<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
or
[ ] 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 of (I.R.S. Employer
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
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares of each of the issuer's classes of common
stock, as of the latest practicable date.
28,192,036
(Shares of common stock outstanding as of May 5, 1999)
<PAGE> 2
ITEQ, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited) 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 (unaudited) and 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II - OTHER INFORMATION 16
</TABLE>
2
<PAGE> 3
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 5,784 $ 7,440
Due on contracts and other receivables, net ........................ 67,752 56,420
Costs and estimated earnings in excess of billings on
uncompleted contracts ......................................... 26,589 20,977
Inventories ........................................................ 25,818 25,935
Prepaid expenses, deposits and other assets ........................ 4,583 4,634
Deferred tax asset ................................................. 1,403 1,895
Assets held for sale ............................................... 935 935
------------- -------------
Total current assets ...................................... 132,864 118,236
PROPERTY AND EQUIPMENT, NET ........................................ 50,125 43,615
OTHER ASSETS, NET .................................................. 103,666 101,841
------------- -------------
TOTAL ASSETS .................................................. $ 286,655 $ 263,692
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................... $ 28,046 21,060
Accrued liabilities:
Job costs ..................................................... 12,085 16,924
Accrued compensation and benefits ............................. 3,765 3,327
Accrued expenses and other current liabilities ................ 12,666 10,905
Billings in excess of costs and estimated earnings on
uncompleted contracts ......................................... 9,693 5,468
------------- -------------
Total current liabilities ................................. 66,255 57,684
LONG-TERM LIABILITIES
Long-term obligations .............................................. 119,603 104,032
------------- -------------
Total Liabilities .................................... 185,858 161,716
------------- -------------
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 shares authorized;
28,298 and 28,331 shares issued at December 31, 1998
and March 31, 1999, respectively .............................. 28 28
Treasury stock, at cost, 139 shares ................................ (1,000) (1,000)
Additional paid-in capital ......................................... 131,450 131,598
Retained earnings (deficit) ........................................ (27,826) (26,865)
Translation adjustment ............................................. (1,855) (1,785)
------------- -------------
Total Stockholders' Equity ................................ 100,797 101,976
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 286,655 $ 263,692
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
3
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ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues ........................................................ $ 71,135 $ 69,448
Cost of revenues ................................................ 54,161 58,446
Selling, general and administrative expenses .................... 8,231 8,253
Depreciation and amortization ................................... 1,692 1,826
Merger, acquisition and strategic charges ....................... 194 2,031
------------- -------------
Operating profit (loss) ....................................... 6,857 (1,108)
------------- -------------
Interest expense, net ........................................... (1,374) (2,152)
Miscellaneous income (expense), net ............................. (24) 4,278
------------- -------------
Earnings from continuing operations before
income tax provision ....................................... 5,459 1,018
Income tax provision (benefit) .................................. 1,992 (120)
------------- -------------
Earnings from continuing operations ............................. 3,467 1,138
------------- -------------
Earnings (Loss) from discontinued operations, net of income tax
provision (benefit) of $222, and ($102), respectively ...... 386 (177)
------------- -------------
Net earnings ............................................... $ 3,853 $ 961
============= =============
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings from continuing operations ............................. $ .13 $ .04
Earnings (Loss) from discontinued operations .................... .01 (.01)
------------- -------------
Net earnings per common share .............................. $ .14 $ .03
============= =============
Weighted average common and common
equivalent shares outstanding .............................. 28,497 28,184
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
4
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ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................................. $ 3,853 $ 961
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization .............................................. 1,941 1,918
Provision (Benefit) for deferred income taxes .............................. 2,178 (505)
Non-cash interest .......................................................... 39 75
Changes in assets and liabilities, net of effects of businesses acquired:
Due on contracts and other receivables, net ........................... 8,488 8,492
Inventories ........................................................... (1,562) (171)
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................................... (4,832) 5,506
Prepaid expenses, deposits and other assets ........................... 353 (236)
Accounts payable and accrued liabilities .............................. (11,642) (6,654)
Billings in excess of costs and estimated earnings on
uncompleted contracts .............................................. (1,629) (4,304)
Progress billings ..................................................... 755 --
Other ................................................................. (129) 220
------------- -------------
Net cash provided (used) by operating activities ....................... (2,187) 5,302
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................ (1,227) (1,247)
Cash received from sale of land, buildings & equipment ..................... -- 13,206
------------- -------------
Net cash provided (used) by investing activities ........................ (1,227) 11,959
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term obligations .......................................... (980) (15,571)
Proceeds from exercise of stock options and warrants ....................... 639 --
------------- -------------
Net cash used by financing activities .................................. (341) (15,571)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................................... 32 (34)
------------- -------------
Net increase (decrease) in cash and cash equivalents ................... (3,723) 1,656
Cash and cash equivalents, beginning of period ............................. 9,681 5,784
------------- -------------
Cash and cash equivalents, end of period ................................... $ 5,958 $ 7,440
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
5
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ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial position as of March 31,
1999, the results of operations for the three months ended March 31, 1998 and
1999, and the cash flows for the three months ended March 31, 1998 and 1999.
The unaudited consolidated financial statements include the accounts of
ITEQ, Inc. and its wholly-owned subsidiaries ("ITEQ" or the "Company").
Significant intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to the prior period's consolidated financial
statements to conform with the current period presentation.
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share 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 for basic and diluted earnings per share is the impact
of common stock options and warrants outstanding calculated using the treasury
stock method.
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. The Company's
comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net income .................................. $ 3,853 $ 961
Foreign currency translation adjustments .... (90) 70
------------ ------------
Comprehensive income ................... $ 3,763 $ 1,031
============ ============
</TABLE>
6
<PAGE> 7
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 - DUE ON CONTRACTS AND OTHER RECEIVABLES
At December 31, 1998, and March 31, 1999, due on contracts and other
receivables consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------- ----------
<S> <C> <C>
Billings on completed contracts and contracts in progress . $ 63,237 $ 52,814
Retained contract receivables ............................. 5,271 4,240
Allowance for doubtful accounts ........................... (756) (634)
---------- ----------
Total ....................................... $ 67,752 $ 56,420
========== ==========
</TABLE>
NOTE 3 - 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. 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, 1998 and March 31, 1999, consists of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Raw materials ................................. $ 6,654 $ 6,404
Work in progress .............................. 18,759 18,883
Finished goods ................................ 405 648
------------- -------------
Total .......................... $ 25,818 $ 25,935
============= =============
</TABLE>
NOTE 4 - OTHER ASSETS
At December 31, 1998 and March 31, 1999, other assets consists of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Excess of costs over net assets acquired, net of accumulated amortization
of $10,173 and $10,406 at December 31, 1998 and
March 31, 1999, respectively ............................................ $ 84,291 $ 83,113
Licenses, trademarks and tradenames, net of accumulated
amortization of $2,240 and $2,380 at December 31, 1998 and
March 31, 1999, respectively ............................................ 15,484 15,397
Deferred tax asset ......................................................... 2,159 2,136
Other ...................................................................... 1,732 1,195
------------- -------------
Total ....................................................... $ 103,666 $ 101,841
============= =============
</TABLE>
7
<PAGE> 8
\
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5 - BUSINESS DISPOSITION
Effective March 26, 1999, the Company sold the assets of Texoma Tank
Company, its tank leasing operation, for $13,956 (consisting of $13,206 in cash
and $750 in a short-term note receivable (subject to certain post-closing
adjustments)), resulting in a pre-tax gain of $4,156 which is included in
miscellaneous income in the accompanying statements of operations. Proceeds from
the sale were used to pay down the Company's bank borrowings.
NOTE 6 - MERGER, ACQUISITION AND STRATEGIC CHARGES
For the three months ended March 31, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $2,031. 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 including
severance.
For the three months ended March 31, 1998, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $194 related
to a terminated purchase agreement.
NOTE 7 - DISCONTINUED OPERATIONS
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 fiberglass reinforced plastic fans.
Management intends to sell the filtration group businesses during 1999, although
no assurances can be made that a sale will be consummated.
Net assets of the filtration group of $21,366 are included in the March
31, 1999 consolidated balance sheet. Sales from the filtration group
discontinued operations were $12,548 and $7,723 for the three months ended
March 31, 1998 and 1999, respectively. After-tax losses from the date of
measurement of $459 have been incurred through March 31, 1999. After-tax
interest expense of $331 is included in the operating loss from the date
of measurement.
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.
8
<PAGE> 9
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8 --SEGMENT REPORTING
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenue from external customers
Storage ......................................... $ 34,788 $ 41,009
Process ......................................... 36,347 28,439
------------- -------------
Total ......................................... $ 71,135 $ 69,448
============= =============
Depreciation and amortization
Storage ......................................... $ 944 $ 1,133
Process ......................................... 734 676
Other ........................................... 14 17
------------- -------------
Total ......................................... $ 1,692 $ 1,826
============= =============
Operating profit (loss)
Storage ......................................... $ 3,912 $ 746
Process ......................................... 4,470 967
Other ........................................... (1,525) (2,821)
------------- -------------
Total ......................................... $ 6,857 $ (1,108)
============= =============
Earnings (Loss) from continuing operations before
income tax provision (benefit)
Storage ......................................... $ 3,827 $ 886
Process ......................................... 4,663 951
Gain on sale of Texoma (see note 5) ............. -- 4,156
Other ........................................... (3,031) (4,975)
------------- -------------
Total ......................................... $ 5,459 $ 1,018
============= =============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
1998 1999
------------- -------------
<S> <C> <C>
Identifiable assets
Storage ......................................... $ 140,906 $ 130,534
Process ......................................... 105,615 94,833
Other ........................................... 40,134 38,325
------------- -------------
Total ......................................... $ 286,655 $ 263,692
============= =============
</TABLE>
The Company does not have material intersegment revenues.
9
<PAGE> 10
ITEM 2
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,
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 and the
first quarter of 1999. 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 1998 and the first quarter of
1999 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.
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 when a project is
substantially complete. The contracts accounted for under this revenue
recognition method are typically less than three months in duration.
10
<PAGE> 11
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 periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Total revenues for the three months ended March 31, 1999 decreased
$1,687, or 2%, from $71,135 for the three months ended March 31, 1998 to
$69,448. The storage group revenues increased by $6,221 of which $1,817 is due
to internal growth and $4,404 is a result of the April 1998 acquisition of
Reliable Steel Fabricators, Inc. ("Reliable") and the June 1998 acquisition of
G.L.M. Tanks and Equipment, Ltd. ("GLM").
Revenues decreased by $7,908 in the process group due to decreased
demand for the Company's products as a result of the decline in the capital
expenditures from the hydrocarbon processing industry. This decline was the
result of decreased oil and refined products prices and merger activity within
the hydrocarbon processing industry.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 1999 increased
$4,285 or 8%, to $58,446 from $54,161 for the three months ended March 31, 1998.
Gross margins declined from 1998 to 1999 due to softening market conditions. The
storage group cost of revenues increased by $8,861, of which $4,342 is due to
the acquisition of GLM and Reliable, and the remaining $4,519 increase in cost
of revenues is the result of pricing pressure due to the reduced capital
spending in the hydrocarbon processing industry.
Cost of revenues decreased by $4,576 in the process group. Margins in
this group also decreased as a result of the above mentioned negative factors on
revenue and margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 1999 increased by $22 and represented 12% of revenues for the three
months ended March 31, 1998 and 1999. The storage group's selling, general and
administrative expenses increased by $337, primarily due to the acquisitions
mentioned above. The process group costs increased by $229. Corporate costs were
lower primarily due to reduced personnel related costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three months ended March
31, 1999 increased by $134 and was primarily attributable to the acquisitions
mentioned above.
11
<PAGE> 12
MERGER, ACQUISITION AND STRATEGIC CHARGES
For the three months March 31, 1999, the Company recorded nonrecurring
merger, acquisition and strategic charges totaling $2,031. 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 including severance.
For the three months ended March 31, 1998, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $194 related to
a terminated purchase agreement.
INTEREST EXPENSE, NET
Interest expense for the three months ended March 31, 1999 increased
$778 to $2,152 from $1,374 in 1998. The increase in interest expense is a result
of higher debt balances from the previously mentioned purchases of Reliable and
GLM.
MISCELLANEOUS INCOME (EXPENSE), NET
Effective March 26, 1999, the Company sold the assets of Texoma Tank
Company, its tank leasing operation, for $13,956 (consisting of $13,206 in cash
and $750 in a short-term note receivable (subject to certain post-closing
adjustments)), resulting in a pre-tax gain of $4,156 which is included in
miscellaneous income in the accompanying statements of operations. Proceeds from
the sale were used to pay down the Company's bank borrowings.
INCOME TAXES
The income tax expense (benefit) from continuing operations for the
three months ended March 31, 1999 was ($120) as compared to $1,992 in 1998. The
effective tax rate for 1999 was different from the Company's normal effective
tax rate of 36.5% due to a one-time tax benefit related to the November 1996
acquisition of Ohmstede, Inc. ("Ohmstede").
DISCONTINUED OPERATIONS
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 fiberglass reinforced plastic fans.
Management intends to sell the filtration group businesses during 1999, although
no assurances can be made that a sale will be consummated.
Net assets of the filtration group of $21,366 are included in the March
31, 1999 consolidated balance sheet. Sales from the filtration group
discontinued operations were $12,548 and $7,723 for the three months ended March
31, 1998 and 1999, respectively. After-tax losses from the date of measurement
of $459 have been incurred through March 31, 1999. After-tax interest expense of
$331 is included in the operating loss from the date of measurement.
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.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company's cash position was $7,440 compared with
$5,784 at December 31, 1998. Net working capital at March 31, 1999 decreased to
$60,552 from $66,609 at December 31, 1998.
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 $27,284 of unused commitment under the line of credit as of
March 31, 1999. The Company's operating activities provided $5,302 in cash
during the three months ended March 31, 1999.
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 $3,500 in 1999 as
compared to $5,938 in 1998.
In connection with the October 1997 merger with Astrotech International
Corporation ("Astrotech"), ITEQ refinanced its and Astrotech's existing credit
facilities under a non-amortizing revolving credit facility with various
financial institutions with a commitment of $135,000 as of March 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 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 March 31, 1999 was $104,032.
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. At March 31, 1999, 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.
13
<PAGE> 14
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.
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 has assessed them for Year
2000 compliance. ITEQ expects remediation of most of its critical systems and
embedded chip technology to be completed by September 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 limited
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.
14
<PAGE> 15
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 the Company's
financial position, business strategy, and plans of management for future
operations are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
ITEM 3
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. Based on the Company's overall interest rate
exposure during the three months ended March 31, 1999, and assuming similar
interest rate volatility in the future, a near-term (12 months) change in
interest rates would not materially affect the Company's consolidated financial
position, results of operations or cash flows. A 10% change in the rate of
interest would not have a material effect on the Company's financial position,
results of operations or cash flows.
FOREIGN CURRENCY RISK. Except for sales from certain foreign
subsidiaries, the Company's sales are either U.S. dollar denominated or payable
in currency with fixed exchange rates against the U.S. 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
U.S. 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.
15
<PAGE> 16
PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
10.1 -- Agreement dated January 29, 1999 between the Registrant and William P.
Reid. (Filed as an exhibit to Form 10-K for the year ended December 31,
1998).
10.2 -- Annex I to Agreement dated January 29, 1999, between the Registrant and
William P. Reid. (Filed as an exhibit to Form 10-K for the year ended
December 31, 1998).
*27 -- Financial Data Schedule.
- -------------
* Filed herewith.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITEQ, INC.
Date: May 14, 1999 /s/ Lawrance W. McAfee
------------------------------------------
Lawrance W. McAfee
Executive Vice President and
Chief Financial Officer
Date: May 14, 1999 /s/ Michael Appling Jr.
------------------------------------------
Michael Appling Jr.
Vice President of Finance and Accounting
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C>
10.1 -- Agreement dated January 29, 1999 between the Registrant and William P.
Reid. (Filed as an exhibit to Form 10-K for the year ended December 31,
1998).
10.2 -- Annex I to Agreement dated January 29, 1999, between the Registrant and
William P. Reid. (Filed as an exhibit to Form 10-K for the year ended
December 31, 1998).
*27 -- Financial Data Schedule.
- -------------
* Filed herewith.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 7,440 5,958
<SECURITIES> 0 0
<RECEIVABLES> 57,054 63,754
<ALLOWANCES> 634 991
<INVENTORY> 25,935 14,721
<CURRENT-ASSETS> 118,236 131,592
<PP&E> 63,181 59,434
<DEPRECIATION> 19,566 17,258
<TOTAL-ASSETS> 263,692 252,378
<CURRENT-LIABILITIES> 57,684 62,854
<BONDS> 104,032 88,974
0 0
0 0
<COMMON> 28 27
<OTHER-SE> 101,948 95,763
<TOTAL-LIABILITY-AND-EQUITY> 263,692 252,378
<SALES> 69,448 71,135
<TOTAL-REVENUES> 69,448 71,135
<CGS> 58,446 54,161
<TOTAL-COSTS> 58,446 54,161
<OTHER-EXPENSES> 12,110 10,117
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,152 1,374
<INCOME-PRETAX> 1,018 5,459
<INCOME-TAX> (120) 1,992
<INCOME-CONTINUING> 1,138 3,467
<DISCONTINUED> (177) 386
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 961 3,853
<EPS-PRIMARY> .03 .14
<EPS-DILUTED> .03 .14
</TABLE>
