expiration of such patents and/or distribution rights will not
materially affect its business.
BACKLOG
The amounts of backlog orders, as of September 30, 1995, September 30, 1996
and March 31, 1997, were $36.7 million, $43.5 million and $46.5 million,
respectively, including both the uncompleted portion of contracts in progress
and contracts awarded and not then started. Substantially all of these contracts
are expected to be completed during the next fiscal year.
EMPLOYMENT
At June 30, 1997, Astrotech employed approximately 1,200 persons. The
number of employees tends to fluctuate as additional employees are employed on a
project-by-project basis, as needed. Employees who meet certain requirements,
including age and length of service, are entitled to participate in a number of
employee benefit programs, including hospitalization, insurance and certain
retirement plans. Approximately 153 of
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Astrotech's employees are covered by collective bargaining agreements. Astrotech
considers its relations with its employees to be good.
ENVIRONMENTAL
Astrotech's policy is to comply with federal, state and local provisions
enacted to regulate the discharge of materials into the environment. Astrotech
has made no material expenditures during fiscal 1996 to comply with
environmental regulations and no material expenditures are anticipated to be
made for fiscal 1997.
The operations of Astrotech are subject to the requirements of the
Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the U.S. Department of Labor require
employers of persons in the refining and petrochemical industries, including
independent contractors, to implement work practices, medical surveillance
systems and personnel protection programs in order to protect employees from
equipment safety hazards and exposure to hazardous chemicals.
PROPERTIES
Astrotech believes that its properties are adequate and suitable to meet
its current requirements, and some are capable of being utilized further to
accommodate growth. While the HMT Thermal Systems and the HMT Tonkawa facilities
are not significantly under-utilized, storage space and land are capable of
being utilized further to accommodate growth. The following table sets forth
Astrotech's principal properties:
<TABLE>
<CAPTION>
DESCRIPTION AND MONTHLY
LOCATION PRODUCTIVE CAPACITY STATUS RENT
-------- ------------------- ------ -------
<S> <C> <C> <C>
Pittsburgh, Pennsylvania............ Executive Office -- 5,000 sq. ft. Leased through $5,625
July 31, 2002(1)
Houston, Texas...................... HMT offices -- 9,400 sq. ft. Leased through $7,707
HMT Thermal Systems office and April 30, 2001
equipment manufacturing facility -- Owned N/A
28,000 sq. ft. on 13 acres
Beaumont, Texas..................... HMT Tank Service operation center -- Owned N/A
6,950 sq. ft. on 4.6 acres
Kelton, Pennsylvania................ HMT Construction Services -- 22,000 Owned N/A
sq. ft. on 4 acres
Tonkawa, Oklahoma................... HMT Tonkawa Tank Division offices Owned N/A
and fabrication facility -- 10,000
sq. ft. on 9 acres
St. Paul, Minnesota................. BMT headquarters offices and tank Owned(2) N/A
fabrication facility -- 88,628 sq.
ft. on 17.9 acres
Birmingham, Alabama................. BMT tank fabrication Owned(2) N/A
facility -- 76,558 sq. ft. on 20
acres
Orem, Utah.......................... BMT tank fabrication Owned(2) N/A
facility -- 36,720 sq. ft. on 16.8
acres
Houston, Texas...................... BMT Offices -- 2,627 sq. ft. Leased through $2,100
September 30,
1998
Pasadena, Texas..................... Graver offices and fabrication Owned(2) N/A
facility -- 154,000 sq. ft. on 18.7
acres
San Luis Obispo, CA................. Trusco offices, storage and Owned(2) N/A
fabrication facility -- 21,500 sq.
ft. on 10 acres
Fresno, CA.......................... Trusco offices, storage and Leased through $8,000
fabrication facility -- 90,000 sq. April 30,
ft. on 7 acres 2007(3)
</TABLE>
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<PAGE> 73
- ---------------
(1) Subject to early termination after the Effective Date of the Merger. Unless
sublet sooner, lease will terminate 30 months after Effective Date.
(2) Facilities are mortgaged.
(3) Subject to Put Agreement, dated May 1, 1997, to purchase the real property
for $3.2 million. The Put Agreement expires April 30, 1999.
Other leased office and storage spaces are located in: Anaheim, California;
Bixby, Oklahoma; Baton Rouge, Port Allen and Westlake, Louisiana; Evans,
Georgia; Edgecliff, N. S. Wales, Australia; and Calgary, Alberta, Canada.
Astrotech also owns and leases facilities in London, England.
LEGAL PROCEEDINGS
On March 19, 1996, HMT was served with a complaint filed in Superior Court
of California, County of Contra Costa. This matter arises out of a tank fire
that occurred in June of 1995, at a refinery in northern California, where
Astrotech employees were replacing seals on an aboveground storage tank. The
complaint, filed by Valerie Vega-Wright, seeks to certify a class of persons
affected by the fire under theories of negligence, nuisance, battery, trespass
and strict liability. The complaint seeks damages for, among other things,
personal injuries and loss of property value, and requests unspecified
compensatory and punitive damages. Astrotech has removed this litigation to the
U.S. District Court for the Northern District of California. On October 22,
1996, HMT was served with a complaint in Allison v. Unocal et al, which was
simultaneously filed in the Contra Costa Superior Court. The complaint seeks
damages for alleged personal injuries, property damage and punitive damages. Two
hundred sixteen plaintiffs contend that they were injured as a result of the
tank fire and seek damages against HMT as well as the owner of the refinery.
Astrotech is currently attempting to request that the federal court remand all
actions back to the state court based on this second complaint. Astrotech's
insurance carriers (both primary and excess) have been notified, and both
Astrotech and its insurance carriers are assessing the claims and related policy
coverages. This matter is in its initial stages and investigative activities are
continuing. While the ultimate outcome cannot now be determined because of the
uncertainties that exist, Astrotech believes that its insurance coverages are
adequate to address its potential liability, if any. Any unfavorable result not
covered by insurance could result in a material charge that has not been
reflected in the accompanying financial statements. Astrotech intends to defend
vigorously this action.
Astrotech is a party to certain other legal proceedings occurring in the
ordinary course of business. Based upon information presently available to it,
Astrotech does not believe that the final outcome of any of these other matters
will have a material adverse effect on the consolidated financial position,
results of operations or liquidity of Astrotech.
EXECUTIVE OFFICERS AND DIRECTORS OF ASTROTECH
The table below sets forth certain information regarding executive officers
and directors of Astrotech:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
S. Kent Rockwell.......................... 52 Chairman, chief executive officer, chief
financial officer, and director
Robert F. Kastelic........................ 62 Director
John Henry................................ 70 Director
Roger W. Thiltgen......................... 46 Director
Fred E. Baxter, Jr........................ 53 Director
T. Richard Mathews........................ 48 Director, president and chief operating
officer
Raymond T. Royko.......................... 51 Vice President, secretary, and general
counsel
Helen Vardy Gricks........................ 35 Treasurer and chief accounting officer
</TABLE>
63
<PAGE> 74
S. Kent Rockwell. Mr. S. Kent Rockwell has been chairman of Astrotech since
August 1989, chief executive officer and chief financial officer of Astrotech
since August 1987 and president of Astrotech from April 1988 to October 1995.
Robert F. Kastelic. Mr. Kastelic is chairman of Quasitronics, Inc., and
president of Xetca, Inc. (d/b/a X-Mark Industries "X-Mark"), formerly
wholly-owned subsidiaries of Astrotech. Quasitronics, Inc. is a designer and
manufacturer of computer peripheral hardware and instrumentation and control
systems for industry and is located at 211 Vandale Drive, Houston, Pennsylvania
15342. X-Mark is engaged in the precision fabrication business and is located at
2001 N. Main Street, Washington, Pennsylvania 15301. Mr. Kastelic served as
executive vice president, treasurer and chief financial officer of Astrotech
from July 1985 to September 1986.
John Henry. Since 1978, Mr. Henry has been president and vice-chairman of
Sinclair & Rush, Inc., a plastics manufacturer located in St. Louis, Missouri.
From 1967 to 1978, Mr. Henry was a senior vice president of Rockwell
International Corporation and served as president of its Admiral Corporation
subsidiary. Mr. Henry serves on the board of directors of Sinclair & Rush, Inc.,
and is a member of the board of trustees of Duquesne University in Pittsburgh,
Pennsylvania.
Roger W. Thiltgen. Mr. Thiltgen served as vice president-market development
of Astrotech from March 6, 1992, to May 9, 1995. Prior thereto, Mr. Thiltgen had
provided consulting services to Astrotech for intellectual property matters and
various development projects for the three-year period ended February 21, 1992.
From December 1978 until February 22, 1989, Mr. Thiltgen was president of HMT.
Mr. Thiltgen is president of DIASU Building, Inc. and HMT Investments, Inc.,
both leasing companies. Mr. Thiltgen is also president of Champion Resources,
Inc., an oil and gas and real estate firm, chairman of G.S. Evans Sales and
Manufacturing located in Little Rock, Arkansas and Tanglewood Resort and
Conference Center located in Pottsboro, Texas.
Fred E. Baxter, Jr. Since September 1992, Mr. Baxter has been a sole
practitioner in his independent law office. He practiced previously as partner
at the law firm of Grogan, Graffam, McGinley & Lucchino at Three Gateway Center,
22nd Floor, Pittsburgh, Pennsylvania 15222. Prior to February 1988, Mr. Baxter
practiced with and was the president of the law firm of Gondleman, Baxter,
McVerry, Smith, Yatch & Trimm, P.C., 450 Fifth Avenue, Pittsburgh, Pennsylvania
15219. He became associated with that law firm in 1972. Since 1983, he has been
a director of the Central Blood Bank of Pittsburgh, which is located at 812
Fifth Avenue, Pittsburgh, Pennsylvania 15219.
T. Richard Mathews. From December 1978 until February 22, 1989, Mr. Mathews
was vice-president and secretary of HMT. From February 22, 1989 to October 3,
1985, Mr. Mathews served as president and chief operating officer of HMT. Mr.
Mathews was appointed president and chief operating officer of Astrotech on
October 3, 1995.
Raymond T. Royko. Mr. Royko has served as vice president, secretary and
general counsel of Astrotech since October 1986. From September 1975 to March
1986, he served as secretary and general counsel of The Union Corporation. From
March 1986 through December 1986, he served as a consultant to The Union
Corporation. The Union Corporation is principally engaged in financial services
and is located in Greenwich, Connecticut.
Helen Vardy Gricks. Ms. Gricks was appointed Astrotech's treasurer and
chief accounting officer on May 17, 1994. Prior to her appointment as treasurer,
Ms. Gricks served Astrotech as director-corporate accounting beginning in 1989
and prior thereto was manager-consolidation accounting. Ms. Gricks joined
Astrotech in 1985.
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<PAGE> 75
ASTROTECH SELECTED FINANCIAL DATA
The following selected historical financial data for each of the years
ended September 30, 1992 through 1996, are derived from the audited consolidated
financial statements of Astrotech. The historical financial data for the six
months ended March 31, 1997 is derived from the unaudited consolidated financial
statements of Astrotech. In the opinion of management, these data contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the six months ended March 31, 1997. The selected financial data
set forth below should be read in conjunction with "Astrotech Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Astrotech Financial Statements and notes thereto included elsewhere in this
Joint Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues....................... $50,954 $39,549 $68,726 $100,203 $122,190 $63,222
Operating profit............... 4,315 1,277 2,798 5,353 7,532 3,712
Earnings from continuing
operations before change in
accounting principle and
provision for income
taxes....................... 3,741 771 1,659 4,501 6,530 3,223
Provision for income taxes..... 550 184 863 1,770 2,520 1,309
Earnings from continuing
operations before change in
accounting principle........ 3,191 587 796 2,731 4,010 1,914
Earnings from discontinued
operations.................. 379 564 154 -- -- --
Cumulative effect of change in
accounting principle for
income taxes................ -- -- 2,931 -- -- --
Net earnings................... 3,570 1,151 3,881 2,731 4,010 1,914
Net earnings applicable to
common shares............... 3,326 1,151 3,881 2,731 4,010 1,914
======= ======= ======= ======== ======== =======
Earnings from continuing
operations before change in
accounting principle per
common share................ $.40(1) $.07 $.09 $.28 $.40 $.19
Cumulative effect of change in
accounting principle per
common share................ -- -- .32 -- -- --
Net earnings per common
share....................... .46 .14 .42 .28 .40 .19
======= ======= ======= ======== ======== =======
Weighted average common and
common equivalent shares
outstanding................. 7,292 8,053 9,157 9,886 10,108 10,232
======= ======= ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets..................... $32,506 $34,012 $64,906 $66,551 $88,364 $85,461
Working capital.................. 5,381 7,161 8,928 10,283 12,722 8,573
Long-term obligations............ 4,760 5,731 12,334 12,482 20,917 17,090
Stockholders' equity............. 19,551 21,133 30,005 33,318 37,053 39,170
</TABLE>
- ---------------
(1) Astrotech paid $244 of preferred stock dividends in 1992.
See Notes 1, 2, and 9 of Notes to the Astrotech Consolidated Financial
Statements included herein for a discussion of change in accounting principle
for income taxes, acquisitions and discontinued operations, respectively, which
affected comparability among years.
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<PAGE> 76
ASTROTECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS)
The following discussion provides information that Astrotech's management
believes is relevant to an assessment and understanding of Astrotech's
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and accompanying notes.
Management believes Astrotech's growth opportunities will be enhanced by
increased expenditures by refineries, storage terminals and pipeline facilities
as high capacity utilization may generate more capital and maintenance spending
as well as increased spending for preventative maintenance and to comply with
current and proposed environmental regulations and industry standards.
Management also expects increased activity in the international markets.
Historically, Astrotech's second fiscal quarter results have tended to
fluctuate, principally due to climatic conditions affecting some of Astrotech's
operations and the timing of maintenance budgets at some of Astrotech's
customers. Consequently, Astrotech's second quarter ending March 31 typically
includes lower revenues than the other three quarters.
RESULTS OF OPERATIONS
Astrotech's revenues are recognized on the percentage-of-completion method.
The following table presents, as a percentage of revenues, certain selected
financial data for Astrotech for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------- ----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 71.6 73.5 74.5 73.0 73.9
----- ----- ----- ----- -----
Gross profit............................... 28.4 26.5 25.5 27.0 26.1
Depreciation and amortization expense...... 4.0 3.2 3.2 3.5 3.5
Selling, general and administrative
expenses................................. 20.3 18.0 16.1 17.4 16.7
----- ----- ----- ----- -----
Operating profit........................... 4.1 5.3 6.2 6.1 5.9
Interest and other income.................. .1 .5 .3 .1 .2
Interest expense........................... 1.8 1.3 1.1 1.1 1.0
Income tax expense......................... 1.2 1.8 2.1 2.0 2.1
----- ----- ----- ----- -----
Net Income................................. 1.2% 2.7% 3.3% 3.1% 3.0%
===== ===== ===== ===== =====
</TABLE>
The results of operations of the Rubbaglas, BMT, and Graver acquisitions
are included in the consolidated financial statements since the respective dates
of acquisition.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1996
Revenues
Astrotech's revenues increased by $5,399, or 22%, in the second quarter of
fiscal 1997 and $13,293, or 27%, in the first six months of fiscal 1997 as
compared to the same periods a year ago. Substantially all of the increase in
the second quarter and 83% of the increase in the six month period was a result
of the inclusion of Graver in fiscal 1997.
Backlog
The total amounts of contracts in backlog, as of March 31, 1997 and 1996,
were approximately $46,522 and $46,743, respectively, including both the
uncompleted portion of contracts in progress and contracts awarded but not yet
started. The majority of the backlog at March 31, 1997 is expected to be
completed within a year.
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<PAGE> 77
Gross Profit Margin
Gross profit margin on revenues decreased from 27.0% in the first six
months of fiscal 1996 to 26.1% in the first six months of fiscal 1997 and
decreased from 27.8% in the second quarter of fiscal 1996 to 27.0% in the second
quarter of fiscal 1997. This decrease was primarily a net result of a change in
the revenue mix of the business.
Selling, General and Administrative Expense
S,G&A expenses increased $1,866, or 21%, from the first six months of
fiscal 1996 to fiscal 1997 and increased $917, or 21%, from the second quarter
of fiscal 1996 to the second quarter of fiscal 1997. Approximately one-half of
the increases for both periods was a result of the inclusion of Graver's costs
in fiscal 1997. The remainder of the increase was primarily a result of
increased costs associated with Astrotech's investment in a corporate-wide
management information system and the addition of new offices to serve expanded
geographic markets. However, due to the increase in revenues, S,G&A expenses, as
a percentage of revenues, decreased from 17.4% in the first six months of fiscal
1996 to 16.1% in the first six months of fiscal 1997.
Operating Profit
Astrotech had operating profit of $1,544 for the second quarter of fiscal
1997 compared to $1,371 for the second quarter of fiscal 1996 and $3,712 for the
first six months of fiscal 1997 compared to $3,045 for the same period of 1996.
The increase resulted primarily from the operating profit generated by Graver
and the increase in revenues from repair and maintenance services.
Interest Expense
Interest expense increased by $66, or 24%, from the second quarter of
fiscal 1996 to the second quarter of fiscal 1997 and $97, or 18%, from the first
six months of fiscal 1996 to the first six months of fiscal 1997. This increase
was due to increased debt levels resulting from borrowings to fund the Graver
acquisition.
Income Taxes
Current income tax expense consists of federal, state and foreign income
taxes. Deferred income taxes consist principally of federal income taxes.
Astrotech's effective income tax rate was 40.6% and 39.0% of income before
income taxes in the first six months of 1997 and 1996, respectively. The rate
varied from the statutory rate primarily due to state taxes and goodwill
amortization, which are not deductible for tax purposes.
Net Income
Astrotech had net income of $732 for the second quarter of fiscal 1997
compared to $696 for the second quarter of fiscal 1996 and $1,914 for the first
six months of fiscal 1997 compared to $1,562 for the same period of fiscal 1996.
The majority of the increase resulted from higher volumes of repair and
maintenance revenues and the inclusion of Graver in 1997.
Other
Effective October 1996, Astrotech adopted 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 adoption of SFAS No.121 did
not have a material effect on Astrotech's financial position or results of
operations.
Effective October 1996, Astrotech adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This new standard defines a fair value based method
of accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense by
adopting the new fair value method or continuing to measure compensation using
the intrinsic value
67
<PAGE> 78
approach under Accounting Principles Board (APB) Opinion No. 25, the former
standard. Astrotech elected to continue using the measurement prescribed by APB
Opinion No. 25. Accordingly, the adoption of this pronouncement did not affect
Astrotech's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which is effective for financial statements issued
for periods ending after December 15, 1997. At that time, Astrotech will be
required to change the methods currently used to compute earnings per share
(EPS) and to restate all prior periods. SFAS No. 128 replaces the current
presentation of "primary" EPS with "basic" EPS, with the principle difference
being that common stock equivalents are not considered in computing "basic" EPS.
The statement also requires the replacement of current "fully diluted" EPS with
"diluted" EPS. "Diluted" EPS will be computed similarly to "fully diluted" EPS.
The adoption of this statement will not have any material impact on Astrotech's
EPS computation.
FISCAL 1996 COMPARED WITH FISCAL 1995
Revenues
Astrotech's revenues increased by $21,987, or 22%, in fiscal 1996 as
compared to fiscal 1995. Approximately 57% of the increase was a result of the
inclusion of Graver for the period from March 29, 1996 to September 30, 1996.
The remainder of the increase was primarily a result of an increase in demand
for Astrotech's tank construction services and increased revenues from
international operations.
Backlog
The total amounts of contracts in backlog, as of September 30, 1996 and
1995, were approximately $43,492 and $36,723, respectively, including both the
uncompleted portion of contracts in progress and contracts awarded but not yet
started. The increase was principally attributable to the addition of Graver's
backlog, which was offset by a decrease in construction backlog. The majority of
the backlog at September 30, 1996 is expected to be completed within a year.
Gross Profit Margin
Gross profit margin on revenues decreased from 26.5% in fiscal 1995 to
25.5% in fiscal 1996. This decrease was primarily a net result of a change in
the revenue mix of the business.
Selling, General and Administrative Expense
S,G&A expenses increased $1,709, or 10%, from fiscal 1995 to 1996.
Approximately 54% of the increase was a result of the acquisition of Graver. The
remainder of the increase was primarily a result of increased costs associated
with Astrotech's investment in a corporate wide management information system
and the addition of new offices to serve expanded geographic markets. However,
due to the increase in revenues, S,G&A expenses, as a percentage of revenues,
decreased from 18.0% in fiscal 1995 to 16.1% in fiscal 1996.
Operating Profit
Astrotech had operating profit of $7,532 for fiscal 1996 compared to $5,353
for fiscal 1995 as a result of the items discussed above. Approximately 36% of
the increase resulted from the acquisition of Graver.
Interest Expense
Interest expense remained relatively constant from 1995 to 1996 despite
increased debt levels due to decreased interest rates negotiated pursuant to the
first amendment to Astrotech's credit facility.
Income Taxes
Current income tax expense consists of federal, state and foreign income
taxes. Deferred income taxes consist principally of federal income taxes.
Astrotech's effective income tax rate was 38.6% and 39.3% of
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<PAGE> 79
income from continuing operations before income taxes in fiscal years 1996 and
1995, respectively. The rate varied from the statutory rate primarily due to
goodwill amortization, which is not deductible for tax purposes, state taxes,
and because, based on Astrotech's utilization of federal tax net operating loss
carryforwards, Astrotech reversed $270 in 1996 and $240 in 1995 of its valuation
allowance, which represents investment and research and development tax credits
expiring principally in 2000 that are now expected to be utilized for tax
purposes. The benefit for existing federal net operating loss carryforwards was
recorded at the beginning of fiscal 1995 when Astrotech changed its method of
accounting for income taxes. Therefore, although utilization of these
carryforwards reduces Astrotech's liability for payment of federal income taxes,
it does not benefit net income in current periods. At September 30, 1996,
Astrotech had investment and research and development tax credit carryforwards
of approximately $375, which expire principally in 2000, and alternative minimum
tax credit carryforwards of approximately $670, which have no expiration date.
Net Income
Astrotech had net income of $4,010 for fiscal 1996 compared to $2,731 for
fiscal 1995. The majority of the increase resulted from higher volumes of
revenues and the inclusion of Graver for the second half of the year in 1996.
FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues
Astrotech's revenues increased by $31,477, or 46%, in fiscal 1995 as
compared to fiscal 1994. Approximately $19,300, or 61%, of this increase was
attributable to revenues of BMT during the first five months of fiscal 1995. The
remainder of the increase is primarily a result of an increase in demand for
Astrotech's tank construction services and installation of its proprietary
products.
Gross Profit Margin
Gross profit margin on revenues decreased from 28.4% in fiscal 1994 to
26.5% in fiscal 1995. The overall decrease in gross profit margins for the
period was primarily caused by the impact of BMT, whose tank construction
projects had lower gross profit margins than the margins associated with
Astrotech's other operations. The decrease was somewhat offset, however, by an
increase in gross margin in Astrotech's tank service business due to the
emphasis management has placed on product sales and related installation
contracts, which have higher margins than Astrotech's repair and maintenance
services. In addition, Astrotech has combined the insurance requirements of all
of its operations and restructured the overall insurance programs, which,
coupled with Astrotech's loss control measures and ongoing safety programs,
resulted in a reduction of the insurance cost component of costs of revenues in
fiscal 1995.
Selling, General and Administrative Expense
SG&A expenses increased $4,031, or 29%, from fiscal 1994 to fiscal 1995.
The increase is primarily a result of the inclusion of BMT since its date of
acquisition. However, due to the increase in revenues, SG&A expenses decreased
as a percentage of revenues from 20.3% to 18.0%.
Operating Profit
Astrotech had operating profit of $5,353 for fiscal 1995 compared to $2,798
for fiscal 1994. Approximately 17% of the increase was due to the inclusion of
the operating profit of BMT for the full period in fiscal 1995, and the
remainder was due to increased operating profit in all of Astrotech's operations
resulting from increased volume discussed above.
Other Income and Interest Expense
Other income in fiscal 1995 includes a gain on the sale of land and
buildings of $312. Interest expense increased from $1,233 during fiscal 1994 to
$1,333 in fiscal 1995 principally due to increased term borrowing
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<PAGE> 80
during fiscal 1994 to fund capital expenditures and fund the acquisitions of
Rubbaglas and BMT. The increase was offset somewhat due to Astrotech's increased
operating cash flow, decreased interest rates and the flexibility in cash
management allowed by the consolidation of Astrotech's debt as discussed above.
Income Tax Expense
Current income tax expense consists of state and foreign income taxes.
Deferred income taxes consist principally of federal income taxes. Astrotech's
effective income tax rate decreased from 52% of income from continuing
operations before income taxes in fiscal 1994 to 39% in fiscal 1995. This
decrease was due to higher earnings in fiscal 1995 and relatively constant
goodwill amortization, which is not deductible for tax purposes, and the
reversal of the valuation allowance in fiscal 1995 discussed above.
Operating Income
Astrotech had income from continuing operations of $2,731 for fiscal 1995
compared to $796 during fiscal 1994. The majority of the increase resulted from
higher volumes of revenues and higher gross margins in Astrotech's tank service
business due to the emphasis management placed on increased product sales and
related installation contracts.
Other
During fiscal 1994, Astrotech recorded a gain from discontinued operations
of $154, net of federal income tax of $80, representing a gain on the sale of
assets of Astrotech Space Operations, Inc. In addition, in fiscal 1994,
Astrotech recorded a gain of $2,931 as a result of the cumulative effect of a
change in accounting for income taxes.
Operating results for the three-year period ended September 30, 1996 were
not significantly affected by inflation.
LIQUIDITY AND CAPITAL RESOURCES
During the two years following its recapitalization in August 1988,
Astrotech financed its acquisitions and activities principally with cash on hand
and cash generated from the operations of its acquired businesses. Since that
time, Astrotech has entered into bank credit facilities to supplement its
necessary cash resources and finance its acquisitions.
On April 30, 1997, Astrotech executed an Amended and Restated Revolving
Credit and Term Loan Agreement (the "Credit Facility") with Bank One, which
consolidated then existing term indebtedness and provided financing to be used
for the acquisition of Trusco, working capital support, capital expenditures,
and other general corporate purposes. During fiscal 1996, Astrotech executed two
amendments to the Credit Facility providing for, among other things, financing
for the acquisition of Graver and an increase in permitted capital expenditures
in fiscal year 1996.
The Credit Facility, as restated and amended, consists of the following:
(i) A term loan in the original amount of $25,000, bearing interest at
Astrotech's option at either a spread ranging from the bank's base rate
minus 1/2 percent to the bank's base rate plus 1/4 percent or at various
LIBOR rates plus spreads ranging from 1 1/4 percent to 2 3/4 percent. The
applicable spread is based upon the ratio of Astrotech's total funded debt
to earnings before interest, taxes, depreciation and amortization, as
defined. Interest is payable either quarterly or at certain LIBOR contract
termination dates. The term loan is payable in equal quarterly installments
of $893 until February 28, 2004.
(ii) A revolving line of credit of up to $20,000, bearing interest at
the same optional rates as the term loan. In addition, Astrotech pays a
quarterly commitment fee of 1/4 percent per annum on the average daily
unused amount. The borrowing amount is based on Astrotech's eligible
accounts receivable and inventory, as defined. The principal amount
outstanding plus all accrued and unpaid interest is due on February 28,
2000.
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<PAGE> 81
(iii) A $5,000 advancing term loan available until February 28, 1998
for capital expenditures bearing interest at the same optional rates as the
term loan. Beginning on May 28, 1998, any principal amount then outstanding
will be payable in equal quarterly installments until February 28, 2004.
All obligations of Astrotech under the Credit Facility are collateralized
by substantially all of the assets of Astrotech and the pledge by Astrotech of
the common stock of each of its direct subsidiaries. The obligations of
Astrotech are guaranteed by each direct and indirect subsidiary. The Credit
Facility contains certain covenants that provide for, among other things,
maintenance of various financial ratios. At March 31, 1997, Astrotech was in
compliance with all such covenants in effect at that time.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1996
Cash provided by operating activities was $8,996 for the first six months
of fiscal 1997, as compared to $4,221 for the first six months of fiscal 1996.
The net cash provided by operating activities in the current year resulted from
net cash inflows from net income plus non-cash items aggregating $4,841 and net
cash inflows due to changes in working capital items.
Cash used in investing activities of $4,061 for the first six months of
fiscal 1997 was primarily used for capital expenditures and payments of
contingent purchase consideration in connection with the acquisitions of BMT and
Graver. Net cash used in investing activities of $6,037 for the first six months
of fiscal 1996 was primarily used for capital expenditures and the acquisition
of Graver. Capital expenditures during the first six months of fiscal 1997
totaled $1,817 compared to 1996 expenditures of $3,342. Astrotech has currently
budgeted an additional $3,200 for capital expenditures during the remainder of
fiscal 1997, including $1,900 principally for machinery and equipment, $300 for
tanks held for lease, $500 for computer hardware and software and $500 for
facility improvements. Astrotech expects to be able to finance these
expenditures with available working capital and credit facilities.
On March 1, 1994, Astrotech acquired all of the capital stock of BMT from
Mr. Irwin Jacobs pursuant to a Stock Purchase Agreement dated February 7, 1994,
among Irwin Jacobs, Astrotech and BMT (the "Stock Purchase Agreement"). The
consideration paid by Astrotech to Mr. Jacobs was comprised of the following:
(i) $11,540 in cash; (ii) 1,600 shares of Astrotech Common Stock; (iii) a $500
unsecured subordinated promissory note; and (iv) contingent annual cash payments
for a period of five years beginning as of October 1, 1993, in an amount equal
to 50% of the BMT Calculated Profit Amount (as defined in the Stock Purchase
Agreement) ("Earn-Out") for each of the fiscal years ended September 30, 1994
through 1998, inclusive; provided, however that in no event would the aggregate
contingent payments exceed $9,000. For fiscal year 1995 and 1996, this
contingent purchase consideration amounted to $424 and $1,355, respectively. On
February 28, 1997, the parties amended the Stock Purchase Agreement to provide
for a complete settlement of all remaining contingent purchase consideration for
a cash payment of $2,600. Astrotech paid $600 upon signing the amendment and
recorded an additional $2,000 of Earn-Out payable, which is due and payable by
September 30, 1997.
Net cash used in financing activities of $3,744 in the first six months of
fiscal 1997 was primarily a result of net repayments under Astrotech's revolving
line of credit and regularly scheduled payments on long-term debt. Cash provided
by financing activities of $2,474 in the first six months of fiscal 1996 was
primarily a result of borrowing for the acquisition of Graver and net borrowings
under Astrotech's revolving line of credit and 1995 capital expenditure
advancing term loan that were offset by the payment of Graver's existing bank
obligations totaling $2,420 and regularly scheduled payments on long-term debt.
During November 1995, Astrotech completed a program to repurchase small
shareholders' common stock at no cost to the shareholder. Through this program
Astrotech repurchased and retired 90 shares of stock at an aggregate purchase
price of $293.
Astrotech believes that its existing funds, amounts generated by
operations, and amounts available for borrowing under its credit facility with
Bank One will be sufficient to meet its working capital needs through fiscal
1997. Management continues to review acquisition opportunities. It is
anticipated that any significant acquisition will require acquisition financing
and will require the consent of Bank One. No assurances can be
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made that any such acquisition will be made, or that any such financing will be
obtained on terms and conditions satisfactory to Astrotech.
FISCAL 1994 THROUGH FISCAL 1996
Cash provided by operating activities was $5,029 for fiscal 1996, as
compared to $6,663 for fiscal 1995 and $2,137 for fiscal 1994. The net cash
provided in operating activities resulted from net cash inflows from net income
plus non-cash items aggregating $9,604, $6,868 and $4,071 in fiscal years 1996,
1995 and 1994, respectively.
Cash used in investing activities of $9,852 for fiscal 1996 was primarily
used for capital expenditures and the acquisition of Graver. The base purchase
price recorded by Astrotech was $2,900. The seller is entitled to receive
additional cash proceeds of up to $1,250 pursuant to the terms of an earn-out
arrangement based on future profits (as defined) of Graver during each of the
three fiscal years ending September 30, 1998. In fiscal year 1996, this
contingent purchase consideration amounted to $236 and will be paid in fiscal
1997. These payments could affect liquidity in future years. In addition,
Astrotech repaid Graver's existing bank obligations totaling $2,420. Net cash
used in investing activities of $3,964 for fiscal 1995 was primarily used for
capital expenditures and the acquisition of an exclusive worldwide license to
use and market certain technology. Capital expenditures during fiscal year 1996
totaled $7,300 compared to last year's expenditures of $3,993. The 1996 amount
includes $3,000 principally for machinery and equipment, $2,400 for tanks held
for lease, $1,300 for a new computer system, including hardware and software,
and $600 for facility improvements. During fiscal 1996, Astrotech completed the
installation of a new corporate-wide management information system, and in July
Astrotech acquired substantially all of the fixed assets of CTI Inspection
Services, Inc., which is engaged in the business of providing non-destructive
testing and inspection services for ASTs and automated ultrasonic inspection of
pressure vessels and piping. The acquisition of these assets was not included in
Astrotech's original 1996 capital expenditure budget. Net cash used in investing
activities of $12,778 for fiscal 1994 was primarily used for the acquisitions of
BMT and Rubbaglas. Net capital expenditures during fiscal 1995 totaled $3,993.
Net cash provided by financing activities of $5,338 in fiscal 1996 was
primarily a result of borrowing for the acquisition of Graver and net borrowings
under Astrotech's revolving line of credit and Astrotech's 1995 capital
expenditure advancing term loan offset by the payment of Graver's existing bank
obligations totaling $2,420 and regularly scheduled payments on long-term debt.
During November 1995, Astrotech completed a program to repurchase small
shareholders' common stock at no cost to the shareholder. Through this program,
Astrotech repurchased and retired 90 shares of stock at an aggregate purchase
price of $293. Net cash used in financing activities of $4,023 in fiscal 1995
was primarily a result of net repayment of Astrotech's revolving lines of credit
and regularly scheduled payments on long-term debt. In February 1989, Astrotech
acquired all the capital stock of HMT. As partial consideration for the
acquisition, Astrotech issued a promissory note in the principal amount of
$1,500 to each of the two sellers. During fiscal 1995, Astrotech prepaid, in
cash, the note payable to one of the sellers, who is now a director of
Astrotech, and converted the note payable to the other seller, who is a director
and executive officer of Astrotech, into 183 shares of common stock. At the date
of this transaction, each note had an outstanding principal balance of $583 and
bore interest at the rate of 12% per annum. Net cash provided by financing
activities of $9,979 in fiscal 1994 was primarily a result of bank borrowings
used to finance the acquisitions of BMT and Rubbaglas totaling approximately
$11,000.
Astrotech believes that its existing funds, amounts generated by
operations, and amounts available for borrowing under the Credit Facility will
be sufficient to meet its working capital needs through fiscal 1997. Management
continues to review acquisition opportunities. It is anticipated that any
significant acquisition will require acquisition financing and will require the
consent of Bank One. No assurances can be made that any such acquisition will be
made, or that any such financing will be obtained on terms and conditions
satisfactory to Astrotech.
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<PAGE> 83
PRINCIPAL STOCKHOLDERS OF ITEQ
The following table sets forth certain information regarding the beneficial
ownership of ITEQ's Common Stock as of July 31, 1997 by (i) each person known by
ITEQ to be the beneficial owner of more than 5% of ITEQ's Common Stock, (ii)
each of ITEQ's directors and executive officers and (iii) all directors and
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES(1) CLASS
---- --------- ----------
<S> <C> <C>
Mark E. Johnson............................................. 1,368,062 8.0%
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Pierre S. Melcher........................................... 1,619,034 9.5%
2727 Allen Parkway, Suite 760
Houston, Texas 77019
International Mezzanine Capital, B.V........................ 1,525,333(2) 8.2%
Manfield House
376-379 Strand
London WCZR-OLR
United Kingdom
Lawrance W. McAfee.......................................... 189,562 1.1%
Thomas N. Amonett........................................... 22,000 *
T. William Porter........................................... 25,000 *
James L. Rainey, Jr......................................... 40,000 *
James A. Read............................................... 15,000 *
All directors and executive officers as a group (8
persons).................................................. 3,278,658(3) 19.0%
</TABLE>
- ---------------
* Less than 1% of outstanding shares.
(1) Includes shares which may be acquired on the exercise of outstanding stock
options, as follows: Mr. Amonett -- 22,000; Mr. McAfee -- 175,312; Mr.
Porter -- 25,000; Mr. Rainey -- 40,000; and Mr. Read -- 15,000.
(2) Includes 1,525,333 shares which may be acquired on the exercise of stock
warrants.
(3) Includes all shares referred to in note (1) above.
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<PAGE> 84
PRINCIPAL STOCKHOLDERS OF ASTROTECH
The following table sets forth certain information regarding beneficial
ownership of Astrotech's Common Stock as of July 31, 1997 by (i) each person
known by Astrotech to be the beneficial owner of more than 5% of Astrotech's
Common Stock, (ii) each of Astrotech's directors and (iii) all directors and
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES(1) PERCENT
---- --------- -------
<S> <C> <C>
T. Richard Mathews.......................................... 670,260(2) 6.7%
4422 F.M. 1960 W., Suite 350
Houston, TX 77068
Roger W. Thiltgen........................................... 517,260(3) 5.1%
14650 Champion Forest Dr., #1801
Houston, TX 77069
S. Kent Rockwell............................................ 1,452,152(4) 14.4%
407 Landon Gate
Fox Hall
Pittsburgh, PA 15238
Irwin Jacobs................................................ 1,600,000 15.8%
c/o Jacobs Management Corporation
100 South Fifth Street
Minneapolis, MN 55402
Fred E. Baxter.............................................. 10,540 *
Helen V. Gricks............................................. 8,166 *
John Henry.................................................. 30,000 *
Robert E. Kastelic.......................................... 12,472(5) *
Raymond T. Royko............................................ 44,200 *
All directors and executive officers as a group (eight
persons).................................................. 4,345,050 43.1%
</TABLE>
- ---------------
* Less than 1% of outstanding shares.
(1) Includes shares that may be acquired on the exercise of outstanding stock
options as follows: Mr. Baxter -- 10,000; Mrs. Gricks -- 7,166; Mr.
Henry -- 10,000; and Mr. Royko -- 39,500.
(2) Includes 34,877 shares held of record by Mr. Mathews' minor son as to which
Mr. Mathews shares voting and investment power.
(3) Includes 12,690 shares held of record by Mr. Thiltgen's minor children as to
which Mr. Thiltgen shares voting and investment power.
(4) Includes 1,380,052 shares held of record by Rockwell Venture Capital, Inc.
The sole stockholder of Rockwell Venture Capital, Inc. is Mr. Rockwell and,
as such, he has sole voting and investment power with respect to said
shares.
(5) Includes 1,100 shares held by Mr. Kastelic's wife.
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<PAGE> 85
DESCRIPTION OF ITEQ CAPITAL STOCK
ITEQ's Restated Certificate, which will become effective if the Merger is
consummated, provides for authorized capital stock of 41,000,000 shares,
consisting of 40,000,000 shares of ITEQ Common Stock, par value $.001 per share,
and 1,000,000 shares of preferred stock, par value $.01 per share ("ITEQ
Preferred Stock"). The following summary description of the capital stock of
ITEQ 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 ITEQ Restated Certificate, and the information is qualified in
its entirety by this reference.
COMMON STOCK
Holders of ITEQ 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 ITEQ Common Stock are not entitled to
cumulative voting rights. Therefore, subject to the voting rights that may be
granted to holders of ITEQ Preferred Stock, pursuant to the ITEQ Restated Bylaws
which will become effective if the Merger is consummated, holders of a plurality
of the shares of ITEQ Common Stock present in person or represented by proxy at
the meeting and entitled to vote can elect all of the directors of ITEQ. Subject
to the terms of any outstanding series of ITEQ Preferred Stock, the holders of
ITEQ Common Stock are entitled to dividends in such amounts and at such times as
may be declared by ITEQ's board of directors out of funds legally available
therefor. The ITEQ Common Stock is not subject to any calls or assessments. Upon
liquidation or dissolution, holders of ITEQ 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 ITEQ Preferred Stock.
Holders of ITEQ Common Stock have no redemption, conversion or preemptive
rights.
PREFERRED STOCK
Shares of ITEQ Preferred Stock may be issued without stockholder approval.
The board of directors is authorized to issue up to 1,000,000 shares of ITEQ
Preferred Stock in one or more series and to determine, with respect to any
series of ITEQ Preferred Stock, the terms and rights of such series, including,
without limitation (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 exchange such shares for, shares
of any other class of stock of ITEQ, (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, ITEQ, (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, ITEQ Common Stock or any other class of
stock that 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. ITEQ has no
current plans for issuance of any shares of ITEQ Preferred Stock. Any issuance
of shares of ITEQ Preferred Stock may adversely affect the voting powers or
rights of the holders of ITEQ Common Stock.
WARRANTS
ITEQ has issued warrants to purchase an aggregate of 1,933,675 shares of
ITEQ Common Stock, of which, warrants to purchase an aggregate of 1,760,000
shares are exercisable at a price of $5.10 per share and expire in November 2003
(the "Financing Warrants"), warrants to purchase 140,000 shares are exercisable
at a price of $4.42 per share and expire in September 1997 (the "Advisor
Warrants"), and warrants to purchase 33,675 shares are exercisable at a price of
$4.72 per share and expire in April 1998. The exercise price and, if 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 ITEQ
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 ITEQ
Common Stock (including the grant of options) and the issuance of securities
convertible into ITEQ Common Stock, subject
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<PAGE> 86
to certain exceptions, at certain price levels. In the case of certain
extraordinary transactions including, without limitation, a merger or
consolidation in which ITEQ is not the surviving entity, or a sale of all or
substantially all of the assets of ITEQ, all of the above warrants become
exercisable for the number of shares of stock, securities, or other property
that holders of ITEQ 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 ITEQ Restated Certificate and the ITEQ Restated Bylaws contain certain
provisions that could make more difficult the acquisition of ITEQ 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 ITEQ Restated
Certificate, the ITEQ Restated Bylaws and 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 ITEQ 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 ITEQ and its stockholders. The board of directors, in so acting,
could issue ITEQ 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 ITEQ'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.
Stockholder Meetings. The ITEQ Restated Certificate provides that
stockholder action may only be taken at an annual or special meeting. The ITEQ
Restated Certificate and the ITEQ Restated Bylaws provide that special meetings
of stockholders can be called by the chairman of the board, the chief executive
officer or the president. 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 ITEQ. In addition, stockholder
meetings are subject to postponement or adjournment by majority vote of the
board of directors or by the chairman of the board. These provisions would
prevent non-director stockholders of ITEQ 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.
Nomination of Directors. The ITEQ Restated Certificate provides that,
except for nominations by the board of directors or a committee thereof, advance
notice of director nominations must be given as provided in the ITEQ Restated
Bylaws. The ITEQ Restated Bylaws require that nominations be received within
certain time periods prior to any annual or special meeting at which directors
are to be elected. This provision, coupled with the restrictions on who may call
special meetings of the stockholders, would hinder an interested stockholder
from gaining control of the board in order to approve a proposal.
Anti-Takeover Legislation. As a Delaware corporation, ITEQ is subject to
Section 203 of the DGCL ("Section 203"). In general, Section 203 prohibits ITEQ
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
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<PAGE> 87
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
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 ITEQ Restated Certificate 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 ITEQ 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 ITEQ nor its stockholders
could recover monetary damages from the director, and the only course of action
available to ITEQ'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 ITEQ Restated Certificate 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 ITEQ 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 ITEQ's stock under
Section 174 of the DGCL or (iv) any transaction from which the director derived
an improper personal benefit. The ITEQ Restated Certificate 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 ITEQ'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 ITEQ Restated
Certificate provides indemnification for ITEQ'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
ITEQ Restated Certificate provides indemnification of ITEQ's directors and
officers to the fullest extent allowed pursuant to the foregoing provisions of
the DGCL.
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<PAGE> 88
The ITEQ Restated Certificate also requires that ITEQ advance expenses
incurred by an officer or director in defending an action or suit in advance of
final disposition thereof to the fullest extent allowed by the DGCL or other
applicable law. The DGCL currently allows advancement of such expenses provided
that the officer or director undertakes to repay such amount if it is ultimately
determined that indemnification was not authorized under 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 officers. The ITEQ
Restated Certificate provides that ITEQ has the authority to purchase such
insurance. 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.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ITEQ AND ASTROTECH
If the Merger is consummated, Astrotech stockholders will receive shares of
ITEQ Common Stock, and the rights of such stockholders will be governed by the
ITEQ Restated Certificate and the ITEQ Restated Bylaws. The following is a
summary of material differences between the rights of holders of ITEQ Common
Stock and the rights of holders of Astrotech Common Stock. As each of ITEQ and
Astrotech is organized under the laws of Delaware, these differences arise
primarily from various provisions of the ITEQ Restated Certificate and the ITEQ
Restated Bylaws and the Certificate of Incorporation and Bylaws of Astrotech.
This summary does not purport to be a complete statement of the rights of
holders of ITEQ Common Stock and Astrotech Common Stock under, and is qualified
in its entirety by reference to, the DGCL and the respective Certificate of
Incorporation and Bylaws of ITEQ and Astrotech.
AUTHORIZED CAPITAL
Astrotech. The authorized capital stock of Astrotech consists of 30,000,000
shares, 20,000,000 of which are shares of Astrotech Common Stock, par value $.01
per share, and 10,000,000 of which are shares of Astrotech preferred stock, par
value $.10 per share (the "Astrotech Preferred Stock"). The Astrotech
Certificate of Incorporation, (the "Astrotech Certificate"), grants specific
authority to the board of directors to designate the classes and series of the
Astrotech Preferred Stock and the relative rights and preferences thereof. As of
the Record Date, shares of Astrotech Common Stock were outstanding and
no shares of Astrotech Preferred Stock were outstanding. The holders of
Astrotech Common Stock are entitled to such dividends as may be declared from
time to time by the board of directors from funds legally available therefor,
and upon liquidation are entitled to receive pro rata all assets of Astrotech
available for distribution to such holders.
ITEQ. The authorized capital stock of ITEQ consists of 41,000,000 shares,
40,000,000 of which are shares of ITEQ Common Stock, par value $.001 per share,
and 1,000,000 of which are shares of ITEQ Preferred Stock, par value $.01 per
share. The ITEQ Restated Certificate grants specific authority to the board of
directors to fix the designation, powers, and preferences, and the conversion,
redemption, dividend, voting and other rights, powers, restrictions and
limitations, of each series of ITEQ Preferred Stock. As of the Record Date,
shares of ITEQ Common Stock, and no shares of ITEQ Preferred Stock,
were outstanding. The ITEQ Restated Certificate specifically denies stockholders
the right of cumulative voting and preemptive rights. The holders of ITEQ Common
Stock have the same rights as holders of Astrotech Common Stock with respect to
dividends and distributions upon liquidation.
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<PAGE> 89
VOTING REQUIREMENTS AND QUORUMS OF STOCKHOLDER MEETINGS
Astrotech. Since Astrotech Certificate and Astrotech's Bylaws (the
"Astrotech Bylaws") are silent on the matter, the DGCL controls with respect to
certain quorum and voting matters. The DGCL provides that at any meeting of
stockholders, the holders of a majority of the outstanding shares entitled to
vote, and present in person or by proxy, will constitute a quorum for the
transaction of any business. In addition, the DGCL provides that when a quorum
is present, the affirmative vote of the holders of a majority of the stock
present, in person or by proxy, and entitled to vote on the subject matter will
be required for the acts of the stockholders; except for the election of
directors, which requires the affirmative vote of a plurality of the votes cast;
and except that the Astrotech Certificate requires the affirmative vote of at
least 80% of the shares entitled to vote in order to amend the provisions of the
Astrotech Bylaws relating to the number of, retirement age of, restrictions on,
and indemnity and liability of directors. In addition, the Astrotech Certificate
requires the affirmative vote of at least 80% of the shares entitled to vote in
order (i) to approve certain transactions involving an Interested Stockholder or
any Affiliate or Associate of an Interested Stockholder (as such terms are
defined in the Astrotech Certificate) or (ii) unless unanimously recommended by
the board of directors if all directors are eligible to serve as Continuing
Directors (as defined in the Astrotech Certificate), to amend, alter or adopt
provisions inconsistent with the provisions relating to transactions with
Interested Stockholders. The Astrotech Bylaws provide that amendment of the
provisions thereof relating to the board of directors' power to select, retain
and remove, and determine the compensation of, officers requires the affirmative
vote of holders of at least 80% of the outstanding shares entitled to vote
thereon.
ITEQ. The ITEQ Restated Bylaws provide that holders of a majority of the
shares entitled to vote, present in person or by proxy, will constitute a quorum
and further specify that the affirmative vote of a majority of the shares
present at a meeting of stockholders will decide any matter submitted to such
meeting, unless the matter is one upon which the vote of a different number is
required by law or express provision of the ITEQ Restated Certificate or the
ITEQ Restated Bylaws.
ELECTION OF DIRECTORS
Astrotech. The Astrotech Certificate classifies directors into three
classes elected for staggered terms of three years each. The Astrotech
Certificate does not provide for cumulative voting by stockholders.
ITEQ. Cumulative voting by stockholders in the election of directors is
expressly denied by the ITEQ Restated Certificate. In addition, the ITEQ
Restated Bylaws provide that only persons nominated in accordance with the
procedures set forth therein are eligible to serve as directors.
VACANCIES ON THE BOARD OF DIRECTORS
Astrotech. The Astrotech Certificate and the Astrotech Bylaws provide that
vacancies arising on the board of directors may be filled by a two-thirds vote
of the remaining directors.
ITEQ. The ITEQ Restated Bylaws provide that a majority of the remaining
directors may fill vacancies occurring on the board of directors.
NUMBER AND TERM OF DIRECTORS
Astrotech. The Astrotech Bylaws provide that the number of directors may be
fixed from time to time by a vote of two-thirds of the directors then in office.
The Astrotech Certificate provides that the board of directors is divided into
three classes, each as nearly equal in size as possible, with one class elected
at each annual meeting for a term of three years.
ITEQ. The ITEQ Restated Bylaws provide that the number of directors may be
increased or decreased by resolution of the board of directors and that the
directors are elected at each annual meeting and serve until a successor is
elected and qualifies.
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<PAGE> 90
REMOVAL OF DIRECTORS
Astrotech. Since the Astrotech Certificate and the Astrotech Bylaws do not
provide for removal of directors, removal is controlled by the DGCL, which
provides that, since the board of directors is classified, any director or the
entire board of directors may only removed for cause by a majority of the shares
entitled to vote at an election of directors.
ITEQ. The ITEQ Restated Certificate provides that any director, or the
entire board of directors, may be removed with or without cause by the
affirmative vote of a majority of the shares entitled to vote in the election of
directors, voting together as a single class.
AMENDMENT OF BYLAWS
Astrotech. The Astrotech Bylaws vest in the board of directors the ability
to amend or repeal the Astrotech Bylaws, or adopt new bylaws, subject to the
power of the stockholders to adopt, amend or repeal the bylaws, and require such
board action to be approved by a majority of the directors; provided that the
affirmative vote of at least 80% of the shares entitled to vote thereon is
required (i) to alter, amend, repeal or substantially interfere with the board
of directors' power to select, retain, remove, and determine the compensation
of, officers.
ITEQ. The ITEQ Restated Bylaws expressly provide that the board of
directors may amend or repeal the ITEQ Restated Bylaws, or adopt new bylaws, by
a majority vote of the directors and that the stockholders, at an annual or
special meeting, may do so by the affirmative vote of a majority of the shares
entitled to vote thereon; provided that, under the ITEQ Restated Certificate,
the stockholder vote must be a majority of the shares entitled to vote in the
election of directors voting together as a single class.
ACTION BY WRITTEN CONSENT AND SPECIAL MEETINGS OF STOCKHOLDERS
Astrotech. The Astrotech Bylaws provide that action may be taken by written
consent of the stockholders but specify that the consent or consents, setting
forth in writing the action to be taken, must be signed by all the stockholders
entitled to vote on the subject matter thereof. The Astrotech Bylaws provide
that special meetings of the stockholders may only be called by the chairman of
the board, the vice chairman of the board, the president if there is no vice
chairman of the board, the board of directors and the holders of 80% of the
shares entitled to vote thereon.
ITEQ. The ITEQ Restated Certificate provides that stockholder action may
only be taken at an annual or special meeting of stockholders, and stockholders
are prohibited from taking any action without a meeting. The ITEQ Restated
Certificate and the ITEQ Restated Bylaws provide that, except as otherwise
provided by law, special meetings of the stockholders may only be called by the
chairman of the board, the chief executive officer or the president.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Astrotech. The Astrotech Certificate and the Astrotech Bylaws provide that
Astrotech will indemnify its directors and officers against expenses, judgments,
fines, and amounts paid in settlement actually and necessarily incurred in
connection with any action, suit or proceeding in which such persons are a party
by reason of having been an officer or director of Astrotech, or at its request,
any other corporation or entity. Indemnification is made only upon a
determination that the officer or director acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of
Astrotech and, with respect to criminal matters, had no reasonable cause to
believe his conduct was unlawful. The determination is made (i) by the board of
directors by majority vote of a quorum of the unaffected directors, (ii) if such
quorum is not attainable, or if attainable, a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. The Astrotech Certificate provides that directors are not
personally liable for breach of their fiduciary duty except to the extent
elimination or limitation of liability is expressly prohibited by the DGCL. The
Astrotech Bylaws provide that Astrotech will pay expenses incurred by directors
and officers in advance of the final disposition of an action, suit or
proceeding upon an undertaking
80
<PAGE> 91
by such officer or director to repay advanced amounts upon determination that he
was not entitled to indemnification.
ITEQ. The ITEQ Restated Bylaws provide that ITEQ will, to the fullest
extent permitted by law, indemnify each of its directors or officers against
reasonable expenses, fines, penalties, judgments, amounts paid in settlement,
and other liabilities actually and reasonably incurred by such person in
connection with any proceeding to which such person is or may be a party by
reason of having served in the capacity of director or officer of ITEQ or, at
its request, any other corporation or other entity or employee benefit plan,
provided such person acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of ITEQ and, with respect to
criminal matters, had no reasonable cause to believe his conduct was unlawful.
ITEQ is obligated to convene a meeting for consideration of any matter as
required by statute in order to determine eligibility for indemnification. The
ITEQ Restated Certificate provides that directors are not liable for breach of
their fiduciary duty except that liability is not eliminated or limited for (i)
breach of the duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) unlawful
payment of dividends, stock repurchases and redemptions and (iv) transactions
involving improper personal benefit. In addition, the ITEQ Restated Certificate
provides that ITEQ will pay expenses incurred by directors and officers in
advance of final disposition or any action, suit or proceeding to the fullest
extent permitted by the DGCL or other applicable laws.
PROPOSAL TO ADOPT ITEQ RESTATED STOCK OPTION PLAN
At the ITEQ Meeting, holders of ITEQ Common Stock as of the ITEQ Record
Date will be asked to approve and adopt the Restated Plan, which was adopted by
the ITEQ board of directors on July 23, 1997. The description set forth below
summarizes the principal terms and conditions of the Restated Plan, does not
purport to be complete and is qualified in its entirety by reference to the
Restated Plan, a copy of which is attached herein as Appendix .
GENERAL
The purposes of the Restated Plan are, among others, to (i) align the
interests of ITEQ's key employees and consultants to those of the ITEQ
stockholders by providing them with a ownership interest in ITEQ, (ii) attract
and retain key employees and consultants by providing competitive incentive
compensation opportunities and (iii) enable ITEQ's key employees and consultants
to share in the long-term growth and success of ITEQ.
ITEQ has reserved 2,000,000 shares of ITEQ Common Stock for use in
connection with the Restated Plan (which includes shares subject to options
previously granted). Beginning with ITEQ's first fiscal quarter after August 1,
1997 (the "Plan Effective Date") and continuing each fiscal quarter thereafter,
the number of shares of ITEQ Common Stock authorized for issuance under the
Restated Plan will be the greater of 2,000,000 or 10% of the number of shares of
ITEQ Common Stock outstanding on the first day of such quarter; provided,
however, the number of shares (a) may not exceed 3,000,000 (b) may not be
decreased as result of a reduction in ITEQ's outstanding shares (other than due
to a reverse stock split or similar transaction) or (c) exceed 2,000,000 shares
for incentive stock options granted under the Restated Plan.
ELIGIBILITY
Persons eligible for awards (herein, "Awards") under the Restated Plan are
key employees and consultants of ITEQ or any parent or subsidiary corporation
thereof. Consultants are not eligible to receive Awards in the form of incentive
stock options. The compensation committee of the ITEQ board of directors (or a
subcommittee thereof) (the "Committee") selects employees and consultants to
whom Awards may be granted, based upon such factors as the nature of services
rendered and their contributions to ITEQ's success.
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<PAGE> 92
ADMINISTRATION
The Plan is administered by the Committee, which consists of not less than
two directors and each whom constitutes an "outside director" within the meaning
of the Code and a "non-employment director" within the meaning of Rule 16b-3
under the Exchange Act. Committee members, none of whom is eligible to receive
Awards under the Restated Plan, are appointed by and serve at the pleasure of
ITEQ's board of directors. The Committee, among other things, selects the key
employees and consultants to whom Awards are to be granted, determines the terms
and conditions of the Award and resolves all questions of application or
interpretation of the Restated Plan. Each member of the Committee is indemnified
by ITEQ against any loss incurred with respect to matters relating to the
Restated Plan.
TYPES OF AWARDS
Awards granted under the Plan may be in the form of incentive stock options
within the meaning of Section 422 of the Code ("ISOs") and non-qualified options
("NQSOs") (ISOs and NQSOs are collectively referred to as "Options"). In
addition, the Committee may grant to key employees and consultants supplemental
cash awards ("Supplemental Payment") associated with the exercise or NQSOs,
which payments may not exceed the amount necessary to pay the federal and state
income taxes payable with respect to the exercise of the NQSO and receipt of the
Supplemental Payment.
Each Option will contain such terms and conditions as the Committee deems
appropriate, but each option agreement will provide for an exercise price per
share of (i) 100% of the fair market value of a share ITEQ Common Stock at the
time of grant in the case of ISOs and (ii) not less than 75% of the fair market
value of a share of ITEQ Common Stock at the time of grant in the case of NQSOs.
Each Option shall be exercisable in such installments, which need not be equal,
at such times and subject to such conditions as designated by the Committee. To
the extent not exercised, installments shall accumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, but not later than the
date the Option expires. The Restated Plan provides that no Option may be
exercisable after ten years from the date of grant and, unless otherwise
provided in the option agreement, terminates Options to the extent not
exercisable and imposes certain restrictions on the exercisability of the
remaining Options on termination of the optionee's employment with ITEQ.
Options may be exercised from time to time, by written notice to ITEQ
stating the full number of shares of ITEQ Common Stock with respect to which the
Option is being exercised, accompanied by full payment for the shares. The
option price is payable in cash or, subject to the approval of the Committee, by
(i) tendering previously acquired shares of ITEQ Common Stock, (ii) withholding
shares which would otherwise be acquired on the exercise or (ii) a combination
of cash and items (i) and (ii) above. In addition, the Committee may also allow
a "cashless exercise" pursuant to the Federal Reserve Board's Regulation T.
No Awards granted under the Restated Plan are transferable or assignable
other than by will or by the laws of descent and distribution. During the
lifetime of an optionee, Options are exercisable only by the holder.
AMENDMENT
The Restated Plan may be amended or terminated at any time by ITEQ's board
of directors; provided, however, no amendment may, without ITEQ Stockholder
approval, increase the maximum number of shares which may be issued under the
Plan (or available for grant for ISOs), change the requirements as to the class
of employees eligible to receive Awards under the Restated Plan or permit
Committee members to receive Awards under the Plan, extend the term of the Plan
or decrease the authority granted to the Committee under the Plan in
contravention to Rule 16b-3 of the Exchange Act. No amendment or termination of
the Restated Plan may alter any outstanding Option to the detriment of an
optionee without his consent.
OTHER MATTERS
Subject to the provisions relating to a change in control of ITEQ, in the
event of (i) a subdivision or consolidation of shares of ITEQ Common Stock,
payment of a stock dividend, stock split, recapitalization or
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<PAGE> 93
other increase or decrease in the number of shares of ITEQ Common Stock
outstanding, without the receipt of consideration therefor, appropriate
adjustments will be made in the aggregate number of shares covered by the
Restated Plan and in the number of shares and exercise price of outstanding
Options or (ii) ITEQ is reorganized, merged or consolidated or is a party to a
plan of exchange with another corporation, and ITEQ Stockholders receive any
shares of ITEQ Common Stock, or other securities or property, each optionee is
entitled to receive an option to acquire the property he would have been
entitled to receive had he exercised his Option immediately preceding such
corporate action, with such adjustments as the Committee deems appropriate.
Upon a change of control, all outstanding Options automatically become 100%
vested and immediately exercisable as of the date of the change of control. For
purposes of the Restated Plan, a "change of control" means (i) acquisition of
beneficial ownership of 20% of the voting power of ITEQ, subject to certain
limited exceptions, (ii) during the period of two consecutive calendar years,
individuals who at the beginning of such period constitute the ITEQ board of
directors, and any newly elected stockholder nominee if approved by two-thirds
of the ITEQ board then in office, cease to comprise a majority of the ITEQ board
of directors, (iii) ITEQ is a party to a merger, consolidation or share exchange
with another corporation in which either ITEQ is not the surviving corporation
or the ITEQ's Common Stock will be converted into shares of another company
(subject to limited exceptions), (iv) the ITEQ Stockholders approve a merger,
consolidation of shares or exchange with another corporation, and immediately
thereafter the former ITEQ Stockholders hold securities representing 50% or less
of the combined voting power of the surviving entity, (v) a complete liquidation
of ITEQ or sale of all or substantially all of ITEQ's assets, subject to limited
exceptions or (vi) any other event that a majority of the ITEQ board of
directors determines constitutes a change in control. Notwithstanding the
occurrence of any of the above events, the ITEQ board of directors (as
constituted immediately prior to such event) may determine, if deemed to be in
ITEQ's best interest, that a change in control did not occur.
TAX CONSEQUENCES
The tax consequences under current federal income tax law that may be
expected by an optionee who is a United States citizen or resident with respect
to Options and other interests awarded pursuant to the Restated Plan are as
discussed below. Currently, all outstanding compensatory options of ITEQ and
Astrotech are NQSOs:
Incentive Stock Options. Taxable income will not be recognized by an
optionee on the grant or qualified exercise of an ISO. Instead, a taxable event
will occur on disposition of stock acquired pursuant to the exercise of an ISO.
If an optionee does not dispose of the shares acquired on exercise of an ISO
within both two years after the grant of the ISO and one year after the exercise
of the ISO, the gain or loss (if any) on a subsequent stock disposition will
generally be a long-term capital gain or loss. Gain or loss is measured with
respect to the exercise price paid by the optionee with respect to the stock
sold.
If the optionee sells the shares acquired on the exercise of an ISO within
either two years after the date of grant of the ISO or within one year after the
exercise of the ISO, the sale is a "disqualifying disposition." The optionee
will recognize ordinary income in the year of the disqualifying disposition
equal to the excess of the fair market value of the shares at the time the ISO
was exercised over the exercise price and the balance (if any) will be long-term
or short-term capital gain depending on whether the shares were sold more than
one year after the ISO was exercised. If the disqualifying disposition is a sale
or exchange at a price between the exercise price and the fair market value at
exercise, the amount of such income is measured with respect to the sale or
exchange price. If the optionee sells the shares in a disqualifying disposition
at a price below the exercise price, the loss will generally be a short-term
capital loss if the optionee has held the shares for one year or less, and
otherwise will be a long-term capital loss. Special rules apply to optionees who
are officers or directors of the Company and who are subject to the provisions
of Section 16(b) of the Exchange Act.
The excess of the fair market value of the stock at exercise of an ISO over
the price paid is a positive adjustment for alternative minimum tax purposes.
Alternative minimum tax paid due to such an adjustment will generate an
alternative minimum tax credit which may reduce a Participant's regular income
tax in the
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<PAGE> 94
future. When stock acquired by exercise of an ISO is disposed of in the year of
exercise for an amount less than the fair market value at exercise, the
alternative minimum tax adjustment will be measured with respect to the amount
realized on disposition.
ITEQ is not entitled to a deduction as the result of the grant or exercise
of an ISO. If an optionee recognizes ordinary income as a result of a
disqualifying disposition, ITEQ will recognize an equal deduction in the taxable
year of ITEQ in which such disposition occurs (subject to certain limitations
for dispositions by covered employees).
Non-Qualified Stock Options. An optionee will not recognize any income at
the time a NQSO is granted, nor will ITEQ be entitled to a deduction at that
time. However, when any part of a NQSO is exercised, the optionee will recognize
ordinary income in an amount equal to the difference between the exercise price
of the NQSO and the current fair market value of the shares received. ITEQ will
recognize a deduction in an amount equal to, and at the time of, the income
recognized by the optionee (subject to certain limitations to NQSO granted to
covered employees).
An optionee will generally recognize capital gain or loss on disposition of
stock acquired by exercise of a NQSO. The optionee's tax basis in such shares
will be equal to the fair market value of such stock at exercise. In the event
stock is sold at a loss, an optionee may be limited in the amount of such loss
that is currently deductible.
Supplement Payment. The recipient of a Supplemental Payment generally will
recognize taxable income in an amount equal to the cash payment in the year
received, and ITEQ will be entitled to a deduction in the same amount.
Deduction Limitation Applicable to Covered Employees. Subject to certain
exceptions, Section 162(m) of the Code denies a tax deduction for annual
compensation paid to covered employees in excess of $1 million, including
compensation attributable to option awards. A covered employee includes for any
given tax year, the company's chief executive officer and the other four highest
paid employees for that year. The Restated Plan provides that unless the
committee determines otherwise, all awards to covered employees are intended to
qualify for the performance-based exception to the Section 162(m) tax deduction
limitation.
The ITEQ board of directors recommends a vote "FOR" the approval of the
Restated Plan.
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This Joint Proxy Statement is submitted by each of ITEQ and Astrotech to
their respective stockholders.
<TABLE>
<S> <C>
ITEQ, Inc. Astrotech International Corporation
By Order of the Board of Directors, By Order of the Board of Directors,
/s/ LAWRANCE W. MCAFEE /s/ RAYMOND T. ROYKO
- ------------------------------------------------- -----------------------------------------------------
Lawrance W. McAfee, Raymond T. Royko,
Secretary Secretary
</TABLE>
August 5, 1997
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEQ, INC.
Consolidated Balance Sheets as of December 31, 1996 and
March 31, 1997 (unaudited)............................. F-2
Consolidated Statements of Operations for the three months
ended March 31, 1996 (unaudited) and 1997
(unaudited)............................................ F-3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 (unaudited) and 1997
(unaudited)............................................ F-4
Notes to Consolidated Financial Statements (unaudited).... F-5
Reports of independent public accountants................. F-8,9
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996....................... F-11
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996........... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, 1996.......................... F-13
Notes to Consolidated Financial Statements................ F-14
ASTROTECH INTERNATIONAL CORPORATION
Consolidated condensed balance sheets as of September 30,
1996 and March 31, 1997 (unaudited).................... F-28
Consolidated condensed statements of operations for the
three months ended March 31, 1996 (unaudited) and 1997
(unaudited)............................................ F-29
Consolidated condensed statement of operations for the six
months ended March 31, 1996 (unaudited) and 1997
(unaudited)............................................ F-30
Consolidated condensed statements of cash flows for the
six months ended March 31, 1996 (unaudited) and 1997
(unaudited)............................................ F-31
Consolidated condensed statement of stockholders' equity
for the six months ended March 31, 1997 (unaudited).... F-32
Notes to consolidated condensed financial statements
(unaudited)............................................ F-33
Report of independent public accountants.................. F-37
Consolidated balance sheets as of September 30, 1995 and
1996................................................... F-38
Consolidated statements of operations for the years ended
September 30, 1994, 1995 and 1996...................... F-39
Consolidated statements of shareholders' equity (deficit)
for the years ended September 30, 1994, 1995 and
1996................................................... F-40
Consolidated statements of cash flows for the years ended
September 30, 1994, 1995 and 1996...................... F-41
Notes to consolidated financial statements................ F-42
</TABLE>
F-1
<PAGE> 97
ITEQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(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-2
<PAGE> 98
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).................................... $ (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-3
<PAGE> 99
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-4
<PAGE> 100
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>
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-
F-5
<PAGE> 101
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
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 August 1997, the Company purchased Exell, Inc. and an affiliated
partnership (collectively, "Exell") for total consideration of approximately
$9.4 million, consisting of cash and the assumption of certain liabilities, less
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 $24.3 million. The
transaction was accounted for using the purchase method of accounting.
NOTE 6 -- RESTRUCTURING COSTS
A restructuring charge of $4.2 million 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.
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,
F-6
<PAGE> 102
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
- --------------------------------------------------------------------------------
resulting in revenues and gross margin of $3.6 million and $0.7 million,
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 $2.0 million and $0.6 million, 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. The direct
cost of the original and replacement vessels will be recovered from the
customer. The Company expects to recover additional amounts from either the
subcontractor or from insurance proceeds, which have not been recognized in the
accompanying financial statements.
In May 1997, a registration statement on Form S-2 filed by the Company went
effective and registered for sale 5.1 million shares of ITEQ Common Stock by the
Company and 0.8 million shares of ITEQ Common Stock from certain selling
stockholders. The primary use of the offering proceeds to the Company was to
reduce debt incurred in acquisitions and for potential future acquisitions.
F-7
<PAGE> 103
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-8
<PAGE> 104
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-9
<PAGE> 105
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-10
<PAGE> 106
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-11
<PAGE> 107
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-12
<PAGE> 108
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 and 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 and 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-13
<PAGE> 109
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-14
<PAGE> 110
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-15
<PAGE> 111
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 practice 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
F-16
<PAGE> 112
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Company modifies the life and/or the carrying amount of an acquisition
intangible if an 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-17
<PAGE> 113
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
Financial instruments that 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.
The Company 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-18
<PAGE> 114
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 ITEQ 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 $5.9 million is being
F-19
<PAGE> 115
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 such as 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 the contract, except for retainages that are
collected upon completion of the contract. The Company has lien rights on
certain contracts.
F-20
<PAGE> 116
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 and 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-21
<PAGE> 117
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 ITEQ'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-22
<PAGE> 118
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 noncancellable
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-23
<PAGE> 119
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-24
<PAGE> 120
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.
F-25
<PAGE> 121
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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>
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.
F-26
<PAGE> 122
ITEQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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.
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,
--------------------------------------
1994 1995
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)
In May 1997, a registration statement on Form S-2 filed by the Company went
effective and registered for sale 5.1 million shares of ITEQ Common Stock by the
Company and 0.8 million shares of ITEQ Common Stock from certain selling
stockholders. The primary use of the offering proceeds to the Company was to
reduce debt incurred in the aforementioned acquisitions and for potential future
acquisitions.
F-27
<PAGE> 123
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1997
------------- -----------
* (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 515 $ 1,706
Trade accounts receivable................................. 28,490 21,267
Inventories (Note 2)...................................... 4,622 5,488
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 6,046 6,165
Deferred income taxes..................................... 2,042 1,726
Prepaid expenses and other current assets................. 1,283 902
------- -------
TOTAL CURRENT ASSETS.............................. 42,998 37,254
PROPERTY, PLANT AND EQUIPMENT
Land...................................................... 2,404 2,404
Buildings................................................. 6,751 6,759
Furniture and office equipment............................ 2,801 2,927
Machinery and equipment................................... 16,895 17,951
Tanks and trucks held for lease........................... 7,336 7,717
------- -------
36,187 37,758
Less accumulated depreciation and amortization............ 10,082 11,760
------- -------
26,105 25,998
OTHER ASSETS
Costs in excess of net assets acquired, net of accumulated
amortization of $4,327 at September 30, 1996 and $4,636
at March 31, 1997...................................... 17,690 20,059
Other assets.............................................. 1,571 2,150
------- -------
TOTAL ASSETS...................................... $88,364 $85,461
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 7,621 $ 5,358
Note payable.............................................. 70 --
Accrued compensation and benefits......................... 3,996 3,401
Accrued expenses and other current liabilities............ 7,959 6,598
Earn-Outs payable......................................... 1,670 2,000
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 5,587 7,944
Current portion of long-term debt......................... 3,373 3,380
------- -------
TOTAL CURRENT LIABILITIES......................... 30,276 28,681
LONG-TERM DEBT.............................................. 17,544 13,710
DEFERRED INCOME TAXES....................................... 3,491 3,900
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, authorized 20,000 shares;
issued and outstanding 9,869 shares at September 30,
1996 and 9,935 at March 31, 1997....................... 99 99
Additional capital........................................ 59,734 59,937
Retained earnings (deficit)............................... (22,780) (20,866)
------- -------
37,053 39,170
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $88,364 $85,461
======= =======
</TABLE>
- ---------------
* Summarized from audited balance sheet included in the Company's 1996 Annual
Report on Form 10-K.
See Notes to Condensed Consolidated Financial Statements.
F-28
<PAGE> 124
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $24,019 $29,418
Cost of revenues............................................ 17,351 21,463
Depreciation and amortization expense....................... 866 1,063
Selling, general and administrative expenses................ 4,431 5,348
------- -------
OPERATING PROFIT.................................. 1,371 1,544
Interest and other income................................... 34 59
Interest expense............................................ (271) (337)
------- -------
INCOME BEFORE INCOME TAXES........................ 1,134 1,266
Income tax expense:
Current................................................... (89) (409)
Deferred.................................................. (349) (125)
------- -------
(438) (534)
------- -------
NET INCOME........................................ $ 696 $ 732
======= =======
Earnings per common and dilutive common equivalent share
(Note 3):
Net income................................................ $0.07 $0.07
Weighted average shares outstanding....................... 10,014 10,251
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-29
<PAGE> 125
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $49,929 $63,222
Cost of revenues............................................ 36,446 46,742
Depreciation and amortization expense....................... 1,738 2,202
Selling, general and administrative expenses................ 8,700 10,566
------- -------
OPERATING PROFIT.................................. 3,045 3,712
Interest and other income................................... 61 146
Interest expense............................................ (538) (635)
------- -------
INCOME BEFORE INCOME TAXES........................ 2,568 3,223
Income tax expense:
Current................................................... (222) (584)
Deferred.................................................. (784) (725)
------- -------
(1,006) (1,309)
------- -------
NET INCOME........................................ $ 1,562 $ 1,914
======= =======
Earnings per common and dilutive common equivalent share
(Note 3):
Net income................................................ $0.16 $0.19
Weighted average shares outstanding....................... 10,028 10,232
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-30
<PAGE> 126
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 4,221 $ 8,996
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (3,342) (1,817)
Contingent purchase consideration paid.................... (544) (2,270)
Cash paid for acquisition of subsidiary, net of cash
acquired............................................... (2,836) --
Proceeds from notes receivable from employee.............. 613 --
Cash received from sale of land, buildings and
equipment.............................................. 72 26
-------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (6,037) (4,061)
-------- --------
Cash flows from financing activities:
Proceeds under revolving lines of credit and notes
payable................................................ 24,560 19,450
Proceeds from long-term debt.............................. 5,000 --
Repayments under revolving lines of credit and notes
payable................................................ (23,733) (21,662)
Repayments of long-term debt.............................. (2,617) (1,685)
Checks not yet presented for payment, net................. (443) --
Cash paid for stock repurchase............................ (293) --
Other..................................................... -- 153
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 2,474 (3,744)
-------- --------
Increase in cash and cash equivalents....................... $ 658 $ 1,191
======== ========
Supplemental cash flow disclosures of noncash investing and
financing activities:
Earn-Out payable in connection with the acquisition of BMT
(Note 4)............................................... $ -- $ 2,000
Details of the Graver Tank & Mfg. Co., Inc. acquisition
follow:
Fair value of assets acquired.......................... 12,773 --
Fair value of liabilities assumed...................... 9,873 --
-------- --------
Net assets acquired............................... $ 2,900 $ --
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-31
<PAGE> 127
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
COMMON ADDITIONAL EARNINGS
STOCK CAPITAL (DEFICIT)
------ ---------- ---------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996............................... $99 $59,734 $(22,780)
Net income................................................ 1,914
Exercise of stock options................................. -- 203 --
--- ------- --------
BALANCE AT MARCH 31, 1997................................... $99 $59,937 $(20,866)
=== ======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE> 128
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information for commercial and industrial companies and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
three and six-month periods ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending September 30,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1996.
The condensed consolidated financial statements include the accounts of
Astrotech International Corporation and its subsidiaries (the "Company").
Intercompany accounts and transactions have been eliminated in consolidation.
2. INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method and consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1997
------------- ---------
<S> <C> <C>
Raw materials and components parts................... $3,589 $4,632
Work in process...................................... 596 314
Finished goods....................................... 437 542
------ ------
$4,622 $5,488
====== ======
</TABLE>
3. EARNINGS PER COMMON SHARE
Earnings per share are computed by dividing the respective income statement
caption by the weighted average number of common and dilutive common equivalent
shares outstanding during the period.
4. ACQUISITIONS
GRAVER TANK & MFG. CO., INC.
On March 28, 1996, the Company acquired Graver Holding Company and its
wholly-owned subsidiary, Graver Tank & Mfg. Co., Inc. (collectively "Graver").
Graver designs, manufactures and erects storage tanks and pressure vessels for
the petroleum and process industries. Graver also provides nickel-clad
installations for the power generation and air pollution industries, providing
fabrication and erection of scrubbers, chimneys, and stack liners.
The base purchase price recorded by the Company of $2,900 consisted of
$2,750 in cash and $150 of acquisition-related expenses. In addition, the
Company repaid Graver's existing bank obligations totaling $2,420. The seller is
entitled to receive additional cash proceeds of up to $1,250 pursuant to the
terms of an earn-out arrangement based on future profits (as defined) of Graver
during each of the three fiscal years ending September 30, 1998. For the fiscal
year ended September 30, 1996, the amount earned was $236 which was paid during
the second quarter of fiscal 1997.
The acquisition has been accounted for using the purchase method of
accounting. The results of operations of Graver commencing March 29, 1996 are
included in the consolidated financial statements. Costs of the acquisition in
excess of net assets of the business acquired were approximately $1,154.
F-33
<PAGE> 129
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
BROWN-MINNEAPOLIS TANK & FABRICATING CO. ("BMT")
On March 1, 1994, the Company acquired all of the capital stock of BMT. The
consideration paid by the Company to Mr. Jacobs was comprised of the following:
(i) $11,515 in cash; (ii) 1,600 shares of Common Stock; (iii) a $500 unsecured
subordinated promissory note; and (iv) contingent annual cash payments for a
period of five years beginning as of October 1, 1993, in an amount equal to 50%
of the BMT Calculated Profit Amount (as defined in the Stock Purchase Agreement)
("Earn-Out") for each of the fiscal years ended September 30, 1994 through 1998,
inclusive; provided, however that in no event shall the aggregate contingent
payments exceed $9,000. For fiscal year 1995 and 1996, this contingent purchase
consideration amounted to $424 and $1,355, respectively. On February 28, 1997
the parties amended the Stock Purchase Agreement to provide for a complete
settlement of all remaining contingent purchase consideration for a cash payment
of $2,600. The Company paid $600 upon signing the amendment and recorded an
additional $2,000 of Earn-Out payable which is due and payable by September 30,
1997.
5. CHANGES IN ACCOUNTING AND NEW ACCOUNTING STANDARDS
Effective October 1996, the Company adopted 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 adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
Effective October 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This new standard defines a fair value based method
of accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense by
adopting the new fair value method or to continue to measure compensation using
the intrinsic value approach under Accounting Principles Board (APB) Opinion No.
25, the former standard. The Company has elected to continue using the
measurement prescribed by APB Opinion No. 25, and accordingly, the adoption of
this pronouncement did not affect the Company's financial position or results of
operations. Management plans to include the required disclosures under SFAS No.
123 in the notes to its fiscal year 1997 consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which is effective for financial statements issued for
periods ending after December 15, 1997. At that time, the Company will be
required to change the methods currently used to compute earnings per share
(EPS) and to restate all prior periods. SFAS No. 128 replaces the current
presentation of "primary" EPS with "basic" EPS, with the principle difference
being that common stock equivalents are not considered in computing "basic" EPS.
The statement also requires the replacement of current "fully diluted" EPS with
"diluted" EPS. "Diluted" EPS will be computed similarly to "fully diluted" EPS.
The adoption of this statement will not have a material impact on the Company's
EPS computation.
6. CONTINGENCIES
On March 19, 1996, the Company's HMT Inc. subsidiary ("HMT") was served
with a Complaint filed in Superior Court of California, County of Contra Costa.
This matter arises out of a tank fire which occurred in June of 1995, at a
refinery in northern California, where Company employees were replacing seals on
an aboveground storage tank. This Complaint, filed by Valerie Vega-Wright, seeks
to certify a class of persons affected by the fire under theories of negligence,
nuisance, battery, trespass and strict liability. The Complaint seeks damages
for, among other things, personal injuries and loss of property value, and is
requesting unspecified compensatory and punitive damages. The Company has
removed this litigation to the U.S. District Court for the Northern District of
California. On October 22, 1996, HMT was served with a Complaint in Allison v.
Unocal et al, which was simultaneously filed in the Contra Costa Superior Court.
The Complaint
F-34
<PAGE> 130
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
seeks damages for alleged personal injuries, property damage and punitive
damages. Two hundred sixteen plaintiffs contend that they were injured as a
result of the tank fire and seek damages against HMT as well as the owner of the
refinery. The Company is currently attempting to request the federal court that
all actions be remanded back to the state court based on this second Complaint.
On March 4, 1997, the Company received tender by Unocal of the defense and
indemnity of certain litigation matters arising out of the tank fire. The
Company's insurance carriers (both primary and excess) have been notified and
both the Company and its insurance carriers are assessing the claims and related
policy coverages. This matter is in its initial stages and investigative
activities are continuing. While the ultimate outcome cannot now be determined
because of the uncertainties which exist, the Company believes that its
insurance coverages are adequate to address its potential liability, if any; and
any unfavorable result not covered by insurance could result in a material
charge which has not been reflected in the accompanying financial statements.
The Company intends to vigorously defend this action.
The Company is a party to certain other legal proceedings occurring in the
ordinary course of business. Based upon information presently available to it,
the Company does not believe that the final outcome of any of these other
matters will have a materially adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.
7. SUBSEQUENT EVENTS
On May 1, 1997, the Company acquired all of the issued and outstanding
shares of capital stock of Trusco Tank, Inc. ("Trusco") and two parcels of real
property used in Trusco's business and owned by two of its shareholders. Trusco
is a full-range designer, fabricator and field erector of steel structures,
including storage tanks, pressure vessels and shop-built tanks (both aboveground
and underground). Trusco's customers include municipal water districts,
wastewater treatment facilities, oil companies, industrial facilities, wineries,
and various process industries.
The purchase price of $10,944 was paid in cash using proceeds from the
amended debt facility discussed below. In addition, the Company repaid Trusco's
existing bank obligations totaling $4,500. The acquisition has been accounted
for using the purchase method of accounting. The results of operations of Trusco
commencing May 2, 1997 will be included in the consolidated financial
statements.
On April 30, 1997, the Company executed an Amended and Restated Revolving
Credit and Term Loan Agreement (the "Credit Facility") with Bank One, which
consolidated then existing term indebtedness and provided financing to be used
for the acquisition of Trusco, working capital support, capital expenditures,
and other general corporate purposes.
THE CREDIT FACILITY, AS RESTATED AND AMENDED, CONSISTS OF THE FOLLOWING:
(i) A term loan in the original amount of $25,000 bearing interest at the
Company's option at either a spread ranging from the bank's base rate minus 1/2
percent to the bank's base rate plus 1/4 percent or at various LIBOR rates plus
spreads ranging from 1 1/4 percent to 2 3/4 percent. The applicable spread is
based upon the ratio of the Company's total funded debt to earnings before
interest, taxes, depreciation and amortization, as defined. Interest is payable
either quarterly or at certain LIBOR contract termination dates. The term loan
is payable in equal quarterly installments of $893 until February 28, 2004.
(ii) A revolving line of credit of up to $20,000 bearing interest at
options equal to those available under the term loan. In addition, the Company
pays a quarterly commitment fee of 1/4 percent per annum on the average daily
unused amount. The borrowing amount is based on the Company's eligible accounts
receivable and inventory, as defined. The principal amount outstanding plus all
accrued and unpaid interest is due on February 28, 2000.
F-35
<PAGE> 131
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(iii) A $5,000 advancing term loan available until February 28, 1998 for
capital expenditures bearing interest at the same options as the term loan.
Beginning on May 28, 1998, any principal amount then outstanding will be payable
in equal quarterly installments until February 28, 2004.
All obligations of the Company under the Credit Facility are collateralized
by substantially all of the assets of the Company and the pledge by the Company
of the Common Stock of each of its direct subsidiaries. The obligations of the
Company are guaranteed by each direct and indirect subsidiary. The Credit
Facility contains certain covenants which provide for, among other things,
maintenance of various financial ratios.
F-36
<PAGE> 132
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
Astrotech International Corporation:
We have audited the consolidated financial statements and financial
statement schedule of Astrotech International Corporation and subsidiaries as
listed in Item 14(a) (1) and (2) of this Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Astrotech International Corporation and subsidiaries as of September 30, 1995
and 1996 and the consolidated results of their operations and cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles. In addition, the financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly the
information required to be included therein.
As discussed in Note 1, the Company changed its method of accounting for
income taxes in fiscal 1994.
COOPERS & LYBRAND L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
December 6, 1996
F-37
<PAGE> 133
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ -- $ 515
Trade accounts receivable, net of allowance of $170 in
1995 and $176 in 1996 (Note 3).......................... 19,821 28,490
Inventories (Note 4)...................................... 4,225 4,622
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 5).......................... 4,348 6,046
Deferred income taxes (Notes 1 and 10).................... 2,143 2,042
Prepaid expenses and other current assets................. 887 1,283
------- -------
TOTAL CURRENT ASSETS............................... 31,424 42,998
PROPERTY, PLANT AND EQUIPMENT
Land...................................................... 2,134 2,404
Buildings................................................. 4,066 6,751
Furniture and office equipment............................ 1,546 2,801
Machinery and equipment................................... 13,034 16,895
Tanks and trucks held for lease........................... 4,980 7,336
------- -------
25,760 36,187
Less accumulated depreciation and amortization............ 7,658 10,082
------- -------
18,102 26,105
OTHER ASSETS
Costs in excess of net assets acquired, net of accumulated
amortization of $3,740 in 1995 and $4,327 in 1996 (Note
2)...................................................... 15,689 17,690
Other assets.............................................. 1,336 1,571
------- -------
TOTAL ASSETS....................................... $66,551 $88,364
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks not yet presented for payment, net................. $ 443 $ --
Accounts payable.......................................... 6,630 7,621
Notes payable............................................. 19 70
Accrued compensation and benefits......................... 2,811 3,996
Accrued expenses and other current liabilities............ 5,555 7,959
Earn-Outs payable......................................... 544 1,670
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 5).......................... 2,743 5,587
Current portion of long-term debt (Note 6)................ 2,396 3,373
------- -------
TOTAL CURRENT LIABILITIES.......................... 21,141 30,276
LONG-TERM DEBT (Note 6)..................................... 10,086 17,544
DEFERRED INCOME TAXES (Notes 1 and 10)...................... 2,006 3,491
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, authorized 20,000 shares;
issued and outstanding
9,929 shares in 1995 and 9,869 shares in 1996 (Notes 7
and 8).................................................. 99 99
Additional capital........................................ 60,009 59,734
Retained earnings (deficit)............................... (26,790) (22,780)
------- -------
33,318 37,053
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $66,551 $88,364
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-38
<PAGE> 134
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Continuing operations:
Revenues.............................................. $ 68,726 $ 100,203 $ 122,190
Cost of revenues...................................... 49,195 73,651 91,102
Depreciation and amortization expense................. 2,769 3,204 3,852
Selling, general and administrative expenses.......... 13,964 17,995 19,704
--------- --------- ----------
OPERATING PROFIT.............................. 2,798 5,353 7,532
Interest and other income............................. 94 481 329
Interest expense...................................... (1,233) (1,333) (1,331)
--------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................ 1,659 4,501 6,530
Income tax expense.................................... (863) (1,770) (2,520)
--------- --------- ----------
INCOME FROM CONTINUING OPERATIONS............. 796 2,731 4,010
--------- --------- ----------
Discontinued operations (Note 9):
Gain on sale of assets of ASO, net of income tax
expense of $80..................................... 154 -- --
--------- --------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................ 950 2,731 4,010
Cumulative effect of change in accounting principle for
income taxes (Note 1)................................. 2,931 -- --
--------- --------- ----------
NET INCOME.................................... $ 3,881 $ 2,731 $ 4,010
========= ========= ==========
Earnings per common and dilutive common equivalent share
(Note 1):
Income from continuing operations..................... $ 0.09 $ 0.28 $ 0.40
Income before cumulative effect of change in
accounting principle............................... $ 0.10 $ 0.28 $ 0.40
Cumulative effect of change in accounting principle... $ 0.32 -- --
Net income............................................ $ 0.42 $ 0.28 $ 0.40
Weighted average shares outstanding................... 9,157 9,886 10,108
</TABLE>
See Notes to Consolidated Financial Statements.
F-39
<PAGE> 135
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
COMMON ADDITIONAL EARNINGS
STOCK CAPITAL (DEFICIT)
----- ------- ---------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993.............................. $81 $54,454 $(33,402)
Net income............................................... 3,881
Issuance of Common Stock issued in connection with the
acquisition of BMT (Note 2)........................... 16 4,984
Costs of extending the Warrants, net of Warrants
exercised............................................. (9)
--- ------- --------
BALANCE AT SEPTEMBER 30, 1994.............................. 97 59,429 (29,521)
Net income............................................... 2,731
Issuance of 183 shares of Common Stock, net of costs of
issuance (Note 6)..................................... 2 575
Stock options and Warrants exercised..................... 5
--- ------- --------
BALANCE AT SEPTEMBER 30, 1995.............................. 99 60,009 (26,790)
Net income............................................... 4,010
Repurchase of 90 shares (Note 7)......................... (1) (292)
Exercise of stock options, net of costs of issuance...... 1 17
--- ------- --------
BALANCE AT SEPTEMBER 30, 1996.............................. $99 $59,734 $(22,780)
=== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-40
<PAGE> 136
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,881 $ 2,731 $ 4,010
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Depreciation....................................... 2,258 2,629 3,227
Amortization....................................... 511 575 625
Deferred income taxes.............................. 595 1,280 1,790
Net gain on sale of land, buildings, and
equipment........................................ (9) (347) (48)
Income from discontinued operations................ (234) -- --
Cumulative effect of change in accounting
principle........................................ (2,931) -- --
Cash provided (used) by assets and liabilities:
Trade accounts receivable........................ (3,283) (936) (3,246)
Inventories...................................... (717) (743) (250)
Costs and estimated earnings in excess of
billings on uncompleted contracts............. (7) 268 (730)
Prepaid expenses and other assets................ 163 (536) (128)
Accounts payable................................. 2,311 (590) 232
Accrued compensation and benefits................ 184 992 576
Accrued expenses................................. (743) 804 352
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (28) 536 (1,381)
Other liabilities................................ 186 -- --
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 2,137 6,663 5,029
-------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (2,083) (3,993) (7,300)
Contingent purchase consideration paid.................... -- -- (544)
Cash paid for license agreement........................... -- (265) --
Net cash paid for acquisition of subsidiaries
and related expenses, net of cash acquired.............. (11,104) -- (2,836)
Proceeds from notes receivable from employee.............. -- -- 613
Cash received from sale of subsidiary..................... 234 -- --
Cash received from sale of land, buildings and
equipment............................................... 175 294 215
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............ (12,778) (3,964) (9,852)
-------- -------- --------
Cash flows from financing activities:
Proceeds under revolving lines of credit and
notes payable............................... 28,515 22,080 47,081
Proceeds from long-term debt.............................. 10,061 400 5,000
Repayments under revolving lines of credit and notes
payable................................................. (26,309) (23,780) (41,626)
Repayments of long-term debt to related parties........... (417) (968) (160)
Repayments of other long-term debt........................ (1,862) (2,193) (4,239)
Checks not yet presented for payment, net................. -- 443 (443)
Cash paid for stock repurchase............................ -- -- (293)
Other..................................................... (9) (5) 18
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................... 9,979 (4,023) 5,338
-------- -------- --------
Increase (decrease) in cash................................. $ (662) $ (1,324) $ 515
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE> 137
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company provides engineering, design, fabrication, maintenance services
and construction of steel structures for a variety of industries, including
refining, petrochemical, water storage, pulp and paper, mining, alcohol,
agriculture, wastewater treatment, power generation and process systems. The
Company's broad range of products include large aboveground storage tanks (and
related parts and constituent products), pressure vessels, bins, silos, stacks
and liners, scrubbers and shop built tanks (both underground and aboveground).
The Company also provides non-destructive testing and inspection services for
large aboveground storage tanks, pressure vessels and piping and also offers
mobile storage tank leasing services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Astrotech
International Corporation and its subsidiaries (the "Company"). Intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
ACQUISITIONS
Acquisitions have been accounted for using the purchase method of
accounting. The results of operations for the periods since the respective dates
of acquisition are included in the consolidated financial statements. Costs in
excess of net assets acquired are amortized on the straight-line method
principally over forty years. Any contingent purchase consideration accrued or
paid increases costs in excess of net assets acquired and is amortized over the
remaining amortization period of such intangible asset. The Company regularly
reviews the individual components of the balances of all of its long term assets
by analyzing the future recoverability of the assets and recognizes, on a
current basis, any diminution in value.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1996, the Company adopted 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 adoption of
SFAS No. 121 will not have a material effect on the Company's financial position
or results of operations.
Effective October 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This new standard defines a fair value based method
of accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense by
adopting the new fair value method or to continue to measure compensation using
the intrinsic value approach under Accounting Principles Board (APB) Opinion No.
25, the former standard. If the former standard for measurement is elected, SFAS
No. 123 requires supplemental disclosure to show the effects of using the new
measurement criteria. The Company intends to continue using the measurement
prescribed by APB Opinion No. 25, and accordingly, this pronouncement will not
affect the Company's financial position or results of operations.
F-42
<PAGE> 138
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Expenditures for
additions and improvements are capitalized, while those for maintenance and
repairs are expensed as incurred. The cost and accumulated depreciation or
amortization of assets sold or retired are removed from the respective accounts
and any gain or loss is reflected in results of operations. Provisions for
depreciation are computed for financial reporting purposes using the
straight-line method based on estimated useful lives. Depreciation for tax
reporting purposes is computed principally on accelerated methods. Total
accumulated depreciation on tanks and trucks held for lease at September 30,
1995 and 1996 was $904 and $1,374, respectively.
OTHER ASSETS
Included in other assets are patents and license agreements which are
recorded at cost and are being amortized on the straight-line method based on
their respective estimated useful lives ranging up to 17 years.
REVENUE RECOGNITION
Revenues primarily arise from contracts and are recognized on the
percentage-of-completion method. Revenues are measured by the percentage of
costs incurred to date to total costs estimated for some contracts and the
percentage of direct labor dollars earned for other contracts. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. It is reasonably possible that future operating results
may be affected if actual contract costs incurred differ from total contract
costs currently estimated by management.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed and costs incurred. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
revenues recognized. Generally, contracts are progress billed as work
progresses.
OPERATING CYCLE
In accordance with industry practice, the Company classifies as current
assets amounts relating to long-term construction contracts which may have terms
extending beyond one year but are expected to be realized during the normal
operating cycle of the Company. The liabilities in the accompanying balance
sheets which have been classified as current liabilities are those expected to
be satisfied by the use of assets classified as current assets.
RESEARCH AND DEVELOPMENT
Expenditures for research and development activities are expensed as
incurred. For the years ended September 30, 1994, 1995 and 1996, research and
development expenses were $334, $439, and $381, respectively.
INCOME TAXES
The Company computes income taxes under the liability method. Under this
method, deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities, as measured by the
enacted tax rates which will be in effect when these differences reverse, and
based on the expected utilization of net operating loss and tax credit
carryforwards. Deferred tax expense or benefit is the result of changes in such
basis differences, enacted rates and expected utilization of carryforwards.
F-43
<PAGE> 139
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
As a result of the adoption of SFAS No. 109 in fiscal 1994, the Company
recorded a gain from cumulative effect of change in accounting principle of
$2,931. The gain arose principally from the tax effect of anticipated use of net
operating loss carryforwards existing at October 1, 1993. As of September 30,
1996, the Company has used all of its previously available net operating loss
carryforwards.
EARNINGS PER COMMON SHARE
Earnings per common and dilutive common equivalent share are computed by
dividing income from continuing operations, income before cumulative effect of
change in accounting principle and net income, respectively, by the weighted
average number of shares and dilutive common equivalent shares of common stock
outstanding during the year. Outstanding Warrants were anti-dilutive and certain
outstanding stock options have a dilutive effect in the three years presented.
FOREIGN CURRENCY TRANSLATION
The functional currencies for the Company's foreign operations are the
applicable local currencies. The translation of the applicable foreign
currencies into U.S. dollars for balance sheet accounts is performed using rates
of exchange in effect at the balance sheet date. Income statements are
translated at average exchange rates during the period. For the years ended
September 30, 1994, 1995 and 1996, such translation adjustments were not
significant.
CONCENTRATION OF CREDIT RISK
The Company grants credit to customers involved primarily in the petroleum
and petrochemical industries. The Company performs ongoing credit evaluations of
its customers to minimize its credit risk.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the current year presentation.
2. ACQUISITIONS
A. GRAVER TANK & MFG. CO., INC.
On March 28, 1996, the Company acquired Graver Holding Company and its
wholly-owned subsidiary, Graver Tank & Mfg. Co., Inc. (collectively "Graver").
Graver designs, manufactures and erects storage tanks and pressure vessels for
the petroleum and process industries. Graver also provides nickel-clad
installations for the power generation and air pollution industries, providing
fabrication and erection of scrubbers, chimneys, and stack liners.
The base purchase price recorded by the Company of $2,900 consisted of
$2,750 in cash and $150 of acquisition-related expenses. The seller is entitled
to receive additional cash proceeds of up to $1,250 pursuant to the terms of an
earn-out arrangement based on future profits (as defined) of Graver during each
of the three fiscal years ending September 30, 1998. For fiscal year 1996, this
contingent purchase consideration amounted to $236. In addition, the Company
repaid Graver's existing bank obligations totaling $2,420. A portion of the cash
consideration paid for Graver was provided through a credit facility with Bank
One, Texas, N.A. See Note 6.
The acquisition has been accounted for using the purchase method of
accounting. The results of operations of Graver commencing March 29, 1996 are
included in the consolidated financial statements. Costs of the acquisition in
excess of net assets of the business acquired were approximately $1,154.
F-44
<PAGE> 140
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The following unaudited pro forma information shows the results of
operations of the Company and Graver for the fiscal years ended September 30,
1995 and 1996, assuming the companies had combined as of October 1, 1994:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenues.............................................. $130,329 $132,579
Net income............................................ $ 959 $ 3,344
Net income per common share........................... $ .10 $ .33
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the companies had been combined during
the periods presented and is not intended to be a projection of future results.
B. BROWN-MINNEAPOLIS TANK & FABRICATING CO. ("BMT")
On March 1, 1994, the Company acquired BMT, a designer, fabricator and
field erector of steel structures including storage tanks, bins, stacks, vessels
and shop-built tanks (both underground and aboveground). The base purchase price
recorded by the Company of $17,040 consisted of $11,540 in cash, a $500
subordinated promissory note, and 1,600 shares of Astrotech common stock with an
aggregate assigned value of $5,000 based on the market price of the stock on
March 1, 1994. The remaining balance of $425 on the subordinated promissory note
is included in long-term debt. The seller of BMT is also entitled to contingent
purchase consideration of up to $9,000 in cash based upon future gross profits
(as defined) of BMT during the five-year period ending September 30, 1998. For
fiscal 1994, no such consideration was earned and for fiscal years 1995 and
1996, this contingent purchase consideration amounted to $424 and $1,355,
respectively.
The results of operations of BMT commencing March 1, 1994 are included in
the consolidated financial statements. Costs of the acquisition in excess of net
assets of the business acquired were approximately $5,425.
C. HMT RUBBAGLAS LIMITED
On November 19, 1993, the Company acquired all the capital stock of HMT
Rubbaglas Limited, a privately-held British company headquartered in London,
England. HMT Rubbaglas designs, manufactures and installs equipment for the
aboveground storage tank industry. HMT Rubbaglas has a manufacturing facility in
London, England and a sales network and distribution system throughout the
United Kingdom, Continental Europe, Africa and the Middle East. The purchase
price paid by the Company for all of the outstanding stock of HMT Rubbaglas was
$2,250. In addition, the Company will be obligated to pay a contingent purchase
consideration in the form of an Earn-Out of up to L850 pounds sterling based
upon future operating profits of Rubbaglas during each of the five years ending
September 30, 1998. No such consideration was earned for fiscal years 1994, 1995
or 1996. Costs of the acquisition in excess of the net assets acquired were
approximately $1,500.
F-45
<PAGE> 141
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The following unaudited pro forma information shows the results of
operations of the Company, BMT, and HMT Rubbaglas for the fiscal year ended
September 30, 1994, assuming the companies had combined as of October 1, 1993:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Revenues.................................................... $83,663
Income from continuing operations........................... $ 321
Income from continuing operations per common share.......... $ .03
Net income.................................................. $ 3,406
Net income per common share................................. $ .35
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the companies had been combined during
the periods presented and is not intended to be a projection of future results.
3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable at September 30, 1995 and 1996 arose from the
following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Completed contracts and product sales................... $ 7,282 $10,626
Uncompleted contracts................................... 9,868 14,779
Retainage............................................... 2,671 3,085
------- -------
$19,821 $28,490
======= =======
</TABLE>
4. INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method. At September 30, 1995 and 1996, inventories consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Raw materials and component parts......................... $3,283 $3,589
Work in process........................................... 306 596
Finished goods............................................ 636 437
------ ------
$4,225 $4,622
====== ======
</TABLE>
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at September 30, 1995
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Costs incurred on uncompleted contracts............... $ 51,364 $ 95,609
Estimated earnings.................................... 10,026 15,150
-------- --------
61,390 110,759
Less billings to date................................. 59,785 110,300
-------- --------
$ 1,605 $ 459
======== ========
</TABLE>
F-46
<PAGE> 142
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheet under the following
captions:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $4,348 $6,046
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 2,743 5,587
------ ------
$1,605 $ 459
====== ======
</TABLE>
6. LONG-TERM DEBT
On February 28, 1995, the Company executed a Revolving Credit and Term Loan
Agreement (the "Credit Facility") with Bank One, which consolidated then
existing term indebtedness previously incurred at the subsidiary levels and
provided financing to be used for working capital support, capital expenditures,
possible acquisitions and other general corporate purposes. During fiscal 1996,
the Company executed two amendments to the Credit Facility providing for, among
other things, financing for the acquisition of Graver and an increase in
permitted capital expenditures in fiscal year 1996.
The Credit Facility, as amended, consists of the following:
(i) A term loan in the original amount of $12,000 which consolidated all
of the term bank borrowings previously existing at the Company's
subsidiary level, bearing interest at the Company's option at either
the bank's base rate plus a spread ranging from 1/4 percent to 1/2
percent or at various LIBOR rates plus spreads ranging from 1 3/4
percent to 2 3/4 percent. The applicable spread is based upon the
ratio of the Company's total liabilities to tangible net worth, as
defined. Interest is payable either quarterly or at certain LIBOR
contract termination dates. At September 30, 1996, the interest rate
was 7.2%. The term loan is payable in equal quarterly installments of
$550 until February 28, 2000, when the remaining outstanding balance
will be due.
(ii) A revolving line of credit of up to $14,000 bearing interest at
options 1/4 percent below the same options available under the term
loan. In addition, the Company pays a quarterly commitment fee of
1/4 percent per annum on the average daily unused amount. The
borrowing amount is based on the Company's eligible accounts
receivable and inventory, as defined. At September 30, 1996, the
weighted average interest rate was 7.1%. The principal amount
outstanding plus all accrued and unpaid interest is due on February
28, 1998. Outstanding letters of credit, which totaled $2,854 at
September 30, 1996, reduce the amount available for borrowing. On
September 30, 1996, $3,694 was available for borrowing.
(iii) An advancing term loan which was available until February 28, 1996
for capital expenditures bearing interest at the same options as the
term loan. During fiscal 1996, the Company borrowed $2,000 under this
loan which is payable in equal quarterly installments of $125 until
February 28, 2000. At September 30, 1996, the interest rate was 7.2%.
(iv) A $3,000 acquisition loan used to purchase Graver. This loan bears
interest at the same options as the term loan and is payable in equal
quarterly installments of $125 until February 28, 2000 when the
remaining outstanding balance will be due. At September 30, 1996, the
interest rate was 7.2%.
(v) A $2,000 advancing term loan available until February 28, 1997 for
capital expenditures bearing interest at the same options as the term
loan. Beginning on May 28, 1997, any principal amount then outstanding
will be payable in equal quarterly installments until February 28,
2001. At September 30, 1996, no amounts were outstanding under this
loan.
F-47
<PAGE> 143
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
All obligations of the Company under the Credit Facility are collateralized
by substantially all of the assets of the Company and the pledge by the Company
of the Common Stock of each of its direct subsidiaries. The obligations of the
Company are guaranteed by each direct and indirect subsidiary. The Credit
Facility contains certain covenants which provide for, among other things,
maintenance of various financial ratios. At September 30, 1996, the Company was
in compliance with all such covenants.
As partial consideration for the acquisition of HMT Inc. in 1989, the
Company issued a promissory note in the principal amount of $1,500 to each of
the two sellers. During the third quarter of fiscal 1995, the Company prepaid,
in cash, the note payable to one of the sellers, who is now a director of the
Company and converted the note payable to the other seller, who is a director
and executive officer of the Company, into 183 shares of common stock. The
conversion rate was based on the market price of the Common Stock at the time of
the exchange. Each note had an outstanding principal balance of $583 and bore
interest at the rate of 12% per annum.
Long-term debt at September 30, 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Term loan............................................... $10,900 $ 8,700
Revolving line of credit................................ 1,050 7,452
1995 Advancing term loan................................ -- 1,750
Acquisition loan........................................ -- 2,750
Other................................................... 532 265
------- -------
12,482 20,917
Less current portion.................................... 2,396 3,373
------- -------
$10,086 $17,544
======= =======
</TABLE>
Required principal payments on long-term debt outstanding at September 30,
1996 for the next five fiscal years are as follows:
<TABLE>
<S> <C>
1997................. $ 3,373
1998................. $10,744
1999................. $ 3,200
2000................. $ 2,850
2001................. $ 750
</TABLE>
Effective October 1, 1995, the Company adopted SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," which requires disclosure about fair
value of all financial instruments. At September 30, 1996, the only financial
instruments held by the Company are its long-term debt obligation. Based on
interest rates currently available, management believes that the carrying amount
of long-term debt is a reasonable estimation of fair value.
7. COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK
Each share of Common Stock is entitled to one vote on all matters
considered at a meeting of stockholders unless otherwise provided in fixing the
relative rights and preferences on one or more classes of preferred stock which
may be established.
On March 31, 1995, all of the Company's outstanding Warrants (858) expired
in accordance with their terms. Each Warrant had entitled the holder thereof to
purchase one share of Common Stock at a price of $6.00 per share.
F-48
<PAGE> 144
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
During November 1995, the Company completed a program to repurchase small
shareholders' common stock at no cost to the shareholder. Through this program
the Company repurchased 90 shares of stock at an aggregate purchase price of
$293.
8. STOCK OPTIONS
A. 1984 STOCK OPTION PLAN
In 1984, the Company adopted a Stock Option Plan (the "1984 Plan") for
eligible employees, including officers and directors. At September 30, 1995 and
1996, options to purchase 19 shares of Common Stock were outstanding and
exercisable at a price of $1.94 per share. No additional options may be granted
under the 1984 Plan.
B. 1989 STOCK INCENTIVE PLAN
In 1989, the Company's Board of Directors adopted the 1989 Stock Incentive
Plan (the "Stock Incentive Plan") which was approved by the stockholders at the
annual meeting held on May 18, 1989. Options may be granted to key employees of
the Company and to directors who are employees or consultants of the Company.
The Stock Incentive Plan is intended to attract and retain key employees and
consultants of outstanding competence and to provide such employees and
consultants with an incentive to achieve long-term corporate objectives by
giving them an opportunity to acquire an equity interest in the Company. No
Stock Appreciation Rights and Restricted Stock Options, allowed by the plan,
have been granted.
During 1996, options to purchase 15 shares of Common Stock expired, options
to purchase 30 shares of Common Stock at an average price of $1.78 per share
were exercised and options to purchase 35 shares of Common Stock were issued. At
September 30, 1996, options to purchase 415 shares of Common Stock were
outstanding and exercisable at an average price of $3.40 per share. Pursuant to
the Stock Incentive Plan, 516 shares of Common Stock, including 102 shares
reserved for options which are available for grant, were reserved at September
30, 1996 for issuance by the Company.
During 1995, options to purchase 22 shares of Common Stock expired, options
to purchase 4 shares of Common Stock at an average price of $1.13 per share were
exercised and options to purchase 60 shares of Common Stock were issued. At
September 30, 1995, options to purchase 424 shares of Common Stock were
outstanding and exercisable at an average price of $3.33 per share. Pursuant to
the Stock Incentive Plan, 546 shares of Common Stock, including 122 shares
reserved for options which are available for grant, were reserved at September
30, 1995 for issuance by the Company.
C. 1994 STOCK OPTION PLAN FOR EMPLOYEES OF BROWN-MINNEAPOLIS TANK & FABRICATING
CO.
In connection with the Company's acquisition of BMT, the Company's Board of
Directors adopted the 1994 Stock Option Plan for Employees of BMT ("1994 BMT
Plan") which was approved by the Company's stockholders at the annual meeting
held on May 17, 1994. Pursuant to the 1994 BMT Plan (which became effective on
March 1, 1994, the day the Company completed the acquisition of BMT), 400 shares
of Common Stock were reserved for issuance by the Company in connection with
awards of stock options under the 1994 BMT Plan. These shares are available for
issuance to key employees of BMT or any BMT subsidiary. Effective March 1, 1994,
stock options to purchase 400 shares of Common Stock were awarded to 19 key
employees of BMT (none of whom are executive officers or directors of the
Company). The exercise price of each stock option was $3.125 (equal to the fair
market value, as defined in the 1994 BMT Plan, on the date of grant). Such
options are not exercisable during the first year after grant and are
exercisable, cumulatively, at the rate of 20% for each year thereafter until the
fifth anniversary of the date of grant when such options become vested and fully
exercisable.
F-49
<PAGE> 145
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The 1994 BMT Plan is intended to promote the future growth and financial
success of the Company and its BMT subsidiary by attracting and retaining key
employees of outstanding competence for BMT and providing such employees an
incentive to achieve long term corporate objectives by giving them an
opportunity to acquire an equity interest in the Company.
At September 30, 1995 and 1996, options to purchase 400 shares of Common
Stock were outstanding, 80 and 195, respectively, of which were exercisable on
that date and 400 shares of Common Stock were reserved for issuance by the
Company.
D. 1995 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
In February 1995, the Company's Board of Directors adopted the 1995
Nonemployee Directors Stock Option Plan ("Directors Plan") which was approved by
the Company's stockholders on May 9, 1995. All directors of the Company who are
not employees are eligible to receive options to purchase Common Stock under the
Directors Plan. Each of the four eligible directors received an option to
purchase 10 shares at an exercise price of $3.1875 (equal to the fair market
value of the Common Stock on the date of grant). Such options were not
exercisable during the first year after grant and are fully exercisable
thereafter until the tenth anniversary of the grant date. In addition, current
directors are ineligible to receive additional options under the Directors Plan,
although any new eligible director will be granted, at election or appointment,
an option to purchase 10 shares at an exercise price equal to the fair market
value on the date of grant. The maximum number of shares which may be issued
pursuant to the Directors Plan is 100. At September 30, 1996, options to
purchase 40 shares of Common Stock were outstanding, all of which were
exercisable on that date and 40 shares of Common Stock were reserved for
issuance by the Company.
9. DISCONTINUED OPERATIONS
On October 29, 1987, substantially all of the assets of Astrotech Space
Operations, Inc. ("ASO") were sold. During fiscal year 1994, the Company
recorded an additional gain on the sale of the assets of ASO of $234
representing additional purchase consideration earned for the preceding calendar
year. No further amounts can be earned under the terms of the purchase
agreement.
10. INCOME TAXES
The income tax provisions for the years ended September 30, 1994, 1995 and
1996 consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ -- $ 150
State........................................... 204 450 420
Foreign......................................... 144 40 160
Deferred:
Federal......................................... 539 1,370 1,730
State........................................... (24) (90) 60
---- ------ ------
$863 $1,770 $2,520
==== ====== ======
</TABLE>
Foreign income taxes arise from income before taxes aggregating $403, $43
and $467 in fiscal 1994, 1995 and 1996, respectively, from the combined
operations of the Company's Australian, British and Canadian subsidiaries and
all other income taxes arise principally from the domestic operations of the
Company.
F-50
<PAGE> 146
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) at September 30, 1995 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards........................ $ 459 $ 159
Tax credit carryforwards................................ 780 1,045
Accrued expenses, deductible when paid.................. 1,685 1,138
------- -------
Gross deferred tax assets............................. 2,924 2,342
Gross deferred tax liability -- fixed asset basis
differences........................................... (2,517) (3,791)
Valuation allowance..................................... (270) --
------- -------
$ 137 $(1,449)
======= =======
</TABLE>
The valuation allowance in 1995 represented tax credit carryforwards which
were not expected to be utilized prior to expiration. During fiscal 1995 and
1996, based on the Company's utilization of federal tax net operating loss
carryforwards resulting from higher than expected earnings, the Company reversed
$240 and $270, respectively of its valuation allowance representing investment
and research and development tax credits expiring principally in 2000 which are
now expected to be utilized.
The provision for income taxes from income from continuing operations in
1994, 1995 and 1996 varied from the U.S. statutory rate for the following
reasons:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 34.0%
Amortization of goodwill.................................... 10.3 4.3 3.3
Foreign income.............................................. (8.3) (.3) (2.4)
Foreign income taxes........................................ 8.7 .9 2.5
State income taxes, net of federal benefit.................. 8.1 5.3 4.8
Other, net.................................................. (.8) .4 .5
Reversal of valuation allowance............................. -- (5.3) (4.1)
----- ---- ----
52.0% 39.3% 38.6%
===== ==== ====
</TABLE>
At September 30, 1996, the Company had investment and research and
development tax credit carryforwards of approximately $375 which expire
principally in 2000 and alternative minimum tax credit carryforwards of
approximately $670 which have no expiration date.
F-51
<PAGE> 147
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
11. CONSOLIDATED STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
The following noncash investing and financing transactions have been
excluded from the Consolidated Statement of Cash Flows:
During the year ended September 30, 1994, the Company issued shares of
Common Stock with an assigned value of $5,000 and a promissory note of $500 in
connection with the acquisition of BMT. The Company also refinanced long-term
debt of $3,043.
During the year ended September 30, 1995, the Company received a mortgage
note in the amount of $497 for the sale of land and buildings and issued shares
of Common Stock to a related party in exchange for a promissory note payable of
$583. The Company also refinanced long-term debt and notes payable of $13,111.
During the year ended September 30, 1996, the Company acquired Graver Tank
& Mfg. Co., Inc. Fair value of net assets acquired was $2,900 consisting of
assets acquired of $12,964 and liabilities assumed of $10,064.
For the years ended September 30, 1995 and 1996, the Company has recorded
contingent purchase consideration related to prior acquisitions totaling $544
and $1,591, respectively. These amounts are accrued in the year earned and paid
in the following year.
For the years ended September 30, 1994, 1995 and 1996, the Company made
cash payments for income taxes of $214, $647 and $718, respectively. Cash paid
for interest was $1,261, $1,334, and $1,305 for the years ended September 30,
1994, 1995 and 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES
A. LEASES
The Company leases certain facilities and equipment under operating leases
which contain renewal options and escalation clauses in some cases. Rent expense
for these operating leases for the years ended September 30, 1994, 1995 and 1996
amounted to $496, $553 and $699, respectively.
The Company leases office space from two entities in which a director and a
director-officer of the Company have ownership interests. During 1994, 1995 and
1996, total lease payments to related parties were $230, $223 and $154,
respectively.
Future annual minimum payments under noncancellable operating leases at
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1997........................................................ $287
1998........................................................ 216
1999........................................................ 146
2000........................................................ 96
2001........................................................ 46
----
$791
====
</TABLE>
B. LITIGATION
On March 19, 1996, the Company's HMT Inc. subsidiary was served with a
Complaint filed in Superior Court of California, County of Contra Costa. This
matter arises out of a tank fire which occurred in June of 1995, at a refinery
in northern California, where Company employees were replacing seals on an
aboveground
F-52
<PAGE> 148
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
storage tank. This Complaint, filed by Valerie Vega-Wright, seeks to certify a
class of persons affected by the fire under theories of negligence, nuisance,
battery, trespass and strict liability. The Complaint seeks damages for, among
other things, personal injuries and loss of property value, and is requesting
unspecified compensatory and punitive damages. The Company has removed this
litigation to the U.S. District Court for the Northern District of California.
On October 22, 1996, HMT was served with a Complaint in Allison v. Unocal et al,
which was simultaneously filed in the Contra Costa Superior Court. The Complaint
seeks damages for alleged personal injuries, property damage and punitive
damages. Two hundred sixteen plaintiffs contend that they were injured as a
result of the tank fire and seek damages against HMT as well as the owner of the
refinery. The Company is currently attempting to request the federal court that
all actions be remanded back to the state court based on this second Complaint.
The Company's insurance carriers (both primary and excess) have been notified
and both the Company and its insurance carriers are assessing the claims and
related policy coverages. This matter is in its initial stages and investigative
activities are continuing. While the ultimate outcome cannot now be determined
because of the uncertainties which exist, the Company believes that its
insurance coverages are adequate to address its potential liability, if any; and
any unfavorable result not covered by insurance could result in a material
charge which has not been reflected in the accompanying financial statements.
The Company intends to vigorously defend this action.
The Company is a party to certain other legal proceedings occurring in the
ordinary course of business. Based upon information presently available to it,
the Company does not believe that the final outcome of any of these other
matters will have a materially adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.
C. INSURANCE
The Company's insurance program for workers' compensation, general
liability and group medical is partially self-insured. Estimated costs of claims
outstanding of $4,667 at September 30, 1996 under these self-insurance
agreements are included in accrued liabilities in the accompanying consolidated
balance sheet. It is reasonably possible that the ultimate cost of claims
outstanding could differ from management's current estimates. In connection with
the Company's insurance programs, a standby letter of credit has been issued by
the Company in the amount of $2,764 to cover reimbursement obligations for
self-insurance claims to be paid by the Company's insurer.
13. RETIREMENT PLANS
The Company maintains three separate 401(k) retirement savings plans.
Eligible employees, as defined, can contribute varying amounts, up to 18% of
eligible salary. The Company (i) may make discretionary contributions based upon
profits as determined by the Board of Directors and (ii) matches employee
participant contributions in an amount equal to (a) 25% of each participant's
contribution up to a maximum of 4% of a participant's salary, (b) 75% of each
participating employee's contribution of up to a maximum of 6% of the
participating employee's compensation for each year or (c) 50% of each
participating employee's contribution of up to a maximum of 4% of the
participating employee's compensation for each year. The plans are funded
currently and the Company has recorded expense, pursuant to the Company match,
of $266, $344 and $404, for the years ended September 30, 1994, 1995 and 1996,
respectively.
The Company also contributes to union-sponsored retirement plans for its
employees covered under collective bargaining agreements. Amounts contributed
are determined based upon a percentage of wages paid or amounts per hour worked
by such employees or a match of the employees' contributions.
F-53
<PAGE> 149
ASTROTECH INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
14. MAJOR CUSTOMERS, FOREIGN OPERATIONS AND EXPORT SALES INFORMATION
The industrial storage industry is the only business segment in which the
Company operates. No customer accounted for more than 10% of revenues in fiscal
years 1994, 1995 and 1996.
The Company has operations in Australia, Singapore, England and Canada
which generated aggregate revenues of $7,384, $6,024 and $8,173 and aggregate
net income of $259, $3 and $305 during the years ended September 30, 1994, 1995
and 1996, respectively. Aggregate identifiable assets of these foreign
operations at September 30, 1995 and 1996 were $5,142 and $6,104, respectively.
The Company also has export sales to various countries which amounted to
$1,210, $1,089 and $4,765 for the years ended September 30, 1994, 1995 and 1996,
respectively.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 FISCAL QUARTERS FIRST SECOND THIRD FOURTH 1995
-------------------- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Revenues................................ $24,871 $22,832 $23,551 $28,949 $100,203
Gross profit before depreciation and
amortization expense.................. 6,589 6,454 6,167 7,342 26,552
Net income.............................. 659 475 591 1,006 2,731
Net income per common share*............ .07 .05 .06 .10 .28
</TABLE>
<TABLE>
<CAPTION>
1996 FISCAL QUARTERS FIRST SECOND THIRD FOURTH 1996
-------------------- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Revenues................................ $25,910 $24,019 $33,008 $39,253 $122,190
Gross profit before depreciation and
amortization expense.................. 6,815 6,667 8,361 9,245 31,088
Net income.............................. 866 696 1,082 1,366 4,010
Net income per common share*............ .09 .07 .11 .14 .40
</TABLE>
- ---------------
* Quarterly figures may not total to year-end numbers due to rounding.
F-54
<PAGE> 150
ASTROTECH INTERNATIONAL CORPORATION
VALUATION & QUALIFYING ACCOUNTS (SEC SCHEDULE II)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED BALANCE AT
CLASSIFICATION OF PERIOD TO EXPENSE DEDUCTIONS OTHER END OF PERIOD
-------------- --------- ---------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1994:
Allowance for Doubtful Accounts........ $ -- $ -- $ (8)(1) $38(2) $ 30
Deferred income tax valuation
allowance............................ $ -- $510(3) $ -- $-- $510
YEAR ENDED SEPTEMBER 30, 1995:
Allowance for Doubtful Accounts........ $ 30 $140 $ -- $-- $170
Deferred income tax valuation
allowance............................ $510 $ -- $(240)(5) $-- $270
YEAR ENDED SEPTEMBER 30, 1996:
Allowance for Doubtful Accounts........ $170 $ -- $ (35) $41(4) $176
Deferred income tax valuation
allowance............................ $270 $ -- $(270)(5) $-- $ --
</TABLE>
- ---------------
(1) Accounts written off, less recoveries.
(2) Acquired through acquisition of BMT.
(3) Included in cumulative effect of change in accounting principle for income
taxes.
(4) Acquired through acquisition of Graver.
(5) Reversal of allowance due to expected utilization of investment and research
and development tax credits expiring principally in 2000.
F-55
<PAGE> 151
APPENDIX A
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
OF
ITEQ, INC.
AND
ASTROTECH INTERNATIONAL CORPORATION
----------
DATED AS OF JUNE 30, 1997
- --------------------------------------------------------------------------------
<PAGE> 152
TABLE OF CONTENTS
ARTICLE I
<TABLE>
<S> <C> <C>
MERGER . . . . . . . . . . . . . 2
1.1. Surviving Corporation . . . . . . . . . . . . . . . . . . . . 2
1.2. Stockholder Approval. . . . . . . . . . . . . . . . . . . . . 2
1.3. Effective Date. . . . . . . . . . . . . . . . . . . . . . . . 2
1.4. Name and Continued Corporate Existence of Surviving
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4.1. Name and Existence. . . . . . . . . . . . . . . . . 2
1.4.2. Federal Income Tax Treatment of Merger. . . . . . . 2
1.5. Governing Law and Certificate of Incorporation of Surviving
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6. Bylaws of Surviving Corporation . . . . . . . . . . . . . . . 3
1.7. Directors of Surviving Corporation . . . . . . . . . . . . . 3
1.7.1. Directors of Surviving Corporation. . . . . . . . . 3
1.7.2. Vacancies. . . . . . . . . . . . . . . . . . . . . 3
1.8. Capital Stock of Surviving Corporation . . . . . . . . . . . 4
1.9. Conversion of Securities upon Merger . . . . . . . . . . . . 4
1.9.1. General. . . . . . . . . . . . . . . . . . . . . . 4
1.9.2. Conversion of AIX Common Stock. . . . . . . . . . 4
1.9.3. Exchange of AIX Common Stock Certificates. . . . . 4
1.9.4. ITEQ Fractional Shares. . . . . . . . . . . . . . . 4
1.9.5. AIX's Transfer Books Closed. . . . . . . . . . . . 5
1.10. Treatment of Stock Options. . . . . . . . . . . . . . . . . . 5
1.11. Assets and Liabilities . . . . . . . . . . . . . . . . . . . 5
1.11.1. Assets and Liabilities of Merging Corporations
Become Those of Surviving Corporation. . . . . . . . 5
1.11.2. Conveyances to Surviving Corporation. . . . . . . . 6
1.11.3. Accounting Treatment. . . . . . . . . . . . . . . . 6
1.11.4. Unclaimed Merger Consideration; No Escheat. . . . . 6
1.11.5. Dissenting Stockholders of AIX. . . . . . . . . . . 6
1.12. Material Adverse Effect . . . . . . . . . . . . . . . . . . . 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF AIX . . . . . . . . . . . . . . . . . 7
2.1. Representations and Warranties of AIX . . . . . . . . . . . . 7
2.1.1. Organization and Standing. . . . . . . . . . . . . . 7
2.1.2. Agreement Authorized and its Effect on Other
Obligations. . . . . . . . . . . . . . . . . . . . 7
2.1.3. Capitalization. . . . . . . . . . . . . . . . . . . 8
</TABLE>
i
<PAGE> 153
<TABLE>
<S> <C> <C>
2.1.4. Subsidiaries . . . . . . . . . . . . . . . . . . . 8
2.1.5. Reports and Financial Statements . . . . . . . . . 8
2.1.6. Liabilities . . . . . . . . . . . . . . . . . . . . 9
2.1.7. Additional AIX Information . . . . . . . . . . . . 9
2.1.7.1. Employee Compensation Plans . . . . . . . 9
2.1.7.2. Certain Salaries . . . . . . . . . . . . 9
2.1.7.3. Employee Agreements . . . . . . . . . . . 9
2.1.7.4. Guaranties . . . . . . . . . . . . . . . 10
2.1.7.5. Environmental. . . . . . . . . . . . . . . 10
2.1.8. No Undisclosed Defaults . . . . . . . . . . . . . . 10
2.1.9. Absence of Certain Changes and Events . . . . . . . 10
2.1.9.1. Financial Change . . . . . . . . . . . . 10
2.1.9.2. Property Damage . . . . . . . . . . . . . 10
2.1.9.3. Dividends . . . . . . . . . . . . . . . . 10
2.1.9.4. Capitalization Change . . . . . . . . . . 10
2.1.9.5. Labor Disputes . . . . . . . . . . . . . 10
2.1.9.6. Other Material Changes . . . . . . . . . 10
2.1.10. Taxes . . . . . . . . . . . . . . . . . . . . . . . 11
2.1.11. Intellectual Property . . . . . . . . . . . . . . . 11
2.1.12. Title to Properties . . . . . . . . . . . . . . . . 11
2.1.13. Litigation . . . . . . . . . . . . . . . . . . . . . 12
2.1.14. Environmental Compliance. . . . . . . . . . . . . . 12
2.1.14.1. Environmental Conditions . . . . . . . . . 12
2.1.14.2. Permits, etc . . . . . . . . . . . . . . . 12
2.1.14.3. Compliance. . . . . . . . . . . . . . . . 12
2.1.14.4. Environmental Claims. . . . . . . . . . . 13
2.1.14.5. Renewals. . . . . . . . . . . . . . . . . 13
2.1.15. Compliance with Other Laws . . . . . . . . . . . . . 13
2.1.16. Finder's Fee . . . . . . . . . . . . . . . . . . . . 13
2.1.17. Compliance with ERISA . . . . . . . . . . . . . . . 13
2.1.18. Investigations; Litigation . . . . . . . . . . . . . 14
2.1.19. Product Warranty . . . . . . . . . . . . . . . . . . 14
2.1.20. Information for Proxy Statement. . . . . . . . . . . 15
2.1.21. Investment Company. . . . . . . . . . . . . . . . 15
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ITEQ . . . . . 15
3.1. Representations and Warranties of ITEQ . . . . . . . . . . . 15
3.1.1. Organization and Standing. . . . . . . . . . . . . 15
3.1.2. Agreement Authorized and its Effect on Other
Obligations. . . . . . . . . . . . . . . . . . . . 15
3.1.3. Capitalization. . . . . . . . . . . . . . . . . . . 16
3.1.4. Subsidiaries . . . . . . . . . . . . . . . . . . . 16
</TABLE>
ii
<PAGE> 154
<TABLE>
<S> <C> <C>
3.1.5. Reports and Financial Statements. . . . . . . . . . 16
3.1.6. Liabilities . . . . . . . . . . . . . . . . . . . . 17
3.1.7. No Undisclosed Defaults . . . . . . . . . . . . . . 17
3.1.8. Absence of Certain Changes and Events in ITEQ. . . 17
3.1.8.1. Financial Change. . . . . . . . . . . . . 17
3.1.8.2. Property Damage . . . . . . . . . . . . . 17
3.1.8.3. Dividends. . . . . . . . . . . . . . . . 17
3.1.8.4. Capitalization Change . . . . . . . . . . 17
3.1.8.5. Labor Disputes . . . . . . . . . . . . . 17
3.1.8.6. Other Material Changes. . . . . . . . . . 17
3.1.9. Taxes. . . . . . . . . . . . . . . . . . . . . . . 17
3.1.10. Intellectual Property. . . . . . . . . . . . . . . 18
3.1.11. Title to Properties. . . . . . . . . . . . . . . . 18
3.1.12. Litigation. . . . . . . . . . . . . . . . . . . . . 19
3.1.13. Environmental Compliance. . . . . . . . . . . . . . 19
3.1.13.1. Environmental Conditions . . . . . . . . 19
3.1.13.2. Permits, etc . . . . . . . . . . . . . . 19
3.1.13.3. Compliance. . . . . . . . . . . . . . . 19
3.1.13.4. Environmental Claims. . . . . . . . . . 19
3.1.13.5. Renewals. . . . . . . . . . . . . . . . 19
3.1.14. Compliance with Other Laws. . . . . . . . . . . . . 19
3.1.15. Finder's Fee. . . . . . . . . . . . . . . . . . . . 20
3.1.16. Compliance With ERISA . . . . . . . . . . . . . . . 20
3.1.17. Investigations; Litigation. . . . . . . . . . . . . 21
3.1.18. Product Warranty . . . . . . . . . . . . . . . . . 21
3.1.19. Information for Proxy Statement. . . . . . . . . . 21
3.1.20. Investment Company. . . . . . . . . . . . . . . . . 21
ARTICLE IV
OBLIGATIONS PENDING EFFECTIVE DATE . . . . . . . 21
4.1. Agreements of ITEQ and AIX. . . . . . . . . . . . . . . . . . 21
4.1.1. Maintenance of Present Business. . . . . . . . . . 21
4.1.2. Maintenance of Properties. . . . . . . . . . . . . 22
4.1.3. Maintenance of Books and Records. . . . . . . . . . 22
4.1.4. Compliance with Law. . . . . . . . . . . . . . . . 22
4.1.5. Compliance with Agreement. . . . . . . . . . . . . 22
4.1.6. Inspection of Each Merging Corporation. . . . . . . 22
4.2. Additional Agreements of ITEQ and AIX. . . . . . . . . . . . 22
4.2.1. Hart-Scott-Rodino. . . . . . . . . . . . . . . . . 22
4.2.2. Proxy Statement. . . . . . . . . . . . . . . . . . 22
4.2.3. Notice of Material Developments. . . . . . . . . . 23
4.3. Additional Agreements of AIX. . . . . . . . . . . . . . . . . 23
</TABLE>
iii
<PAGE> 155
<TABLE>
<S> <C> <C>
4.3.1. Prohibition of Certain Employment Contracts. . . . 23
4.3.2. Prohibition of Certain Loans. . . . . . . . . . . . 23
4.3.3. Prohibition of Certain Commitments. . . . . . . . . 23
4.3.4. Disposal of Assets. . . . . . . . . . . . . . . . . 23
4.3.5. Maintenance of Insurance. . . . . . . . . . . . . . 23
4.3.6. AIX Acquisition Proposals. . . . . . . . . . . . . 24
4.3.6.1. No Solicitation. . . . . . . . . . . . . 24
4.3.6.2. Acceptance of Superior AIX Transaction
Proposals . . . . . . . . . . . . . . . . . . . . . 25
4.3.7. No Amendment to Certificate of Incorporation, etc. 25
4.3.8. No Issuance, Sale, or Purchase of Securities. . . . 26
4.3.9. Prohibition on Dividends. . . . . . . . . . . . . . 26
4.3.10. Supplemental Financial Statements. . . . . . . . . 26
4.3.11. Notice of Material Developments. . . . . . . . . . 26
4.3.12. Stockholders' Meeting . . . . . . . . . . . . . . . 26
4.4. Additional Agreements of ITEQ. . . . . . . . . . . . . . . . 26
4.4.1. Prohibition of Certain Employment Contracts. . . . 26
4.4.2. Prohibition of Certain Loans. . . . . . . . . . . . 27
4.4.3. Prohibition of Certain Commitments. . . . . . . . . 27
4.4.4. Disposal of Assets. . . . . . . . . . . . . . . . . 27
4.4.5. Maintenance of Insurance. . . . . . . . . . . . . . 27
4.4.6. No Amendment to Certificate of Incorporation, etc. 27
4.4.7. No Issuance, Sale, or Purchase of Securities. . . . 27
4.4.8. Prohibition on Dividends. . . . . . . . . . . . . . 28
4.4.9. Stockholders' Meeting. . . . . . . . . . . . . . . 28
4.4.10. Issuance of ITEQ Common Stock. . . . . . . . . . . 28
4.4.11. Listing of ITEQ Stock. . . . . . . . . . . . . . . 28
4.4.12. Notice of Material Developments. . . . . . . . . . 28
4.4.13. Refinancing of Outstanding Indebtedness. . . . . . 28
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS . . . . . . . . 29
5.1. Conditions Precedent to Obligations of AIX. . . . . . . . . . 29
5.1.1. Representations and Warranties of ITEQ True at
Effective Date. . . . . . . . . . . . . . . . . . . 29
5.1.2. No Material Litigation. . . . . . . . . . . . . . . 29
5.1.3. Opinion of ITEQ Counsel. . . . . . . . . . . . . . 29
5.1.4. Stockholder Approval. . . . . . . . . . . . . . . . 30
5.1.5. Hart-Scott-Rodino, etc. . . . . . . . . . . . . . . 30
5.1.6. Registration; Listing of ITEQ Common Stock. . . . . 30
5.1.7. Consent of Certain Parties in Privity With ITEQ. . 30
5.1.8. Stock Options and Other Employee Benefit Plans of AIX . . . . 30
5.1.9. Ancillary Matters. . . . . . . . . . . . . . . . . 31
5.1.10. Tax Opinion . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
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<TABLE>
<S> <C> <C>
5.2. Conditions Precedent to Obligations of ITEQ . . . . . . . . . 31
5.2.1. Representations and Warranties of AIX True at
Effective Date. . . . . . . . . . . . . . . . . . . 31
5.2.2. No Material Litigation. . . . . . . . . . . . . . . 31
5.2.3. Opinion of AIX's Counsel. . . . . . . . . . . . . . 32
5.2.4. Stockholder Approval. . . . . . . . . . . . . . . . 32
5.2.5. Hart-Scott-Rodino, etc. . . . . . . . . . . . . . . 32
5.2.6. Consent of Certain Parties in Privity with AIX. . . 32
5.2.7. Ancillary Matters . . . . . . . . . . . . . . . . . 32
ARTICLE VI
TERMINATION AND ABANDONMENT . . . . . . . . . . 33
6.1. Termination. . . . . . . . . . . . . . . . . . . . . . . . . 33
6.1.1. By Mutual Consent. . . . . . . . . . . . . . . . . 33
6.1.2. By ITEQ Because of Conditions Precedent. . . . . . 33
6.1.3. By ITEQ Because of Material Adverse Change. . . . . 33
6.1.4. By AIX Because of Conditions Precedent. . . . . . . 33
6.1.5. By AIX Due to a Superior AIX Transaction Proposal. 33
6.1.6. By AIX Because of Material Adverse Change. . . . . 33
6.1.7. By ITEQ or AIX Because of Legal Proceedings. . . . 33
6.1.8. By ITEQ or AIX if Merger not Effective by November
30, 1997. . . . . . . . . . . . . . . . . . . . . . 34
6.1.9. By ITEQ or AIX if Merger Cannot be Accounted for
as a Pooling. . . . . . . . . . . . . . . . . . . . 34
6.2. Termination by Board of Directors. . . . . . . . . . . . . . 34
6.3. Effect of Termination. . . . . . . . . . . . . . . . . . . . 34
6.4. Waiver of Conditions. . . . . . . . . . . . . . . . . . . . . 34
6.5. Expense on Termination. . . . . . . . . . . . . . . . . . . . 34
ARTICLE VII
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . 34
7.1. Exchange of Options . . . . . . . . . . . . . . . . . . . . . 34
7.2. Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.2.1. Indemnification by ITEQ as to Proxy Statement . . . 35
7.2.2. Indemnification of Directors and Officers . . . . . 35
7.2.3. Indemnification Procedure . . . . . . . . . . . . . 35
7.2.4. Benefits . . . . . . . . . . . . . . . . . . . . . 36
7.3. Registration of Certain AIX Control Person Shares. . . . . . 36
7.3.1. Agreement to Register Resales . . . . . . . . . . . 36
7.3.2. Procedures . . . . . . . . . . . . . . . . . . . . 36
7.3.3. Registration Expenses . . . . . . . . . . . . . . . 36
7.3.4. Preparation; Reasonable Investigation . . . . . . . 37
7.3.5. Rights Non-Transferable . . . . . . . . . . . . . . 37
7.3.6. Indemnification by ITEQ . . . . . . . . . . . . . . 37
</TABLE>
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<TABLE>
<S> <C>
7.3.7. Notices of Claims, etc . . . . . . . . . . . . . . 38
7.3.8. Undertaking to File Reports and Cooperate in Rule
144 Transactions . . . . . . . . . . . . . . . . . 38
7.3.9. Beneficiaries . . . . . . . . . . . . . . . . . . . 38
7.4. Affiliate Agreements. . . . . . . . . . . . . . . . . . . . . 39
7.4.1. AIX Affiliates . . . . . . . . . . . . . . . . . . 39
7.4.2. ITEQ Affiliates . . . . . . . . . . . . . . . . . . 39
7.5. Publication of Combined Results . . . . . . . . . . . . . . . 39
ARTICLE VIII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.1. Entirety. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.2. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 39
8.3. Notices and Waivers. . . . . . . . . . . . . . . . . . . . . 39
8.4. Termination of Representations, Warranties, etc. . . . . . . 40
8.5. Table of Contents and Captions. . . . . . . . . . . . . . . . 40
8.6. Successors and Assigns. . . . . . . . . . . . . . . . . . . . 40
8.7. Severability. . . . . . . . . . . . . . . . . . . . . . . . . 40
8.8. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . 41
8.9. Public Announcements. . . . . . . . . . . . . . . . . . . . . 41
8.10. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . 41
APPENDICES
Amended and Restated Certificate of Incorporation of ITEQ . . App. I
Amended and Restated Bylaws of ITEQ . . . . . . . . . . . . . App. II
AIX Affiliate Agreement . . . . . . . . . . . . . . . . . . . App. III
ITEQ Affiliate Agreement . . . . . . . . . . . . . . . . . . App. IV
</TABLE>
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PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER ("Agreement"), dated as of June 30, 1997,
by and between ITEQ, Inc., a Delaware corporation ("ITEQ" or the "Surviving
Corporation"), and Astrotech International Corporation, a Delaware corporation
("AIX"). ITEQ and AIX are hereinafter collectively referred to as the "Merging
Corporations."
W I T N E S S E T H:
WHEREAS, ITEQ is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at 1013 Centre
Road, Wilmington, Delaware 19805 and its principal executive office at 2727
Allen Parkway, Suite 760, Houston, Texas 77019;
WHEREAS, the authorized capital stock of ITEQ consists of 1,000,000
shares of preferred stock, par value $.01 per share, of which at June 30, 1997,
no shares were issued or outstanding; and 30,000,000 shares of common stock,
par value $.001 per share ("ITEQ Common Stock"), of which at June 30, 1997,
16,966,231 shares were issued and outstanding; 1,052,325 shares were reserved
for issuance in conjunction with options outstanding under various ITEQ benefit
plans and another 1,927,221 shares were reserved for issuance upon exercise of
outstanding warrants; at the same date, 791 shares of Common Stock were held in
ITEQ's treasury;
WHEREAS, AIX is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at 1209 Orange
Street, Wilmington, Delaware 19801 and its principal executive office at 960
Penn Avenue, Suite 800, Pittsburgh, Pennsylvania 15222;
WHEREAS, the authorized capital stock of AIX consists of 20,000,000
shares of common stock, par value $.01 per share (the "AIX Common Stock"), of
which at June 30, 1997, 9,962,920 shares were issued and outstanding, and an
additional 832,832 shares were reserved for issuance in conjunction with
various employee benefit plans; at the same date, no shares were held in AIX's
treasury; and
WHEREAS, the respective boards of directors of ITEQ and AIX deem it
desirable and in the best interests of their respective corporations and their
respective stockholders that AIX be merged into ITEQ, pursuant to the
provisions of Section 251 of the General Corporation Law of the State of
Delaware ("DGCL"), in exchange for the consideration herein provided for, and
have proposed, declared advisable, and approved such merger pursuant to this
Plan and Agreement of Merger (the "Agreement"), which Agreement has been duly
approved by resolutions of the respective boards of directors of ITEQ and AIX;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and in order to set forth the terms
and conditions of the merger, the mode of carrying the same into effect, the
manner and basis of converting the presently outstanding shares of AIX Common
Stock into shares of ITEQ Common Stock, and such other details and provisions
as are deemed necessary or proper, the parties hereto agree as follows:
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ARTICLE I
MERGER
1.1. Surviving Corporation. Subject to the adoption and approval of
this Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, ITEQ and AIX
shall be, upon the Effective Date of the merger (as defined in Section 1.3
hereof), merged into a single surviving corporation, which shall be ITEQ, one
of the Merging Corporations, which shall continue its corporate existence and
remain a Delaware corporation governed by and subject to the laws of that
state.
1.2. Stockholder Approval. This Agreement shall be submitted for
adoption and approval by the stockholders of each of the Merging Corporations
in accordance with their respective certificates of incorporation and the
applicable laws of the State of Delaware, at separate meetings called and held
for such purpose.
1.3. Effective Date. The merger shall become effective upon the
filing by ITEQ of a Certificate of Merger with the Secretary of State of the
State of Delaware in accordance with Section 251(c) of the DGCL. The date upon
which the merger shall become effective is referred to in this Agreement as the
"Effective Date."
1.4. Name and Continued Corporate Existence of Surviving Corporation
1.4.1. Name and Existence. On the Effective Date, the
Certificate of Incorporation of ITEQ, the corporation whose corporate
existence is to survive the merger and continue thereafter as the
surviving corporation, shall be amended and restated in its entirety
[reference to omitted appendix] (the "Restated Certificate of
Incorporation"). In all other respects the identity, existence,
purposes, powers, objects, franchises, rights, and immunities of ITEQ,
the surviving corporation of the merger, shall continue unaffected and
unimpaired by the merger, and the corporate identity, existence,
purposes, powers, objects, franchises, rights, and immunities of AIX
shall be wholly merged into ITEQ, the Surviving Corporation, and ITEQ
shall be fully vested therewith. Accordingly, on the Effective Date,
the separate existence of AIX, except insofar as continued by statute,
shall cease.
1.4.2. Federal Income Tax Treatment of Merger. The merger is
intended to qualify as and, subject to the requirements of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), shall be characterized as a tax-free merger transaction
described in Section 368(a)(1)(A) of the Code.
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1.5. Governing Law and Certificate of Incorporation of Surviving
Corporation. The laws of Delaware shall continue to govern the Surviving
Corporation. On the Effective Date, the Restated Certificate of Incorporation
shall be the certificate of incorporation of ITEQ until further amended in the
manner provided by law.
1.6. Bylaws of Surviving Corporation. Effective as of the Effective
Date, the bylaws of ITEQ shall be amended and restated in their entirety
[reference to omitted appendix] (the "Restated Bylaws"), and the Restated
Bylaws shall be the bylaws of the Surviving Corporation until altered, amended,
or repealed, or until new bylaws shall be adopted in accordance with the
provisions of law, the Restated Certificate of Incorporation and the Restated
Bylaws.
1.7. Directors of Surviving Corporation
1.7.1. Directors of Surviving Corporation. The names and
addresses of the persons who, upon the Effective Date, shall constitute
the board of directors of the Surviving Corporation, and who shall hold
office until the first annual meeting of stockholders of the Surviving
Corporation next following the Effective Date, are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Thomas N. Amonett 515 Post Oak Boulevard
Houston, Texas 77027
Nathan M. Avery 4900 Woodway
Houston, Texas 77056
Mark E. Johnson, Chairman 2727 Allen Parkway
Houston, Texas 77019
Lawrance W. McAfee 2727 Allen Parkway
Houston, Texas 77019
Pierre S. Melcher 2727 Allen Parkway
Houston, Texas 77019
T. William Porter 700 Louisiana Street
Houston, Texas 77002
James L. Rainey 4009 Birdneck
Edmond, Oklahoma 73003
James A. Read Manfield House
One Southampton Street
London WC2R OLR
England
S. Kent Rockwell 960 Penn Avenue, Suite 800
Pittsburgh, Pennsylvania 15222
</TABLE>
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1.7.2. Vacancies. On or after the Effective Date, if a vacancy
shall exist for any reason in the board of directors of the Surviving
Corporation, such vacancy shall be filled in the manner provided in the
Restated Certificate of Incorporation and/or Restated Bylaws of the
Surviving Corporation.
1.8. Capital Stock of Surviving Corporation. The authorized number of
shares of capital stock of the Surviving Corporation, and the par value,
designations, preferences, rights, and limitations thereof, and the express
terms thereof, shall be as set forth in the Restated Certificate of
Incorporation.
1.9. Conversion of Securities upon Merger
1.9.1. General. The manner and basis of converting the issued
and outstanding shares of the capital stock of AIX into shares of the
capital stock of ITEQ shall be as hereinafter set forth in this Section
1.9.
1.9.2. Conversion of AIX Common Stock. On the Effective Date,
each share of AIX Common Stock then issued and outstanding, without any
action on the part of the holders thereof, shall automatically become
and be converted into the right to receive certificates evidencing 0.93
of a fully paid and nonassessable share of issued and outstanding ITEQ
Common Stock (the "ITEQ Shares") upon surrender, in accordance with
Paragraph 1.9.3 hereof, of certificates theretofore evidencing shares of
AIX Common Stock. The ITEQ Shares are hereinafter referred to
collectively as the "Merger Consideration."
1.9.3. Exchange of AIX Common Stock Certificates. Commencing on
the Effective Date, each holder of an outstanding certificate or
certificates theretofore representing shares of AIX Common Stock may
surrender the same to an exchange agent designated by ITEQ, and such
holder shall be entitled upon such surrender to receive in exchange
therefor a certificate or certificates representing the number of whole
ITEQ Shares into which the shares of AIX Common Stock theretofore
represented by the certificate or certificates so surrendered shall have
been converted as aforesaid. However, before surrender, each
outstanding certificate representing issued and outstanding AIX Common
Stock shall be deemed, for all purposes, only to evidence ownership of
the number of whole ITEQ Shares into which such shares have been so
converted. Unless and until such outstanding certificates formerly
representing AIX Common Stock are so surrendered, no dividend payable to
holders of record of ITEQ Common Stock as of any date after the
Effective Date shall be paid to the holders of such outstanding
certificates in respect thereof. Upon surrender of such outstanding
certificates, however, there shall be paid to the holders of the
certificates of ITEQ Shares issued in partial exchange therefor the
amount of dividends, if any, which theretofore (but after the Effective
Date) became payable with respect to such full ITEQ Shares. No interest
shall be payable with respect to the payment of such dividends on
surrender of outstanding certificates. The holder of fractional share
interests, as such, shall
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<PAGE> 162
not be entitled to any dividends or to any distribution in the event of
liquidation or to any voting or other privileges of a stockholder of
ITEQ.
1.9.4. ITEQ Fractional Shares. No certificates for fractional
share interests of ITEQ Common Stock will be issued, but, in lieu
thereof, ITEQ will settle all such fractional share interests in cash on
the basis of the closing price for ITEQ Common Stock on the Nasdaq
National Market (as reported in The Wall Street Journal) on the last
trading day before the Effective Date.
1.9.5. AIX's Transfer Books Closed. Upon the Effective Date, the
stock transfer books of AIX shall be deemed closed, and no transfer of
any certificates theretofore representing shares of AIX shall thereafter
be made or consummated.
1.10. Treatment of Stock Options. On the Effective Date, each of the
then outstanding options to purchase AIX Common Stock (collectively, the "AIX
Options")(which includes all outstanding options granted under AIX's stock
option plans (the "AIX Option Plans")) will and without any further action on
the part of any holder thereof (herein, an "optionholder"), be exchanged for an
option to purchase that number of shares of ITEQ Common Stock determined by
multiplying the number of shares of AIX Common Stock subject to such AIX Option
at the Effective Date by 0.93, at an exercise price per share of ITEQ Common
Stock equal to the exercise price per share of such AIX Option divided by 0.93.
If the foregoing calculation results in an exchanged AIX Option being
exercisable for a fraction of a share of ITEQ Common Stock, then the number of
shares of ITEQ Common Stock subject to such option will be rounded down to the
nearest whole number of shares, and the total exercise price for the option
will be reduced by the exercise price of the fractional share. The term,
exerciseability, vesting schedule, and all other terms and conditions of the
AIX Options will otherwise be unchanged by the provisions of this Section 1.10
and shall operate in accordance with their terms. All shares of ITEQ Common
Stock issued upon exercise of the exchanged AIX Options shall be registered
under an effective Form S-8 Registration Statement (or other comparable form)
filed with the Securities and Exchange Commission (the "Commission").
1.11. Assets and Liabilities
1.11.1. Assets and Liabilities of Merging Corporations Become
Those of Surviving Corporation. On the Effective Date, all rights,
privileges, powers, immunities, and franchises of each of the Merging
Corporations, both of a public and private nature, and all property,
real, personal, and mixed, and all debts due on whatever account, as
well as stock subscriptions and all other choses or things in action,
and all and every other interest of or belonging to or due to either of
the Merging Corporations, shall be taken by and shall be vested in the
Surviving Corporation without further act or deed, and all such rights,
privileges, powers, immunities, and franchises, property, debts, choses
or things in action, and all and every other interest of each of the
Merging Corporations shall be thereafter as effectually the property of
the Surviving Corporation as they were of the respective Merging
Corporations, and the title to any real or other property, or any
interest therein, whether
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vested by deed or otherwise, in either of the Merging Corporations,
shall not revert or be in any way impaired by reason of the merger,
provided, however, that all rights of creditors and all liens upon any
properties of each of the Merging Corporations shall be preserved
unimpaired, and all debts, liabilities, restrictions, obligations, and
duties of the respective Merging Corporations, including without
limitation all obligations, liabilities and duties as lessee under any
existing lease, shall thenceforth attach to the Surviving Corporation
and may be enforced against and by it to the same extent as if such
debts, liabilities, duties, restrictions and obligations had been
incurred or contracted by it. Any action or proceeding pending by or
against either of the Merging Corporations may be prosecuted to judgment
as if the merger had not taken place, or the Surviving Corporation may
be substituted in place of either of the Merging Corporations.
1.11.2. Conveyances to Surviving Corporation. The Merging
Corporations hereby agree, respectively, that from time to time, as and
when requested by the Surviving Corporation, or by its successors and
assigns, they will execute and deliver or cause to be executed and
delivered, all such deeds, conveyances, assignments, permits, licenses
and other instruments, and will take or cause to be taken such further
or other action as the Surviving Corporation, its successors or assigns,
may deem necessary or desirable to vest or perfect in or confirm to the
Surviving Corporation, its successors and assigns, title to and
possession of all the property, rights, privileges, powers, immunities,
franchises, and interests referred to in this Paragraph 1.11.2 and
otherwise carry out the intent and purposes of this Agreement.
1.11.3. Accounting Treatment. The assets and liabilities of the
Merging Corporations shall be taken up on the books of the Surviving
Corporation in accordance with generally accepted accounting principles,
and the capital surplus and retained earnings accounts of the Surviving
Corporation shall be determined, in accordance with generally accepted
accounting principles, by the board of directors of the Surviving
Corporation. Nothing herein shall prevent the board of directors of the
Surviving Corporation from making any future changes in its accounts in
accordance with law.
1.11.4. Unclaimed Merger Consideration; No Escheat. Subject to
any contrary provision of governing law, all consideration deposited
with the exchange agent or held by ITEQ for the payment of the
consideration into which the outstanding shares of AIX Common Stock
shall have been converted, and remaining unclaimed for one year after
the Effective Date, shall be paid or delivered to ITEQ; and the holder
of any unexchanged certificate or certificates which before the
Effective Date represented shares of AIX Common Stock shall thereafter
look only to ITEQ for exchange or payment thereof upon surrender of such
certificate or certificates to ITEQ.
1.11.5. Dissenting Stockholders of AIX. AIX (or ITEQ on behalf
of AIX) agrees that, if the merger contemplated hereby becomes
effective, it will promptly pay to any dissenting stockholder of AIX the
amount, if any, to which such holder is entitled under the provisions
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<PAGE> 164
of Section 262 of the DGCL, provided such dissenter acts in strict
compliance with such provisions.
1.12. Material Adverse Effect. "Material Adverse Effect" or "Material
Adverse Change" means any effect, change, event, circumstance or condition
which when considered with all other effects, changes, events, circumstances or
conditions would reasonably be expected to result in a "loss" having the effect
of adversely affecting the business, results of operations, or financial
prospects of ITEQ or AIX, in each case including its respective subsidiaries
together with it taken as a whole, as the case may be, so that the benefits
reasonably expected to be obtained by the other party to the merger
contemplated by this Agreement more likely than not would be jeopardized. In
no event shall any of the following constitute a Material Adverse Effect or a
Material Adverse Change: (i) a change in the trading prices of either of ITEQ's
or AIX's equity securities between the date hereof and the Effective Date, in
and of itself; (ii) effects, changes, events, circumstances or conditions
generally affecting the industry in which either ITEQ or AIX operate or arising
from changes in general business or economic conditions; (iii) effects,
changes, events, circumstances or conditions directly attributable to (a) out-
of-pocket fees and expenses (including without limitation legal, accounting,
investigatory, investment banking, and other fees and expenses) incurred in
connection with the transactions contemplated by this Agreement, or (b) the
payment by ITEQ or AIX of all amounts due to any officers or employees of AIX
under employment contracts, non-competition agreements, employee benefit plans
or severance arrangements; (iv) any effects, changes, events, circumstances or
conditions resulting from any change in law or generally accepted accounting
principles, which affect generally entities such as ITEQ and AIX; and (v) any
effect resulting from compliance by ITEQ or AIX with the terms of this
Agreement. For purposes of this subparagraph, the term "loss" shall mean any
and all direct or indirect payments, obligations, assessments, losses, loss of
income, liabilities, fines, penalties, costs and expenses paid or incurred or
more likely than not to be paid or incurred, or diminutions in value of any
kind or character (whether known or unknown, conditional or unconditional,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise) that are more likely than not to occur,
including without limitation penalties, interest on any amount payable to a
third party as a result of the foregoing and any legal or other expenses
reasonably incurred or more likely than not to be incurred in connection with
investigating or defending any demands, claims, actions or causes of action
that, if adversely determined, would likely result in losses, and all amounts
paid in settlement of claims or actions; provided, however, that losses shall
be net of any insurance proceeds entitled to be received from a nonaffiliated
insurance company on account of such losses (after taking into account any
costs incurred in obtaining such proceeds and any increase in insurance
premiums as a result of a claim with respect to such proceeds).
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF AIX
2.1. Representations and Warranties of AIX. AIX represents and
warrants as follows:
2.1.1. Organization and Standing. AIX is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and
operate the properties currently owned and operated by it, and is duly
qualified or licensed to do business and is in good standing as a
foreign corporation authorized to do business in all jurisdictions in
which the character of the properties owned or the nature of the
business conducted by it would make such qualification or licensing
necessary, except where the failure to be so qualified or licensed could
not reasonably be expected to have a Material Adverse Effect on AIX.
2.1.2. Agreement Authorized and its Effect on Other Obligations.
Upon approval of this Agreement by the stockholders of AIX, the
consummation of the transactions contemplated hereby will have been duly
and validly authorized by all necessary corporate action on the part of
AIX, and this Agreement will be a valid and binding obligation of AIX
enforceable against AIX (subject to normal equitable principles) in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws
affecting the rights of creditors generally. At the Effective Date, and
except as specified in Schedule 2.1.2 [omitted], the consummation of the
merger contemplated by this Agreement will not conflict with or result
in a violation or breach of any term or provision of, nor constitute a
default under (i) the certificate of incorporation or bylaws of AIX or
(ii) any obligation, indenture, mortgage, deed of trust, lease, contract
or other agreement to which AIX or any of its subsidiaries is a party or
by which any of them or their properties are bound, other than such
violations, breaches or defaults as could not reasonably be expected to
have a Material Adverse Effect on AIX.
2.1.3. Capitalization. The authorized capitalization of AIX
consists of 20,000,000 shares of common stock, par value $.01 per share
(the "AIX Common Stock"), of which at June 30, 1997, 9,962,920 shares
were issued and outstanding, and an additional 832,832 shares were
reserved for issuance in conjunction with various employee benefit
plans; at the same date, no shares were held in AIX's treasury.
2.1.4. Subsidiaries. Schedule 2.1.4 [omitted] lists the
subsidiary corporations of AIX existing at June 30, 1997, and shows as
to each of such subsidiary corporations the percentage of the total
outstanding stock thereof which is owned by AIX. Except as specified in
Schedule 2.1.4 [omitted], all outstanding shares of stock of the
subsidiary corporations owned by AIX are validly issued, fully paid, and
nonassessable, and AIX has
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good and marketable title thereto free and clear of any mortgage,
pledge, lien, charge, security interest, option, right of first refusal,
preferential purchase right, defect, encumbrance or other right or
interest of any other person (collectively, an "Encumbrance"). Each
such subsidiary is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction under which it is
incorporated and has full requisite corporate power and authority to own
its property and carry on its business as presently conducted by it and
is, or on the Effective Date will be, duly qualified or licensed to do
business and is, or on the Effective Date will be, in good standing as a
foreign corporation authorized to do business in all jurisdictions in
which the character of the properties owned or the nature of the
business conducted makes such qualification or licensing necessary,
except where the failure to be so qualified or licensed could not
reasonably be expected to have a Material Adverse Effect on AIX. As
hereinafter used in this Article II, the term "AIX" also includes any
and all of its directly and indirectly held subsidiaries, except where
the context indicates to the contrary.
2.1.5. Reports and Financial Statements. AIX has previously
furnished to ITEQ true and complete copies of (a) all annual reports
filed with the Commission pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), since September 30, 1994, (b)
AIX's quarterly and other reports filed with the Commission since
September 30, 1994, (c) all definitive proxy solicitation materials
filed with the Commission since September 30, 1994, and (d) any
registration statements declared effective by the Commission since
September 30, 1994. The consolidated financial statements of AIX and
its subsidiaries included in AIX's most recent report on Form 10-K and
most recent report on Form 10-Q, and any other reports filed with the
Commission by AIX under the Exchange Act (collectively, the "AIX
Reports") were, or (if filed after the date hereof) will be, prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved and fairly present, or will
present, the consolidated financial position for AIX and its
subsidiaries as of the dates thereof and the consolidated results of
their operations and changes in financial position for the periods then
ended (except with respect to interim period financial statements, for
normal year-end adjustments which are not material); and the AIX Reports
did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading. Since September 30, 1994, AIX has
filed with the Commission all reports required to be filed by AIX under
the Exchange Act and the rules and regulations of the Commission.
2.1.6. Liabilities. AIX does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which could
reasonably be expected to have a Material Adverse Effect on AIX, other
than those (i) disclosed in the AIX Reports or (ii) set forth on
Schedule 2.1.6 hereto [omitted].
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2.1.7. Additional AIX Information. Attached as Schedule 2.1.7
[omitted] are true, complete and correct lists of the following items
(which will be periodically updated by AIX and delivered to ITEQ through
the Effective Date), and AIX agrees that upon the request of ITEQ, it
will furnish to ITEQ true, complete and correct copies of any documents
referred to in such lists:
2.1.7.1. Employee Compensation Plans. All bonus,
incentive compensation, stock option, deferred compensation,
profit-sharing, retirement, pension, welfare, group insurance,
death benefit, or other fringe benefit plans, arrangements or
trust agreements covering active, former or retired employees of
AIX (collectively, "AIX Plans"), together with copies of the most
recent reports with respect to such plans, arrangements, or trust
agreements filed with any governmental agency and all Internal
Revenue Service determination letters that have been received
with respect to such plans;
2.1.7.2. Certain Salaries. The names and salary rates of
all present officers and employees of AIX whose current regular
annual salary rate is $50,000 or more, together with any bonuses
paid or payable to such persons for the fiscal year ended
September 30, 1996, or since that date, and, to the extent
existing on the date of this Agreement, all arrangements with
respect to any bonuses to be paid to them from and after the date
of this Agreement;
2.1.7.3. Employee Agreements. Any collective bargaining
agreements of AIX with any labor union or other representative of
employees, including amendments, supplements, and understandings,
and all employment and consulting agreements of AIX;
2.1.7.4. Guaranties. All third party indebtedness,
liabilities and commitments of others as to which AIX 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;
2.1.7.5. Environmental. All environmental orders and
decrees material to current operations conducted by AIX and all
environmental audits, assessments, investigations and reviews
conducted within the last five years on any property owned or
used by AIX.
Schedule 2.1.7 [omitted] shall be true, complete and correct as
of the Effective Date.
2.1.8. No Undisclosed Defaults. Except as may be specified in
the AIX Reports or Schedule 2.1.8 [omitted], AIX is not a party to, or
bound by, any material contract or arrangement of any kind to be
performed after the Effective Date, nor is AIX in default in
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any material obligation or covenant on their part to be performed under
any material obligation, lease, contract, order, plan or other
arrangement except as identified in Schedule 2.1.8 [omitted].
2.1.9. Absence of Certain Changes and Events. Except as set
forth in Schedule 2.1.9 hereto [omitted], other than as a result of the
transactions contemplated by this Agreement, since March 31, 1997, there
has not been:
2.1.9.1. Financial Change. Any adverse change in the
financial condition, backlog, operations, assets, liabilities or
business of AIX which could reasonably be expected to have a
Material Adverse Effect on AIX;
2.1.9.2. Property Damage. Any damage, destruction, or
loss to the business or properties of AIX (whether or not covered
by insurance) that could reasonably be expected to have a
Material Adverse Effect on AIX;
2.1.9.3. Dividends. Any declaration, setting aside, or
payment of any dividend or other distribution in respect of the
common stock of AIX, or any direct or indirect redemption,
purchase or any other acquisition by AIX of any such stock;
2.1.9.4. Capitalization Change. Any change in the
capital stock or in the number of shares or classes of AIX's
authorized or outstanding capital stock as described in Paragraph
2.1.3;
2.1.9.5. Labor Disputes. Any labor dispute (other than
routine grievances); or
2.1.9.6. Other Material Changes. Any other event or
condition known to AIX particularly pertaining to and adversely
affecting the operations, assets or business of AIX (other than
events or conditions which are of a general or industry-wide
nature and of general public knowledge) which could reasonably be
expected to have a Material Adverse Effect on AIX.
2.1.10. Taxes. Except as set forth in Schedule 2.1.10
[omitted], and except with respect to failures which, in the aggregate,
could not reasonably be expected to have a Material Adverse Effect on
AIX, proper and accurate Federal, state and local income, value added,
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 AIX for each period for which any
returns, reports, or estimates were due (taking into account any
extensions of time to file before the date hereof); all taxes shown by
such returns to be payable and any other taxes due and payable have been
paid other than those being contested in good faith by AIX; and the tax
provision reflected in AIX's most recent balance sheet included in the
AIX Reports is
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adequate, in accordance with generally accepted accounting principles,
to cover liabilities of AIX at the date thereof for all taxes, including
any interest, penalties and additions to taxes of any character
whatsoever applicable to AIX or its assets or business. Except as set
forth on Schedule 2.1.10 [omitted], no waiver of any statute of
limitations executed by AIX with respect to federal or state income or
other tax is in effect for any period. The Federal income tax returns
of AIX have never been examined by the Internal Revenue Service. There
are no tax liens on any assets of AIX except for taxes not yet currently
due and those which could not reasonably be expected to have a Material
Adverse Effect on AIX.
2.1.11. Intellectual Property. Except as set forth in Schedule
2.1.11 [omitted], AIX owns or possesses licenses to use all patents,
patent applications, trademarks and service marks (including
registrations and applications therefor), trade names, copyrights and
written know-how, trade secrets and all other similar proprietary data
and the goodwill associated therewith (collectively, the "Intellectual
Property") that are either material to the business of AIX or that are
necessary for the manufacture, use or sale of any products manufactured,
used or sold by AIX. The AIX Intellectual Property is owned or licensed
by AIX free and clear of any Encumbrance other than such Encumbrances as
are listed in Schedule 2.1.11 [omitted]. Except as otherwise indicated
in such Schedule, AIX has not granted to any other person any license to
use any Intellectual Property. AIX has not received any notice of
infringement, misappropriation, or conflict with, the intellectual
property rights of others in connection with the use by AIX of the AIX
Intellectual Property.
2.1.12. Title to Properties. With minor exceptions which in the
aggregate are not material, and except for merchandise and other
property sold, used or otherwise disposed of in the ordinary course of
business for fair value, AIX has good and marketable title to all its
properties, interests in properties and assets, real and personal,
reflected in the most recent balance sheet of AIX included in the AIX
Reports, free and clear of any Encumbrance of any nature whatsoever,
except (i) liens and Encumbrances reflected in the most recent balance
sheet of AIX included in the AIX Reports, (ii) liens for current taxes
not yet due and payable, and (iii) such imperfections of title,
easements and Encumbrances, if any, as are not substantial in character,
amount, or extent and do not and will not materially detract from the
value, or interfere with the present use, of the property subject
thereto or affected thereby, or otherwise materially impair business
operations. All leases pursuant to which AIX leases (whether as lessee
or lessor) any substantial amount of real or personal property are in
good standing, valid, and effective; and there is not, under any such
leases, any existing or prospective default or event of default or event
which with notice or lapse of time, or both, would constitute a default
by AIX and in respect to which AIX has not taken adequate steps to
prevent a default from occurring. The buildings and premises of AIX
that are used in its business are in good operating condition and
repair, subject only to ordinary wear and tear. All major items of
equipment of AIX are in good operating condition and in a state of
reasonable maintenance and repair, ordinary wear and tear excepted, and
are free from any known defects except as may be repaired by routine
maintenance and such minor defects as
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do not substantially interfere with the continued use thereof in the
conduct of normal operations.
2.1.13. Litigation. Except to the extent set forth in the AIX
Reports or in Schedule 2.1.13 [omitted], there is no suit, action, or
legal, administrative, arbitration, or other proceeding or governmental
investigation pending to which AIX is a party or, to the knowledge of
AIX, might become a party or which particularly affects AIX, nor is any
change in the zoning or building ordinances directly affecting the real
property or leasehold interests of AIX, pending or, to the knowledge of
AIX, threatened.
2.1.14. Environmental Compliance. Except as set forth in
Schedule 2.1.14 [omitted];
2.1.14.1. Environmental Conditions. There are no
environmental conditions or circumstances, such as the presence
or release of any hazardous substance, on any real property owned
by AIX that could reasonably be expected to have a Material
Adverse Effect on AIX.
2.1.14.2. Permits, etc. AIX has in full force and
effect all environmental permits, licenses, approvals and other
authorizations required to conduct its operations and is
operating in material compliance thereunder.
2.1.14.3. Compliance. AIX's operations and use of its
assets do not violate any applicable federal, state or local law,
statute, ordinance, rule, regulation, order or notice requirement
pertaining to (a) the condition or protection of air,
groundwater, surface water, soil, or other environmental media,
(b) the environment, including natural resources or any activity
which affects the environment, or (c) the regulation of any
pollutants, contaminants, waste, substances (whether or not
hazardous or toxic), including, without limitation, the
Comprehensive Environmental Response Compensation and Liability
Act (42 U.S.C. Section 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. Section 1609
et seq.), the Clean Water Act (33 U.S.C. 1251 et seq.), the
Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic
Substances Control Act (17 U.S.C. Section 2601 et seq.), the
Safe Drinking Water Act (42 U.S.C. Section 201 and Section 300f
et seq.), the Rivers and Harbors Act (33 U.S.C. Section 401 et
seq.), the Oil Pollution Act (33 U.S.C. Section 2701 et seq.)
and analogous state and local provisions, as any of the foregoing
may have been amended or supplemented from time to time
(collectively the "Applicable Environmental Laws"), except for
violations which, either singly or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on AIX.
2.1.14.4. Environmental Claims. No notice has been
served on AIX from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or
inquiry related to alleged violations under any Applicable
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Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental
Laws, other than any of the foregoing which, either singly or in
the aggregate, could not reasonably be expected to have a
Material Adverse Effect on AIX.
2.1.14.5. Renewals. AIX does not know of any reason
ITEQ would not be able to renew any of the permits, licenses, or
other authorizations required pursuant to any Applicable
Environmental Laws to operate and use any of AIX's assets for
their current purposes and uses.
2.1.15. Compliance with Other Laws. Except as set forth in the
AIX Reports or in Schedule 2.1.15 [omitted], AIX is not in violation of
or in default with respect to, or in alleged violation of or alleged
default with respect to, the Occupational Safety and Health Act (29
U.S.C. Section 651 et seq.) as amended ("OSHA"), or any other applicable
law or any applicable rule, regulation, or any writ or decree of any
court or any governmental commission, board, bureau, agency, or
instrumentality, or delinquent with respect to any report required to be
filed with any governmental commission, board, bureau, agency or
instrumentality, except for violations which, either singly or in the
aggregate, could not reasonably be expected to have a Material Adverse
Effect on AIX.
2.1.16. Finder's Fee. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on
by AIX and its counsel directly with ITEQ and its counsel, without the
intervention of any other person as the result of any act of AIX, and so
far as is known to AIX, without the intervention of any other person in
such manner as to give rise to any valid claim against any of the
parties hereto for a brokerage commission, finder's fee or any similar
payments, other than financial advisory fees to be paid (i) by ITEQ to
Simmons & Company International, Inc. ("Simmons") and Deutsche Morgan
Grenfell ("DMG") in connection with the transaction (including the
rendition of a fairness opinion to ITEQ) and (ii) by AIX to Rauscher
Pierce Refsnes, Inc. ("RPR") under financial arrangements approved in
advance by ITEQ for the rendition of a fairness opinion to AIX in
connection with the merger contemplated by this Agreement.
2.1.17. Compliance with ERISA. AIX has made available to ITEQ a
copy of each AIX Plan, any related trust agreement and annuity or
insurance contract, if any, and each plan's most recent annual report
filed with the Internal Revenue Service, if any, and: (i) each AIX Plan
has been maintained and administered in material compliance with its
terms and with the requirements prescribed by any and all applicable
statutes, orders, rules and regulations, and is, to the extent required
by applicable law or contract, fully funded without having any deficit
or unfunded actuarial liability; (ii) all required employer
contributions under any such plans have been made and the applicable
funds have been funded in accordance with the terms thereof and no past
service funding liabilities exist thereunder; (iii) each AIX Plan that
is required or intended to be qualified under applicable law or
registered or approved by a governmental agency or authority has been so
qualified, registered or
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approved by the appropriate governmental agency or authority, and
nothing has occurred since the date of the last qualification,
registration or approval to materially and adversely affect, or cause,
the appropriate governmental agency or authority to revoke such
qualification, registration or approval; (iv) to the extent applicable,
the AIX Plans comply, in all material respects, with the requirements of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code, and any AIX Plan intended to be qualified under
Section 401(a) of the Code has been determined by the Internal Revenue
Service to be so qualified and nothing has occurred to cause the loss of
such qualified status; (v) no AIX Plan is covered by Title IV of ERISA
or Section 412 of the Code; (vi) there are no pending or anticipated
material claims against or otherwise involving any of the AIX Plans and
no suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of AIX Plan activities) has been brought
against or with respect to any AIX Plan; (vii) all material
contributions, reserves or premium payments, required to be made as of
the date hereof to the AIX Plans have been made or provided for; (viii)
AIX has not incurred any liability under subtitle C or D of Title IV of
ERISA with respect to any "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by AIX or
any entity which is considered one employer with AIX under Section 4001
of ERISA; (ix) AIX has not incurred any withdrawal liability under
Subtitle E of Title IV of ERISA with respect to any "multiemployer
plan," within the meaning of Section 4001(a)(3) of ERISA; and (x) AIX
has no obligations for retiree health and life benefits under any AIX
Plan, except as set forth on Schedule 2.1.17 [omitted], and there are no
restrictions on the rights of AIX to amend or terminate any such AIX
Plan without incurring any liability thereunder.
2.1.18. Investigations; Litigation. Except as required
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1978 and
the rules and regulations promulgated thereunder (collectively, "HSR")
and any applicable comparable foreign laws and regulations, (i) no
investigation or review by any governmental entity with respect to AIX
or any of the transactions contemplated by this Agreement is pending or,
to the best of AIX's knowledge, threatened, nor has any governmental
entity indicated to AIX an intention to conduct the same, and (ii) there
is no action, suit or proceeding pending or, to the best of AIX's
knowledge, threatened against or affecting AIX at law or in equity, or
before any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, which either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on AIX.
2.1.19. Product Warranty. There are no existing liabilities or,
to the knowledge of AIX, potential liabilities, arising from claims
regarding the performance or design of the products and services sold by
AIX either in the past or at present that in the aggregate could
reasonably be expected to have a Material Adverse Effect on AIX.
2.1.20. Information for Proxy Statement. All information and
data (including financial statements) concerning AIX which is or will be
included in the registration
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statement and proxy statement (collectively, the "Proxy Statement")
issued in connection with the transactions contemplated by this
Agreement will be furnished by AIX for inclusion therein and will not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained
therein not misleading.
2.1.21. Investment Company. AIX is not an "investment company,"
or an "affiliated person of" or "promoter" or "principal underwriter" of
an investment company, as those terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ITEQ
3.1. Representations and Warranties of ITEQ. ITEQ represents and
warrants as follows:
3.1.1. Organization and Standing. ITEQ is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and
operate the properties currently owned and operated by it, and is duly
qualified or licensed to do business and is in good standing as a
foreign corporation authorized to do business in all jurisdictions in
which the character of the properties owned or the nature of the
business conducted by it would make such qualification or licensing
necessary, except where the failure to be so qualified or licensed could
not reasonably be expected to have a Material Adverse Effect on ITEQ.
3.1.2. Agreement Authorized and its Effect on Other Obligations.
Upon approval of this Agreement by the stockholders of ITEQ, the
consummation of the transactions contemplated hereby will have been duly
and validly authorized by all necessary corporate action on the part of
ITEQ, and this Agreement will be a valid and binding obligation of ITEQ
enforceable against ITEQ (subject to normal equitable principles) in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws
affecting the rights of creditors generally. At the Effective Date and
except as specified in Schedule 3.1.2 [omitted], the consummation of the
merger contemplated by this Agreement will not conflict with or result
in a violation or breach of any term or provision of, nor constitute a
default under (i) the certificate of incorporation or bylaws of ITEQ or
(ii) any obligation, indenture, mortgage, deed of trust, lease, contract
or other agreement to which ITEQ or any of its subsidiaries is a party
or by which any of them or their properties are bound, other than such
violations, breaches or defaults as could not reasonably be expected to
have Material Adverse Effect on ITEQ.
3.1.3. Capitalization. The capitalization of ITEQ consists of
1,000,000 shares of preferred stock, par value $.01 per share, of which
at June 30, 1997 no shares were issued
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or outstanding; and 30,000,000 shares of ITEQ Common Stock, par value
$.001 per share, of which at June 30, 1997, 16,966,231 shares were
issued and outstanding, 1,052,325 shares were reserved for issuance in
connection with options outstanding under various ITEQ benefit plans and
another 1,927,221 shares were reserved for issuance upon exercise of
outstanding warrants; at the same date, 791 shares of ITEQ Common Stock
were held in ITEQ's treasury.
3.1.4. Subsidiaries. All outstanding shares of stock of the
subsidiary corporations owned by ITEQ are validly issued, fully paid,
and nonassessable, ITEQ has good and marketable title thereto free and
clear of any Encumbrance, except as specified in Schedule 3.1.4
[omitted], and ITEQ owns all outstanding shares of stock of said
subsidiary corporations. Each such subsidiary is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction under which it is incorporated and has full requisite
corporate power and authority to own its property and carry on its
business as presently conducted by it and is, or on the Effective Date
will be, duly qualified or licensed to do business and is, or on the
Effective Date will be, in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed could not reasonably be expected to have a
Material Adverse Effect on ITEQ. As hereinafter used in this Article
III, the term "ITEQ" also includes any and all of its directly and
indirectly held subsidiaries, except where the context indicates to the
contrary.
3.1.5. Reports and Financial Statements. ITEQ has previously
furnished to AIX true and complete copies of (a) all annual reports
filed with the Commission pursuant to the Exchange Act, since December
31, 1994, (b) ITEQ's quarterly and other reports filed with the
Commission since December 31, 1994, (c) all definitive proxy
solicitation materials filed with the Commission since December 31,
1994, and (d) any registration statements declared effective by the
Commission since December 31, 1994. The consolidated financial
statements of ITEQ and its subsidiaries included in ITEQ's most recent
report on Form 10-K and most recent report on Form 10-Q, and any other
reports filed with the Commission by ITEQ under the Exchange Act (the
"ITEQ Reports") were, or (if filed after the date hereof) will be,
prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved and fairly
present, or will present, the consolidated financial position for ITEQ
and its subsidiaries as of the dates thereof and the consolidated
results of their operations and changes in financial position for the
periods then ended (except with respect to interim period financial
statements, for normal year-end adjustments which are not material); and
the ITEQ Reports did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Since
December 31, 1994, ITEQ has filed with the Commission all reports
required to be filed by ITEQ under the Exchange Act and the rules and
regulations of the Commission.
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3.1.6. Liabilities. ITEQ does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which would
have a Material Adverse Effect on ITEQ, other than those (i) disclosed
in the ITEQ Reports or (ii) set forth on Schedule 3.1.6 hereto
[omitted].
3.1.7. No Undisclosed Defaults. Except as may be specified in
the ITEQ Reports or in Schedule 3.1.7 [omitted], ITEQ is not a party to,
or bound by, any material contract or arrangement of any kind to be
performed after the Effective Date, nor is ITEQ in default in any
material obligation or covenant on its part to be performed under any
material obligation, lease, contract, order, plan or other arrangement
except as identified in Schedule 3.1.7 [omitted].
3.1.8. Absence of Certain Changes and Events in ITEQ. Except as
set forth in Schedule 3.1.8 hereto [omitted], other than as a result of
the transactions contemplated by this Agreement, since March 31, 1997,
there has not been:
3.1.8.1. Financial Change. Any adverse change in the
financial condition, operations, assets or business of ITEQ which
could reasonably be expected to have a Material Adverse Effect on
ITEQ;
3.1.8.2. Property Damage. Any material damage,
destruction, or loss to the business or properties of ITEQ
(whether or not covered by insurance);
3.1.8.3. Dividends. Any declaration, setting aside, or
payment of any dividend or other distribution in respect of
ITEQ's capital stock, or any direct or indirect redemption,
purchase or any other acquisition of such stock;
3.1.8.4. Capitalization Change. Any change in the
capital stock or in the number of shares or classes of ITEQ's
authorized or outstanding capital stock as described in Paragraph
3.1.3;
3.1.8.5. Labor Disputes. Any labor dispute (other than
routine grievances); or
3.1.8.6. Other Material Changes. Any other event or
condition known to ITEQ particularly pertaining to and adversely
affecting the operations, assets or business of ITEQ (other than
events or conditions which are of a general or industry-wide
nature and of general public knowledge) which could reasonably be
expected to have a Material Adverse Effect on ITEQ.
3.1.9. Taxes. Except as set forth in Schedule 3.1.9 [omitted],
and except with respect to failures which in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on ITEQ, proper
and accurate Federal, state and local income, value added,
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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 ITEQ for each period for which any
returns, reports, or estimates were due (taking into account any
extensions of time to file before the date hereof); all taxes shown by
such returns to be payable and any other taxes due and payable have been
paid other than those being contested in good faith by ITEQ; and the tax
provision reflected in ITEQ's most recent balance sheet included in the
ITEQ Reports is adequate, in accordance with generally accepted
accounting principles, to cover liabilities of ITEQ at the date thereof
for all taxes, including any interest, penalties and additions to taxes
of any character whatsoever applicable to ITEQ or its assets or
business. Except as set forth on Schedule 3.1.9 [omitted], no waiver of
any statute of limitations executed by ITEQ with respect to Federal or
state income or other tax is in effect for any period. The Federal
income tax returns of ITEQ have never been examined by the Internal
Revenue Service, but notice with respect to an audit of the year ended
December 31, 1994 has been received by ITEQ. There are no tax liens on
any assets of ITEQ except for taxes not yet currently due and those
which could not reasonably be expected to have a Material Adverse Effect
on ITEQ.
3.1.10. Intellectual Property. Except as set forth in Schedule
3.1.10 [omitted], ITEQ owns or possesses licenses to use all ITEQ
Intellectual Property that is either material to the business of ITEQ or
that is necessary for the manufacture, use or sale of any products
manufactured, used or sold by ITEQ. The ITEQ Intellectual Property is
owned or licensed by ITEQ free and clear of any Encumbrance other than
such Encumbrances as are listed in Schedule 3.1.10 [omitted]. Except as
otherwise indicated in such Schedule, ITEQ has not granted to any other
person any license to use any ITEQ Intellectual Property. ITEQ has not
received any notice of infringement, misappropriation, or conflict with,
the intellectual property rights of others in connection with the use by
ITEQ of the ITEQ Intellectual Property.
3.1.11. Title to Properties. With minor exceptions which in the
aggregate are not material, and except for merchandise and other
property sold, used or otherwise disposed of in the ordinary course of
business for fair value, ITEQ has good and marketable title to all its
properties, interests in properties and assets, real and personal,
reflected in the most recent financial statements contained in the ITEQ
Reports, free and clear of any Encumbrance of any nature whatsoever,
except (i) liens and Encumbrances reflected in the most recent balance
sheet of ITEQ included in the ITEQ Reports, (ii) liens for current taxes
not yet due and payable, and (iii) such imperfections of title,
easements and Encumbrances, if any, as are not substantial in character,
amount, or extent and do not and will not materially detract from the
value, or interfere with the present use, of the property subject
thereto or affected thereby, or otherwise materially impair business
operations. All leases pursuant to which ITEQ leases (whether as lessee
or lessor) any substantial amount of real or personal property are in
good standing, valid, and effective; and there is not, under any such
leases, any existing or prospective default or event of default or event
which with notice or lapse of time, or both,
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would constitute a default by ITEQ and in respect to which ITEQ has not
taken adequate steps to prevent a default from occurring. The
buildings and premises of ITEQ that are used in its business are in good
operating condition and repair, subject only to ordinary wear and tear.
All major items of equipment of ITEQ are in good operating condition and
in a state of reasonable maintenance and repair, ordinary wear and tear
excepted, and are free from any known defects except as may be repaired
by routine maintenance and such minor defects as to not substantially
interfere with the continued use thereof in the conduct of normal
operations.
3.1.12. Litigation. Except to the extent set forth in the ITEQ
Reports or in Schedule 3.1.12 [omitted], there is no suit, action, or
legal, administrative, arbitration, or other proceeding or governmental
investigation pending to which ITEQ is a party or, to the knowledge of
ITEQ, might become a party or which particularly affects ITEQ, nor is
any change in the zoning or building ordinances directly affecting the
real property or leasehold interests of ITEQ, pending or, to the
knowledge of ITEQ, threatened.
3.1.13. Environmental Compliance. Except as set forth in
Schedule 3.1.13 [omitted];
3.1.13.1. Environmental Conditions. There are no
environmental conditions or circumstances such as the presence or
release of any hazardous substance on any real property owned by
ITEQ that could reasonably be expected to have a Material Adverse
Effect on ITEQ.
3.1.13.2. Permits, etc. ITEQ has in full force and
effect all environmental permits, licenses, approvals and other
authorizations required to conduct its operations and is
operating in material compliance thereunder.
3.1.13.3. Compliance. ITEQ's operations and use of its
assets do not violate any Applicable Environmental Laws, except
for violations which, either singly or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on
ITEQ.
3.1.13.4. Environmental Claims. No notice has been
served on ITEQ from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or
inquiry related to alleged violations under any Applicable
Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental
Laws, other than any of the foregoing which, either singly or in
the aggregate, could not reasonably be expected to have a
Material Adverse Effect on ITEQ.
3.1.13.5. Renewals. ITEQ does not know of any reason
ITEQ would not be able to renew any of the permits, licenses, or
other authorizations required pursuant
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to any Applicable Environmental Laws to operate and use any of
ITEQ's assets for their current purposes and uses.
3.1.14. Compliance with Other Laws. Except as set forth in the
ITEQ Reports or in Schedule 3.1.14 [omitted], ITEQ is not in violation
of or in default with respect to, or in alleged violation of or alleged
default with respect to, OSHA or any other applicable law or any
applicable rule, regulation, or any writ or decree of any court or any
governmental commission, board, bureau, agency, or instrumentality, or
delinquent with respect to any report required to be filed with any
governmental commission, board, bureau, agency or instrumentality,
except for violations which, either singly or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on ITEQ.
3.1.15. Finder's Fee. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on
by ITEQ and its counsel, directly with AIX or its counsel, without the
intervention of any other person as the result of an act of ITEQ and, so
far as known to ITEQ, without the intervention of any other person in
such manner as to give rise to any valid claim against any of the
parties hereto for a brokerage commission, finder's fee, or any similar
payments, other than financial advisory fees to be paid by (i) ITEQ to
Simmons and DMG and (ii) AIX to RPR in connection with the merger
contemplated by this Agreement.
3.1.16. Compliance With ERISA. All bonus, incentive
compensation, stock option, deferred compensation, profit-sharing,
retirement, pension, welfare, group insurance, death benefit, or other
fringe benefit plans, arrangements or trust agreements covering active,
former or retired employees of ITEQ (collectively, the "ITEQ Plans") are
listed in Schedule 3.1.16 [omitted]. ITEQ has made available to AIX a
copy of each ITEQ Plan, any related trust agreement and annuity or
insurance contract, if any, and each plan's most recent annual report
filed with the Internal Revenue Service, if any, the most recent reports
with respect to such plans, trust agreements and annuity or insurance
contracts filed with any governmental agency, all Internal Revenue
Service determination letters that have been received with respect to
such plans and: (i) each ITEQ Plan has been maintained and administered
in material compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and
regulations, and is, to the extent required by applicable law or
contract, fully funded without having any deficit or unfunded actuarial
liability; (ii) all required employer contributions under any such plans
have been made and the applicable funds have been funded in accordance
with the terms thereof and no past service funding liabilities exist
thereunder; (iii) each ITEQ Plan that is required or intended to be
qualified under applicable law or registered or approved by a
governmental agency or authority has been so qualified, registered or
approved by the appropriate governmental agency or authority, and
nothing has occurred since the date of the last qualification,
registration or approval to adversely affect, or cause, the appropriate
governmental agency or authority to revoke such qualification,
registration or approval; (iv) to the extent applicable, the ITEQ Plans
comply, in all material respects, with the requirements of ERISA
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and the Code, and any ITEQ Plan intended to be qualified under Section
401(a) of the Code has been determined by the Internal Revenue Service
to be so qualified and nothing has occurred to cause the loss of such
qualified status; (v) no ITEQ Plan is covered by Title IV of ERISA or
Section 412 of the Code; (vi) there are no pending or anticipated
material claims against or otherwise involving any of the ITEQ Plans and
no suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of ITEQ Plan activities) has been
brought against or with respect to any ITEQ Plan; (vii) all material
contributions, reserves or premium payments, required to be made as of
the date hereof to the ITEQ Plans have been made or provided for; (viii)
ITEQ has not incurred any liability under subtitle C or D of Title IV of
ERISA with respect to any "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by ITEQ
or any entity which is considered one employer with ITEQ under Section
4001 of ERISA; (ix) ITEQ has not incurred any withdrawal liability under
Subtitle E of Title IV of ERISA with respect to any "multiemployer
plan," within the meaning of Section 4001(a)(3) of ERISA; and (x) ITEQ
does not have any obligations for retiree health and life benefits under
any ITEQ Plan, except as set forth on Schedule 3.1.16 [omitted], and
there are no restrictions on the rights of ITEQ to amend or terminate
any such ITEQ Plan without incurring any liability thereunder.
3.1.17. Investigations; Litigation. Except as required pursuant
to HSR and any applicable comparable foreign laws and regulations, (i)
no investigation or review by any governmental entity with respect to
ITEQ in connection with any of the transactions contemplated by this
Agreement is pending or, to the best of ITEQ's knowledge, threatened,
nor has any governmental entity indicated to ITEQ an intention to
conduct the same and (ii) there is no action, suit or proceeding pending
or, to the best of ITEQ's knowledge, threatened against or affecting
ITEQ or its subsidiaries at law or in equity, or before any federal,
state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, which either individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect on ITEQ.
3.1.18. Product Warranty. There are no existing liabilities or,
to the knowledge of ITEQ, potential liabilities, arising from claims
regarding the performance or design of the products sold by ITEQ either
in the past or at present that in the aggregate could reasonably be
expected to have a Material Adverse Effect on ITEQ.
3.1.19. Information for Proxy Statement. All information and
data (including financial statements) concerning ITEQ which is or will
be included in the Proxy Statement to be issued in connection with the
transactions contemplated by this Agreement will be furnished by ITEQ
for inclusion therein and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements contained therein not misleading.
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3.1.20. Investment Company. ITEQ is not an "investment
company," or an "affiliated person of" or "promoter" or "principal
underwriter" of an investment company, as those terms are defined in the
Investment Company Act.
ARTICLE IV
OBLIGATIONS PENDING EFFECTIVE DATE
4.1. Agreements of ITEQ and AIX. Each of ITEQ and AIX agrees that
from the date hereof to the Effective Date, it will:
4.1.1. Maintenance of Present Business. Other than as
contemplated by this Agreement, 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, use all
reasonable efforts to preserve intact its present business organization,
keep available the services of its present officers and employees, and
preserve its relationships with customers, suppliers, jobbers,
distributors, and others having business dealings with it;
4.1.2. Maintenance of Properties. At its expense, maintain all
of its property and assets in customary repair, order, and condition,
reasonable wear and use and damage by fire or unavoidable casualty
excepted;
4.1.3. Maintenance of Books and Records. Maintain its books of
account and records in the usual, regular, and ordinary manner, in
accordance with generally accepted accounting principles applied on a
consistent basis;
4.1.4. Compliance with Law. Duly comply in all material respects
with all laws applicable to it and to the conduct of its business; and
4.1.5. Compliance with Agreement. At its expense, take all
commercially reasonable actions as may be necessary (i) to insure that
the representations and warranties made by it herein are true and
correct at the Effective Date, (ii) to fully perform all covenants made
by it herein and (iii) to satisfy timely all other obligations imposed
upon it by this Agreement (including, without limitation, the obligation
from the date of this Agreement to take no action which either alone or
in combination with actions previously taken would disqualify the merger
from "pooling of interests" accounting treatment).
4.1.6. Inspection of Each Merging Corporation. Permit the other
party hereto, and their officers and authorized representatives, during
normal business hours, to inspect its records and to consult with its
officers, employees, attorneys, and agents for the purpose of
determining the accuracy of the representations and warranties
hereinabove made and the compliance with covenants contained in this
Agreement.
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4.2. Additional Agreements of ITEQ and AIX. ITEQ and AIX agree to
take the following actions after the date hereof:
4.2.1. Hart-Scott-Rodino. Each party shall file such materials
as are required under the HSR Act with respect to the transaction
contemplated hereby and shall cooperate with the other party to the
extent necessary to assist the other party in the preparation of such
filings.
4.2.2. Proxy Statement. ITEQ and AIX shall cooperate in the
preparation and prompt filing of the Proxy Statement with the Commission
with respect to the meetings of their stockholders called for the
purpose of, among other things, securing stockholder approval of the
merger contemplated by this Agreement and the consummation of the
transaction herein contemplated. Each of ITEQ and AIX shall use all
reasonable efforts to have the Proxy Statement cleared by the
Commission.
4.2.3. Notice of Material Developments. Each of ITEQ and AIX
will promptly notify the other party in writing of (i) any event
occurring subsequent to the date of this Agreement which would render
any representation or warranty of such party contained in this Agreement
untrue or inaccurate in any material respect, (ii) any Material Adverse
Effect on such party and (iii) breach by such party of any covenant or
agreement contained in this Agreement.
4.3. Additional Agreements of AIX. AIX agrees that from the date
hereof to the Effective Date, it will:
4.3.1. Prohibition of Certain Employment Contracts. Not enter
into any contracts of employment which (i) cannot be terminated on
notice of 14 days or less or (ii) provide for any severance payments or
benefits covering a period beyond the termination date (other than those
which ITEQ has previously approved) except as may be required by law;
4.3.2. Prohibition of Certain Loans. Not incur any borrowings
except (i) the refinancing of indebtedness now outstanding or additional
borrowings under its existing revolving credit facilities, (ii) the
prepayment by customers of amounts due or to become due for goods sold
or services rendered or to be rendered in the future, (iii) trade
payables incurred in the ordinary course of business, (iv) other
borrowings incurred in the ordinary course of business to finance normal
operations or (v) as is otherwise agreed to in writing by ITEQ;
4.3.3. Prohibition of Certain Commitments. Not enter into
commitments of a capital expenditure nature or incur any contingent
liability which would exceed $1,000,000, in the aggregate, except (i) as
may be necessary for the maintenance of existing facilities, machinery
and equipment in good operating condition and repair in the ordinary
course of business, (ii) as may be required by law or (iii) as is
otherwise agreed to in writing by ITEQ;
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4.3.4. Disposal of Assets. Not sell, dispose of, or encumber,
any property or assets, except (i) in the ordinary course of business or
(ii) as is otherwise agreed to in writing by ITEQ;
4.3.5. Maintenance of Insurance. Maintain insurance (or self
insurance reserves) upon all its properties and with respect to the
conduct of its business of such kinds and in such amounts as is
customary in the type of business in which it is engaged, but not less
than that presently carried by it, which insurance (or self insurance
reserves) may be added to from time to time in its discretion; provided,
that if during the period from the date hereof to and including the
Effective Date any of its property or assets are damaged or destroyed by
fire or other casualty, the obligations of ITEQ and AIX under this
Agreement shall not be affected thereby (subject, however, to the
provision that the coverage limits of such policies are adequate in
amount to cover the replacement value of such property or assets and
loss of profits during replacement, less commercially reasonable
deductibles, if of material significance to the assets or operations of
AIX) but it shall promptly notify ITEQ in writing thereof and proceed
with the repair or restoration of such property or assets in such manner
and to such extent as may be approved by ITEQ, and upon the Effective
Date all proceeds of insurance and claims of every kind arising as a
result of any such damage or destruction shall remain the property of
Surviving Corporation;
4.3.6. AIX Acquisition Proposals. Not directly or indirectly:
4.3.6.1. No Solicitation. Authorize or permit any of its
respective agents to: (i) solicit, initiate, encourage
(including by way of furnishing information) or take any other
action to facilitate, any inquiry or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any
acquisition or purchase of a substantial amount of assets of, or
an equity interest of 30% or more in, AIX or any merger,
consolidation, business combination, sale of substantially all
assets, sale of securities, recapitalization, liquidation,
dissolution or similar transaction involving AIX (other than the
transactions contemplated by this Agreement) or any other
material corporate transaction the consummation of which would,
or could reasonably be expected to, impede, interfere with,
prevent or materially delay the merger contemplated by this
Agreement (collectively, "AIX Transaction Proposals") or agree to
or endorse any AIX Transaction Proposal or (ii) propose, enter
into or participate in any discussions or negotiations regarding
any of the foregoing, or furnish to another person any
information with respect to its business, properties or assets or
any of the foregoing, or otherwise cooperate in any way with, or
assist or participate in, facilitate or encourage, an effort or
attempt by any other person to do or seek any of the foregoing,
provided, however, that the foregoing clauses (i) and (ii) shall
not prohibit AIX from (A) furnishing information pursuant to an
appropriate confidentiality letter concerning AIX and its
businesses, properties or assets to a third party who has made a
Superior AIX Transaction Proposal (as defined below), (B)
engaging in discussions or negotiations with a third party who
has made a Superior
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AIX Transaction Proposal or (C) following receipt of a Superior
AIX Transaction Proposal, taking and disclosing to its
stockholders a position with respect thereto or changing the
recommendation by AIX's board of directors but in each case
referred to in the foregoing clauses (A) through (C) only after
the board of directors of AIX concludes in good faith following
advice of its outside counsel that such action is reasonably
necessary in order for the board of directors of AIX to comply
with its fiduciary obligations to stockholders under applicable
law. If the board of directors of AIX receives an AIX
Transaction Proposal, then AIX shall immediately inform ITEQ of
the terms and conditions of such proposal and the identity of the
person making it and shall keep ITEQ fully informed of the status
and details of any such AIX Transaction Proposal and of all steps
it is taking in response to such AIX Transaction Proposal;
provided that nothing contained in this Paragraph 4.3.6.1 shall
prohibit AIX or its board of directors from making such
disclosure to AIX's stockholders or taking any action which, in
the good faith judgment of AIX's board of directors, may be
required under applicable law, including Rules 14d-9 and 14e-2
promulgated under the Exchange Act. For purposes of this
Agreement, the term "Superior AIX Transaction Proposal" shall
mean a bona fide AIX Transaction Proposal that the board of
directors of AIX determines in good faith after consultation with
(and based in part on the advice of) its independent financial
advisors to be more favorable to AIX's stockholders than the
merger contemplated by this Agreement, is reasonably capable of
being financed and is not subject to any material contingencies
relating to financing.
4.3.6.2. Acceptance of Superior AIX Transaction
Proposals. If (i) (A) this Agreement is terminated by AIX
pursuant to Paragraph 6.1.5 hereof, (B) AIX shall violate the
covenant set forth in Paragraph 4.3.6.1 hereof, or (C) AIX
modifies or withdraws its board of directors' recommendation in
favor of the transactions contemplated by this Agreement or (ii)
AIX enters into an agreement which provides for Another AIX
Transaction (as defined below) or Another AIX Transaction is
consummated (in each case with any third party which after the
date of this Agreement and before termination of this Agreement
has communicated to it an AIX Transaction Proposal), in either
case within twelve months after the date of termination of this
Agreement, then, in any such event, AIX shall pay to ITEQ within
two days after demand by ITEQ in the case of the occurrence of
any of the events specified in clause (i) above, and immediately
upon the first to occur of the entering into an agreement
providing for, or the consummation of, Another AIX Transaction in
the case of clause (ii) above (by wire transfer of immediately
available funds to an account designated by ITEQ for such
purpose), a fee (the "Break-Up Fee") in an amount equal to
$2,500,000. AIX agrees that the Break-Up Fee is a reasonable
determination, in light of the uncertainty and difficulty of
ascertaining the exact amount thereof, of the loss that ITEQ
would actually sustain in respect of one of the events described
in this Paragraph 4.3.6.2. For purposes of this Paragraph
4.3.6.2, the term "Another AIX Transaction" shall mean any
transaction pursuant to which
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(i) any person, entity or group (within the meaning of Section
13(d)(3) of the Exchange Act) (each, a "Third Party") acquires
50% or more of the outstanding AIX Common Stock, (ii) a Third
Party acquires 25% or more of the total assets of AIX taken as a
whole, (iii) a Third Party merges, consolidates or combines in
any other way with AIX other than in a transaction in which
holders of AIX Common Stock continue to own at least 75% of the
equity of the surviving corporation, or (iv) AIX distributes or
transfers to its stockholders, by dividend or otherwise, assets
constituting 25% or more of the market value or earning power of
AIX on a consolidated basis (it being understood that stock of
subsidiaries constitute assets of AIX for purposes of this
Paragraph 4.3.6.2). Notwithstanding anything contained in this
Agreement to the contrary, ITEQ agrees that if AIX pays the
Break-Up Fee to ITEQ in accordance with this Paragraph 4.3.6.2
either because AIX shall have violated the covenant set forth in
Paragraph 4.3.6.1 hereof, or under any other circumstances where
ITEQ has been paid the Break-Up Fee by AIX, then following such
payment AIX shall have no further liability to ITEQ under this
Agreement.
4.3.7. No Amendment to Certificate of Incorporation, etc. Prior
to the receipt by ITEQ of the Break-Up Fee pursuant to Section 4.3.6.2
or without the consent of ITEQ, not amend its certificate of
incorporation or bylaws or other organizational documents or merge or
consolidate with or into any other corporation or change in any manner
the rights of its capital stock or the character of its business;
4.3.8. No Issuance, Sale, or Purchase of Securities. Prior to
the receipt by ITEQ of the Break-Up Fee pursuant to Section 4.3.6.2 or
without the consent of ITEQ, 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;
provided, that nothing in this Paragraph shall restrict or prohibit the
issuance by AIX of shares of AIX Common Stock upon exercise of options
previously granted under existing benefit plans;
4.3.9. Prohibition on Dividends. Prior to the receipt by ITEQ of
the Break-Up Fee pursuant to Section 4.3.6.2 or without the consent of
ITEQ, not declare or pay any dividend on shares of its capital stock or
make any other distribution of assets to the holders thereof;
4.3.10. Supplemental Financial Statements. Deliver to ITEQ,
within 45 days after the end of each fiscal quarter of AIX beginning
June 30, 1997 and through the Effective Date, unaudited consolidated
balance sheets and related unaudited statements of income, retained
earnings and cash flows as of the end of each fiscal quarter of AIX, and
as of the corresponding fiscal quarter of the previous fiscal year. AIX
hereby represents and warrants that such unaudited consolidated
financial statement shall (i) be complete in all material respects
except for the omission of notes and schedules contained in audited
financial statements, (ii) present fairly the financial condition of AIX
as at the dates indicated and the
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results of operations for the respective periods indicated (except for
normal year-end adjustments which are not material) (iii) shall have
been prepared in accordance with generally accepted accounting
principles applied on a consistent basis, except as noted therein and
(iv) shall contain all adjustments which AIX considers necessary for a
fair presentation of its results for each respective fiscal period;
4.3.11. Notice of Material Developments. Promptly furnish to
ITEQ copies of all communications from AIX to its stockholders and all
AIX Reports.
4.3.12. Stockholders' Meeting. Call and hold a meeting of
stockholders within 45 days after the Commission has indicated that it
has no further comments on the Proxy Statement for the purpose of
considering and acting a proposal to approve this Agreement and the
merger contemplated hereby.
4.4. Additional Agreements of ITEQ. ITEQ agrees that from the date
hereof to the Effective Date, it will:
4.4.1. Prohibition of Certain Employment Contracts. Not enter
into any contracts of employment which (i) cannot be terminated on
notice of 14 days or less or (ii) provide for any severance payments or
benefits covering a period beyond the termination date (other than those
which AIX has previously been approved) except as may be required by
law; provided, however, that nothing in this Paragraph shall prohibit
ITEQ from entering into an employment agreement with its chief executive
officer on substantially the terms previously disclosed in writing to
AIX;
4.4.2. Prohibition of Certain Loans. Except as contemplated by
Paragraph 4.4.13, not incur any borrowings except (i) the refinancing of
indebtedness now outstanding, or additional borrowings under its
existing revolving credit facilities, (ii) the prepayment by customers
of amounts due or to become due for goods sold or services rendered or
to be rendered in the future, (iii) trade payables incurred in the
ordinary course of business, (iv) other borrowings incurred in the
ordinary course of business to finance normal operations or (v) as is
otherwise agreed to in writing by AIX;
4.4.3. Prohibition of Certain Commitments. Not enter into
commitments of a capital expenditure nature or incur any contingent
liability which would exceed $1,000,000, in the aggregate, except (i) as
may be necessary for the maintenance of existing facilities, machinery
and equipment in good operating condition and repair in the ordinary
course of business, (ii) as may be required by law or (iii) as is
otherwise agreed to in writing by AIX;
4.4.4. Disposal of Assets. Not sell, dispose of, or encumber,
any property or assets, except (i) in the ordinary course of business or
(ii) as is otherwise agreed to in writing by AIX;
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4.4.5. 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 customary in the type of business in which it
is engaged, but not less than that presently carried by it, which
insurance may be added to from time to time in its discretion; provided,
that if during the period from the date hereof to and including the
Effective Date any of its property or assets are damaged or destroyed by
fire or other casualty, the obligations of ITEQ and AIX under this
Agreement shall not be affected thereby (subject, however, to the
provision that the coverage limits of such policies are adequate in
amount to cover the replacement value of such property or assets and
loss of profits during replacement, less commercially reasonable
deductible, if of material significance to the assets or operations of
ITEQ) but it shall promptly notify AIX in writing thereof and proceed
with the repair or restoration of such property or assets in such manner
and to such extent as may be approved by AIX, and upon the Effective
Date all proceeds of insurance and claims of every kind arising as a
result of any such damage or destruction shall remain the property of
Surviving Corporation;
4.4.6. No Amendment to Certificate of Incorporation, etc. Except
as otherwise provided herein, not amend its certificate of incorporation
or bylaws or other organizational documents or merge into any other
corporation or change in any manner the rights of its Common Stock;
4.4.7. No Issuance, Sale, or Purchase of Securities. Not issue
or sell, or issue options (other than (i) options previously authorized
by the compensation committee of ITEQ's board of directors or (ii)
options granted to new personnel upon commencement of employment) 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;
provided, that nothing in this Paragraph shall restrict or prohibit the
issuance by ITEQ of shares of ITEQ Common Stock upon exercise of options
previously granted under existing employee benefit plans, the issuance
of shares of ITEQ Common Stock upon exercise of outstanding warrants, or
the issuance of up to 1,000,000 shares of ITEQ Common Stock in the
acquisition of other businesses in "non-dilutive" (for financial
reporting purposes) transactions if such acquired businesses would not
individually or collectively constitute a "significant subsidiary" of
ITEQ;
4.4.8. Prohibition on Dividends. Not declare or pay any dividend
on shares of its capital stock or make any other distribution of assets
to the holders thereof;
4.4.9. Stockholders' Meeting. Call and hold a meeting of
stockholders within 45 days after the Commission has indicated that it
has no further comments on the Proxy Statement for the purpose of
considering and acting upon proposals to approve this Agreement and the
merger contemplated hereby;
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4.4.10. Issuance of ITEQ Common Stock. Take all action it deems
reasonably necessary to register the "issuance" of ITEQ Common Stock to
the stockholders of AIX in connection with the merger contemplated by
this Agreement under the Securities Act of 1933, as amended (the
"Securities Act"). ITEQ also shall take any action reasonably required
to be taken under state blue sky or securities laws in connection with
the issuance of the ITEQ Common Stock pursuant to the merger;
4.4.11. Listing of ITEQ Stock. Take such steps as are required
to accomplish, as of the Effective Date, the Notification of Additional
Listing of the shares of ITEQ Common Stock to be issued pursuant to this
Agreement on the Nasdaq National Market;
4.4.12. Notice of Material Developments. Promptly furnish to
AIX copies of all communications from ITEQ to its stockholders and all
ITEQ Reports; and
4.4.13. Refinancing of Outstanding Indebtedness. Use all
reasonable commercial efforts to arrange for the payment or assumption
by it of all outstanding debt of AIX on the Effective Date on such terms
as could not reasonably be expected to have a Material Adverse Effect on
ITEQ, including (i) the borrowing by ITEQ of up to an additional
$35,000,000 to fund any such repayment and (ii) the amendment or
refunding of its present long-term and revolving indebtedness (the
"Refinancing").
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1. Conditions Precedent to Obligations of AIX. The obligations of
AIX to consummate and effect the merger hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by AIX in
the manner contemplated by Section 6.4 before the Effective Date:
5.1.1. Representations and Warranties of ITEQ True at Effective
Date. The representations and warranties of ITEQ herein contained shall
be, in all material respects, true as of and at the Effective Date with
the same effect as though made at such date, except as affected by
transactions permitted or contemplated by this Agreement; ITEQ shall
have performed and complied with all covenants required by this
Agreement to be performed or complied, in all material respects, with by
ITEQ before the Effective Date; and ITEQ shall have delivered to AIX a
certificate, dated the Effective Date and signed by its chairman of the
board or its president, and by its chief financial or accounting
officer, and its secretary, to both such effects.
5.1.2. No Material Litigation. No suit, action, or other
proceeding shall be pending, or to ITEQ's knowledge, threatened, before
any court or governmental agency in which it will be, or it is, sought
to restrain or prohibit or to obtain damages or other relief in
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connection with this Agreement or the consummation of the merger
contemplated hereby or which could reasonably be expected to have a
Material Adverse Effect on ITEQ.
5.1.3. Opinion of ITEQ Counsel. AIX shall have received a
favorable opinion, dated as of the Effective Date, from Porter & Hedges,
L.L.P., counsel for ITEQ, to the effect that (i) ITEQ has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware; (ii) all corporate proceedings
required to be taken by or on the part of ITEQ to authorize the
execution of this Agreement and the implementation of the merger
contemplated hereby have been taken; (iii) the shares of ITEQ Common
Stock which are to be delivered in accordance with this Agreement will,
when issued, be validly issued, fully paid and nonassessable outstanding
securities of ITEQ; (iv) this Agreement has been duly executed and
delivered by ITEQ; (v) the Registration Statement on Form S-4 (which
contains the Proxy Statement relating to the merger contemplated hereby)
has become effective and no stop order has been issued by the
Commission; and (vi) except as specified by such counsel (such
exceptions to be acceptable to AIX) such counsel does not know of any
material litigation, proceedings, or governmental investigation pending
or threatened against or relating to ITEQ, any of its subsidiaries, or
their respective properties or businesses in which it is sought to
restrain, prohibit or otherwise affect the consummation of the
transactions contemplated by this Agreement. Such opinion also shall
cover such other matters incident to the transactions herein
contemplated as AIX and its counsel may reasonably request. In
rendering such opinion, such counsel may rely upon (i) certificates of
public officials and of officers of ITEQ as to matters of fact and (ii)
the opinion or opinions of other counsel, which opinions shall be
reasonably satisfactory to AIX, as to matters other than federal or
Texas law.
5.1.4. Stockholder Approval. At the meeting of stockholders of
AIX to be held before the Effective Date, the holders of the requisite
majority of the outstanding shares of AIX Common Stock shall have
approved the merger contemplated by this Agreement.
5.1.5. Hart-Scott-Rodino, etc. All waiting periods required by
HSR shall have expired with respect to the transactions contemplated by
this Agreement, or early termination with respect thereto shall have
been obtained without the imposition of any governmental request or
order requiring the sale or disposition or holding separate (through a
trust or otherwise) of particular assets or businesses of ITEQ, its
affiliates or any component of AIX or other actions as a precondition to
the expiration of any waiting period or the receipt of any necessary
governmental approval or consent. In addition, any approvals required
under any state or foreign laws comparable to HSR shall have been
obtained.
5.1.6. Registration; Listing of ITEQ Common Stock. On the
Effective Date (i) the Proxy Statement shall have become effective under
the Securities Act, and (ii) the shares of ITEQ Common Stock issuable at
the Effective Date of this Agreement shall have become eligible for
trading on the Nasdaq National Market.
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5.1.7. Consent of Certain Parties in Privity With ITEQ. The
holders of any material indebtedness of ITEQ, the lessors of any
material property leased by ITEQ, and the other parties to any other
material agreements to which ITEQ is a party shall, when and to the
extent necessary in the reasonable opinion of AIX, have consented to the
merger contemplated hereby.
5.1.8. Stock Options and Other Employee Benefit Plans of AIX.
ITEQ shall have made effective provision (i) for the assumption at the
Effective Date of all stock options outstanding under plans maintained
by AIX and/or its subsidiaries, (ii) for the assumption, termination or
discontinuation of all other AIX Plans, and (iii) except for benefits
provided by AIX Plans assumed by ITEQ, make available to employees of
AIX and its subsidiaries ("AIX Employees") participation following the
Effective Date in the ITEQ Plans extended by ITEQ to similarly situated
employees. If an AIX Plan that is terminated or discontinued by ITEQ is
a group health plan, then ITEQ shall permit each AIX Employee
participating in such group health plan and his or her eligible
dependents (including, without limitation, all such AIX Employee's
dependents covered by such group health plan as of the time such
coverage ceases) to be covered under an ITEQ Plan that (i) provides
medical and dental benefits to each such AIX Employee and such eligible
dependents effective immediately upon the cessation of coverage of such
individuals under such group health plan, (ii) credits such AIX
Employee, for the year during which such coverage under such ITEQ Plan
begins, with any deductibles and copayments already incurred during such
year under such group health plan, and (iii) waives any preexisting
condition restrictions to the extent necessary to provide immediate
coverage. ITEQ and the ITEQ Plans shall recognize each AIX Employee's
years of service and level of seniority with AIX and its subsidiaries
for purposes of terms of employment and eligibility, vesting and benefit
determination under the ITEQ Plans (other than benefit accruals under
any defined benefit pension plan).
5.1.9. Ancillary Matters. ITEQ shall have concluded the
Refinancing, subject only to consummation of the merger contemplated by
this Agreement, and AIX shall have received a favorable opinion from RPR
for inclusion in the Proxy Statement as to the fairness, from a
financial point of view, to the AIX stockholders of the Merger
Consideration, which opinion shall not have been withdrawn at the
Effective Date.
5.1.10.Tax Opinion. AIX shall have received an opinion,
dated as of the Effective Date, from Porter & Hedges, L.L.P., counsel
for ITEQ, to the effect that (i) the merger of AIX into ITEQ as provided
in this Agreement will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, and AIX and ITEQ will be parties to
the reorganization; (ii) no gain or loss will be recognized to AIX or
ITEQ upon such merger; (iii) no gain or loss will be recognized to any
stockholder of AIX as a consequence of the merger, except to the extent
of any cash received in lieu of fractional share interests; (iv) the
aggregate tax basis of the ITEQ Common Stock received by an AIX
stockholder as a result of the merger will be the same as the aggregate
tax basis of the AIX Common Stock exchanged for such shares, reduced by
basis allocable to fractional shares redeemed for cash;
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(v) the holding period of the ITEQ Common Stock received in exchange for
AIX Common Stock pursuant to the merger will include the holding period
of such AIX Common Stock; (vi) ITEQ's basis and holding period for all
the assets of AIX acquired pursuant to the merger will be determined
solely with respect to the basis and holding period of such assets in
the hands AIX; and (vii) no gain or loss will be recognized to holders
of AIX Options upon their exchange into options to purchase ITEQ Common
Stock pursuant to the merger.
5.2. Conditions Precedent to Obligations of ITEQ. The obligations of
ITEQ to consummate and effect the merger hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by ITEQ in
the manner contemplated by Section 6.4 before the Effective Date.
5.2.1. Representations and Warranties of AIX True at Effective
Date. The representations and warranties of AIX herein contained shall
be, in all material respects, true as of and at the Effective Date with
the same effect as though made at such date, except as affected by
transactions permitted or contemplated by this Agreement; AIX shall have
performed and complied with all covenants required by this Agreement to
be performed or complied with, in all material respects, by it before
the Effective Date; and AIX shall have delivered to ITEQ a certificate,
dated the Effective Date and signed by its chairman of the board or its
president, and by its chief financial or accounting officer, and by its
secretary to both such effects.
5.2.2. No Material Litigation. No suit, action, or other
proceeding shall be pending, or to AIX's knowledge, threatened, before
any court or governmental agency 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 merger
contemplated hereby or which could reasonably be expected to have a
Material Adverse Effect on AIX.
5.2.3. Opinion of AIX's Counsel. ITEQ shall have received a
favorable opinion, dated the Effective Date, from Vinson & Elkins
L.L.P., counsel to AIX to the effect that (i) AIX has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware; (ii) all outstanding shares of
the AIX Common Stock have been validly issued and are fully paid and
nonassessable; (iii) all corporate or other proceedings required to be
taken by or on the part of AIX to authorize the execution of this
Agreement and the implementation of the merger contemplated hereby have
been taken; (iv) this Agreement has been duly executed and delivered by
AIX; and (v) except as specified by such counsel (such exceptions to be
acceptable to ITEQ) such counsel does not know of any material
litigation, proceedings or governmental investigation, pending or
threatened against or relating to AIX or its properties or businesses in
which it is sought to restrain, prohibit or otherwise affect
consummation of the transactions contemplated by this Agreement. Such
opinion shall also cover such other matters incident to the transactions
herein contemplated as ITEQ and its counsel may reasonably request. In
rendering such
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opinion, such counsel may rely upon (i) certificates of public officials
and of officers of AIX as to matters of fact and (ii) on the opinion or
opinions of other counsel, which opinions shall be reasonably
satisfactory to ITEQ, as to matters other than federal or Texas law.
5.2.4. Stockholder Approval. At the meeting of stockholders of
ITEQ to be held before the Effective Date, the holders of the requisite
majority of the outstanding shares of ITEQ Common Stock shall have
approved the merger contemplated by this Agreement.
5.2.5. Hart-Scott-Rodino, etc. All waiting periods required by
HSR shall have expired with respect to the transactions contemplated by
this Agreement, or early termination with respect thereto shall have
been obtained without the imposition of any governmental request or
order requiring the sale or disposition or holding separate (through a
trust or otherwise) of particular assets or businesses of ITEQ, its
affiliates or any component of AIX or other actions as a precondition to
the expiration of any waiting period or the receipt of any necessary
governmental approval or consent. In addition, any approvals required
under any state or foreign laws comparable to HSR shall have been
obtained.
5.2.6. Consent of Certain Parties in Privity with AIX. The
holders of any material indebtedness of AIX, the lessors of any material
property leased by AIX, and the other parties to any other material
agreements to which AIX is a party shall, when and to the extent
necessary in the reasonable opinion of ITEQ, have consented to the
merger contemplated hereby.
5.2.7. Ancillary Matters. ITEQ shall have concluded the
Refinancing, subject only to consummation of the merger contemplated by
this Agreement, and it shall have received a favorable opinion from
Simmons for inclusion in the Proxy Statement as to the fairness, from a
financial point of view, to ITEQ of the Merger Consideration, which
opinion shall not have been withdrawn at the Effective Date.
ARTICLE VI
TERMINATION AND ABANDONMENT
6.1. Termination. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated and the merger
contemplated hereby abandoned at any time (whether before or after the approval
and adoption thereof by the stockholders of AIX or ITEQ) before the Effective
Date:
6.1.1. By Mutual Consent. By mutual consent of ITEQ and AIX.
6.1.2. By ITEQ Because of Conditions Precedent. By ITEQ, if
there has been a breach by AIX of any of its representations,
warranties, covenants, or agreements set forth in this Agreement, or if
any representation or warranty of AIX shall have become untrue, in
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either case which could reasonably be expected to have a Material
Adverse Effect on AIX, and which AIX fails to cure within 15 business
days after written notice thereof from ITEQ (except that no cure period
shall be provided for any breach by AIX which by its nature cannot be
cured).
6.1.3. By ITEQ Because of Material Adverse Change. By ITEQ, if
there has been since March 31, 1997, a Material Adverse Change with
respect to AIX.
6.1.4. By AIX Because of Conditions Precedent. By AIX, if there
has been a breach by ITEQ of any of its representations, warranties,
covenants or agreements set forth in this Agreement, or if any
representation or warranty of ITEQ shall have become untrue, in either
case which could reasonably be expected to have a Material Adverse
Effect on ITEQ, and which ITEQ fails to cure within 15 business days
after written notice thereof from AIX (except that no cure period shall
be provided for any breach by ITEQ which by its nature cannot be cured).
6.1.5. By AIX Due to a Superior AIX Transaction Proposal. By AIX
if, before the Effective Date, AIX's board of directors shall have
withdrawn or modified in a manner adverse to ITEQ its approval of this
Agreement or the merger contemplated hereby under the terms, conditions
and procedures set forth in Paragraph 4.3.6.2.
6.1.6. By AIX Because of Material Adverse Change. By AIX, if
there has been since March 31, 1997, a Material Adverse Change with
respect to ITEQ.
6.1.7. By ITEQ or AIX Because of Legal Proceedings. By either
ITEQ or AIX if any suit, action, or other proceeding shall be pending or
threatened by the federal or a state government before any court or
governmental agency, in which it is sought to restrain, prohibit, or
otherwise affect the consummation of the merger contemplated hereby.
6.1.8. By ITEQ or AIX if Merger not Effective by November 30,
1997. By either ITEQ or AIX, if all conditions to consummation of the
merger shall not have been satisfied or waived on or before November 30,
1997, other than as a result of a breach of this Agreement by the
terminating party.
6.1.9. By ITEQ or AIX if Merger Cannot be Accounted for as a
Pooling. By ITEQ or AIX if the merger contemplated by this Agreement
cannot for financial reporting purposes be accounted for as a "pooling
of interests"; provided, however, this provisions shall not be available
to a party which has engaged in any transaction after June 30, 1997,
that either alone or in combination with actions previously taken
disqualifies the merger from such accounting treatment.
6.2. Termination by Board of Directors. An election of ITEQ to
terminate this Agreement and abandon the merger as provided in Section 6.1
shall be exercised on behalf of ITEQ by its board
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of directors. An election of AIX to terminate this Agreement and abandon the
merger as provided in Section 6.1 shall be exercised on behalf of AIX by its
board of directors.
6.3. Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to and in accordance with the provisions
of Section 6.1 hereof, this Agreement shall become void and have no effect,
without any liability on the part of any party hereto (or its stockholders or
controlling persons or directors or officers), except (i) the provisions of the
confidentiality agreements dated July 23, 1997, between ITEQ and AIX shall
survive such termination, and abandonment, (ii) the provisions of Paragraphs
4.3.6.1 and 4.3.6.2 shall survive such termination and abandonment and (iii)
except as otherwise provided in Paragraph 4.3.6.2, neither party shall be
released or relieved from any liability arising from the willful breach by such
party of any of its representations, warranties, covenants or agreements as set
forth in this Agreement.
6.4. Waiver of Conditions. 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, by action
taken by its board of directors.
6.5. Expense on Termination. If the merger contemplated hereby is
abandoned pursuant to and in accordance with the provisions of Section 6.1
hereof, all expenses will be paid by the party incurring them.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Exchange of Options. Promptly after the Effective Date,
ITEQ will notify in writing each holder of an AIX Option of the exchange of the
AIX Option for an option to purchase ITEQ Common Stock in accordance with
Section 1.10 hereof.
7.2. Indemnity.
7.2.1. Indemnification by ITEQ as to Proxy Statement. ITEQ
agrees to indemnify and hold harmless AIX and its officers and directors
and each person who controls AIX 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 any
of them may become subject under the Securities Act, the Exchange Act or
any other statute or common law, and to reimburse them for any legal or
other expenses incurred by them in connection with investigating any
claims and defending any actions, to the extent such losses, claims,
damages, liabilities, or actions arise out of or are based upon (i) any
false, misleading or untrue statement or alleged false, misleading or
untrue statement of a material fact, insofar as it relates to ITEQ
contained in the Proxy Statement in the form mailed to the stockholders
of ITEQ or (ii) the omission or alleged omission to state in the Proxy
Statement
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(including the Prospectus used in connection with the "issuance" of the
Merger Consideration) a material fact required to be stated therein or
necessary to make the statements therein not misleading, except for such
statements or omissions made in reliance upon and in conformity with the
information furnished to ITEQ in writing by AIX specifically for use in
connection with the preparation of the Proxy Statement.
7.2.2. Indemnification of Directors and Officers. ITEQ shall
indemnify and hold harmless each present and former director and officer
of AIX, determined as of the Effective Date, against any claims, losses,
liabilities, damages, judgments, fines, fees, costs or expenses,
including without limitation attorneys' fees and disbursements incurred
in connection with any claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising out of
or pertaining to matters existing or occurring at or prior to the
Effective Date (including, without limitation, the merger, the
preparation, filing and mailing of the Proxy Statement and the other
transactions and actions contemplated by this Agreement), whether
asserted or claimed prior to, at or after the Effective Date, to the
fullest extent that AIX would have been permitted, under applicable law,
indemnification agreements existing on the date hereof, the Certificate
of Incorporation or Bylaws of AIX in effect on the date hereof, to
indemnify such person (and ITEQ shall also advance expenses as incurred
to the fullest extent permitted under applicable law provided the person
to whom expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not entitled
to indemnification).
7.2.3. Indemnification Procedure. Any indemnified party wishing
to claim indemnification under this Section 7.2, upon learning of any
such claim, action, suit, proceeding or investigation, shall promptly
notify ITEQ thereof, but the failure to so notify shall not relieve ITEQ
of any liability or obligation it may have to such indemnified party
except, and only to the extent, that such failure materially prejudices
ITEQ. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before, at or after the Effective Date),
ITEQ shall have the right to assume the defense thereof and ITEQ shall
not be liable to such indemnified parties for any legal expenses of
other counsel or any other expenses subsequently incurred by such
indemnified parties in connection with the defense thereof, except that
if ITEQ elects not to assume such defense, or counsel for the
indemnified parties advises that there are bona fide issues that raise
conflicts of interest between ITEQ and indemnified party, the
indemnified parties may retain counsel satisfactory to them, and ITEQ
shall pay all reasonable fees and expenses of such counsel for the
indemnified party promptly as statements therefor are received. If such
indemnity is not available with respect to any indemnified party, then
ITEQ and the indemnified party shall contribute to the amount payable in
such proportion as is appropriate to reflect relative faults and
benefits.
7.2.4. Benefits. The provisions of this Section 7.2 is intended
to be for the benefit of, and shall be enforceable by, each of the
indemnified parties and their respective heirs and legal
representatives. The indemnification provided for herein shall not be
exclusive of any
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rights to which an indemnified party is entitled, whether pursuant to
law, contract or otherwise.
7.3. Registration of Certain AIX Control Person Shares.
7.3.1. Agreement to Register Resales. ITEQ agrees that promptly
following the Effective Date, it will file with the Commission on Form
S-3, a shelf registration statement pursuant to Rule 415 of the
Securities Act (the "Registration Statement") covering the resale by
each of the former stockholders of AIX who has complied with Paragraph
7.4.1 ("Stockholders") of all the shares of ITEQ Common Stock received
by them in the merger or receivable upon exercise of AIX Options (the
"Stock"), and will use its best efforts to cause the same to be declared
effective promptly by the Commission (and in any event, not later than
10 days following the publication by ITEQ of financial results
containing at least 30 days of post-merger operations). ITEQ agrees to
maintain such Registration Statement in effect for the maximum period
allowable under the regulations promulgated by the Commission, and in
any event to maintain the same (or, to the extent necessary, successive
registration statements) through at least December 31, 2002. In any
offering pursuant to this Paragraph, ITEQ will use its best efforts to
effect any such registration and use its best efforts to effect such
qualification and compliance as may be required and as would permit or
facilitate the resale of such Stock, including, without limitation,
registration under the Securities Act, appropriate qualifications under
applicable blue-sky or other state securities laws, and appropriate
compliance with any other governmental requirements.
7.3.2. Procedures. Unless otherwise agreed between ITEQ and any
Stockholder, the Registration Statement will cover resales of Stock in
the open market by the Stockholders, among others. In no event shall
the plan of distribution of Stock include the use of a contractual
underwriter, nor shall ITEQ have any obligation to enter into an
underwriting agreement with any investment banking firm participating as
a broker in the execution of any such resales. ITEQ agrees that it will
furnish to each Stockholder such number of prospectuses, prospectus
supplements, or other documents incident to any registration,
qualification or compliance referred to herein as the Stockholder from
time to time may reasonably request.
7.3.3. Registration Expenses. All expenses (except for
commissions and any legal fees for Stockholder's counsel) of any
registrations of Stock effected pursuant to this Agreement (including,
but not limited to, the expenses of any qualifications under the blue-
sky or other state securities laws and compliance with governmental
requirements of preparing and filing any post-effective amendments or
prospectus supplements required for the lawful distribution of the Stock
to the public in connection with such registration) will be paid by
ITEQ.
7.3.4. Preparation; Reasonable Investigation. In connection with
the preparation and filing of any registration statement under the
Securities Act pursuant to this Agreement,
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ITEQ will give each Stockholder (and any single counsel designated by
all Stockholders), the opportunity to participate in the preparation of
such registration statement, each prospectus included therein or filed
with the Commission, and each amendment thereof or supplement thereto,
and will give each of them such access to its books and records and such
opportunities to discuss the business of ITEQ with its officers and the
independent public accountants who have certified its financial
statements as shall be necessary to conduct a reasonable investigation
within the meaning of the Securities Act.
7.3.5. Rights Non-Transferable. The registration rights provided
by this Section 7.3 are for the benefit solely of the Stockholders, are
personal in nature, and shall not be available to any subsequent holder
of Stock (other than subsequent holders who have become such by gift or
other transfer by a Stockholder to an immediate family member of such
Stockholder, by will or through operation of the laws of descent and
distribution ("Heirs") and the Stockholders' and their Heirs' respective
administrators, guardians, receivers, executors or other persons acting
in a similar capacity).
7.3.6. Indemnification by ITEQ. ITEQ agrees to indemnify and
hold harmless each Stockholder and each person, if any, who controls a
Stockholder, against any and all claims, demands, losses, costs,
expenses, obligations, liabilities, joint or several, damages,
recoveries and deficiencies, including interest, penalties and
attorneys' fees (collectively, "Claims"), to which such Stockholder may
become subject under the Securities Act or otherwise, insofar as such
Claims (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and ITEQ will reimburse such Stockholder and
each such controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or
defending any such Claim (or action or proceeding in respect thereof);
provided that ITEQ shall not be liable in any such case to the extent
that any such Claim (or action or proceeding in respect thereof) or
expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such
Registration Statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement, in reliance
upon and in conformity with written information furnished to ITEQ
through an instrument duly executed by such Stockholder specifically
stating that it is for use in the preparation thereof. Such indemnity
shall remain in full force and effect regardless of any investigation
made by or on behalf of any Stockholder or any such controlling person
and shall survive any transfer of Stock by a Stockholder.
7.3.7. Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or
proceeding involving a Claim referred to in this Section 7.3, such
indemnified party will, if a claim in respect thereof is to be made
against
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ITEQ, give written notice to ITEQ, in the manner and to the address
specified in Section 8.3 hereof, of the commencement of such action,
provided that the failure of any indemnified party to give notice as
provided herein shall not relieve ITEQ of its obligations under this
Section 7.3, except and only to the extent that ITEQ is actually
prejudiced by such failure to give notice. In case any such action is
brought against ITEQ, unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such Claim, ITEQ shall be
entitled to participate in and to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party, and after
notice from ITEQ to such indemnified party of its election so to assume
the defense thereof, ITEQ shall not be liable to such indemnified party
for any legal expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation.
ITEQ shall not, without the consent of the indemnified party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect of such Claim.
7.3.8. Undertaking to File Reports and Cooperate in Rule 144
Transactions. For as long as any of the Stockholders shall continue to
hold any Stock, ITEQ will undertake, on a reasonable commercial basis,
to timely file all annual, quarterly and other reports required to be
filed by it under Section 13 or 15(d) of the Exchange Act, and the
regulations of the Commission thereunder. In the event of any proposed
sale of Stock by any of the Stockholders pursuant to Rule 144 under the
Securities Act, ITEQ shall cooperate with such Stockholder so as to
enable such sales to be made in accordance with applicable laws, rules
and regulations, the requirements of ITEQ's transfer agents, and the
reasonable requirements of any broker through which the sales are
proposed to be executed. Without limiting the generality of the
foregoing, ITEQ shall, upon request, furnish with respect to each such
sale (i) a written statement certifying that ITEQ has filed all reports
required to be filed by it under the Exchange Act for a period of at
least one year preceding the date of the proposed sale, and, in
addition, has filed the most recent annual report required to be filed
by it thereunder; (ii) an opinion of ITEQ's counsel regarding such
matters as ITEQ's transfer agents or such Stockholder's broker may
reasonably desire to confirm; and (iii) upon surrender of a certificate
or certificates for the same or a greater number of Stock, unlegended
certificates representing Stock in such numbers and denominations as
such Stockholder shall reasonably require for delivery pursuant to such
resales.
7.3.9. Beneficiaries. The provisions of this Section 7.3 are for
the benefit of the Stockholders and ITEQ, and no other person shall
acquire or have any rights under or by virtue of this Agreement except
as set forth in Paragraph 7.3.5. As express third-party beneficiaries
of this Section 7.3, any Stockholder may independently enforce the
provisions hereof against ITEQ.
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7.4. Affiliate Agreements.
7.4.1. AIX Affiliates. To insure that the merger contemplated by
this Agreement will be treated as a "pooling of interests" and to insure
compliance with Rule 145 of the rules and regulations promulgated by the
Commission and the Securities Act, each of AIX's directors, executive
officers and beneficial owners of 5% or more of AIX's Common Stock has
concurrently signed and delivered to ITEQ the AIX affiliate agreements
in the form attached as [reference to omitted appendix].
7.4.2. ITEQ Affiliates. To insure that the merger contemplated
by this Agreement will be treated as a "pooling of interests," each of
ITEQ's directors, executive officers and beneficial owners of 5% or more
of ITEQ's Common Stock has concurrently signed and delivered to ITEQ the
ITEQ affiliate agreements in the form attached as [reference to omitted
appendix].
7.5. Publication of Combined Results. ITEQ agrees to publicly release
a report in the form of a quarterly earnings report, registration statement
filed with the Commission, a report filed with the Commission on Form 10-K, 10-
Q, or 8-K or any other public filing, statement or announcement which includes
the combined financial results (including combined sales and net income) of
ITEQ and AIX for a period of at least 30 days of combined operations of ITEQ
and AIX following the Effective Date within 30 days after the end of the first
full calendar month of combined operations.
ARTICLE VIII
MISCELLANEOUS
8.1. Entirety. This Agreement embodies the entire agreement between
the parties with respect to the subject matter hereof, and all prior agreements
between the parties with respect thereto are hereby superseded in their
entirety.
8.2. Counterparts. Any number of counterparts of this Agreement may
be executed and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
instrument.
8.3. Notices and Waivers. Any notice or waiver to be given to any
party hereto shall be in writing and shall be delivered by courier, sent by
facsimile transmission or first class registered or certified mail, postage
prepaid.
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<PAGE> 199
IF TO ITEQ
<TABLE>
<S> <C>
Addressed to: With a copy to:
ITEQ, Inc. Porter & Hedges, L.L.P.
2727 Allen Parkway, Suite 760 700 Louisiana, 35th Floor
Houston, Texas 77019 Houston, Texas 77210-4744
Attention: Lawrance W. McAfee Attention: T. William Porter
Facsimile: (713) 522-1759 Facsimile: (713) 226-0235
IF TO AIX
Addressed to: With a copy to:
Astrotech International Corporation Vinson & Elkins L.L.P.
960 Penn Avenue, Suite 800 1001 Fannin
Pittsburgh, Pennsylvania 15222 2300 First City Tower
Attention: S. Kent Rockwell Houston, Texas 77002
Facsimile: (412) 391-3347 Attention: John S. Watson
Facsimile: (713) 615-5236
</TABLE>
Any communication so addressed and mailed by first-class registered or
certified mail, postage prepaid, shall be deemed to be received on the fifth
business day after so mailed, and if delivered by courier or facsimile to such
address, upon delivery during normal business hours on any business day.
8.4. Termination of Representations, Warranties, etc. The respective
representations and warranties contained in Articles II and III shall expire
with, and be terminated and extinguished by, the merger pursuant to this
Agreement at the time of the consummation thereof on the Effective Date. This
Section 8.4 shall not limit any covenant or agreement of the parties hereto
which by its terms contemplates performance after the Effective Date or after
termination of this Agreement.
8.5. Table of Contents and Captions. The table of contents and
captions contained in this Agreement are solely for convenient reference and
shall not be deemed to affect the meaning or interpretation of any article,
section, or paragraph hereof.
8.6. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of and be enforceable by the successors and assigns
of the parties hereto and the employees of AIX shall be considered third-party
beneficiaries of the covenants and agreements contained in Section 1.10 and
5.18 of this Agreement. As express third-party beneficiaries of Sections 1.10
and 5.18, the employees of AIX may independently enforce such provisions
against ITEQ.
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<PAGE> 200
8.7. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
8.8. Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas
(except to the extent that the form and content of the Certificate of Merger
and the consequences of the filing thereof shall be governed by the DGCL).
8.9. Public Announcements. The parties agree that before the
Effective Date that they shall consult with each other before the making of any
public announcement regarding the existence of this Agreement, the contents
hereof or the transactions contemplated hereby, and to obtain the prior
approval of the other party as to the content of such announcement, which
approval shall not be unreasonably withheld. However, the foregoing shall not
apply to any announcement or written statement which, upon the written advice
of counsel, is required by law to be made, except that the party required to
make such announcement shall, whenever practicable, consult with and solicit
prior approval from such other party concerning the timing and content of such
legally required announcement or statement before it is made.
8.10. Definitions. The following terms are defined in the indicated
place:
<TABLE>
<CAPTION>
Section or
Term Paragraph
---- ---------
<S> <C>
Agreement Premises
AIX Common Stock Premises
AIX Employee 5.1.8
AIX Options 1.10
AIX Option Plans 1.10
AIX Plans 2.1.7.1
AIX Reports 2.1.5
AIX Transaction Proposals 4.3.6.1
Another AIX Transaction 4.3.6.2
Applicable Environmental Laws 2.1.14.3
Break-Up Fee 4.3.6.2
Claims 7.3.6
Code 1.4.2
Commission 1.10
DGCL Premises
DMG 2.1.16
Effective Date 1.3
</TABLE>
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<PAGE> 201
<TABLE>
<S> <C>
Encumbrance 2.1.4
ERISA 2.1.17
Exchange Act 2.1.5
Heirs 7.3.5
HSR 2.1.18
Intellectual Property 2.1.11
Investment Company Act 2.1.21
ITEQ Common Stock Premises
ITEQ Plans 3.1.16
ITEQ Reports 3.1.5
ITEQ Shares 1.9.2
Material Adverse Effect 1.12
Merger Consideration 1.9.2
Merging Corporations Premises
OSHA 2.1.15
Proxy Statement 2.1.20
RPR 2.1.16
Refinancing 4.4.13
Registration Statement 7.3.1
Restated Bylaws 1.6
Restated Certificate of Incorporation 1.4.1
Securities Act 4.4.10
Simmons 2.1.16
Stock 7.3.1
Stockholders 7.3.1
Superior AIX Transaction Proposal 4.3.6.1
</TABLE>
[Signature Page Follows]
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<PAGE> 202
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective duly authorized
representatives, all as of the day and year first above written (but executed
and delivered as of the 23rd of day of July, 1997).
THE PARTIES TO THE MERGER CONTEMPLATED BY THIS AGREEMENT:
ITEQ, INC.
By: /s/ Mark E. Johnson
--------------------------------------
Mark E. Johnson, Chairman of the
Board and Chief Executive Officer
ASTROTECH INTERNATIONAL CORPORATION
By: /s/ S. Kent Rockwell
--------------------------------------
S. Kent Rockwell, Chairman of the
Board and Chief Executive Officer
A-45
<PAGE> 203
APPENDIX B
July 23, 1997
Board of Directors
ITEQ, Inc.
2727 Allen Parkway, Suite 760
Houston, Texas 77019
Members of the Board:
You have requested the opinion of Simmons & Company International ("Simmons")
as investment bankers as to the fairness, from a financial point of view, to
the holders of common stock of ITEQ, Inc. ("ITEQ" or "the Company") of the
consideration to be paid by ITEQ in the proposed merger of Astrotech
International Corporation ("Astrotech") with and into ITEQ, pursuant to the
Plan and Agreement of Merger ("the Agreement"), executed by ITEQ and Astrotech
("the Proposed Merger").
As more specifically set forth in the Agreement, in the Proposed Merger each
share of common stock of Astrotech ("Astrotech Common Stock") will be converted
into 0.93 shares of common stock, par value of $0.001 per share, of ITEQ ("ITEQ
Common Stock").
Simmons, as a specialized, energy-related investment banking firm, is engaged
in, among other things, the valuation of businesses and their securities in
connection with mergers and acquisitions, the management and underwriting of
sales of equity and debt to the public and private placements of equity and
debt. In addition, in the ordinary course of business, Simmons may actively
trade the securities of ITEQ and Astrotech for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Simmons has from time to time been engaged by
Astrotech to provide general corporate finance advisory services.
In connection with rendering its opinion, Simmons has reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) the financial
statements and other information concerning the Company, including the Annual
Reports on Form 10-K of the Company for each of the years in the three-year
period ended December 31, 1996, the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 31, 1997, ITEQ interim financial statements
for periods subsequent to March 31, 1997, the Current Reports on Form 8-K dated
February 3, 1997 and March 7, 1997, the Proxy Solicitation Materials on
Schedule 14A dated April 30, 1997, and the Registration Statement on Form S-2
of the Company related to the registration of ITEQ Common Stock on May 20,
1997;
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<PAGE> 204
ITEQ, Inc.
July 23, 1997
Page 2
(iii) certain near-term forecasts and other internal information, primarily
financial in nature, concerning the business and operations of the Company for
purposes of Simmons' analysis; (iv) certain publicly available information
concerning the trading of, and the trading market for, ITEQ Common Stock; (v)
the financial statements and other information concerning Astrotech, including
the Annual Reports on Form 10-K of Astrotech for each of the years in the
three-year period ended September 30, 1996, the Quarterly Reports on Form 10-Q
of Astrotech for the quarters ended December 31, 1996 and March 31, 1997,
Astrotech interim financial statements for periods subsequent to March 31,
1997, the Current Report on Form 8-K dated May 1, 1997, and the Proxy
Solicitation Materials on Schedule 14A dated April 16, 1997; (vi) certain
near-term forecasts and other internal information, primarily financial in
nature, concerning the business and operations of Astrotech furnished by
Astrotech for purposes of Simmons' analysis; (vii) certain publicly available
information concerning the trading of, and the trading market for, Astrotech
Common Stock; (viii) certain publicly available information with respect to
certain other companies that Simmons believes to be comparable to the Company
or Astrotech and the trading markets for certain of such other companies'
securities; (ix) certain publicly available information concerning the estimate
of the future operating performance of the Company, Astrotech and the
comparable companies prepared by industry experts unaffiliated with either the
Company or Astrotech; and (x) certain publicly available information concerning
the nature and terms of certain other transactions considered relevant to the
inquiry. Simmons has also met with certain officers and employees of the
Company and Astrotech to discuss the foregoing, as well as other matters
believed relevant to the inquiry.
In arriving at its opinion, Simmons has assumed and relied upon the accuracy
and completeness of all of the financial and other information provided or
publicly available, including, without limitation, information with respect to
the amount and timing of cost savings provided by the Company and Astrotech
pursuant to the Proposed Merger, and has not attempted independently to verify
any of such information. Simmons has not conducted a physical inspection of any
of the assets, properties or facilities of the Company or Astrotech, nor has
Simmons made or obtained any independent evaluations or appraisals of any such
assets, properties or facilities. Simmons has also assumed that the Proposed
Merger will be accounted for as a pooling-of-interests for accounting purposes
and as a tax-free reorganization for federal income tax purposes. In addition,
although Simmons discussed the prospects of ITEQ and Astrotech with certain
representatives of their respective managements, Simmons was only provided with
limited financial projections from both ITEQ and Astrotech.
In conducting its analysis and arriving at its opinion expressed herein,
Simmons has considered such financial and other factors as it deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of the Company and
Astrotech; (ii) the business prospects of the Company and Astrotech; (iii)
estimates of pro forma combination benefits
B-2
<PAGE> 205
ITEQ, Inc.
July 23, 1997
Page 3
pursuant to the Proposed Merger prepared by the Company and Astrotech; (iv) the
historical and current market for ITEQ Common Stock and Astrotech Common Stock
and for the equity securities of certain other companies believed to be
comparable to the Company or Astrotech; (v) the respective contributions in
terms of various financial measures of the Company and Astrotech to the
combined company, and the relative ownership of ITEQ after the proposed
transaction by the current holders of ITEQ Common Stock and Astrotech Common
Stock; (vi) the pro forma effect of the transaction on ITEQ's capitalization
ratios, earnings per share and cash flow per share; and (vii) the nature and
terms of certain other acquisition transactions that Simmons believes to be
relevant. Simmons has also taken into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities' valuation generally. Simmons' opinion
necessarily is based upon conditions as they exist and can be evaluated on, and
on the information made available at, the date hereof. Simmons does not express
any opinion as to the price or range of prices at which the shares of ITEQ
Common Stock will trade subsequent to the date hereof or the consummation of
the Proposed Merger. Simmons is acting as financial advisor to the Company in
the transaction and will receive a customary fee for its services, which fee is
primarily contingent upon the consummation of the Proposed Merger. Simmons'
engagement and the opinion expressed are solely for the benefit of the ITEQ
Board of Directors and are not on behalf of and are not intended to confer
rights or remedies upon any holder of ITEQ Common Stock or any other person.
Based upon and subject to the foregoing, Simmons is of the opinion, as
investment bankers, that the consideration to be paid by the Company in the
Proposed Merger is fair, from a financial point of view, to holders of ITEQ
Common Stock.
Sincerely,
SIMMONS & COMPANY INTERNATIONAL
/s/ GEORGE C. MORRIS III
George C. Morris III
Managing Director
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<PAGE> 206
APPENDIX C
July 22, 1997
PERSONAL AND CONFIDENTIAL
Board of Directors
Astrotech International Corporation
Convention Towers Building
960 Penn Avenue, Suite 800
Pittsburgh, PA 15222
Attention: S. Kent Rockwell
Chairman and CEO
Gentlemen:
You have advised Rauscher Pierce Refsnes, Inc. ("RPR") that ITEQ, Inc.
("ITEQ") has proposed a merger with Astrotech International Corporation
("Astrotech") in which each share of Astrotech common stock will be exchanged
for 0.93 shares of ITEQ common stock, and ITEQ will be the surviving
corporation. You have requested that RPR issue an opinion ("Opinion") as to
the fairness from a financial point of view to the common stockholders of
Astrotech of the financial terms of the proposed transaction as set forth in
the draft Plan and Agreement of Merger dated July 17, 1997.
RPR, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for estate,
corporate and other purposes.
In arriving at our opinion, we have, among other things:
1. Reviewed the draft Plan and Agreement of Merger dated July 17,
1997 with ITEQ;
2. Reviewed Astrotech's annual report and Form 10-K for the year
ended September 30, 1996.
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<PAGE> 207
Astrotech International Corporation
July 22, 1997
Page 2
3. Reviewed Astrotech's Form 10-Q quarterly reports for the periods
ended 12/31/96 and 3/31/97;
4. Reviewed Astrotech's Proxy Statement dated April 15, 1997;
5. Reviewed Astrotech's Form 8-K/A-1 dated May 1, 1997 (relating to
Astrotech's acquisition of Trusco Tank, Inc.);
6. Reviewed a research report on Astrotech dated May 22, 1996
prepared by First Analysis Corporation;
7. Reviewed a research report on Astrotech dated January 7, 1997
prepared by Emerald Research;
8. Reviewed a research report on Astrotech dated March 25, 1997
prepared by GunnAllen Financial;
9. Reviewed ITEQ's Form 10-K and annual report for the year ended
12/31/96;
10. Reviewed ITEQ's Form 10-Q and quarterly shareholder report dated
3/31/97;
11. Reviewed a research report on ITEQ dated May 23, 1997 prepared by
EVEREN Securities, Inc.;
12. Reviewed a research report on ITEQ dated May 27, 1997 prepared by
Williams Mackay Jordan & Co;
13. Reviewed a research report on ITEQ dated June 5, 1997 prepared by
Deutsche Morgan Grenfell;
14. Reviewed merger/acquisition proposal materials prepared for ITEQ
and Astrotech by Simmons & Company dated June 6, 1997 and June
12, 1997;
15. Reviewed ITEQ's Prospectus dated May 20, 1997 for its secondary
public offering of Common Stock;
16. Reviewed ITEQ's Proxy Statement dated May 21, 1997;
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<PAGE> 208
Astrotech International Corporation
July 22, 1997
Page 3
17. Reviewed ITEQ's Form 8-K/A dated February 3, 1997;
18. Considered such other information, financial studies, analyses
and investigations as we deemed relevant under the circumstances;
and
19. Discussed with management of Astrotech and ITEQ the outlook for
future operating results, the assets and liabilities of both
companies, materials in the foregoing documents, and other
matters we considered relevant to our inquiry.
In our review and in arriving at our opinion, we have, with your
permission, (i) not independently verified any of the foregoing information and
have relied upon its being complete and accurate in all material respects and
(ii) not made an independent evaluation or appraisal of specific assets of
Astrotech or ITEQ. Our Opinion is provided to you pursuant to the terms of our
engagement letter dated July 10, 1997.
Based upon and subject to the foregoing, it is our Opinion that, as of
the date hereof, the consideration to be received pursuant to the proposed
transaction is fair to the common stockholders of Astrotech from a financial
point of view.
RAUSCHER PIERCE REFSNES, INC.
By: /s/ G. CLYDE BUCK
--------------------------------
G. Clyde Buck
Managing Director
C-3
<PAGE> 209
APPENDIX D
ITEQ, INC.
1990 STOCK OPTION PLAN
AS AMENDED AND RESTATED EFFECTIVE AUGUST 1, 1997
<PAGE> 210
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. GENERAL PROVISIONS RELATING TO PLAN
GOVERNANCE, COVERAGE AND BENEFITS . . . . . . . . . . . . . . . . . . 1
1.1 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(a) Authorized Officer . . . . . . . . . . . . . . . . . . . . . 1
(b) Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(c) Change in Control . . . . . . . . . . . . . . . . . . . . . . 2
(d) Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(e) Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(f) Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 2
(g) Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
(h) Consultant . . . . . . . . . . . . . . . . . . . . . . . . . 2
(i) Covered Employee . . . . . . . . . . . . . . . . . . . . . . 2
(j) Disability . . . . . . . . . . . . . . . . . . . . . . . . . 2
(k) Effective Date . . . . . . . . . . . . . . . . . . . . . . . 3
(l) Employee . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(m) Employment . . . . . . . . . . . . . . . . . . . . . . . . . 3
(n) Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . 3
(o) Fair Market Value . . . . . . . . . . . . . . . . . . . . . . 3
(p) Grantee . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(q) Incentive Award . . . . . . . . . . . . . . . . . . . . . . . 4
(r) Incentive Agreement . . . . . . . . . . . . . . . . . . . . . 4
(s) Incentive Stock Option . . . . . . . . . . . . . . . . . . . 4
(t) Insider . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(u) Nonstatutory Stock Option . . . . . . . . . . . . . . . . . . 4
(v) Option Price . . . . . . . . . . . . . . . . . . . . . . . . 4
(w) Outside Director . . . . . . . . . . . . . . . . . . . . . . 4
(x) Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(y) Performance-Based Exception . . . . . . . . . . . . . . . . . 5
(z) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(aa) Retirement . . . . . . . . . . . . . . . . . . . . . . . . . 5
(bb) Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(cc) Share Pool . . . . . . . . . . . . . . . . . . . . . . . . . 5
(dd) Stock Option or Option . . . . . . . . . . . . . . . . . . . 5
(ee) Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . 5
(ff) Supplemental Payment . . . . . . . . . . . . . . . . . . . . 5
1.3 Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Authority of the Committee . . . . . . . . . . . . . . . . . 5
(b) Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
i
<PAGE> 211
<TABLE>
<S> <C> <C>
(c) Decisions Binding . . . . . . . . . . . . . . . . . . . . . . 6
(d) Modification of Outstanding Incentive Awards . . . . . . . . 6
(e) Delegation of Authority . . . . . . . . . . . . . . . . . . . 6
(f) Expenses of Committee . . . . . . . . . . . . . . . . . . . . 7
(g) Surrender of Previous Incentive Awards . . . . . . . . . . . 7
(h) Indemnification . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 Shares of Common Stock Subject to the Plan . . . . . . . . . . . . . . 7
1.5 Share Pool Adjustments for Awards and Payouts . . . . . . . . . . . . 8
1.6 Sources of Common Stock Available for Issuance. . . . . . . . . . . 8
1.7 Eligibility for Participation . . . . . . . . . . . . . . . . . . . . 8
(a) Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . 8
(b) Incentive Stock Option Eligibility . . . . . . . . . . . . . 9
1.8 Types of Incentive Awards . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2. STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Grant of Stock Options . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Stock Option Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(a) Written Agreement . . . . . . . . . . . . . . . . . . . . . . 9
(b) Number of Shares . . . . . . . . . . . . . . . . . . . . . 10
(c) Exercise Price . . . . . . . . . . . . . . . . . . . . . . 10
(d) Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(e) Exercise . . . . . . . . . . . . . . . . . . . . . . . . . 10
(f) $100,000 Limit on Incentive Stock Options . . . . . . . . . 10
2.3 Stock Option Exercises . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Method of Exercise and Payment . . . . . . . . . . . . . . 11
(b) Restrictions on Option Transferability. . . . . . . . . . 11
(c) Restrictions on Share Transferability . . . . . . . . . . . 11
(d) Notification with respect to Incentive Stock Options . . . 12
(e) Proceeds of Option Exercise . . . . . . . . . . . . . . . . 12
2.4 Supplemental Payment on Exercise of Nonstatutory Stock Options . . . 12
SECTION 3. INCENTIVE AGREEMENTS AND STOCK ADJUSTMENTS . . . . . . . . . . . . . 13
3.1 Plan Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Incentive Agreement . . . . . . . . . . . . . . . . . . . . 13
(b) No Right to Employment . . . . . . . . . . . . . . . . . . 13
(c) Securities Requirements . . . . . . . . . . . . . . . . . . 13
3.2 Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Non-Transferable Incentive Awards . . . . . . . . . . . . . 14
(b) Ability to Exercise Options . . . . . . . . . . . . . . . . 14
(c) Representation of Ownership . . . . . . . . . . . . . . . . 14
3.3 No Rights as a Stockholder . . . . . . . . . . . . . . . . . . . . . 14
3.4 Change in Stock and Adjustments . . . . . . . . . . . . . . . . . . 14
(a) Changes in Law or Circumstances . . . . . . . . . . . . . . 14
</TABLE>
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<TABLE>
<S> <C> <C>
(b) Exercise of Corporate Powers . . . . . . . . . . . . . . . 15
(c) Recapitalization of the Company . . . . . . . . . . . . . . 15
(d) Reorganization of the Company . . . . . . . . . . . . . . . 15
(e) Issue of Common Stock by the Company . . . . . . . . . . . 16
3.5 Termination of Employment, Death, Disability and Retirement . . . . 16
(a) Termination of Employment . . . . . . . . . . . . . . . . . 16
(b) Retirement of Employee . . . . . . . . . . . . . . . . . . 16
(c) Disability or Death . . . . . . . . . . . . . . . . . . . . 17
(d) Post-Termination Amendment . . . . . . . . . . . . . . . . 17
3.6 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.7 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.1 Commencement Date; Termination Date . . . . . . . . . . . . . . . . 19
4.2 No Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 19
(a) Tax Withholding . . . . . . . . . . . . . . . . . . . . . . 19
(b) Share Withholding . . . . . . . . . . . . . . . . . . . . . 19
(c) Incentive Stock Options . . . . . . . . . . . . . . . . . . 20
4.4 No Guarantee of Tax Consequences . . . . . . . . . . . . . . . . . . 20
4.5 Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . 20
4.6 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.8 Gender, Tense and Headings . . . . . . . . . . . . . . . . . . . . . 21
4.9 Amendment and Termination . . . . . . . . . . . . . . . . . . . . . 21
4.10 Rule 16b-3 Securities Law Compliance . . . . . . . . . . . . . . . . 21
4.11 Compliance with Code Section 162(m) . . . . . . . . . . . . . . . . 21
4.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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ITEQ, INC.
1990 STOCK OPTION PLAN
AS AMENDED AND RESTATED EFFECTIVE AUGUST 1, 1997
SECTION 1.
GENERAL PROVISIONS RELATING TO
PLAN GOVERNANCE, COVERAGE AND BENEFITS
1.1 PURPOSE
The purpose of the ITEQ, Inc. 1990 Stock Option Plan (the "Plan") is
to foster and promote the long-term financial success of ITEQ, Inc. (the
"Company") and to increase stockholder value by: (a) encouraging the commitment
of selected key Employees and Consultants (b) motivating superior performance
of key Employees and Consultants by means of long-term performance related
incentives, (c) encouraging and providing key Employees and Consultants with a
program for obtaining ownership interests in the Company which link and align
their personal interests to those of the Company's stockholders, (d) attracting
and retaining key Employees and Consultants by providing competitive incentive
compensation opportunities, and (e) enabling key Employees and Consultants to
share in the long-term growth and success of the Company.
The Plan provides for Incentive Awards of Nonstatutory Stock Options
and Incentive Stock Options and, therefore, is not intended to be a plan that
is subject to the Employee Retirement Income Security Act of 1974, as amended
(ERISA). The Plan shall be interpreted, construed and administered consistent
with its status as a plan that is not subject to ERISA.
The original effective date of the Plan was October 1, 1990. Unless
earlier terminated, no Options shall be issued under the Plan after the close
of business on October 1, 2000. The Plan was originally adopted by the Board
on October 1, 1990 and approved by the Company's stockholders on July 30, 1991.
The Plan, as amended and restated in its entirety, was adopted by the Board of
May 19, 1993 and approved by the Company's stockholders on August 24, 1993.
Subsequent amendments to the Plan were adopted by the Board on June 29, 1995
and approved by the Company's stockholders on June 29, 1995. The terms set
forth herein constitute all of the terms and provisions of the Plan, as amended
and restated in its entirety effective August 1, 1997, until further amended
pursuant to Section 4.10.
1.2 DEFINITIONS
The following terms shall have the meanings set forth below:
(a) Authorized Officer. The Chief Executive Officer,
Chief Financial Officer or Treasurer of the Company, each of whom has
been delegated the authority to execute any Incentive
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Agreement for and on behalf of the Company provided that such
Incentive Agreement has been approved or ratified by the Committee.
No officer shall be an Authorized Officer with respect to any
Incentive Agreement for himself, nor act in any matter hereunder
relating directly to himself.
(b) Board. The Board of Directors of the Company.
(c) Change in Control. Any of the events described in
and subject to Section 3.6.
(d) Code. The Internal Revenue Code of 1986, as amended,
and regulations and other authority promulgated thereunder by the
appropriate governmental authority. References herein to any
provision of the Code shall refer to any successor provision thereto.
(e) Committee. Any Committee appointed by the Board
consisting of not less than two directors who fulfill the
"non-employee director" requirements of Rule 16b-3 under the Exchange
Act and the "outside director" requirements of Section 162(m) of the
Code. Without limitation, the Committee may be the Compensation
Committee of the Board, or any subcommittee of the Compensation
Committee, provided that the members of the Committee satisfy the
requirements of the previous sentence. The members of the Committee
shall be appointed from time to time by, and shall serve at the
discretion of, the Board.
(f) Common Stock. The common stock of ITEQ, Inc., $.001
par value per share, and any class of common stock into which such
common shares may hereafter be converted, reclassified or
recapitalized.
(g) Company. ITEQ, Inc., a corporation organized under
the laws of the State of Delaware, and any successor in interest
thereto.
(h) Consultant. An independent agent, consultant,
attorney or other individual who is not an employee of the Company or
any Parent or Subsidiary and who, in the opinion of the Committee, is
in a position to contribute materially to the growth or financial
success of the Company or any Parent or Subsidiary.
(i) Covered Employee. A named executive officer who is
one of the group of "covered employees" as defined in regulations
promulgated under Section 162(m) of the Code.
(j) Disability. As determined by the Committee in its
discretion exercised in good faith, a physical or mental condition of
the Employee that would entitle him to payment of disability income
payments under the Company's long term disability insurance policy or
plan for employees, as then effective, if any; or in the event that
the Grantee is not covered, for whatever reason, under the Company's
long-term disability insurance policy or plan, "Disability" means a
permanent and total disability as defined in Section 22(e)(3) of the
Code.
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(k) Effective Date. August 1, 1997, the effective date
of the amendment and restatement of the Plan.
(l) Employee. Any common-law employee of the Company or
any Parent or Subsidiary who, in the opinion of the Committee, is one
of a select group of executive officers, other officers, or other key
personnel of the Company or any Parent or Subsidiary, who is in a
position to contribute materially to the growth and development and to
the financial success of the Company or any Parent or Subsidiary,
including, without limitation, officers who are members of the Board.
(m) Employment. Employment by the Company or any Parent
or Subsidiary, or by any corporation issuing or assuming an Incentive
Award in any transaction described in Section 424(a) of the Code, or
by a parent corporation or a subsidiary corporation of such
corporation issuing or assuming such Incentive Award, as the
parent-subsidiary relationship is determined at the time of the
corporate action described in Section 424(a) of the Code. In this
regard, neither the transfer of a Grantee from Employment by the
Company to Employment by any Parent or Subsidiary, nor the transfer of
a Grantee from Employment by any Parent or Subsidiary to Employment by
the Company, shall be deemed to be a termination of Employment of the
Grantee. Moreover, the Employment of a Grantee shall not be deemed to
have been terminated because of an approved leave of absence from
active Employment on account of illness, vacation or for reasons of
professional advancement, education, health, or government service, or
during military leave for any period (if the Grantee returns to active
Employment within 90 days after the termination of military leave), or
during any period required to be treated as a leave of absence by
virtue of any valid law or agreement.
Unless otherwise provided in the Incentive Agreement, the term
"Employment" for purposes of the Plan will also include compensatory
services performed by a Consultant for the Company or any Parent or
Subsidiary.
(n) Exchange Act. The Securities Exchange Act of 1934,
as amended.
(o) Fair Market Value. The fair market value of one
share of Common Stock on the date in question, which is deemed to be
(i) the closing sales price on such date of a share of Common Stock as
reported on the principal national securities exchange on which Shares
are then listed or admitted to trading, or (ii) if not so reported,
the last reported sales price for a Share on such date as quoted on
the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), or (iii) if not quoted on NASDAQ, the average of
the closing bid and asked prices for a Share as quoted by the National
Quotation Bureau's "Pink Sheets" or the National Association of
Securities Dealers' OTC Bulletin Board System. If there was no public
trade of Common Stock on the date in question, Fair Market Value shall
be determined by reference to the last preceding date on which such a
trade was so reported.
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If the Common Stock is not traded in accordance with clauses
(i), (ii) or (iii) of the preceding paragraph at the time a
determination of its Fair Market Value is required to be made
hereunder, the determination of Fair Market Value for purposes of the
Plan shall be made by the Committee in its discretion exercised in
good faith. In this respect, the Committee may rely on such
financial data, valuations or experts as it deems advisable under the
circumstances.
In the event that a Grantee uses a cashless exercise method or
a Share withholding method to exercise a Stock Option, as provided in
Section 2.3, Fair Market Value shall be based on the sale prices of
the Shares sold to pay the Option Price.
(p) Grantee. Any Employee or Consultant who is granted
an Incentive Award under the Plan.
(q) Incentive Award. A Nonstatutory Stock Option or
Incentive Stock Option, as well as any Supplemental Payment, awarded
under the Plan to a Grantee.
(r) Incentive Agreement. The written agreement entered
into between the Company and the Grantee setting forth the terms and
conditions pursuant to which an Incentive Award is granted under the
Plan, as such agreement is further defined in Section 3.1(a).
(s) Incentive Stock Option. A Stock Option granted by
the Committee to an Employee which is designated by the Committee as
an Incentive Stock Option and intended to qualify as an Incentive
Stock Option under Section 422 of the Code.
(t) Insider. An individual who is, on the relevant date,
an officer, director or ten percent (10%) beneficial owner of any
class of the Company's equity securities that is registered pursuant
to Section 12 of the Exchange Act, all as defined under Section 16 of
the Exchange Act.
(u) Nonstatutory Stock Option. A Stock Option granted by
the Committee to a Grantee which is not designated by the Committee as
an Incentive Stock Option.
(v) Option Price. The price at which a Share may be
purchased by the Grantee upon exercise of a Stock Option.
(w) Outside Director. A member of the Board who is not,
at the time of grant of an Incentive Award, an employee of the Company
or any Parent or Subsidiary.
(x) Parent. Any corporation (whether now or hereafter
existing) which constitutes a "parent" of the Company, as defined in
Section 424(e) of the Code.
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(y) Performance-Based Exception. The performance-based
exception from the tax deductibility limitations of Code Section
162(m), as prescribed in Code Section 162(m) and Treasury Regulation
Section 1.162-27(e) (or its successor).
(z) Plan. The ITEQ, Inc. 1990 Stock Option Plan as set
forth herein and as it may be amended from time to time.
(aa) Retirement. The voluntary termination of Employment
from the Company and any Parent or Subsidiary constituting retirement
for age on any date after the Employee attains the normal retirement
age of 65 years, or such other age as may be designated by the
Committee in the Employee's Incentive Agreement.
(ab) Share. A share of the Common Stock of the Company.
(ac) Share Pool means the number of shares authorized for
issuance under Section 1.4, as adjusted for granted Options under
Section 1.5 and as adjusted for changes in corporate capitalization
under Section 3.4.
(ad) Stock Option or Option. Pursuant to Section 2, (i)
an Incentive Stock Option or Nonstatutory Stock Option granted to an
Employee, or (ii) a Nonstatutory Stock Option granted to a Consultant,
whereunder the Grantee has the right to purchase Shares of Common
Stock. In accordance with Section 422 of the Code, no Consultant
shall be granted an Incentive Stock Option.
(ae) Subsidiary. Any corporation (whether now or
hereafter existing) which constitutes a "subsidiary" of the Company,
as defined in Section 424(f) of the Code.
(af) Supplemental Payment. Any amount, as described in
Section 2.4, dedicated to payment of income taxes that are payable by
the Grantee on exercise of a Nonstatutory Stock Option.
1.3 PLAN ADMINISTRATION
(a) Authority of the Committee. Except as may be limited
by law or by the Certification of Incorporation or Bylaws of the
Company, and subject to the provisions herein, the Committee shall
have full power to (i) select Grantees who shall participate in the
Plan; (ii) determine the sizes, duration and types of Incentive
Awards; (iii) determine the terms and conditions of Incentive Awards
and Incentive Agreements; (iv) determine whether any shares which are
subject to Options will be subject to any restrictions on transfer
after exercise of the Options; (v) construe and interpret the Plan and
any Incentive Agreement or other agreement entered into under the
Plan; and (vi) establish, amend, or waive rules for the Plan's
administration. Further, the Committee shall make all other
determinations which may be necessary or advisable for the
administration of the Plan.
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(b) Meetings. The Committee shall designate a chairman
from among its members who shall preside at all of its meetings, and
shall designate a secretary, without regard to whether that person is
a member of the Committee, who shall keep the minutes of the
proceedings and all records, documents, and data pertaining to its
administration of the Plan. Meetings shall be held at such times and
places as shall be determined by the Committee and the Committee may
hold telephonic meetings. The Committee may take any action otherwise
proper under the Plan by the affirmative vote, taken with or without a
meeting, of a majority of its members. The Committee may authorize
any one or more of their members or any officer of the Company to
execute and deliver documents on behalf of the Committee.
(c) Decisions Binding. All determinations and decisions
made by the Committee shall be made in its discretion pursuant to the
provisions of the Plan, and shall be final, conclusive and binding on
all persons including the Company, its stockholders, Employees,
Grantees, and their estates and beneficiaries. The Committee's
decisions and determinations under the Plan and with respect to any
Incentive Award need not be uniform and may be made selectively among
Incentive Awards, Employees or Consultants, whether or not such
Incentive Awards are similar or such Employees or Consultants are
similarly situated.
(d) Modification of Outstanding Incentive Awards.
Subject to the stockholder approval requirements of Section 4.9 if
applicable, the Committee may, in its discretion, provide for the
extension of the exerciseability of an Incentive Award, accelerate the
vesting or exerciseability of an Incentive Award, eliminate or make
less restrictive any restrictions contained in an Incentive Award,
waive any restriction or other provisions of an Incentive Award, or
otherwise amend or modify an Incentive Award in any manner that is
either (i) not adverse to the Grantee to whom such Incentive Award was
granted or (ii) consented to by such Grantee. The Committee may grant
an Incentive Award to an individual who it expects to become an
Employee within the next six months, with such Incentive Award being
subject to such individual actually becoming an Employee within such
time period, and subject to such other terms and conditions as may be
established by the Committee in its discretion.
(e) Delegation of Authority. The Committee may delegate
to the Authorized Officers, or any of them, any of its assigned duties
under this Plan pursuant to such conditions or limitations as the
Committee may establish from time to time, except that the Committee
may not delegate to any Authorized Officer the authority to (i) grant
Incentive Awards or (ii) to take any action which would contravene the
requirements of Rule 16b-3 under the Exchange Act or the
Performance-Based Exception.
(f) Expenses of Committee. The Committee may employee
legal counsel, including, without limitation, independent legal
counsel and counsel regularly employed by the Company, consultants and
agents as the Committee may deem appropriate for the administration of
the Plan, and may rely upon any opinion received from any such counsel
or consultant and any computations received from any such consultant
or agent. All expenses
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incurred by the Committee in interpreting and administering the Plan,
including, without limitation, meeting fees and expenses and
professional fees, shall be paid by the Company.
(g) Surrender of Previous Incentive Awards. The
Committee may, in its absolute discretion, grant Incentive Awards to
Grantees on the condition that such Grantees surrender to the
Committee for cancellation such other Incentive Awards (including,
without limitation, Incentive Awards with higher exercise prices) as
the Committee directs. Incentive Awards granted on the condition
precedent of surrender of outstanding Incentive Awards shall not count
against the limits set forth in Section 1.4 until such time as such
previous Incentive Awards are surrendered and cancelled.
(h) Indemnification. Each person who is or was a member
of the Committee, or of the Board, shall be indemnified by the Company
against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may
be a party or in which he may be involved by reason of any action
taken or failure to act under the Plan, except for any such act or
omission constituting willful misconduct or gross negligence. Such
person shall be indemnified by the Company for all amounts paid by him
in settlement thereof, with the Company's approval, or paid by him in
satisfaction of any judgment in any such action, suit, or proceeding
against him, provided he shall give the Company an opportunity, at its
own expense, to handle and defend the same before he undertakes to
handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the
Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or
hold them harmless.
1.4 SHARES OF COMMON STOCK SUBJECT TO THE PLAN
Subject to the provisions of Sections 1.5 and 3.4, the minimum number
of Shares of Common Stock which may be issued pursuant to the exercise of
Options under this Plan shall be 2,000,000 Shares as of the Effective Date and,
thereafter, on the first day of each fiscal quarter of the Company, the number
of Shares shall be automatically adjusted to an amount equal to ten percent
(10%) of the outstanding Shares of Common Stock on such date; provided,
however, that except for an adjustment in accordance with Section 3.4, the
number of Shares which may be issued pursuant to the exercise of Options under
this Plan shall not (i) exceed 3,000,000 Shares, (ii) be less than 2,000,000
Shares, (iii) be decreased as a result of a reduction in the Company's
outstanding Shares of Common Stock or (iv) exceed 2,000,000 Shares for
Incentive Stock Options granted hereunder.
Unless the Committee designates that a particular Incentive Award
granted to a Covered Employee is not intended to comply with the
Performance-Based Exception, subject to adjustment as provided in Section 3.4,
the maximum aggregate number of Options for Shares that may be granted to any
Covered Employee shall be Five Hundred Thousand (500,000) in any calendar year.
With respect to any Stock Option granted to a Covered Employee that is canceled
or repriced, the
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number of Shares subject to such Option shall continue to count against the
maximum number of Shares that may be the subject of Stock Options granted to
such Covered Employee hereunder and, in this regard, such maximum number shall
be determined in accordance with regulations promulgated under Section 162(m)
of the Code.
1.5 SHARE POOL ADJUSTMENTS FOR AWARDS AND PAYOUTS.
Options granted under the Plan shall reduce, on a one Share for one
Share basis, the number of Shares authorized for issuance under the Share Pool.
A cancellation, termination, expiration, forfeiture, or lapse for any
reason of any Option, and payment of an Option Price with previously acquired
Shares or by withholding Shares which otherwise would be acquired on exercise
(i.e., the number of Shares turned in or withheld as payment of the Option
Price), shall restore, on a one Share for one Share basis, the number of Shares
authorized for issuance under the Plan.
1.6 SOURCES OF COMMON STOCK AVAILABLE FOR ISSUANCE.
The Common Stock available for issuance upon the exercise of Options
under the Plan shall be made available from Shares now or hereafter (a) held in
the treasury of the Company, (b) authorized but unissued shares, or (c) Shares
to be purchased or acquired by the Company. No fractional Shares shall be
issued under the Plan; payment for fractional Shares shall be made in cash.
1.7 ELIGIBILITY FOR PARTICIPATION
(a) Eligibility. The Committee shall from time to time
designate those Employees and/or Consultants, if any, to be granted
Incentive Awards under the Plan, the number and type of Stock Options
granted, and any other terms or conditions relating to the Incentive
Awards as it may deem appropriate to the extent consistent with the
provisions of the Plan. A Grantee who has been granted an Incentive
Award may, if otherwise eligible, be granted additional Incentive
Awards at any time. The grant of any Option hereunder in any one year
to a Grantee shall neither guarantee nor preclude a further grant of
an Option to such Grantee in that year or in any subsequent year.
(b) Incentive Stock Option Eligibility. No Consultant
shall be eligible for the grant of any Incentive Stock Option. In
addition, no Employee shall be eligible for the grant of any Incentive
Stock Option who owns, or would own immediately before the grant of
such Incentive Stock Option, directly or indirectly, stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, or any Parent or Subsidiary. This
restriction does not apply if, at the time such Incentive Stock Option
is granted, the Incentive Stock Option exercise price is at least one
hundred and ten percent (110%) of the Fair Market Value on the date of
grant and the Incentive Stock Option by its terms is not exercisable
after the expiration of five (5) years from the date of grant. For
the
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purpose of the immediately preceding sentence, the attribution rules
of Section 424(d) of the Code shall apply for the purpose of
determining an Employee's percentage ownership in the Company or any
Parent or Subsidiary. This paragraph shall be construed consistent
with the requirements of Section 422 of the Code.
1.8 TYPES OF INCENTIVE AWARDS
The types of Incentive Awards available under the Plan are Stock
Options and Supplemental Payments as described in Section 2.
SECTION 2.
STOCK OPTIONS
2.1 GRANT OF STOCK OPTIONS
The Committee is authorized to grant (a) Nonstatutory Stock Options to
Employees and Consultants and (b) Incentive Stock Options to Employees only, in
accordance with the terms and conditions of the Plan and with such additional
terms and conditions, not inconsistent with the Plan, as the Committee shall
determine in its discretion. Successive grants may be made to the same Grantee
whether or not any Stock Option previously granted to such person remains
unexercised.
2.2 STOCK OPTION TERMS
(a) Written Agreement. Each grant of an Stock Option
shall be evidenced by a written Incentive Agreement. Among its other
provisions, each Incentive Agreement shall set forth the extent to
which the Grantee shall have the right to exercise the Stock Option
following termination of the Grantee's Employment. Such provisions
shall be determined in the discretion of the Committee, shall be
included in the Grantee's Incentive Agreement, need not be uniform
among all Stock Options issued pursuant to the Plan, and may reflect
distinctions based on the reasons for termination of Employment.
(b) Number of Shares. Each Stock Option shall specify
the number of Shares of Common Stock to which it pertains.
(c) Exercise Price. The exercise price per Share of
Common Stock under each Stock Option shall be determined by the
Committee and specified in the Incentive Agreement; provided, however,
(i) in the case of an Incentive Stock Option, such exercise price
shall not be less than one hundred percent (100%) of the Fair Market
Value per Share on the date the Incentive Stock Option is granted and
(ii) in the case of a Nonstatutory Stock Option, shall not be less
than seventy-five percent (75%) of the Fair Market Value on the date
the Nonstatutory Stock Option is granted; provided, however, if the
Nonstatutory Stock Option
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is intended to qualify for the Performance-Based Exception, the
exercise price shall not be less than one hundred percent (100%) of
the Fair Market Value on the date the Nonstatutory Stock Option is
granted. Each Incentive Agreement may also specify the method of
exercise which shall be consistent with the requirements of Section
2.3(a).
(d) Term. In the Incentive Agreement, the Committee
shall fix the term of each Stock Option which shall be not more than
ten (10) years from the date of grant. In the event no term is fixed,
such term shall be five (5) years from the date of grant.
(e) Exercise. In the Incentive Agreement, the Committee
shall specify the time or times at which a Stock Option may be
exercised in whole or in part. An Incentive Agreement may require a
period of continuous Employment and/or performance objectives to be
achieved before the Stock Option or any portion thereof will become
vested and exercisable. Each Stock Option, the exercise or timing of
which is dependent, in whole or in part, on the achievement of
designated performance objectives, may specify a minimum level of
achievement in respect of the specified performance objectives below
which no Stock Options will be exercisable and a method for
determining the number of Stock Options that will be exercisable if
performance is at or above such minimum but short of full achievement
of the performance objectives. Options may be exercisable in
installments (which may be cumulative or noncumulative or subject to
acceleration) during the term of the Option. All such terms and
conditions of the Option, as determined by the Committee in its
discretion, shall be set forth in the Incentive Agreement.
(f) $100,000 Limit on Incentive Stock Options.
Notwithstanding any contrary provision in the Plan, to the extent that
the aggregate Fair Market Value (determined as of the time the
Incentive Stock Options are granted) of the Shares of Common Stock
with respect to which Incentive Stock Options are exercisable for the
first time by any Grantee during any single calendar year (under the
Plan and any other stock option plans of the Company and its
Subsidiaries or Parent) exceeds the sum of $100,000, such Incentive
Stock Options shall be treated as a Nonstatutory Stock Options and not
an Incentive Stock Options. This paragraph shall be applied by taking
Incentive Stock Options into account in the order in which they are
granted.
2.3 STOCK OPTION EXERCISES
(a) Method of Exercise and Payment. Stock Options shall
be exercised by the delivery of a signed written notice of exercise to
the Company as of the date specified by the Company in advance of the
proposed exercise date. The notice shall set forth the number of
Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
The Option Price upon exercise of any Stock Option shall be
payable to the Company in full either: (i) in cash or its equivalent,
or (ii) subject to prior approval by the Committee,
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by tendering previously acquired whole Shares, free and clear of all
liens and encumbrances, having an aggregate Fair Market Value at the
time of exercise equal to the total Option Price (provided that the
Shares which are tendered by an Insider must have been held by the
Insider for at least six (6) months prior to their tender to satisfy
the Option Price), or (iii) subject to prior approval by the
Committee, by withholding Shares which otherwise would be acquired on
exercise having an aggregate Fair Market Value at the time of exercise
equal to the Option Price, or (iv) subject to prior approval by the
Committee, by a combination of (i), (ii), and (iii) above.
The Committee also may allow (i) "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220
(or its successor), and subject to applicable securities law
restrictions and tax withholdings, or (ii) by any other means which
the Committee, in its discretion, determines to be consistent with the
Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification
of exercise and full payment, the Company shall deliver to or on
behalf of the Grantee, in the name of the Grantee (or other
appropriate recipient in the event of Grantee's death), stock
certificates for the number of Shares purchased pursuant to exercise
of the Stock Option. Such delivery shall be deemed effected for all
purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to
Grantee or other appropriate recipient.
(b) Restrictions on Option Transferability. During the
lifetime of a Grantee, each Option granted to him shall be exercisable
only by the Grantee or his legal guardian in the event of his
Disability (or by a broker-dealer pursuant to a cashless exercise
under Section 2.3(a) if permitted by the Committee. No Option shall
be assignable or transferable by Grantee otherwise than by will or by
the laws of descent and distribution.
(c) Restrictions on Share Transferability. The Committee
may impose such restrictions on any Shares acquired pursuant to the
exercise of a Stock Option as it may deem advisable in its discretion,
including, without limitation, restrictions under applicable federal
securities laws, under the requirements of any stock exchange or
market upon which such Shares are then traded or listed, and under any
blue sky or state securities law applicable to such Shares.
Any certificate issued to evidence Shares issued upon the
exercise of an Option may bear such legends and statements as the
Committee shall deem advisable to assure compliance with federal and
state laws and regulations.
Any Grantee or other person exercising an Option may be
required by the Committee to give a written representation that the
Option and the Shares subject to the Option will be acquired for
investment and not with a view to public distribution; provided,
however, that
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the Committee, in its sole discretion, may release any person
receiving an Option from any such representations either prior to or
subsequent to the exercise of the Option.
(d) Notification with respect to Incentive Stock Options.
Notwithstanding any other provision of the Plan, a Grantee who
disposes of Shares of Common Stock acquired upon the exercise of an
Incentive Stock Option by a sale or exchange either (i) within two (2)
years after the date of the grant of the Incentive Stock Option under
which the Shares were acquired or (ii) within one (1) year after the
transfer of such Shares to him pursuant to exercise, shall promptly
notify the Company of such disposition, the amount realized and his
adjusted basis in such Shares.
(e) Proceeds of Option Exercise. The proceeds received
by the Company from the sale of Shares pursuant to Stock Options
exercised under the Plan shall be used for general corporate purposes.
2.4 SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS
The Committee may provide in the Incentive Agreement for a
supplemental payment (the "SUPPLEMENTAL PAYMENT") by the Company to the Grantee
with respect to the exercise of any Nonstatutory Stock Option. The
Supplemental Payment shall be in the amount specified by the Committee, which
amount shall not exceed the amount necessary to pay the federal and state
income tax payable with respect to both the exercise of the Nonstatutory Stock
Option and the receipt of the Supplemental Payment, assuming the holder is
taxed either at the maximum effective income tax rate applicable thereto or at
a lower effective tax rate as deemed appropriate by the Committee. The
Committee shall have the discretion to grant Supplemental Payments that are
payable solely in cash or Supplemental Payments that are payable in cash,
Common Stock, or a combination of both, as determined by the Committee.
SECTION 3.
INCENTIVE AGREEMENTS AND STOCK ADJUSTMENTS
3.1 PLAN CONDITIONS
(a) Incentive Agreement. Each Grantee to whom an Option
is granted shall be required to enter into an Incentive Agreement with
the Company, in such a form as is provided by the Committee. The
Incentive Agreement shall (i) contain specific terms as determined by
the Committee, in its discretion, with respect to the Grantee's
particular Incentive Award and (ii) be signed by an Authorized Officer
as authorized by the Committee. Such terms need not be uniform among
all Grantees or any similarly-situated Grantees. The Incentive
Agreement may include, without limitation, vesting, forfeiture and
other provisions particular to the Incentive Award, as well as, for
example, provisions to the effect that the Grantee (i) shall not
disclose any confidential information acquired during Employment with
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the Company, (ii) shall abide by all the terms and conditions of the
Plan and such other terms and conditions as may be imposed by the
Committee, (iii) shall not interfere with the employment or other
service of any employee of the Company, (iv) shall not compete with
the Company or become involved in a conflict of interest with the
interests of the Company, (v) shall forfeit an Incentive Award if
terminated for cause as defined in the Incentive Agreement, and (vi)
shall be subject to any other agreement between the Grantee and the
Company regarding Shares that may be acquired under an Incentive Award
including, without limitation, an agreement restricting the
transferability of Shares by the Grantee. An Incentive Agreement may
also include any such other terms or conditions as are determined by
the Committee, in its discretion, to be appropriate with respect to
any individual Grantee.
(b) No Right to Employment. Nothing in the Plan, nor in
any instrument executed pursuant to the Plan, shall create any
Employment rights (including without limitation, rights to continued
Employment) in any Grantee, nor affect the right of the Company to
terminate the Employment of any Grantee at any time without regard to
the existence of the Plan.
(c) Securities Requirements. The Company shall be under
no obligation to effect the registration pursuant to the Securities
Act of 1933 of any Shares to be issued hereunder or to effect similar
compliance under any state laws. Notwithstanding anything herein to
the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificates evidencing Shares unless and until the
Company is advised by its counsel that the issuance and delivery of
such certificates is in compliance with all applicable laws and
regulations of governmental authorities, and the requirements of any
securities exchanges or listing organizations on which the Shares are
traded or listed. The Committee may require, as a condition of the
issuance and delivery of certificates evidencing Shares, that the
recipient of such Shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the
Committee, in its discretion, deems necessary or desirable.
3.2 TRANSFERABILITY
(a) Non-Transferable Incentive Awards. No Incentive
Award and no right under the Plan, contingent or otherwise, will be
(i) assignable, saleable, or otherwise transferable by a Grantee
except by will or by the laws of descent and distribution, or (ii)
subject to any encumbrance, pledge, lien, assignment or charge of any
nature.
No transfer by will or by the laws of descent and distribution
shall be effective to bind the Company unless and until the Committee
has been furnished with a copy of the deceased Grantee's enforceable
will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in
violation of this Section 3.2(a) shall be void and ineffective.
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(b) Ability to Exercise Options. Only the Grantee (or
his legal guardian in the event of Grantee's Disability), or in the
event of his death, his estate, may exercise Stock Options, receive
deliveries of Shares, and otherwise assume the rights of the Grantee.
(c) Representation of Ownership. In the case of the
exercise of an Option by a person or estate acquiring the right to
exercise such Option by reason of the death or Disability of a
Grantee, the Committee may require reasonable evidence as to the
ownership of such Option or the authority of such person and may
require such consents and releases of taxing authorities as the
Committee may deem advisable.
3.3 NO RIGHTS AS A STOCKHOLDER
The Grantee of a Stock Option (or a permitted transferee of
such Grantee) shall have no rights as a stockholder with respect to
any Shares until the issuance of a stock certificate to him after
exercise of the Option.
No adjustment shall be made for dividends (ordinary or
extraordinary) whether in cash, securities or other property, or
distributions, or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in
Section 3.4.
3.4 CHANGE IN STOCK AND ADJUSTMENTS
(a) Changes in Law or Circumstances. Subject to Section
3.6 which only applies in the event of a Change in Control, in the
event of any change in applicable laws or any change in circumstances
which results in or would result in any dilution of the rights granted
under the Plan, or which otherwise warrants equitable adjustment
because it interferes with the intended operation of the Plan, then,
if the Committee should determine, in its discretion, that such change
equitably requires an adjustment in the number or kind of Shares of
Common Stock or other securities or property subject to issuance or
transfer under the Plan or in the terms and conditions of outstanding
Incentive Awards, such adjustment shall be made in accordance with
such determination. Such adjustments may include changes with respect
to (i) the aggregate number of Shares that may be issued under the
Plan, (ii) the number of Shares subject to Incentive Awards, and (iii)
the Option Price per Share for outstanding Options. Any adjustment of
an Incentive Stock Option under this paragraph shall be made only to
the extent not constituting a "modification" within the meaning of
Section 424(h)(3) of the Code unless otherwise agreed to by the
Grantee in writing. The Committee shall give notice to each
applicable Grantee of such adjustment which shall be effective and
binding.
(b) Exercise of Corporate Powers. The existence of the
Plan or outstanding Incentive Awards hereunder shall not affect in any
way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalization, reorganization or
other changes in the Company's capital structure or its business or
any
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merger or consolidation of the Company, or any issue of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding
whether of a similar character or otherwise.
(c) Recapitalization of the Company. Subject to Section
3.6, if while there are Incentive Awards outstanding, the Company
shall effect any subdivision or consolidation of Shares of Common
Stock or other capital readjustment, the payment of a stock dividend,
stock split, recapitalization, reorganization, or other increase or
reduction in the number of Shares outstanding, without receiving
compensation therefor in money, services or property, then the number
of Shares available under the Plan and the number of Options which may
thereafter be exercised shall (i) in the event of an increase in the
number of Shares outstanding, be proportionately increased and the
Fair Market Value and Option Price of the outstanding) Options shall
be proportionately reduced; and (ii) in the event of a reduction in
the number of Shares outstanding, be proportionately reduced, and the
Fair Market Value and Option Price of the outstanding Options shall be
proportionately increased. The Committee shall take such action and
whatever other action it deems appropriate so that the aggregate
Option Price payable to the Company and the value of each outstanding
Option to the Grantee shall not be changed.
(d) Reorganization of the Company. Subject to Section
3.6, if the Company is reorganized, merged or consolidated, or is a
party to a plan of exchange with another corporation, pursuant to
which reorganization, merger, consolidation or plan of exchange
stockholders of the Company receive any Shares of Common Stock or
other securities or property, or if the Company should distribute
securities of another corporation to its stockholders, each Grantee
shall be entitled to receive, in lieu of the number of unexercised
Options previously awarded, the number of Options (with a
corresponding adjustment to the Fair Market Value of such Options) to
which such holder would have been entitled pursuant to the terms of
such corporate action if, immediately prior to such corporate action,
the Grantee had been the holder of record of a number of Shares equal
to the number of the unexercised Options previously awarded to him.
In this regard, the Committee shall take whatever other action it
deems appropriate to preserve the rights of Grantees holding
outstanding Options.
(e) Issue of Common Stock by the Company. Except as
hereinabove expressly provided in this Section 3.4 and subject to
Section 3.6, the issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any class, for cash
or property, or for labor or services, either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon any
conversion of shares or obligations of the Company convertible into
such shares or other securities, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number or Fair
Market Value of any Options then outstanding under previous Incentive
Awards.
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3.5 TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT
(a) Termination of Employment. Unless otherwise
specifically provided in the Grantee's Incentive Agreement, if the
Grantee's Employment is terminated for any reason other than due to
his death, Disability or Retirement, any non-vested portion of any
Options at the time of such termination shall automatically expire and
terminate and no further vesting shall occur. In such event, except
as may otherwise be specifically provided in his Incentive Agreement,
the Grantee shall be entitled to exercise his rights only with respect
to the portion of the Option that was vested as of the termination
date for a period that shall end on the earlier of (i) the expiration
date set forth in the Incentive Agreement with respect to the vested
portion of such Option or (ii) the date that occurs thirty (30)
calendar days after his termination of Employment date.
(b) Retirement of Employee. Unless otherwise
specifically provided in the Grantee's Incentive Agreement, upon the
Retirement of any Employee who is a Grantee:
(i) any nonvested portion of any outstanding
Option shall immediately terminate and no further vesting
shall occur; and
(ii) any vested Option shall expire on the earlier
of (A) the expiration date set forth in the Incentive
Agreement for such Option; or (B) the expiration of six (6)
months after the date of Retirement in the case of a
Nonstatutory Stock Option, or three (3) months after the date
of Retirement in the case of an Incentive Stock Option.
(c) Disability or Death. Unless otherwise specifically
provided in the Grantee's Incentive Agreement, upon termination of
Employment as a result of the Grantee's Disability or death:
(i) any nonvested portion of any outstanding
Option of the Grantee shall immediately terminate upon
termination of Employment and no further vesting shall occur;
and
(ii) any vested Option shall expire upon the
earlier of either (A) the expiration date set forth in the
Incentive Agreement or (B) the first anniversary of the
Grantee's termination of Employment as a result of his
Disability or death.
(d) Post-Termination Amendment. Subject to the
conditions and limitations of the Plan and applicable law and
regulation, in the event that a Grantee ceases to be an Employee or
Consultant, as applicable, for whatever reason, the Committee and
Grantee may mutually agree with respect to any Option then held by the
Grantee (i) for an acceleration or other adjustment in any vesting
schedule applicable to the Option, (ii) for a continuation of the
exercise period following termination for a longer period than is
otherwise provided under such Option, or (iii) to any other change in
the terms and conditions of the Option. In the
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event of any such change to an outstanding Option, a written amendment
to the Grantee's Incentive Agreement shall be required.
3.6 CHANGE IN CONTROL
Notwithstanding any contrary provision in the Plan, in the event of a
Change in Control (as defined below), all of the Stock Options then outstanding
shall automatically become 100% vested and immediately and fully exercisable as
of the Change in Control date, unless specifically provided otherwise in the
Grantee's Incentive Agreement.
For all purposes of this Plan, a "CHANGE IN CONTROL" of the Company
shall mean:
(a) The acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act (a "PERSON") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of twenty percent (20%) or
more of the total voting power of all the Company's then outstanding
securities entitled to vote generally in the election of directors to
the Board; provided, however, that for purposes of this subsection
(a), the following acquisitions shall not constitute a Change in
Control: (i) any acquisition by the Company or its Parent or
Subsidiaries, (ii) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or its Parent or
Subsidiaries, or (iii) any acquisition consummated with the prior
approval of the Board.
(b) During the period of two consecutive calendar years,
individuals who at the beginning of such period constitute the Board,
and any new director(s) whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at
least two-thirds of the directors then still in office, who either
were directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved, cease
for any reason to constitute a majority of the Board; or
(c) The Company becomes a party to a merger, plan of
reorganization, consolidation or share exchange in which either (i)
the Company will not be the surviving corporation or (ii) the Company
will be the surviving corporation and any outstanding shares of the
Company's common stock will be converted into shares of any other
company (other than a reincorporation or the establishment of a
holding company involving no change of ownership of the Company) or
other securities, cash or other property (excluding payments made
solely for fractional shares); or
(d) The stockholders of the Company approve a merger,
plan of reorganization, consolidation or share exchange with any other
corporation, and immediately following such merger, plan of
reorganization, consolidation or share exchange the holders of the
voting securities of the Company outstanding immediately prior thereto
hold securities representing fifty percent (50%) or less of the
combined voting power of the voting securities of the
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Company or such surviving entity outstanding immediately after such
merger, plan of reorganization, consolidation or share exchange;
provided, however, that notwithstanding the foregoing, no Change in
Control shall be deemed to have occurred if one-half ( 1/2) or more of
the members of the Board of the Company or such surviving entity
immediately after such merger, plan of reorganization, consolidation
or share exchange is comprised of persons who served as directors of
the Company immediately prior to such merger, plan of reorganization,
consolidation or share exchange or who are otherwise designees of the
Company; or
(e) Upon approval by the Company's stockholders of a
complete liquidation and dissolution of the Company or the sale or
other disposition of all or substantially all of the assets of the
Company other than to a Parent or Subsidiary; or
(f) Any other event that a majority of the Board, in its
sole discretion, shall determine constitutes a Change in Control.
Notwithstanding the occurrence of any of the foregoing events which
result in a Change in Control, the Board may determine, if it deems it to be in
the best interest of the Company, that an event or events otherwise
constituting a Change in Control shall not be so considered. Such
determination shall be effective only if it is made by the Board prior to the
occurrence of an event that otherwise would be or probably would lead to a
Change in Control; or after such event if made by the Board a majority of which
is composed of directors who were members of the Board immediately prior to
the event that otherwise would be or probably would lead to a Change in
Control.
3.7 FINANCING
The Company may extend and maintain, or arrange for and guarantee, the
extension and maintenance of financing to any Grantee to purchase Shares
pursuant to exercise of an Option upon such terms as are approved by the
Committee in its discretion.
SECTION 4.
GENERAL
4.1 COMMENCEMENT DATE; TERMINATION DATE
The original date of commencement of the Plan was October 1, 1990.
Unless earlier terminated no Options shall be awarded under the Plan after the
close of business on October 1, 2000.
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4.2 NO FUNDING
No provision of the Plan shall require the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made, or otherwise
to segregate any assets. Any liability or obligation of the Company to any
Grantee with respect to an Incentive Award shall be based solely upon any
contractual obligations that may be created by this Plan and any Incentive
Agreement, and no such liability or obligation of the Company shall be deemed
to be secured by any pledge or other encumbrance on any property of the
Company.
4.3 WITHHOLDING TAXES
(a) Tax Withholding. The Company shall have the power
and the right to deduct or withhold, or require a Grantee to remit to
the Company, an amount sufficient to satisfy federal, state, and local
taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of the
Plan or an Incentive Award hereunder.
(b) Share Withholding. With respect to tax withholding
required upon the exercise of Stock Options, or upon any other taxable
event arising as a result of any Option, Grantees may elect, subject
to the prior approval of the Committee in its discretion, to satisfy
the tax withholding requirement, in whole or in part, by having the
Company withhold Shares having a Fair Market Value on the date the tax
is to be determined equal to the minimum statutory total tax which
could be imposed on the transaction as determined by the Committee.
All such elections shall be irrevocable, made in writing, signed by
the Grantee, and subject to any restrictions or limitations that the
Committee, in its discretion, deems appropriate.
(c) Incentive Stock Options. With respect to Shares
received by a Grantee pursuant to the exercise of an Incentive Stock
Option, if such Grantee disposes of any such Shares within (i) two
years from the date of grant of such Option or (ii) one year after the
transfer of such Shares to the Grantee, the Company shall have the
right to withhold from any salary, wages or other compensation payable
by the Company to the Grantee an amount sufficient to satisfy any tax
withholding requirements attributable to such disqualifying
disposition.
4.4 NO GUARANTEE OF TAX CONSEQUENCES
Neither the Company nor the Committee makes any commitment or
guarantee that any federal, state or local tax treatment will apply or be
available to any person participating or eligible to participate hereunder.
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4.5 MISCELLANEOUS PROVISIONS
(a) No Employee, Consultant or any other person shall
have any claim or right to be granted an Incentive Award under the
Plan.
(b) The expenses of the Plan and the Committee hereunder
shall be borne by the Company.
(c) By accepting any Incentive Award, each Grantee (and
each person claiming by or through him) shall be deemed to have
indicated his acceptance of the Plan.
4.6 SUCCESSORS
All obligations of the Company under the Plan with respect to
Incentive Awards hereunder shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
4.7 SEVERABILITY
In the event that any provision of this Plan shall be held illegal,
invalid or unenforceable for any reason, such provision shall be fully
severable, but shall not affect the remaining provisions of the Plan, and the
Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.
4.8 GENDER, TENSE AND HEADINGS
Whenever the context so requires, words of the masculine gender used
herein shall include the feminine and neuter, and words used in the singular
shall include the plural. Section headings as used herein are inserted solely
for convenience and reference and constitute no part of the interpretation or
construction of the Plan.
4.9 AMENDMENT AND TERMINATION
The Board shall have complete power and authority to terminate or
amend the Plan; provided, however, that the Board shall not, without the
approval of the stockholders of the Company within the time period required by
applicable law, (a) increase the maximum number of Shares which may be issued
under the Plan pursuant to Section 1.4, (b) amend the requirements as to the
class of Employees eligible to purchase Common Stock under the Plan or permit
the members of the Committee to purchase Common Stock under the Plan, (c)
extend the term of the Plan, or (d) decrease the authority granted to the
Committee under the Plan in contravention of Rule 16b-3 under the Exchange Act
or Section 162(m) of the Code. No termination, modification, or amendment of
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the Plan shall adversely affect the rights of a Grantee with respect to an
Option previously granted to him under such Option without his written consent.
In addition, to the extent that the Committee determines that (a) the
listing for qualification requirements of any national securities exchange or
quotation system on which the Company's Common Stock is then listed or quoted,
or (b) the Code (or regulations promulgated thereunder), require stockholder
approval in order to maintain compliance with such listing requirements or to
maintain any favorable tax advantages or qualifications, then the Plan shall
not be amended in such respect without obtaining the approval of the Company's
stockholders within the prescribed time period.
4.10 RULE 16b-3 SECURITIES LAW COMPLIANCE
With respect to Insiders, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successor under the
Exchange Act. Any ambiguities or inconsistencies in the construction of an
Incentive Award or the Plan shall be interpreted to give effect to such
intention. However, to the extent any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Committee in its discretion.
4.11 COMPLIANCE WITH CODE SECTION 162(m)
Unless otherwise determined by the Committee with respect to any
particular Incentive Award, it is extended that the Plan comply fully with and
meet all the requirements of Section 162(m) of the Code so that Incentive
Awards granted to Covered Employees shall qualify for the Performance-Based
Exception. If any provision of the Plan or an Incentive Agreement would
disqualify the Plan or would not otherwise permit the Plan or Incentive Award
to comply with the Performance-Based Exception as so intended, such provision
shall be construed or deemed amended to conform to the requirements of the
Performance-Based Exception to the extent permitted by applicable law and
deemed advisable by the Committee in its discretion; provided, however, no such
construction or amendment shall have an adverse effect on the prior grant of an
Incentive Award nor on the economic value to a Grantee of any outstanding
Incentive Award.
4.12 GOVERNING LAW
The Plan shall be governed, interpreted, construed and constructed in
accordance with the laws of the State of Texas, except as superseded by
applicable laws of the United States.
IN WITNESS WHEREOF, ITEQ, Inc. has caused this Plan to be duly
executed in its name and on its behalf by its duly authorized officer, to be
effective as of August 1, 1997.
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ATTEST: ITEQ, INC.
By: By:
---------------------------------- -------------------------------------
Name: Name:
-------------------------------- -----------------------------------
Title: Title:
------------------------------- ----------------------------------
Date: Date:
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APPENDIX E
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ITEQ, INC.
ARTICLE I
NAME
The name of the corporation is ITEQ, Inc.
ARTICLE II
REGISTERED AGENT
The address of its registered office in the State of Delaware is 1013
Centre Road, Wilmington, Delaware, Kent County 19805. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
PURPOSE
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (as from time to time in effect, the "DGCL").
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Corporation consists of 40,000,000
shares of common stock, par value $.001 per share ("Common Stock"), and
1,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock").
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A. Issuance of Preferred Stock. Preferred Stock may be issued from
time to time by the board of directors as shares of one or more series.
Subject to the provisions of this paragraph A and limitations prescribed by
law, the board of directors is vested with the authority and is expressly
authorized, prior to issuance, by adopting resolutions providing for the
issuance of, or providing for a change in the number of, shares of any
particular series and, if and to the extent from time to time required by the
DGCL, by filing a certificate pursuant to the DGCL, to establish or change the
number of shares to be included in each such series and to fix the designation
and powers, preferences and rights and the qualifications and limitations
thereof or restrictions thereon relating to the shares of each such series, all
to the maximum extent permitted by the DGCL. The authority of the board of
directors with respect to each series shall include, but not be limited to, the
determination of the following:
(1) the distinctive serial designation of the series and the
number of shares constituting the series;
(2) the annual dividend rate, if any, on shares of the series
and the preferences, if any, over shares of any other class or another
series of the same class (or of shares of any other class or of another
series over such series) with respect to dividends, and whether
dividends shall be cumulative and, if so, from which date or dates;
(3) whether the shares of the series shall be redeemable and,
if so, the terms and conditions of their redemption, including the date
or dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which may vary under
different conditions and at different redemption dates;
(4) the obligation, if any, of the Corporation to purchase or
redeem shares of the series pursuant to a sinking fund or purchase fund
and the terms of any such obligation;
(5) whether shares of the series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes, shares
of any series of the same class or any evidence of indebtedness, and, if
so, the terms and conditions of conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange;
(6) whether the shares of the series shall have voting rights
in addition to the voting rights provided by law, and, if so, the terms
of such voting rights, including whether such shares shall have the
right to vote with the Common Stock on issues on an equal, greater or
lesser basis;
(7) the rights of the shares of the series in the event of a
voluntary or involuntary liquidation, dissolution, winding up or
distribution of assets of the Corporation;
(8) whether the shares of the series shall be entitled to the
benefit of conditions and restrictions upon (i) the creation of
indebtedness of the Corporation or any subsidiary,
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(ii) the issuance of any additional stock (including additional shares
of the series or of any other series) or (iii) the payment of dividends
or the making of other distributions on the purchase, redemption or
other acquisition by the Corporation or any subsidiary of any
outstanding stock of the Corporation; and
(9) any other relative, rights, powers, preferences,
qualifications, limitations or restrictions thereof, including, but not
limited to, any that may be determined in connection with the adoption
of any stockholder rights plan relating to any such series.
Except as otherwise set forth in the resolution or resolutions adopted by the
board of directors providing for the issuance of any series of Preferred Stock,
the number of shares comprising such series may be increased or decreased (but
not below the number of shares then outstanding) from time to time by like
action of the board of directors. The shares of Preferred Stock of any one
series shall be identical with the other shares in the same series in all
respects except as to the dates from and after which dividends thereon shall
cumulate, if cumulative.
B. Redeemed or Reacquired Shares of Preferred Stock. Shares of any
series of any Preferred Stock that have been redeemed (whether through the
operation of a sinking fund or otherwise) or purchased by the Corporation, or
which, if convertible or exchangeable, have been converted into, or exchanged
for, shares of stock of any other class or classes, any other series of the
same class, or any evidences of indebtedness, shall have the status of
authorized and unissued shares of Preferred Stock and may be reissued as a part
of the series of which they were originally a part, or may be reclassified and
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the board of directors or as part of any other series of
Preferred Stock, all subject to the conditions or restrictions on issuance set
forth in the resolution or resolutions adopted by the board of directors
providing for the issuance of any series of Preferred Stock and to any filing
required by law.
C. Denial of Preemptive Rights. No holder of any stock of the
Corporation shall be entitled as such, as a matter of right, to subscribe for
or purchase any part of any new or additional issue of stock of any class of
the Corporation, or of securities convertible into or exchangeable for stock
of any class, whether now or hereafter authorized, or whether issued for cash
or other consideration or by way of dividend.
D. Denial of Cumulative Voting. No holder of any stock of the
Corporation shall have the right of cumulative voting at any election of
directors or upon any other matter.
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ARTICLE V
EXISTENCE
The existence of the Corporation is to be perpetual.
ARTICLE VI
BOARD OF DIRECTORS AND STOCKHOLDER ACTIONS
All powers of the Corporation shall be vested in and exercised by or
under the direction of its board of directors except as otherwise provided
herein or required by law.
For the management of the business and for the conduct of the affairs of
the Corporation, and in further creation, definition, limitation and regulation
of the power of the Corporation and of its directors and stockholders, it is
further provided that:
A. Number of Board. The number of directors constituting the board
of directors shall be fixed by, or in the manner provided in, the bylaws.
B. Quorum. A majority of the number of directors constituting the
board of directors will constitute a quorum for the transaction of business at
meetings of the board of directors.
C. Requisite Vote. The requisite vote or concurrence of the board
of directors required to take board action shall be the vote or concurrence of
a majority of the directors present at a meeting at which a quorum is present.
D. Action Without a Meeting. Any action required or permitted by
law or by the Certificate of Incorporation or the bylaws of the Corporation to
be taken at a meeting of the board of directors or a committee thereof may be
taken without a meeting, without prior notice, and without a vote, if a written
consent or consents, setting forth the action so taken, shall have been signed
by all the members of the board of directors or such committee.
E. Advance Notice of Nominations. Advance notice of nominations for
the election of directors, other than nominations by the board of directors or
a Committee thereof, shall be given in the manner provided in the bylaws.
F. Election by Written Ballot. Election of directors shall be by
written ballot.
G. Removal. Any director, or the entire board of directors, may be
removed from office with or without cause by the affirmative vote of the
holders of a majority of the voting power of the
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then outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
H. Stockholder Action. Stockholder action can only be taken at an
annual or special meeting of stockholders, and stockholders are prohibited from
taking action without a meeting. Except as otherwise required by law, special
meetings of the stockholders of the Corporation may be called only by the
Chairman of the Board, the Chief Executive Officer, or the President. Any
meeting of stockholders shall be subject to postponement or adjournment by the
vote of the majority of the directors at a meeting in which a quorum is
present, or by the Chairman of the Board, in the manner provided in the bylaws.
I. Amendment of Bylaws. The board of directors shall have the power
to make, alter, amend and repeal the bylaws. Any bylaws made, altered or
amended by the board of directors under the powers conferred hereby may be
further altered or amended, or repealed, by the directors or by the
stockholders; provided, however, that the bylaws shall not be altered, amended
or repealed and no provision inconsistent therewith shall be adopted by
stockholder action without the affirmative vote of at least a majority of the
voting power of the then outstanding shares entitled to vote generally in the
election of directors, voting together as a single class.
J. Amendments of Certificate of Incorporation. The affirmative vote
of the holders of a majority of the voting power of all shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class shall be required to alter, amend, adopt any
provision inconsistent with, or repeal, this Article VI or any provision
hereof.
ARTICLE VII
DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or to its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this Article VII shall not eliminate or limit
the liability of a director:
(1) for any breach of the director's duty of loyalty to the
Corporation or its stockholders,
(2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(3) under Section 174 of the DGCL, as it may hereafter be
amended from time to time, for any unlawful payment of a dividend or
unlawful stock purchase or redemption, or
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(4) for any transaction from which the director derived an
improper personal benefit.
If the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended. No amendment to or repeal of this
Article VII will apply to, or have any effect on, the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of the director occurring prior to such amendment or repeal.
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ARTICLE VIII
INDEMNIFICATION
A. Mandatory Indemnification. Each person who at any time is or was
a director or officer of the Corporation, and is threatened to be or is made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative (a
"Proceeding"), by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, member,
employee, trustee, agent or similar functionary of another domestic or foreign
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other for-profit or non-profit enterprise, whether the basis of
a Proceeding is alleged action in such person's official capacity or in another
capacity while holding such office, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the DGCL, or any other
applicable law as may from time to time be in effect (but, in the case of any
such amendment or enactment, only to the extent that such amendment or law
permits the Corporation to provide broader indemnification rights than such law
prior to such amendment or enactment permitted the Corporation to provide),
against all expense, liability and loss (including, without limitation, court
costs and attorneys' fees, judgments, fines, excise taxes or penalties, and
amounts paid or to be paid in settlement) actually and reasonably incurred or
suffered by such person in connection with a Proceeding if such person acted in
good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, and such indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation or a director, officer,
partner, venturer, proprietor, member, employee, trustee, agent or similar
functionary of another domestic or foreign corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other for-profit
or non-profit enterprise, and shall inure to the benefit of such person's
heirs, executors and administrators. The Corporation's obligations under this
paragraph A include, but are not limited to, the convening of any meeting, and
the consideration of any matter thereby, required by statute in order to
determine the eligibility of any person for indemnification.
B. Prepayment of Expenses. Expenses incurred by a director or
officer of the Corporation in defending a Proceeding shall be paid by the
Corporation in advance of the final disposition of such Proceeding to the
fullest extent permitted by, and only in compliance with, the DGCL or any other
applicable laws as may from time to time be in effect, including, without
limitation, any provision of the DGCL which requires, as a condition precedent
to such expense advancement, the delivery to the Corporation of an undertaking,
by or on behalf of such director or officer, to repay all amounts so advanced
if it shall ultimately be determined that such director or officer is not
entitled to be indemnified under paragraph A of this Article VIII or otherwise.
Repayments of all amounts so advanced shall be upon such terms and conditions,
if any, as the Corporation's board of directors deems appropriate.
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C. Vesting. The Corporation's obligation to indemnify and to prepay
expenses under paragraphs A and B of this Article VIII shall arise, and all
rights granted to the Corporation's directors and officers hereunder shall
vest, at the time of the occurrence of the transaction or event to which a
Proceeding relates, or at the time that the action or conduct to which such
Proceeding relates was first taken or engaged in (or omitted to be taken or
engaged in), regardless of when such Proceeding is first threatened, commenced
or completed. Notwithstanding any other provision of this Certificate of
Incorporation or the bylaws of the Corporation, no action taken by the
Corporation, either by amendment of this Certificate of Incorporation or the
bylaws of the Corporation or otherwise, shall diminish or adversely affect any
rights to indemnification or prepayment of expenses granted under paragraphs A
and B of this Article VIII which shall have become vested as aforesaid prior to
the date that such amendment or other corporate action is effective or taken,
whichever is later.
D. Enforcement. If a claim under either or both of paragraphs A and
B of this Article VIII is not paid in full by the Corporation within thirty
days after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit in a court of competent jurisdiction
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim. It shall be a defense to any such suit
(other than a suit brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the DGCL or other applicable law to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
The failure of the Corporation (including its board of directors, independent
legal counsel, or stockholders) to have made a determination prior to the
commencement of such suit as to whether indemnification is proper in the
circumstances based upon the applicable standard of conduct set forth in the
DGCL or other applicable law shall neither be a defense to the action nor
create a presumption that the claimant has not met the applicable standard of
conduct. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal
Proceeding, had reasonable cause to believe that his conduct was unlawful.
E. Nonexclusive. The indemnification provided by this Article VIII
shall not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any statute, bylaw, other provisions of
this Certificate of Incorporation, agreement, vote of by the stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
F. Permissive Indemnification. The rights to indemnification and
prepayment of expenses which are conferred to the Corporation's directors and
officers by paragraphs A and B of
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this Article VIII may be conferred upon any employee or agent of the
Corporation if, and to the extent, authorized by the board of directors.
G. Insurance. The Corporation shall have power to purchase and
maintain insurance, at its expense, on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise against any expense, liability or loss asserted against such person
and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power to
indemnify him against such expense, liability or loss under the Corporation's
bylaws, the provisions of this Article VIII, the DGCL or other applicable law.
H. Other Arrangements for Indemnification. Without limiting the
power of the Corporation to procure or maintain insurance or other arrangement
on behalf of any of the persons as described in paragraph G of this Article
VIII, the Corporation may, for the benefit of persons eligible for
indemnification by the Corporation, (1) create a trust fund, (2) establish any
form of self-insurance, (3) secure its indemnity obligation by grant of a
security interest or other lien on the assets of the Corporation or (4)
establish a letter of credit, guaranty or surety arrangement.
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PROXY ITEQ, INC. PROXY
2727 ALLEN PARKWAY, SUITE 760
HOUSTON, TEXAS 77019
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER ,
1997
The undersigned stockholder of ITEQ, Inc. (the "Company") hereby
appoints each of Mark E. Johnson and Lawrance W. McAfee attorneys and
proxies of the undersigned, with full power of substitution, to vote
on behalf of the undersigned at the Special Meeting of Stockholders of
the Company to be held at the offices of the Company, 2727 Allen
Parkway, Suite 760, Houston, Texas 77019, on September , 1997, at
10:00 a.m., central time, and at any adjournments of said meeting, all
of the shares of Common Stock which the undersigned may be entitled to
vote.
1. ADOPTION OF PLAN AND AGREEMENT OF MERGER WITH ASTROTECH
INTERNATIONAL CORPORATION
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. APPROVAL OF THE RESTATED PLAN:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, upon such other matters as may properly
come before the meeting; hereby revoking any proxy or proxies
regarding such matters heretofore given by the undersigned.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON OTHER SIDE)
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(CONTINUED FROM OTHER SIDE)
The board of directors recommends a vote FOR each proposal above
and if no specification is made, the shares will be voted FOR adoption
of the Merger Agreement and FOR approval of the Restated Plan. The
undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Proxy Statement furnished herewith.
Dated , 1997
---------------------------
Stockholder's Signature
---------------------------
Stockholder's Signature
Signature should agree with
name printed hereon. If
Stock is held in the name
of more than one person,
EACH joint owner should
sign. Executors,
administrators, trustees,
guardians, and attorneys
should indicate the
capacity in which they
sign. Attorneys should
submit powers of attorney.
PLEASE SIGN AND RETURN IN THE ENVELOPE ENCLOSED
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<PAGE> 246
ASTROTECH INTERNATIONAL CORPORATION
PROXY FOR SPECIAL MEETING TO BE HELD SEPTEMBER 30, 1997
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints S. Kent Rockwell and Raymond T. Royko as
Proxies, and each of them with power of substitution, and hereby authorizes
them to represent the undersigned and vote, as designated below, all of the
shares of Common Stock, par value $.01 per share (the "Common Stock"), of
Astrotech International Corporation ("Astrotech") that the undersigned would be
entitled to vote if personally present at the Special Meeting of Stockholders
to be held at __________________, Houston, Texas on Tuesday, September 30, 1997,
and at any adjournments thereof:
(To be Signed on Reverse Side)
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SEE REVERSE
SIDE
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<TABLE>
<S> <C> <C> <C> <C>
---
- ---- PLEASE MARK YOUR | |
X VOTES AS IN THIS ---
- ---- EXAMPLE.
FOR AGAINST ABSTAIN
1. Adoption of the Plan and Agreement ------- ------- -------
of Merger dated as of June 30, 1997.
between ITEQ, Inc. and Astrotech
International Corporation. ------- ------- -------
2. In their discretion, the Proxies are
authorized to vote on the transaction
of such other business as may
properly come before the meeting
and any adjournment or adjourn-
ments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL (1) ABOVE,
WHICH HAS BEEN UNANIMOUSLY APPROVED BY THE BOARD OF DIRECTORS.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED. IF NO SPECIFICATION IS MADE, THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" PROPOSAL (1).
SIGNATURES(S) _____________________________________ DATED _____________, 1997
NOTE: Please sign EXACTLY as your name appears on this card. When shares are held by joint tenants, both should sign.
When signing as trustee, executor, etc., title should be so stated. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
</TABLE>
