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, 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.
28,265,744
(Shares of common stock outstanding as of August 9, 2000)
<PAGE>
ITEQ, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 (unaudited) and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
2
<PAGE>
ITEQ, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents .................................................................... $ 4,554 $ 5,287
Due on contracts and other receivables, net .................................................. 12,100 13,044
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................................................... 4,338 3,851
Inventories, net ............................................................................. 5,748 8,084
Prepaid expenses, deposits and other assets .................................................. 1,507 2,477
Assets of businesses held for sale ........................................................... 53,046 106,159
--------------- ---------------
Total Current Assets .............................................................. 81,293 138,902
PROPERTY AND EQUIPMENT, NET .................................................................. 10,934 11,321
OTHER ASSETS, NET ............................................................................ 28,568 28,377
--------------- ---------------
TOTAL ASSETS ............................................................................ $ 120,795 $ 178,600
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term obligations classified as current .................................................. 53,273 102,687
Accounts payable ............................................................................. 8,353 6,641
Accrued liabilities:
Job costs ................................................................................ 2,797 4,684
Accrued compensation and benefits ........................................................ 810 952
Accrued expenses ......................................................................... 5,266 5,368
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................................................... 196 1,279
Liabilities of businesses held for sale ...................................................... 15,014 31,827
--------------- ---------------
Total Current Liabilities ...................................................... 85,709 153,438
=============== ===============
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;
28,405 and 28,350 shares issued at June 30, 2000 and
December 31, 1999, respectively .............................................................. 28 28
Treasury stock, at cost, 139 shares .......................................................... (1,000) (1,000)
Additional paid-in capital ................................................................... 131,727 131,637
Retained earnings (deficit) .................................................................. (94,295) (104,895)
Accumulated comprehensive loss ............................................................... (1,374) (608)
--------------- ---------------
Total Stockholders' Equity ...................................................... 35,086 25,162
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $ 120,795 $ 178,600
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
ITEQ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 37,606 $ 71,311 $ 88,379 $ 148,482
Costs and Operating Expenses:
Cost of revenues ............................................... 31,724 61,788 74,525 126,539
Selling, general and administrative expenses ................... 4,970 8,773 11,694 18,445
Depreciation and amortization .................................. 969 2,057 2,280 3,975
Merger, acquisition and strategic charges ..................... -- 707 -- 2,738
Gain on sales of assets, net ................................... (28) -- (14,632) (4,156)
------------ ------------ ------------ ------------
Total Costs and Operating Expenses ....................... 37,635 73,325 73,867 147,541
Income (Loss) from Operations ..................................... (29) (2,014) 14,512 941
Other Income (Expense):
Interest expense, net .......................................... (1,435) (2,093) (3,897) (4,489)
Other .......................................................... (20) 34 (15) 214
------------ ------------ ------------ ------------
Income (Loss) before Income Tax ................................... (1,484) (4,073) 10,600 (3,334)
Income Tax Expense (Benefit) ...................................... -- (1,486) -- (1,708)
------------ ------------ ------------ ------------
Net earnings (loss) ............................................... $ (1,484) $ (2,587) $ 10,600 $ (1,626)
============ ============ ============ ============
Basic earnings (loss) per share ................................... $ .(05) $ (.09) $ .38 $ (.06)
============ ============ ============ ============
Basis weighted average shares outstanding ......................... 28,262 28,193 28,253 28,185
============ ============ ============ ============
Diluted earnings (loss) per share ................................. $ (.05) $ (.09) $ .38 $ (.06)
============ ============ ============ ============
Diluted weighted average shares and equivalent shares outstanding . 28,262 28,193 28,255 28,185
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
ITEQ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ........................................................................ $ 10,600 $ (1,626)
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization ........................................................... 2,280 3,975
Provision (Benefit) for deferred income taxes .......................................... -- (2,151)
Net gain on sales of assets ............................................................ (14,632) (4,156)
Other .................................................................................. (436) 339
Changes in operating assets and liabilities, net of effects of
dispositions:
Due on contracts and other receivables, net ........................................ 449 8,932
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................................................ (217) 6,883
Inventories, net ................................................................... 2,584 7,458
Prepaid expenses, deposits and other assets ........................................ 1,160 (460)
Assets of businesses held for sale ................................................. 5,963 (4,069)
Accounts payable and accrued liabilities ........................................... 33 (9,608)
Billings in excess of costs and estimated earnings on
uncompleted contracts ............................................................ (1,158) 556
Liabilities of businesses held for sale ............................................ (8,396) 1,962
--------------- ---------------
Net cash provided (used) by operating activities ................................... (1,770) 8,035
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................................................... (107) (2,477)
Net proceeds from asset dispositions ...................................................... 50,517 13,206
--------------- ---------------
Net cash provided by investing activities .......................................... 50,410 10,729
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit ....................................................... (49,414) (18,194)
Proceeds from exercise of stock options and warrants ...................................... 90 152
--------------- ---------------
Net cash used by financing activities .............................................. (49,324) (18,042)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................................................... (49) 59
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ............................... (733) 781
Cash and cash equivalents, beginning of period ............................................ 5,287 5,784
--------------- ---------------
Cash and cash equivalents, end of period .................................................. $ 4,554 $ 6,565
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
NOTE 1 - RECENT EVENTS
ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures, and
services process and storage equipment and components. The Company's products
and services are utilized by customers in manufacturing processes requiring the
process, treatment, storage, or movement of gases and liquids. Management of the
Company believes that it is the leading domestic manufacturer and servicer of
shell and tube heat exchangers, principally for petrochemical and refining
applications. The Company is also a leading provider of maintenance services for
above-ground storage tanks ("AST") and related products primarily for oil
production and storage, petrochemical, refining, water storage, and agriculture
industries. The Company operates internationally, with its equipment, systems
and services sold or utilized in countries worldwide.
Volatility in oil prices and the oversupply of certain commodity chemicals
during 1998 and 1999 have adversely effected many of the Company's customers in
the refining and petrochemical industries. Beginning in 1998 and continuing into
2000, certain of these customers deferred equipment purchases related to major
projects, resulting in reduced demand for the Company's products and services.
These factors have also increased pricing pressure on new equipment resulting in
a decline in the Company's gross margins and operating profits.
As a result, in late 1999 and continuing through April 3, 2000, the
Company failed to meet certain financial requirements of its credit facility.
Consequently, 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 had been completed. During the period from September 30, 1999
through June 30, 2000, the Company reduced its outstanding debt from $106,325 to
$53,273.
As of April 3, 2000 and subsequently on July 7, 2000, the Company and its
lenders entered into Limited Waivers and amended the credit facility whereby
compliance with certain financial covenants was waived through December 29,
2000. In connection with these waivers and amendments, the Company retained an
investment banking firm to assist it in reviewing and implementing restructuring
alternatives.
On June 27, 2000, management adopted a plan to further reduce the Company's
bank debt by selling its operating units in the storage tank and filtration
business segments. As such, for balance sheet presentation, the assets and
liabilities of the operating units in these segments have been reclassified as
"held for sale" as of June 30, 2000 and December 31, 1999. In the event that the
Limited Waiver and Ninth Amendment executed on July 7, 2000 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.
6
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
NOTE 2 - 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,
2000, the results of operations for the three and six months ended June 30, 2000
and 1999, and the cash flows for the six months ended June 30, 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. However, for all periods presented except the six month period
ended June 30, 2000, common stock equivalents were not used in the calculation
of diluted earnings per share, as their effect was antidilutive.
The Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) .................................................. $ (1,484) $ (2,587) $ 10,600 $ (1,626)
Foreign currency translation adjustments ........................... (382) 641 (766) 711
------------ ------------ ------------ ------------
Comprehensive income (loss) ................................... $ (1,866) $ (1,946) $ 9,834 $ (915)
============ ============ ============ ============
</TABLE>
7
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
NOTE 3 - 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. As amended, the credit facility
bears interest at Fleet National Bank's ("Fleet") (fka BankBoston, N.A.) Base
Rate plus the Applicable Margin, as defined. 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 classified as current
the amounts outstanding under its credit facility as of December 31, 1999 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.
On July 7, 2000, the Company and its lenders entered into a Limited Waiver and
Ninth Amendment to Revolving Credit Agreement (the "Ninth Amendment") which
waived compliance with certain financial covenants from June 29, 2000 through
December 29, 2000. As such, the Company has classified as current the amounts
outstanding under its credit facility as of June 30, 2000. The provisions of the
Ninth Amendment require that capital expenditures may not exceed $750 during
the last six months of 2000 and imposes a minimum level of EBITDA. The Company
believes the amount of allowable capital expenditures to be adequate in support
of anticipated capital expenditure needs and that the Company will be able to
comply with the EBITDA requirement. The Ninth Amendment provides for a total
commitment of approximately $56,200 with a maximum borrowing capacity of
$54,400, governed by a borrowing base calculation. As required by the Ninth
Amendment, the total commitment will be reduced by amounts that correspond to
net proceeds realized from the sale of assets. At June 30, 2000 and December 31,
1999, the balances outstanding were $53,273 and $102,687, respectively. Balances
outstanding at June 30, 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 six-month period ended June 30, 2000.
As required by the Limited Waiver and Eighth Amendment, and subsequently
the Ninth Amendment to the Revolving Credit Facility, the Company retained an
investment banking firm to assist it in reviewing and subsequently executing
restructuring alternatives. (see Note 1-Recent Events). 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 Ninth 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
8
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
anticipated cash requirements of the Company through December 29, 2000, the
expiration date of the Ninth Amendment. In the event that the Ninth 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.
NOTE 4 - DUE ON CONTRACTS AND OTHER RECEIVABLES, NET
At June 30, 2000 and December 31, 1999, due on contracts and other
receivables consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Billings on completed contracts and contracts in progress .............................. $ 12,511 $ 13,404
Retained contract receivables .......................................................... -- --
Allowance for doubtful accounts ........................................................ (411) (360)
------------------ ------------------
Due on contracts and other receivables, net .............................. $ 12,100 $ 13,044
================== ==================
</TABLE>
NOTE 5 - 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 June 30, 2000 and December 31, 1999, consisted of the
following:
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
Raw materials .................................. $ 1,104 $ 1,108
Work in progress ............................... 4,819 7,151
------------ ------------
5,923 8,259
Less: Allowance for obsolete inventory ......... (175) (175)
------------ ------------
Inventories, net ................. $ 5,748 $ 8,084
============ ============
NOTE 6 - 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.
9
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
At June 30, 2000 and December 31, 1999, other assets consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Excess of costs over net assets acquired, net of accumulated amortization
of $7,628 and $7,315 at June 30, 2000 and December 31, 1999,
respectively ............................................................................... $ 21,605 $ 21,917
Licenses, trademarks and trade names, net of accumulated amortization of
$1,546 and $1,325 at June 30, 2000 and December 31, 1999,
respectively ............................................................................... 5,962 6,183
Note Receivable from Related Party (see Note 7) ................................................ 1,000 --
Other .......................................................................................... 1 277
--------------- ---------------
Total ........................................................................... $ 28,568 $ 28,377
=============== ===============
</TABLE>
NOTE 7 - BUSINESS DISPOSITIONS
During the first six months 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 six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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. 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 six months ended June 30, 2000. In
connection with this transaction, Graver Manufacturing, 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.
10
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
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 gain on sales of assets in the Company's
results of operations for the six months ended June 30, 2000.
Effective March 26, 1999, the Company sold the assets of Texoma Tank
Company, its tank leasing operation, for $13,956 (consisting of $13,206 in cash
and $750 in a short-term note receivable (subject to certain post-closing
adjustments)), resulting in a pre-tax gain of $4,156 which is included in gain
on sales of assets in the accompanying statements of operations for the six
months ended June 30, 1999. Proceeds from the sale were used to reduce the
Company's bank borrowings.
NOTE 8 - MERGER, ACQUISITION AND STRATEGIC CHARGES
For the six months and quarter ended June 30, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $2,738 and $707,
respectively. 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.
11
<PAGE>
ITEQ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
NOTE 9 --SEGMENT REPORTING
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Storage .................................................... $ 6,999 $ 39,164 $ 26,918 $ 80,173
Process .................................................... 18,182 24,722 40,046 53,161
Filtration ................................................. 12,425 7,425 21,415 15,148
------------ ------------ ------------ ------------
Total ................................................... $ 37,606 $ 71,311 $ 88,379 $ 148,482
============ ============ ============ ============
Depreciation and amortization
Storage .................................................. $ 175 $ 1,210 $ 617 $ 2,343
Process .................................................. 532 725 1,106 1,401
Filtration ............................................... 246 106 524 198
Other .................................................... 16 16 33 33
------------ ------------ ------------ ------------
Total ................................................. $ 969 $ 2,057 $ 2,280 $ 3,975
============ ============ ============ ============
Income (Loss) from operations
Storage .................................................. $ 492 $ 391 $ 15,986 $ 5,217
Process .................................................. (216) 56 (314) 1,099
Filtration ............................................... 559 (677) 624 (770)
Other .................................................... (864) (1,784) (1,784) (4,605)
------------ ------------ ------------ ------------
Total ................................................. $ (29) $ (2,014) $ 14,512 $ 941
============ ============ ============ ============
Income (Loss) before income tax
Storage .................................................. $ 508 $ 223 $ 15,984 $ 4,999
Process .................................................. (216) 58 (315) 1,085
Filtration ............................................... 537 (881) 627 (1,160)
Other .................................................... (2,313) (3,473) (5,696) (8,258)
------------ ------------ ------------ ------------
Total ................................................. $ (1,484) $ (4,073) $ 10,600 $ (3,334)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000 AS OF DECEMBER 31, 1999
-------------------- --------------------
<S> <C> <C>
Identifiable assets
Storage ................................................................ $ 25,816 73,188
Process ................................................................ 59,847 68,039
Filtration ............................................................. 30,735 28,988
Other .................................................................. 4,397 8,385
-------------------- --------------------
Total ........................................................ $ 120,795 $ 178,600
==================== ====================
</TABLE>
12
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS OR AS OTHERWISE NOTED)
GENERAL
ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures, and
services process and storage equipment and components. The Company's products
and services are utilized by customers in manufacturing processes requiring the
process, treatment, storage, or movement of gases and liquids. Management of the
Company believes that it is the leading domestic manufacturer and servicer of
shell and tube heat exchangers, principally for petrochemical and refining
applications. The Company is also a leading provider of maintenance services for
above-ground storage tanks ("AST") and related products primarily for oil
production and storage, petrochemical, refining, water storage, and agriculture
industries. The Company operates internationally, with its equipment, systems
and services sold or utilized in countries worldwide.
Volatility in oil prices and the oversupply of certain commodity chemicals
during 1998 and 1999 have adversely effected many of the Company's customers in
the refining and petrochemical industries. Beginning in 1998 and continuing into
2000, certain of these customers deferred equipment purchases related to major
projects, resulting in reduced demand for the Company's products and services.
These factors have also increased pricing pressure on new equipment resulting in
a decline in the Company's gross margins and operating profits.
As a result, in late 1999 and continuing through April 3, 2000, the
Company failed to meet certain financial requirements of its credit facility.
Consequently, in the fourth quarter of 1999, the Company adopted a debt
reduction initiative and plans to dispose of several businesses and assets. At
the end of the first quarter of 2000, substantially all such planned
transactions had been completed. During the period from September 30, 1999
through June 30, 2000, the Company reduced its outstanding debt from $106,325 to
$53,273.
As of April 3, 2000 and subsequently on July 7, 2000, the Company and its
lenders entered into Limited Waivers and amended the credit facility whereby
compliance with certain financial covenants was waived through December 29,
2000. In connection with these waivers and amendments, the Company retained an
investment banking firm to assist it in reviewing and implementing restructuring
alternatives.
On June 27, 2000, management adopted a plan to further reduce its
indebtedness by selling its operating units in the storage tank and filtration
business segments. As such, for balance sheet presentation, the assets and
liabilities of the operating units in these segments have been reclassified as
"held for sale" as of June 30, 2000 and December 31, 1999. In the event that the
Limited Waiver and Ninth Amendment ("Ninth 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.
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
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1999
REVENUES
For the second quarter of 2000, total revenues of $37,606 represented a
decrease of $33,705, or 47%, as compared to revenues of $71,311 for the second
quarter of 1999. Businesses sold or liquidated accounted for decreases of
$38,900. The remaining net increase of $5,195 represents a decrease of $2,764
for process equipment operations, which was more than offset by increases for
filtration operations of $5,000 and storage tank operations of $2,959.
COST OF REVENUES
For the second quarter of 2000, cost of revenues decreased by $30,064, or
49%, to $31,724 from $61,788 for the second three months of 1999. Businesses
sold or liquidated accounted for decreases of $33,574. Of the remaining net
increase of $3,510, decreases for process equipment operations of $2,276 were
offset by increases for filtration operations of $3,723 and storage tank
operations of $2,063.
GROSS PROFIT
The Company's gross profit, defined as revenues less cost of revenues,
decreased from $9,522 for the second quarter of 1999 to $5,882 for the second
quarter of 2000. Businesses sold or liquidated represented $5,326 of the total
decrease of $3,640. The Company's remaining storage tank operations, consisting
primarily of GLM, reflected an increase of $897 for the 2000 quarterly period,
primarily as a result of increased business associated with higher oil prices.
Filtration operations reflected an increase of $1,277 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 $488 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 second three-month period of 2000, SG&A expenses totaled $4,970
and represented 13% of revenues. For the second quarter of 1999, SG&A expenses
were $8,773 and represented 12% of revenues. Of the total decrease of $3,803,
businesses sold or liquidated accounted for $3,629 with the remaining decrease
attributable to cost reduction programs initiated in late 1999 and 2000,
primarily at the Ohmstede business unit.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the quarter ended June 30, 2000 was $969
as compared to $2,057 for the comparable period in 1999. The decrease of $1,088
was primarily attributable to assets sold in the last quarter of 1999 and the
first quarter of 2000.
MERGER, ACQUISITION AND STRATEGIC CHARGES
For the three months ended June 30, 1999, the Company recorded
nonrecurring merger, acquisition and strategic charges totaling $707. These
charges 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.
INTEREST EXPENSE, NET
Interest expense for the quarter ended June 30, 2000, decreased $658 to
$1,435 from $2,093 in 1999. The decrease in interest expense is primarily the
result of lower average debt balances as proceeds from asset sales were used to
reduce indebtedness. These savings have been partially offset by higher interest
rates charged during 2000.
INCOME TAXES
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 $24,750 as of June 30, 2000. 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 June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES
For the first half of 2000, total revenues of $88,379 represented a
decrease of $60,103, or 40%, as compared to revenues of $148,482 for the first
half of 1999. Businesses sold or liquidated accounted for decreases of $65,573.
The remaining net increase of $5,470 represents a decrease of $7,112 for process
equipment operations, which was more than offset by increases for filtration
operations of $6,268 and storage tank operations of $6,314.
COST OF REVENUES
For the first half of 2000, cost of revenues decreased by $52,014, or 41%,
to $74,525 from $126,539 for the first six months of 1999. Businesses sold or
liquidated caused decreases of $56,470. Of the remaining net increase of $4,456,
decreases for process equipment operations of $4,908 were more than offset by
increases for filtration operations of $4,790 and storage tank operations of
$4,574.
GROSS PROFIT
The Company's gross profit, defined as revenues less cost of revenues,
decreased from $21,943 for the first half of 1999 to $13,854 for the first half
of 2000. Businesses sold or liquidated represented $9,103 of the total decrease
of $8,089. The Company's remaining storage tank operations, consisting primarily
of GLM, reflected an increase of $1,740 for the 2000 period, primarily as a
result of increased business associated with higher oil prices. Filtration
operations reflected an increase of $1,478 in the
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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 $2,204 for the 2000 semi-annual period
as the market for new heat exchangers continues to be very weak.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
For the first six months of 2000, SG&A expenses totaled $11,694 and
represented 13% of revenues. For the first six months of 1999, SG&A expenses
were $18,445 and represented 12% of revenues. Of the total decrease of $6,751,
businesses sold or liquidated accounted for $5,738 of the total, with the
remaining decrease attributable to cost reduction programs initiated in late
1999 and 2000, primarily in the Ohmstede business unit.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the six months ended June 30, 2000 was
$2,280 as compared to $3,975 for the comparable period in 1999. The decrease of
$1,695 was primarily attributable to asset writedowns at the end of 1999 and
assets sold in the first quarter of 2000.
MERGER, ACQUISITION AND STRATEGIC CHARGES
For the six months ended June 30, 1999, the Company recorded nonrecurring
merger, acquisition and strategic charges totaling $2,738. These charges
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.
GAIN ON SALES OF ASSETS, NET
In the first half of 2000, the Company recognized a gain of $14,632 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 half 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 six months ended June 30, 2000, decreased $592 to
$3,897 from $4,489 in 1999. The decrease in interest expense is primarily the
result of lower average debt balances as proceeds from asset sales were used to
reduce indebtedness. These savings have been partially offset by higher interest
rates charged in 2000.
INCOME TAXES
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 $24,750 as of June 30, 2000. 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 June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's cash position was $4,554 compared with
$5,287 at December 31, 1999. 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 $1,770 in
cash during the six months ended June 30, 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 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. As amended, this credit facility
bears interest at Fleet National Bank's ("Fleet") (fka BankBoston, N.A.) Base
Rate plus the Applicable Margin, as defined. 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 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.
On July 7, 2000, the Company and its lenders entered into the Ninth Amendment
which waived compliance with certain financial covenants from June 29, 2000
through December 29, 2000. As such, the Company classified as current, the
amounts outstanding under its credit facility as of June 30, 2000. The
provisions of the Ninth Amendment require that capital expenditures may not
exceed $750 during the last six months of 2000 and imposes a minimum level of
earnings before depreciation, interest and taxes. The Company believes the
amount of allowable capital expenditures to be adequate in support of
anticipated capital expenditure needs and that the Company will be able to
comply with the minimum level of earnings requirement. The Ninth Amendment
provides for a total commitment of approximately $56,200 with a maximum
borrowing capacity of $54,400, governed by a borrowing base calculation. As
required by the Ninth Amendment, the total commitment will be reduced by amounts
that correspond to net proceeds realized from the sale of assets. At June 30,
2000 and December 31, 1999, the balance outstanding was $53,273 and $102,687,
respectively. Balances outstanding at June 30, 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 six-month period ended June 30, 2000.
As required by the Limited Waiver and Eighth Amendment and subsequently
the Ninth Amendment to the Revolving Credit Facility, the Company retained an
investment banking firm to assist it in reviewing and subsequently executing
restructuring alternatives. It is uncertain whether any such efforts to
restructure the Company will be successful.
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The Company believes that based on its current levels of business, that it
can comply with the various financial covenants in the Ninth 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 December 29, 2000, the
expiration of the Ninth Amendment. In the event that the Ninth 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.
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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, 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.
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PART II --- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.21* Limited Waiver and Ninth Amendment to the Revolving Credit
Agreement, dated as of July 7, 2000, among the Registrant, the
Guarantors and various lending institutions including Fleet National
Bank (f/k/a/ BankBoston, N.A.), as Agent, and DeustcheBank AG, as
Documentation Agent
10.24* Agreement dated May 1, 2000 between the Registrant and Douglas R.
Harrington, Jr.
--------------------
* Filed herwith.
*27 -- Financial Data Schedule.
-------------
* Filed herewith.
(B) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the quarter ended June
30, 2000.
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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 14, 2000 _______________________________________
William P. Reid
President, Chief Executive Officer
and Secretary
Date: August 14, 2000 _______________________________________
Douglas R. Harrington, Jr.
Vice President, Chief Financial Officer
and Assistant Secretary
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