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, 2000
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.
28,262,048
(Shares of common stock outstanding as of May 4, 2000)
<PAGE>
ITEQ, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2000
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 (unaudited) and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 (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 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
2
<PAGE>
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents ............................... $ 2,121 $ 5,287
Due on contracts and other receivables, net ............. 28,402 25,072
Costs and estimated earnings in excess of
billings on uncompleted contracts ..................... 11,572 11,053
Inventories, net ........................................ 11,087 12,425
Prepaid expenses, deposits and other assets ............. 2,631 3,476
Assets of businesses held for sale ...................... -- 53,211
--------- ------------
Total Current Assets .............................. 55,813 110,524
PROPERTY AND EQUIPMENT, NET ............................. 21,428 21,890
OTHER ASSETS, NET ....................................... 47,875 47,716
--------- ------------
TOTAL ASSETS ....................................... $ 125,116 $ 180,130
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term obligations classified as current ............. 51,780 102,687
Accounts payable ........................................ 15,084 11,349
Accrued liabilities:
Job costs ........................................... 7,854 9,445
Accrued compensation and benefits ................... 1,557 1,534
Accrued expenses liabilities ........................ 11,142 9,427
Billings in excess of costs and estimated
earnings on uncompleted contracts ..................... 757 1,806
Liabilities of businesses held for sale ................. -- 18,720
--------- ------------
Total Current Liabilities ................. 88,174 154,968
========= ============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01par value; 1,000 shares
authorized; no shared issued or outstanding ........ -- --
Common stock, $.001 par value; 40,000 shares
authorized; 28,401 and 28,350 shares issued at March
31, 2000 and December 31, 1999, respectively ....... 28 28
Treasury stock, at cost, 139 shares ..................... (1,000) (1,000)
Additional paid-in capital .............................. 131,717 131,637
Retained earnings (deficit) ............................. (92,811) (104,895)
Accumulated comprehensive loss .......................... (992) (608)
--------- ------------
Total Stockholders' Equity ................. 36,942 25,162
--------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .......................................... $ 125,116 $ 180,130
========= ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues ..................................................... $ 50,773 $ 77,171
Costs and Operating Expenses:
Cost of revenues ......................................... 42,801 64,751
Selling, general and administrative expenses ............. 6,724 9,672
Depreciation and amortization ............................ 1,311 1,918
Merger, acquisition and strategic charges ................ -- 2,031
Net gain on sales of assets............................... (14,604) (4,156)
-------- --------
Total Costs and Operating Expenses .................. 36,232 74,216
-------- --------
Income from Operations ..................................... 14,541 2,955
Other Income (Expense)
Interest, net ............................................ (2,462) (2,396)
Other .................................................... 5 180
-------- --------
Income before Income Tax ..................................... 12,084 739
Income Tax Expense (Benefit) ............................. -- (222)
-------- --------
Net earnings ................................................. $ 12,084 $ 961
======== ========
Earnings per share:
Basic earnings per share ..................................... $ .43 $ .03
======== ========
Basic Weighted Average Shares Outstanding .................... 28,244 28,178
======== ========
Diluted earnings per share ................................... $ .43 $ .03
======== ========
Diluted Weighted Average Common and Common
Equivalent Shares Outstanding ........................... 28,296 28,184
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ......................................... $ 12,084 $ 961
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization .................... 1,311 1,918
Provision (Benefit) for deferred income taxes .... -- (505)
Net gain on sales of assets ...................... (14,604) (4,156)
Other ............................................ (111) 165
Changes in assets and liabilities, net of
effects of dispositions:
Due on contracts and other receivables, net ...... (3,372) 3,600
Inventories, net ............................... 1,321 5,778
Costs and estimated earnings in excess of
billings on uncompleted contracts .............. (714) 5,165
Prepaid expenses, deposits and other assets ...... 804 85
Assets of businesses held for sale ............... 5,950 715
Accounts payable and accrued liabilities ......... 4,107 (8,534)
Billings in excess of costs and estimated
earnings on uncompleted contracts .............. (1,048) 556
Liabilities of businesses held for sale ........ (8,396) (594)
-------- --------
Net cash provided (used) by operating
activities ................................... (2,668) 5,154
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................. (97) (1,247)
Net proceeds from asset dispositions ................ 50,463 13,206
-------- --------
Net cash provided by investing
activities ................................ 50,366 11,959
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit ................. (50,907) (15,571)
Proceeds from exercise of stock options and
warrants .......................................... 79 148
-------- --------
Net cash used by financing activities .......... (50,828) (15,423)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. (36) (34)
-------- --------
Net increase (decrease) in cash and
cash equivalents ............................. (3,166) 1,656
Cash and cash equivalents, beginning of period ...... 5,287 5,784
-------- --------
Cash and cash equivalents, end of period ............ $ 2,121 $ 7,440
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
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,
2000, the results of operations for the three months ended March 31, 2000 and
1999, and the cash flows for the three months ended March 31, 2000 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.
In September 1998, management adopted a plan to discontinue the Company's
filtration operations. However, in September 1999, it was determined by
management that it was in the best interest of its shareholders to continue
those operations. Accordingly, the filtration operations were reconsolidated for
financial reporting purposes in the third quarter of 1999. Management has
implemented a plan to restructure the filtration operations and believes that
the markets for its products are improving.
The Company's comprehensive income was as follows:
Three Months
Ended March 31,
--------------------------
2000 1999
-------- --------
Net income .................................. $ 12,084 $ 961
Foreign currency translation
adjustments ............................... (384) 70
-------- --------
Comprehensive income ................... $ 11,700 $ 1,031
======== ========
6
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2 - LONG TERM OBLIGATIONS
In October 1997, the Company refinanced its existing credit facilities
under a non-amortizing revolving credit facility with various financial
institutions, which matures in October 2002. 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 Company's credit facility requires the Company to maintain certain
levels of net earnings before interest, taxes and depreciation and amortization
("EBITDA"), interest coverage, working capital and stockholders' equity and
contains other restrictive covenants. Additionally, the credit facility limits
the ability of the Company to incur additional indebtness, to pay dividends or
to make acquisitions and certain investments. As of December 31,1999 and through
April 3, 2000, the Company was not in compliance with certain financial
covenants of its loan agreement. As a result, the Company has classified as
current the amounts outstanding under its credit facility as of December 31,
1999 and March 31, 2000 as, under the terms of the credit facility, balances
borrowed are due and payable if the event of default is not remedied within a
specified time period.
The Company and its lenders entered into a Limited Waiver and Eighth
Amendment to Revolving Credit Agreement on April 3, 2000 which waived compliance
with certain financial covenants in the credit facility through June 29, 2000.
Additional provisions require that the capital expenditures may not exceed $1.0
million during the first six months of 2000. The Company believes this amount to
be adequate in support of anticipated capital expenditure needs. The Limited
Waiver and Eighth Amendment provides for a total commitment of approximately
$58.0 million with a maximum borrowing capacity of $54.4 million, governed by a
borrowing base calculation. The facility bears interest at the Base Rate plus
the Applicable Margin, as defined. At March 31, 2000 and December 31, 1999, the
balances outstanding were $51,780 and $102,687, respectively. Balances
outstanding at March 31, 2000 and December 31, 1999 bore interest at a rate of
10.25% and 9.8%, respectively. The Company used the net proceeds from the sale
of assets and businesses to reduce its indebtedness under its credit facility
during the three-month period ended March 31, 2000.
In connection with the Limited Waiver and Eighth Amendment to the
Revolving Credit Facility, the Company agreed among other things, to retain an
investment banking firm to assist it in reviewing restructuring alternatives. It
is uncertain whether any such efforts to restructure the Company will be
successful.
The Company believes that based on its current levels of business, that it
can comply with the various financial covenants in the Limited Waiver and Eighth
Amendment and that cash generated from operations, existing cash balances and
the available borrowing capacity under its credit facility will be sufficient to
meet the anticipated cash requirements of the Company through June 29, 2000, the
expiration of the Limited Waiver. In the event that the Limited Waiver and
Eighth Amendment expires before the Company is able to restructure the credit
facility or unless additional waivers are obtained, the ability of the Company
to continue as a going concern may be jeopardized.
7
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
NOTE 3 - DUE ON CONTRACTS AND OTHER RECEIVABLES, NET
At March 31, 2000 and December 31, 1999 due on contracts and other
receivables consists of the following:
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
Billings on completed contracts and
contracts in progress ............................ $ 28,531 $ 25,256
Retained contract receivables ...................... 575 431
Allowance for doubtful accounts .................... (704) (615)
-------- ------------
Due on contracts and other receivables,
net ........................................ $ 28,402 $ 25,072
======== ============
NOTE 4 - INVENTORIES, NET
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 March 31, 2000 and December 31, 1999, consisted of the
following:
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
Raw materials ...................................... $ 3,021 $ 3,005
Work in progress ................................... 7,795 9,070
Finished goods ..................................... 535 604
-------- ------------
11,351 12,679
Less: Allowance for obsolete inventory ............. (264) (254)
-------- ------------
Inventories, net ..................... $ 11,087 $ 12,425
======== ============
NOTE 5 - OTHER ASSETS, NET
For the year ended December 31, 1999, the Company recorded a write down
of $21,556 for impairment of the carrying value of goodwill related to G.L.M.
Tanks and Equipment, Ltd. and Exell, Inc. The Company modifies the life and/or
carrying amount of an acquired intangible if an impairment is identified.
8
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
At March 31, 2000 and December 31, 1999, other assets consist of the
following:
March 31, December 31,
2000 1999
--------- ------------
Excess of costs over net assets acquired,
net of accumulated amortization of
$27,833 and $27,435 at March 31, 2000
and December 31, 1999, respectively .............. $ 32,595 $ 32,993
Licenses, trademarks and tradenames, net of
accumulated amortization of $3,016 and
$2,857 at March 31, 2000 and December 31,
1999, respectively ............................... 14,241 14,405
Note Receivable .................................... 1,000 --
Other .............................................. 39 318
--------- ------------
Total ............................... $ 47,875 $ 47,716
========= ============
NOTE 6 - BUSINESS DISPOSITIONS
During the first quarter of 2000, the Company concluded several sales of
its assets and businesses as part of its debt reduction initiative and received
gross proceeds totaling $53,863. Proceeds received were used to reduce the
Company's indebtedness under its credit facility. The following transactions
were concluded during the quarter ended March 31, 2000.
In January 2000, the Company received $575 from the sale of substantially
all of the assets of its Clinton and Provo facilities located in Texas and Utah,
respectively, and $1,052 from the sale of certain tracts of land and
improvements in Birmingham, Alabama. The Company realized a gain of $109 on
these sales and the gain has been recorded in net gain on sales of assets in the
Company's results of operations for the quarter ended March 31, 2000.
In February 2000, the Company received gross proceeds of $8,900 from the
sale of certain assets and properties associated with its San Luis Obispo,
California facility. Approximately $400 of the gross proceeds received is
currently held in escrow. The Company realized a loss of $140 on this sale and
the loss has been recorded in net gain on sales of assets in the Company's
results of operations for the quarter ended March 31, 2000.
In February 2000, the Company received gross proceeds of $4,000, in the
form of cash of $3,000 and a promissory note for $1,000, for the sale of 100% of
the issued and outstanding capital stock of Graver Manufacturing Co., Inc.
("Graver") to a newly formed entity owned 35% by an unaffiliated individual and
65% by the Company's Chairman of the Board. The Company realized a gain of $263
on this sale and the gain has been recorded in net gain on sales of assets in
the Company's results of operations for the quarter ended March 31, 2000. In
connection with this transaction, Graver was independently appraised. Management
is of the opinion that the terms of this transaction were at least as favorable
to the Company as could have been obtained from an unrelated third party.
9
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
In March 2000, the Company received gross proceeds of $40,000, less a
working capital adjustment of $664, from the sale of substantially all of assets
of its HMT operating unit. Approximately $2,000 of the gross proceeds is
currently held in escrow. The Company realized a gain of $14,371 on this sale
and the gain has been recorded in net gain on sales of assets in the Company's
results of operations for the quarter ended March 31, 2000.
In March 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 gain on sales of
assets in the accompanying statements of operations for the quarter ended March
31, 1999. Proceeds from the sale were used to reduce the Company's bank
borrowings.
NOTE 7 - 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.
10
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8 - SEGMENT REPORTING
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- ----------
Revenue from external customers
Storage ......................................... $ 20,054 $ 41,009
Process ......................................... 21,837 28,439
Filtration ...................................... 8,882 7,723
---------- ----------
Total ......................................... $ 50,773 $ 77,171
========== ==========
Depreciation and amortization
Storage ......................................... $ 438 $ 1,133
Process ......................................... 574 676
Filtration ...................................... 278 92
Other ........................................... 21 17
---------- ----------
Total ......................................... $ 1,311 $ 1,918
========== ==========
Operating profit (loss)
Storage ......................................... $ 15,230 $ 4,902
Process ......................................... 164 967
Filtration ...................................... 65 (93)
Other ........................................... (918) (2,821)
---------- ----------
Total ......................................... $ 14,541 $ 2,955
========== ==========
Earnings (Loss) from operations before
income tax provision (benefit)
Storage ......................................... $ 15,213 $ 5,042
Process ......................................... 164 951
Filtration ...................................... 90 (279)
Other ........................................... (3,383) (4,975)
---------- ----------
Total ......................................... $ 12,084 $ 739
========== ==========
AS OF MARCH 31, AS OF DECEMBER 31,
2000 1999
--------------- ------------------
Identifiable assets
Storage ............................. $ 28,041 73,188
Process ............................. 61,503 68,464
Filtration .......................... 28,368 28,988
Other ............................... 7,204 9,490
--------------- ------------------
Total ............................. $ 125,116 $ 180,130
=============== ==================
The Company does not have material intersegment revenues.
11
<PAGE>
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 through 1998, the Company experienced
substantial growth through numerous acquisitions, culminating with the
acquisition of G.L.M. Tanks and Equipment, Ltd, ("GLM") in June of 1998.
However, beginning in 1997 and continuing through the first quarter of 2000, the
Company has undergone a restructuring and debt reduction program during which
certain low-margin operations were liquidated and several storage tank
operations businesses were sold.
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.
In September 1998, management adopted a plan to discontinue the Company's
filtration operations. However, in September 1999, it was determined by
management that it was in the best interest of its shareholders to continue
those operations. Accordingly, the filtration operations have been
reconsolidated for financial reporting purposes. Management has implemented a
plan to restructure the filtration operations and believes that the markets for
its products are improving. During the first quarter of 2000, significant
increases in the profitability of the Company's foreign filtration operations
were achieved; however domestic filtration operations continue to be below
historical levels.
In the fourth quarter of 1999, the Company adopted a debt reduction
initiative and planned to dispose of several businesses and assets. At the end
of the first quarter of 2000, substantially all such planned transactions have
been completed. During the period from September 30, 1999 through March 31,
2000, the Company has reduced its outstanding debt from $106,325 to $51,780.
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 of accounting. Revenue is recognized under this method
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.
12
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1999
REVENUES
For the first quarter of 2000, total revenues of $50,773 represented a
decrease of $26,398, or 34%, as compared to revenues of $77,171 for the first
quarter of 1999. Businesses sold or liquidated accounted for decreases of
$26,626. The remaining net increase of $228 represents a decrease of $4,374 for
process equipment operations, which was more than offset by increases for
filtration operations of $1,159 and storage tank operations of $3,443.
COST OF REVENUES
For the first quarter of 2000, cost of revenues decreased by $21,950, or
34%, to $42,801 from $64,751 for the first three months of 1999. Businesses sold
or liquidated caused decreases of $22,702. Of the remaining net increase of
$752, decreases for process equipment operations of $2,658 were more than offset
by increases for filtration operations of $956 and storage tank operations of
$2,454.
GROSS PROFIT
The Company's gross profit, defined as revenues less cost of revenues,
decreased from $12,420 for the first quarter of 1999 to $7,972 for the first
quarter of 2000. Businesses sold or liquidated represented $3,924 of the total
decrease of $4,448. The Company's remaining storage tank operations, consisting
primarily of GLM, reflected an increase of $989 for the 2000 quarterly period,
primarily as a result of increased business associated with higher oil prices.
Filtration operations reflected an increase of $203 in the 2000 period as
increased business for wet scrubbers in the foreign markets more than offset
decreases in the domestic market. The Company's remaining process equipment
operations, consisting primarily of the Ohmstede business unit, reflected a
decrease in gross profit of $1,716 for the 2000 quarterly period as the market
for new heat exchangers continues to be very weak.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
For the first three months of 2000, SG&A expenses totaled $6,724 and
represented 13% of revenues. For the first quarter of 1999, SG&A expenses were
$9,672 and represented 13% of revenues. Of the total decrease of $2,948,
businesses sold or liquidated comprised $2,238 of the total, and the remaining
decrease was primarily attributable to personnel reductions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the quarter ended March 31, 2000 was
$1,311 as compared to $1,918 for the comparable period in 1999. The decrease of
$607 was primarily attributable to assets sold in the fourth quarter of 1999 and
the first quarter of 2000.
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.
13
<PAGE>
NET GAIN ON SALES OF ASSETS
In the first quarter of 2000, the Company recognized a gain of $14,604 for
the sale of businesses and assets. This amount was comprised primarily of a gain
of $14,371 related to the sale of the HMT operating unit and a gain of $263
related to the sale of the Graver unit.
In the first quarter of 1999, the Company sold the assets of Texoma Tank
Company and recognized a gain of $4,156.
INTEREST EXPENSE, NET
Interest expense for the three months ended March 31, 2000, increased $66
to $2,462 from $2,396 in 1999. The increase in interest expense is a result of a
decrease attributable to lower average debt balances which has been more than
offset by higher interest rates.
INCOME TAXES
For the first quarter of 2000, the Company did not record a provision for
income taxes due to the Company's net operating loss position which, for tax
reporting purposes, totaled approximately $35,000 as of December 31, 1999. For
financial reporting purposes, a valuation allowance has been recorded to fully
offset the Company's deferred tax assets as of December 31, 1999 and March 2000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's cash position was $2,121 compared with
$5,287 at December 31, 1999. At March 31, 2000, the Company had a net working
capital deficit of $32,361, as compared to a net working capital deficit of
$44,444 at December 31,1999. However, such working capital amounts are not
indicative of traditional or future results due to (1) the inclusion at December
31,1999 in current assets of property, equipment and intangibles held for sale,
and (2) the classification of the Company's long-term obligations as current
liabilities due to debt compliance issues.
The Company's existing capital resources consist of cash balances, cash
provided by its operating activities and funds available under its line of
credit. The Company's operating activities consumed $2,668 in cash during the
three months ended March 31, 2000.
The Company's cash requirements consist of its general working capital
needs, capital expenditures, obligations under its leases and indebtedness. 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.
In connection with the October 1997 merger with Astrotech, ITEQ refinanced
its and Astrotech's existing credit facilities under a new non-amortizing
revolving credit facility which matures in October 2002. The 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
2.0% to3.25% 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 Company's credit facility requires the Company to maintain certain levels
of net earnings before interest, taxes and depreciation and amortization
("EBITDA"), interest coverage, working capital and stockholders' equity and
contains other restrictive covenants. Additionally, the credit facility limits
the
14
<PAGE>
ability of the Company to incur additional indebtness, to pay dividends or to
make acquisitions and certain investments. As of December 31, 1999 and through
April 3, 2000, the Company was not in compliance with certain financial
covenants of its loan agreement. As a result, the Company has classified as
current the amounts outstanding under its credit facility as of December 31,
1999 and March 31, 2000 as, under the terms of the credit facility, balances
borrowed are due and payable if the event of default is not remedied within a
specified time period.
The Company and its lenders entered into a Limited Waiver and Eighth
Amendment to Revolving Credit Agreement on April 3, 2000 which waived compliance
with certain financial covenants in the credit facility through June 29, 2000.
Additional provisions require that the capital expenditures may not exceed $1.0
million during the first six months of 2000. The Company believes this amount to
be adequate in support of anticipated capital expenditure needs. The Limited
Waiver and Eighth Amendment provides for a total commitment of approximately
$58.0 million with a maximum borrowing capacity of $54.4 million governed by a
borrowing base calculation. The facility bears interest at the Base Rate plus
the Applicable Margin, as defined. At March 31, 2000 and December 31, 1999, the
balance outstanding was $51,780 and $102,687, respectively. Balances outstanding
at March 31, 2000 and December 31, 1999 bore interest at a rate of 10.25% and
9.8%, respectively. The Company used the net proceeds from the sale of assets
and businesses to reduce its indebtedness under its credit facility during the
three-month period ended March 31, 2000.
In connection with the Limited Waiver and Eighth Amendment to the
Revolving Credit Facility, the Company agreed among other things, to retain an
investment banking firm to assist it in reviewing restructuring alternatives. It
is uncertain whether any such efforts to restructure the Company will be
successful.
The Company believes that based on its current levels of business, that it
can comply with the various financial covenants in the Limited Waiver and Eighth
Amendment and that cash generated from operations, existing cash balances and
the available borrowing capacity under its credit facility will be sufficient to
meet the anticipated cash requirements of the Company through June 29, 2000, the
expiration of the Limited Waiver. In the event that the Limited Waiver and
Eighth Amendment expires before the Company is able to restructure the credit
facility or unless additional waivers are obtained, the ability of the Company
to continue as a going concern may be jeopardized.
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.
15
<PAGE>
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, 2000, 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.
16
<PAGE>
PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
*27 -- Financial Data Schedule.
- -------------
* Filed herewith.
(B) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K dated February 1, 2000 related to
the sale of its HMT operating unit.
17
<PAGE>
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 15, 2000 /s/ WILLIAM P. REID
William P. Reid
Chief Executive Officer, President
and Secretary
Date: May 15, 2000 /s/ DONALD E DUNMIRE
Donald E. Dunmire
Corporate Controller, Treasurer
and Assistant Secretary
18
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<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-31-2000 JAN-31-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
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