-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRB/1oKhEjQpC8g+ezuo2l+JSRVl8fqZWKtVVDp0eI5q6vI/jTf+dOsCGOhHszng zUDDzLd7YtBRFCsHi3X8Sw== 0000950129-97-001815.txt : 19970505 0000950129-97-001815.hdr.sgml : 19970505 ACCESSION NUMBER: 0000950129-97-001815 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITEQ INC CENTRAL INDEX KEY: 0000868755 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 411667001 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27986 FILM NUMBER: 97594732 BUSINESS ADDRESS: STREET 1: 2727 ALLENPARKWAY SUITE 760 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7132852700 MAIL ADDRESS: STREET 1: 2727 ALLEN PKWY SUITE 760 CITY: HOUSTON STATE: TX ZIP: 77019 FORMER COMPANY: FORMER CONFORMED NAME: AIR CURE TECHNOLOGIES INC /DE DATE OF NAME CHANGE: 19951024 FORMER COMPANY: FORMER CONFORMED NAME: AIR CURE ENVIRONMENTAL INC DATE OF NAME CHANGE: 19930328 10-K/A 1 ITEQ, INC. AMENDMENT DATED 12/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------------- FORM 10-K/A1 --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10668 ITEQ, INC. (Exact name of registrant as specified in its charter) DELAWARE 47-1667001 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
2727 ALLEN PARKWAY, SUITE 760, HOUSTON, TEXAS 77019 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 713-285-2700 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.001 par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 6, 1997 was $56,289,031. As of March 6, 1997, there were 11,601,346 shares of the registrant's Common Stock, $.001 par value, outstanding. ================================================================================ 2 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required hereunder is included in this report as set forth in the "Index to Financial Statements" on page F-1. 3 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 hereunto duly authorized. ITEQ, INC. By: -------------------------------------- Lawrance W. McAfee, Executive Vice President and Chief Financial Officer May 2, 1997 4 ITEQ, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ------ Reports of Independent Public Accountants................... F-2,3 Consolidated Balance Sheets -- December 31, 1995 and December 31, 1996......................................... F-4 Consolidated Statements of Operations -- Years ended December 31, 1994, 1995 and 1996.......................... F-5 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1994, 1995 and 1996.................... F-6 Consolidated Statements of Cash Flows -- Years ended December 31, 1994, 1995 and 1996.......................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 5 ITEQ, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of ITEQ, Inc.: We have audited the accompanying consolidated balance sheets of ITEQ, Inc. (a Delaware corporation, formerly Air-Cure Technologies, Inc.) and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. We did not audit the financial statements of Allied Industries, Inc., a company acquired during 1995 in a transaction accounted for as a pooling of interests, as discussed in Note 2, for the period from January 28, 1994 to December 31, 1994. The statement of operations and cash flows for Allied Industries, Inc. is included in the 1994 consolidated statements of operations and cash flows of ITEQ, Inc. and reflects total revenues of 28% of the consolidated total. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Allied Industries, Inc., is based solely upon the report of other auditors. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ITEQ, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, the Company has given retroactive effect to the change in accounting for percentage-of-completion on long-term contracts. Arthur Andersen LLP Houston, Texas February 24, 1997 F-2 6 ITEQ, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Allied Industries, Inc.: We have audited the balance sheet of Allied Industries, Inc. (the Company) as of December 31, 1994, and the related statements of operations, retained earnings and cash flows for the period from January 28, 1994 (date of inception) to December 31, 1994 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allied Industries, Inc. as of December 31, 1994, and the results of its operations and its cash flows for the period from January 28, 1994 (date of inception) to December 31, 1994 in conformity with generally accepted accounting principles. As explained in Note 1 to the financial statements, the Company has given retroactive effect to the change in accounting for percentage of completion on long-term contracts. KPMG Peat Marwick LLP Houston, Texas March 31, 1995, except as to Note 1 which is as of February 24, 1997 F-3 7 ITEQ, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996 (IN THOUSANDS)
DECEMBER 31, 1995 AS RESTATED DECEMBER 31, (NOTE 1) 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents................................... $ 2,216 $ 6,331 Restricted cash............................................. 83 144 Due on contracts and other receivables including retainages of $1,279 and $544 at December 31, 1995 and 1996, respectively, net......................................... 22,926 34,230 Costs and estimated earnings in excess of billings on uncompleted contracts..................................... 18,067 20,690 Inventories................................................. 3,944 10,649 Refundable income taxes..................................... 832 -- Prepaid expenses, deposits and other assets................. 502 881 Deferred tax asset.......................................... 240 1,979 ------- -------- Total Current Assets............................... 48,810 74,904 PROPERTY AND EQUIPMENT, NET................................. 5,392 13,661 OTHER ASSETS, NET........................................... 16,642 47,823 ------- -------- TOTAL ASSETS....................................... $70,844 $136,388 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................ $11,799 $ 14,568 Accrued liabilities Job costs................................................. 10,854 8,171 Warranties................................................ 419 353 Compensation.............................................. 2,358 5,067 Other..................................................... 1,260 4,260 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... 815 958 Progress billings........................................... -- 5,137 Current maturities of long-term debt........................ 3,347 6,012 Income taxes payable........................................ 124 527 ------- -------- Total Current Liabilities.......................... 30,976 45,053 LONG-TERM LIABILITIES Borrowings under line of credit............................. 11,499 25,400 Other long-term obligations, less current maturities........ 6,709 29,029 Subordinated notes.......................................... -- 12,712 Deferred tax liability...................................... 257 941 ------- -------- Total Liabilities.................................. 49,441 113,135 ------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 1,000 shares authorized, no shares issued or outstanding.............................. -- -- Common stock, $.001 par value; 30,000 shares authorized, 11,453 and 11,510 shares issued and outstanding at December 31, 1995 and 1996, respectively.................. 11 11 Additional paid-in capital.................................. 20,901 23,161 Retained earnings (deficit)................................. 42 (44) Translation adjustment...................................... 449 125 ------- -------- Total Stockholders' Equity......................... 21,403 23,253 ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $70,844 $136,388 ======= ========
See Notes to Consolidated Financial Statements F-4 8 ITEQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 AS AS RESTATED RESTATED (NOTE 1) (NOTE 1) 1996 -------- -------- -------- Revenues.................................................... $61,826 $113,164 $110,804 Cost of revenues............................................ 49,135 93,262 88,949 ------- -------- -------- Gross profit.............................................. 12,691 19,902 21,855 Selling, general and administrative expenses................ 8,926 11,645 11,977 Sales commissions........................................... 1,327 2,477 2,755 Depreciation and amortization............................... 845 1,009 1,146 Merger costs, restructuring charges and other nonrecurring costs..................................................... -- 1,335 3,704 ------- -------- -------- Operating profit.......................................... 1,593 3,436 2,273 ------- -------- -------- Other income (expense): Interest expense, net..................................... (888) (1,502) (2,660) Other income.............................................. 112 326 305 ------- -------- -------- Total other expense............................... (776) (1,176) (2,355) ------- -------- -------- Earnings (loss) before provision for income taxes........... 817 2,260 (82) Provision for income taxes.................................. 338 1,500 4 ------- -------- -------- Net earnings (loss)............................... $ 479 $ 760 $ (86) ======= ======== ======== Net earnings (loss) per common share........................ $ 0.04 $ 0.07 $ (0.01) ======= ======== ======== Weighted average common and common equivalent shares outstanding............................................... 10,891 11,552 11,481 ======= ======== ========
See Notes to Consolidated Financial Statements F-5 9 ITEQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL --------------- PAID-IN EARNINGS TRANSLATION STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY ------ ------ ---------- --------- ----------- ------------- BALANCE, DECEMBER 31, 1993........................ 5,906 $ 6 $14,577 $ 236 $(192) $14,627 Stock issued for business combinations............ 1,390 1 5,167 -- -- 5,168 Stock issued for the employee stock purchase plan............................................ 2 -- 2 -- -- 2 Costs related to issuance of stock................ -- -- (76) -- -- (76) Change in foreign currency translation adjustment...................................... -- -- -- -- 335 335 Equity transactions of pooled company............. 4,140 4 935 -- -- 939 Net earnings...................................... -- -- -- 479 -- 479 ------ --- ------- ------- ----- ------- BALANCE, DECEMBER 31, 1994 As Restated (Note 1)... 11,438 11 20,605 715 143 21,474 Stock issued for the employee stock purchase plan............................................ 15 -- 46 -- -- 46 Stock issued for the exercise of stock options.... -- -- 1 -- -- 1 Costs related to issuance of stock................ -- -- (14) -- -- (14) Compensation expense in connection with non-qualified stock option grants............... -- -- 13 -- -- 13 Change in foreign currency translation adjustment...................................... -- -- -- -- 306 306 Equity transactions of pooled company............. -- -- 250 (1,433) -- (1,183) Net earnings...................................... -- -- -- 760 -- 760 ------ --- ------- ------- ----- ------- BALANCE, DECEMBER 31, 1995 As Restated (Note 1)... 11,453 11 20,901 42 449 21,403 Stock issued for the employee stock purchase plan............................................ 15 -- 44 -- -- 44 Stock issued for the exercise of stock options.... 42 -- 134 -- -- 134 Warrants issued to Subordinated Lenders, net of issuance costs.................................. -- -- 2,082 -- -- 2,082 Change in foreign currency translation adjustment...................................... -- -- -- -- (324) (324) Net loss.......................................... -- -- -- (86) -- (86) ------ --- ------- ------- ----- ------- BALANCE, DECEMBER 31, 1996........................ 11,510 $11 $23,161 $ (44) $ 125 $23,253 ====== === ======= ======= ===== =======
See Notes to Consolidated Financial Statements F-6 10 ITEQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 (IN THOUSANDS)
1994 1995 AS AS RESTATED RESTATED (NOTE 1) (NOTE 1) 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)....................................... $ 479 $ 760 $ (86) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization........................... 1,513 1,631 1,865 Provision (benefit) for deferred income taxes........... (444) 118 (156) Gain on sale of investment in subsidiary................ -- -- (160) Non-cash interest....................................... -- -- 302 Changes in assets and liabilities, net of effects of businesses acquired: Restricted cash....................................... (293) 552 (61) Due on contracts and other receivables, net........... (26) (7,537) 6,944 Inventories........................................... 616 (664) 2,863 Costs and estimated earnings in excess of billings on uncompleted contracts.............................. 153 (9,937) (3,409) Prepaid expenses, deposits and other assets........... (20) (122) (390) Accounts payable and accrued liabilities.............. 479 11,988 (3,176) Billings in excess of costs and estimated earnings on uncompleted contracts.............................. (296) (2,695) 184 Progress billings..................................... -- -- 4,128 Income taxes payable.................................. 147 (26) 21 Other................................................. (6) (27) (817) -------- ------- -------- Net cash provided (used) by operating activities... 2,302 (5,959) 8,052 -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquired businesses, net of cash acquired... (2,087) -- (52,786) Purchases of property and equipment....................... (657) (932) (991) Proceeds from sale of investment in subsidiary............ -- -- 1,000 -------- ------- -------- Net cash used by investing activities.............. (2,744) (932) (52,777) -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term obligations....................... 3,000 10,000 27,499 Proceeds from subordinated debt & warrants................ -- -- 15,000 Payments of long-term obligations......................... (11,247) (9,279) (2,499) Net borrowings under line of credit....................... 8,906 8,117 11,977 Debt issuance costs....................................... -- -- (3,002) Capital contributions from (distributions to) shareholders of pooled company....................................... 939 (1,433) -- Proceeds from exercise of stock options................... 2 47 178 Costs relating to issuance of warrants and stock.......... (75) -- (206) -------- ------- -------- Net cash provided by financing activities.......... 1,525 7,452 48,947 -------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 72 114 (107) -------- ------- -------- Net increase in cash and cash equivalents................... 1,155 675 4,115 Cash and cash equivalents, beginning of period.............. 386 1,541 2,216 -------- ------- -------- Cash and cash equivalents, end of period.................... $ 1,541 $ 2,216 $ 6,331 ======== ======= ======== Supplemental disclosure of cash flow information: Cash paid for interest.................................... $ 729 $ 569 $ 1,718 ======== ======= ======== Cash paid for income taxes................................ $ 546 $ 2,168 $ 126 ======== ======= ======== Supplemental schedule of non-cash investing & financing activities: Financing of non-compete agreements....................... -- -- $ 500 ======== ======= ======== Net business assets disposed through Company financing or non-cash consideration.................................. -- -- $ 950 ======== ======= ========
See Notes to Consolidated Financial Statements F-7 11 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ITEQ, Inc. (formerly Air-Cure Technologies, Inc.) and its subsidiaries (the "Company") is a provider of manufactured equipment, engineered systems and services used in the processing, treatment and movement of gases and liquids. It is a domestic manufacturer of shell and tube heat exchangers, principally for petrochemical and refining applications, and a producer of baghouses, scrubbers, fans and other filtration systems and components for environmental and general industrial applications. ITEQ also manufactures specialized process equipment, such as reactors, blenders, stacks, towers, columns and pressure vessels, principally for the refining, petrochemical and plastics industries. The Company has operations in the United States, Canada, Germany and Singapore. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of ITEQ, Inc. and its wholly-owned subsidiaries. Significant intercompany balances and transactions have been eliminated. The consolidated financial statements have also been restated to reflect the merger with Allied Industries, Inc. ("Allied") on December 28, 1995, which was accounted for as a pooling-of-interests. (See Note 2). REVENUE RECOGNITION The Company records revenues from long-term contracts using the percentage-of-completion method. Under this method, the Company recognizes as revenues that portion of the total contract price which the cost of work completed to date bears to the estimated total cost of the work included in the contract. Because contracts may extend over more than one fiscal period, revisions of cost and profit estimates are made periodically and are reflected in the accounting period in which they are determined. If the estimate of total costs on a contract indicates a loss, the total anticipated loss is recognized immediately. Contract costs include all direct material, labor and subcontracting costs and those indirect costs related to contract performance, such as supplies, tools and repairs. The Company recognizes revenue from certain short-term contracts using the completed contract method. Revenue is recognized when a project is substantially complete. The contracts under this revenue recognition method are typically less than three months in duration. "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Such revenues are expected to be billed and collected within one year. "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. F-8 12 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Beginning in 1996, the Company estimated percentage-of-completion for the materials portion of its long-term contracts at Allied based on when the material was placed into production, whereas previously such estimates were based on when the liability for the cost of the material was legally incurred. The new method of applying the percentage-of-completion accounting principle was adopted to better reflect the economics of Allied's revenue and profit earnings process, and financial statements of prior years have been restated to apply the revised method retroactively. The effect of the accounting change on previously reported 1994 and 1995 results and net earnings of 1996 is as follows:
INCREASE (DECREASE) ------------------------ 1994 1995 1996 ---- ------- ----- Net earnings (loss)......................................... $94 $(1,608) $ 321 Net earnings (loss) per common share........................ -- $ (.14) $ .03
The balances of retained earnings at December 31, 1994 and 1995 have been increased (reduced) by $94 and $(1,514), respectively, for the effect (net of income taxes) of applying retroactively the revised method of accounting. The change in method had no effect on periods prior to 1994, since Allied is included in the Company's historical financial statements beginning January 28, 1994, the date of inception of Allied. CASH AND CASH EQUIVALENTS The Company considers all highly liquid temporary investments including those with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of interest bearing accounts. RESTRICTED CASH From time to time, the Company pledges cash to financial institutions as security for bonds. ACCOUNTS RECEIVABLE The allowance for doubtful accounts totaled $195 and $712 at December 31, 1995 and 1996, respectively. All retainages as of December 31, 1996 are expected to be collected by December 31, 1997. INVENTORIES Inventories consist of costs for which no related revenue has been recognized. Inventories include materials used in the manufacturing process, purchased parts and equipment held for resale and are valued at the lower of cost or market. Cost is determined by the average cost method for materials and the first-in, first-out (FIFO) method for purchased parts. Inventory consists of the following:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Raw Materials.............................................. $3,529 $ 3,514 Work in Progress........................................... -- 7,135 Other...................................................... 415 -- ------ ------- Total............................................ $3,944 $10,649 ====== =======
F-9 13 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, including costs to ready assets for use. Depreciation and amortization of property and equipment are computed on the straight-line method over the estimated useful lives of the assets as follows:
USEFUL LIVES ------------ Furniture and Fixtures...................................... 3 to 15 Years Machinery and Equipment..................................... 7 to 15 Years Patterns and Molds.......................................... 5 Years Transportation Equipment.................................... 3 Years Buildings and Improvements.................................. 7 to 39 Years Leasehold Improvements...................................... Life of the lease
At December 31, 1995 and 1996, Property and Equipment was comprised of the following items:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Land.................................... $ -- $ 700 Furniture and fixtures.................. 427 668 Machinery and equipment................. 6,341 9,176 Patterns and molds...................... 625 602 Transportation equipment................ 186 540 Buildings and improvements.............. -- 4,382 Leasehold improvements.................. 252 330 ------- -------- 7,831 16,398 Less accumulated depreciation and amortization....................... (2,439) (2,737) ------- -------- Net property and equipment.... $ 5,392 $ 13,661 ======= ========
Repair and maintenance costs are expensed as incurred while major renewals and betterments are capitalized. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in "Other income." Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews certain long-lived assets for impairment whenever events indicate that the carrying amount of an asset may not be recoverable and recognizes an impairment loss under certain circumstances in the amount by which the carrying value exceeds the fair value of the asset. The Company's adoption of SFAS No. 121 had no material effect on the Company's results of operations or financial position. AMORTIZATION OF INTANGIBLES The excess of cost over net assets acquired and licenses, trademarks and tradenames are amortized on a straight-line basis over periods ranging from five to forty years. The Company maintains separate financial records for each of its acquired entities and performs periodic strategic and long-range planning for each entity. This enables the Company to monitor each entity's historical and expected performance in the context of the value assigned to acquisition intangibles and to the amortization period applied to each intangible asset. The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may not be sufficient to support recorded goodwill. The Company modifies the life and/or the carrying amount of an acquisition intangible if an impairment is identified. Amortization expense F-10 14 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) was $0.7 million, $0.8 million and $0.8 million for the years ended December 31, 1994, 1995 and 1996, respectively. At December 31, 1995 and 1996, other assets was comprised of the following items:
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Excess costs over net assets acquired, net of accumulated amortization, of $1,370 and $1,789 at December 31, 1995 and 1996, respectively.................................... $12,191 $32,941 Licenses, trademarks and tradenames, net of accumulated amortization of $600 and $878 at December 31, 1995 and 1996, respectively........................................ 4,400 11,880 Debt issuance costs, net of accumulated amortization of $45 at December 31, 1996...................................... -- 2,957 Other....................................................... 51 45 ------- ------- Net Other Assets.................................. $16,642 $47,823 ======= =======
INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires deferred taxes to be provided based on temporary differences between the book and tax basis of assets and liabilities using presently enacted tax rates. NET EARNINGS (LOSS) PER COMMON SHARE Primary and fully diluted earnings per share are computed based upon the weighted average number of common and dilutive common equivalent shares outstanding. The dilutive effect of common equivalent shares is calculated through the use of the Treasury Stock Method. Common Stock equivalents consist of stock options and warrants. TRANSLATION ADJUSTMENT The financial activity of the Company's non-U.S. operations located in Canada, Germany and Singapore are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Net assets of non-U.S. operations whose "functional" currencies are other than the U.S. dollar are translated at year end rates of exchange. Income and expense items are translated at the average exchange rate for the year. USE OF ESTIMATES The presentation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUES The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities are reasonable estimates of their fair values due to the short maturities of these instruments. The fair value of long-term obligations is estimated based on ITEQ's current financing agreement and approximates carrying value. F-11 15 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash with various financial institutions. Accounts receivable at any given time are concentrated in a number of primarily domestic customers. An allowance for doubtful accounts has been provided for estimated losses. To mitigate credit risk the Company may require customers to make advance payments. At December 31, 1996, the Company had collected approximately $2,018 in such advance payments which are included in progress billings. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the December 31, 1996 presentation. NOTE 2 -- BUSINESS COMBINATIONS OHMSTEDE On November 20, 1996 (effective November 1, 1996), the Company purchased all the outstanding stock (excluding certain assets and liabilities) of Ohmstede, Inc. ("Ohmstede") for approximately $52.9 million in cash. Assets not purchased included the majority of receivables due from and a 99 percent equity investment in C&D Robotics ("C&D"), a partnership formerly consolidated by Ohmstede; a federal tax deposit made by the owners; and the cash surrender value of life insurance policies for certain owners. Additionally, the former owners received approximately $0.6 million in dividends just prior to the transaction, as set forth in the agreement with the Company. As the Company continues to rent operating space to C&D, rental fees charged to C&D are included in the financial statements. Air-Cure paid $52 million for Ohmstede's stock and $0.9 million for related acquisition costs. The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of the acquisition, as follows: Working capital............................................. $14,800 Property and equipment...................................... 8,453 Intangibles................................................. 7,500 Excess of costs over net assets acquired.................... 21,914 Imputed interest expense.................................... 257 ------- Total purchase price.............................. $52,924 =======
The following unaudited pro forma consolidated results of operations assume that the purchase occurred on January 1, 1995 and include merger costs, restructuring charges, and other non-recurring expenses:
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Revenues................................................... $201,917 $193,928 Net earnings............................................... $ 699 $ 2,253 Net earnings per share..................................... $ .06 $ .19
F-12 16 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ALLIED On December 28, 1995, the Company issued 4,140 shares of its common stock in exchange for all of the outstanding common stock of Allied. The merger has been accounted for as a pooling-of-interests and, accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of Allied effective January 28, 1994, the date of inception of Allied. Effective January 1, 1995, Allied was granted S Corporation tax status. Accordingly, Allied did not pay U.S. Federal income taxes during 1995. Allied was included in the Company's income tax return effective December 28, 1995, and, therefore, a deferred tax liability and corresponding charge to income tax expense of approximately $0.5 million, or $.04 per share, was recorded upon closing to reflect Allied's net taxable temporary differences. Revenues, net earnings and related per share amounts of the merged entities are presented in the following table. The table includes unaudited pro forma net earnings and per share amounts reflecting the elimination of the nonrecurring merger costs and pro forma adjustments to present income taxes on the basis on which they will be reported in future periods.
YEAR ENDED DECEMBER 31, -------------------------- 1994 1995 AS RESTATED AS RESTATED (NOTE 1) (NOTE 1) ----------- ----------- Net revenues: ITEQ...................................................... $44,713 $ 74,457 Allied.................................................... 17,113 38,707 ------- -------- Total............................................. $61,826 $113,164 ======= ======== Net earnings: ITEQ...................................................... $ (298) $ 1,557 Allied.................................................... 777 (797) ------- -------- Net earnings, as reported......................... 479 760 Pro forma adjustments: Allied merger costs, net of tax........................... -- 973 Allied Subchapter S status................................ -- (321) Allied deferred tax liability............................. -- 491 Interest on convertible debt.............................. -- 12 ------- -------- Pro forma net earnings............................ $ 479 $ 1,915 ======= ======== Net earnings per common share: As reported............................................... $ .04 $ .07 Pro forma................................................. $ .04 $ .17
The "Allied merger costs, net of tax" balance of $973 related to $1.1 million in nonrecurring merger costs, the majority of which was non-deductible. AMEREX On May 25, 1994, Amerex, Inc. and Amerex Industries, Inc. (collectively "Amerex") were merged into a subsidiary of the Company. In the merger, the stockholders of Amerex received $4 million and 1,256 shares of Common Stock with a fair market value of $3.69 per share at the acquisition date. The excess of the total acquisition costs over the fair value of the net assets acquired in the amount of $5.9 million is being amortized F-13 17 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) on a straight-line basis over 25 years. Amerex produces and markets filtration, gas cleaning and heat recovery equipment. The accounts of Amerex have been included in the accompanying financial statements for the period from the date of acquisition through December 31, 1996. This acquisition has been accounted for as a purchase with the purchase price allocated to the assets acquired and liabilities assumed based upon their estimated fair market values. NOTE 3 -- MERGER COSTS, RESTRUCTURING CHARGES AND OTHER NONRECURRING COSTS During 1996, the Company incurred a restructuring charge of $4.4 million, of which $3.7 million and $0.7 million were recorded as restructuring charges and cost of revenues, respectively. The charge included (i) a provision for the contractually required severance obligations to the former president and chief executive officer who was replaced in March 1996, and (ii) the cost of implementing new management's plan to reduce the Company's overall cost structure including employee severance, lease and other contract buyouts, inventory and other asset impairments, losses related to termination of unprofitable product lines, excess machinery disposal and other related costs. The following table summarizes the major components of the restructuring charge: Termination pay and benefits........................ $1,300 Discontinued product lines.......................... 1,656 Office relocation and consolidation................. 564 Legal............................................... 242 Other............................................... 642 ------ $4,404 ======
When the Company committed to its restructuring plan during the first quarter, it made the decision to terminate 15 employees, including the former president and chief executive officer. By December 31, 1996, all 15 employees had been terminated. Approximately $0.9 million in severance pay and benefits, unpaid as of December 31, 1996, was paid during the first quarter of fiscal 1997. Substantially all of the terminated employees were either in management positions or were professionals including engineers and accountants. During the fourth quarter of fiscal 1995, the Interel and VIC subsidiaries were reorganized and combined. The reorganization of these operations and costs of settling a lawsuit resulted in a one-time charge of approximately $0.2 million. In the fourth quarter of 1995, the Company recorded a nonrecurring charge of approximately $1.1 million for acquisition costs related to the Allied merger, which is more fully described in Note 2 to the financial statements. NOTE 4 -- CONTRACTS IN PROGRESS The Company obtains substantially all of its contracts through competitive bids. The Company's prerequisites for billing on contracts vary with individual contract terms. The Company sometimes has bonds or letters of credit as collateral on accounts receivable, and generally all amounts are due in the month following performance under contract except for retainages that are collected upon completion of the contract. The Company has lien rights on certain contracts. F-14 18 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Costs incurred to date, estimated earnings and the related progress billings to date on contracts in progress are as follows:
1995 AS RESTATED (NOTE 1) 1996 ----------- -------- Costs incurred to date...................................... $ 49,137 $ 53,037 Estimated earnings.......................................... 14,801 17,701 -------- -------- Revenue recognized.......................................... 63,938 70,738 Progress billings to date................................... (48,867) (51,961) Costs incurred for which no revenues were recognized to date...................................................... 2,181 955 -------- -------- $ 17,252 $ 19,732 ======== ========
The preceding is included in the accompanying consolidated balance sheets as follows:
1995 AS RESTATED (NOTE 1) 1996 ----------- ------- Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $18,067 $20,690 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (815) (958) ------- ------- $17,252 $19,732 ======= =======
NOTE 5 -- LONG-TERM OBLIGATIONS Long-term obligations include the following:
DECEMBER 31, ------------------ 1995 1996 ------- ------- Secured term loan note ("term loan"), maturing October 31, 2001; due in quarterly installments of $1,500 commencing January 31, 1997 and increasing to $1,813 after the first four payments, with interest (December 31, 1996 -- 8.6%) fluctuating with the Offshore Rate or Base Rate defined below..................................................... $10,000 $35,000 Secured note maturing November 18, 2001, under a revolving credit facility ("line of credit") totaling $38,000 with interest (December 31, 1996 -- 8.9%) fluctuating with the Offshore Rate or Base Rate defined below.................. 11,499 25,400 Unsecured senior subordinated notes maturing November 18, 2003, bearing interest at 12% through 1997 increasing 0.5% per year through maturity................................. -- 15,000 Less debt discount related to issuance of detachable warrants in conjunction with senior subordinated notes.... -- (2,288) Other....................................................... 56 41 ------- ------- 21,555 73,153 Less current maturities..................................... (3,347) (6,012) ------- ------- Long-term obligations, net of current maturities............ $18,208 $67,141 ======= =======
F-15 19 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Scheduled maturities of long-term obligations are as follows: 1997........................................................ $ 6,012 1998........................................................ 7,262 1999........................................................ 7,262 2000........................................................ 7,255 2001........................................................ 32,650 Thereafter.................................................. 12,712 ------- $73,153 =======
On November 18, 1996, the Company revised its financing agreement to, among other things, increase its credit facilities with participating financial institutions ("Lenders"), including Bank of America National Trust and Savings Association ("BoA"), as agent for the Lenders. The financing consists of a $35 million term loan and a $38 million revolving line of credit facility. The term loan currently bears interest at the BoA Offshore Rate ("Offshore Rate"), as defined by BoA, plus a spread, and the line of credit bears interest at the Offshore Rate or the Base Rate plus spreads. The spread can range from 2% to 3% above the Offshore Rate and from 0.25% to 1.25% above the Base Rate. The spread increases or decreases based on the Company's leverage ratio. Substantially all of the assets of the Company serve as collateral. In addition to the bank financing, on November 18, 1996, the Company entered into two Senior Subordinated Notes ("Subordinated Notes") with International Mezzanine Capital, B.V. and First Commerce Capital, (collectively, the "Subordinated Note Holders"), for $13 million and $2 million, respectively. The Subordinated Notes, which mature November 18, 2003, bear interest at 12% through December 31, 1997 and increase by 0.5% per year for each year they remain unpaid. As further consideration, the Subordinated Note Holders received warrants to purchase an aggregate of 1,760 shares of the Company's Common Stock at $5.10 per share, subject to adjustment. The warrants may be exercised at any time or from time to time until they expire on November 18, 2003. The warrants were valued at approximately $2.3 million, which was reflected as equity and as a debt discount at the date of their issuance, and will be amortized as additional interest expense over the seven-year life of the Subordinated Notes. The debt obligations require the Company to maintain certain levels of working capital and stockholders' equity and contain other provisions, some of which restrict expenditures for the purchase of the Company's stock, for capital expenditures and for payment of dividends. Such agreements also limit, subject to the Lenders' and Subordinated Note Holders' consent, the creation, incurrence or assumption of indebtedness (as defined by the agreements) and acquisitions and investments. At December 31, 1996, the Company was in compliance with the provisions of its debt agreements. F-16 20 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6 -- LEASE COMMITMENTS The Company and its subsidiaries are obligated under various leases for office and manufacturing facilities and certain machinery, equipment and fixtures. Certain leases have renewal or escalation clauses or both. The following is a schedule of minimum rental commitments under all non-cancellable leases which expire at various dates:
YEAR ENDING DECEMBER 31, - ------------------------ 1997.............................................................. $ 924 1998.............................................................. 795 1999.............................................................. 667 2000.............................................................. 599 2001.............................................................. 571 Thereafter........................................................ 1,579 ------ $5,135 ======
The leases provide for payment of maintenance and other expenses by the Company. Rent expense was $1.1 million, $1.2 million, and $1.2 million for the years ended December 31, 1994, 1995 and 1996, respectively. NOTE 7 -- INCOME TAXES Provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 ------- ------- ------- Current: Federal............................... $ 644 $ 1,069 $ -- State................................. 105 201 -- Foreign............................... 33 112 160 ------- ------- ------- 782 1,382 160 ------- ------- ------- Deferred: Federal............................... 119 99 (419) State................................. 6 19 (74) Foreign............................... (569) -- 337 ------- ------- ------- (444) 118 (156) ------- ------- ------- Provision for income taxes.............. $ 338 $ 1,500 $ 4 ======= ======= =======
The earnings before taxes relating to foreign operations totaled approximately $0.1 million and $1.4 million for the years ended December 31, 1995 and 1996, respectively. The loss before taxes relating to foreign operations totaled approximately $1.3 million for the year ended December 31, 1994. F-17 21 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The tax effects of the financial reporting and income tax reporting basis differences which give rise to the deferred income tax asset and liability are as follows:
DECEMBER 31, -------------------- 1995 1996 ------- ------- Net current deferred income tax assets: Compensation recognition.............. $ -- $ 382 Accruals and reserves................. 439 1,056 Tax benefit carryforwards............. -- 825 Contract accounting................... (213) (316) Other................................. 14 32 ------- ------- $ 240 $ 1,979 ======= ======= Net non-current deferred income tax liabilities: Tax benefit carryforwards............. $ 524 $ 208 Property and equipment................ (444) (692) Intangible assets..................... (197) (313) Other................................. 6 2 Valuation allowance................... (146) (146) ------- ------- $ (257) $ (941) ======= =======
The valuation allowance relates to deferred tax assets established under SFAS No. 109 for losses incurred in foreign subsidiaries. These losses will be carried forward to future years for utilization and are not expected to expire. As of December 31, 1995 and 1996, the Company had regular U.S. and foreign net operating loss carryforwards for tax reporting purposes totaling approximately $1.3 million and $2.6 million, respectively. The majority of the foreign net operating loss carryforwards do not have an expiration date. Differences between the Company's effective income tax rate and the statutory federal income tax rate are as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 1996 ----- ------- ----- Tax provision at the federal statutory income tax rate...... $277 $ 768 $(28) Differences in foreign versus U.S. tax rates................ (79) 7 9 State income taxes, net of federal benefit.................. 46 178 (74) Amortization of intangible assets........................... 70 104 84 Non-deductible acquisition costs............................ -- 234 -- S Corporation income........................................ -- (202) -- Conversion from S-Corporation............................... -- 491 -- Valuation allowance......................................... -- (137) -- Other....................................................... 24 57 13 ---- ------ ---- Total Tax Provision............................... $338 $1,500 $ 4 ==== ====== ====
During 1995, the valuation allowance was reduced by $137 in order to properly recognize the portion of the Company's deferred tax asset which was more likely than not to be realized. F-18 22 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 8 -- STOCK WARRANTS AND OPTIONS STOCK WARRANTS Following is a summary of the warrants outstanding at December 31, 1996:
STOCK EXERCISE OUTSTANDING ISSUABLE PRICE DATE AND UPON PER EXPIRATION DESCRIPTION ISSUED EXERCISABLE EXERCISE SHARE DATE ----------- ------ ----------- -------- -------- ---------- Financial advisor: Warrants........................ 6/92 100 140 $4.42 6/97 Warrants........................ 4/96 34 34 $4.72 4/98 Underwriter warrants.............. 12/92 50 50 $4.80 12/97 Subordinated debt warrants........ 11/96 1,760 1,760 $5.10 11/03 ----- ----- Total................... 1,944 1,984 ===== =====
No warrants have been exercised. The exercise price of the subordinated debt warrants and the financial advisor warrants issued in June of 1992 are subject to adjustment. STOCK OPTIONS On October 1, 1990, the Company's Board of Directors approved an Employee Stock Option Plan (the "Plan") which was subsequently amended and which provides for the issuance of up to 10% of the Company's outstanding shares of Common Stock shares but initially not less than 1,250 shares of Common Stock (subject to anti-dilution provisions). Options granted expire in five to ten years, and the option price, which must be at least the fair market value of the Company's stock at the date of grant can be paid in cash or in shares of the Company's Common Stock. Options may not be transferred by the optionee other than by will or the laws of descent and distribution. The Company's Board of Directors approved the Directors' Stock Option Plan on May 19, 1993, which provides for the issuance of up to 200 shares of Common Stock (subject to anti-dilution provisions). The plan currently provides that each outside director will be granted an option to purchase 10 shares of Common Stock at the fair market value of the Common Stock at the date of grant at each time the director is elected, re-elected or appointed to the Board of Directors. Options granted under this plan expire after ten years, and the option price must be paid in cash. Options may not be transferred by the optionee other than by will or the laws of descent and distribution. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net earnings (loss) and net earnings (loss) per common share would have been reduced to the following pro forma amounts:
YEAR ENDED DECEMBER 31, ------------- 1995 1996 ----- ---- Net earnings (loss): As reported............................................... $ 760 $(86) Pro forma................................................. 730 (199) Net earnings (loss) per common share:....................... As reported............................................... .07 (.01) Pro forma................................................. .06 (.02)
F-19 23 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of the pro forma cost to be expected in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
1995 GRANTS 1996 GRANTS --------------- ----------------- Expected dividend yield.......................... 0% 0% Expected stock price volatility.................. 39.74% - 45.09% 42.88% - 44.85% Risk free interest rate.......................... 5.43% - 6.48% 5.38% - 6.93% Expected life of options......................... 5 to 10 years 4.25 - 10 years
A summary of the status of the Company's two stock option plans at December 31, 1995 and 1996 and changes during the years then ended is presented in the table below.
1995 1996 ------------------- ------------------- WTD AVG WTD AVG SHARES EX PRICE SHARES EX PRICE ------ --------- ------ --------- Outstanding at beginning of year.............. 751 $ 4.00 953 $ 3.63 Granted....................................... 249 2.50 385 3.66 Exercised..................................... -- (3.38) (42) (3.15) Forfeited..................................... (47) (3.52) (201) (3.42) Expired....................................... -- -- -- -- ----- ------ ----- ------ Outstanding at end of year.................... 953 $ 3.63 1,095 $ 3.70 ===== ====== ===== ====== Exercisable at end of year.................... 474 $ 3.96 681 $ 3.88 ===== ====== ===== ====== Weighted average fair value of options granted..................................... $1.19 $1.78 ===== =====
The options outstanding at December 31, 1996 have exercise prices between $2.44 and $4.75 and a weighted average remaining contractual life of 4.44 years. The Company maintains an Employee Stock Purchase Plan whereby all employees are eligible for participation after ninety days of service. Under this plan, employees may purchase stock at 90% of the current market price of the stock. During the years ended December 31, 1995 and December 31, 1996, 15 and 15 shares, respectively, were issued under the plan. NOTE 9 -- COMMITMENTS AND CONTINGENCIES The Company is party to certain legal proceedings which are considered by management to be customary and incidental to its business. In the opinion of management, after consulting with legal counsel, the ultimate disposition of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. F-20 24 ITEQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 10 -- MAJOR CUSTOMERS AND FOREIGN OPERATIONS Due to the nature of the Company's business, contracts are generally nonrecurring. For the year ended December 31, 1996, no single customer accounted for 10% of revenues. For the years ended December 31, 1994 and 1995, a single customer accounted for revenues of 11% and 10%, respectively. Financial data by geographical area is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 AS AS RESTATED RESTATED (NOTE 1) (NOTE 1) 1996 ------------ -------- ----------- Revenue: North America.................................... $56,764 $101,546 $ 96,024 Europe........................................... 1,913 6,974 8,866 Asia............................................. 3,149 4,644 5,914 ------- -------- -------- Total.................................... $61,826 $113,164 $110,804 ======= ======== ======== Operating profit (loss): North America.................................... $ 2,558 $ 2,640 1,237 Europe........................................... (1,140) 404 620 Asia............................................. 175 392 416 ------- -------- -------- Total.................................... $ 1,593 $ 3,436 $ 2,273 ======= ======== ======== Identifiable assets: North America.................................... $47,916 $ 63,983 $128,915 Europe........................................... 3,214 4,276 5,633 Asia............................................. 1,670 2,585 1,840 ------- -------- -------- Total.................................... $52,800 $ 70,844 $136,388 ======= ======== ========
Including exports, international sales accounted for approximately 23% of total revenues in 1996. NOTE 11 -- SUBSEQUENT EVENT (UNAUDITED) The Company is in the process of filing a registration statement on Form S-2 to register for sale 5.1 million shares of common stock (4.3 million from the Company and 0.8 million from certain selling stockholders). The primary use of the offering proceeds to the Company will be to reduce debt incurred in the aforementioned acquisitions and for potential future acquisitions. F-21 25 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 -- Certificate of Incorporation of Registrant, as amended (Filed as an exhibit to Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 3.2 -- Certificate of Amendment to Certificate of Incorporation of Registrant (Filed as an exhibit to Form 8-K dated March 7, 1997 and incorporated herein by reference). 3.3 -- Bylaws of the Registrant, as amended (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 4.1 -- See Exhibits 3.1 and 3.3 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining the rights of holders of Common Stock. 4.2 -- Amended and Restated Credit Agreement dated November 18, 1996, among the Registrant, Bank of America National Trust and Savings Association, as Agent, The First National Bank of Boston, as Co-Agent and certain other financial institutions. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.3 -- Subordination Agreement among the Registrant and various financial institutions (the "Senior Lenders"), including Bank of America National Trust and Savings Association, as Agent, and The First National Bank of Boston, as Co-Agent. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.4 -- Subordinated Note and Purchase Agreement dated November 18, 1996, among the Registrant, International Mezzanine Capital, B.V. ("Mezzanine") and First Commerce Corporation ("First Commerce"). (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.5 -- Senior Subordinated Note due November 18, 2003, between the Registrant and Mezzanine, dated November 18, 1996. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.6 -- Senior Subordinated Note due November 18, 2003, between the Registrant and First Commerce, dated November 18, 1996. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.7 -- Guaranty dated November 18, 1996, executed by the Registrant in favor of Mezzanine and First Commerce. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.8 -- Warrant Agreement, dated November 18, 1996, between the Registrant and Mezzanine. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.9 -- Warrant Agreement dated November 18, 1996, between the Registrant and First Commerce. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.10 -- Registration Rights Agreement dated November 18, 1996, among the Registrant, Mezzanine, and First Commerce. (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.11 -- Warrant Agreement, dated April 24, 1996, between the Registrant and Sanders Morris Mundy, Inc. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). 4.12 -- Warrant Agreement, dated December 1992, between Registrant and Pennsylvania Merchant Group, Ltd. (Filed as an exhibit to Form 10-K for fiscal year ending March 31, 1993 and incorporated herein by reference). 10.1 -- Agreement and Plan of Merger dated September 19, 1996, among the Registrant, Air-Cure Acquisition, Inc. and Ohmstede, Inc. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference).
26
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2 -- Agreement and Plan of Merger dated October 13, 1995, among the Registrant, Air-Cure Acquisition Corporation, Allied Industries, Inc., Mark E. Johnson and Pierre S. Melcher. (Filed as an exhibit to Post-Effective Amendment No. 1 to Form S-4 Registration Statement (No. 33-92308) and incorporated herein by reference). 10.3 -- Agreement and Plan of Merger dated April 28, 1994, among the Registrant., VIC Acquisition Corporation, VIC Environmental Systems, Inc. and Ronald E. Lewis. (Filed as an exhibit to Post-Effective Amendment No. 1 to Form S-1 Registration Statement (No. 33-69524) and incorporated herein by reference). 10.4 -- Agreement and Plan of Merger dated April 5, 1994, among the Registrant, Air-Cure Acquisition Corporation, Amerex, Inc., Amerex Industries, Inc. and certain other parties. (Filed as an exhibit to Post-Effective Amendment No. 1 to Form S-1 Registration Statement (No. 33-69524) and incorporated herein by reference). 10.5 -- Employment Agreement dated March 1, 1996, between the Registrant and Lawrance W. McAfee. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference). 10.6 -- Employment Agreement dated December 29, 1995, between the Registrant and Mark E. Johnson. (Filed as an exhibit to Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.7 -- Employment Agreement dated December 29, 1995, between the Registrant and Pierre S. Melcher. (Filed as an exhibit to Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.8 -- Employment Agreement dated March 1, 1995, between the Registrant and John P. Fitzpatrick. (Filed as an exhibit to Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.9 -- Employment Agreement dated December 17, 1992, between the Registrant and Michael P. Lawlor. (Filed as an exhibit to Form 10-K for the fiscal year ended March 31, 1993 and incorporated herein by reference). 10.10 -- Employees Stock Purchase Plan, as amended, dated December 15, 1994. (Filed as an exhibit to Form 10-K for year ended December 31, 1994 and incorporated herein by reference). 10.11 -- Director Stock Option Plan, as amended. (Plan filed as an exhibit to Proxy Statement for Annual Meeting of Stockholders hold on June 29, 1995, and amendment filed as an exhibit to Form 10-Q for the quarter ended June 30, 1996 both of which are incorporated herein by reference). 10.12 -- Amended and Restated 1990 Stock Option Plan, as amended, dated June 29, 1995. (Filed as an exhibit to Proxy Statement for Annual Meeting of Stockholders held on June 29, 1995 and incorporated herein by reference). 10.13 -- Form of Stock Option Agreement. (Filed as an exhibit to Form 10-K for the fiscal year ended March 31, 1993 and incorporated herein by reference). 10.14 -- Lease Agreement dated May 25, 1994, between Halligan and Labbe Enterprises, L.L.C. and Amerex Industries, Inc. (Filed as an exhibit to Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.15 -- License and Technical Assistance Agreement dated August 28, 1991, between Interel Environmental Technologies, Inc. and Heinrich Luhr Staubtechnik GmbH & Co. (Filed as an exhibit to Form S-1 (No. 33-44205) and incorporated herein by reference). *23.1 -- Consent of Arthur Andersen LLP. *23.2 -- Consent of KPMG Peat Marwick LLP. 23.3 -- Letter of Arthur Andersen LLP regarding change in accounting.
- --------------- * Filed herewith. EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of ITEQ, Inc: As independent public accountants, we hereby consent to the incorporation of our report dated February 24, 1997 related to the consolidated financial statements of ITEQ, Inc. and subsidiaries included in this Form 10-K/A, into ITEQ's previously filed Registration Statement File no. 333-09051 on Form S-8. ARTHUR ANDERSEN LLP Houston, TX April 30, 1997 EX-23.2 3 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors ITEQ, Inc. and Subsidiaries: We consent to the incorporation by reference of our report, included in ITEQ Inc.'s Form 10-Ka, into ITEQ Inc.'s previously filed Form S-8 registration statement (333-09051). KPMG PEAT MARWICK LLP Houston, TX April 30, 1997 -----END PRIVACY-ENHANCED MESSAGE-----