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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27986
ITEQ, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 41-1667001
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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2727 ALLEN PARKWAY, SUITE 760, HOUSTON, TEXAS 77019
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 713-285-2700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.001 par value Nasdaq National Market
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 18, 1998 was $208,434,136. As of March 18, 1998, there
were 27,044,442 shares of the registrant's Common Stock, $.001 par value,
outstanding.
Documents incorporated by reference. Certain portions of the registrant's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders ("Proxy
Statement") are incorporated in Part III by reference.
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TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters....................................... 9
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Disagreements on Accounting and Financial Disclosure........ 17
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 17
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 17
Item 13. Certain Relationships and Related Transactions.............. 17
PART IV
Item 14. Financial Statements and Financial Statement Schedules,
Exhibits and
Reports on Form 8-K....................................... 17
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PART I
ITEM 1. BUSINESS
ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures and
services process, storage and filtration systems, equipment and components. The
Company's products and services are utilized by customers in manufacturing
processes requiring the process, treatment, storage or movement of gases and
liquids. It is the leading domestic manufacturer and servicer of shell and tube
heat exchangers, principally for petrochemical and refining applications, a
leading designer and producer of above-ground storage tanks ("ASTs") and related
products primarily for the petrochemical, municipal water storage, food and
agriculture industries, and a leading producer of baghouses, scrubbers, fans and
other filtration systems and components for environmental and general industrial
applications including use in the steel and foundry, microelectronics, chemical,
minerals, pharmaceutical and other industries. The Company also manufactures
specialized process equipment, such as pressure vessels and blenders,
principally for the refining, petrochemical and plastics industries. ITEQ also
provides non-destructive testing and inspection services for ASTs, pressure
vessels and piping and also offers mobile storage tank leasing services. The
Company operates internationally, with its equipment, systems and services sold
or utilized in over 30 countries worldwide.
ITEQ believes that through acquisitions of complementary businesses it has
been able to capitalize on its relationships with existing customers through
cross-selling opportunities. Additionally, through its international
distribution network and broad offering of products and services, ITEQ has
benefited from its customers' continuing consolidation of their sources of
supply.
In recent years, annual worldwide capital expenditures for hydrocarbon
processing equipment, industrial and municipal storage and related equipment and
industrial air filtration equipment have averaged an estimated $45 billion, of
which approximately 30% represents domestic spending. Although there is no
dominant manufacturer of equipment and systems for the highly fragmented
domestic markets served by the Company, ITEQ believes it is the largest domestic
manufacturer and servicer of shell and tube heat exchangers. Similarly, the
Company believes it is one of the largest domestic producers of ASTs, tank
products, baghouses, scrubbers, FRP fans and other filtration systems for the
selected niche markets served.
The Company was incorporated in Delaware in 1990 under the name Air-Cure
Environmental, Inc. The Company changed its name in 1993 to Air-Cure
Technologies, Inc. and again in March 1997, to ITEQ, Inc. The Company's
principal executive offices are located at 2727 Allen Parkway, Suite 760,
Houston, Texas 77019, and its telephone number is (713) 285-2700.
BUSINESS STRATEGY
The Company's objective is to be a leading integrated 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. The Company has
experienced rapid growth since its inception in 1990 through a combination of
strategic acquisitions and internal growth. Management of ITEQ is focused on
maximizing long-term shareholder value through maximizing ITEQ's stock price.
Management has preliminarily reviewed certain information related to stock
valuations of other similar type companies, some of which are larger and some of
which are smaller than ITEQ. Additionally, management reviewed certain
information related to ITEQ's shareholder base and financial structure, and the
potential impact from their respective composition, on ITEQ's stock price. Based
on this preliminary review, management has concluded that the historical growth
rate of the Company's operations and acquisition trends, relative to the other
reviewed companies, has not been adequately reflected in ITEQ's stock price. As
stated above, one of management's goals is to maximize shareholder value.
Accordingly, management, following a special Board of Directors meeting on March
6, 1998, retained two investment banking firms to assist them in performing an
in-depth review of ITEQ's strategic alternatives to maximize long-term
shareholder value and implementing the resultant action plans. Management will
evaluate three alternatives: (1) accelerate growth either by accelerating the
Company's acquisition pace or by pursuing larger acquisitions, (2) pursue a
financial restructuring, or (3) seek a strategic partner. Management remains
focused on its business strategy, and intends to continue to grow its business
and pursue acquisitions as it evaluates its options.
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Acquisition Strategy. The Company 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. The Company believes it is one of the few domestic acquirers and
consolidators of businesses in those markets. In general, the Company pursues
the acquisition of businesses that 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 that 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. The Company has experienced significant internal growth in
recent years despite operating in mature markets. This growth has resulted from
the Company's strategy of gaining additional market share by selling its
products, and those acquired through acquisitions, to existing and new customers
and industries, introducing new products, and developing its international
markets. In addition, each of the acquired businesses has a substantial
installed base of products, and ITEQ has achieved further revenue increases
through additional emphasis on the maintenance and refurbishment aftermarkets.
Increasingly, and consistent with the Company's overall growth strategy,
major industrial concerns are consolidating their sources of supply for goods
and services in an effort to obtain worldwide single-source suppliers for broad
ranges of systems, equipment and services. In fragmented markets such as those
served by the Company, further industry consolidation is to be expected. At
present, the Company believes that no other supplier of products and services to
the niche markets presently served offers as broad an array of products and
services as those offered by the Company. The Company believes its current
product lines and its acquisition strategy position it to benefit from this
ongoing trend.
ACQUISITION HISTORY
Since its inception in 1990, the Company has experienced substantial growth
through acquisitions. The Company's business was originally focused on the
highly regulated air pollution control industry. However, beginning in 1995 with
the merger with Allied Industries, Inc. ("Allied") the Company increased its
focus on the process equipment business which accelerated with the November 1996
acquisition of Ohmstede, Inc. ("Ohmstede"). In addition, in August 1997, ITEQ
completed the acquisition of Exell, Inc. ("Exell"), a manufacturer of shell and
tube heat exchangers and previously a competitor of the Company's Ohmstede
operation. The Company recently entered the industrial and municipal AST and
related equipment and service industry through the merger with Astrotech
International Corporation ("Astrotech") in October 1997.
The following table sets forth certain information concerning the
businesses which have been acquired by ITEQ through December 31, 1997:
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DATE PRINCIPAL
ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED
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Air-Cure, Inc.(1) 1990 Fabric filters Electric utilities, coal
Interel, Inc. 1991 Dry scrubbers, packed and mini Waste treatment, foundry, smelter
scrubbers, heat exchangers
Ceilcote Air Pollution Control, 1992 Wet scrubbers, tower internals, Microelectronics, chemical
Inc. FRP fans processing, waste treatment, food
processing
VIC Environmental Systems, Inc. 1994 Carbon adsorption systems Pharmaceutical, rubber
</TABLE>
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<TABLE>
<CAPTION>
DATE PRINCIPAL
ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED
---------------- -------- --------- ---------------
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Amerex Industries, Inc. 1994 Fabric filters, wet and dry Steel, cement and lime, refining,
scrubbers, heat exchangers foundry
Allied Industries, Inc.(2)(3) 1995 Air separation equipment, Petrochemical, plastics, refining
reactors, blenders, stacks,
towers and columns, pressure
vessels
Ohmstede, Inc. 1996 Heat exchangers Petrochemical, refining
Exell, Inc. 1997 Heat exchangers Petrochemical, refining
Astrotech International 1997 Aboveground storage tanks, Petrochemical, refining, water
Corporation(2) pressure vessels, bins, silos, storage, pulp and paper, mining,
stacks and liners, scrubbers, alcohol, agriculture, water
shopbuilt tanks treatment, power generation,
process systems
</TABLE>
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(1) Divested in November 1996.
(2) Accounted for as poolings-of-interests; all other acquisitions accounted for
as purchases.
(3) During August 1997 and effective on August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary. Certain net assets of Allied will be
liquidated as remaining orders in process are completed, which is expected
to be finished by the third quarter of 1998. The Allied manufacturing
facility will be utilized in ITEQ's facility consolidation efforts to
eliminate duplicate facilities and excess capacity resulting from its
acquisitions. For a discussion of the financial statement impact
attributable to these discontinued operations, see Note 10 to the
Consolidated Financial Statements.
PRODUCTS AND SERVICES
The following table sets forth, for the periods indicated, the contribution
to the Company's revenues from its significant classes of products and services.
Acquisitions accounted for as purchases have been included for the periods
subsequent to acquisition and acquisitions accounted for as
poolings-of-interests have been restated for all relevant periods.
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NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1993 1994 1995 1996 1997
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(IN THOUSANDS)
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Process Equipment............... $ -- $ -- $ -- $ 32,828 $142,161
Storage Equipment(1)............ 29,658 68,726 100,424 109,929 127,718
Filtration Equipment(2)......... 27,859 44,713 74,549 66,058 65,720
------- -------- -------- -------- --------
$57,517 $113,439 $174,973 $208,815 $335,599
======= ======== ======== ======== ========
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(1) Storage Equipment revenues consist primarily of Astrotech's historical
reported revenues for its fiscal years ended September 30. Effective January
1, 1997, ITEQ changed Astrotech's fiscal year to December 31 and the
reported 1997 revenues are for the year then ended. The "Nine Months Ended
December 31, 1993" primarily includes Astrotech's revenues for the
nine-month period ended September 30, 1993. As a result, the three month
period ended December 31, 1996 for Astrotech is not presented. Revenues for
this period were $33,804.
(2) During 1996, Air-Cure, Inc. ("ACI") and Pipkorn, Inc.("Pipkorn") were sold.
Accordingly, revenue from these entities has been excluded subsequent to
their sales.
For information with respect to the Company's financial data by geographic
location, see Note 13 to the Consolidated Financial Statements.
Process Equipment. The Company'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
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the Gulf Coast area. The Company intends to pursue increased sales of new heat
exchangers by marketing its products throughout the United States and
internationally by capitalizing on its existing distribution network and
customer relationships. The Company has a substantial installed base of heat
exchangers, since Ohmstede units were marketed for more than 40 years and Exell
units were marketed for more than 20 years prior to acquisition. Aftermarket
services are provided both in the field and on Company premises and may consist
of a variety of services ranging from minor field repair and maintenance to
de-coking (i.e., the removal of fouling from tubes) or complete unit
reconstruction.
Shell and tube heat exchangers are used in a variety of temperature
control, heating and cooling, and other plant operation applications and are
integrated into a variety of industrial processes that allow heat to be
transferred from one fluid or gas involved in the process to another. Usually
the fluid or gas 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.
Storage Equipment. Through the recent acquisition of Astrotech, the Company
has expanded into the storage equipment and related service business. The
Company designs, fabricates and erects storage tanks for the storage of
petrochemical products, municipal water, other liquids, and a variety of gases,
including methane and nitrogen. In addition, the Company manufactures a variety
of related equipment and products including, (i) primary and secondary tank
seals, drain systems and related products used in connection with floating roof
ASTs, (ii) aluminum internal floating roofs marketed under the Aluminator
trademark and (iii) AST secondary containment and leak detection systems. The
floating roof used in connection with the tank seals minimizes vapor emissions
and losses of the stored product from the storage tank by spanning the gap
between the floating circular roof and the tank wall and permitting both the
roof and seal to move freely up and down as the level of the product in the tank
changes.
The Company also provides comprehensive tank inspection, maintenance and
repair and leasing services. Its inspection services are designed to determine
AST compliance with environmental regulations and industry standards, and
include ultrasonic thickness and magnetic flux testing (both designed to test
AST structural integrity), primary and secondary seal inspection, floating roof
pontoon inspection, leak detection and weld seam testing. The maintenance,
repair and leasing services offered by the Company to its customers consist of,
among other things (i) development of customized and fully integrated tank
maintenance and management programs, (ii) preparation of detailed tank
inspection and condition reports, (iii) performance of emergency welding work,
(iv) installation and construction of fire-fighting foam systems, internal
floating roofs and fixed-coned roofs and (v) leasing of mobile storage tanks
capable of being transported to and from various facility locations.
Filtration Equipment. Filtration products are marketed by the Company under
the Amerex, VIC Environmental Systems, Ceilcote Air Pollution Control, Interel,
Tellerette(R) and IWS tradenames and to engineering and construction firms and
directly to end-users for environmental and general industrial applications.
Such systems operate by filtering air or gas through many large filter bags
("baghouses") that capture ambient particulate matter or by venting a
particulate-laden air stream through an aerosol spray which captures the
particulates ("scrubbers"). Baghouses and scrubbers are custom-designed systems
which may be of substantial scale and incorporate a variety of products
manufactured by the Company. These products include wet scrubbers, dry
scrubbers, axial and centrifugal fiberglass reinforced plastic fans ("FRP
fans"), heat exchangers, ductwork, aeration towers ("strippers"), scrubber
packing, tower internals, air washers, carbon adsorption systems, quenches,
cooling and condensing towers, mist eliminators and pneumatic conveying systems.
Such products are sold as components to other systems fabricators or
incorporated into complete systems designed and constructed by the Company.
SALES AND MARKETING
The Company's products are marketed through a staff of in-house sales
people and other regional and local marketing personnel or through over 100
commission-based, independent representative organizations, each operating in an
exclusive territory and serving segmental industrial customers located in that
territory or
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engineering or contracting firms. In addition to sales activities at the
Company's plants and principal offices, the Company also maintains a number of
sales offices, from which its own personnel either assist the representative
organizations or make direct contact with potential customers. The Company also
maintains operations in Australia and Singapore, which service the Pacific Rim,
while the Company's United Kingdom and German subsidiaries sell products in
Europe, Africa and the Middle East.
Inquiries from potential customers are referred to Company engineering
personnel for any necessary product or system design and for job cost estimation
and preparation of price quotations or bid packages for submission to the
prospective customer. The interval between customer inquiry and confirmation of
an order or contract execution varies substantially. In general, orders are
filled for components and small systems on a purchase order basis at fixed
prices on normal 30-day trade terms, and larger, more complex systems involving
long lead times are filled on a contract basis. Though contract terms are
subject to considerable variation, contracts normally provide for progress
payments, price adjustment provisions for some major materials 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 normally
significant to the Company. Most contracts for products to be exported for sale
are secured by letters of credit drawn on major commercial banks. In certain
instances, particularly in the performance of aftermarket heat exchanger
services, work may be undertaken on a time and materials basis on normal 30-day
credit terms.
Consistent with emerging industry trends, the Company has also entered into
formal "corporate alliances" with certain of its customers, under which the
Company has been designated a preferred vendor for various products. The Company
intends to continue to pursue additional strategic alliances or other corporate
partnering arrangements. In addition, the Company will continue to expand its
emphasis on aftermarket sales and services in an effort to minimize the
potential cyclical nature of industry capital spending.
MARKET CONDITIONS AND COMPETITION
Market Conditions. The industrial equipment markets in which the Company
operates are mature. In recent years, annual worldwide capital expenditures for
hydrocarbon processing equipment, industrial and municipal storage and related
equipment and industrial air filtration equipment have averaged an estimated $45
billion of which approximately 30% represents domestic spending. Although the
Company's products and services are utilized in a number of industrial
applications, a majority of its recent annual revenues has been attributable to
the hydrocarbon processing industry which includes oil terminals, refining,
petrochemical, plastics, and air separation. A significant portion of the
Company's revenues from those markets is attributable to plant expansions,
upgrades and maintenance and to a lesser extent the construction of new
industrial capacity abroad. The Company estimates that 55% to 60% of its sales
are the result of the customer's capital equipment requirements and that 40% to
45% of its sales are the result of the customer's maintenance requirements. In
an effort to minimize the effects of cyclical capital spending, the Company
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, the
Company seeks to carry minimal inventories of raw materials and components and
maintain a reasonable balance between the manufacture and purchase of product
components and subassemblies. Since virtually all the Company's revenues are
attributable to products and systems manufactured to customer specifications, it
carries very little 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, 1997, certain components and subassemblies
were purchased from numerous subcontractors, typically under fixed price
arrangements. Should the need arise, the Company believes that any subcontractor
or supplier can be replaced without significant disruption to its business.
Competition. The markets in which the Company competes in North America are
generally highly fragmented, and most competitors in these niche markets are
relatively small, privately held businesses. However, with respect to the
storage equipment business, the Company's major competitors also include several
other nationally recognized firms. In North American markets, competition is
based on several
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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, the Company's product and
services are sold, in certain circumstances, in situations where it is not the
low bidder. A significant portion of the Company's annual revenues represents
repeat business from its customers.
Most of the Company's storage equipment business is competitively bid with
customer purchasing decisions made on a project-by-project basis as new
construction, expansion, upgrade, maintenance or repair projects are identified.
The Company's non-bid contracts in this area are consummated through either
direct negotiations, maintenance agreements or various alliance agreements with
customers. See "Significant Customers."
With increasing frequency, the Company is asked by end-users to submit
proposals or bids for entire systems, thus bypassing engineering and
construction firms in the procurement process. When awarded such jobs, the
Company designs the entire system, purchases certain "off-the-shelf" or
fabricated components from vendors or subcontractors, and manufactures those
portions of the system for which it has particular expertise. The system is then
delivered to the customer's site for final assembly and installation by field
construction personnel who may be subcontractors for or supervised by the
Company.
ENVIRONMENTAL MATTERS
The Company is subject to numerous federal, state, local and foreign laws
and regulations relating to the storage, handling, emission and discharge of
materials into the environment, including the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA"), the Clean Water Act, the
Clean Air Act (including the 1990 Amendments) ("CAA") and the Resource
Conservation and Recovery Act ("RCRA"). Each of these statutes allows the
imposition of substantial civil and criminal penalties, as well as permit
revocation, for violations of the requirements. Although the Company's
operations may involve environmental management issues typically associated with
manufacturing operations, the Company believes that it is in material compliance
with all environmental laws. The Company has no current plans for substantial
capital expenditures in this area. It is not a party to any threatened or
pending legal proceedings or administrative actions relating to the environment.
It is possible that future developments, such as changes in existing laws,
regulations or enforcement practices under environmental laws, could lead to
material costs of environmental compliance and cleanup by the Company.
SIGNIFICANT CUSTOMERS
Historically, the Company's principal customers have been refining and
petrochemical processors, steel producers, foundries, mining and waste treatment
concerns. Recently, the Company's customer base has been expanded to include
steel mini-mills, microelectronics manufacturers and power generation facilities
and customers in the alcohol, sugar-processing, pulp and paper, agricultural and
specialty construction industries. The Company participates in "corporate
alliance" programs with certain of its customers, including Amoco Corporation,
Chevron Corporation, Lyondell-Citgo, Dow Chemical, E. I. Du Pont, Olin
Corporation, Hoechst Celanese, Tosco and Marathon under which it is a designated
preferred vendor for various types of equipment and services primarily relating
to its heat exchangers, AST and related service business. Such customers
accounted for approximately $52,321,000 and $52,889,000 of total revenues for
the years ended December 31, 1996 and 1997, respectively. Although the terms of
these arrangements vary widely, they do not involve any minimum purchase
obligations, but set forth the basis upon which the Company is to be paid for
work performed -- either on the basis of cost plus a predetermined profit margin
or cost of materials plus agreed labor rates -- and involve the exchange of a
broad range of information with the customer, including the customer's expected
future requirements for the product and service classes covered by the
arrangement and the expected timing of future job awards, and the Company's
existing and expected future material and labor costs, as well as periodic
reports on continuing productivity improvements and total quality management.
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Under such arrangements, the Company is afforded the first opportunity to
furnish the covered products and services on the customer's tendered terms,
which often are subject to further negotiation at the time of individual job
award. The Company intends to continue its focus on entering into additional
strategic alliances or other corporate partnering arrangements. Due to the
contractual nature of the Company's operations, it is anticipated that
significant portions of future consolidated revenues may be attributable to a
limited number of customers in any particular year, although it is likely that
the particular customers may vary from year to year. For the year ended December
31, 1997, no single customer accounted for as much as 10% of the Company's
consolidated revenues.
BACKLOG
At December 31, 1997, the Company's backlog was $104.9 million. This
compared with $91.6 million at December 31, 1996. Such backlog consisted of
written orders or commitments believed to be firm contracts for products and
services. Such agreements are occasionally varied or modified by mutual consent
and in certain instances may be cancelable by the customer on short notice
without substantial penalty. As a result, the Company's backlog as of any
particular date may not be indicative of the Company's actual operating results
for any subsequent fiscal period. Management believes that substantially all of
the orders and commitments included in backlog at December 31, 1997 will be
completed within the next twelve months.
EMPLOYEES
At December 31, 1997, the Company employed approximately 2,100 full-time
personnel, including approximately 530 unionized employees at ten domestic
manufacturing facilities who are subject to collective bargaining agreements.
The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal facilities are shown in the table below:
<TABLE>
<CAPTION>
APPROXIMATE
BUILDING SPACE
LOCATION STATUS (SQUARE FEET) DESCRIPTION
-------- ------ -------------- -----------
<S> <C> <C> <C>
CORPORATE
Houston, TX Leased through 9,569 Corporate offices
June 30, 2001
OHMSTEDE/EXELL
Beaumont, TX Owned 25,000 Manufacturing facility and offices
Corpus Christi, TX Owned 42,000 Manufacturing facility and offices
LaPorte, TX Owned 78,000 Manufacturing facility and offices
Sulfur, LA Owned 90,000 Manufacturing facility and offices
St. Gabrial, LA Owned 90,000 Manufacturing facility and offices
Beaumont, TX Leased 98,000 Manufacturing facility and offices
ALLIED
Houston, TX Leased through 300,000 Manufacturing facility, warehouse,
February 28, 1999 office and other facilities
AMEREX
Woodstock, GA Leased through 8,640 Warehouse and offices
June 30, 1999
Woodstock, GA Leased through 5,880 Warehouse and offices
September 30, 2001
Woodstock, GA Leased through 3,000 Offices
June 30, 2000
Denver, CO Leased month to 1,156 Offices
month
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE
BUILDING SPACE
LOCATION STATUS (SQUARE FEET) DESCRIPTION
-------- ------ -------------- -----------
<S> <C> <C> <C>
CEILCOTE AIR POLLUTION CONTROL
La Grange, OH Leased through 22,500 Manufacturing facility and
March 31, 1999 warehouse
Strongsville, OH Leased through 12,700 Laboratory and offices
January 31, 2010
Plungstadt, Germany Leased 11,000 Offices
Singapore Leased through 5,600 Manufacturing facility and offices
May 31, 1998
HMT
Houston, TX Owned/Leased 54,000 Manufacturing facility and offices
through April 30,
2001
Beaumont, TX Owned 8,100 Service Center
Kelton, PA Owned 7,500 Fabrication facility and offices
Tonkawa, OK Owned 10,000 Fabrication facility and offices
BMT
Egan, MN Owned 88,628 Fabrication facility and offices
Birmingham, AL Owned 86,450 Fabrication facility
Orem, UT Owned 36,720 Fabrication facility
Port Allen, LA Leased 10,000 Warehouse
GRAVER
Pasadena, TX Owned 154,000 Fabrication facility and offices
TRUSCO
San Luis Obispo, CA Owned 25,600 Fabrication facility, warehouse
and offices
Fresno, CA Leased through 103,000 Fabrication facility, warehouse
April 30, 2007 and offices
</TABLE>
In addition, as of December 31, 1997, the Company owned or leased 22 sales,
service and other facilities in the United States and 7 in foreign countries.
ITEM 3. LEGAL PROCEEDINGS
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 arose out of a tank fire which occurred in June of 1995, at a
refinery in northern California, where HMT employees were replacing seals on an
aboveground storage tank. In October 1997, HMT entered into a Settlement
Agreement effectively terminating this matter. The Company's insurance carrier
funded the settlement amount of $500,000, subject to the Company's self-insured
retention limits, under the applicable insurance policy.
Certain of the Company's subsidiaries are parties to legal proceedings in
the ordinary course of business. While the outcome of lawsuits or other
proceedings cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the financial condition, results of
operations or liquidity of the Company.
8
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 28, 1997, the Company held a special meeting of stockholders 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
would merge into ITEQ, with ITEQ being the surviving corporation. The
Merger Agreement, provided for, among other things, (i) the conversion of
each share of outstanding Astrotech common stock into .93 of a share of
ITEQ common stock, (ii) conversion of outstanding Astrotech stock options
into options to purchase ITEQ common stock, adjusted for the exchange
ratio,(iii) the appointment of two additional members to the ITEQ board of
directors and (iv) 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; and
(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 ITEQ 1990 Stock Option Plan to
3,000,000.
There were present at the meeting, in person and by proxy, the holders of
11,118,636 shares of common stock or approximately 65% of the total number of
issued and outstanding shares which were entitled to vote. The results of the
vote were as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NUMBER OF VOTES VOTES
VOTES FOR AGAINST WITHHELD
---------- ---------- ----------
<S> <C> <C> <C>
Approval & Adoption of Plan and Agreement of
Merger......................................... 11,009,425 6,345 13,599
Approval & Adoption of Amended and Restated ITEQ
1990 Stock Option Plan......................... 9,924,575 1,034,077 39,417
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ITEQ." The high and low sales prices per share for the periods
indicated were as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. $ 4 1/2 $ 3 1/4
Second Quarter............................................ $ 4 1/4 $ 3 3/8
Third Quarter............................................. $ 5 1/8 $ 2 7/8
Fourth Quarter............................................ $ 5 $ 4 1/8
1997
First Quarter............................................. $ 7 1/2 $ 4 1/2
Second Quarter............................................ $ 9 1/2 $ 5 13/16
Third Quarter............................................. $14 1/8 $ 9 1/4
Fourth Quarter............................................ $14 1/4 $10
</TABLE>
On March 23, 1998, the last reported sale price for the Common Stock, as
quoted by the Nasdaq National Market, was $12.125 per share. As of the same
date, there were approximately 2,908 holders of record of the Common Stock, and
the Company estimates that there are over 7,500 beneficial owners of Common
Stock.
9
<PAGE> 12
On November 26, 1997, underwriter warrants for 140,000 shares of common
stock were exercised at an exercise price of $4.42 per share for aggregate
consideration of $618,800.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company intends to retain any future earnings for reinvestment in its
business and does not intend to pay cash dividends in the foreseeable future.
Furthermore, the Company is prohibited from declaring or paying cash dividends
on its capital stock under the terms of certain of the Company's indebtedness.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the nine month period
ended December 31, 1993, and the years ended December 31, 1994, 1995, 1996 and
1997 is derived from the audited consolidated financial statements of the
Company. Accounts from acquisitions accounted for as purchases have been
included for the periods subsequent to acquisition and all accounts, for
relevant periods, have been restated to reflect acquisitions accounted for as
poolings-of-interests. Historical results of operations, percentage fluctuations
and any trends that may be inferred from the data below are not necessarily
indicative of the results of operations for any future period. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements and notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1993 1994 1995 1996 1997
------------ -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA (1)(2):
Revenue.................................... $57,517 $113,439 $174,973 $208,815 $335,599
Cost of revenues........................... 39,672 86,788 133,869 159,637 260,117
Selling, general and administrative
expenses................................. 13,505 20,812 27,589 30,209 42,148
Depreciation and amortization.............. 2,427 3,172 4,487 5,226 7,547
Merger, acquisition and restructuring
costs.................................... -- -- 170 2,022 17,956
------- -------- -------- -------- --------
Operating profit........................... 1,913 2,667 8,858 11,721 7,831
Interest expense, net...................... (575) (1,438) (1,895) (3,084) (5,971)
Miscellaneous income, net.................. 128 65 436 224 519
------- -------- -------- -------- --------
Earnings from continuing operations before
income tax provision..................... 1,466 1,294 7,399 8,861 2,379
Income tax provision....................... 379 796 3,110 3,395 2,344
------- -------- -------- -------- --------
Earnings from continuing operations........ 1,087 498 4,289 5,466 35
Earnings (Loss) from discontinued
operations(3)............................ 564 931 (798) (1,542) (2,956)
Extraordinary loss from early
extinguishment of debt................... -- -- -- -- (3,080)
Cumulative effect of change in accounting
principle for income taxes............... -- 2,931 -- -- --
------- -------- -------- -------- --------
Net earnings (loss)........................ $ 1,651 $ 4,360 $ 3,491 $ 3,924 $ (6,001)
======= ======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
From continuing operations............... $ .08 $ .03 $ .21 $ .26 $ --
From discontinued operations (3)......... .04 .05 (.04) (.07) (.12)
Extraordinary loss from early
extinguishment of debt................ -- -- -- -- (.13)
Cumulative effect of change in accounting
principle............................. -- .15 -- -- --
------- -------- -------- -------- --------
Net earnings (loss).............. $ .12 $ .23 $ .17 $ .19 $ (.25)
======= ======== ======== ======== ========
Weighted average common shares
outstanding.............................. 13,409 19,297 20,560 20,645 24,301
======= ======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
From continuing operations............... $ .08 $ .02 $ .21 $ .26 $ --
From discontinued operations(3).......... .04 .05 (.04) (.07) (.11)
Extraordinary loss from early
extinguishment of debt................ -- -- -- -- (.12)
Cumulative effect of change in accounting
principle............................. -- .15 -- -- --
------- -------- -------- -------- --------
Net earnings (loss).............. $ .12 $ .22 $ .17 $ .19 $ (.23)
======= ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding............ 13,501 19,407 20,746 21,004 25,583
======= ======== ======== ======== ========
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................. $59,899 $117,706 $137,395 $224,752 $261,487
Working capital.......................... 11,358 15,840 28,117 42,573 64,531
Long-term debt, net of current
maturities............................. 6,521 19,408 28,294 84,685 89,954
Stockholders' equity..................... 35,760 51,479 54,721 60,306 91,388
</TABLE>
- ---------------
(1) Astrotech's historical operating results and balances have been included
using Astrotech's fiscal years ended September 30. Effective January 1,
1997, ITEQ changed Astrotech's fiscal year to December 31 and the reported
1997 amounts are for the year then ended. As a result, the three-month
period ended December 31, 1996 for Astrotech is not presented. Revenues and
earnings from continuing operations for this period were $33,804 and $1,181,
respectively. The "Nine Months Ended December 31, 1993" includes Astrotech's
amounts for the nine-month period ended September 30, 1993.
(2) During August 1997 and effective on August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary which is expected to be completed in the
third quarter of 1998. See Note 10 to the Consolidated Financial Statements.
(3) Discontinued operations for 1993 relate to Astrotech Space Operations.
Discontinued operations for 1994 and all subsequent years relate to the
Company's Allied subsidiary.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GENERAL
Since its inception in 1990 the Company has experienced substantial growth
through a combination of strategic acquisitions and internal growth. Due to the
magnitude of these acquisitions and the integration of the acquired operations
with the Company's existing businesses, results of operations for prior periods
are not necessarily comparable with or indicative of results of operations for
current or future periods.
The Company records substantially all revenues 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 accounted for under this revenue recognition method are
typically less than three months in duration.
The Company historically has experienced quarterly fluctuations in its
operating results. Operating results in any quarter are dependent upon the
timing of equipment and system sales, which may vary considerably between
quarters. In recent years, the Company has experienced greater revenues and net
income in its second and third quarters, partially as a result of the budgetary
and procurement processes of its customers.
12
<PAGE> 15
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Revenues
Revenues for the year ended December 31, 1997 increased $126,784 or 61% to
$335,599 from $208,815 for the year ended December 31, 1996. The increased
revenues are primarily attributable to the March 1996 acquisition of Graver, the
November 1996 acquisition of Ohmstede, the May 1997 acquisition of Trusco and
the August 1997 acquisition of Exell, all accounted for as purchases. These
process and storage group entities increased revenues $126,965, including
internal growth subsequent to acquisition for the year ended December 31, 1997
as compared to 1996. Revenues decreased in the filtration equipment group as a
result of the disposition in November 1996 of Air-Cure, Inc. ("ACI") and
Pipkorn, Inc. ("Pipkorn") which contributed $5,245 in revenues in 1996.
During 1997, the Company experienced growth in sales to a number of
industry groups, including the steel, chemical, petrochemical, cement, and
microelectronics industries. Petrochemical industry sales increased both
internationally and domestically primarily because of increased marketing
efforts.
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.
Cost of Revenues
Cost of revenues for the year ended December 31, 1997 increased $100,480 to
$260,117 primarily due to the four acquisitions previously mentioned. The
increase in cost of revenues due to these process and storage group entities was
$99,857, including increased cost of revenues associated with internal growth
subsequent to acquisition. Other increases due to higher sales volumes in the
filtration systems group were partially offset by the sale of ACI and Pipkorn in
November 1996 which had cost of revenues of $4,325 for the year ended December
31, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1997 increased $11,939 from $30,209 in 1996 to $42,148. The increase is
related primarily to acquisitions as discussed above. As a result of these
acquisitions, selling, general and administrative expenses increased $12,483 for
the year ended December 31, 1997 as compared to 1996.
Depreciation and Amortization
Depreciation and amortization expense was $7,547 and $5,226 for the years
ended December 31, 1997 and 1996, respectively. The increase was primarily a
result of acquisitions as discussed above which increased depreciation and
amortization by $2,174 for the year ended December 31, 1997 as compared to 1996.
Merger, Acquisition and Restructuring Costs
During the fourth quarter of 1997, the Company recorded nonrecurring
charges totaling $17,956 in connection with the merger of Astrotech and related
restructuring of operations including the elimination of excess capacity and
duplicate facilities. Of this amount, (i) transaction costs totaled $5,145,
which consisted of professional fees paid to financial advisors, accountants and
attorneys, (ii) costs to combine the operations of the Company and Astrotech
included write-downs for duplicate facilities and excess capacity of $5,276,
(iii) severance costs and other benefits totaled $4,221 and (iv) business
integration and reorganization costs totaled $3,314. Transaction costs include
professional expenses of $361 related to the terminated purchase agreement with
Matrix Service Company. Approximately $5,055 of the asset write-down was
non-cash.
13
<PAGE> 16
Interest Expense
Interest expense in 1997 was $5,971 compared to $3,084 in 1996. The
increase in expense reflects the additional borrowings required to finance
acquisitions offset by application of the net proceeds of the May 1997 stock
offering to reduce such debt.
Income Taxes
The income tax expense from continuing operations for the year ended
December 31, 1997 was $2,344 as compared to $3,395 in 1996. The 1997 effective
tax rate was significantly higher than the Federal statutory rate due to
significant nondeductible acquisition expenses related to the merger with
Astrotech.
Discontinued Operations and Extraordinary Item
During August 1997 and effective on August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary. Certain of the net assets of Allied's
operations will be liquidated as remaining orders in process are completed. The
estimated completion date of the net asset liquidation is the third quarter of
1998. The Allied facility will not be disposed of, as it will be used in the
Company's facility consolidation effort. The Company recorded a loss from
discontinued operations in 1997 and 1996 of $2,956 and $1,542, net of tax
benefits of $1,613 and $871, respectively, for the Company's Allied subsidiary.
During the third quarter of 1997, the Company repaid its subordinated notes
using available proceeds under its revolving credit facility. In the fourth
quarter of 1997, in connection with the Merger, the Company refinanced its and
Astrotech's existing credit facilities. The Company incurred an extraordinary
loss of $4,812 ($3,080 net of taxes), related to the write-off of unamortized
debt issuance and discount costs.
1996 COMPARED WITH 1995
Revenues
Revenues for the year ended December 31, 1996 increased $33,842, or 19.3%,
to $208,815 from $174,973 for the year ended December 31, 1995. This increase
resulted primarily from the acquisitions of Graver in March 1996 and Ohmstede in
November 1996. These process group entities increased revenues $29,583,
including internal growth subsequent to acquisition for the year ended December
31, 1996, as compared to 1995. The filtration systems group experienced a
decrease in revenues in 1996 compared with 1995 due to the commencement and
completion of an $11,800 order in 1995 which was not replaced in full by other
orders in 1996. This decrease was partially offset by an increase of $9,504 in
the storage systems group in 1996, as compared to 1995.
In 1996, the Company's sales to the petrochemical and refining industries
increased due to the acquisition of Ohmstede, which had sales to these
industries only. The Company's international sales, sales of tank construction
services and sales to the microelectronics and the cement and lime industries
also increased during 1996.
Cost of Revenues
Cost of revenues for the year ended December 31, 1996 increased $25,768 to
$159,637 primarily due to the acquisition of Graver and Ohmstede during 1996.
These process group entities incurred cost of revenues of $24,109 during the
year ended December 31, 1996 including increased cost of revenues associated
with internal growth subsequent to acquisition.
The filtration systems group experienced a decrease in cost of revenues in
1996, as compared with 1995 due to commencement and completion of an $11,800
order in 1995 which was not replaced in full by other orders in 1996. This
decrease in cost was partially offset by the increase in activity in the storage
systems group in 1996.
14
<PAGE> 17
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 1996 and 1995 were at $30,209 and $27,589, respectively. This increase is
primarily due to the acquisition of Graver and Ohmstede during 1996.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 1996
increased $739 to $5,226. The increase was primarily due to the acquisition of
Graver and Ohmstede as discussed above.
Merger, Acquisition and Restructuring Costs
During 1996, the Company incurred a restructuring charge of $2,022. The
charge included (i) a provision for the contractually required severance
obligations to the former president and chief executive officer who was replaced
in March 1996, and (ii) the cost of implementing new management's plan to reduce
the Company's overall cost structure including employee severance, lease and
other contract buyouts, inventory and other asset impairments, losses related to
termination of unprofitable business lines, excess machinery disposal and other
related costs.
During 1995 the Company recorded a nonrecurring charge of approximately
$170 for operational consolidation during 1995, and unrelated litigation
settlement costs.
Interest Expense
Interest expense for the years ended December 31, 1996 and 1995 was $3,084
and $1,895, respectively. The borrowings required to finance the Ohmstede
acquisition accounted for most of the increase.
Income Taxes
The income tax expense from continuing operations for the year ended
December 31, 1996 was $3,395 as compared to $3,110 in 1995. The 1996 effective
tax rate of 38.3% is lower than 1995 effective tax rate of 42.0% principally due
to nondeductible merger and acquisition costs incurred in 1995.
Discontinued Operations
In August 1997 and effective on August 31, 1997, management adopted plans
to discontinue its Allied subsidiary which consisted of low margin generic
fabrication operations. The Company recorded a loss from discontinued operations
in 1996 and 1995 of $1,542 and $798, net of a tax benefit of $871 and a tax
provision of $160, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company's cash position was $9,681 compared with
$6,990 at December 31, 1996. Net working capital at December 31, 1997 increased
to $64,531 from $42,573 at December 31, 1996.
The Company's existing capital resources consist of cash balances, cash
provided by its operating activities and funds available under its line of
credit. Cash provided by operations in 1997 was $6,841. During 1996, the
Company's operating activities provided $13,142 in cash, compared to $152 in
cash provided in 1995.
The Company's cash requirements consist of its general working capital
needs, capital expenditures, obligations under its leases and indebtedness, and
capital required for future acquisitions. The Company's general working capital
requirements consist of salary costs and related overhead and the purchase price
of materials and components, and may also include subcontract costs incurred
prior to the receipt of corresponding progress payments under the contract with
respect to which such costs are incurred. Management anticipates that the
Company will make capital expenditures of approximately $6,000 in 1998 as
compared to $5,377 in 1997.
15
<PAGE> 18
In November 1996, the Company amended its principal credit agreement to
increase its maximum borrowings in conjunction with the Ohmstede acquisition.
The financing consisted of a $35,000 term loan and a $38,000 revolving line of
credit facility. In May 1997, ITEQ sold approximately 5,058 shares of common
stock and used the net proceeds (approximately $31,795) to reduce debt. In
addition to the bank financing, in November 1996, the Company issued Senior
Subordinated Notes ("Subordinated Notes") to two institutional lenders in an
aggregate amount of $15,000. The Subordinated Notes were scheduled to mature
November 18, 2003, and bore interest at an initial rate of 12%. As additional
consideration, the Subordinated Note holders received warrants to purchase an
aggregate of 1,760 shares of the Company's common stock at $5.10 per share,
subject to adjustment. The warrants may be exercised at any time prior to
expiration on November 18, 2003. Approximately $2,300 warrant value was
reflected as equity and as debt discount that was being amortized as additional
interest expense over the seven year life of the Subordinated Notes. In 1997,
ITEQ repaid the Subordinated Notes and refinanced its then existing revolving
credit facility which resulted in extraordinary charge of approximately $3,080,
net of an estimated tax benefit of $1,732.
In connection with the merger with Astrotech, ITEQ refinanced its and
Astrotech's existing credit facilities under a new non-amortizing revolving
credit facility with various financial institutions with a commitment of
$175,000 maturing in October 2002 and bearing interest, at ITEQ's option, at
BankBoston, N.A.'s ("BankBoston") customary base rate or at BankBoston's
Eurodollar rate plus, in either case, an agreed upon margin ranging from 0% to
2.5% for the applicable base rate margin, and from 1% to 1.75% for the
applicable Eurodollar rate margin. This new credit facility is secured by
substantially all of the assets of ITEQ, a pledge of the stock of ITEQ's
domestic subsidiaries and guarantees entered into by such subsidiaries. The
outstanding balance under the credit facility at December 31, 1997 was $89,936.
ITEQ's principal credit facility requires the Company to maintain certain
levels of working capital and stockholders' equity and contains other
restrictive covenants. Such instruments also limit the ability of the Company to
incur additional indebtedness and to make acquisitions and certain investments.
At December 31, 1997, the Company was in compliance with the provisions of its
loan agreements.
Except with respect to funding 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 1998. 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.
The Company is currently in the process of evaluating its computer software
programs and operating systems to ensure such programs and systems will be able
to process transactions in the year 2000. However, the Company does not expect
that such costs to modify its programs and systems will be material to its
financial condition or results of operations. The Company does not currently
have information concerning the year 2000 compliance of its suppliers and
customers. In the event the Company's significant suppliers or customers do not
successfully and timely achieve year 2000 compliance, the Company's operations
could be adversely affected.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements other than statements of
historical facts included in the preceding 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.
16
<PAGE> 19
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors is set forth in
the Proxy Statement under the caption entitled "Election of Directors" and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Proxy Statement
under the caption "Compensation of Directors and Executive Officers" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Proxy Statement
under the captions "Election of Directors" and "Compensation of Directors and
Executive Officers" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Proxy Statement
under the caption "Certain Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See "Index to Financial Statements" set forth on page F-1.
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant. (Filed as Appendix E to the Joint Proxy
Statement/Prospectus of the Registrant and Astrotech on
October 3, 1997 and incorporated herein by reference).
3.2 -- Amended and Restated Bylaws of the Registrant. (Filed as
an exhibit to Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference).
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the Registrant
defining the rights of holders of Common Stock.
4.2 -- Revolving Credit Agreement dated as of October 28, 1997
by and among the Registrant, the Guarantors and various
lending institutions including Deutsche Bank AG as
Documentation Agent and BankBoston, N.A. as Agent. (Filed
as an exhibit to Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by reference).
4.3 -- Warrant Agreement, dated November 18, 1996, between the
Registrant and International Mezzanine Capital, B.V.
("Mezzanine"). (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.4 -- Warrant Agreement dated November 18, 1996, between the
Registrant and First Commerce Corporation ("First
Commerce"). (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
4.5 -- Registration Rights Agreement dated November 18, 1996,
among the Registrant, Mezzanine, and First Commerce.
(Filed as an exhibit to Form 8-K dated December 5, 1996
and incorporated herein by reference).
4.6 -- Warrant Agreement, dated April 24, 1996, between the
Registrant and Sanders Morris Mundy, Inc. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference).
4.7 -- Warrant Agreement, dated December 1992, between
Registrant and Pennsylvania Merchant Group, Ltd. (Filed
as an exhibit to Form 10-K for fiscal year ending March
31, 1993 and incorporated herein by reference).
10.1 -- Plan and Agreement of Merger dated as of June 30, 1997,
by and between the Registrant and Astrotech International
Corporation ("Astrotech"). (Filed as Appendix A to the
Joint Proxy Statement/Prospectus of the Registrant and
Astrotech on October 3, 1997 and incorporated herein by
reference).
10.2 -- Stock Purchase Agreement dated as of April 30, 1997, by
and between Jared A. Trussler, Ray E. Crosno and Leslie
D. Scott ("Sellers") and Astrotech
(predecessor-in-interest to the Registrant). (Filed as an
exhibit to Form 8-K of Astrotech dated as of May 14, 1997
and incorporated herein by reference).
10.3 -- Stock Purchase Agreement, dated April 24, 1997, among the
owners of Exell, Inc. ("Exell") and the Registrant.
(Filed as an exhibit to Amendment No. 2 to the
Registrant's Registration Statement on Form S-2 (No.
333-23245) and incorporated herein by reference).
10.4 -- First and Second Amendment to Exell Stock Purchase
Agreement among the owners of Exell and the Registrant.
(Filed as an exhibit to Form 10-Q for the quarter ending
June 30, 1997 and incorporated herein by reference).
10.5 -- Amendment No. 2, as of February 28, 1997, to the Stock
Purchase Agreement dated February 7, 1994, by and among
Astrotech (predecessor-in-interest to the Registrant),
Brown-Minneapolis Tank & Fabricating Company ("BMT") and
Irwin Jacobs. (Filed as an exhibit to Form 10-Q for the
quarter ended March 31, 1997 of Astrotech and
incorporated herein by reference).
10.6 -- Purchase and Sale Agreement, dated as of the Effective
Date (as defined therein), between Babel, Miller &
Blackwell Partnership (the "Partnership") and the
Registrant. (Filed as an exhibit to Form 8-K dated August
28, 1997 and incorporated herein by reference).
10.7 -- First Amendment to Purchase and Sale Agreement, effective
August 13, 1997, among the Partnership, Beaumont Franklin
Street Properties, L.L.C. ("BFSP"), Neches Street
Properties, L.L.C. ("NSP") and the Registrant. (Filed as
an exhibit to Form 8-K dated August 28, 1997 and
incorporated herein by reference).
10.8 -- Agreement and Plan of Merger dated September 19, 1996,
among the Registrant, Air-Cure Acquisition, Inc. and
Ohmstede, Inc. (Filed as an exhibit to Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein
by reference).
10.9 -- Stock Purchase Agreement dated March 7, 1996, by and
among Astrotech (predecessor-in-interest to the
Registrant), Timothy J. McDavid, Graver Holding Company
and Graver Tank & Mfg. Co. (Filed as an exhibit to
Astrotech's Form 8-K dated April 10, 1996 and
incorporated herein by reference).
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10 -- Agreement and Plan of Merger dated October 13, 1995,
among the Registrant, Air-Cure Acquisition Corporation,
Allied Industries, Inc., Mark E. Johnson and Pierre S.
Melcher. (Filed as an exhibit to Post-Effective Amendment
No. 1 to Form S-4 Registration Statement (No. 33-92308)
and incorporated herein by reference).
10.11 -- Employment Agreement dated September 30, 1997 for Mark E.
Johnson. (Filed as an exhibit to Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein
by reference).
10.12 -- Employment Agreement dated May 15, 1997, between the
Registrant and John Camardella. (Filed as an exhibit to
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
10.13 -- Employment Agreement dated March 1, 1996, between the
Registrant and Lawrance W. McAfee. (Filed as an exhibit
to Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
10.14 -- Employment Agreement dated March 1, 1995, between the
Registrant and John P. Fitzpatrick. (Filed as an exhibit
to Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10.15 -- Employees Stock Purchase Plan, as amended, dated December
15, 1994. (Filed as an exhibit to Form 10-K for year
ended December 31, 1994 and incorporated herein by
reference).
10.16 -- Director Stock Option Plan, as amended. (Plan filed as an
exhibit to Proxy Statement for Annual Meeting of
Stockholders held on June 29, 1995, and amendment filed
as an exhibit to Form 10-Q for the quarter ended June 30,
1996 both of which are incorporated herein by reference).
10.17 -- Amended and Restated ITEQ 1990 Stock Option Plan. (Filed
as Appendix D to Joint Proxy Statement/Prospectus of the
Registrant and Astrotech on October 3, 1997 and
incorporated herein by reference).
10.18 -- 1984 Stock Option Plan. (Filed as an exhibit to
Astrotech's Registration Statement on Form S-8 (No.
33-3360) and incorporated herein by reference).
10.19 -- 1989 Stock Incentive Plan. (Filed as an exhibit to
Astrotech's Registration Statement on Form S-8 (No.
33-2975) and incorporated herein by reference).
10.20 -- The 1994 Stock Option Plan for the Employees of BMT.
(Filed as an exhibit to Astrotech's Registration
Statement on Form S-8 (No. 33-85106) and incorporated
herein by reference).
10.21 -- 1995 Non-Employee Directors' Stock Option Plan. (Filed as
an exhibit to Astrotech's Proxy Statement of Astrotech
for the Annual Meeting of Shareholders filed on or about
April 10, 1995 and incorporated herein by reference).
10.22 -- Lease, dated August 13, 1997 among Beaumont Franklin
Street Properties, L.L.C., Neches Street Properties,
L.L.C. and Exell. (Filed as an exhibit to Form 8-K dated
August 28, 1997 and incorporated herein by reference).
10.23 -- Lease Agreement dated May 25, 1994, between Halligan and
Labbe Enterprises, L.L.C. and Amerex Industries, Inc.
(Filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- License and Technical Assistance Agreement dated August
28, 1991, between Interel Environmental Technologies,
Inc. and Heinrich Luhr Staubtechnik GmbH & Co. (Filed as
an exhibit to Form S-1 (No. 33-44205) and incorporated
herein by reference).
*23.1 -- Consent of Arthur Andersen LLP
*23.2 -- Consent of Coopers & Lybrand L.L.P.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed the following Reports on Form 8-K during the fourth
quarter of 1997:
- Form 8-K/A dated October 27, 1997 amending the financial statements and
exhibits of the Form 8-K dated August 28, 1997 with respect to the
acquisition of Exell.
- Form 8-K dated October 28, 1997 with respect to the merger with
Astrotech.
- Form 8-K dated December 17, 1997 with respect to entering into Plan and
Agreement of Merger with Matrix Service Company (which agreement was
subsequently terminated in January 1998).
- Form 8-K dated December 18, 1997 with respect to the combined results of
operations of the Registrant and Astrotech for the month ended November
30, 1997.
20
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Public Accountants................... F-2,3
Consolidated Balance Sheets -- December 31, 1996 and
December 31, 1997......................................... F-4
Consolidated Statements of Operations -- Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1995, 1996 and 1997.................... F-6
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1995, 1996 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 24
ITEQ, INC.
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, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. We did not audit the financial statements of
Astrotech International Corporation, a company acquired during 1997 in a
transaction accounted for as a pooling-of-interests, as discussed in Note 2, for
the two years ended September 30, 1995 and 1996. The statements of operations
and cash flows for Astrotech International Corporation are included in the 1995
and 1996 consolidated statements of operations and cash flows of ITEQ, Inc. and
represents revenues of 57% and 59%, respectively, of the consolidated total.
Additionally, total assets of Astrotech International Corporation at September
30, 1996 have been included in the consolidated balance sheet of ITEQ, Inc. and
represent 39% of consolidated assets. 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 Astrotech International Corporation, 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, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 5, 1998
F-2
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Astrotech International Corporation:
We have audited the consolidated balance sheet of Astrotech International
Corporation and subsidiaries as of September 30, 1996 and the consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended September 30, 1996 (not presented separately herein).
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 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, 1996
and the consolidated results of their operations and cash flows for each of the
two years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
December 6, 1996
F-3
<PAGE> 26
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 6,990 $ 9,681
Due on contracts and other receivables, net................. 62,720 72,140
Unbilled revenues........................................... -- 741
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 26,736 30,164
Inventories................................................. 15,271 13,138
Prepaid expenses, deposits and other assets................. 2,164 3,538
Deferred tax asset.......................................... 4,021 7,589
Assets held for sale........................................ -- 2,925
-------- --------
Total current assets.............................. 117,902 139,916
Property and equipment, net................................. 39,766 42,198
Other assets, net........................................... 67,084 79,373
-------- --------
TOTAL ASSETS...................................... $224,752 $261,487
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 22,189 $ 24,861
Accrued liabilities
Job costs................................................. 8,171 9,498
Accrued compensation and benefits......................... 9,063 6,077
Accrued expenses and other current liabilities............ 13,197 25,634
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 6,545 8,194
Progress billings........................................... 5,137 579
Current maturities of long term obligations................. 9,455 104
Income taxes payable........................................ 1,572 438
-------- --------
Total current liabilities......................... 75,329 75,385
LONG-TERM LIABILITIES
Long-term obligations, less current maturities.............. 84,685 89,954
Deferred tax liability...................................... 4,432 4,760
-------- --------
Total Liabilities................................. 164,446 170,099
-------- --------
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 and 40,000 shares
authorized at December 31, 1996 and 1997, respectively;
20,688 and 26,912 shares issued and outstanding at
December 31, 1996 and 1997, respectively.................. 21 27
Additional paid-in capital.................................. 82,984 119,823
Retained earnings (deficit)................................. (22,824) (27,644)
Translation adjustment...................................... 125 (818)
-------- --------
Total Stockholders' Equity........................ 60,306 91,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $224,752 $261,487
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 27
ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $174,973 $208,815 $335,599
Cost of revenues........................................... 133,869 159,637 260,117
Selling, general and administrative expenses............... 27,589 30,209 42,148
Depreciation and amortization.............................. 4,487 5,226 7,547
Merger, acquisition and restructuring costs................ 170 2,022 17,956
-------- -------- --------
Operating profit......................................... 8,858 11,721 7,831
Interest expense, net...................................... (1,895) (3,084) (5,971)
Miscellaneous income, net.................................. 436 224 519
-------- -------- --------
Earnings from continuing operations before income tax
provision and extraordinary loss...................... 7,399 8,861 2,379
Income tax provision....................................... 3,110 3,395 2,344
-------- -------- --------
Earnings from continuing operations before extraordinary
loss.................................................. 4,289 5,466 35
-------- -------- --------
Loss from discontinued operations, net of income tax
provision (benefit) of $160, ($871) and ($547),
respectively............................................. (798) (1,542) (1,061)
Loss on disposal of discontinued operations net of income
tax benefit of $1,066.................................... -- -- (1,895)
-------- -------- --------
Loss from discontinued operations........................ (798) (1,542) (2,956)
-------- -------- --------
Extraordinary loss on early extinguishment of debt, net of
income tax benefit of $1,732............................. -- -- (3,080)
-------- -------- --------
Net earnings (loss)...................................... $ 3,491 $ 3,924 $ (6,001)
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings from continuing operations........................ $ .21 $ .26 $ --
Loss from discontinued operations.......................... (.04) (.07) (.12)
Extraordinary loss......................................... -- -- (.13)
-------- -------- --------
Net earnings (loss) per common share..................... $ .17 $ .19 $ (.25)
======== ======== ========
Weighted average common shares outstanding................. 20,560 20,645 24,301
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings from continuing operations........................ $ .21 $ .26 $ --
Loss from discontinued operations.......................... (.04) (.07) (.11)
Extraordinary loss......................................... -- -- (.12)
-------- -------- --------
Net earnings (loss) per common share..................... $ .17 $ .19 $ (.23)
======== ======== ========
Weighted average common and common equivalent shares
outstanding.............................................. 20,746 21,004 25,583
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 28
ITEQ, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(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, 1994, AS PREVIOUSLY REPORTED....... 11,438 $11 $ 20,605 $ 715 $ 143 $21,474
Adjustment for Astrotech pooling-of-interests............ 9,060 9 59,517 (29,521) -- 30,005
------ --- -------- -------- ----- -------
POOLED BALANCE, DECEMBER 31, 1994, AS RESTATED........... 20,498 20 80,122 (28,806) 143 51,479
Stock issued for the employee stock purchase plan........ 15 -- 46 -- -- 46
Stock issued for the exercise of stock options........... -- -- 6 -- -- 6
Issuance of 170 shares of common stock, net of costs..... 170 1 576 -- -- 577
Costs related to issuance of stock....................... -- -- (14) -- -- (14)
Compensation expense in connection with non-qualified
stock option grants.................................... -- -- 13 -- -- 13
Foreign currency translation adjustment.................. -- -- -- -- 306 306
Equity transactions of pooled company.................... -- -- 250 (1,433) -- (1,183)
Net earnings............................................. -- -- -- 3,491 -- 3,491
------ --- -------- -------- ----- -------
BALANCE, DECEMBER 31, 1995............................... 20,683 21 80,999 (26,748) 449 54,721
Stock issued for the employee stock purchase plan........ 15 -- 44 -- -- 44
Stock issued for the exercise of stock options........... 74 -- 151 -- -- 151
Repurchase of 84 shares.................................. (84) -- (292) -- -- (292)
Warrants issued to subordinated lenders, net of issuance
costs.................................................. -- -- 2,082 -- -- 2,082
Foreign currency translation adjustment.................. -- -- -- -- (324) (324)
Net earnings............................................. -- -- -- 3,924 -- 3,924
------ --- -------- -------- ----- -------
BALANCE, DECEMBER 31, 1996............................... 20,688 21 82,984 (22,824) 125 60,306
Issuance of 5,058 shares of common stock................. 5,058 5 31,790 -- -- 31,795
Exercise of warrants..................................... 190 -- 857 -- -- 857
Stock issued for employee stock purchase plan and
exercise of stock options.............................. 976 1 4,192 -- -- 4,193
Effect of change in Astrotech year end................... -- -- -- 1,181 -- 1,181
Foreign currency translation adjustment.................. -- -- -- -- (943) (943)
Net loss................................................. -- -- -- (6,001) -- (6,001)
------ --- -------- -------- ----- -------
BALANCE, DECEMBER 31, 1997............................... 26,912 $27 $119,823 $(27,644) $(818) $91,388
====== === ======== ======== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 29
ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $ 3,491 $ 3,924 $ (6,001)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization............................. 4,835 5,717 7,859
Provision (Benefit) for deferred income taxes............. 1,398 1,634 (3,240)
Non-cash write-offs related to discontinued operations.... -- -- 824
Gain on sale of investment in subsidiary.................. -- (160) --
Extraordinary loss on early extinguishment of debt........ -- -- 4,812
Change in Astrotech fiscal year end....................... -- -- 1,181
Tax benefit from employee stock plans..................... -- -- 630
Non-cash write-offs from restructuring.................... -- -- 5,055
Gain on sale of land, buildings & equipment............... (347) (48) --
Non-cash interest......................................... -- 302 499
Changes in assets and liabilities, net of effects of
businesses acquired:
Due on contracts and other receivables, net............. (8,473) 3,698 (3,559)
Inventories............................................. (1,407) 2,613 5,106
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. (9,669) (4,139) (2,859)
Prepaid expenses, deposits and other assets............. (658) (518) (985)
Accounts payable and accrued liabilities................ 13,168 (1,995) 3,002
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (2,159) (1,197) 1,053
Progress billings....................................... -- 4,128 (4,891)
Other................................................... (27) (817) (1,645)
------- ------- --------
Net cash provided by operating activities............... 152 13,142 6,841
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired businesses, net of cash acquired... -- (55,622) (18,776)
Purchases of property and equipment....................... (5,190) (8,291) (5,377)
Contingent purchase consideration paid.................... -- (544) (3,354)
Cash received from sale of land, buildings & equipment.... 294 215 --
Proceeds from note receivable from employee............... -- 613 --
Proceeds from sale of investment in subsidiary............ -- 1,000 --
------- ------- --------
Net cash used by investing activities................... (4,896) (62,629) (27,507)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations....................... 10,400 32,499 17,840
Proceeds/Repayment from subordinated debt & warrants...... -- 15,000 (15,000)
Payments of long-term obligations......................... (9,279) (2,499) (70,830)
Net borrowings under line of credit....................... 6,417 17,432 55,531
Debt issuance costs....................................... -- (3,002) --
Net proceeds from common stock offering................... -- -- 31,795
Capital distributions to shareholders of pooled company... (1,433) -- --
Proceeds from exercise of stock options and warrants...... 47 178 4,420
Costs relating to issuance of warrants and stock.......... -- (206) --
Repayments of long-term debt to related parties........... (968) (160) --
Repayment of other long-term debt......................... (2,193) (4,239) --
Cash paid for stock repurchase............................ -- (292) --
Other..................................................... 438 (426) --
------- ------- --------
Net cash provided by financing activities............... 3,429 54,285 23,756
------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 114 (107) (399)
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (1,201) 4,691 2,691
Cash and cash equivalents, beginning of period.............. 3,500 2,299 6,990
------- ------- --------
Cash and cash equivalents, end of period.................... $ 2,299 $ 6,990 $ 9,681
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 1,903 $ 3,023 $ 6,853
======= ======= ========
Cash paid for income taxes.............................. $ 2,815 $ 844 $ 380
======= ======= ========
Supplemental schedule of non-cash investing & financing
activities:
Non-compete agreements.................................. $ -- $ 500 $ --
======= ======= ========
Net business assets disposed through company financing
or non-cash consideration.............................. $ -- $ 950 $ --
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE> 30
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ITEQ, Inc. ("ITEQ" or the "Company")designs, engineers, manufactures and
services process, storage and filtration systems, equipment and components. The
Company's products and services are utilized by customers in manufacturing
processes requiring the process, treatment, storage or movement of gases and
liquids. It is the leading domestic manufacturer and servicer of shell and tube
heat exchangers, principally for petrochemical and refining applications, a
leading designer and producer of above-ground storage tanks ("ASTs") and related
products primarily for the petrochemical, municipal water storage, food and
agriculture industries, and a leading producer of baghouses, scrubbers, fans and
other filtration systems and components for environmental and general industrial
applications including use in the steel and foundry, microelectronics, chemical,
minerals, pharmaceutical and other industries. The Company also manufactures
specialized process equipment, such as pressure vessels and blenders,
principally for the refining, petrochemical and plastics industries. ITEQ also
provides non-destructive testing and inspection services for ASTs, pressure
vessels and piping and also offers mobile storage tank leasing services. The
Company operates internationally, with its equipment, systems and services sold
or utilized in over 30 countries worldwide.
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. All significant intercompany balances and
transactions have been eliminated. The consolidated financial statements have
also been restated to reflect the merger with Astrotech International
Corporation ("Astrotech") on October 28, 1997 and the merger with Allied
Industries, Inc. ("Allied") on December 28, 1995 which were accounted for as
poolings-of-interests. During August 1997 and effective on August 31, 1997,
management of ITEQ adopted plans to discontinue certain of its low margin
generic fabrication operations at its Allied subsidiary which is expected to be
completed in the third quarter of 1998. See Note 10.
REVENUE RECOGNITION
The Company records substantially all revenues 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.
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-8
<PAGE> 31
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
ACCOUNTS RECEIVABLE
At December 31, 1996 and 1997, due on contracts and other receivables
consist of:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Billings on completed contracts and contracts in progress... $59,979 $68,522
Retained contract receivables............................... 3,629 4,599
Allowance for doubtful accounts............................. (888) (981)
------- -------
$62,720 $72,140
======= =======
</TABLE>
All retainages as of December 31, 1997 are expected to be collected by
December 31, 1998.
INVENTORIES
Inventories consist of costs for which no related revenue has been
recognized. Inventories include materials used in the manufacturing process and
purchased parts 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 at December 31, 1996 and 1997,
consists of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials............................................... $ 7,103 $ 6,910
Work in progress............................................ 7,731 5,027
Finished goods.............................................. 437 1,201
------- -------
$15,271 $13,138
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, including costs to ready assets
for use. Depreciation and amortization of property and equipment is computed on
the straight-line method over the estimated useful
F-9
<PAGE> 32
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
lives of the assets and is recognized as depreciation expense in the statement
of operations. At December 31, 1996 and 1997, property and equipment was
comprised of the following items:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES 1996 1997
---------- -------- --------
<S> <C> <C> <C>
Land............................................... N/A $ 3,104 $ 3,647
Furniture and fixtures............................. 3-15 years 3,469 4,094
Machinery and equipment............................ 5-15 years 27,213 29,309
Buildings and improvements......................... 7-39 years 11,133 12,423
Leasehold improvements............................. 3-10 years 330 388
Tanks and trucks held for lease.................... 4-15 years 7,336 8,352
-------- --------
52,585 58,213
Less accumulated depreciation and amortization..... (12,819) (16,015)
-------- --------
Property and equipment, net........................ $ 39,766 $ 42,198
======== ========
</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.
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.
INTANGIBLE ASSETS
The excess of cost over net assets acquired, licenses, trademarks and
tradenames are amortized on a straight-line basis over periods ranging from five
to forty years. The Company monitors each entity's historical and expected
performance in the context of the value assigned to acquisition intangibles and
to the amortization period applied to each intangible asset. The Company
assesses the recoverability of its goodwill whenever adverse events or changes
in circumstances or business climate indicate that expected future cash flows
(undiscounted and without interest charges) for individual business units may
not be sufficient to support recorded goodwill. The Company modifies the life
and/or the carrying amount of an acquisition intangible if an impairment is
identified. Amortization expense was $1,300, $1,400 and $2,695 for the years
ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1996 and 1997, other assets was comprised of the following
items:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Excess of costs over net assets acquired, net of accumulated
amortization
of $6,116 and $7,787 at December 31, 1996 and 1997,
respectively.............................................. $50,631 $65,867
Licenses, patents, trademarks and tradenames, net of
accumulated amortization of $970 and $1,639 at December
31, 1996 and 1997, respectively........................... 12,525 11,607
Debt issuance costs, net of accumulated amortization of $45
at December 31, 1996...................................... 2,957 --
Other....................................................... 971 1,899
------- -------
Other assets, net........................................... $67,084 $79,373
======= =======
</TABLE>
F-10
<PAGE> 33
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME TAXES
Deferred taxes are provided based on temporary differences between the book
and tax basis of assets and liabilities using presently enacted tax rates.
EARNINGS (LOSS) PER COMMON SHARE
On December 15, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which replaced primary and fully diluted earnings per share ("EPS") with
basic and diluted EPS. SFAS No. 128 was applied to all periods presented. Basic
EPS is computed by dividing net income by the weighted average number of shares
of common stock outstanding during the year. Weighted average number of shares
of common stock outstanding for diluted EPS includes the dilutive effect of
common stock equivalents. Diluted earnings per share is approximately equal to
the total of the combined primary earnings per share previously reported by ITEQ
and Astrotech, after giving consideration to the exchange ratio. The only
reconciling difference between the numerators and denominators for basic and
diluted earnings per share is the impact of common stock options and warrants
outstanding calculated using the treasury stock method.
TRANSLATION ADJUSTMENT
The financial activity of the Company's non-U.S. operations located in
Canada, Germany, England, Australia and Singapore are translated into U.S.
dollars. 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 the Company's current financing agreement and approximates
carrying value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company maintains its cash with various financial institutions.
Accounts receivable at any given time are concentrated in a number of primarily
domestic customers. An allowance for doubtful accounts has been provided for
estimated losses. To mitigate credit risk, the Company may require customers to
make advance payments or secure obligations with letters of credit.
PENDING ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
F-11
<PAGE> 34
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company is currently assessing the impact that adoption
of this statement will have on its financial position and results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the December 31, 1997 presentation.
NOTE 2 -- BUSINESS COMBINATIONS
Results of operations for business combinations accounted for as purchases
are included in the accompanying consolidated financial statements since the
date of acquisition. The allocations of the purchase price to the fair market
value of the net assets acquired in the 1997 acquisitions are based on
preliminary estimates of fair market values and may be revised when additional
information concerning asset and liability valuations is obtained. With respect
to business combinations accounted for as poolings-of-interests, the
consolidated financial statements have been restated for all periods presented
as if the companies had been combined since inception.
ASTROTECH
On October 28, 1997, the Company merged with Astrotech International
Corporation ("Astrotech") in a transaction accounted for as a
pooling-of-interests (the "Merger"). Astrotech is a designer, fabricator and
supplier of proprietary storage tank products and services providing a range of
inspection, engineering, construction and maintenance services for aboveground
storage tanks and also offering mobile storage tank leasing services. Industries
served include refining, petrochemical, wastewater treatment, agricultural, pulp
and paper, mining, water storage, power generation and process systems. The
Company issued approximately 9,541 shares of ITEQ common stock in exchange for
all the outstanding shares of Astrotech common stock based on an exchange ratio
of .93 of a share of ITEQ common stock for each share of Astrotech common stock
outstanding. In addition, all outstanding options to purchase Astrotech common
stock were converted into options to purchase shares of ITEQ common stock, as
adjusted for the exchange ratio. In connection with the Merger, the Company
amended and restated its Certificate of Incorporation to, among other things,
increase its authorized shares of common stock from 30,000 to 40,000.
Prior to the Merger, Astrotech used a fiscal year ending on September 30.
Accordingly, the restated financial statements combine the September 30, 1995
and 1996 financial statements of Astrotech with the December 31, 1995 and 1996
financial statements of the Company. Revenues and earnings from continuing
operations of Astrotech for the three month period ended December 31, 1996 were
$33,804 and $1,181, respectively, with net earnings reflected as an adjustment
to retained earnings effective January 1, 1997.
F-12
<PAGE> 35
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Combined and separate results of the Company and Astrotech during the
periods proceeding the merger were as follows:
<TABLE>
<CAPTION>
EARNINGS FROM NET
CONTINUING EARNINGS
REVENUES OPERATIONS (LOSS)
-------- ------------- --------
<S> <C> <C> <C>
Nine months ended
September 30, 1997 (unaudited):
ITEQ............................................ $131,479 $5,372 $ 546
Astrotech....................................... 110,943 3,531 3,531
-------- ------ ------
Combined..................................... $242,422 $8,903 $4,077
======== ====== ======
1996:
ITEQ............................................ $ 86,077 $1,456 $ (86)
Astrotech....................................... 122,738 4,010 4,010
-------- ------ ------
Combined..................................... $208,815 $5,466 $3,924
======== ====== ======
1995:
ITEQ............................................ $ 74,549 $1,558 $ 760
Astrotech....................................... 100,424 2,731 2,731
-------- ------ ------
Combined..................................... $174,973 $4,289 $3,491
======== ====== ======
</TABLE>
EXELL
Effective August 1, 1997, the Company purchased all of the capital stock of
Exell, Inc. ("Exell") for total cash consideration of approximately $8,088 plus
assumption of certain liabilities. The cash consideration consisted of $7,864 in
purchase price and $224 for related acquisition expenses. Exell is a
manufacturer of shell and tube heat exchangers and was previously a competitor
of the Company's Ohmstede operation. For its fiscal year ended September 30,
1996, Exell reported revenues of approximately $26,779.
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............................................. $1,424
Property and equipment...................................... 1,422
Excess of costs over net assets acquired.................... 5,242
------
Total purchase price...................................... $8,088
======
</TABLE>
TRUSCO
On May 1, 1997, the Company purchased 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 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 base purchase price of $11,458 consisted of $10,958 in cash and $500 of
acquisition-related expenses. In addition, Astrotech repaid Trusco's existing
bank obligations totaling $4,500.
F-13
<PAGE> 36
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The purchase price has been allocated to the assets purchased and
liabilities assumed based upon the estimated fair values at the date of
acquisition as follows:
<TABLE>
<S> <C>
Working capital............................................. $ 4,800
Property and equipment...................................... 3,658
Debt assumed................................................ (4,726)
Excess of costs over net assets acquired.................... 7,726
-------
Total purchase price.............................. $11,458
=======
</TABLE>
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 $52,924 consisting of $52,000 for
Ohmstede's stock and $924 for related acquisition costs. Assets not purchased
included the majority of receivables due from 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 $600 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 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>
GRAVER
On March 28, 1996, the Company purchased 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 and stack liners.
The base purchase price of approximately $2,900 consisted of approximately
$2,750 in cash and approximately $150 of acquisition-related expenses. The
seller has been paid additional cash proceeds of approximately $1,250 pursuant
to the terms of an earn-out arrangement based on future profits, as defined. The
profits under the earn-out agreement were achieved as of December 31, 1997. In
addition, Astrotech repaid Graver's existing bank obligations totaling
approximately $2,400.
Net assets acquired were approximately $4,696 and costs of the acquisition
in excess of net assets of the business acquired were approximately $870.
Subsequent to the acquisition, additional consideration in the form of earn-out
payments of $984 have been paid as of December 31, 1997 and recorded as costs in
excess of net assets acquired.
F-14
<PAGE> 37
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma consolidated results of operations assume
that the purchase of Exell, Trusco, Ohmstede and Graver occurred on January 1,
1996:
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
ITEQ 1997 EXELL TRUSCO 1997
--------- ------- ------ --------
<S> <C> <C> <C> <C>
Revenues............................................... $335,599 $15,166 $7,571 $358,336
Earnings (Loss) from continuing operations............. 35 367 (71) 331
Net earning (loss)..................................... (6,001) 367 (71) (5,705)
Basic earnings (loss) per common share:
From continuing operations........................... -- .02 -- .02
Net earnings (loss).................................. (.25) .02 -- (.23)
Diluted earnings (loss) per common share:
From continuing operations........................... -- .01 -- .01
Net earnings (loss).................................. (.23) .01 -- (.22)
</TABLE>
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
ITEQ 1996 EXELL TRUSCO OHMSTEDE GRAVER 1996
--------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $208,815 $26,779 $24,809 $83,124 $10,389 $353,916
Earnings (Loss) from continuing
operations...................... 5,466 406 950 2,339 (666) 8,495
Net earnings (loss)............... 3,924 406 950 2,339 (666) 6,953
Basic earnings (loss) per common
share:
From continuing operations...... .26 .02 .05 .11 (.03) .41
Net earnings (loss)............. .19 .02 .05 .11 (.03) .34
Diluted earnings (loss) per common
share:
From continuing operations...... .26 .02 .04 .11 (.03) .40
Net earnings (loss)............. .19 .02 .04 .11 (.03) .33
</TABLE>
The pro forma financial information may not necessarily be indicative of
the Company's results of operations that would have occurred had the transaction
been effected on the assumed dates, nor do the pro forma results purport to
indicate the Company's results of operations for any future period.
NOTE 3 -- MERGER, ACQUISITION AND RESTRUCTURING COSTS
During the fourth quarter of 1997, the Company recorded nonrecurring
charges totaling $17,956 in connection with the merger with Astrotech and
related restructuring of operations including the elimination of excess capacity
and duplicate facilities. Of this amount, (i) transaction costs totaled $5,145,
which consisted of professional fees paid to financial advisors, accountants and
attorneys, (ii) costs to combine the operations of the Company and Astrotech
included write-downs for duplicate facilities and excess capacity of $5,276,
(iii) severance costs and other benefits totaled $4,221 and (iv) business
integration and reorganization costs totaled $3,314. Transaction costs include
professional expenses of $361 related to the terminated purchase agreement with
Matrix Service Company. Approximately $5,055 of the asset write-down was
non-cash.
During 1996, the Company incurred a restructuring charge of $2,022. 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
F-15
<PAGE> 38
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
overall cost structure including employee severance, lease and other contract
buyouts, inventory and other asset impairments, losses related to termination of
unprofitable business lines, excess machinery disposal and other related costs.
The following table summarizes the major components of the restructuring
charge:
<TABLE>
<S> <C>
Termination pay and benefits................................ $1,204
Office relocation and consolidation......................... 462
Legal....................................................... 242
Other....................................................... 114
------
$2,022
======
</TABLE>
When the Company committed to its restructuring plan during the first
quarter of 1996, 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 $900 in severance pay and benefits,
unpaid as of December 31, 1996, was paid during the first quarter of 1997.
Substantially all of the terminated employees were either in management
positions or were professionals including engineers and accountants.
During the fourth quarter of 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 $170.
NOTE 4 -- CONTRACTS IN PROGRESS
The Company obtains substantially all of its contracts through competitive
bids. The Company's prerequisites for billing on contracts vary with individual
contract terms. The Company sometimes has bonds or letters of credit as
collateral on accounts receivable, and generally all amounts are due in the
month following performance under contract except for retainages that are
collected upon completion of the contract. The Company has lien rights on
certain contracts.
Costs incurred to date, estimated earnings and the related progress
billings to date on contracts in progress are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Costs incurred to date...................................... $ 148,646 $ 203,243
Estimated earnings.......................................... 32,851 53,402
--------- ---------
Revenue recognized.......................................... 181,497 256,645
Progress billings to date................................... (162,261) (234,815)
Costs incurred for which no revenues were recognized to
date...................................................... 955 140
--------- ---------
$ 20,191 $ 21,970
========= =========
</TABLE>
The preceding is included in the accompanying consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 26,736 $ 30,164
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (6,545) (8,194)
--------- ---------
$ 20,191 $ 21,970
========= =========
</TABLE>
F-16
<PAGE> 39
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following as of December 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revolving loan facility..................................... $ -- $89,936
Secured term loan note with interest fluctuating with the
Offshore Rate or Base Rate................................ 35,000 --
Secured note under a credit facility totaling $38,000 with
interest fluctuating with the Offshore Rate or Base
Rate...................................................... 25,400 --
Term loan, with interest at the Company's option at either
lender's base rate plus a spread ranging from 1/4 to 1/2
percent or at various LIBOR rates plus a spread ranging
from 1 3/4 to 2 3/4 percent............................... 8,700 --
Line of credit of up to $14,000 with interest at the
Company's option at either Bank One's base rate plus a
spread ranging from zero to 1/4 percent or at various
LIBOR rates plus a spread ranging from 1 1/2 to 2 1/2
percent................................................... 7,452 --
Unsecured senior subordinated notes bearing interest at 12%
through 1997 net of debt discount of $2,288 related to
issuance of detachable warrants........................... 12,712 --
Other....................................................... 4,876 122
------- -------
94,140 90,058
Less current maturities..................................... (9,455) (104)
------- -------
Long-term obligations, net of current maturities............ $84,685 $89,954
======= =======
</TABLE>
Scheduled maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1998................................................... $ 104
1999................................................... 18
2000................................................... --
2001................................................... --
2002................................................... 89,936
-------
$90,058
=======
</TABLE>
REVOLVING LOAN FACILITY
In October 1997, in connection with the Astrotech Merger, the Company
refinanced its and Astrotech's existing credit facilities under a new revolving
credit facility (the "New Credit Facility") with various financial institutions
with a commitment amount of up to $175,000 maturing in 5 years and bearing
interest, at the Company's option, at BankBoston, N.A.'s customary base rate or
at BankBoston's eurodollar rate plus, in either case, an agreed upon margin
ranging from 0% to .25% for the applicable base rate margin, and from 1% to
1.75% for the applicable eurodollar rate margin. The applicable interest rate on
amounts outstanding at December 31, 1997 was 6.97%. A commitment fee ranging
from 0.25% to 0.5% per annum is payable on the unused portion of the New Credit
Facility. The New Credit Facility is secured by substantially all of the assets
of the Company, a pledge of the stock of the Company's domestic subsidiaries,
and guarantees entered into by such subsidiaries.
The Company's credit facility requires the Company to maintain certain
levels of working capital and stockholders' equity and contains other
restrictive covenants. Such instruments also limit the ability of the
F-17
<PAGE> 40
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company to incur additional indebtedness and to make acquisitions and certain
investments. At December 31, 1997, the Company was in compliance with the
provisions of its debt agreements.
PRIOR CREDIT FACILITY
On November 18, 1996, the Company revised its financing agreement to, among
other things, increase its prior credit facilities with participating financial
institutions ("Lenders"). The Company's prior credit facilities consisted of a
$35,000 secured term loan and a $38,000 secured revolving credit facility. The
interest on the term loan was at the lender's Offshore Rate ("Offshore Rate"),
as defined, plus a spread, and the interest on the line of credit was at the
Offshore Rate or the base rate, as defined, plus spreads. The spreads ranged
from 2% to 3% above the Offshore Rate and from 0.25% to 1.25% above the base
rate. The spread increased or decreased based on the Company's leverage ratio.
Substantially all of the assets of the Company served as collateral. In October
1997, the Company refinanced these credit facilities and incurred an
extraordinary charge of $1,630 ($1,043 net of taxes) related to the write-off of
debt issuance costs from these previous credit facilities.
SUBORDINATED NOTES
In addition to the prior credit facilities, on November 18, 1996, the
Company entered into two Senior Subordinated Notes ("Subordinated Notes")for
approximately $13,000 and $2,000, respectively. The interest on the Subordinated
Notes was at 12% through December 31, 1997 and increased by 0.5% per year for
each year until paid. As further consideration, the Lender received warrants to
purchase an aggregate of 1,760 shares of the Company's Common Stock at $5.10 per
share, subject to adjustment. The warrants may be exercised at any time or from
time to time until they expire on November 18, 2003. The warrants were valued at
approximately $2,300, which was reflected as equity and as a debt discount at
the date of their issuance. During the quarter ended September 30, 1997, the
Company repaid its subordinated notes using available proceeds under its New
Credit facility. The Company incurred an extraordinary loss of $3,182 ($2,037
net of taxes), related to the write-off of unamortized debt discount and
issuance costs.
NOTE 6 -- LEASE COMMITMENTS
The Company and its subsidiaries are obligated under various leases for
office and manufacturing facilities and certain machinery, equipment and
fixtures. Certain leases have renewal or escalation clauses or both. The
following is a schedule of minimum rental commitments under all non-cancelable
leases:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1998................................................................. $1,225
1999................................................................. 1,076
2000................................................................. 910
2001................................................................. 694
2002................................................................. 544
------
Total................................................................ $4,449
======
</TABLE>
The leases provide for payment of maintenance and other expenses by the
Company. Rent expense was approximately $1,800, $1,900 and $1,437 for the years
ended December 31, 1995, 1996 and 1997.
F-18
<PAGE> 41
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- INCOME TAXES
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 830 $ 559 $ 5,483
State................................................... 610 492 853
Foreign................................................. 150 320 557
------ ------ -------
Total current provision................................... 1,590 1,371 6,893
------ ------ -------
Deferred:
Federal................................................. 1,591 1,629 (3,867)
State................................................... (71) 58 (567)
Foreign................................................. -- 337 (115)
------ ------ -------
Total deferred provision.................................. 1,520 2,024 (4,549)
------ ------ -------
Income tax provision...................................... $3,110 $3,395 $ 2,344
====== ====== =======
</TABLE>
The earnings before taxes relating to foreign operations totaled
approximately $530, $1,870 and $1,400 for the years ended December 31, 1995,
1996 and 1997, respectively.
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,
-------------------
1996 1997
------- -------
<S> <C> <C>
Net current deferred income tax assets (liabilities):
Compensation recognition.................................. $ 382 $ 632
Accruals.................................................. 2,053 4,506
Tax benefit carry forwards................................ 1,870 2,387
Contract accounting....................................... (316) 64
Other..................................................... 32 --
------- -------
$ 4,021 $ 7,589
======= =======
Net non-current deferred income tax assets (liabilities):
Tax benefit carry forwards................................ $ 508 $ 1,230
Property and equipment.................................... (4,483) (4,930)
Intangible assets......................................... (313) (914)
Other..................................................... 2 --
Valuation allowance....................................... (146) (146)
------- -------
$(4,432) $(4,760)
======= =======
</TABLE>
The valuation allowance relates to deferred tax assets for losses incurred
by foreign subsidiaries. These losses will be carried forward to future years
and are not expected to expire.
As of December 31, 1996 and 1997, the Company had regular U.S. and foreign
net operating losses carried forward for tax reporting purposes totaling
approximately $3,256 and $7,298, respectively.
F-19
<PAGE> 42
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Differences between the Company's effective income tax rate and the
statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax provision at the federal statutory income tax rate... $2,516 $3,014 $ 833
Differences in foreign versus U.S. tax rates............. 34 16 68
State income taxes, net of federal benefit............... 353 386 116
Amortization of intangible assets........................ 298 300 349
Non-deductible acquisition costs......................... 234 -- 910
Valuation allowance...................................... (377) (270) --
Other.................................................... 52 (51) 68
------ ------ ------
Total tax provision............................ $3,110 $3,395 $2,344
====== ====== ======
</TABLE>
The valuation allowance was reduced by $377 and $270 for the years ended
December 31, 1995 and 1996 in order to properly recognize the portion of the
Company's deferred tax asset which was more likely than not to be realized.
NOTE 8 -- STOCK OFFERING
In May 1997, the Company sold approximately 5,058 shares of common stock.
The primary use of the offering net proceeds of $31,795 was to reduce debt
incurred for the Company's acquisition program.
NOTE 9 -- STOCK WARRANTS AND OPTIONS
STOCK WARRANTS
Following is a summary of the warrants outstanding at December 31, 1997:
<TABLE>
<CAPTION>
STOCK EXERCISE
ISSUABLE PRICE
DATE UPON PER EXPIRATION
DESCRIPTION ISSUED EXERCISE SHARE DATE
----------- ------ -------- -------- ----------
<S> <C> <C> <C> <C>
Warrants...................................... 4/96 34 $4.72 4/98
Subordinated debt warrants.................... 11/96 1,760 $5.10 11/03
-----
Total....................................... 1,794
=====
</TABLE>
In 1997, warrants for 190 shares were exercised for net proceeds of $857.
The exercise price of the subordinated debt warrants is 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 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, is the fair market value of the Company's stock at the date of
grant and 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.
F-20
<PAGE> 43
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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. Options may not be
transferred by the optionee other than by will or the laws of descent and
distribution.
Prior to merger, Astrotech maintained four stock option plans for its
employees and nonemployee directors, the 1984 Stock Option Plan, the 1989 Stock
Incentive Plan, the 1994 Stock Option Plan for Employees of BMT (the "BMT Plan")
and the 1995 Nonemployee Directors Stock Option Plan. The numbers of options and
exercise price per share was converted to ITEQ options in accordance with the
exchange rate in the merger agreement. The merger effected no other terms of any
of the plans. All outstanding options, except for grants under the BMT Plan, are
fully exercisable. The BMT Plan options issued vest at the rate of 20% per year
after the first anniversary from the date of grant.
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 1997
------ ------ -------
<S> <C> <C> <C>
Net earnings (loss):
As reported........................................... $3,491 $3,924 $(6,001)
Pro forma............................................. 3,461 3,767 (6,446)
Basic net earnings (loss) per common share:
As reported........................................... .17 .19 (.25)
Pro forma............................................. .17 .18 (.27)
Diluted net earnings (loss) per common share:
As reported........................................... .17 .19 (.23)
Pro forma............................................. .17 .18 (.27)
</TABLE>
Because the SFAS No. 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 table above excludes $85 of expense related to immediately vested
options granted to Astrotech employees in October 1996. Astrotech's net earnings
for three months ended December 31, 1996, of $1,181 would have been $1,096 on a
pro forma basis. 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 1997 GRANTS
----------- ----------- -----------
<S> <C> <C> <C>
Expected dividend yield.......... 0% 0% 0%
Expected stock price
volatility..................... 39.74%-45.09% 42.88%-44.85% 54.17%-61.78%
Risk free interest rate.......... 5.43%-6.48% 5.38%-6.93% 5.51%-5.57%
Expected life of options......... 5 to 10 years 4.25 to 10 years 5 to 10 years
</TABLE>
F-21
<PAGE> 44
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Stock option grants for 1995 reflect only ITEQ grants. Stock option grants
for 1996 and 1997 include both ITEQ and Astrotech grants. A summary of the
status of the Company's stock option plans at December 31, 1995, 1996 and 1997
and changes during the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 1,503 $ 3.75 1,774 $ 3.55 1,907 $ 3.60
Granted.......................... 342 2.68 418 3.65 453 7.35
Exercised........................ (4) (1.41) (70) (2.70) (967) (3.67)
Forfeited........................ (47) (3.52) (201) (3.42) (100) (3.65)
Expired.......................... (20) (4.82) (14) (4.71) -- --
------ ------ ------ ------ ------ ------
Outstanding at end of year....... 1,774 $ 3.55 1,907 $ 3.60 1,293 $ 4.81
====== ====== ====== ====== ====== ======
Exercisable at end of year....... 960 $ 3.73 1,302 $ 3.71 553 $ 3.78
====== ====== ====== ====== ====== ======
Weighted average fair value of
options granted................ $ 1.19 $ 1.82 $ 5.16
====== ====== ======
</TABLE>
The options outstanding at December 31, 1997 have exercise prices between
$1.22 and $13.94 and a weighted average remaining contractual life of 5.4 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, 1996 and 1997, 15 and 9 shares,
respectively, were issued under the plan.
NOTE 10 -- DISCONTINUED OPERATIONS
During August 1997 and effective on August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary.
Certain of the net assets of Allied's operations will be liquidated as
remaining orders in process are completed. The estimated completion date of the
net asset liquidation is the third quarter of 1998. The Allied facility will not
be disposed as it will be used in the Company's facility consolidation effort.
The net assets of Allied are included in the December 31, 1997 consolidated
balance sheet and are summarized as follows:
<TABLE>
<S> <C>
Due on contracts and other receivables, net................. $2,192
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 2,185
Inventories................................................. 1,822
Other assets................................................ 79
------
Total assets...................................... 6,278
------
Accounts payable............................................ 752
Accrued liabilities including estimated losses from
disposal.................................................. 1,194
------
Total liabilities................................. 1,946
------
Net assets of discontinued operations....................... $4,332
======
</TABLE>
Management believes the liability for the estimated loss on disposal of
discontinued operations is adequate. The adequacy of this liability will be
evaluated each quarter.
F-22
<PAGE> 45
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales from discontinued operations were $38,707, $24,779 and $15,297 for
the years ended 1995, 1996 and 1997, respectively. Summary operating results
through August 31, the date of measurement, for 1997 were as follows:
<TABLE>
<S> <C>
Revenues.................................................... $11,800
Operating loss.............................................. 578
Interest expense............................................ 1,030
Loss before income taxes.................................... 1,608
Income tax benefit.......................................... 547
Net loss from discontinued operations....................... 1,061
</TABLE>
Operating losses during the phase out period have been included in the loss
on disposal of discontinued operations in the accompanying financial statements.
Losses of $2,401 have been incurred through December 31, 1997. Interest expense
has been allocated based on intercompany debt balances. After tax interest
expense of $193 has been included in the estimated loss on disposal.
Discontinued operations have not been separated in the consolidated statements
of cash flows and, therefore, amounts for certain captions will not agree with
the respective consolidated statement of operations.
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 1995 and 1996 net earnings is as
follows:
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
-------------------
1995 1996
--------- ------
<S> <C> <C>
Net earnings (loss)......................................... $(1,608) $321
Basic net earnings (loss) per common share.................. (.08) .02
Diluted net earnings (loss) per common share................ (.08) .02
</TABLE>
The balance of retained earnings at December 31, 1995 was reduced by
$1,514, for the effect (net of income taxes) of applying retroactively the
revised method of accounting.
NOTE 11 -- CONTINGENCIES
LITIGATION
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 HMT employees were replacing seals on an
aboveground storage tank. In October 1997, HMT entered into a Settlement
Agreement effectively terminating this matter. The Company's insurance carrier
funded the settlement amount of $500, subject to the Company's self-insured
retentive limits, under the applicable insurance policy.
Certain of the Company's subsidiaries are parties to legal proceedings in
the ordinary course of business. While the outcome of lawsuits or other
proceedings cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the financial condition, results of
operations or liquidity of the Company.
F-23
<PAGE> 46
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INSURANCE
Prior to November 1997, Astrotech's insurance program for workers'
compensation and general liability was partially self-insured. Estimated costs
of claims outstanding of approximately $3,700 at December 31, 1997 under these
self-insurance agreements are included in accrued liabilities in the
accompanying consolidated balance sheet. It is possible that the ultimate cost
of claims outstanding could differ from management's current estimates.
NOTE 12 -- RETIREMENT PLANS
The Company maintains several defined contribution plans covering
substantially all of its employees. Employees may contribute to these plans and
contributions may be matched at the Company's discretion in varying amounts. 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.
NOTE 13 -- MAJOR CUSTOMERS AND FOREIGN OPERATIONS
Due to the nature of the Company's business, contracts are generally
nonrecurring. For the years ended December 31, 1995, 1996 and 1997, no single
customer accounted for 10% of revenues.
Financial data by geographical area is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
North America...................................... $158,032 $186,268 $309,602
Europe............................................. 10,253 13,106 13,043
Asia............................................... 6,688 9,441 12,954
-------- -------- --------
Total...................................... $174,973 $208,815 $335,599
======== ======== ========
Operating profit(1):
North America...................................... $ 8,244 $ 12,231 $ 24,266
Europe............................................. 520 878 709
Asia............................................... 264 634 812
-------- -------- --------
Total...................................... $ 9,028 $ 13,743 $ 25,787
======== ======== ========
Identifiable assets:
North America...................................... $125,765 $211,418 $245,847
Europe............................................. 7,678 9,471 10,717
Asia............................................... 3,952 3,863 4,923
-------- -------- --------
Total...................................... $137,395 $224,752 $261,487
======== ======== ========
</TABLE>
- ---------------
(1) Before merger, acquisition and restructuring costs of $170, $2,022 and
$17,956 for 1995, 1996 and 1997, respectively.
Including exports, international sales accounted for approximately 15% of
total revenue in 1997.
F-24
<PAGE> 47
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14 -- UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
<S> <C> <C> <C> <C>
1997
Revenues.............................................. $74,079 $78,210 $90,133 $ 93,177
Earnings (loss) from continuing operations............ 2,263 2,787 3,853 (8,868)
Net earnings (loss)................................. 1,905 2,321 (149) (10,078)
Basic earnings per share:
From continuing operations.......................... .11 .12 .15 (.33)
Net earnings (loss)................................. .09 .10 (.01) (.38)
Diluted earnings per share:
From continuing operations.......................... .10 .11 .14 (.33)
Net earnings (loss)................................. .09 .10 (.01) (.38)
1996
Revenues.............................................. $42,161 $42,443 $50,017 $ 74,194
Earnings from continuing operations................... 112 1,570 1,521 2,263
Net earnings (loss)................................. (1,031) 685 1,995 2,275
Basic earnings per share:
From continuing operations.......................... .01 .08 .07 .11
Net earnings (loss)................................. (.05) .03 .10 .11
Diluted earnings per share:
From continuing operations.......................... .01 .08 .07 .11
Net earning (loss).................................. (.05) .03 .10 .11
</TABLE>
F-25
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 1998.
ITEQ, Inc.
(Registrant)
By /s/ MARK E. JOHNSON
-----------------------------------
(Mark E. Johnson)
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated and on the 24th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ MARK E. JOHNSON Director, Chairman of the Board
- ----------------------------------------------------- and Chief Executive Officer
(Mark E. Johnson) (Principal Executive Officer)
/s/ LAWRANCE W. MCAFEE Director, Executive Vice
- ----------------------------------------------------- President, Chief Financial
(Lawrance W. McAfee) Officer and Secretary (Principal
Financial Officer and Principal
Accounting Officer)
/s/ PIERRE S. MELCHER Director
- -----------------------------------------------------
(Pierre S. Melcher)
/s/ THOMAS N. AMONETT Director
- -----------------------------------------------------
(Thomas N. Amonett)
/s/ T. WILLIAM PORTER Director
- -----------------------------------------------------
(T. William Porter)
/s/ JAMES L. RAINEY Director
- -----------------------------------------------------
(James L. Rainey)
/s/ JAMES A. READ Director
- -----------------------------------------------------
(James A. Read)
/s/ NATHAN M. AVERY Director
- -----------------------------------------------------
(Nathan M. Avery)
</TABLE>
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant. (Filed as Appendix E to the Joint Proxy
Statement/Prospectus of the Registrant and Astrotech on
October 3, 1997 and incorporated herein by reference).
3.2 -- Amended and Restated Bylaws of the Registrant. (Filed as
an exhibit to Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference).
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the
Certificate of Incorporation and Bylaws of the Registrant
defining the rights of holders of Common Stock.
4.2 -- Revolving Credit Agreement dated as of October 28, 1997
by and among the Registrant, the Guarantors and various
lending institutions including Deutsche Bank AG as
Documentation Agent and BankBoston, N.A. as Agent. (Filed
as an exhibit to Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by reference).
4.3 -- Warrant Agreement, dated November 18, 1996, between the
Registrant and International Mezzanine Capital, B.V.
("Mezzanine"). (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
4.4 -- Warrant Agreement dated November 18, 1996, between the
Registrant and First Commerce Corporation ("First
Commerce"). (Filed as an exhibit to Form 8-K dated
December 5, 1996 and incorporated herein by reference).
4.5 -- Registration Rights Agreement dated November 18, 1996,
among the Registrant, Mezzanine, and First Commerce.
(Filed as an exhibit to Form 8-K dated December 5, 1996
and incorporated herein by reference).
4.6 -- Warrant Agreement, dated April 24, 1996, between the
Registrant and Sanders Morris Mundy, Inc. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference).
4.7 -- Warrant Agreement, dated December 1992, between
Registrant and Pennsylvania Merchant Group, Ltd. (Filed
as an exhibit to Form 10-K for fiscal year ending March
31, 1993 and incorporated herein by reference).
10.1 -- Plan and Agreement of Merger dated as of June 30, 1997,
by and between the Registrant and Astrotech International
Corporation ("Astrotech"). (Filed as Appendix A to the
Joint Proxy Statement/Prospectus of the Registrant and
Astrotech on October 3, 1997 and incorporated herein by
reference).
10.2 -- Stock Purchase Agreement dated as of April 30, 1997, by
and between Jared A. Trussler, Ray E. Crosno and Leslie
D. Scott ("Sellers") and Astrotech
(predecessor-in-interest to the Registrant). (Filed as an
exhibit to Form 8-K of Astrotech dated as of May 14, 1997
and incorporated herein by reference).
10.3 -- Stock Purchase Agreement, dated April 24, 1997, among the
owners of Exell Inc. ("Exell") and the Registrant. (Filed
as an exhibit to Amendment No. 2 to the Registrant's
Registration Statement on Form S-2 (No. 333-23245) and
incorporated herein by reference).
10.4 -- First and Second Amendment to Exell Stock Purchase
Agreement among the owners of Exell and the Registrant.
(Filed as an exhibit to Form 10-Q for the quarter ending
June 30, 1997 and incorporated herein by reference).
10.5 -- Amendment No. 2, as of February 28, 1997, to the Stock
Purchase Agreement dated February 7, 1994, by and among
Astrotech (predecessor-in-interest to the Registrant),
Brown-Minneapolis Tank & Fabricating Company ("BMT") and
Irwin Jacobs. (Filed as an exhibit to Form 10-Q for the
quarter ended March 31, 1997 of Astrotech and
incorporated herein by reference).
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6 -- Purchase and Sale Agreement, dated as of the Effective
Date (as defined therein), between Babel, Miller &
Blackwell Partnership (the "Partnership") and the
Registrant. (Filed as an exhibit to Form 8-K dated August
28, 1997 and incorporated herein by reference).
10.7 -- First Amendment to Purchase and Sale Agreement, effective
August 13, 1997, among the Partnership, Beaumont Franklin
Street Properties, L.L.C. ("BFSP"), Neches Street
Properties, L.L.C. ("NSP") and the Registrant. (Filed as
an exhibit to Form 8-K dated August 28, 1997 and
incorporated herein by reference).
10.8 -- Agreement and Plan of Merger dated September 19, 1996,
among the Registrant, Air-Cure Acquisition, Inc. and
Ohmstede, Inc. (Filed as an exhibit to Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein
by reference).
10.9 -- Stock Purchase Agreement dated March 7, 1996, by and
among Astrotech (predecessor-in-interest to the
Registrant), Timothy J. McDavid, Graver Holding Company
and Graver Tank & Mfg. Co. (Filed as an exhibit to
Astrotech's Form 8-K dated April 10, 1996 and
incorporated herein by reference).
10.10 -- Agreement and Plan of Merger dated October 13, 1995,
among the Registrant, Air-Cure Acquisition Corporation,
Allied Industries, Inc., Mark E. Johnson and Pierre S.
Melcher. (Filed as an exhibit to Post-Effective Amendment
No. 1 to Form S-4 Registration Statement (No. 33-92308)
and incorporated herein by reference).
10.11 -- Employment Agreement dated September 30, 1997 for Mark E.
Johnson. (Filed as an exhibit to Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein
by reference).
10.12 -- Employment Agreement dated May 15, 1997, between the
Registrant and John Camardella. (Filed as an exhibit to
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
10.13 -- Employment Agreement dated March 1, 1996, between the
Registrant and Lawrance W. McAfee. (Filed as an exhibit
to Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
10.14 -- Employment Agreement dated March 1, 1995, between the
Registrant and John P. Fitzpatrick. (Filed as an exhibit
to Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
10.15 -- Employees Stock Purchase Plan, as amended, dated December
15, 1994. (Filed as an exhibit to Form 10-K for year
ended December 31, 1994 and incorporated herein by
reference).
10.16 -- Director Stock Option Plan, as amended. (Plan filed as an
exhibit to Proxy Statement for Annual Meeting of
Stockholders held on June 29, 1995, and amendment filed
as an exhibit to Form 10-Q for the quarter ended June 30,
1996 both of which are incorporated herein by reference).
10.17 -- Amended and Restated ITEQ 1990 Stock Option Plan. (Filed
as Appendix D to Joint Proxy Statement/Prospectus of the
Registrant and Astrotech on October 3, 1997 and
incorporated herein by reference).
10.18 -- 1984 Stock Option Plan. (Filed as an exhibit to
Astrotech's Registration Statement on Form S-8 (No.
33-3360) and incorporated herein by reference).
10.19 -- 1989 Stock Incentive Plan. (Filed as an exhibit to
Astrotech's Registration Statement on Form S-8 (No.
33-2975) and incorporated herein by reference).
10.20 -- The 1994 Stock Option Plan for the Employees of BMT.
(Filed as an exhibit to Astrotech's Registration
Statement on Form S-8 (No. 33-85106) and incorporated
herein by reference).
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.21 -- 1995 Non-Employee Directors' Stock Option Plan. (Filed as
an exhibit to Astrotech's Proxy Statement of Astrotech
for the Annual Meeting of Shareholders filed on or about
April 10, 1995 and incorporated herein by reference).
10.22 -- Lease, dated August 13, 1997 among Beaumont Franklin
Street Properties, L.L.C., Neches Street Properties,
L.L.C. and Exell. (Filed as an exhibit to Form 8-K dated
August 28, 1997 and incorporated herein by reference).
10.23 -- Lease Agreement dated May 25, 1994, between Halligan and
Labbe Enterprises, L.L.C. and Amerex Industries, Inc.
(Filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10.24 -- License and Technical Assistance Agreement dated August
28, 1991, between Interel Environmental Technologies,
Inc. and Heinrich Luhr Staubtechnik GmbH & Co. (Filed as
an exhibit to Form S-1 (No. 33-44205) and incorporated
herein by reference).
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Coopers & Lybrand, L.L.P.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Of ITEQ, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our report dated March 5, 1998 related to the consolidated financial
statements of ITEQ, Inc. and subsidiaries included in this Form 10-K, into
ITEQ's previously filed Registration Statements on Form S-8 (Files No.
333-09051, 33-68516, 33-68518 and 33-68636) and into ITEQ's previously filed
Registration Statement File No. 333-39367 on Form S-3.
ARTHUR ANDERSEN LLP
Houston, TX
March 24, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of ITEQ, Inc. on Form S-8 (Files No. 333-09051, 33-68516, 33-68518 and 33-68636)
and the Registration Statement of ITEQ, Inc. on Form S-3 (File No. 333-39367) of
our report dated December 6, 1996, on our audit of the consolidated financial
statements of Astrotech International Corporation and subsidiaries as of
September 30, 1996, and for each of the two years in the period ended September
30, 1996.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 9,681 6,990
<SECURITIES> 0 0
<RECEIVABLES> 72,140 62,720
<ALLOWANCES> 0 0
<INVENTORY> 13,138 15,271
<CURRENT-ASSETS> 139,916 117,902
<PP&E> 42,198 39,766
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 261,487 224,752
<CURRENT-LIABILITIES> 75,385 75,329
<BONDS> 0 0
0 0
0 0
<COMMON> 27 21
<OTHER-SE> 91,361 60,285
<TOTAL-LIABILITY-AND-EQUITY> 261,487 224,752
<SALES> 335,599 208,815
<TOTAL-REVENUES> 335,599 208,815
<CGS> 260,117 159,637
<TOTAL-COSTS> 260,117 159,637
<OTHER-EXPENSES> 67,651 37,457
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,971 3,084
<INCOME-PRETAX> 2,379 8,861
<INCOME-TAX> 2,344 3,395
<INCOME-CONTINUING> 35 5,466
<DISCONTINUED> (2,956) (1,542)
<EXTRAORDINARY> (3,080) 0
<CHANGES> 0 0
<NET-INCOME> (6,001) 3,924
<EPS-PRIMARY> (.25) .19
<EPS-DILUTED> (.23) .19
</TABLE>
