<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 June 30, 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.
28,194,838
(Shares of common stock outstanding as of August 11, 1999)
<PAGE> 2
ITEQ, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited) 3
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1998 (unaudited) and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 (unaudited) and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II - OTHER INFORMATION 19
</TABLE>
2
<PAGE> 3
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
----------- ---------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 5,784 $ 6,565
Due on contracts and other receivables, net ....................... 67,752 55,956
Costs and estimated earnings in excess of billings on
uncompleted contracts ........................................ 26,589 18,051
Inventories ....................................................... 25,818 25,390
Prepaid expenses, deposits and other assets ....................... 4,583 4,261
Deferred tax asset ................................................ 1,403 1,895
Assets held for sale .............................................. 935 935
--------- ---------
Total current assets ..................................... 132,864 113,053
PROPERTY AND EQUIPMENT, NET ....................................... 50,125 43,861
OTHER ASSETS, NET ................................................. 103,666 103,694
--------- ---------
TOTAL ASSETS ................................................. $ 286,655 $ 260,608
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .................................................. $ 28,046 $ 23,338
Accrued liabilities:
Job costs .................................................... 12,085 17,358
Accrued compensation and benefits ............................ 3,765 2,664
Accrued expenses and other current liabilities ............... 12,666 9,573
Billings in excess of costs and estimated earnings on
uncompleted contracts ........................................ 9,693 6,232
--------- ---------
Total current liabilities ................................ 66,255 59,165
LONG-TERM OBLIGATIONS ............................................. 119,603 101,409
--------- ---------
Total Liabilities ................................... 185,858 160,574
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000 shares
authorized; no shares issued or outstanding .................. -- --
Common stock, $.001 par value; 40,000 shares authorized;
28,298 and 28,333 shares issued at December 31, 1998
and June 30, 1999, respectively .............................. 28 28
Treasury stock, at cost, 139 shares ............................... (1,000) (1,000)
Additional paid-in capital ........................................ 131,450 131,602
Retained earnings (deficit) ....................................... (27,826) (29,452)
Translation adjustment ............................................ (1,855) (1,144)
--------- ---------
Total Stockholders' Equity ............................... 100,797 100,034
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 286,655 $ 260,608
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 79,770 $ 63,886 $ 150,905 $133,334
Cost of revenues 61,984 55,248 116,145 113,694
Selling, general and administrative expenses 7,840 7,415 16,071 15,668
Depreciation and amortization 1,794 1,951 3,486 3,777
Merger, acquisition and strategic charges 845 609 1,039 2,640
--------- --------- --------- ---------
Operating profit (loss) 7,307 (1,337) 14,164 (2,445)
Interest expense, net (1,160) (1,869) (2,534) (4,021)
Miscellaneous income, net 47 14 23 4,292
--------- --------- --------- ---------
Earnings (Loss) from continuing operations
before income tax provision (benefit) 6,194 (3,192) 11,653 (2,174)
Income tax provision (benefit) 2,261 (1,165) 4,253 (1,285)
--------- --------- --------- ---------
Earnings (Loss) from continuing operations 3,933 (2,027) 7,400 (889)
Loss from discontinued operations, net of income
tax benefit (432) (560) (46) (737)
--------- --------- --------- ---------
Net earnings (loss) $ 3,501 $ (2,587) $ 7,354 $ (1,626)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (Loss) from continuing operations $ .14 $ (.07) $ .27 $ (.03)
Loss from discontinued operations (.01) (.02) -- (.03)
--------- --------- --------- ---------
Net earnings (loss) per common share $ .13 $ (.09) $ .27 $ (.06)
========= ========= ========= =========
Weighted average common shares outstanding 27,422 28,193 27,205 28,185
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (Loss) from continuing operations $ .13 $ (.07) $ .26 $ (.03)
Loss from discontinued operations (.01) (.02) -- (.03)
--------- --------- --------- ---------
Net earnings (loss) per common share $ .12 $ (.09) $ .26 $ (.06)
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 28,798 28,196 28,634 28,191
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................................................ $ 7,354 $ (1,626)
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization ................................................ 3,984 3,975
Provision (Benefit) for deferred income taxes ................................ 3,694 (2,151)
Non-cash interest ............................................................ 80 149
Changes in assets and liabilities, net of effects of businesses acquired:
Due on contracts and other receivables, net ............................. 668 9,923
Inventories ............................................................. (1,854) 414
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................................. (5,304) 8,337
Prepaid expenses, deposits and other assets ............................. (1,600) (42)
Accounts payable and accrued liabilities ................................ (19,207) (6,490)
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................................ (1,246) (3,538)
Other ................................................................... (616) (916)
-------- --------
Net cash provided (used) by operating activities ......................... (14,047) 8,035
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquired businesses, net of cash acquired ...................... (23,055) --
Purchases of property and equipment .......................................... (2,524) (2,477)
Cash received from sale of land, buildings & equipment ....................... -- 13,206
-------- --------
Net cash provided (used) by investing activities .......................... (25,579) 10,729
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit ............................... 31,648 (18,194)
Proceeds from exercise of stock options and warrants ......................... 2,495 152
Purchase of treasury stock ................................................... (874) --
-------- --------
Net cash provided (used) by financing activities ......................... 33,269 (18,042)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ (229) 59
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... (6,586) 781
Cash and cash equivalents, beginning of period ............................... 9,681 5,784
-------- --------
Cash and cash equivalents, end of period ..................................... $ 3,095 $ 6,565
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
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 June 30,
1999, the results of operations for the three and six months ended June 30, 1998
and 1999, and the cash flows for the six months ended June 30, 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. The Company's comprehensive income (loss)
was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) ................................ $ 3,501 $(2,587) $ 7,354 $(1,626)
Foreign currency translation adjustments ......... (160) 641 (250) 711
------- ------- ------- -------
Comprehensive income (loss) ................. $ 3,341 $(1,946) $ 7,104 $ (915)
======= ======= ======= =======
</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 June 30, 1999, due on contracts and other
receivables consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Billings on completed contracts and contracts in progress ................. $ 63,237 $ 51,883
Retained contract receivables ............................................. 5,271 4,555
Allowance for doubtful accounts ........................................... (756) (482)
-------- --------
Total ....................................................... $ 67,752 $ 55,956
======== ========
</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. Inventories at December 31, 1998 and June 30, 1999, consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
--------- ---------
<S> <C> <C>
Raw materials..................................................... $ 6,654 $ 5,717
Work in progress.................................................. 18,759 18,996
Finished goods.................................................... 405 677
--------- ---------
Total.............................................. $ 25,818 $ 25,390
========= =========
</TABLE>
NOTE 4 - 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. Additionally, management periodically evaluates various
alternatives, including the potential sale of certain assets or closure of
certain facilities which could result in a potential impairment of the recorded
asset value should the business unit cease to operate as a consolidated
operation of the Company.
7
<PAGE> 8
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1998 and June 30, 1999, other assets consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
Excess of costs over net assets acquired, net of accumulated
amortization of $10,173 and $11,056 at December 31, 1998
and June 30, 1999, respectively ................................... $ 84,291 $ 83,082
Licenses, trademarks and tradenames, net of accumulated
amortization of $2,240 and $2,446 at December 31, 1998 and
June 30, 1999, respectively ....................................... 15,484 15,421
Deferred tax asset ................................................... 2,159 3,818
Other ................................................................ 1,732 1,373
-------- --------
Total ................................................. $103,666 $103,694
======== ========
</TABLE>
NOTE 5 - BUSINESS DISPOSITION
Effective March 26, 1999, the Company sold the assets of Texoma Tank
Company ("Texoma Tank"), 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 and six months ended June 30, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $609 and $2,640.
The charge included the costs (estimated as incremental job costs) to combine
the operations of the Company and Astrotech and related losses associated with
two plant closings and business integration and reorganization costs, such as
severance and other personnel related costs.
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. Merger, acquisition and strategic charges of
$845 for the three months ended June 30, 1998 relate to the termination of a
proposed tender offer.
NOTE 7 - DISCONTINUED OPERATIONS
Allied
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. Such operations ceased in the third quarter
of 1998.
Operating losses during the phase out period were included in the loss
on disposal of discontinued operations. Losses before tax of $3,454 were
incurred through June 30, 1998. The loss from discontinued operations included
in the statement of operations is reflected net of the effective income tax rate
for the applicable period. Interest expense was allocated based on intercompany
debt balances. After-tax interest expense of $262 was included in the estimated
loss on disposal for the six months ended June 30, 1998. The discontinued
operations accrual was increased by $455, net of $256 income tax benefit, in the
second quarter of 1998.
8
<PAGE> 9
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 fiberglass reinforced plastic fans.
Net assets of the filtration group of $21,877 are included in the June
30, 1999 consolidated balance sheet. Sales from the filtration group's
discontinued operations were $11,440 and $7,424 for the three months ended June
30, 1998 and 1999, respectively, and $23,988 and $15,147 for the six months
ended June 30, 1998 and 1999, respectively. After-tax losses from the date of
measurement of $1,019 have been incurred through June 30, 1999. After-tax
interest expense of $471 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.
NOTE 8 --SEGMENT REPORTING
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue from external customers
Storage ............................................... $ 42,814 $ 39,164 $ 77,602 $ 80,173
Process ............................................... 36,956 24,722 73,303 53,161
--------- --------- --------- ---------
Total .............................................. $ 79,770 $ 63,886 $ 150,905 $ 133,334
========= ========= ========= =========
Depreciation and amortization
Storage ............................................. $ 1,061 $ 1,210 $ 2,067 $ 2,343
Process ............................................. 717 725 1,389 1,401
Other ............................................... 16 16 30 33
--------- --------- --------- ---------
Total ............................................ $ 1,794 $ 1,951 $ 3,486 $ 3,777
========= ========= ========= =========
Operating profit (loss)
Storage ............................................. $ 5,069 $ 391 $ 8,840 $ 1,061
Process ............................................. 4,640 56 9,251 1,099
Other ............................................... (2,402) (1,784) (3,927) (4,605)
--------- --------- --------- ---------
Total ............................................ $ 7,307 $ (1,337) $ 14,164 $ (2,445)
========= ========= ========= =========
Earnings (Loss) from continuing operations before
income tax provision (benefit)
Storage ............................................. $ 5,117 $ 223 $ 8,804 $ 843
Process ............................................. 4,640 58 9,301 1,085
Gain on sale of Texoma (see Note 5) ................. -- -- -- 4,156
Other ............................................... (3,563) (3,473) (6,452) (8,258)
--------- --------- --------- ---------
Total ............................................ $ 6,194 $ (3,192) $ 11,653 $ (2,174)
========= ========= ========= =========
</TABLE>
9
<PAGE> 10
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
1998 1999
------------------ --------------
<S> <C> <C>
Identifiable assets
Storage $140,906 $132,261
Process 105,615 83,470
Other 40,134 44,877
-------- --------
Total $286,655 $260,608
======== ========
</TABLE>
The Company does not have material intersegment revenues.
10
<PAGE> 11
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.
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 volatility in 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 and the first half of 1999 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 half 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 half of 1999
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. Due to extended adverse economic conditions in the
Company's markets, management continues to review alternatives to reduce future
operating costs including further consolidation of operations, plant closings,
personnel terminations and the potential sale of selected assets. The financial
impact, if any, of these potential alternatives is not currently estimable.
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.
11
<PAGE> 12
The Company recognizes revenue from certain short-term contracts using
the completed contract method. Revenue is recognized when a project is
substantially complete. The contracts accounted for under this revenue
recognition method are typically less than three months in duration.
The Company historically has experienced quarterly fluctuations in its
operating results. Operating results in any quarter are dependent upon the
timing of equipment and system sales, which may vary considerably among periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
Revenues
Total revenues for the three months ended June 30, 1999 were $63,886, a
decrease of $15,884 or 20%, from revenues of $79,770 for the three months ended
June 30, 1998. Revenues within the storage group were $39,164, a decrease of
$3,650 from $42,814, principally due to the March 1999 sale of Texoma Tank,
which accounted for $1,467 of the decrease. The loss of the Texoma Tank revenue
was partially offset by $720 of additional revenue related to the June 1998
acquisition of G.L.M. Tanks and Equipment, Ltd. ("GLM"). Revenues within the
process group were $24,722, a decrease of $12,234 from $36,956 principally due
to a decline in the demand for new heat exchangers resulting from a significant
decrease in capital expenditures by the hydrocarbon processing industry due to
depressed refined products margins.
Cost of Revenues
Cost of revenues for the three months ended June 30, 1999 were $55,248,
a decrease of $6,736 or 11%, from cost of revenues of $61,984 for the three
months ended June 30, 1998. Gross margins declined from 1998 to 1999 mainly due
to softening market conditions which resulted in increased pricing pressure. The
storage group cost of revenues increased by $1,307, from $32,631 to $33,938, of
which $800 is attributable to the acquisition of GLM and a decrease of $776 is
attributable to the March 1999 sale of Texoma Tank. Cost of revenues within the
process group decreased by $8,043, from $29,353 to $21,310.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
June 30, 1999 decreased by $425 and represented 10% and 12% of revenues for the
three months ended June 30, 1998 and 1999, respectively. The storage group's
selling, general and administrative expenses decreased by $428, primarily due to
cost reductions and the March 1999 sale of Texoma Tank, partially offset by
additional expenses related to the GLM acquisition. The process group costs
increased by $385. Corporate costs were lower primarily due to reduced personnel
related costs.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended June
30, 1999 increased by $157 due to the GLM acquisition and machinery and
equipment additions partially offset by the March 1999 sale of Texoma Tank.
12
<PAGE> 13
Merger, Acquisition and Strategic Charges
For the three months June 30, 1999, the Company recorded nonrecurring
merger, acquisition and strategic charges totaling $609 consisting primarily of
severance and other personnel related costs.
Merger, acquisition and strategic charges of $845 for the three months
ended June 30, 1998 relate to the termination of a proposed tender offer.
Interest Expense, net
Interest expense for the three months ended June 30, 1999 was $1,869,
an increase of $709 from $1,160 in 1998. This increase is a result of higher
debt balances from the June 1998 acquisition of GLM and higher interest rates
partially offset by the reduction in debt from the proceeds of the March 1999
sale of Texoma Tank.
Income Taxes
The income tax expense (benefit) from continuing operations for the
three months ended June 30, 1999 was ($1,165) as compared to $2,261 for the
comparable period in 1998. The effective tax rate for the three months ended
June 30, 1999 and 1998 was 36.5%.
Discontinued Operations
Allied
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. Such operations ceased in the third quarter
of 1998. The loss from discontinued operations for the three months ended June
30, 1998 was $455, net of $256 income tax benefit.
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 fiberglass reinforced plastic fans.
Net assets of the filtration group of $21,877 are included in the June
30, 1999 consolidated balance sheet. Sales from the filtration group
discontinued operations were $11,440 and $7,424 for the three months ended June
30, 1998 and 1999, respectively. From the date of measurement after-tax losses
of $1,019 have been incurred through June 30, 1999. After-tax interest expense
of $471 is included in the operating loss for the same period.
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.
13
<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
Total revenues for the six months ended June 30, 1999 were $133,334, a
decrease of $17,571 or 12%, from $150,905 for the six months ended June 30,
1998. Revenues within the storage group were $80,173, an increase of $2,571 from
$77,602 primarily as the result of the April 1998 acquisition of Reliable Steel
Fabricators, Inc. ("Reliable") and the June 1998 acquisition of GLM. This
increase was partially offset by the March 1999 sale of Texoma Tank. Revenues
within the process group were $53,161, a decrease of $20,142 from $73,303
principally due to a decline in demand for new heat exchangers resulting from a
significant decrease in capital expenditures by the hydrocarbon processing
industry due to depressed refined products margins.
Cost of Revenues
Cost of revenues for the six months ended June 30, 1999 were $113,694,
a decrease of $2,451 or 2%, from $116,145 for the six months ended June 30,
1998. Gross margins declined from 1998 to 1999 mainly due to softening market
conditions which resulted in increased pricing pressure. The storage group cost
of revenues increased by $10,244, from $58,829 to $69,073, of which $4,873 is
attributable to the acquisitions of GLM and Reliable. Cost of revenues within
the process group decreased by $12,695, from $57,316 to $44,621.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended
June 30, 1999 decreased by $403 and represented 11% and 12% of revenues for the
six months ended June 30, 1998 and 1999, respectively. The storage group's
selling, general and administrative expenses decreased by $170, primarily due to
cost reductions and decreased expenses related to the March 1999 sale of Texoma
Tank partially offset by the acquisitions described above. The process group
costs increased by $693. Corporate costs were lower primarily due to reduced
personnel related costs.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30,
1999 increased by $291 due to the Reliable and GLM acquisitions and machinery
and equipment additions partially offset by the March 1999 sale of Texoma Tank.
Merger, Acquisition and Strategic Charges
For the six months June 30, 1999, the Company recorded nonrecurring
merger, acquisition and strategic charges totaling $2,640. The charge included
the costs (estimated as incremental job costs) to combine the operations of the
Company and Astrotech and related losses associated with two plant closings and
business integration and reorganization costs, such as severance and other
personnel related costs.
For the six months ended June 30, 1998, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $1,039
consisting of $194 related to a terminated purchase agreement and $845 related
to the termination of a proposed tender offer.
14
<PAGE> 15
Interest Expense, net
Interest expense for the six months ended June 30, 1999 was $4,021, an
increase of $1,487 from $2,534 in 1998. This increase is a result of higher debt
balances from the acquisitions of Reliable and GLM during the second quarter of
1998 and higher interest rates partially offset by the reduction in debt from
the proceeds of the March 1999 sale of Texoma Tank.
Miscellaneous Income, net
Effective March 26, 1999, the Company sold the assets of Texoma Tank,
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 six
months ended June 30, 1999 was ($1,285) as compared to $4,253 for the comparable
period in 1998. The effective tax rate for 1999 was lower than the Company's
normal effective tax rate of 36.5% due to a one-time tax benefit.
Discontinued Operations
Allied
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. Such operations ceased in the third quarter
of 1998. The loss from discontinued operations for the six months ended June 30,
1998 was $455, net of $256 income tax benefit.
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 fiberglass reinforced plastic fans.
Net assets of the filtration group of $21,877 are included in the June
30, 1999 consolidated balance sheet. Sales from the filtration group
discontinued operations were $23,988 and $15,147 for the six months ended June
30, 1998 and 1999, respectively. From the date of measurement after-tax losses
of $1,019 have been incurred through June 30, 1999. After-tax interest expense
of $471 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company's cash position was $6,565 compared with
$5,784 at December 31, 1998. Net working capital at June 30, 1999 decreased to
$53,888 from $66,609 at December 31, 1998.
15
<PAGE> 16
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 $19,945 of unused commitment under the line of credit as of
June 30, 1999. The Company's operating activities provided $8,035 in cash during
the six months ended June 30, 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 $4,000 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 $125,000 as of June 30, 1999 and
maturing in October 2002. The revolving credit facility was amended effective
July 30, 1999 and the amount of the commitment reduced to $120,000. The loan
facility bears 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 1.25% for the applicable base rate margin,
and from 2.00% to 3.25% 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 June
30, 1999 was $101,400.
ITEQ's principal credit facility requires the Company to maintain
certain levels of earnings before interest, taxes and depreciation and
amortization, interest coverage, 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 June 30, 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.
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
16
<PAGE> 17
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 has
attempted to contact its major third party vendors to ensure that they have an
effective plan in place to address the Year 2000 problem. Although responses to
the Company's inquiries have not been complete, ITEQ has not been informed of
any supplier's Year 2000 noncompliance. ITEQ intends to make further
communications with those vendors who do not respond to its inquiries.
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 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.
17
<PAGE> 18
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 six months ended June 30, 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, the United Kingdom, Germany and Singapore in addition to
operations in the United States and other countries. These companies' functional
currencies are the Canadian dollar, the British pound, 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 countries other than
the United States as mentioned above. As a result, the Company is exposed to
risks normally associated with operations located outside the U.S., including
political, economic, social and labor instabilities, as well as foreign exchange
controls, currency fluctuations and taxation changes.
18
<PAGE> 19
PART II --- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 30, 1999, the Company held its annual meeting of stockholders,
the purpose of which was to elect a board of seven directors to serve until the
next annual meeting or until their successors are elected and qualify; and to
consider and vote on a proposal to amend the Company's Directors' Stock Option
Plan to increase the number of shares authorized for issuance under the plan by
100,000. There were present at the meeting, in person and by proxy, the holders
of 25,422,588 shares of common stock or approximately 90% of the total number of
issued and outstanding shares which were entitled to vote. The results of the
vote were as follows:
<TABLE>
<CAPTION>
Number of Votes Number of Votes Number of Votes
Action For Against Withheld
--------------- --------------- ---------------
<S> <C> <C> <C>
1. Election of Board of Seven Directors
Name of Nominee
---------------
Mark E. Johnson 24,629,058 --- 793,530
William P. Reid 24,851,517 --- 571,071
Lawrance W. McAfee 24,629,598 --- 792,990
Thomas N. Amonett 24,852,130 --- 570,458
T. William Porter 24,423,191 --- 999,397
James L. Rainey 24,852,088 --- 570,500
James A. Read 24,851,783 --- 570,805
2. Approval and adoption of amendment to
the Company's Directors' Stock
Option Plan 23,640,277 1,729,811 52,500
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
*10.1 -- Agreement dated June 30, 1999 between the Registrant and Mark E.
Johnson.
*27 -- Financial Data Schedule.
- -------------
* Filed herewith.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
19
<PAGE> 20
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: August 16, 1999 /s/ Lawrance W. McAfee
---------------------------
Lawrance W. McAfee
Executive Vice President and
Chief Financial Officer
Date: August 16, 1999 /s/ Keith L. Morgenroth
----------------------------
Keith L. Morgenroth
Vice President of Finance and
Accounting
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
*10.1 -- Agreement dated June 30, 1999 between the Registrant and Mark E.
Johnson.
*27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AGREEMENT
THIS AGREEMENT, dated as of the 30th day of June, 1999 (the "Effective
Date"), is by and between ITEQ, Inc., a Delaware corporation (the "Company"),
and Mark E. Johnson ("Executive").
In consideration of the payments described below, the agreements set
forth in this Agreement and other good and valuable consideration, the adequacy,
mutuality, receipt and sufficiency of which are hereby acknowledged, the Company
and Executive hereby agree as follows:
1. Employment Agreement. The employment agreement, dated as of
September 30, 1997, between ITEQ, Inc. and Executive (the "Employment
Agreement") is hereby terminated in its entirety, and neither party shall have
any further rights, duties or obligations arising thereunder or in any way
attributable thereto.
2. Term. The Company agrees that it will employ Executive and
Executive agrees to serve the Company from the Effective Date until December 31,
2004 (the "Expiration Date") unless sooner terminated in accordance with
paragraph 5.
3. Nature of Duties.
(a) Transition Period. Until December 31, 1999 (the
"Transition Period"), the Executive shall devote substantially his full
time during normal business hours to insuring an orderly management
transition at the Company and shall undertake such additional executive
duties during the Transition Period (of a stature and dignity
appropriate to a former chief executive officer of the Company) as
shall be assigned to Executive by the chief executive officer of the
Company.
(b) Retention Period. Commencing upon expiration of the
Transition Period and ending on the Expiration Date (the "Retention
Period"), Executive shall continue to be an employee and in such
capacity shall (i) consult with the Company's chief executive officer
on an "as requested" basis concerning acquisitions, divestitures and
similar matters and assist the Company in their execution and (ii)
shall undertake such additional executive duties (of a stature and
dignity appropriate to a former chief executive officer of the Company)
as shall be assigned to Executive by the chief executive officer of the
Company, but such services shall not be required during more than three
days in any week. In addition, such services will be required only at
such times and such places as will result in the least inconvenience to
Executive, having regard for other business commitments during said
period which may obligate him to meet such other commitments prior to
performing services requested hereunder. To the end that there shall be
a minimum interference with Executive's other commitments, his
Retention Period services shall be rendered by personal consultation at
his residence or office, wherever maintained, or by correspondence
through the mails, telephone, or telegraph, including weekends and
evenings, as may be most convenient to Executive. During the Retention
Period, Executive shall not be obligated (i) to occupy any office of
the
<PAGE> 2
Company or any of its subsidiaries, or (ii) to render any services
whatsoever to the Company or any of its subsidiaries other than those
specified in this paragraph 3(b). During the Retention Period (prior to
any Termination Date), Executive may accept and maintain employment
with any employer other than an employer that is in direct competition
with any business in which the Company is then engaged.
4. (a) Compensation.
(i) The Company agrees to pay the Executive from the
Effective Date through the end of the Transition Period at a
rate of $33,333 per month, payable on a current basis not less
frequently than monthly in accordance with the Company's
established policy, subject only to such payroll and
withholding deductions as may be required by law; and
(ii) The Company agrees to pay the Executive during
the Retention Period (prior to the Expiration Date) at a rate
of $16,667 per month, payable on a current basis not less
frequently than monthly in accordance with the Company's
established policy, subject only to such payroll and
withholding deductions as may be required by law.
(b) Expense Reimbursement. The Company shall reimburse
the Executive for all direct out-of-pocket expenses incurred by him in
the performance of services through the Expiration Date at the request
of the Company's chief executive officer, to the extent such expenses
are consistent with the Company's normal expense reimbursement
policies.
(c) Insurance and Defined Contribution Plan Benefits
Through the Expiration Date. To the extent permitted by applicable plan
provisions, the Executive and his immediate family shall be permitted
to continue participation through the Expiration Date in all medical,
health, life, accidental death and disability insurance programs and
non-contributory defined contribution plans maintained by the Company
for the benefit of its executive officers, with all premium and medical
reimbursement expense of insurance plans to be borne by the Company to
the same extent applicable to executive officers generally.
(d) Office. The Executive will continue to be provided
with an office at the Company's principal offices through the
Expiration Date, at which location the Company will provide customary
secretarial and other support facilities to Executive.
(e) Club Dues and Expenses. Executive agrees to accept
sole responsibility for all dues and usage charges incurred after the
Transition Period for country club and luncheon club memberships held
by him in his individual name or owned by the Company for Executive's
designated use. The Company hereby relinquishes any interest it may
have in such individually-owned memberships and agrees to cooperate
with Executive in converting (at no out-of-pocket cost to the Company)
any Company-owned corporate club memberships
2
<PAGE> 3
on which Executive is the designated user into individual memberships
in the name of Executive. If Executive is unable to so convert any
Company-owned membership into an individual membership by December 31,
1999, the Executive agrees to cooperate with the Company in effecting a
transfer of the use privilege to one or more Company-designated
successor users.
(f) No Other Benefits. In view of the character of
Executive's duties hereunder, Executive hereby irrevocably declines,
waives and rejects participation at all times after the Transition
Period in the Company's employee stock purchase plan and 401(k) plan.
5. Termination. Executive's employment with the Company:
(a) shall terminate on December 31, 2004;
(b) shall terminate automatically upon Executive's
earlier death;
(c) shall terminate automatically on the earliest date at
which Executive does not occupy the position of chairman of the board
of directors of the Company (other than as a result of Executive's
resignation or refusal to serve); or
(d) shall terminate upon written notice from the
Executive to the Company that he declines to stand for reelection as a
director or to serve as chairman of the board, or that he resigns from
such position;
(with each such date being hereinafter referred to as a "Termination Date").
6. Effects of Termination. Anything else in this Agreement to the
contrary notwithstanding, if Executive's employment is terminated:
(a) pursuant to paragraphs 5(a), 5(b) or 5(d), then
Executive shall be entitled to receive (i) payment when due of
Executive's salary through the end of the first monthly pay period
ended on or after the Termination Date and (ii) all benefits under any
benefit plans in which the Executive is at the time a participant, to
the extent the same are vested under the terms thereof at the
Termination Date, and all other obligations of the Company under this
Agreement shall cease; or
(b) pursuant to paragraph 5(c), then Executive shall be
entitled to the following:
(i) on or within ten days following the Termination
Date, the Company shall pay to Executive a lump sum cash
amount equal to the lesser of (A) $600,000 or (B) an amount
equal to $16,667, multiplied by the number of months remaining
between the Termination Date and the Expiration Date; and
3
<PAGE> 4
(ii) all unvested benefits under any benefit plans
(including any stock option plan) in which the Executive is at
the time a participant shall on the Termination Date
automatically become fully vested, exercisable, distributable
or otherwise performable by the Company; and
(iii) the insurance benefits provided for in
paragraph 4(c) shall be continued through the Expiration Date;
and all other obligations of the Company under this Agreement shall
cease.
7. Release.
(a) Executive hereby unconditionally, irrevocably and forever
releases and discharges the Company, its subsidiaries, their respective
officers, directors, shareholders, employees, agents and assigns and
all other persons, firms or entities in control of, under the direction
of, or associated with the Company (collectively, the "Company
Representatives") from any and all claims, causes of action, suits,
charges, complaints, obligations, liabilities, promises, agreements,
contracts, damages, accrued benefits or other liabilities of any kind
or character, whether known or hereafter discovered and whether arising
in tort, contract, by law or otherwise, arising from or in any way
connected with or related to the Employment Agreement and/or
Executive's employment with the Company; provided that the foregoing
release shall not apply to (i) any rightful claims for indemnity that
Executive may have arising under the Company's charter or bylaws or any
preexisting contractual indemnity by the Company in favor of Employee
or (ii) any failure of the Company to perform its obligations under
this Agreement. Employee voluntarily acknowledges and agrees that the
consideration described in this Agreement is sufficient payment for the
full, final and complete release stated herein and agrees that no other
promises or representations have been made to him by the Company, any
Company Representative or any other person purporting to act on behalf
the Company.
(b) The Company hereby unconditionally and irrevocably forever
releases and discharges Executive his heirs and legal representatives,
from and against any and all claims, causes of action, suits, charges,
complaints, obligations, liabilities, promises, agreements, contracts,
damages, accrued benefits or other liabilities of any kind or
character, whether known or hereafter discovered and whether arising in
tort, contract, by law or otherwise, arising from or any way connected
with or related to the Employment Agreement and/or the Executive's
employment with the Company. The Company voluntarily acknowledges and
agrees that the consideration described in this Agreement is sufficient
payment for the full, final and complete release stated herein and
agrees that no other promises or representations have been made by
Executive, his agents or representatives to the Company or any Company
Representative.
4
<PAGE> 5
8. Further Assurances; Future Cooperation. Each party to this Agreement
agrees to do such things as may be reasonably requested by the other party to
this Agreement in order more effectively to consummate or document the
transactions contemplated by this Agreement.
9. Binding Agreement; Captions. This Agreement is binding upon, and
shall inure to the benefit of, the parties to this Agreement and their
respective legal representatives, heirs, devisees, legatees, successors and
assigns. Titles and captions of or in this Agreement are inserted only as a
matter of convenience and for reference and in no way affect the scope of this
Agreement or the intent of its provisions.
10. Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto with respect to the subject matter hereof, supersedes all
prior agreements of any of the parties to this Agreement with respect to its
subject matter, and may not be amended except in writing signed by both parties.
11. Binding Arbitration. Should any dispute arise between the parties
with respect to this Agreement or the rights, duties and obligations of the
parties hereunder, each of the parties irrevocably agrees that the exclusive
remedy of each of them shall be to commence binding arbitration proceedings
under the rules of the American Arbitration Association, with any such
arbitration proceeding to be conducted in Houston, Texas, applying the
substantive law of the State of Texas. Each party agrees to deposit with the
neutral arbitrator an amount equal to 50% of the arbitrator's preliminary
estimate of the costs of arbitration (excluding counsel fees) as security for
costs. Actual costs of arbitration (including counsel fees of both parties)
shall be apportioned by the arbitrator in such a manner as he shall deem
equitable in light of any financial award.
12. Miscellaneous. Failure of any party to this Agreement at any time
or times to require the performance of any provision of this Agreement shall in
no manner affect the right to enforce the same; and the waiver by any party to
this Agreement of any provision (or a breach of any provision) of this
Agreement, whether by conduct or otherwise, shall not be deemed or construed
either as a further or continuing waiver of any such provision or breach or as a
waiver of any other provision (or a breach of any other provision) of this
Agreement. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of Texas. This Agreement may be executed
in two or more counterparts, each of which shall be an original for all
purposes, but all of which taken together shall constitute but one and the same
instrument.
5
<PAGE> 6
IN WITNESS WHEREOF, this Agreement is executed this 13th day of July,
1999.
ITEQ, INC.
By: /s/ William P. Reid
----------------------------------------
William P. Reid, President and
Acting Chief Executive Officer
By: /s/ T. William Porter
----------------------------------------
T. William Porter, Chairman,
Compensation Committee of the Board of
Directors
MARK E. JOHNSON
/s/ Mark E. Johnson
----------------------------------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 6,565 3,095
<SECURITIES> 0 0
<RECEIVABLES> 55,956 75,255
<ALLOWANCES> 0 0
<INVENTORY> 25,390 17,866
<CURRENT-ASSETS> 113,053 145,711
<PP&E> 43,861 50,673
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 260,608 295,758
<CURRENT-LIABILITIES> 59,165 62,144
<BONDS> 101,409 0
0 0
0 0
<COMMON> 28 28
<OTHER-SE> 100,006 108,524
<TOTAL-LIABILITY-AND-EQUITY> 260,608 295,758
<SALES> 133,334 150,905
<TOTAL-REVENUES> 133,334 150,905
<CGS> 113,694 116,145
<TOTAL-COSTS> 113,694 116,145
<OTHER-EXPENSES> 22,085 20,596
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,021 2,534
<INCOME-PRETAX> (2,174) 11,653
<INCOME-TAX> (1,285) 4,253
<INCOME-CONTINUING> (889) 7,400
<DISCONTINUED> (737) (46)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,626) 7,354
<EPS-BASIC> (0.06) 0.27
<EPS-DILUTED> (0.06) 0.26
</TABLE>
