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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, 1998
[ ] 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)
DELAWARE 41-1667001
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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
------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.001 par value Nasdaq National Market
Preferred Stock Purchase Rights Nasdaq National Market
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 17, 1999 was $53,626,462. As of March 17, 1999, there
were 28,192,036 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 1999 Annual Meeting of
Shareholders ("Proxy Statement") are incorporated in Part III by reference.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.........................................................................................1
Item 2. Properties.......................................................................................8
Item 3. Legal Proceedings................................................................................9
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........................................................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................19
Item 8. Financial Statements and Supplementary Data....................................................19
Item 9. Disagreements on Accounting and Financial Disclosure...........................................19
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................19
Item 11. Executive Compensation.........................................................................19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................................................19
Item 13. Certain Relationships and Related Transactions.................................................20
PART IV
Item 14. Financial Statements and Financial Statement
Schedules, Exhibits and Reports on Form 8-K...............................................20
</TABLE>
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PART I
ITEM 1. BUSINESS
ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures,
and services process and storage 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.
Management of the Company believes that it is the leading domestic manufacturer
and servicer of shell and tube heat exchangers, principally for petrochemical
and refining applications and that the Company is a leading designer and
producer of above-ground storage tanks ("ASTs") and related products primarily
for the petrochemical, refining, water storage, food and agriculture industries.
The Company also manufactures specialized process equipment, such as pressure
vessels, principally for the refining, petrochemical and plastics industries.
ITEQ also provides non-destructive testing and inspection services for ASTs,
pressure vessels and blenders and offers mobile storage tank leasing services.
The Company operates internationally, with its equipment, systems and services
sold or utilized in 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.
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 and tank products for the selected niche markets served.
During September 1998 and effective on September 30, 1998, management
of ITEQ adopted plans to discontinue the operations of its filtration group. The
majority of the filtration group's operations relate to manufacturing fabric
filters, wet and dry scrubbers and fiberglass reinforced plastic ("FRP") fans.
Management believes that the sale of its filtration group businesses will be
consumated in 1999, although no assurances can be made that a sale will be
consummated.
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 become a leading integrated provider of
manufactured equipment 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.
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
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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:
o Well-managed domestic companies serving niche industrial markets.
o Large, defensible share of their respective markets, involving
proven technologies.
o Provide complementary products and services that afford
cross-selling opportunities or are direct competitors.
o Significant installed product bases and long operating histories.
o Potential for significant expansion into international markets.
o Predictable cash flow and earnings potential.
o Potential for internal synergies and economies of scale.
Internal Growth. The Company has experienced 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
operations.
The Company entered the industrial and municipal AST and related
equipment and service industry through the merger with Astrotech International
Corporation ("Astrotech") in October 1997.
In April 1998, ITEQ completed the acquisition of Reliable Steel, Inc.
("Reliable"), a manufacturer of storage tanks and structural components. In
addition, in June 1998, ITEQ completed the acquisition of G.L.M. Tanks and
Equipment, Ltd. ("GLM"), a manufacturer of storage tanks, pressure vessels, and
process equipment.
The following table sets forth certain information concerning the businesses
which have been acquired by ITEQ through December 31, 1998:
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<TABLE>
<CAPTION>
DATE PRINCIPAL
ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED
---------------- -------- -------- ---------------
<S> <C> <C> <C>
Air-Cure, Inc. (1) 1990 Fabric filters Electric utilities, coal
Interel, Inc. (2) 1991 Dry scrubbers, packed and mini Waste treatment, foundry, smelter
scrubbers, heat exchangers
Ceilcote Air Pollution Control, 1992 Wet scrubbers, tower Microelectronics, chemical
Inc.(2) internals, FRP fans processing, waste treatment,
food processing
VIC Environmental 1994 Carbon adsorption systems Pharmaceutical, rubber
Systems, Inc. (2)
Amerex Industries, Inc.(2) 1994 Fabric filters, wet and dry Steel, cement and lime,
scrubbers, heat exchangers refining, foundry
Allied Industries, Inc. (3)(4) 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 (3) pressure vessels, bins, silos, storage, pulp and paper, mining,
stacks and liners, scrubbers, alcohol, agriculture, water
shopbuilt tanks treatment, power generation,
process systems
Reliable Steel, Inc. 1998 Storage tanks and structural Pulp and paper, municipal water
components treatment and refining
G.L.M. Tanks & Equipment Ltd. 1998 Storage tanks, pressure Oil and gas, refining, pulp and
vessels and process equipment paper, petrochemical and mining
</TABLE>
(1) Divested in November 1996.
(2) During September 1998 and effective on September 30, 1998,
management of ITEQ adopted plans to discontinue the operations of
its filtration group. The majority of the filtration group's
operations relate to manufacturing fabric filters, wet and dry
scrubbers and FRP fans. Management intends to sell the filtration
group businesses during 1999, although no assurances can be made
that a sale will be consummated. For a discussion of the financial
statement impact attributable to these discontinued operations, see
Note 10 to the Consolidated Financial Statements.
(3) Accounted for as a poolings-of-interests; all other acquisitions
accounted for as purchases.
(4) In 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. The Allied
manufacturing facility is being 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 revenues
contributed from the Company's significant classes of products and services.
Revenues attributable to acquisitions accounted for as purchases have been
included for the periods after acquisitions and revenues from acquisitions
accounted for as poolings-of-interests have been included for all relevant
periods.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Process Equipment $ -- $ -- $ 32,828 $ 142,161 $ 132,988
Storage Equipment (1) 68,726 100,424 109,553 127,645 169,842
----------- ----------- ---------- ----------- -----------
$ 68,726 $ 100,424 $ 142,381 $ 269,806 $ 302,830
=========== =========== ========== =========== ===========
</TABLE>
(1) Storage Equipment revenues consist 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. As a result, the
three month period ended December 31, 1996 for Astrotech is not
presented. Revenues for this period were $33,804.
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 the Gulf Coast area.
The Company has penetrated new markets for 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 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 include (i)
development of
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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.
SALES AND MARKETING
The Company's products and services are marketed through a staff of
in-house sales people and other regional and local marketing personnel and, in
some cases, through commission-based, independent representative organizations,
each operating in an exclusive territory and serving segmental industrial
customers located in that territory or engineering or contracting firms. In
addition to sales activities at ITEQ'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 maintains international offices in Australia and
Singapore, which service the Pacific Rim, while the Company's United Kingdom
subsidiary sells 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 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. Worldwide capital expenditures for hydrocarbon
processing equipment, industrial and municipal storage facilities have
exceeded $30 billion per year in recent years. 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, and plastics. 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%
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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, 1998, 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's process and storage
equipment groups compete 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 large nationally
recognized firms. In North American markets, competition is based on several
competitive factors, including reputation, manufacturing capabilities,
availability of plant capacity, price, performance and dependability. In foreign
markets, competition varies widely. In some international markets, price
competition is more intense than that prevailing in North America while in
others, where prior relationships and product quality receive more customer
emphasis than do marginal pricing differentials, price competition is less
intensive. As a result of innovative design solutions, quality of product
workmanship and dependability of on-time performance, the Company's product and
services are sold, in certain circumstances, in situations where it is not the
low bidder. Although the Company does not typically maintain supply or service
contracts with its customers, a significant portion of the Company's annual
revenues represents repeat business from its 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 partially
completed system is then delivered to the customer's site for final assembly and
installation by field construction personnel who may be subcontractors for, or
supervised, by the Company.
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 is not a party to any
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threatened or pending legal proceedings relating to the environment. The Company
is not a party to any environmental administrative actions other than at its
leased Exell facility in Beaumont, Texas. The Company is investigating soil and
groundwater contamination and has been accepted into the Texas Voluntary Cleanup
Program. Management believes the Company is adequately reserved for the exposure
based on current information. 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
The Company's principal customers have been refining and petrochemical
processors, pulp and paper, power generation, agriculture, food processing,
specialty construction, mining and waste treatment concerns. The Company
participates in "corporate alliance" programs with certain of its customers,
including BP-Amoco , Chevron Corporation, Lyondell-Citgo, Dow Chemical, E. I. Du
Pont, Olin Corporation, Hoechst Celanese, Shell, 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 $50,928,000 and $50,964,000 of total
revenues for the years ended December 31, 1997 and 1998, 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 services 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. Under such arrangements, the Company is afforded the first
opportunity to furnish the covered products and services on the customer's
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, 1998, no single customer accounted for as much as 10% of the Company's
consolidated revenues.
BACKLOG
At December 31, 1998, the Company's backlog for its process and storage
businesses was $75.2 million. This compared with $89.1 million at December 31,
1997. 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, 1998 will be completed within the next twelve months.
EMPLOYEES
At December 31, 1998, the Company employed approximately 2,500
full-time personnel, including approximately 500 unionized employees at ten
domestic manufacturing facilities who are
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subject to collective bargaining agreements. The Company considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
ITEQ'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 June 9,600 Corporate offices
30, 2001
STORAGE:
Houston, TX Owned/Leased Offices 54,000 Manufacturing facility and
through April 30, offices
2001
Houston, TX Leased through 300,000 Manufacturing facility,
February 28, 2000 warehouse, office and other
facilities
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
Warsaw, IN Leased through 11,000 Offices
August 31, 2001
Birmingham, AL Owned 86,500 Fabrication facility
Orem, UT Owned 36,700 Fabrication facility
Port Allen, LA Leased 3,500 Warehouse
Rosemont MN Leased 11,000 Warehouse
Mendota Heights, MN Leased 11,900 Offices
Calgary, Alberta, Canada Leased 1,800 Office
Nisku, Alberta, Canada Owned 60,000 Manufacturing facility and
offices
Battleford, Saskatchewan, Owned 50,000 Manufacturing facility and
Canada offices
Olympia , WA Leased 38,000 Manufacturing facility and
offices
San Luis Obispo, CA Owned 25,600 Fabrication facility,
warehouse and offices
Fresno, CA Owned 109,000 Fabrication facility,
warehouse and offices
PROCESS:
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. Gabriel, LA Owned 90,000 Manufacturing facility and offices
Beaumont, TX Leased 98,000 Manufacturing facility and offices
Pasadena, TX Owned 154,000 Fabrication facility and offices
FILTRATION: (a)
Woodstock, GA Leased through June 10,000 Warehouse and offices
30, 1999
Woodstock, GA Leased through 5,900 Warehouse and offices
September 30, 2001
Woodstock, GA Leased through June 3,000 Offices
30, 2000
La Grange, OH Leased through March 95,000 Manufacturing facility and warehouse
31, 2006
Strongsville, OH Leased through 10,000 Laboratory and offices
January 31, 2010
Pfungstadt, Germany Leased 20,000 Manufacturing facility and offices
Singapore Leased through May 6,400 Manufacturing facility and offices
31, 2000
Cheshire, UK Leased 1,500 Sales office
</TABLE>
(a) See Note 10 to the Consolidated Financial Statements.
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In addition, as of December 31, 1998, the Company owned or leased 24
sales, service and other facilities in the United States and 6 in foreign
countries.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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>
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
1998
First Quarter $ 14 1/4 $ 9 7/8
Second Quarter $ 15 $ 6 1/4
Third Quarter $ 8 $ 1 13/16
Fourth Quarter $ 3 3/8 $ 2
</TABLE>
On March 17, 1999, the last reported sale price for the Common Stock,
as quoted by the Nasdaq National Market, was $2.00 per share. As of the same
date, there were approximately 8,700 holders of record of the Common Stock, and
the Company estimates that there are over 9,000 beneficial owners of Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common
Stock. The Company intends to retain any future earnings for reinvestment in its
business and does not intend to pay cash dividends in the foreseeable future.
Furthermore, the Company is prohibited from declaring or paying cash dividends
on its capital stock under the terms of certain of the Company's indebtedness.
RECENT SALES OF UNREGISTERED SECURITIES
The Company issued and sold unregistered securities during the year
ended December 31, 1998 in connection with its acquisition of G.L.M. Tanks &
Equipment Ltd., an Alberta corporation ("GLM"). Except as otherwise disclosed,
the Company's securities issued and sold in the GLM transaction were not
registered under the Securities Act, pursuant to the exemption available under
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<PAGE> 12
Section 4(2) thereof, for transactions not involving a public offering. No
underwriter was involved in the transaction and no commissions were paid. The
Company issued a total of 796,179 shares of Company Common Stock to the seven
common shareholders of GLM in exchange for all of the outstanding common shares
of GLM. Of the 796,179 shares of Company Common Stock issued in the GLM
transaction, 742,039 shares were registered for resale on the Company's
registration statement on Form S-3/A (Registration No. 333-58611) filed with the
Commission on August 19, 1998. For a more detailed description of the GLM
transaction, see Note 2 to the Company's Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 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>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating Data (1)(2)(3):
Revenue .............................................. $ 68,726 $ 100,424 $ 142,381 $ 269,806 $ 302,830
Cost of revenues ..................................... 49,195 73,802 106,687 206,816 235,365
Selling, general and
administrative expenses ............................ 15,506 19,796 23,109 35,574 36,236
Depreciation and
amortization ....................................... 2,769 3,475 4,352 6,757 7,304
Merger, acquisition
and strategic charges .............................. -- -- 1,819 17,956 11,901
--------- --------- --------- --------- ---------
Operating profit ..................................... 1,256 3,351 6,414 2,703 12,024
Interest expense, net ................................ (1,128) (1,331) (2,347) (5,402) (6,302)
Miscellaneous income, net ............................ 217 626 192 579 62
--------- --------- --------- --------- ---------
Earnings (Loss) from
continuing operations
before income tax provision,
extraordinary loss and change
in accounting principle ............................ 345 2,646 4,259 (2,120) 5,784
Income tax provision ................................. 440 1,112 1,632 801 2,111
--------- --------- --------- --------- ---------
Earnings (Loss) from
continuing operations before
extraordinary loss and change in
accounting principle ............................... (95) 1,534 2,627 (2,921) 3,673
Earnings (Loss) from
discontinued operations ............................ 1,524 1,957 1,297 -- (3,855)
Extraordinary loss from
early extinguishment of debt ....................... -- -- -- (3,080) --
Cumulative effect of
change in accounting
principle for income taxes ......................... 2,931 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) .................................. $ 4,360 $ 3,491 $ 3,924 $ (6,001) $ (182)
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
From continuing operations before
extraordinary loss and change in
accounting principle ............................... $ -- $ .07 $ .13 $ (.12) $ .13
From discontinued
operations ......................................... .08 .10 .06 -- (.14)
Extraordinary loss from
early extinguishment of debt ....................... -- -- -- (.13) --
Cumulative effect of change
in accounting principle ............................ .15 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) .................................. $ .23 $ .17 $ .19 $ (.25) $ (.01)
========= ========= ========= ========= =========
Weighted average common
shares outstanding ................................. 19,297 20,560 20,645 24,301 27,686
========= ========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
From continuing operations before
extraordinary loss and change in
accounting principle................................ $ -- $ .07 $ .13 $ (.12) $ .13
From discontinued operations.......................... .08 .10 .06 -- (.14)
Extraordinary loss from early
extinguishment of debt.............................. -- -- -- (.13) --
Cumulative effect of change
in accounting principle............................. .15 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)................................... $ .23 $ .17 $ .19 $ (.25) $ (.01)
========= ========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding......................................... 19,297 20,746 21,004 24,301 27,982
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $ 117,706 $ 137,395 $ 224,752 $ 261,487 $ 286,655
Working capital....................................... 15,840 28,117 42,573 64,531 66,609
Long-term debt........................................ 19,408 28,294 84,685 89,954 119,603
Stockholders' equity.................................. 51,479 54,721 60,306 91,388 100,797
</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 and 1998 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.
(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 it's Allied subsidiary, and during 1998 Allied
ceased operations. See Note 10 to the Consolidated Financial Statements.
(3) During September 1998 and effective on September 30, 1998, management of
ITEQ adopted plans to discontinue the operations of its filtration
group. The majority of the filtration group's operations relate to
manufacturing fabric filters, wet and dry scrubbers and FRP fans.
Management intends to sell the filtration group businesses during 1999.
See Note 10 to the Consolidated Financial Statements.
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<PAGE> 14
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 acquisitions. Due to the magnitude of these acquisitions and the
integration of the acquired operations with the Company's existing businesses
and results of operations for prior periods are not necessarily comparable with
or indicative of results of operations for current or future periods. The
Company discontinued its low margin fabrication operations during 1997 and 1998,
and adopted plans to discontinue the filtration group operations in September
1998 with its eventual sale expected in 1999.
The Company's results of operations are affected by certain conditions
outside the Company's control, including overall industrial economic conditions
and specifically the demand for hydrocarbon processing products and services.
Additionally, recent low oil prices and the oversupply of certain commodity
chemicals have adversely affected many of the Company's customers in the
refining and petrochemical industries. The downturn in the Asian market has
reduced export opportunities and to a limited degree increased domestic
competition from foreign equipment producers. Certain petrochemical and refining
customers deferred equipment purchases related to certain major projects during
the second half of 1998 that reduced demand for some of the Company's products.
These factors have increased pricing pressure on new equipment resulting in a
decline in the Company's gross margins and operating profits in 1998. However,
refinery and plant utilization remains near capacity and management believes
that the intermediate and long-term prospects for the sale of the Company's
equipment, parts and services to the hydrocarbon processing industry remain
strong.
The Company's results of operations for the year ended December 31,
1998 were also adversely affected by conditions relating to the Company's
business combination following the October 1997 merger with Astrotech. On
November 12, 1998, the Company announced actions to restructure its management
organization, reduce its underlying cost structure and refocus the Company's
efforts on providing superior customer service. These actions include a
multi-step strategic plan designed to enhance future operations which was
developed based on an in-depth review of the Company's operations and systems.
This included replacing certain management personnel. Management also determined
effective September 30, 1998, that the Filtration Group was non-core and decided
to dispose of this business unit. The Filtration Group has been treated as a
discontinued operation and is currently for sale. See Note 10.
The Company records most of its 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 under this method when a
project is substantially
12
<PAGE> 15
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 among
quarters. In recent years, the Company has experienced greater revenues and net
income in its second and third quarters, partially as a result of the budgetary
and procurement processes of its customers.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Revenues
Total revenues for 1998 increased $33,024, or 12%, from $269,806 for
1997 to $302,830. The storage group revenues increased by $42,197 of which
$19,267 is due to internal growth and $11,575 is a result of the April 1998
acquisition of Reliable and the June 1998 acquisition of GLM. Additionally, 1998
revenues in the storage group increased by $11,355 as a result of the May 1997
acquisition of Trusco.
Revenues decreased by $9,173 in the process group. This decrease was
primarily due to a decrease from Graver Manufacturing Co., Inc.(fabricator of
storage tanks and pressure vessels) in 1998 as compared to 1997 due to the
restructuring of Graver to concentrate on higher margin jobs and the
discontinuance of certain low margin fabricating business. This decrease was
partially offset by the August 1997 acquisition of Exell.
Cost of Revenues
Cost of revenues for 1998 increased $28,549 or 14%, to $235,365 from
$206,816 for 1997 primarily due to the increased revenues discussed above. Gross
margins declined from 23.3% to 22.3% from 1997 to 1998 due to softening market
conditions. The storage group cost of revenue increased by $34,379, of which
$9,080 is due to the acquisition of GLM and Reliable, $10,380 is due to the 1997
acquisition of Trusco and the remaining $14,919 is a result of internal growth
within the storage group.
Cost of revenues decreased by $5,830 in the process group as a result
of the above mentioned restructuring at Graver which was partially offset by the
inclusion of Exell for the full year in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 increased by $662
and represented 13% of revenues in 1997 and 12% of revenues in 1998. Selling,
general and administrative expenses have held fairly steady as the Company's
revenues have grown. The storage group's selling, general and administrative
expenses increased by $1,060, primarily as a result of the 1998 GLM and Reliable
acquisition and the 1997 Trusco acquisition. The process group costs decreased
by $1,825 primarily as a result of increased efficiencies as a result of
consolidating facilities and restructuring. The other increases in expenses are
a result of the growth within the corporate office to strengthen the
infrastructure in order to support the increased size of the company.
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<PAGE> 16
Depreciation and Amortization
Depreciation and amortization expense for 1998 increased by $547 and
was primarily attributable to acquisitions within the storage and process
groups.
Merger, Acquisition and Strategic Charges
In 1998, the Company recorded nonrecurring merger, acquisition and
strategic charges totaling $11,901.
Merger and acquisition costs of $1,117 related to a terminated purchase
agreement and the termination of a proposed tender offer and other acquisition
related activity.
The Company incurred a strategic charge of $10,784. The charge included
the costs, estimated as incremental job costs, to combine the operations of the
Company and Astrotech including losses associated with two plant closings and
business integration and reorganization costs. The Company also incurred
severance costs and other benefits associated with employee terminations,
including that of the Company's former president and chief operating officer,
and legal and accounting services fees. Additional costs are expected to be
incurred and be recognized in the first half of 1999 and are not expected to
exceed $3,000.
Interest Expense, net
Interest expense for 1998 increased $900 to $6,302 from $5,402 in 1997.
The increase in interest expense is a result of higher overall debt balances in
1998.
Income Taxes
The income tax expense from continuing operations for 1998 was $2,111
as compared to $801 in 1997. The 1997 effective tax rate was significantly
higher than the Company's normal effective tax rate due to nondeductible
acquisition expenses related to the merger with Astrotech. The effective tax
rate for 1998 was 36.5%.
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. The loss from these discontinued operations
for 1997 and 1998 was $2,956 and $1,259, respectively, net of $1,613 and $708
income tax benefit, respectively.
During September 1998 and effective on September 30, 1998, management
of ITEQ adopted plans to discontinue the operations of its filtration group.
Management intends to sell the filtration group businesses during 1999, although
no assurances can be made that a sale will be consummated. The earnings (loss)
from these discontinued operations for 1997 and 1998 was $2,956 and ($2,596),
respectively, net of $1,543 and ($1,491) income tax provision (benefit),
respectively.
Extraordinary Loss
During the third quarter of 1997, the Company repaid its subordinated
notes using available proceeds under its revolving credit facility. In October
1997, in connection with the Astrotech
14
<PAGE> 17
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.
1997 COMPARED WITH 1996
Revenues
Revenues for 1997 increased $127,425, or 89%, to $269,806 from $142,381
for 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 entities contributed revenues of $154,860 in 1997 as
compared to $29,473 in 1996. The rest of the process and storage group entities
revenues increased by $2,112 for 1997 as compared to 1996.
Cost of Revenues
Cost of revenues for 1997 increased $100,129 to $206,816 primarily due
to the four acquisitions discussed above. The cost of revenues due to these
process and storage group entities increased by $99,857, including cost of
revenues associated with internal growth subsequent to the acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the 1997 increased
$12,465 to $35,574 from $23,109 in 1996. As a result of the four acquisitions,
selling, general and administrative expenses increased by $12,483 for 1997 as
compared to 1996.
Depreciation and Amortization
Depreciation and amortization expense was $6,757 for 1997 and $4,352
for 1996. The increase was primarily a result of the acquisitions discussed
above, which increased depreciation and amortization by $2,174 for 1997 as
compared to 1996.
Merger, Acquisition and Strategic Charges
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 of $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.
Interest Expense
Interest expense in 1997 was $5,402 compared to $2,347 in 1996. The
increase in interest expense reflects the additional borrowings required to
finance acquisitions. This increase was partially offset by application of the
net proceeds of the May 1997 stock offering to reduce such debt.
15
<PAGE> 18
Income Taxes
The income tax expense from continuing operations for 1997 was $801 as
compared to $1,632 in 1996. The 1997 effective tax rate was significantly higher
than the Federal statutory rate due to nondeductible acquisition expenses
related to the merger with Astrotech.
Discontinued Operations
During August 1997 and effective August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary. The loss from these discontinued operations
in 1996 and 1997 was $1,542 and $2,956, net of income tax benefits of $871 and
$1,613, respectively.
During September 1998 and effective on September 30, 1998, management
of ITEQ adopted plans to discontinue the operations of its filtration group.
Management intends to sell the filtration group businesses during 1999, although
no assurances can be made that a sale will be consummated. The earnings from
these discontinued operations for 1996 and 1997 was $2,839 and $2,956,
respectively, net of $1,763 and $1,543 of income tax provision, respectively.
Extraordinary Item
During the third quarter of 1997, the Company repaid its subordinated
notes using available proceeds under its revolving credit facility. In October
1997, in connection with the Astrotech 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company's cash position was $5,784 compared
with $9,681 at December 31, 1997. Net working capital at December 31, 1998
increased to $66,609 from $64,531 at December 31, 1997.
The Company's existing capital resources consist of cash balances, cash
provided by its operating activities and funds available under its line of
credit. There was $20,565 of unused commitment under the line of credit as of
December 31, 1998. The Company's operating activities used $10,380 in cash
during the year ended December 31, 1998. During 1997, the Company's operating
activities provided $6,841 in cash, compared to $13,142 in cash provided in
1996. The negative cash flow from operations for 1998 includes the operations of
the Filtration Group (see Note 10), a reduction in accrued liabilities which
included cash payments of $7,757 that were accrued at December 31, 1997, related
to the Astrotech acquisition and the expenditure of $1,117 related to two failed
acquisitions. (See Note 3).
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 $5,000 in 1999 as
compared to $5,938 in 1998.
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<PAGE> 19
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. Net of exercises, 1,460 shares remained to be issued
under the warrants. 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 loss of approximately $3,080,
net of an estimated tax benefit of $1,732.
In connection with the October 1997 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 $145,000 as of December 31, 1998 (reducing to $135,000 on
December 31, 1999) and 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 0.75% for the applicable base rate margin, and from 1.50% to 2.50%
for the applicable Eurodollar rate margin. This new credit facility is secured
by substantially all of the assets of ITEQ, a pledge of 65% of the stock of each
of ITEQ's material foreign subsidiaries, and a pledge of the stock of ITEQ's
domestic subsidiaries and guarantees entered into by such domestic subsidiaries.
The outstanding balance under the credit facility at December 31, 1998 was
$119,603.
ITEQ's principal credit facility requires the Company to maintain
certain levels of net income, working capital and stockholders' equity and
contains other restrictive covenants. Such instruments also limit the ability of
the Company to incur additional indebtedness, to pay dividends or to make
acquisitions and certain investments. As previously disclosed, as of September
30, 1998, the Company was not in compliance with certain financial covenants of
its loan agreement. The Company obtained an amendment to this agreement on
December 14, 1998. At December 31, 1998, the Company was in compliance with the
provisions of its loan agreement.
Except with respect to funding any future acquisitions, management
believes that cash generated from operations, existing cash balances and
available borrowing capacity will be sufficient to meet ITEQ's anticipated cash
requirements for 1999. 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, however, such financing
may not be available when required or on terms acceptable to ITEQ.
YEAR 2000 ISSUE
ITEQ is facing the Year 2000 issue which arises from the past practice
of utilizing two digits (as opposed to four) to represent the year in some
computer programs and software and could result in computational or operational
errors as dates are compared across the century boundary. The Year 2000 problem
could result in system failures or miscalculations causing disruptions of the
operations of ITEQ, its vendors and its customers.
17
<PAGE> 20
ITEQ has developed a multi-phase plan to resolve potential Year 2000
problems relating to its information technology ("IT") systems and embedded chip
technology contained in certain of its facilities and a limited number of
products it produces, including identifying and evaluating all IT systems and
embedded chip technology according to their potential business impact;
identifying IT systems and embedded chip technology that use date functions and
assessing them for Year 2000 functionality; reprogramming or replacing
equipment/systems, where necessary, to ensure Year 2000 readiness; testing the
code modifications and new equipment/systems to ensure successful operation in a
post-1999 environment; and adoption of contingency plans in the case of
potential Year 2000 failures. ITEQ currently has identified the IT systems and
embedded chip technology utilizing date functions and assessing them for Year
2000 compliance. ITEQ expects remediation of most of its critical systems and
embedded chip technology to be completed by June 30, 1999.
ITEQ relies on numerous third-party vendors and suppliers for a wide
variety of goods and services, including raw materials, banking,
telecommunications and utilities such as water and electricity. Many of ITEQ's
operations would be adversely affected if these supplies and services were
curtailed as a result of a supplier's Year 2000 noncompliance. ITEQ is currently
contacting its third party vendors to ensure that they have an effective plan in
place to address the Year 2000 problem. ITEQ, however, has received little
information from these vendors to date and does not have sufficient information
to assess whether its external relationships will be Year 2000 ready. ITEQ
intends to make further communications with those vendors who do not respond to
ITEQ.
ITEQ currently estimates that its Year 2000 costs will not exceed $500,
most of which will be incurred in 1999. Certain of these costs may or may not be
recurring. ITEQ expects cash flow from operations to be sufficient to fund these
expenditures.
If ITEQ's Year 2000 issues were unresolved, potential consequences
would include, among other possibilities, the inability to accurately and timely
process customers' orders, process financial transactions, bill customers, or
report accurate data to management, shareholders, customers, and others as well
as business interruptions or shutdowns, financial losses, and litigation related
to Year 2000 issues.
ITEQ is developing contingency/recovery plans aimed at ensuring the
continuity of critical business functions before and after December 31, 1999. As
part of that process, ITEQ plans to develop reasonably likely failure scenarios
for its critical IT systems and external relationships and the embedded systems
in its critical facilities. Once these scenarios are identified, ITEQ will
develop plans that are designed to reduce the impact on ITEQ, and provide
methods of returning to normal operations, if one or more of those scenarios
occur. ITEQ cannot guarantee that it will be able to resolve all of its Year
2000 issues. ITEQ expects contingency/recovery planning to be substantially
complete by September 30, 1999.
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.
18
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK. The Company's results of operations are affected by
certain conditions outside the Company's control, including overall industrial
economic conditions and specifically the demand for hydrocarbon processing
products and services.
INTEREST RATE RISK. The Company has $119,603 of variable interest rate
long-term debt outstanding at December 31, 1998. The rate in effect at December
31, 1998 was 6.97%. A hypothetical one tenth of one percent increase or decrease
in the December 31, 1998 interest rates in effect for this debt is approximately
$120 before taxes.
FOREIGN CURRENCY RISK. Except for sales from certain foreign
subsidiaries, the Company's sales are either US dollar denominated or payable in
currency with fixed exchange rates against the US dollar. The Company has
operations in Canada, Germany and Singapore in addition to operations in the
United States and other countries. These companies' functional currencies are
the Canadian dollar, the German Mark and the Singapore dollar, respectively. The
company's financial results from these foreign operations are translated into US
dollars in consolidation. As such, the Company is exposed to foreign currency
risk to the extent that there are fluctuations in local currency exchange rates
against the U.S. dollar.
FOREIGN OPERATIONS. The Company has operations in other countries as
mentioned above. As a result, the Company is exposed to risks normally
associated with operations located outside the U.S. and Canada, including
political, economic, social and labor instabilities, as well as foreign exchange
controls, currency fluctuations and taxation changes.
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.
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.
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<PAGE> 22
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
- ------- -----------
<S> <C>
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 - Second Amendment to Revolving Credit Agreement, dated as of December 14, 1998, among the Registrant,
the Guarantors and various lending institutions including BankBoston, N.A., as Agent, and Deutsche Bank
AG, as Documentation Agent (Filed as an exhibit to Form 8-K filed December 22, 1998 and incorporated
herein by reference).
4.3 - First Amendment to Rights Agreement effective November 19, 1998 between the Registrant and Harris Trust
and Savings Bank, as Rights Agent. (Filed as an exhibit to Form 8-K filed November 20, 1998 and
incorporated herein by reference).
4.4 - Rights Agreement dated as of September 4, 1998 between the Registrant and Harris Trust and Savings
Bank, as Rights Agent, which includes as Exhibit C thereto the Form of Right Certificate. (Filed as an
exhibit to Form 8-K filed September 15, 1998 and incorporated herein by reference).
4.5 - 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).
4.6 - 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).
4.7 - 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).
4.8 - 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).
4.9 - Warrant Agreement, dated April 24, 1996, between the Registrant and Sanders Morris Mundy, Inc. (Filed
as an exhibit to Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by
reference).
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.10 - 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 dated January 29, 1999 between the Registrant and William P. Reid.
*10.9 Annex I to Agreement dated January 29, 1999 between the Registrant and William P. Reid.
10.10 - Severance Agreement dated September 17, 1998, between Registrant and John Camardella. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30, 1998 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 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).
10.13 - 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).
10.14 - 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).
10.15 - 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).
10.16 - 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).
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.17 - 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).
10.18 - 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).
10.19 - 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).
10.20 - 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).
10.21 - 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).
10.22 - 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).
*21.1 - List of Subsidiaries of the Registrant.
*23.1 - Consent of Arthur Andersen LLP.
*23.2 - Consent of PricewaterhouseCoopers LLP.
*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 1998:
o Form 8-K filed November 20, 1998, with respect to First Amendment to
the Rights Agreement effective November 19, 1998 between the Registrant
and Harris Trust and Savings Bank, as Rights Agent.
o Form 8-K filed December 22, 1998, with respect to the Second Amendment
to Revolving Credit Agreement dated as of December 14, 1998, among the
Registrant, the Guarantors and various lending institutions including
BankBoston, N.A., as Agent, and Deutsche Bank AG as Documentation
Agent.
22
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Reports of Independent Public Accountants........................................................F-2, 3
Consolidated Balance Sheets-December 31, 1997 and December 31, 1998..............................F-4
Consolidated Statements of Operations--Years ended December 31, 1996,
1997 and 1998..................................................................................F-5
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1996, 1997 and 1998...............................................................F-6
Consolidated Statements of Cash Flows--Years ended December 31, 1996,
1997 and 1998..................................................................................F-7
Notes to Consolidated Financial Statements.......................................................F-8
</TABLE>
F-1
<PAGE> 26
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) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998. 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 year ended September 30,
1996. The statements of operations, stockholders' equity and cash flows for
Astrotech International Corporation are included in the 1996 consolidated
statements of operations and cash flows of ITEQ, Inc. and reflect revenues of
59% of the consolidated total, a portion of which is included in discontinued
operations. 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, 1997 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
March 17, 1999
F-2
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Astrotech International Corporation:
We have audited the consolidated statements of income, stockholders'
equity and cash flows of Astrotech International Corporation and subsidiaries
for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Astrotech International Corporation and subsidiaries for the
year ended September 30, 1996, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
December 6, 1996
F-3
<PAGE> 28
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 9,681 $ 5,784
Due on contracts and other receivables, net .................................. 72,881 67,752
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................................... 30,164 26,589
Inventories .................................................................. 13,138 25,818
Prepaid expenses, deposits and other assets .................................. 3,538 4,583
Deferred tax asset ........................................................... 7,589 1,403
Assets held for sale ......................................................... 2,925 935
--------- ---------
Total current assets ................................................ 139,916 132,864
PROPERTY AND EQUIPMENT, NET .................................................. 42,198 50,125
OTHER ASSETS, NET ............................................................ 79,373 103,666
--------- ---------
TOTAL ASSETS ............................................................ $ 261,487 $ 286,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................. $ 24,861 $ 28,046
Accrued liabilities:
Job costs ............................................................... 9,498 12,085
Accrued compensation and benefits ....................................... 6,077 3,765
Accrued expenses and other current liabilities .......................... 26,755 12,666
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................................... 8,194 9,693
--------- ---------
Total current liabilities ........................................... 75,385 66,255
LONG-TERM LIABILITIES
Long-term obligations ........................................................ 89,954 119,603
Deferred tax liability ....................................................... 4,760 --
--------- ---------
Total Liabilities ................................................... 170,099 185,858
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000 shares
authorized; no shared issued or outstanding ............................. -- --
Common stock, $.001 par value; 40,000 authorized 26,912 shares issued and
outstanding at December 31, 1997 and 28,298 shares issued at
December 31, 1998 ....................................................... 27 28
Treasury stock, at cost, 139 shares at December 31, 1998 ..................... -- (1,000)
Additional paid-in capital ................................................... 119,823 131,450
Retained earnings (deficit) .................................................. (27,644) (27,826)
Translation adjustment ....................................................... (818) (1,855)
--------- ---------
Total Stockholders' Equity .......................................... 91,388 100,797
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 261,487 $ 286,655
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 29
ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues ................................................ $ 142,381 $ 269,806 $ 302,830
Cost of revenues ........................................ 106,687 206,816 235,365
Selling, general and administrative expenses ............ 23,109 35,574 36,236
Depreciation and amortization ........................... 4,352 6,757 7,304
Merger, acquisition and strategic charges ............... 1,819 17,956 11,901
--------- --------- ---------
Operating profit ........................................ 6,414 2,703 12,024
Interest expense, net ................................... (2,347) (5,402) (6,302)
Miscellaneous income, net ............................... 192 579 62
--------- --------- ---------
Earnings (Loss) from continuing operations before
income tax provision and extraordinary loss .......... 4,259 (2,120) 5,784
Income tax provision .................................... 1,632 801 2,111
--------- --------- ---------
Earnings (Loss) from continuing operations before
extraordinary loss ................................... 2,627 (2,921) 3,673
--------- --------- ---------
Earnings (Loss) from discontinued operations, net of
income tax provision (benefit) of $892,
$996 and ($2,199), respectively ...................... 1,297 1,895 (3,855)
Loss on disposal of discontinued operations,
net of income tax benefit of $1,066 .................. -- (1,895) --
--------- --------- ---------
Earnings (Loss) from discontinued operations ............ 1,297 -- (3,855)
--------- --------- ---------
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $1,732 ......... -- (3,080) --
--------- --------- ---------
Net earnings (loss) ..................................... $ 3,924 $ (6,001) $ (182)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (Loss) from continuing operations .............. $ .13 $ (.12) $ .13
Earnings (Loss) from discontinued operations ............ .06 -- (.14)
Extraordinary loss ...................................... -- (.13) --
--------- --------- ---------
Net earnings (loss) per common share .................... $ .19 $ (.25) $ (.01)
========= ========= =========
Weighted average common shares outstanding .............. 20,645 24,301 27,686
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (Loss) from continuing operations .............. $ .13 $ (.12) $ .13
Earnings from discontinued operations .................. .06 -- (.14)
Extraordinary loss ...................................... -- (.13) --
--------- --------- ---------
Net earnings (loss) per common share .................... $ .19 $ (.25) $ (.01)
========= ========= =========
Weighted average common and common equivalent shares
outstanding .......................................... 21,004 24,301 27,982
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 30
ITEQ, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED TOTAL
STOCK TREASURY PAID-IN EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT STOCK CAPITAL (DEFICIT) ADJUSTMENT (A) EQUITY
--------- --------- --------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 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
Exercise of warrants ................ 322 -- -- 1,530 -- -- 1,530
Stock issued for employee
stock purchase plan and
exercise of stock options ......... 268 -- -- 1,659 -- -- 1,659
Repurchase of common stock .......... -- -- (1,000) -- -- -- (1,000)
GLM purchase ........................ 796 1 -- 8,438 -- -- 8,439
Foreign currency
translation adjustment ............ -- -- -- -- -- (1,037) (1,037)
Net loss ............................ -- -- -- -- (182) -- (182)
--------- --------- --------- ---------- --------- -------------- -------------
BALANCE, DECEMBER 31, 1998 .......... 28,298 $ 28 $ (1,000) $ 131,450 $ (27,826) $ (1,855) $ 100,797
========= ========= ========= ========== ========= ============== =============
</TABLE>
(a) The only component of comprehensive income that is not included in
the accompanying consolidated statement of operations is the
foreign currency translation adjustment. Comprehensive income for
the three years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net Income (Loss) $ 3,924 $(6,001) $ (182)
Foreign Currency Translation Adjustment (324) (943) (1,037)
------- ------- -------
Comprehensive Income (Loss) $ 3,600 $(6,944) $(1,219)
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 31
ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ................................................................... $ 3,924 $ (6,001) $ (182)
Adjustments to reconcile net earnings (loss) to net cash
Provided (used) by operating activities:
Depreciation and amortization ....................................................... 5,717 7,859 8,314
Provision (benefit) for deferred income taxes ....................................... 1,634 (3,240) (2,211)
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 ............................................... -- 630 707
Non-cash write-offs from restructuring .............................................. -- 5,055 --
Non-cash interest ................................................................... 302 499 174
Changes in assets and liabilities, net of effects of businesses acquired:
Due on contracts and other receivables, net .................................... 3,698 (3,559) 8,867
Inventories .................................................................... 2,613 5,106 (1,362)
Costs and estimated earnings in excess of billings on
uncompleted contracts ........................................................ (4,139) (2,859) 3,711
Prepaid expenses, deposits and other assets .................................... (518) (985) (970)
Accounts payable and accrued liabilities ....................................... (1,995) 3,002 (26,532)
Billings in excess of costs and estimated earnings on
uncompleted contracts ....................................................... (1,197) 1,053 1,577
Progress billings .............................................................. 4,128 (4,891) (579)
Other .......................................................................... (865) (1,645) (1,894)
-------- -------- --------
Net cash provided (used) by operating activities ................................ 13,142 6,841 (10,380)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired businesses, net of cash acquired ............................. (55,622) (18,776) (23,055)
Purchases of property and equipment ................................................. (8,291) (5,377) (5,938)
Contingent purchase consideration paid .............................................. (544) (3,354) --
Cash received from sale of land, buildings & equipment .............................. 215 -- 2,538
Proceeds from note receivable from employee ......................................... 613 -- --
Proceeds from sale of investment in subsidiary ...................................... 1,000 -- --
-------- -------- --------
Net cash used by investing activities ............................................ (62,629) (27,507) (26,455)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations ................................................. 32,499 17,840 --
Proceeds from subordinated debt & warrants .......................................... 15,000 (15,000) --
Payments of long-term obligations ................................................... (2,499) (70,830) --
Net borrowings under line of credit ................................................. 17,432 55,531 30,949
Debt issuance costs ................................................................. (3,002) -- --
Net proceeds from common stock offering ............................................. -- 31,795 --
Proceeds from exercise of stock options and warrants ................................ 178 4,420 3,189
Costs relating to issuance of warrants and stock .................................... (206) -- --
Repayments of long-term debt to related parties ..................................... (160) -- --
Repayment of other long-term debt ................................................... (4,239) -- --
Cash paid for stock repurchase ...................................................... (292) -- (1,000)
Other ............................................................................... (426) -- --
-------- -------- --------
Net cash provided by financing activities ....................................... 54,285 23,756 33,138
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................... (107) (399) (200)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............................ 4,691 2,691 (3,897)
Cash and cash equivalents, beginning of period ...................................... 2,299 6,990 9,681
-------- -------- --------
Cash and cash equivalents, end of period ............................................ $ 6,990 $ 9,681 $ 5,784
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .............................................................. $ 3,023 $ 6,853 $ 7,504
======== ======== ========
Cash paid for income taxes .......................................................... $ 844 $ 380 $ 1,812
======== ======== ========
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> 32
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures,
and services process and storage 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.
Management of the Company believes that it is the leading domestic manufacturer
and servicer of shell and tube heat exchangers, principally for petrochemical
and refining applications and that the Company is a leading designer and
producer of above-ground storage tanks ("ASTs") and related products primarily
for the petrochemical, refining, water storage, food and agriculture industries.
The Company also manufactures specialized process equipment, such as pressure
vessels, principally for the refining, petrochemical and plastics industries.
ITEQ also provides non-destructive testing and inspection services for ASTs,
pressure vessels and blenders and offers mobile storage tank leasing services.
The Company operates internationally, with its equipment, systems and services
sold or utilized in countries worldwide.
BUSINESS AND MARKET CONDITIONS
The Company's results of operations are affected by certain conditions
outside the Company's control, including overall industrial economic conditions
and specifically the demand for hydrocarbon processing products and services.
Additionally, recent low oil prices and the oversupply of certain commodity
chemicals have adversely affected many of the Company's customers in the
refining and petrochemical industries. The downturn in the Asian market has
reduced export opportunities and to a limited degree increased domestic
competition from foreign equipment producers. Certain petrochemical and refining
customers deferred equipment purchases related to certain major projects during
the second half of 1998 that reduced demand for some of the Company's products.
These factors have increased pricing pressure on new equipment resulting in a
decline in the Company's gross margins and operating profits in 1998. However,
refinery and plant utilization remains near capacity and management believes
that the intermediate and long-term prospects for the sale of the Company's
equipment, parts and services to the hydrocarbon processing industry remain
strong.
The Company's results of operations for the year ended December 31,
1998 were also adversely affected by conditions relating to the Company's
business combination following the October 1997 merger with Astrotech
International Corporation ("Astrotech"). On November 12, 1998, the Company
announced actions to restructure its management organization, reduce its
underlying cost structure and refocus the Company's efforts on providing
superior customer service. These actions include a multi-step strategic plan
designed to enhance future operations which was developed based on an in-depth
review of the Company's operations and systems. This included replacing certain
management personnel. Management also determined effective September 30, 1998,
that the Filtration Group was non-core and decided to dispose of this business
unit. The Filtration Group has been treated as a discontinued operation and is
currently for sale. See Note 10.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing capital resources consist of cash balances, cash
provided by its operating activities and funds available under its line of
credit. Management believes that such cash generated from operations, existing
cash balances and available borrowing capacity will be sufficient to meet ITEQ's
anticipated cash requirements for 1999.
F-8
<PAGE> 33
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
REVENUE RECOGNITION
The Company records most of its 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. See Note 3 regarding incremental job costs
classified as strategic charges in 1998.
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.
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, 1997 and 1998, due on contracts and other receivables
consist of:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Billings on completed contracts and contracts
in progress ................................... $ 69,263 $ 63,237
Retained contract receivables .................... 4,599 5,271
Allowance for doubtful accounts .................. (981) (756)
-------- --------
Total ................................... $ 72,881 $ 67,752
======== ========
</TABLE>
All retainages as of December 31, 1998 are expected to be collected by December
31, 1999.
F-9
<PAGE> 34
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INVENTORIES
Inventories consist of costs for which no related revenue has been
recognized. Inventories include materials used in the manufacturing process,
labor, overhead and purchased parts and are valued at the lower of cost or
market. The Company accrues certain open purchase orders as the Company would
incur substantial expense to cancel such purchase orders. These amounts are
included in work in progress inventory in 1998. 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, 1997 and 1998, consists of the
following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Raw materials................................... $ 6,910 $ 6,654
Work in progress................................ 5,027 18,759
Finished goods.................................. 1,201 405
-------- --------
Total..................................... $ 13,138 $ 25,818
======== ========
</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 lives of the
assets and is recognized as depreciation expense on the statement of operations.
At December 31, 1997 and 1998, property and equipment was comprised of the
following items:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES 1997 1998
---------------- -------- ---------
<S> <C> <C> <C>
Land N/A $ 3,647 $ 4,561
Furniture and fixtures 3-15 years 4,094 6,504
Machinery and equipment 5-15 years 29,309 30,742
Buildings and improvements 7-39 years 12,423 20,023
Leasehold improvements 3-10 years 388 209
Tanks and trucks held for lease 4-15 years 8,352 9,324
-------- --------
58,213 71,363
Less accumulated depreciation and
amortization (16,015) (21,238)
-------- --------
Property and equipment, net $ 42,198 $ 50,125
======== ========
</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.
F-10
<PAGE> 35
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OTHER ASSETS
The excess of costs 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 from continuing operations was $734, $2,325 and
$2,220 for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, 1997 and 1998, other assets was comprised of the
following items:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Excess of costs over net assets acquired, net of
accumulated amortization of $7,787 and $10,173
at December 31, 1997 and 1998, respectively ......... $ 65,867 $ 84,291
Licenses, patents, trademarks and tradenames, net
of accumulated amortization of $1,639 and $2,240
at December 31, 1997 and 1998, respectively ......... 11,607 15,484
Deferred tax asset ..................................... -- 2,159
Other .................................................. 1,899 1,732
-------- --------
Total ........................................... $ 79,373 $103,666
======== ========
</TABLE>
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
SFAS No. 128 was applied to all periods presented. Basic earnings per
share ("EPS") is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year. Diluted EPS is computed
by dividing net income by the weighted average number of shares of common stock
outstanding including the dilutive effect of common stock equivalents. The only
reconciling difference between the numerator and denominator between 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.
F-11
<PAGE> 36
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 large 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.
COMPREHENSIVE INCOME
The Company implemented Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," effective January 1, 1998. This standard
requires that all items required to be recognized under this standard as
components of comprehensive income, such as the Company's foreign currency
translation adjustments, be reported in a financial statement. See Consolidated
Statements of Stockholders' Equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform with the December 31, 1998
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 1998 acquisitions are based on
preliminary estimates of fair market values and may be revised if 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.
F-12
<PAGE> 37
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
GLM
Effective June 1, 1998, the Company purchased the shares of G.L.M.
Tanks and Equipment, Ltd. ("GLM"), a Canadian company, for approximately
$28,500, consisting of 796 shares of the Company's common stock, valued based on
the average closing prices of the Company's stock when the principal terms were
agreed and announced at approximately $8,400, and cash consideration of
approximately $19,870 and acquisition expenses of approximately $230. This
acquisition has been accounted for as a purchase. GLM is a manufacturer of
storage tanks and process equipment in western Canada.
RELIABLE
Effective April 1, 1998, the Company purchased the assets of Reliable
Steel Fabricators, Inc. ("Reliable") for approximately $4,000 in cash. This
acquisition has been accounted for as a purchase. Reliable is a manufacturer of
storage tanks serving the Pacific Northwest.
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 was a domestic 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,
1996 financial statements of Astrotech with the December 31, 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.
Combined and separate results of the Company and Astrotech during the
periods preceding the merger were as follows:
F-13
<PAGE> 38
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
EARNINGS FROM NET
CONTINUING EARNINGS
REVENUES OPERATIONS (LOSS)
-------- ------------- --------
<S> <C> <C> <C>
Nine months ended September 30, 1997 (unaudited):
ITEQ ............................................. $ 87,650 $ 3,470 $ 546
Astrotech ........................................ 110,943 3,531 3,531
-------- -------- --------
Combined .................................... $198,593 $ 7,001 $ 4,077
======== ======== ========
1996:
ITEQ......................................... $ 19,643 $ (1,383) $ (86)
Astrotech.................................... 122,738 4,010 4,010
-------- -------- --------
Combined..................................... $142,381 $ 2,627 $ 3,924
======== ======== ========
</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, the Company repaid Trusco's
existing bank obligations totaling $4,500.
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>
<CAPTION>
<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>
F-14
<PAGE> 39
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $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.
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. As of December 31, 1998, additional cash proceeds of approximately
$1,250 have been paid pursuant to the terms of an earn-out arrangement based on
future profits (as defined) which were achieved as of December 31, 1997. These
payments were recorded as costs in excess of net assets acquired. In addition,
the Company 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.
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:
F-15
<PAGE> 40
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS REPORTED
ITEQ PRO FORMA
1997 EXELL TRUSCO 1997
----------- -------- ------- ---------
<S> <C> <C> <C> <C>
Revenues ..................... $ 269,806 $ 15,166 $ 7,571 $ 292,543
Earnings (Loss) from
continuing operations ..... (2,921) 367 (71) (2,625)
Net earnings (loss) .......... (6,001) 367 (71) (5,705)
Basic earnings (loss) per
common share:
From continuing
operations ............... (.12) .02 -- (.11)
Net earnings (loss)....... (.25) .02 -- (.23)
Diluted earnings (loss)
per common share:
From continuing
operations................ (.12) .01 -- (.11)
Net earnings (loss)....... (.25) .01 -- (.23)
</TABLE>
<TABLE>
<CAPTION>
AS REPORTED
ITEQ PRO FORMA
1996 EXELL TRUSCO OHMSTEDE GRAVER 1996
----------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues .................. $ 142,381 $26,779 $24,809 $ 83,124 $10,389 $ 287,482
Earnings (Loss) from
continuing operations... 2,627 406 950 2,339 (666) 5,656
Net earnings (loss)..... 3,924 406 950 2,339 (666) 6,953
Basic earnings per
common share:
From continuing
operations............. .13 .02 .05 .11 (.03) .27
Net earnings (loss).... .19 .02 .05 .11 (.03) .34
Diluted earnings (loss)
per common share:
From continuing
operations............ .13 .02 .04 .11 (.03) .27
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.
F-16
<PAGE> 41
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The 1998 pro forma results of operations is not presented for the
acquisitions of GLM and Reliable due to the timing and relative significance of
such acquisitions to the 1998 pro forma results of operations.
NOTE 3--MERGER, ACQUISITION AND STRATEGIC CHARGES
For the year ended December 31, 1998, the Company recorded nonrecurring
merger, acquisition and strategic charges totaling $11,901.
Merger and acquisition costs of $1,117 related to terminated purchase
agreements and other acquisition related activity.
The Company incurred a strategic charge of $10,784. The charge included
the costs, estimated as incremental jobs costs, to combine the operations of the
Company and Astrotech including losses associated with two plant closings and
business integration and reorganization costs. The Company also incurred
severance costs and other benefits associated with employee terminations,
including that of the Company's former president and chief operating officer,
and legal and accounting services fees. Additional costs are expected to be
incurred and recognized in the first half of 1999 and are not expected to exceed
$3,000.
During the fourth quarter of 1997, the Company recorded nonrecurring
charges totaling $17,956 in connection with the merger with Astrotech and the
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. Transactions costs include
professional fees of $361 related to a terminated purchase agreement.
Approximately $5,055 of the asset write-down was non-cash.
During 1996, the Company incurred a restructuring charge of $1,819. 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.
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. 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.
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
F-17
<PAGE> 42
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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>
1997 1998
--------- ---------
<S> <C> <C>
Costs incurred to date............................................ $ 203,243 $ 259,447
Estimated earnings................................................ 53,402 44,816
--------- ---------
Revenue recognized................................................ 256,645 304,263
Progress billings to date......................................... (234,815) (287,863)
Costs incurred for which no revenues were
recognized to date........................................... 140 496
--------- ---------
$ 21,970 $ 16,896
========= =========
</TABLE>
The preceding is included in the accompanying consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................. $ 30,164 $ 26,589
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................. (8,194) (9,693)
-------- --------
$ 21,970 $ 16,896
======== ========
</TABLE>
NOTE 5--LONG-TERM OBLIGATIONS
Long-term obligations as of December 31, 1997 and 1998 of $89,954 and
$119,603, respectively, consist of the revolving loan facility. The December 31,
1998 balance of $119,603 is due to be paid in October 2002.
During the third quarter of 1997, the Company repaid its subordinated
notes using available proceeds under its revolving credit facility. In October
1997, in connection with the Astrotech 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.
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.
As amended in December 1998, the New Credit Facility provides a commitment
amount of up to $145,000 at December 31, 1998 (reducing to $135,000 at December
31, 1999) maturing in October 2002 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 .75% for the
applicable base rate margin, and from 1.5% to 2.5% for the applicable eurodollar
rate margin. The applicable interest rate on amounts outstanding at December 31,
1998 was 6.97%. A commitment fee ranging from 0.375% 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 65% of the stock of
F-18
<PAGE> 43
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
each of ITEQ's material foreign subsidiaries, and 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 net income, working capital and stockholders' equity and contain other
restrictive covenants. Such instruments also limit the ability of the Company to
incur additional indebtedness, to pay dividends or to make acquisitions and
certain investments. As previously disclosed, as of September 30, 1998, the
Company was not in compliance with certain financial covenants of its loan
agreement. The Company obtained an amendment to this agreement on December 14,
1998. At December 31, 1998, the Company was in compliance with the provisions of
its loan agreement.
During the third quarter of 1997, the Company repaid its subordinated
notes using available proceeds under its revolving credit facility. In October
1997, in connection with the Astrotech 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.
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>
1999 ...................... $1,190
2000 ...................... 789
2001 ...................... 399
2002 ...................... 241
2003 ...................... 240
------
Total ..................... $2,859
======
</TABLE>
The leases provide for payment of maintenance and other expenses by the
Company. Rent expense from continuing operations was approximately $900, $753
and $1,196 for the years ended December 31, 1996, 1997 and 1998. The filtration
group has minimum rental commitments under non-cancelable leases of $564, $480,
$402, $399 and $399 for the years 1999, 2000, 2001, 2002 and 2003, respectively,
which are not included in the above table.
NOTE 7--INCOME TAXES
Provision (benefit) for income taxes related to continuing operations
consists of the following:
F-19
<PAGE> 44
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal ............ $ (592) $ 4,508 $ --
State .............. 289 702 387
Foreign ............ 160 169 134
------- ------- -------
Total current provision ..... (143) 5,379 521
------- ------- -------
Deferred:
Federal ............ 1,720 (3,943) 1,533
State .............. 55 (580) 320
Foreign ............ -- (55) (263)
------- ------- -------
Total deferred provision .... 1,775 (4,578) 1,590
------- ------- -------
Income tax provision ........ $ 1,632 $ 801 $ 2,111
======= ======= =======
</TABLE>
The earnings (loss) before taxes relating to foreign operations totaled
approximately $400, $500 and ($120) for the years ended December 31, 1996, 1997
and 1998, 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,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Net current deferred income tax assets (liabilities):
Compensation recognition .......................... $ 632 $ 387
Accruals .......................................... 4,506 735
Tax benefit carry forwards ........................ 2,387 --
Contract accounting ............................... 64 281
-------- --------
$ 7,589 $ 1,403
======== ========
Net non-current deferred income tax assets (liabilities):
Tax benefit carry forwards ........................ $ 1,230 $ 11,400
Property and equipment ............................ (4,930) (7,908)
Intangible assets ................................. (914) (1,187)
Valuation allowance ............................... (146) (146)
-------- --------
$ (4,760) $ 2,159
======== ========
</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, 1997 and 1998, the Company had regular U.S. and
foreign net operating losses carried forward for tax reporting purposes totaling
approximately $10,600 and $28,900, respectively. These tax benefit carryforwards
were classified as non-current in 1998 since their realization is expected after
one year. Management believes it is more likely than not that the tax benefit
carryforwards will be realized.
Differences between the Company's effective income tax rate and the
statutory federal income tax rate are as follows:
F-20
<PAGE> 45
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Tax provision at the federal statutory income
Tax rate ...................................... $ 1,449 $ (721) $ 1,967
Differences in foreign versus U.S. tax rates ..... 7 56 (76)
State income taxes, net of federal benefit ....... 248 (103) 282
Amortization of intangible assets ................ 216 231 393
Non-deductible acquisition costs ................. -- 884 60
Valuation allowance .............................. (270) -- --
Other ............................................ (18) 454 (515)
------- ------- -------
Total tax provision ..................... $ 1,632 $ 801 $ 2,111
======= ======= =======
</TABLE>
The valuation allowance was reduced by $270 for the year ended December
31, 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--COMMON STOCK AND PREFERRED STOCK
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.
On September 4, 1998, the Board of Directors of the Company declared a
distribution of one right for each outstanding share of common stock to
stockholders of record at the close of business on September 14, 1998 and
designated 300 shares of the authorized preferred stock as a class to be
distributed under a stockholder rights agreement. Upon the occurrence of certain
events enumerated by the stockholder rights agreement, each right entitles the
registered holder to purchase a fraction of a share of the Company's authorized
preferred stock. The rights, among other things, will cause substantial dilution
to a person or group that attempts to acquire the Company. The rights expire on
March 4, 2000 but may be redeemed earlier.
NOTE 9--STOCK WARRANTS AND OPTIONS
STOCK WARRANTS
At December 31, 1998, subordinated debt warrants for 1,460 shares of
common stock at an exercise price of $5.10 per share were outstanding. These
warrants were issued in November 1996 and expire in November 2003. The exercise
price of the subordinated debt warrants is subject to adjustment. In 1998,
warrants for 334 shares were exercised for net proceeds of $1,530.
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, which must be at least the fair market value of the Company's
stock at the date of grant can be paid in cash or in shares of the Company's
Common Stock. Options may not be transferred by the optionee other than by will
or the laws of descent and distribution.
F-21
<PAGE> 46
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, and the
option price must be paid in cash. Options may not be transferred by the
optionee other than by will or the laws of descent and distribution.
Prior to the 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 exerciseable. 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,
---------------------------------
1996 1997 1998
--------- --------- --------
<S> <C> <C> <C>
Net earnings (loss):
As reported ................................... $ 3,924 $ (6,001) $ (182)
Pro forma ..................................... 3,767 (6,446) (930)
Basic net earnings (loss) per common share:
As reported ................................... .19 (.25) (.01)
Pro forma ..................................... .18 (.27) (.03)
Diluted net earnings (loss) per common share:
As reported ................................... .19 (.25) (.01)
Proforma ...................................... .18 (.27) (.03)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1996, 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>
1996 GRANTS 1997 GRANTS 1998 GRANTS
----------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 42.88%-44.85% 54.17% - 61.78% 64.07% - 70.98%
Risk free interest rate 5.38%-6.93% 5.51% - 5.57% 4.21% - 5.70%
Expected life of options 4.25 to 10 years 5 to 10 years 5 to 10 years
</TABLE>
F-22
<PAGE> 47
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, 1996, 1997 and 1998 and changes during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
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 .......... 1,774 $ 3.55 1,907 $ 3.60 1,293 $ 4.81
Granted ................................... 418 3.65 453 7.35 320 9.52
Exercised ................................. (70) (2.70) (967) (3.67) (259) (3.57)
Forfeited ................................. (201) (3.42) (100) (3.65) (257) (5.71)
Expired ................................... (14) (4.71) -- -- (9) (4.75)
------ -------- ------ -------- ------ --------
Outstanding at end of year ................ 1,907 $ 3.60 1,293 $ 4.81 1,088 $ 6.26
====== ======== ====== ======== ====== ========
Exercisable at end of year ................ 1,302 $ 3.71 553 $ 3.78 614 $ 5.43
====== ======== ====== ======== ====== ========
Weighted average fair value of options
granted ................................... $ 1.82 $ 5.16 $ 4.48
====== ====== ======
</TABLE>
The options outstanding at December 31, 1998 have exercise prices
between $1.22 and $13.94 and a weighted average remaining contractual life of
4.5 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, 1997, and 1998, 15, 9 and
31 shares, respectively, were issued under the plan.
NOTE 10--DISCONTINUED OPERATIONS
ALLIED
During August 1997 and effective August 31, 1997, management of ITEQ
adopted plans to discontinue certain of its low margin generic fabrication
operations at its Allied subsidiary. Such operations ceased in the third quarter
of 1998.
Sales from Allied's discontinued operations were $24,779, $15,297 and
$3,867 for the years ended 1996, 1997 and 1998, 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 Allied's 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. Net losses of $1,259 have been incurred for the year ended December
31, 1998. Net losses of $1,895 were incurred in 1997 subsequent to the
measurement date. Interest expense has been allocated based on intercompany debt
balances. After tax interest expense of $193 and $313 have been included in the
estimated loss for the years ended December 31, 1997 and 1998, respectively.
Discontinued operations have not been separated in the consolidated balance
sheet or statements of cash flows and, therefore,
F-23
<PAGE> 48
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amounts for certain captions will not agree with the respective consolidated
statements 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 increased 1996 net earnings as
follows:
<TABLE>
<CAPTION>
<S> <C>
Net earnings ............................................. $321
Basic net earnings per common share...................... $.02
Diluted net earnings per common share.................... $.02
</TABLE>
FILTRATION
During September 1998 and effective September 30, 1998, management of
ITEQ adopted plans to discontinue the operations of its filtration group. The
majority of the filtration group's operations relate to manufacturing fabric
filters, wet and dry scrubbers and FRP fans. Management intends to sell the
filtration group businesses during 1999, although no assurances can be made that
a sale will be consummated. Management believes that the company will not incur
additional losses from operations or the sale of the filtration group; therefore
no additional losses have been accrued.
The net assets of the filtration group are included in the December 31,
1998 consolidated balance sheet and are summarized as follows:
<TABLE>
<S> <C>
Due on contracts and other receivables, net $ 6,706
Costs and estimated earnings in excess of billings
on uncompleted contracts 5,917
Inventories 1,091
Property and equipment, net 1,362
Other assets, net 13,847
-------
Total assets 28,923
-------
Accounts payable 3,966
Accrued liabilities 4,761
-------
Total liabilities 8,727
-------
Net assets of filtration group discontinued operations $20,196
=======
</TABLE>
Sales from the filtration groups' discontinued operations were $66,434,
$65,793 and $39,661 for the years ended 1996, 1997 and 1998, respectively.
Summary operating results through September 30, the date of measurement, for
1998 were as follows:
F-24
<PAGE> 49
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenues........................................................ $31,044
Operating loss.................................................. 3,284
Interest expense................................................ 731
Loss before income taxes........................................ 3,644
Income tax benefit.............................................. 1,330
Net loss from filtration group's discontinued operations........ 2,314
</TABLE>
After tax losses from the date of measurement of $282 have been
incurred through December 31, 1998. After tax interest expense of $177 is
included in the operating loss from the date of measurement. Net income of
$2,956 has been incurred for the year ended December 31, 1997.
Discontinued operations have not been separated in the consolidated
balance sheet or statements of cash flows and, therefore, amounts for certain
captions will not agree with the respective consolidated statements of
operations.
NOTE 11--CONTINGENCIES
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.
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--SEGMENT REPORTING
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue from external customers
Storage .................................. $ 109,553 $ 127,645 $ 169,842
Process .................................. 32,828 142,161 132,988
--------- --------- ---------
Total .................................. $ 142,381 $ 269,806 $ 302,830
========= ========= =========
Revenue from internal operating segments
Storage .................................. $ -- $ 843 $ 790
Process .................................. -- 1,004 2,804
--------- --------- ---------
Total .................................. $ -- $ 1,847 $ 3,594
========= ========= =========
Depreciation and amortization
Storage .................................. $ 3,576 $ 4,141 $ 4,605
Process .................................. 512 2,347 2,637
Other .................................... 264 269 62
--------- --------- ---------
Total .................................. $ 4,352 $ 6,757 $ 7,304
========= ========= =========
</TABLE>
F-25
<PAGE> 50
<TABLE>
<S> <C> <C> <C>
Operating profit (loss)
Storage .................................. $ 9,278 $ 9,217 $ 15,438
Process .................................. 3,573 14,305 12,497
Other .................................... (6,437) (20,819) (15,911)
--------- --------- ---------
Total .................................. $ 6,414 $ 2,703 $ 12,024
========= ========= =========
Earnings (Loss) from continuing operations
before income tax provision (benefit) and
extraordinary loss Storage................ $ 9,412 $ 7,304 $ 7,696
Process................................... 2,611 8,579 7,585
Other..................................... (7,764) (18,003) (9,497)
--------- --------- ---------
Total................................... $ 4,259 $ (2,120) $ 5,784
========= ========= =========
Identifiable assets
Storage................................... $ 78,198 $ 90,356 $ 140,906
Process................................... 80,630 94,112 105,615
Other..................................... 65,924 77,019 40,134
--------- --------- ---------
Total................................... $ 224,752 $ 261,487 $ 286,655
========= ========= =========
</TABLE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--MAJOR CUSTOMERS AND FOREIGN OPERATIONS
Due to the nature of the Company's business, contracts are generally
nonrecurring. For the years ended December 31, 1996, 1997 and 1998, no single
customer accounted for 10% of revenues. Financial data by geographical area is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
North America $134,614 $259,133 $294,920
Europe 4,240 4,926 5,092
Asia 3,527 5,747 2,818
-------- -------- --------
Total $142,381 $269,806 $302,830
======== ======== ========
Operating profit (a):
North America $ 5,938 $ 1,955 $ 11,633
Europe 258 220 355
Asia 218 528 36
-------- -------- --------
Total $ 6,414 $ 2,703 $ 12,024
======== ======== ========
Identifiable assets:
North America $211,418 $245,847 $274,282
Europe 9,471 10,717 8,910
Asia 3,863 4,923 3,463
-------- -------- --------
Total $224,752 $261,487 $286,655
======== ======== ========
</TABLE>
(a) Includes merger, acquisition and strategic charges of $1,819,
$17,956 and $11,901, for 1996, 1997 and 1998, respectively.
Including exports, international sales accounted for approximately 12%
of total revenue in 1998.
F-26
<PAGE> 51
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenues $71,135 $79,770 $74,035 $77,890
Merger, acquisition and strategic
charges 194 845 8,800 2,062
Earnings (Loss) from
continuing operations 3,467 3,933 (3,777) 50
Net earnings (loss) 3,853 3,501 (7,304) (232)
Basic earnings (loss) per share:
From continuing operations .13 .14 (.13) --
Net earnings (loss) .14 .13 (.26) (.01)
Diluted earnings (loss) per share:
From continuing operations .13 .13 (.13) --
Net earnings (loss) .14 .12 (.26) (.01)
1997
Revenues $60,422 $63,949 $74,222 $71,213
Merger, acquisition and strategic
charges -- -- -- 17,956
Earnings (Loss) from
continuing operations 1,907 2,145 2,949 (9,922)
Net earnings (loss) 1,905 2,321 (149) (10,078)
Basic earnings (loss) per share:
From continuing operations .09 .09 .11 (.37)
Net earnings (loss) .09 .10 (.01) (.38)
Diluted earnings (loss)per share:
From continuing operations .09 .09 .10 (.37)
Net earnings (loss) .09 .10 (.01) (.38)
</TABLE>
F-27
<PAGE> 52
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 22nd day of
March, 1999.
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 22nd day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<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 Officer and
(Lawrance W. McAfee) Secretary (Principal Financial Officer)
/s/ MICHAEL APPLING JR. Vice President of Finance and Accounting
- ------------------------------------------------------------ (Principal Accounting Officer)
(Michael Appling Jr.)
/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)
</TABLE>
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 - Second Amendment to Revolving Credit Agreement, dated as of December 14, 1998, among the Registrant,
the Guarantors and various lending institutions including BankBoston, N.A., as Agent, and Deutsche Bank
AG, as Documentation Agent (Filed as an exhibit to Form 8-K filed December 22, 1998 and incorporated
herein by reference).
4.3 - First Amendment to Rights Agreement effective November 19, 1998 between the Registrant and Harris Trust
and Savings Bank, as Rights Agent. (Filed as an exhibit to Form 8-K filed November 20, 1998 and
incorporated herein by reference).
4.4 - Rights Agreement dated as of September 4, 1998 between the Registrant and Harris Trust and Savings
Bank, as Rights Agent, which includes as Exhibit C thereto the Form of Right Certificate. (Filed as an
exhibit to Form 8-K filed September 15, 1998 and incorporated herein by reference).
4.5 - 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).
4.6 - 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).
4.7 - 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).
4.8 - 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).
4.9 - 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).
4.10 - 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).
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 dated January 29, 1999 between the Registrant and William P. Reid.
*10.9 Annex I to Agreement dated January 29, 1999 between the Registrant and William P. Reid.
10.10 - Severance Agreement dated September 17, 1998, between Registrant and John Camardella. (Filed as an
exhibit to Form 10-Q for the quarter ended September 30, 1998 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 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).
10.13 - 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).
10.14 - 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).
10.15 - 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).
10.16 - 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).
10.17 - 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).
10.18 - 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).
10.19 - 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).
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.20 - 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).
10.21 - 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).
10.22 - 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).
*21.1 - List of Subsidiaries of the Registrant.
*23.1 - Consent of Arthur Andersen LLP.
*23.2 - Consent of PricewaterhouseCoopers LLP.
*27 - Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.8
January 29, 1999
Mr. William P. Reid
23 Misty Grove Circle
The Woodlands, TX 77380
Dear Mr. Reid:
ITEQ, Inc. (the "Company") considers the establishment and maintenance
of a sound and vital management to be essential for the protection and
enhancement of the best interests of the Company and its shareholders. In view
of your experience and performance in the business of the Company and its
subsidiaries, the Company desires to retain your services for an extended
period. In addition, the Company recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control may arise and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders.
Accordingly, the board of directors of the Company (the "Board") has
determined that appropriate steps should be taken to assure the Company of the
continuation of your services and to reinforce and encourage the attention and
dedication of members of the Company's management to their assigned duties
without distraction in circumstances arising from the possibility of a change in
control of the Company. In particular the Board believes it important, should
the Company or its shareholders receive a proposal for or notice of transfer of
control of the Company, that you be able to assess and advise the Board whether
such transfer would be or is in the best interests of the Company and its
shareholders, and to take such other action regarding such proposal or transfer
as the Board might determine to be appropriate without being influenced by the
uncertainties of your own situation.
In order to induce you into the employ of the Company, this letter
agreement (the "Agreement"), which has been approved by the Board, sets forth
the terms of your continued employment by the Company and the compensation and
severance benefits which the Company agrees will be provided to you in the event
of a change in control and if your employment with the Company should be
terminated under the circumstances described below.
<PAGE> 2
Reference is made to Annex I hereto for definitions of certain terms
used in this Agreement, and such definitions are incorporated herein by such
reference with the same effect as if set forth herein. Certain capitalized terms
used in this Agreement in connection with the description of various Plans are
defined in the respective Plans, but if any conflicts with a definition herein
contained, the latter shall prevail.
1. Term of Employment. The Company hereby agrees to continue your
employment and you hereby agree to serve the Company for an employment period
commencing on the date hereof and initially ending the third anniversary from
the date hereof; provided, however, that on each successive January 29,
commencing in 2002, the employment period shall automatically be extended for
one additional year (with the date to which the employment period has most
recently been so extended being hereinafter referred to as the "Expiration Date"
and the period commencing the date hereof and ending on the Expiration Date
being hereinafter referred to as the "Employment Period"), subject to prior
termination of the Employment Period pursuant to Section 4 of this Agreement.
2. Duties.
(a) During the Employment Period, you shall serve the Company as its
President and Chief Operating Officer and perform your duties and
responsibilities diligently, faithfully and loyally and devote such time to the
Company's affairs as may be necessary to the end of achieving the proper,
efficient and successful operation of the Company's business. In such capacities
you shall (i) generally have the duties of such offices as specified in the
Bylaws, (ii) report directly to the Chief Executive Officer and (iii) have
general executive supervision and management of the business and affairs of the
operations of the Company, subject to the direction the Chief Executive Officer,
the Board or any Committee thereof. The foregoing shall not, however, be deemed
to restrict you from attending to matters or engaging in activities not directly
related to the business of the Company, if reasonable in scope and time
commitment and not otherwise in violation of this Agreement.
(b) If during the Employment Period, (i) a tender offer or exchange
offer is made for more than 20% of the Company's outstanding Voting Securities
or (ii) a transaction is proposed which, if consummated, would result in a
Change of Control, you agree that you will not leave your employment with the
Company (other than as a result of Disability or upon Retirement) and will also
continue to render the services contemplated in the introductory paragraphs of
this Agreement.
3. Compensation.
(a) Base Salary. As compensation for your services, the Company
agrees to pay you basic compensation at the rate of $340,000 per annum through
December 31, 1999 ("Base Salary"), payable on a current basis in equal
installments
<PAGE> 3
not less frequently than monthly, subject only to such payroll and withholding
deductions as may be required by law or the terms of Plans in which you are a
participant. For periods subsequent to December 31, 1999, your Base Salary shall
be established annually by the Compensation Committee of the Board and paid on
the same basis as for the prior year, but no such adjustment shall result in a
Base Salary for any year of less than the highest annual rate so authorized by
the Committee to be paid to you during any previous calendar year(s) of the
Company ended during the Employment Period, except upon your prior written
consent.
(b) Plans. In addition to your Base Salary, you will participate in
the Bonus Plan and be eligible to participate in the Defined Contribution Plan
and Other Plans, for each year during the Employment Period.
(c) Other. The Company shall reimburse you for all reasonable
expenses paid or incurred by you in the performance of your duties under this
Agreement in accordance with the Company's normal expense reimbursement policies
applicable to senior executives.
4. Termination. Upon compliance by the initiating party with any
applicable procedures set forth in Section 5 hereof, your employment with the
Company:
(a) shall terminate automatically upon your death or Retirement;
(b) may be terminated prior to the Expiration Date at the discretion
of the Chief Executive Officer or the Board upon your Disability;
(c) may be terminated prior to the Expiration Date at the discretion
of the Chief Executive Officer or the Board for Cause;
(d) may be terminated prior to the Expiration Date at your
discretion, other than for Good Reason;
(e) may be terminated prior to the Expiration Date at the discretion
of the Chief Executive Officer or the Board prior to a Change of Control without
Cause;
(f) may be terminated prior to the Expiration Date at the discretion
of the Chief Executive Officer or the Board at or after a Change of Control
without Cause;
(g) may be terminated prior to the Expiration Date at your
discretion for Good Reason prior to a Change of Control; or
(h) may be terminated prior to the Expiration Date at your
discretion for Good Reason at or after a Change of Control.
<PAGE> 4
5. Procedures for Termination. If it is intended that your employment
be terminated:
(a) pursuant to Section 4(b), the Company shall transmit to you
written notice setting forth the particulars upon which the Company bases its
determination that a Disability exists, requiring that you resume your duties
within 30 days following the date thereof, failing which a "final discharge"
shall then occur;
(b) pursuant to Section 4(c), the Company shall transmit to you
written notice setting forth the Cause for which you are proposed to be
dismissed in sufficient detail to permit a reasonable assessment of the bona
fides thereof, and setting a meeting with the Chief Executive Officer not less
than 30 days following the date of such notice at which the Chief Executive
Officer shall consider your termination and at which you and your counsel shall
have the opportunity to be heard, following which the Chief Executive Officer
shall either by resolution withdraw the notice, or if he so finds in his good
faith opinion, issue his report within ten days thereafter that Cause exists and
specifying the particulars of its findings, in which latter event a "final
discharge" shall occur. After receipt of a notice of intended termination for
Cause, you shall not have any authority to incur any obligation of any kind
whatsoever on behalf of the Company pending withdrawal of such notice or "final
discharge;"
(c) pursuant to Section 4(d), you shall transmit to the Company
written notice specifying that your resignation is other than for Good Reason;
(d) pursuant to Section 4(e) or 4(f) the Company shall transmit to
you written notice specifying that your termination is without Cause;
(e) pursuant to Section 4(g) or 4(h), you shall transmit to the
Company written notice setting forth the particulars upon which you base your
determination that Good Reason exists and, only if the stated basis therefor is
capable of being cured, requesting a cure within 10 days, failing which a "final
separation" shall then occur, and if such stated basis is not capable of cure by
the Company, "final separation" shall occur co-extensive with delivery of the
notice.
For purposes of this Agreement, a "Termination Date" shall be deemed to
have occurred upon (i) the happening of any event contemplated by Section 4(a)
[death or Retirement], (ii) the date of "final discharge" in the case of
termination initiated under Sections 5(a) [Disability] or 5(b)[Cause], (iii) the
date of "final separation" in the case of a termination initiated under Section
5(e) [Good Reason], or (iv) the 30th day following the date of any notice
contemplated by Sections 5(c) [resignation without Good Reason] or 5(d)
[discharge without Good Reason; provided, that any proceeding initiated pursuant
to Section 10 hereof within 15 days after the giving of any notice under this
Section 5 shall (anything else in this Agreement to the contrary
notwithstanding) automatically toll the effectiveness of any Termination Date
until final
<PAGE> 5
resolution of such proceeding. Each notice which complies with the requirements
of this Section 5 is hereinafter referred to as a "Termination Notice".
6. Effect of Termination. If your employment is terminated:
(a) pursuant to Sections 4(a) [death or Retirement], 4(b)
[Disability], 4(c) [Cause], or 4(d) [resignation without Good Reason], then you
shall be entitled to receive (i) payment when due of your Base Salary through
the end of the first monthly pay period ended after the Termination Date and
(ii) all benefits under the Plans in which you are at the time a participant, to
the extent the same are vested under the terms thereof at the Termination Date,
and (except as otherwise provided herein) all other obligations of the Company
under this Agreement shall thereupon cease; or
(b) pursuant to Sections 4(e) [discharge without Cause prior to
Change of Control] or 4(g) [resignation for Good Reason prior to Change of
Control], then you shall become entitled to all benefits conferred upon you by
the Termination Package, and (except as otherwise provided herein) all other
obligations of the Company under this Agreement shall thereupon cease; or
(c) pursuant to Sections 4(f) [discharge without Cause after Change
of Control] or 4(h) [resignation for Good Reason after Change of Control], then
you shall become entitled to all benefits conferred upon you by the Severance
Package, and (except as otherwise provided herein) all other obligations of the
Company under this Agreement shall thereupon cease.
You shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment, nor shall the amount
of any payment provided for in this Agreement be reduced by any compensation
earned by you as the result of employment by another employer after any
Effective Date or Termination Date.
7. Excise Tax. To the extent that the acceleration of vesting or any
payment, distribution or issuance made to you pursuant to this Agreement
following any Effective Date or Change of Control is subject to federal income,
excise, or other tax at a rate above the rate ordinarily applicable to like
payments paid in the ordinary course of business ("Penalty Tax"), whether as a
result of the provisions of Section 280G(b)(1) and 4999(a) of the Internal
Revenue Code of 1986, as amended, any similar or analogous provisions of any
statute adopted subsequent to the date hereof, or otherwise, then the Company
shall pay you an additional amount of cash (the "Additional Amount") such that
the net amount received by you, after paying any applicable Penalty Tax and any
federal or state income tax on such Additional Amount, shall be equal to the
amount that you would have received if such Penalty Tax were not applicable.
<PAGE> 6
8. Deferral of Payments; Early Payments. At any time prior to a
Termination Date, you may irrevocably direct the Company that any amounts which
are or should become payable to you under the Severance Package or Termination
Package shall be paid to you in three equal installments, payable on or within
ten days following the Termination Date, and on the first and second
anniversaries of the initial installment payment. In addition, if any payment to
you in respect of a stock-based benefit which is precipitated by the occurrence
of an Effective Date or a Termination Date and which would, in and of itself,
give rise to a short-swing profit under Section 16(b) of the Exchange Act, then
both the payment and the entitlement to payment thereof, shall automatically be
deferred until the earliest date (not later than 183 days following a
Termination Date) at which the payment of such benefit would not, in and of
itself, result in a short-swing profit. The Company and you further agree that
when it has become apparent in our collective best judgment (as expressed by the
Compensation Committee of the Board, in the case of the Company) that a Change
of Control is likely to occur and further that a likely consequence thereof will
be the occurrence of a Termination Date, the Company and you will use reasonable
good faith efforts to undertake and conclude negotiations intended to result in
the payment to you of a portion of the Severance Package earlier than would
otherwise be the case hereunder, thereby increasing the benefit conferred upon
you and the tax efficiency of such payments to the Company, with any consequent
tax savings to be allocated between you and the Company in such reasonable
proportions as we shall agree; unless so agreed to by both parties in writing,
no such negotiation or agreement shall affect the Company's obligations to you
under any other provision of this Agreement.
9. Dispute Resolution. It is irrevocably agreed that if any dispute
arises between us under this Agreement, or as to any interpretive matter under
or alleged breach of this Agreement, the exclusive remedy of each of us shall be
to commence binding arbitration proceedings under the rules of the American
Arbitration Association (the "Rules"), with any such arbitration proceeding to
be conducted in Houston, Texas, applying the substantive law of the State of
Texas ("Arbitration"). If Arbitration is commenced prior to an Effective Date,
each of us will deposit with the arbitrator(s), 50% of the arbitrator's
preliminary estimate of the costs of arbitration (excluding counsel fees and
expenses) as security for costs; if Arbitration is commenced after an Effective
Date, the Company will be solely responsible for all costs thereof and shall
deposit with the arbitrator(s) 100% of the arbitrator(s) preliminary estimate
thereof. Notwithstanding any contrary provision of the Rules or Texas law, the
Company shall have the burden of proof with respect to any of the following
which are at issue in Arbitration: (i) that Cause or Disability existed at the
time any notice was given to you under Section 5 based upon either them and/or
the sufficiency of such notice; and (ii) that Good Reason did not exist at the
time notice was given to the Company under Section 5 based upon Good Reason (but
only if such notice was dated on or after an Effective Date) and/or the
sufficiency of such notice; and (iii) that a Change of Control has not occurred.
Any final ruling of the arbitrator(s) in an Arbitration shall be final
<PAGE> 7
and binding for all purposes, and judgment on any Arbitration award may be
entered and enforced in any court having jurisdiction.
The Company and you irrevocably agree that in the event the
arbitrator(s) shall determine (after hearing) that any matter presented in
Arbitration is one which under Texas law is not susceptible to arbitration, in
such event (and only in such event), (i) exclusive jurisdiction over the
non-arbitrable issue shall be in the lowest Texas state court of general
jurisdiction sitting in Harris County, Texas, (ii) we are each at the time
present in Texas for the purpose of conferring personal jurisdiction; (iii) any
such action may be brought in such courts, and any objection that the Company or
you may now or hereafter have to the venue of such action or proceeding in any
such court or that such action or proceeding was brought in an inconvenient
court is waived, and we each agree not to plead or claim the same, (iv) service
of process in any such proceeding or action may be effected by mailing a copy
thereof by registered or certified mail, return receipt requested (or any
substantially similar form of mail), postage prepaid, to such party at the
address provided in Section 13 hereof, (v) no punitive or consequential damages
shall be awarded in any such action or proceeding and we each agree not to plead
or claim the same; and (vi) prior to any trial on the merits, we will submit any
such non-arbitrable issue to court supervised, non-binding mediation.
If proceedings are commenced prior to an Effective Date, all actual
costs of Arbitration or court proceedings involving any non-arbitrable issue
(excluding, in each case, counsel fees and expenses), shall be apportioned by
the arbitrator(s) or the court in such manner as shall be deemed equitable in
light of any final Arbitration award or judgment; if commenced on or after an
Effective Date, all such costs shall be borne exclusively by the Company.
Anything else in this Section to the contrary notwithstanding, nothing
in this Agreement shall impair your ability to seek specific performance of your
right to be paid under, and to receive all other benefits conferred by, Section
3 of this Agreement during the pendency of any dispute or proceeding concerning
Sections 5, 6 and/or 8 hereof.
10. Successors; Binding Agreement.
(a) Upon your written request, the Company will seek to have any
Successor (as defined below), by agreement in form and substance satisfactory to
you, expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it. If there
has been a Change of Control prior to, or a Change of Control will result from,
any such succession, then failure of the Company to obtain at your request such
agreement prior to or upon the effectiveness of any such succession (other than
by merger or consolidation) shall constitute Good Reason for termination by you
of your employment
<PAGE> 8
and, upon delivery of a Notice of Termination by you to the Company, you shall
be entitled to the benefits provided in Section 6(c) hereof. "Successor" shall
mean any Person that succeeds to, or has the ability to control, the Company's
business as a whole, directly by merger, consolidation or spin-off or indirectly
by purchase of the Company's Voting Securities or acquisition of all or
substantially all of the assets of the Company.
(b) This Agreement shall inure to the benefit of and be enforceable
by your personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
11. Fees and Expenses. The Company shall pay all legal fees and
reasonable expenses incurred by you (including costs of arbitration) as a result
of (a) your termination following a Change of Control (including all such fees
and expenses, if any, incurred in contesting or disputing any such termination)
or (b) your seeking to obtain, assert or enforce any right or benefit conferred
upon you by this Agreement.
12. Notices. Any and all notices required or permitted to be given
hereunder shall be in writing and shall be deemed to have been given when
delivered in person to the persons specified below or deposited in the United
States mail, certified or registered mail, postage prepaid and addressed as
follows:
If to the Company: ITEQ, Inc.
2727 Allen Parkway
Houston, Texas 77019
Attention: Chief Executive Officer
If to you: William P. Reid
23 Misty Grove Circle
The Woodlands, TX 77380
Either party may change, by the giving of notice in accordance with
this Section 2, the address to which notices are thereafter to be sent.
13. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Survival. All obligations undertaken and benefits conferred
pursuant to this Agreement, except those set forth in Sections 1 and 2, shall
survive the Employment Period and continue thereafter until performed in full.
<PAGE> 9
15. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such modification, waiver or discharge is agreed to
in writing signed by you and the Chairman of the Compensation Committee of the
Board. No waiver by either party hereto at any time of any breach by the other
party hereto of, or of compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the internal laws of the State of Texas.
If this letter correctly sets forth our understanding with respect to
the subject matter hereof, please sign and return one copy of this letter to the
Company.
Sincerely,
ITEQ, INC.
By: /s/ Mark E. Johnson
------------------------------
Mark E. Johnson
Chief Executive Officer
Agreed to as of the 29th day of January, 1999.
/s/ William P. Reid
- ---------------------------
William P. Reid
<PAGE> 1
ANNEX I TO AGREEMENT DATED JANUARY 29, 1999
BETWEEN
ITEQ, INC.
AND
WILLIAM P. REID
DEFINITION OF
CERTAIN TERMS
"BONUS PLAN" means (i) for calendar 1999, the Company's obligation to
pay to you the amounts, if any, to which you would be entitled under the
Company's corporate incentive bonus plan as presently in effect and (ii) for
each subsequent year, any Plan adopted by the Board which provides for the
payment of additional compensation on an annual basis to senior executive
officers contingent upon the Company's results of operations for that specific
year, as such Plan shall be amended or modified to, but not on or after, any
Effective Date.
"BYLAWS" means the bylaws of the Company as in effect at the date
hereof and as the same shall be amended or otherwise modified to, but not on or
after, any Effective Date.
"CAUSE" means (i) your conviction by a court of competent jurisdiction,
from which conviction no further appeal can be taken, of a felony-grade crime
involving scienter, or (ii) your willful failure to perform substantially your
duties with the Company (other than a failure due to physical or mental illness)
which is materially and demonstrably injurious to the Company, or (iii) only
prior to an Effective Date, the engaging by you in any "business" engaged in
activities in direct competition with the Company, whether as an employee,
officer or director or through the beneficial ownership by you of 10% or more of
the Voting Securities of such "business." No act or failure to act on your part
shall be considered "willful" unless done, or omitted to be done, by you in bad
faith and without reasonable belief that your action or omission was in, or not
opposed to, the best interests of the Company.
"CHANGE OF CONTROL" means the earliest date at which:
(i) Any Person is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the Company's
outstanding Voting Securities, other than through the purchase of Voting
Securities directly from the Company through a private placement; or
<PAGE> 2
(ii) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least two-thirds of the directors comprising the
Incumbent Board shall from and after such election be deemed to be a member of
the Incumbent Board; or
(iii) the Company is merged or consolidated with another corporation or
entity and as a result of such merger or consolidation less than 60% of the
outstanding Voting Securities of the surviving or resulting corporation or
entity shall then be owned by the former stockholders of the Company; or
(iv) a tender offer or exchange offer is made and consummated by a
Person other than the Company for the ownership of 20% or more of the Voting
Securities of the Company then outstanding; or
(v) all or substantially all of the assets of the Company are sold or
transferred to a Person as to which (A) the Incumbent Board does not have
authority (whether by law or contract) to directly control the use or further
disposition of such assets and (B) the financial results of the Company and such
Person are not consolidated for financial reporting purposes.
Anything else in this definition to the contrary notwithstanding, no
Change of Control shall be deemed to have occurred by virtue of any transaction
which results in you, or a group of Persons which includes you, acquiring more
than 20% of either the combined voting power of the Company's outstanding Voting
Securities or the Voting Securities of any other corporation or entity which
acquires all or substantially all of the assets of the Company, whether by way
of merger, consolidation, sale of such assets or otherwise.
"CHARTER" means the certificate of incorporation of the Company as in
effect at the date hereof and as the same shall be amended or otherwise modified
to, but not on or after, any Effective Date.
"DEFINED CONTRIBUTION PLAN" means the ITEQ, Inc. 401K Plan, as the same
shall be amended or modified to, but not on or after, any Effective Date.
"DISABILITY" means your continuing full-time absence from your duties
with the Company for 180 days or longer as a result of physical or mental
incapacity.
"EFFECTIVE DATE" means the earliest date upon which (i) any of the
events set forth under the definition of Change of Control shall have occurred,
(ii) the receipt by the Company of a Schedule 13D stating the intention of any
Person to take actions
<PAGE> 3
which, if accomplished, would constitute a Change of Control, or (iii) the
public announcement by any Person of its intention to take any such action, in
each case without regard for any contingency or condition which has not been
satisfied on such date.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"GOOD REASON" means any of the following:
(i) except as a result of your death or Retirement, or
following the receipt by you of a Notice of Termination for Cause or
due to Disability, a change in your status, title(s) or position(s) as
an officer of the Company which, in your reasonable judgment, does not
represent a promotion, with commensurate adjustment of compensation,
from your status, title(s) and position(s) or the assignment to you of
any duties or responsibilities which, in your reasonable judgment, are
inconsistent with such status, title(s) or position(s), or the
withdrawal from you of any duties or responsibilities which in your
reasonable opinion are consistent with such status, title(s) or
position(s), or any removal of you from or any failure to reappoint or
reelect you to such position(s); or
(ii) a reduction by the Company in your base salary; or
(iii) the failure by the Company to continue in effect any
Plan in which you were then participating other than as a result of the
normal expiration or amendment of any such Plan in accordance with its
terms, or the taking of any action, or the failure to act, by the
Company which would adversely affect your continued participation in
any such Plan on at least as favorable a basis to you as is the case on
the date hereof or which would materially reduce your benefits under
any of such Plan or deprive you of any material benefit enjoyed by you
on the date hereof, except as proposed by you to the Board or the
Compensation Committee thereof; or
(iv) the failure by the Company upon a Change of Control to
obtain the assumption of this Agreement by any Successor (other than by
merger or consolidation); or
(v) any purported termination by the Company of your
employment which is not effected pursuant to a Notice of Termination;
and for purposes of this Agreement, no such purported termination shall
be effective; or
(vi) any refusal by the Company to continue to allow you to
attend to matters or engage in activities not directly related to the
business of the Company
<PAGE> 4
which you attended to or were engaged in prior to the date hereof and
which do not otherwise violate your obligations hereunder; or
(vii) any continuing material default by the Company in the
performance of its obligations under this Agreement, whether before or
after a Change of Control.
"OTHER PLANS" means any thrift; bonus or incentive; stock option or
stock accumulation; pension; medical, disability, accident or life insurance
plan, program or policy of the Company which is intended to benefit the chief
executive officer and/or executive officers of the Company (other than the Bonus
Plan or Defined Contribution Plan).
"PERSON" means any individual, corporation, partnership, group,
association or other "person," as such term is used in Sections 13(d) and 14(d)
of the Exchange Act, other than the Company or any Plans sponsored by the
ICompany.
"PLANS" means the Bonus Plan, Defined Contribution Plan and Other
Plans.
"RETIREMENT" means termination of your employment on the "normal
retirement date" coextensive with your attainment of age 65.
"SEVERANCE PACKAGE" means your right to receive, and the Company's
obligation to pay and/or perform on, the following:
(a) on or within ten days following an applicable Termination
Date, the Company shall pay to you a lump sum, cash amount equal to the
sum of (i) three times the highest annual rate of Base Salary in effect
during the current year or any of the three years preceding the
Termination Date and (ii) three times the greater of (A) the maximum
award you would have been eligible to receive under the Bonus Plan in
respect of the current year, regardless of any limitations otherwise
applicable to the Bonus Plan (i.e., the failure to have completed any
vesting period or the current measurement period, or the failure to
achieve any performance goal applicable to all or any portion of the
measurement period) or (B) the largest award earned (whether or not
paid) under the Bonus Plan in respect of any of the three years
preceding the Termination Date; and
(b) in addition to your entitlement to the vested portion of
your interest in the Defined Contribution Plan in accordance with the
terms of that plan, the Company shall pay to you, on or within ten days
following the applicable Termination Date, an amount in cash equal to
the unvested portion of the Company's contributions to your account;
and
(c) immediately upon an applicable Termination Date, all
options and rights to contingent incentive compensation granted to you
under the Plans (other
<PAGE> 5
than the Bonus and Defined Contribution Plans and medical, disability,
accident and life insurance plans and programs for which separate
provision is made herein) which are not then fully vested, exercisable,
distributable or otherwise performable by the Company shall immediately
become fully vested, exercisable, distributable or otherwise
performable by the Company as though any and all applicable performance
goals had been met or achieved at maximum levels for all performance
periods (including those extending beyond the Termination Date) and any
and all other Plan contingencies had been satisfied in full at the
Termination Date and the maximum benefits thereunder had been earned at
the Termination Date, and solely for purposes of determining when any
outstanding option shall lapse or expire, you shall be deemed to remain
in the Company's employ until the option would have otherwise expired
notwithstanding any contrary provision in the pertinent stock option
plan or related option agreement;
(d) following an applicable Termination Date, you shall
receive all benefits under and in accordance with the terms of the
Plans (other than the Bonus and Defined Contribution Plans and medical,
disability, accident and life insurance plans and programs and any
subsequently adopted Other Plan fitting the description contained in
clause (c) above, for all of which separate provision is made herein)
in which you are at the time a participant, but only to the extent the
same are vested under the terms of such Plans at the Termination Date;
and
(e) unless you give notice to the Company pursuant to the next
sentence within 90 days following an applicable Termination Date, the
Company shall maintain in full force and effect, at its sole expense
for the continued benefit of you and your dependents during the period
from the Termination Date through the earlier of (i) two years from the
Termination Date or (ii) the commencement date of equivalent benefits
from a new employer, all insured and self-insured employee welfare
benefit Plans in which you were entitled to participate immediately
prior to the Termination Date. Alternatively, if you notify the Company
that you so elect, the Company shall pay you within five days of such
notification an amount in cash equal to two times the average annual
cost incurred by the Company during the preceding three calendar years
as a result of your participation in such welfare benefit Plans (or
such fewer whole calendar years as you have so participated). If your
participation in any such welfare benefit Plan is barred, the Company,
at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to
those which you are entitled to receive under such Plans. You shall not
be required to pay any premiums or other charges for such policies. At
the end of two years after the Termination Date, the Company, provided
you have not previously received or are not then receiving equivalent
benefits from a new employer, shall arrange, at its sole cost and
expense, to enable you to convert you and your dependents' coverage
under such Plans to individual policies or programs upon the same terms
as employees of the Company may apply for such conversions.
<PAGE> 6
Anything else in this Agreement to the contrary notwithstanding, if an
applicable Termination Date results from a merger or a tender offer or an
exchange offer, then unless otherwise agreed to by both parties in writing, all
amounts to which you shall at the closing thereof, or which you may upon
subsequent notice or lapse of time, become entitled under this Severance Package
or Section 9 shall be accelerated to, and become immediately due and payable
contemporaneously with, such closing.
"SHARES" means shares of Common Stock, $.001 par value, of the Company
at the date of this Agreement, as the same shall be subsequently amended,
modified or changed. The term "market value," when used with respect to a Share
means the closing price therefor on the NASDAQ National Market or if not listed
thereon, on such other exchange as shall at the time constitute the principal
exchange for trading in Shares.
"TERMINATION PACKAGE" means your right to receive, and the Company's
obligation to pay and/or perform on, the following:
(a) on or within ten days following an applicable Termination
Date, the Company shall pay to you a lump sum cash amount equal to the
one times the highest annual rate of base salary in effect during the
current year or any of the three years preceding the Termination Date.
(b) following an applicable Termination Date, you shall
receive all benefits under and in accordance with the terms of the
Plans (other than the Bonus Plan, for which separate provision is made
above) in which you are at the time a participant, but only to the
extent the same are vested under the terms of such Plans at the
Termination Date.
"VOTING SECURITIES" means, with respect to any corporation or business
enterprise, those securities which under ordinary circumstances are entitled to
vote for the election of directors or others charged with comparable duties
under applicable law.
<PAGE> 1
EXHIBIT 21.1
ITEQ, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY NAME INCORPORATED
------------ ------------
<S> <C>
Air-Cure (Canada) Technologies, Ltd. Ontario, Canada
Air-Cure Dynamics, Inc. Delaware
Air-Cure Environmental GmbH Germany
Air-Cure (Singapore) Pte. Ltd. Singapore
Allied Industries, Inc. Texas
Amerex Industries, Inc. Delaware
Australasian HMT Pty. Ltd. Australia
Ceilcote Air-Cure Ltd. England
Exell, Inc. Delaware
G.L.M. Acquisition, L.L.C. Delaware
G.L.M. Tanks and Equipment Ltd. Canada
Graver Manufacturing Co., Inc. Delaware
HMT Canada, Inc. Alberta, Canada
HMT Rubbaglas, Ltd. England
HMT Singapore Pte. Ltd. Singapore
HMT Tank Systems B.V. Netherlands
Interel Environmental Technologies, Inc. Delaware
ITEQ (Australia), Inc. Delaware
ITEQ Aviation, Inc. Delaware
ITEQ Construction Services, Inc. Delaware
ITEQ Export, Inc. Barbados
ITEQ Intellectual Properties, Inc. Delaware
ITEQ Investments, Inc. Delaware
ITEQ Management Company Delaware
ITEQ Storage Systems, Inc. Minnesota
ITEQ Tank Services, Inc. Delaware
Ohmstede, Inc. Texas
Reliable Steel, Inc. Delaware
Texoma Tank Company, Inc. Texas
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of ITEQ, Inc.
As independent public accountants, we hereby consent to the
incorporation of our report dated March 17, 1999 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, 33-68636, 333-50187) and into ITEQ's previously
filed Registration Statements File No. 333-39367 and 333-58611 on Form S-3.
ARTHUR ANDERSEN LLP
Houston, TX
March 22, 1999
<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 (File No. 333-09051, 33-68516, 33-68518, 33-68636 and
333-50187) and the Registration Statement of ITEQ, Inc. on Form S-3 (File No.
333-39367 and 333-58611) of our report dated December 6, 1996, on our audit of
the consolidated financial statements of Astrotech International Corporation and
subsidiaries for the year ended September 30, 1996.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,784
<SECURITIES> 0
<RECEIVABLES> 67,752
<ALLOWANCES> 0
<INVENTORY> 25,818
<CURRENT-ASSETS> 132,864
<PP&E> 50,125
<DEPRECIATION> 0
<TOTAL-ASSETS> 286,655
<CURRENT-LIABILITIES> 66,255
<BONDS> 0
0
0
<COMMON> 28
<OTHER-SE> 100,769
<TOTAL-LIABILITY-AND-EQUITY> 286,655
<SALES> 302,830
<TOTAL-REVENUES> 302,830
<CGS> 235,365
<TOTAL-COSTS> 235,365
<OTHER-EXPENSES> 55,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,302
<INCOME-PRETAX> 5,784
<INCOME-TAX> 2,111
<INCOME-CONTINUING> 3,673
<DISCONTINUED> (3,855)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,681
<SECURITIES> 0
<RECEIVABLES> 72,881
<ALLOWANCES> 0
<INVENTORY> 13,138
<CURRENT-ASSETS> 139,916
<PP&E> 42,198
<DEPRECIATION> 0
<TOTAL-ASSETS> 261,487
<CURRENT-LIABILITIES> 75,385
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 91,361
<TOTAL-LIABILITY-AND-EQUITY> 261,487
<SALES> 269,806
<TOTAL-REVENUES> 269,806
<CGS> 206,816
<TOTAL-COSTS> 206,816
<OTHER-EXPENSES> 60,287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,402
<INCOME-PRETAX> (2,120)
<INCOME-TAX> 801
<INCOME-CONTINUING> (2,921)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,080)
<CHANGES> 0
<NET-INCOME> (6,001)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
