-----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, TVMKqGAcu/6LPL0Q8upCLoTOAZ+blyFKc12V0J13vJinVcBEt+XfgyZdLkbOGVCH Y1v6dHr6cxiXoM7X+v/rmA== 0000950129-98-001190.txt : 19980325 0000950129-98-001190.hdr.sgml : 19980325 ACCESSION NUMBER: 0000950129-98-001190 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 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 SEC ACT: SEC FILE NUMBER: 000-27986 FILM NUMBER: 98572238 BUSINESS ADDRESS: STREET 1: 2727 ALLEN PKWY STE 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 1 ITEQ, INC. - DATED 12/31/97 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] 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 (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 18, 1998 was $208,434,136. As of March 18, 1998, there were 27,044,442 shares of the registrant's Common Stock, $.001 par value, outstanding. Documents incorporated by reference. Certain portions of the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders ("Proxy Statement") are incorporated in Part III by reference. ================================================================================ 2 TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business.................................................... 1 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 9 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters....................................... 9 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Item 8. Financial Statements and Supplementary Data................. 16 Item 9. Disagreements on Accounting and Financial Disclosure........ 17 PART III Item 10. Directors and Executive Officers of the Registrant.......... 17 Item 11. Executive Compensation...................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 17 Item 13. Certain Relationships and Related Transactions.............. 17 PART IV Item 14. Financial Statements and Financial Statement Schedules, Exhibits and Reports on Form 8-K....................................... 17
3 PART I ITEM 1. BUSINESS ITEQ, Inc. ("ITEQ" or the "Company") designs, engineers, manufactures and services process, storage and filtration systems, 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. It is the leading domestic manufacturer and servicer of shell and tube heat exchangers, principally for petrochemical and refining applications, a leading designer and producer of above-ground storage tanks ("ASTs") and related products primarily for the petrochemical, municipal water storage, food and agriculture industries, and a leading producer of baghouses, scrubbers, fans and other filtration systems and components for environmental and general industrial applications including use in the steel and foundry, microelectronics, chemical, minerals, pharmaceutical and other industries. The Company also manufactures specialized process equipment, such as pressure vessels and blenders, principally for the refining, petrochemical and plastics industries. ITEQ also provides non-destructive testing and inspection services for ASTs, pressure vessels and piping and also offers mobile storage tank leasing services. The Company operates internationally, with its equipment, systems and services sold or utilized in over 30 countries worldwide. ITEQ believes that through acquisitions of complementary businesses it has been able to capitalize on its relationships with existing customers through cross-selling opportunities. Additionally, through its international distribution network and broad offering of products and services, ITEQ has benefited from its customers' continuing consolidation of their sources of supply. In recent years, annual worldwide capital expenditures for hydrocarbon processing equipment, industrial and municipal storage and related equipment and industrial air filtration equipment have averaged an estimated $45 billion, of which approximately 30% represents domestic spending. Although there is no dominant manufacturer of equipment and systems for the highly fragmented domestic markets served by the Company, ITEQ believes it is the largest domestic manufacturer and servicer of shell and tube heat exchangers. Similarly, the Company believes it is one of the largest domestic producers of ASTs, tank products, baghouses, scrubbers, FRP fans and other filtration systems for the selected niche markets served. The Company was incorporated in Delaware in 1990 under the name Air-Cure Environmental, Inc. The Company changed its name in 1993 to Air-Cure Technologies, Inc. and again in March 1997, to ITEQ, Inc. The Company's principal executive offices are located at 2727 Allen Parkway, Suite 760, Houston, Texas 77019, and its telephone number is (713) 285-2700. BUSINESS STRATEGY The Company's objective is to be a leading integrated provider of manufactured equipment, engineered systems and services used in each of the niche industrial markets in which it operates and to expand its markets through acquisitions of complementary product and service lines. The Company has experienced rapid growth since its inception in 1990 through a combination of strategic acquisitions and internal growth. Management of ITEQ is focused on maximizing long-term shareholder value through maximizing ITEQ's stock price. Management has preliminarily reviewed certain information related to stock valuations of other similar type companies, some of which are larger and some of which are smaller than ITEQ. Additionally, management reviewed certain information related to ITEQ's shareholder base and financial structure, and the potential impact from their respective composition, on ITEQ's stock price. Based on this preliminary review, management has concluded that the historical growth rate of the Company's operations and acquisition trends, relative to the other reviewed companies, has not been adequately reflected in ITEQ's stock price. As stated above, one of management's goals is to maximize shareholder value. Accordingly, management, following a special Board of Directors meeting on March 6, 1998, retained two investment banking firms to assist them in performing an in-depth review of ITEQ's strategic alternatives to maximize long-term shareholder value and implementing the resultant action plans. Management will evaluate three alternatives: (1) accelerate growth either by accelerating the Company's acquisition pace or by pursuing larger acquisitions, (2) pursue a financial restructuring, or (3) seek a strategic partner. Management remains focused on its business strategy, and intends to continue to grow its business and pursue acquisitions as it evaluates its options. 4 Acquisition Strategy. The Company pursues a strategy of acquiring leading providers of complementary manufactured products and services in highly fragmented industrial equipment markets, with a view to further consolidating those markets. The Company believes it is one of the few domestic acquirers and consolidators of businesses in those markets. In general, the Company pursues the acquisition of businesses that satisfy most of the following criteria: - Well-managed domestic companies serving niche industrial markets. - Large, defensible share of their respective markets, involving proven technologies. - Provide complementary products and services that afford cross-selling opportunities or are direct competitors. - Significant installed product bases and long operating histories. - Potential for significant expansion into international markets. - Predictable cash flow and earnings potential. - Potential for internal synergies and economies of scale. Internal Growth. The Company has experienced significant internal growth in recent years despite operating in mature markets. This growth has resulted from the Company's strategy of gaining additional market share by selling its products, and those acquired through acquisitions, to existing and new customers and industries, introducing new products, and developing its international markets. In addition, each of the acquired businesses has a substantial installed base of products, and ITEQ has achieved further revenue increases through additional emphasis on the maintenance and refurbishment aftermarkets. Increasingly, and consistent with the Company's overall growth strategy, major industrial concerns are consolidating their sources of supply for goods and services in an effort to obtain worldwide single-source suppliers for broad ranges of systems, equipment and services. In fragmented markets such as those served by the Company, further industry consolidation is to be expected. At present, the Company believes that no other supplier of products and services to the niche markets presently served offers as broad an array of products and services as those offered by the Company. The Company believes its current product lines and its acquisition strategy position it to benefit from this ongoing trend. ACQUISITION HISTORY Since its inception in 1990, the Company has experienced substantial growth through acquisitions. The Company's business was originally focused on the highly regulated air pollution control industry. However, beginning in 1995 with the merger with Allied Industries, Inc. ("Allied") the Company increased its focus on the process equipment business which accelerated with the November 1996 acquisition of Ohmstede, Inc. ("Ohmstede"). In addition, in August 1997, ITEQ completed the acquisition of Exell, Inc. ("Exell"), a manufacturer of shell and tube heat exchangers and previously a competitor of the Company's Ohmstede operation. The Company recently entered the industrial and municipal AST and related equipment and service industry through the merger with Astrotech International Corporation ("Astrotech") in October 1997. The following table sets forth certain information concerning the businesses which have been acquired by ITEQ through December 31, 1997:
DATE PRINCIPAL ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED ---------------- -------- --------- --------------- Air-Cure, Inc.(1) 1990 Fabric filters Electric utilities, coal Interel, Inc. 1991 Dry scrubbers, packed and mini Waste treatment, foundry, smelter scrubbers, heat exchangers Ceilcote Air Pollution Control, 1992 Wet scrubbers, tower internals, Microelectronics, chemical Inc. FRP fans processing, waste treatment, food processing VIC Environmental Systems, Inc. 1994 Carbon adsorption systems Pharmaceutical, rubber
2 5
DATE PRINCIPAL ACQUIRED COMPANY ACQUIRED PRODUCTS INDUSTRY SERVED ---------------- -------- --------- --------------- Amerex Industries, Inc. 1994 Fabric filters, wet and dry Steel, cement and lime, refining, scrubbers, heat exchangers foundry Allied Industries, Inc.(2)(3) 1995 Air separation equipment, Petrochemical, plastics, refining reactors, blenders, stacks, towers and columns, pressure vessels Ohmstede, Inc. 1996 Heat exchangers Petrochemical, refining Exell, Inc. 1997 Heat exchangers Petrochemical, refining Astrotech International 1997 Aboveground storage tanks, Petrochemical, refining, water Corporation(2) pressure vessels, bins, silos, storage, pulp and paper, mining, stacks and liners, scrubbers, alcohol, agriculture, water shopbuilt tanks treatment, power generation, process systems
- --------------- (1) Divested in November 1996. (2) Accounted for as poolings-of-interests; all other acquisitions accounted for as purchases. (3) During August 1997 and effective on August 31, 1997, management of ITEQ adopted plans to discontinue certain of its low margin generic fabrication operations at its Allied subsidiary. Certain net assets of Allied will be liquidated as remaining orders in process are completed, which is expected to be finished by the third quarter of 1998. The Allied manufacturing facility will be utilized in ITEQ's facility consolidation efforts to eliminate duplicate facilities and excess capacity resulting from its acquisitions. For a discussion of the financial statement impact attributable to these discontinued operations, see Note 10 to the Consolidated Financial Statements. PRODUCTS AND SERVICES The following table sets forth, for the periods indicated, the contribution to the Company's revenues from its significant classes of products and services. Acquisitions accounted for as purchases have been included for the periods subsequent to acquisition and acquisitions accounted for as poolings-of-interests have been restated for all relevant periods.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------- 1993 1994 1995 1996 1997 ------------ -------- -------- -------- -------- (IN THOUSANDS) Process Equipment............... $ -- $ -- $ -- $ 32,828 $142,161 Storage Equipment(1)............ 29,658 68,726 100,424 109,929 127,718 Filtration Equipment(2)......... 27,859 44,713 74,549 66,058 65,720 ------- -------- -------- -------- -------- $57,517 $113,439 $174,973 $208,815 $335,599 ======= ======== ======== ======== ========
- --------------- (1) Storage Equipment revenues consist primarily of Astrotech's historical reported revenues for its fiscal years ended September 30. Effective January 1, 1997, ITEQ changed Astrotech's fiscal year to December 31 and the reported 1997 revenues are for the year then ended. The "Nine Months Ended December 31, 1993" primarily includes Astrotech's revenues for the nine-month period ended September 30, 1993. As a result, the three month period ended December 31, 1996 for Astrotech is not presented. Revenues for this period were $33,804. (2) During 1996, Air-Cure, Inc. ("ACI") and Pipkorn, Inc.("Pipkorn") were sold. Accordingly, revenue from these entities has been excluded subsequent to their sales. For information with respect to the Company's financial data by geographic location, see Note 13 to the Consolidated Financial Statements. Process Equipment. The Company's line of custom-built shell and tube heat exchangers are marketed under the well-established Ohmstede and Exell names primarily to the petrochemical and refining industries in 3 6 the Gulf Coast area. The Company intends to pursue increased sales of new heat exchangers by marketing its products throughout the United States and internationally by capitalizing on its existing distribution network and customer relationships. The Company has a substantial installed base of heat exchangers, since Ohmstede units were marketed for more than 40 years and Exell units were marketed for more than 20 years prior to acquisition. Aftermarket services are provided both in the field and on Company premises and may consist of a variety of services ranging from minor field repair and maintenance to de-coking (i.e., the removal of fouling from tubes) or complete unit reconstruction. Shell and tube heat exchangers are used in a variety of temperature control, heating and cooling, and other plant operation applications and are integrated into a variety of industrial processes that allow heat to be transferred from one fluid or gas involved in the process to another. Usually the fluid or gas being cooled runs through a series of tubes in the heat exchanger, while the cooling fluid flows simultaneously in the opposite direction in the void between the outer shell of the units and the tube bundles. In the petrochemical and power industries, this type of exchanger is used as feedwater heaters and surface condensers for plant operations. Storage Equipment. Through the recent acquisition of Astrotech, the Company has expanded into the storage equipment and related service business. The Company designs, fabricates and erects storage tanks for the storage of petrochemical products, municipal water, other liquids, and a variety of gases, including methane and nitrogen. In addition, the Company manufactures a variety of related equipment and products including, (i) primary and secondary tank seals, drain systems and related products used in connection with floating roof ASTs, (ii) aluminum internal floating roofs marketed under the Aluminator trademark and (iii) AST secondary containment and leak detection systems. The floating roof used in connection with the tank seals minimizes vapor emissions and losses of the stored product from the storage tank by spanning the gap between the floating circular roof and the tank wall and permitting both the roof and seal to move freely up and down as the level of the product in the tank changes. The Company also provides comprehensive tank inspection, maintenance and repair and leasing services. Its inspection services are designed to determine AST compliance with environmental regulations and industry standards, and include ultrasonic thickness and magnetic flux testing (both designed to test AST structural integrity), primary and secondary seal inspection, floating roof pontoon inspection, leak detection and weld seam testing. The maintenance, repair and leasing services offered by the Company to its customers consist of, among other things (i) development of customized and fully integrated tank maintenance and management programs, (ii) preparation of detailed tank inspection and condition reports, (iii) performance of emergency welding work, (iv) installation and construction of fire-fighting foam systems, internal floating roofs and fixed-coned roofs and (v) leasing of mobile storage tanks capable of being transported to and from various facility locations. Filtration Equipment. Filtration products are marketed by the Company under the Amerex, VIC Environmental Systems, Ceilcote Air Pollution Control, Interel, Tellerette(R) and IWS tradenames and to engineering and construction firms and directly to end-users for environmental and general industrial applications. Such systems operate by filtering air or gas through many large filter bags ("baghouses") that capture ambient particulate matter or by venting a particulate-laden air stream through an aerosol spray which captures the particulates ("scrubbers"). Baghouses and scrubbers are custom-designed systems which may be of substantial scale and incorporate a variety of products manufactured by the Company. These products include wet scrubbers, dry scrubbers, axial and centrifugal fiberglass reinforced plastic fans ("FRP fans"), heat exchangers, ductwork, aeration towers ("strippers"), scrubber packing, tower internals, air washers, carbon adsorption systems, quenches, cooling and condensing towers, mist eliminators and pneumatic conveying systems. Such products are sold as components to other systems fabricators or incorporated into complete systems designed and constructed by the Company. SALES AND MARKETING The Company's products are marketed through a staff of in-house sales people and other regional and local marketing personnel or through over 100 commission-based, independent representative organizations, each operating in an exclusive territory and serving segmental industrial customers located in that territory or 4 7 engineering or contracting firms. In addition to sales activities at the Company's plants and principal offices, the Company also maintains a number of sales offices, from which its own personnel either assist the representative organizations or make direct contact with potential customers. The Company also maintains operations in Australia and Singapore, which service the Pacific Rim, while the Company's United Kingdom and German subsidiaries sell products in Europe, Africa and the Middle East. Inquiries from potential customers are referred to Company engineering personnel for any necessary product or system design and for job cost estimation and preparation of price quotations or bid packages for submission to the prospective customer. The interval between customer inquiry and confirmation of an order or contract execution varies substantially. In general, orders are filled for components and small systems on a purchase order basis at fixed prices on normal 30-day trade terms, and larger, more complex systems involving long lead times are filled on a contract basis. Though contract terms are subject to considerable variation, contracts normally provide for progress payments, price adjustment provisions for some major materials during periods when metal goods prices are subject to volatility and, except for sales from certain foreign subsidiaries, are either dollar denominated or payable in currencies with fixed exchange rates against the dollar. As a result, working capital, raw material pricing, and currency translation risks are not normally significant to the Company. Most contracts for products to be exported for sale are secured by letters of credit drawn on major commercial banks. In certain instances, particularly in the performance of aftermarket heat exchanger services, work may be undertaken on a time and materials basis on normal 30-day credit terms. Consistent with emerging industry trends, the Company has also entered into formal "corporate alliances" with certain of its customers, under which the Company has been designated a preferred vendor for various products. The Company intends to continue to pursue additional strategic alliances or other corporate partnering arrangements. In addition, the Company will continue to expand its emphasis on aftermarket sales and services in an effort to minimize the potential cyclical nature of industry capital spending. MARKET CONDITIONS AND COMPETITION Market Conditions. The industrial equipment markets in which the Company operates are mature. In recent years, annual worldwide capital expenditures for hydrocarbon processing equipment, industrial and municipal storage and related equipment and industrial air filtration equipment have averaged an estimated $45 billion of which approximately 30% represents domestic spending. Although the Company's products and services are utilized in a number of industrial applications, a majority of its recent annual revenues has been attributable to the hydrocarbon processing industry which includes oil terminals, refining, petrochemical, plastics, and air separation. A significant portion of the Company's revenues from those markets is attributable to plant expansions, upgrades and maintenance and to a lesser extent the construction of new industrial capacity abroad. The Company estimates that 55% to 60% of its sales are the result of the customer's capital equipment requirements and that 40% to 45% of its sales are the result of the customer's maintenance requirements. In an effort to minimize the effects of cyclical capital spending, the Company intends increasingly to emphasize greater market penetration in aftermarkets and diversification into less competitive international markets, and other less cyclical domestic markets by capitalizing on its broad range of product lines with potential customers and through extension of its "corporate alliance" program into other industries. See "Significant Customers". In addition, the Company seeks to carry minimal inventories of raw materials and components and maintain a reasonable balance between the manufacture and purchase of product components and subassemblies. Since virtually all the Company's revenues are attributable to products and systems manufactured to customer specifications, it carries very little finished goods inventory and purchases raw materials, components and subassemblies only on a job specific, often "just in time" basis. During the year ended December 31, 1997, certain components and subassemblies were purchased from numerous subcontractors, typically under fixed price arrangements. Should the need arise, the Company believes that any subcontractor or supplier can be replaced without significant disruption to its business. Competition. The markets in which the Company competes in North America are generally highly fragmented, and most competitors in these niche markets are relatively small, privately held businesses. However, with respect to the storage equipment business, the Company's major competitors also include several other nationally recognized firms. In North American markets, competition is based on several 5 8 competitive factors, including reputation, manufacturing capabilities, availability of plant capacity, price, performance and dependability. In foreign markets, competition varies widely. In some international markets, price competition is more intense than that prevailing in North America while in others, where prior relationships and product quality receive more customer emphasis than do marginal pricing differentials, price competition is less intensive. As a result of innovative design solutions, quality of product workmanship and dependability of on-time performance, the Company's product and services are sold, in certain circumstances, in situations where it is not the low bidder. A significant portion of the Company's annual revenues represents repeat business from its customers. Most of the Company's storage equipment business is competitively bid with customer purchasing decisions made on a project-by-project basis as new construction, expansion, upgrade, maintenance or repair projects are identified. The Company's non-bid contracts in this area are consummated through either direct negotiations, maintenance agreements or various alliance agreements with customers. See "Significant Customers." With increasing frequency, the Company is asked by end-users to submit proposals or bids for entire systems, thus bypassing engineering and construction firms in the procurement process. When awarded such jobs, the Company designs the entire system, purchases certain "off-the-shelf" or fabricated components from vendors or subcontractors, and manufactures those portions of the system for which it has particular expertise. The system is then delivered to the customer's site for final assembly and installation by field construction personnel who may be subcontractors for or supervised by the Company. ENVIRONMENTAL MATTERS The Company is subject to numerous federal, state, local and foreign laws and regulations relating to the storage, handling, emission and discharge of materials into the environment, including the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), the Clean Water Act, the Clean Air Act (including the 1990 Amendments) ("CAA") and the Resource Conservation and Recovery Act ("RCRA"). Each of these statutes allows the imposition of substantial civil and criminal penalties, as well as permit revocation, for violations of the requirements. Although the Company's operations may involve environmental management issues typically associated with manufacturing operations, the Company believes that it is in material compliance with all environmental laws. The Company has no current plans for substantial capital expenditures in this area. It is not a party to any threatened or pending legal proceedings or administrative actions relating to the environment. It is possible that future developments, such as changes in existing laws, regulations or enforcement practices under environmental laws, could lead to material costs of environmental compliance and cleanup by the Company. SIGNIFICANT CUSTOMERS Historically, the Company's principal customers have been refining and petrochemical processors, steel producers, foundries, mining and waste treatment concerns. Recently, the Company's customer base has been expanded to include steel mini-mills, microelectronics manufacturers and power generation facilities and customers in the alcohol, sugar-processing, pulp and paper, agricultural and specialty construction industries. The Company participates in "corporate alliance" programs with certain of its customers, including Amoco Corporation, Chevron Corporation, Lyondell-Citgo, Dow Chemical, E. I. Du Pont, Olin Corporation, Hoechst Celanese, Tosco and Marathon under which it is a designated preferred vendor for various types of equipment and services primarily relating to its heat exchangers, AST and related service business. Such customers accounted for approximately $52,321,000 and $52,889,000 of total revenues for the years ended December 31, 1996 and 1997, respectively. Although the terms of these arrangements vary widely, they do not involve any minimum purchase obligations, but set forth the basis upon which the Company is to be paid for work performed -- either on the basis of cost plus a predetermined profit margin or cost of materials plus agreed labor rates -- and involve the exchange of a broad range of information with the customer, including the customer's expected future requirements for the product and service classes covered by the arrangement and the expected timing of future job awards, and the Company's existing and expected future material and labor costs, as well as periodic reports on continuing productivity improvements and total quality management. 6 9 Under such arrangements, the Company is afforded the first opportunity to furnish the covered products and services on the customer's tendered terms, which often are subject to further negotiation at the time of individual job award. The Company intends to continue its focus on entering into additional strategic alliances or other corporate partnering arrangements. Due to the contractual nature of the Company's operations, it is anticipated that significant portions of future consolidated revenues may be attributable to a limited number of customers in any particular year, although it is likely that the particular customers may vary from year to year. For the year ended December 31, 1997, no single customer accounted for as much as 10% of the Company's consolidated revenues. BACKLOG At December 31, 1997, the Company's backlog was $104.9 million. This compared with $91.6 million at December 31, 1996. Such backlog consisted of written orders or commitments believed to be firm contracts for products and services. Such agreements are occasionally varied or modified by mutual consent and in certain instances may be cancelable by the customer on short notice without substantial penalty. As a result, the Company's backlog as of any particular date may not be indicative of the Company's actual operating results for any subsequent fiscal period. Management believes that substantially all of the orders and commitments included in backlog at December 31, 1997 will be completed within the next twelve months. EMPLOYEES At December 31, 1997, the Company employed approximately 2,100 full-time personnel, including approximately 530 unionized employees at ten domestic manufacturing facilities who are subject to collective bargaining agreements. The Company considers its relations with its employees to be good. ITEM 2. PROPERTIES The Company's principal facilities are shown in the table below:
APPROXIMATE BUILDING SPACE LOCATION STATUS (SQUARE FEET) DESCRIPTION -------- ------ -------------- ----------- CORPORATE Houston, TX Leased through 9,569 Corporate offices June 30, 2001 OHMSTEDE/EXELL Beaumont, TX Owned 25,000 Manufacturing facility and offices Corpus Christi, TX Owned 42,000 Manufacturing facility and offices LaPorte, TX Owned 78,000 Manufacturing facility and offices Sulfur, LA Owned 90,000 Manufacturing facility and offices St. Gabrial, LA Owned 90,000 Manufacturing facility and offices Beaumont, TX Leased 98,000 Manufacturing facility and offices ALLIED Houston, TX Leased through 300,000 Manufacturing facility, warehouse, February 28, 1999 office and other facilities AMEREX Woodstock, GA Leased through 8,640 Warehouse and offices June 30, 1999 Woodstock, GA Leased through 5,880 Warehouse and offices September 30, 2001 Woodstock, GA Leased through 3,000 Offices June 30, 2000 Denver, CO Leased month to 1,156 Offices month
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APPROXIMATE BUILDING SPACE LOCATION STATUS (SQUARE FEET) DESCRIPTION -------- ------ -------------- ----------- CEILCOTE AIR POLLUTION CONTROL La Grange, OH Leased through 22,500 Manufacturing facility and March 31, 1999 warehouse Strongsville, OH Leased through 12,700 Laboratory and offices January 31, 2010 Plungstadt, Germany Leased 11,000 Offices Singapore Leased through 5,600 Manufacturing facility and offices May 31, 1998 HMT Houston, TX Owned/Leased 54,000 Manufacturing facility and offices through April 30, 2001 Beaumont, TX Owned 8,100 Service Center Kelton, PA Owned 7,500 Fabrication facility and offices Tonkawa, OK Owned 10,000 Fabrication facility and offices BMT Egan, MN Owned 88,628 Fabrication facility and offices Birmingham, AL Owned 86,450 Fabrication facility Orem, UT Owned 36,720 Fabrication facility Port Allen, LA Leased 10,000 Warehouse GRAVER Pasadena, TX Owned 154,000 Fabrication facility and offices TRUSCO San Luis Obispo, CA Owned 25,600 Fabrication facility, warehouse and offices Fresno, CA Leased through 103,000 Fabrication facility, warehouse April 30, 2007 and offices
In addition, as of December 31, 1997, the Company owned or leased 22 sales, service and other facilities in the United States and 7 in foreign countries. ITEM 3. LEGAL PROCEEDINGS On March 19, 1996, the Company's HMT, Inc. subsidiary ("HMT") was served with a complaint filed in Superior Court of California, County of Contra Costa. This matter arose out of a tank fire which occurred in June of 1995, at a refinery in northern California, where HMT employees were replacing seals on an aboveground storage tank. In October 1997, HMT entered into a Settlement Agreement effectively terminating this matter. The Company's insurance carrier funded the settlement amount of $500,000, subject to the Company's self-insured retention limits, under the applicable insurance policy. Certain of the Company's subsidiaries are parties to legal proceedings in the ordinary course of business. While the outcome of lawsuits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition, results of operations or liquidity of the Company. 8 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 28, 1997, the Company held a special meeting of stockholders for the following purposes: (1) To consider and act upon a proposal to adopt the Plan and Agreement of Merger (the "Merger Agreement"), pursuant to which Astrotech would merge into ITEQ, with ITEQ being the surviving corporation. The Merger Agreement, provided for, among other things, (i) the conversion of each share of outstanding Astrotech common stock into .93 of a share of ITEQ common stock, (ii) conversion of outstanding Astrotech stock options into options to purchase ITEQ common stock, adjusted for the exchange ratio,(iii) the appointment of two additional members to the ITEQ board of directors and (iv) the adoption of an Amended and Restated Certificate of Incorporation which, among other things, increases the authorized ITEQ common stock, $.001 par value per share, from 30,000,000 to 40,000,000 shares; and (2) To consider and act upon a proposal to amend and restate the ITEQ 1990 Stock Option Plan to, among other things, increase the maximum number of shares available for issuance under the ITEQ 1990 Stock Option Plan to 3,000,000. There were present at the meeting, in person and by proxy, the holders of 11,118,636 shares of common stock or approximately 65% of the total number of issued and outstanding shares which were entitled to vote. The results of the vote were as follows:
NUMBER OF NUMBER OF NUMBER OF VOTES VOTES VOTES FOR AGAINST WITHHELD ---------- ---------- ---------- Approval & Adoption of Plan and Agreement of Merger......................................... 11,009,425 6,345 13,599 Approval & Adoption of Amended and Restated ITEQ 1990 Stock Option Plan......................... 9,924,575 1,034,077 39,417
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ITEQ." The high and low sales prices per share for the periods indicated were as follows:
HIGH LOW ---- --- 1996 First Quarter............................................. $ 4 1/2 $ 3 1/4 Second Quarter............................................ $ 4 1/4 $ 3 3/8 Third Quarter............................................. $ 5 1/8 $ 2 7/8 Fourth Quarter............................................ $ 5 $ 4 1/8 1997 First Quarter............................................. $ 7 1/2 $ 4 1/2 Second Quarter............................................ $ 9 1/2 $ 5 13/16 Third Quarter............................................. $14 1/8 $ 9 1/4 Fourth Quarter............................................ $14 1/4 $10
On March 23, 1998, the last reported sale price for the Common Stock, as quoted by the Nasdaq National Market, was $12.125 per share. As of the same date, there were approximately 2,908 holders of record of the Common Stock, and the Company estimates that there are over 7,500 beneficial owners of Common Stock. 9 12 On November 26, 1997, underwriter warrants for 140,000 shares of common stock were exercised at an exercise price of $4.42 per share for aggregate consideration of $618,800. DIVIDEND POLICY The Company has never declared or paid cash dividends on the Common Stock. The Company intends to retain any future earnings for reinvestment in its business and does not intend to pay cash dividends in the foreseeable future. Furthermore, the Company is prohibited from declaring or paying cash dividends on its capital stock under the terms of certain of the Company's indebtedness. 10 13 ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data for the nine month period ended December 31, 1993, and the years ended December 31, 1994, 1995, 1996 and 1997 is derived from the audited consolidated financial statements of the Company. Accounts from acquisitions accounted for as purchases have been included for the periods subsequent to acquisition and all accounts, for relevant periods, have been restated to reflect acquisitions accounted for as poolings-of-interests. Historical results of operations, percentage fluctuations and any trends that may be inferred from the data below are not necessarily indicative of the results of operations for any future period. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and notes thereto.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------- 1993 1994 1995 1996 1997 ------------ -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA (1)(2): Revenue.................................... $57,517 $113,439 $174,973 $208,815 $335,599 Cost of revenues........................... 39,672 86,788 133,869 159,637 260,117 Selling, general and administrative expenses................................. 13,505 20,812 27,589 30,209 42,148 Depreciation and amortization.............. 2,427 3,172 4,487 5,226 7,547 Merger, acquisition and restructuring costs.................................... -- -- 170 2,022 17,956 ------- -------- -------- -------- -------- Operating profit........................... 1,913 2,667 8,858 11,721 7,831 Interest expense, net...................... (575) (1,438) (1,895) (3,084) (5,971) Miscellaneous income, net.................. 128 65 436 224 519 ------- -------- -------- -------- -------- Earnings from continuing operations before income tax provision..................... 1,466 1,294 7,399 8,861 2,379 Income tax provision....................... 379 796 3,110 3,395 2,344 ------- -------- -------- -------- -------- Earnings from continuing operations........ 1,087 498 4,289 5,466 35 Earnings (Loss) from discontinued operations(3)............................ 564 931 (798) (1,542) (2,956) Extraordinary loss from early extinguishment of debt................... -- -- -- -- (3,080) Cumulative effect of change in accounting principle for income taxes............... -- 2,931 -- -- -- ------- -------- -------- -------- -------- Net earnings (loss)........................ $ 1,651 $ 4,360 $ 3,491 $ 3,924 $ (6,001) ======= ======== ======== ======== ======== BASIC EARNINGS (LOSS) PER SHARE: From continuing operations............... $ .08 $ .03 $ .21 $ .26 $ -- From discontinued operations (3)......... .04 .05 (.04) (.07) (.12) Extraordinary loss from early extinguishment of debt................ -- -- -- -- (.13) Cumulative effect of change in accounting principle............................. -- .15 -- -- -- ------- -------- -------- -------- -------- Net earnings (loss).............. $ .12 $ .23 $ .17 $ .19 $ (.25) ======= ======== ======== ======== ======== Weighted average common shares outstanding.............................. 13,409 19,297 20,560 20,645 24,301 ======= ======== ======== ======== ======== DILUTED EARNINGS (LOSS) PER SHARE: From continuing operations............... $ .08 $ .02 $ .21 $ .26 $ -- From discontinued operations(3).......... .04 .05 (.04) (.07) (.11) Extraordinary loss from early extinguishment of debt................ -- -- -- -- (.12) Cumulative effect of change in accounting principle............................. -- .15 -- -- -- ------- -------- -------- -------- -------- Net earnings (loss).............. $ .12 $ .22 $ .17 $ .19 $ (.23) ======= ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding............ 13,501 19,407 20,746 21,004 25,583 ======= ======== ======== ======== ========
11 14
DECEMBER 31, --------------------------------------------------- 1993 1994 1995 1996 1997 ------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Total assets............................. $59,899 $117,706 $137,395 $224,752 $261,487 Working capital.......................... 11,358 15,840 28,117 42,573 64,531 Long-term debt, net of current maturities............................. 6,521 19,408 28,294 84,685 89,954 Stockholders' equity..................... 35,760 51,479 54,721 60,306 91,388
- --------------- (1) Astrotech's historical operating results and balances have been included using Astrotech's fiscal years ended September 30. Effective January 1, 1997, ITEQ changed Astrotech's fiscal year to December 31 and the reported 1997 amounts are for the year then ended. As a result, the three-month period ended December 31, 1996 for Astrotech is not presented. Revenues and earnings from continuing operations for this period were $33,804 and $1,181, respectively. The "Nine Months Ended December 31, 1993" includes Astrotech's amounts for the nine-month period ended September 30, 1993. (2) During August 1997 and effective on August 31, 1997, management of ITEQ adopted plans to discontinue certain of its low margin generic fabrication operations at its Allied subsidiary which is expected to be completed in the third quarter of 1998. See Note 10 to the Consolidated Financial Statements. (3) Discontinued operations for 1993 relate to Astrotech Space Operations. Discontinued operations for 1994 and all subsequent years relate to the Company's Allied subsidiary. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) GENERAL Since its inception in 1990 the Company has experienced substantial growth through a combination of strategic acquisitions and internal growth. Due to the magnitude of these acquisitions and the integration of the acquired operations with the Company's existing businesses, results of operations for prior periods are not necessarily comparable with or indicative of results of operations for current or future periods. The Company records substantially all revenues using the percentage-of-completion method. Under this method, the Company recognizes as revenues that portion of the total contract price which the cost of work completed to date bears to the estimated total cost of the work included in the contract. Because contracts may extend over more than one fiscal period, revisions of cost and profit estimates are made periodically and are reflected in the accounting period in which they are determined. If the estimate of total costs on a contract indicates a loss, the total anticipated loss is recognized immediately. Contract costs include all direct material, labor and subcontracting costs and those indirect costs related to contract performance, such as supplies, tools and repairs. The Company recognizes revenue from certain short-term contracts using the completed contract method. Revenue is recognized when a project is substantially complete. The contracts accounted for under this revenue recognition method are typically less than three months in duration. 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 between quarters. In recent years, the Company has experienced greater revenues and net income in its second and third quarters, partially as a result of the budgetary and procurement processes of its customers. 12 15 RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 Revenues Revenues for the year ended December 31, 1997 increased $126,784 or 61% to $335,599 from $208,815 for the year ended December 31, 1996. The increased revenues are primarily attributable to the March 1996 acquisition of Graver, the November 1996 acquisition of Ohmstede, the May 1997 acquisition of Trusco and the August 1997 acquisition of Exell, all accounted for as purchases. These process and storage group entities increased revenues $126,965, including internal growth subsequent to acquisition for the year ended December 31, 1997 as compared to 1996. Revenues decreased in the filtration equipment group as a result of the disposition in November 1996 of Air-Cure, Inc. ("ACI") and Pipkorn, Inc. ("Pipkorn") which contributed $5,245 in revenues in 1996. During 1997, the Company experienced growth in sales to a number of industry groups, including the steel, chemical, petrochemical, cement, and microelectronics industries. Petrochemical industry sales increased both internationally and domestically primarily because of increased marketing efforts. As planned when acquired, Ohmstede has initiated foreign sales, which typically have longer production times and more units per order in production and shipment than Ohmstede's historical domestic business. Accordingly, such sales were recognized under the percentage-of-completion revenue recognition method. Cost of Revenues Cost of revenues for the year ended December 31, 1997 increased $100,480 to $260,117 primarily due to the four acquisitions previously mentioned. The increase in cost of revenues due to these process and storage group entities was $99,857, including increased cost of revenues associated with internal growth subsequent to acquisition. Other increases due to higher sales volumes in the filtration systems group were partially offset by the sale of ACI and Pipkorn in November 1996 which had cost of revenues of $4,325 for the year ended December 31, 1996. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 1997 increased $11,939 from $30,209 in 1996 to $42,148. The increase is related primarily to acquisitions as discussed above. As a result of these acquisitions, selling, general and administrative expenses increased $12,483 for the year ended December 31, 1997 as compared to 1996. Depreciation and Amortization Depreciation and amortization expense was $7,547 and $5,226 for the years ended December 31, 1997 and 1996, respectively. The increase was primarily a result of acquisitions as discussed above which increased depreciation and amortization by $2,174 for the year ended December 31, 1997 as compared to 1996. Merger, Acquisition and Restructuring Costs During the fourth quarter of 1997, the Company recorded nonrecurring charges totaling $17,956 in connection with the merger of Astrotech and related restructuring of operations including the elimination of excess capacity and duplicate facilities. Of this amount, (i) transaction costs totaled $5,145, which consisted of professional fees paid to financial advisors, accountants and attorneys, (ii) costs to combine the operations of the Company and Astrotech included write-downs for duplicate facilities and excess capacity of $5,276, (iii) severance costs and other benefits totaled $4,221 and (iv) business integration and reorganization costs totaled $3,314. Transaction costs include professional expenses of $361 related to the terminated purchase agreement with Matrix Service Company. Approximately $5,055 of the asset write-down was non-cash. 13 16 Interest Expense Interest expense in 1997 was $5,971 compared to $3,084 in 1996. The increase in expense reflects the additional borrowings required to finance acquisitions offset by application of the net proceeds of the May 1997 stock offering to reduce such debt. Income Taxes The income tax expense from continuing operations for the year ended December 31, 1997 was $2,344 as compared to $3,395 in 1996. The 1997 effective tax rate was significantly higher than the Federal statutory rate due to significant nondeductible acquisition expenses related to the merger with Astrotech. Discontinued Operations and Extraordinary Item During August 1997 and effective on August 31, 1997, management of ITEQ adopted plans to discontinue certain of its low margin generic fabrication operations at its Allied subsidiary. Certain of the net assets of Allied's operations will be liquidated as remaining orders in process are completed. The estimated completion date of the net asset liquidation is the third quarter of 1998. The Allied facility will not be disposed of, as it will be used in the Company's facility consolidation effort. The Company recorded a loss from discontinued operations in 1997 and 1996 of $2,956 and $1,542, net of tax benefits of $1,613 and $871, respectively, for the Company's Allied subsidiary. During the third quarter of 1997, the Company repaid its subordinated notes using available proceeds under its revolving credit facility. In the fourth quarter of 1997, in connection with the Merger, the Company refinanced its and Astrotech's existing credit facilities. The Company incurred an extraordinary loss of $4,812 ($3,080 net of taxes), related to the write-off of unamortized debt issuance and discount costs. 1996 COMPARED WITH 1995 Revenues Revenues for the year ended December 31, 1996 increased $33,842, or 19.3%, to $208,815 from $174,973 for the year ended December 31, 1995. This increase resulted primarily from the acquisitions of Graver in March 1996 and Ohmstede in November 1996. These process group entities increased revenues $29,583, including internal growth subsequent to acquisition for the year ended December 31, 1996, as compared to 1995. The filtration systems group experienced a decrease in revenues in 1996 compared with 1995 due to the commencement and completion of an $11,800 order in 1995 which was not replaced in full by other orders in 1996. This decrease was partially offset by an increase of $9,504 in the storage systems group in 1996, as compared to 1995. In 1996, the Company's sales to the petrochemical and refining industries increased due to the acquisition of Ohmstede, which had sales to these industries only. The Company's international sales, sales of tank construction services and sales to the microelectronics and the cement and lime industries also increased during 1996. Cost of Revenues Cost of revenues for the year ended December 31, 1996 increased $25,768 to $159,637 primarily due to the acquisition of Graver and Ohmstede during 1996. These process group entities incurred cost of revenues of $24,109 during the year ended December 31, 1996 including increased cost of revenues associated with internal growth subsequent to acquisition. The filtration systems group experienced a decrease in cost of revenues in 1996, as compared with 1995 due to commencement and completion of an $11,800 order in 1995 which was not replaced in full by other orders in 1996. This decrease in cost was partially offset by the increase in activity in the storage systems group in 1996. 14 17 Selling, General and Administrative Expenses Selling, general and administrative expenses for the years ended December 31, 1996 and 1995 were at $30,209 and $27,589, respectively. This increase is primarily due to the acquisition of Graver and Ohmstede during 1996. Depreciation and Amortization Depreciation and amortization expense for the year ended December 31, 1996 increased $739 to $5,226. The increase was primarily due to the acquisition of Graver and Ohmstede as discussed above. Merger, Acquisition and Restructuring Costs During 1996, the Company incurred a restructuring charge of $2,022. 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 business lines, excess machinery disposal and other related costs. During 1995 the Company recorded a nonrecurring charge of approximately $170 for operational consolidation during 1995, and unrelated litigation settlement costs. Interest Expense Interest expense for the years ended December 31, 1996 and 1995 was $3,084 and $1,895, respectively. The borrowings required to finance the Ohmstede acquisition accounted for most of the increase. Income Taxes The income tax expense from continuing operations for the year ended December 31, 1996 was $3,395 as compared to $3,110 in 1995. The 1996 effective tax rate of 38.3% is lower than 1995 effective tax rate of 42.0% principally due to nondeductible merger and acquisition costs incurred in 1995. Discontinued Operations In August 1997 and effective on August 31, 1997, management adopted plans to discontinue its Allied subsidiary which consisted of low margin generic fabrication operations. The Company recorded a loss from discontinued operations in 1996 and 1995 of $1,542 and $798, net of a tax benefit of $871 and a tax provision of $160, respectively. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997 the Company's cash position was $9,681 compared with $6,990 at December 31, 1996. Net working capital at December 31, 1997 increased to $64,531 from $42,573 at December 31, 1996. The Company's existing capital resources consist of cash balances, cash provided by its operating activities and funds available under its line of credit. Cash provided by operations in 1997 was $6,841. During 1996, the Company's operating activities provided $13,142 in cash, compared to $152 in cash provided in 1995. The Company's cash requirements consist of its general working capital needs, capital expenditures, obligations under its leases and indebtedness, and capital required for future acquisitions. The Company's general working capital requirements consist of salary costs and related overhead and the purchase price of materials and components, and may also include subcontract costs incurred prior to the receipt of corresponding progress payments under the contract with respect to which such costs are incurred. Management anticipates that the Company will make capital expenditures of approximately $6,000 in 1998 as compared to $5,377 in 1997. 15 18 In November 1996, the Company amended its principal credit agreement to increase its maximum borrowings in conjunction with the Ohmstede acquisition. The financing consisted of a $35,000 term loan and a $38,000 revolving line of credit facility. In May 1997, ITEQ sold approximately 5,058 shares of common stock and used the net proceeds (approximately $31,795) to reduce debt. In addition to the bank financing, in November 1996, the Company issued Senior Subordinated Notes ("Subordinated Notes") to two institutional lenders in an aggregate amount of $15,000. The Subordinated Notes were scheduled to mature November 18, 2003, and bore interest at an initial rate of 12%. As additional 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 prior to expiration on November 18, 2003. Approximately $2,300 warrant value was reflected as equity and as debt discount that was being amortized as additional interest expense over the seven year life of the Subordinated Notes. In 1997, ITEQ repaid the Subordinated Notes and refinanced its then existing revolving credit facility which resulted in extraordinary charge of approximately $3,080, net of an estimated tax benefit of $1,732. In connection with the merger with Astrotech, ITEQ refinanced its and Astrotech's existing credit facilities under a new non-amortizing revolving credit facility with various financial institutions with a commitment of $175,000 maturing in October 2002 and bearing interest, at ITEQ's option, at BankBoston, N.A.'s ("BankBoston") customary base rate or at BankBoston's Eurodollar rate plus, in either case, an agreed upon margin ranging from 0% to 2.5% for the applicable base rate margin, and from 1% to 1.75% for the applicable Eurodollar rate margin. This new credit facility is secured by substantially all of the assets of ITEQ, a pledge of the stock of ITEQ's domestic subsidiaries and guarantees entered into by such subsidiaries. The outstanding balance under the credit facility at December 31, 1997 was $89,936. ITEQ's principal credit facility requires the Company to maintain certain levels of working capital and stockholders' equity and contains other restrictive covenants. Such instruments also limit the ability of the Company to incur additional indebtedness and to make acquisitions and certain investments. At December 31, 1997, the Company was in compliance with the provisions of its loan agreements. Except with respect to funding any future acquisitions, management believes that funds available under its credit facilities, together with cash generated from operations, will be sufficient to meet ITEQ's anticipated cash requirements for 1998. Management further believes that ITEQ could obtain additional capital to make acquisitions primarily through either issuances of common or preferred stock, or debt or lease financing, although no assurance can be given with respect to whether such financing would be available when required or whether such financing can be obtained on terms acceptable to ITEQ. The Company is currently in the process of evaluating its computer software programs and operating systems to ensure such programs and systems will be able to process transactions in the year 2000. However, the Company does not expect that such costs to modify its programs and systems will be material to its financial condition or results of operations. The Company does not currently have information concerning the year 2000 compliance of its suppliers and customers. In the event the Company's significant suppliers or customers do not successfully and timely achieve year 2000 compliance, the Company's operations could be adversely affected. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K 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 ITEQ's financial position, business strategy, and plans of management for future operations are forward-looking statements. Although ITEQ believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. ITEM 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. 16 19 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding directors is set forth in the Proxy Statement under the caption entitled "Election of Directors" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth in the Proxy Statement under the caption "Compensation of Directors and Executive Officers" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth in the Proxy Statement under the captions "Election of Directors" and "Compensation of Directors and Executive Officers" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in the Proxy Statement under the caption "Certain Transactions" and is incorporated herein by reference. PART IV ITEM 14. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES See "Index to Financial Statements" set forth on page F-1. (a)(3) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant. (Filed as Appendix E to the Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 3.2 -- Amended and Restated Bylaws of the Registrant. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining the rights of holders of Common Stock. 4.2 -- Revolving Credit Agreement dated as of October 28, 1997 by and among the Registrant, the Guarantors and various lending institutions including Deutsche Bank AG as Documentation Agent and BankBoston, N.A. as Agent. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 4.3 -- Warrant Agreement, dated November 18, 1996, between the Registrant and International Mezzanine Capital, B.V. ("Mezzanine"). (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference).
17 20
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.4 -- Warrant Agreement dated November 18, 1996, between the Registrant 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 -- 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). 4.6 -- 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). 4.7 -- 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 -- Plan and Agreement of Merger dated as of June 30, 1997, by and between the Registrant and Astrotech International Corporation ("Astrotech"). (Filed as Appendix A to the Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 10.2 -- Stock Purchase Agreement dated as of April 30, 1997, by and between Jared A. Trussler, Ray E. Crosno and Leslie D. Scott ("Sellers") and Astrotech (predecessor-in-interest to the Registrant). (Filed as an exhibit to Form 8-K of Astrotech dated as of May 14, 1997 and incorporated herein by reference). 10.3 -- Stock Purchase Agreement, dated April 24, 1997, among the owners of Exell, Inc. ("Exell") and the Registrant. (Filed as an exhibit to Amendment No. 2 to the Registrant's Registration Statement on Form S-2 (No. 333-23245) and incorporated herein by reference). 10.4 -- First and Second Amendment to Exell Stock Purchase Agreement among the owners of Exell and the Registrant. (Filed as an exhibit to Form 10-Q for the quarter ending June 30, 1997 and incorporated herein by reference). 10.5 -- Amendment No. 2, as of February 28, 1997, to the Stock Purchase Agreement dated February 7, 1994, by and among Astrotech (predecessor-in-interest to the Registrant), Brown-Minneapolis Tank & Fabricating Company ("BMT") and Irwin Jacobs. (Filed as an exhibit to Form 10-Q for the quarter ended March 31, 1997 of Astrotech and incorporated herein by reference). 10.6 -- Purchase and Sale Agreement, dated as of the Effective Date (as defined therein), between Babel, Miller & Blackwell Partnership (the "Partnership") and the Registrant. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.7 -- First Amendment to Purchase and Sale Agreement, effective August 13, 1997, among the Partnership, Beaumont Franklin Street Properties, L.L.C. ("BFSP"), Neches Street Properties, L.L.C. ("NSP") and the Registrant. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.8 -- 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). 10.9 -- Stock Purchase Agreement dated March 7, 1996, by and among Astrotech (predecessor-in-interest to the Registrant), Timothy J. McDavid, Graver Holding Company and Graver Tank & Mfg. Co. (Filed as an exhibit to Astrotech's Form 8-K dated April 10, 1996 and incorporated herein by reference).
18 21
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10 -- 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). 10.11 -- Employment Agreement dated September 30, 1997 for Mark E. Johnson. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.12 -- Employment Agreement dated May 15, 1997, between the Registrant and John Camardella. (Filed as an exhibit to Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.13 -- 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). 10.14 -- 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). 10.15 -- 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). 10.16 -- Director Stock Option Plan, as amended. (Plan filed as an exhibit to Proxy Statement for Annual Meeting of Stockholders held 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). 10.17 -- Amended and Restated ITEQ 1990 Stock Option Plan. (Filed as Appendix D to Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 10.18 -- 1984 Stock Option Plan. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-3360) and incorporated herein by reference). 10.19 -- 1989 Stock Incentive Plan. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-2975) and incorporated herein by reference). 10.20 -- The 1994 Stock Option Plan for the Employees of BMT. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-85106) and incorporated herein by reference). 10.21 -- 1995 Non-Employee Directors' Stock Option Plan. (Filed as an exhibit to Astrotech's Proxy Statement of Astrotech for the Annual Meeting of Shareholders filed on or about April 10, 1995 and incorporated herein by reference). 10.22 -- Lease, dated August 13, 1997 among Beaumont Franklin Street Properties, L.L.C., Neches Street Properties, L.L.C. and Exell. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.23 -- 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).
19 22
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.24 -- 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 Coopers & Lybrand L.L.P. *27 -- Financial Data Schedule.
- --------------- * Filed herewith. (b) REPORTS ON FORM 8-K The Company filed the following Reports on Form 8-K during the fourth quarter of 1997: - Form 8-K/A dated October 27, 1997 amending the financial statements and exhibits of the Form 8-K dated August 28, 1997 with respect to the acquisition of Exell. - Form 8-K dated October 28, 1997 with respect to the merger with Astrotech. - Form 8-K dated December 17, 1997 with respect to entering into Plan and Agreement of Merger with Matrix Service Company (which agreement was subsequently terminated in January 1998). - Form 8-K dated December 18, 1997 with respect to the combined results of operations of the Registrant and Astrotech for the month ended November 30, 1997. 20 23 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Reports of Independent Public Accountants................... F-2,3 Consolidated Balance Sheets -- December 31, 1996 and December 31, 1997......................................... F-4 Consolidated Statements of Operations -- Years Ended December 31, 1995, 1996 and 1997.......................... F-5 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1995, 1996 and 1997.................... F-6 Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1996 and 1997.......................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 24 ITEQ, INC. 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, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. We did not audit the financial statements of Astrotech International Corporation, a company acquired during 1997 in a transaction accounted for as a pooling-of-interests, as discussed in Note 2, for the two years ended September 30, 1995 and 1996. The statements of operations and cash flows for Astrotech International Corporation are included in the 1995 and 1996 consolidated statements of operations and cash flows of ITEQ, Inc. and represents revenues of 57% and 59%, respectively, of the consolidated total. Additionally, total assets of Astrotech International Corporation at September 30, 1996 have been included in the consolidated balance sheet of ITEQ, Inc. and represent 39% of consolidated assets. 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 Astrotech International Corporation, 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, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 5, 1998 F-2 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Astrotech International Corporation: We have audited the consolidated balance sheet of Astrotech International Corporation and subsidiaries as of September 30, 1996 and the consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended September 30, 1996 (not presented separately herein). 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 provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Astrotech International Corporation and subsidiaries as of September 30, 1996 and the consolidated results of their operations and cash flows for each of the two years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Pittsburgh, Pennsylvania December 6, 1996 F-3 26 ITEQ, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
1996 1997 -------- -------- CURRENT ASSETS Cash and cash equivalents................................... $ 6,990 $ 9,681 Due on contracts and other receivables, net................. 62,720 72,140 Unbilled revenues........................................... -- 741 Costs and estimated earnings in excess of billings on uncompleted contracts..................................... 26,736 30,164 Inventories................................................. 15,271 13,138 Prepaid expenses, deposits and other assets................. 2,164 3,538 Deferred tax asset.......................................... 4,021 7,589 Assets held for sale........................................ -- 2,925 -------- -------- Total current assets.............................. 117,902 139,916 Property and equipment, net................................. 39,766 42,198 Other assets, net........................................... 67,084 79,373 -------- -------- TOTAL ASSETS...................................... $224,752 $261,487 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................ $ 22,189 $ 24,861 Accrued liabilities Job costs................................................. 8,171 9,498 Accrued compensation and benefits......................... 9,063 6,077 Accrued expenses and other current liabilities............ 13,197 25,634 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... 6,545 8,194 Progress billings........................................... 5,137 579 Current maturities of long term obligations................. 9,455 104 Income taxes payable........................................ 1,572 438 -------- -------- Total current liabilities......................... 75,329 75,385 LONG-TERM LIABILITIES Long-term obligations, less current maturities.............. 84,685 89,954 Deferred tax liability...................................... 4,432 4,760 -------- -------- Total Liabilities................................. 164,446 170,099 -------- -------- 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 and 40,000 shares authorized at December 31, 1996 and 1997, respectively; 20,688 and 26,912 shares issued and outstanding at December 31, 1996 and 1997, respectively.................. 21 27 Additional paid-in capital.................................. 82,984 119,823 Retained earnings (deficit)................................. (22,824) (27,644) Translation adjustment...................................... 125 (818) -------- -------- Total Stockholders' Equity........................ 60,306 91,388 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $224,752 $261,487 ======== ========
See Notes to Consolidated Financial Statements F-4 27 ITEQ, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 1997 -------- -------- -------- Revenues................................................... $174,973 $208,815 $335,599 Cost of revenues........................................... 133,869 159,637 260,117 Selling, general and administrative expenses............... 27,589 30,209 42,148 Depreciation and amortization.............................. 4,487 5,226 7,547 Merger, acquisition and restructuring costs................ 170 2,022 17,956 -------- -------- -------- Operating profit......................................... 8,858 11,721 7,831 Interest expense, net...................................... (1,895) (3,084) (5,971) Miscellaneous income, net.................................. 436 224 519 -------- -------- -------- Earnings from continuing operations before income tax provision and extraordinary loss...................... 7,399 8,861 2,379 Income tax provision....................................... 3,110 3,395 2,344 -------- -------- -------- Earnings from continuing operations before extraordinary loss.................................................. 4,289 5,466 35 -------- -------- -------- Loss from discontinued operations, net of income tax provision (benefit) of $160, ($871) and ($547), respectively............................................. (798) (1,542) (1,061) Loss on disposal of discontinued operations net of income tax benefit of $1,066.................................... -- -- (1,895) -------- -------- -------- Loss from discontinued operations........................ (798) (1,542) (2,956) -------- -------- -------- Extraordinary loss on early extinguishment of debt, net of income tax benefit of $1,732............................. -- -- (3,080) -------- -------- -------- Net earnings (loss)...................................... $ 3,491 $ 3,924 $ (6,001) ======== ======== ======== BASIC EARNINGS (LOSS) PER SHARE: Earnings from continuing operations........................ $ .21 $ .26 $ -- Loss from discontinued operations.......................... (.04) (.07) (.12) Extraordinary loss......................................... -- -- (.13) -------- -------- -------- Net earnings (loss) per common share..................... $ .17 $ .19 $ (.25) ======== ======== ======== Weighted average common shares outstanding................. 20,560 20,645 24,301 ======== ======== ======== DILUTED EARNINGS (LOSS) PER SHARE: Earnings from continuing operations........................ $ .21 $ .26 $ -- Loss from discontinued operations.......................... (.04) (.07) (.11) Extraordinary loss......................................... -- -- (.12) -------- -------- -------- Net earnings (loss) per common share..................... $ .17 $ .19 $ (.23) ======== ======== ======== Weighted average common and common equivalent shares outstanding.............................................. 20,746 21,004 25,583 ======== ======== ========
See Notes to Consolidated Financial Statements F-5 28 ITEQ, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL --------------- PAID-IN EARNINGS TRANSLATION STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY ------ ------ ---------- --------- ----------- ------------- BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY REPORTED....... 11,438 $11 $ 20,605 $ 715 $ 143 $21,474 Adjustment for Astrotech pooling-of-interests............ 9,060 9 59,517 (29,521) -- 30,005 ------ --- -------- -------- ----- ------- POOLED BALANCE, DECEMBER 31, 1994, AS RESTATED........... 20,498 20 80,122 (28,806) 143 51,479 Stock issued for the employee stock purchase plan........ 15 -- 46 -- -- 46 Stock issued for the exercise of stock options........... -- -- 6 -- -- 6 Issuance of 170 shares of common stock, net of costs..... 170 1 576 -- -- 577 Costs related to issuance of stock....................... -- -- (14) -- -- (14) Compensation expense in connection with non-qualified stock option grants.................................... -- -- 13 -- -- 13 Foreign currency translation adjustment.................. -- -- -- -- 306 306 Equity transactions of pooled company.................... -- -- 250 (1,433) -- (1,183) Net earnings............................................. -- -- -- 3,491 -- 3,491 ------ --- -------- -------- ----- ------- BALANCE, DECEMBER 31, 1995............................... 20,683 21 80,999 (26,748) 449 54,721 Stock issued for the employee stock purchase plan........ 15 -- 44 -- -- 44 Stock issued for the exercise of stock options........... 74 -- 151 -- -- 151 Repurchase of 84 shares.................................. (84) -- (292) -- -- (292) Warrants issued to subordinated lenders, net of issuance costs.................................................. -- -- 2,082 -- -- 2,082 Foreign currency translation adjustment.................. -- -- -- -- (324) (324) Net earnings............................................. -- -- -- 3,924 -- 3,924 ------ --- -------- -------- ----- ------- BALANCE, DECEMBER 31, 1996............................... 20,688 21 82,984 (22,824) 125 60,306 Issuance of 5,058 shares of common stock................. 5,058 5 31,790 -- -- 31,795 Exercise of warrants..................................... 190 -- 857 -- -- 857 Stock issued for employee stock purchase plan and exercise of stock options.............................. 976 1 4,192 -- -- 4,193 Effect of change in Astrotech year end................... -- -- -- 1,181 -- 1,181 Foreign currency translation adjustment.................. -- -- -- -- (943) (943) Net loss................................................. -- -- -- (6,001) -- (6,001) ------ --- -------- -------- ----- ------- BALANCE, DECEMBER 31, 1997............................... 26,912 $27 $119,823 $(27,644) $(818) $91,388 ====== === ======== ======== ===== =======
See Notes to Consolidated Financial Statements F-6 29 ITEQ, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
1995 1996 1997 ------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)......................................... $ 3,491 $ 3,924 $ (6,001) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization............................. 4,835 5,717 7,859 Provision (Benefit) for deferred income taxes............. 1,398 1,634 (3,240) Non-cash write-offs related to discontinued operations.... -- -- 824 Gain on sale of investment in subsidiary.................. -- (160) -- Extraordinary loss on early extinguishment of debt........ -- -- 4,812 Change in Astrotech fiscal year end....................... -- -- 1,181 Tax benefit from employee stock plans..................... -- -- 630 Non-cash write-offs from restructuring.................... -- -- 5,055 Gain on sale of land, buildings & equipment............... (347) (48) -- Non-cash interest......................................... -- 302 499 Changes in assets and liabilities, net of effects of businesses acquired: Due on contracts and other receivables, net............. (8,473) 3,698 (3,559) Inventories............................................. (1,407) 2,613 5,106 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. (9,669) (4,139) (2,859) Prepaid expenses, deposits and other assets............. (658) (518) (985) Accounts payable and accrued liabilities................ 13,168 (1,995) 3,002 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. (2,159) (1,197) 1,053 Progress billings....................................... -- 4,128 (4,891) Other................................................... (27) (817) (1,645) ------- ------- -------- Net cash provided by operating activities............... 152 13,142 6,841 ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquired businesses, net of cash acquired... -- (55,622) (18,776) Purchases of property and equipment....................... (5,190) (8,291) (5,377) Contingent purchase consideration paid.................... -- (544) (3,354) Cash received from sale of land, buildings & equipment.... 294 215 -- Proceeds from note receivable from employee............... -- 613 -- Proceeds from sale of investment in subsidiary............ -- 1,000 -- ------- ------- -------- Net cash used by investing activities................... (4,896) (62,629) (27,507) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term obligations....................... 10,400 32,499 17,840 Proceeds/Repayment from subordinated debt & warrants...... -- 15,000 (15,000) Payments of long-term obligations......................... (9,279) (2,499) (70,830) Net borrowings under line of credit....................... 6,417 17,432 55,531 Debt issuance costs....................................... -- (3,002) -- Net proceeds from common stock offering................... -- -- 31,795 Capital distributions to shareholders of pooled company... (1,433) -- -- Proceeds from exercise of stock options and warrants...... 47 178 4,420 Costs relating to issuance of warrants and stock.......... -- (206) -- Repayments of long-term debt to related parties........... (968) (160) -- Repayment of other long-term debt......................... (2,193) (4,239) -- Cash paid for stock repurchase............................ -- (292) -- Other..................................................... 438 (426) -- ------- ------- -------- Net cash provided by financing activities............... 3,429 54,285 23,756 ------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 114 (107) (399) ------- ------- -------- Net increase (decrease) in cash and cash equivalents........ (1,201) 4,691 2,691 Cash and cash equivalents, beginning of period.............. 3,500 2,299 6,990 ------- ------- -------- Cash and cash equivalents, end of period.................... $ 2,299 $ 6,990 $ 9,681 ======= ======= ======== Supplemental disclosure of cash flow information: Cash paid for interest.................................. $ 1,903 $ 3,023 $ 6,853 ======= ======= ======== Cash paid for income taxes.............................. $ 2,815 $ 844 $ 380 ======= ======= ======== Supplemental schedule of non-cash investing & financing activities: Non-compete agreements.................................. $ -- $ 500 $ -- ======= ======= ======== Net business assets disposed through company financing or non-cash consideration.............................. $ -- $ 950 $ -- ======= ======= ========
See Notes to Consolidated Financial Statements F-7 30 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ITEQ, Inc. ("ITEQ" or the "Company")designs, engineers, manufactures and services process, storage and filtration systems, 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. It is the leading domestic manufacturer and servicer of shell and tube heat exchangers, principally for petrochemical and refining applications, a leading designer and producer of above-ground storage tanks ("ASTs") and related products primarily for the petrochemical, municipal water storage, food and agriculture industries, and a leading producer of baghouses, scrubbers, fans and other filtration systems and components for environmental and general industrial applications including use in the steel and foundry, microelectronics, chemical, minerals, pharmaceutical and other industries. The Company also manufactures specialized process equipment, such as pressure vessels and blenders, principally for the refining, petrochemical and plastics industries. ITEQ also provides non-destructive testing and inspection services for ASTs, pressure vessels and piping and also offers mobile storage tank leasing services. The Company operates internationally, with its equipment, systems and services sold or utilized in over 30 countries worldwide. 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. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements have also been restated to reflect the merger with Astrotech International Corporation ("Astrotech") on October 28, 1997 and the merger with Allied Industries, Inc. ("Allied") on December 28, 1995 which were accounted for as poolings-of-interests. During August 1997 and effective on August 31, 1997, management of ITEQ adopted plans to discontinue certain of its low margin generic fabrication operations at its Allied subsidiary which is expected to be completed in the third quarter of 1998. See Note 10. REVENUE RECOGNITION The Company records substantially all revenues using the percentage-of-completion method. Under this method, the Company recognizes as revenues that portion of the total contract price which the cost of work completed to date bears to the estimated total cost of the work included in the contract. Because contracts may extend over more than one fiscal period, revisions of cost and profit estimates are made periodically and are reflected in the accounting period in which they are determined. If the estimate of total costs on a contract indicates a loss, the total anticipated loss is recognized immediately. Contract costs include all direct material, labor and subcontracting costs and those indirect costs related to contract performance, such as supplies, tools and repairs. The Company recognizes revenue from certain short-term contracts using the completed contract method. Revenue is recognized when a project is substantially complete. The contracts 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. As planned when acquired, Ohmstede has initiated foreign sales, which typically have longer production times and more units per order in production and shipment than Ohmstede's historical domestic business. Accordingly, such sales were recognized under the percentage-of-completion revenue recognition method. F-8 31 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. ACCOUNTS RECEIVABLE At December 31, 1996 and 1997, due on contracts and other receivables consist of:
1996 1997 ------- ------- Billings on completed contracts and contracts in progress... $59,979 $68,522 Retained contract receivables............................... 3,629 4,599 Allowance for doubtful accounts............................. (888) (981) ------- ------- $62,720 $72,140 ======= =======
All retainages as of December 31, 1997 are expected to be collected by December 31, 1998. INVENTORIES Inventories consist of costs for which no related revenue has been recognized. Inventories include materials used in the manufacturing process and purchased parts 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 at December 31, 1996 and 1997, consists of the following:
1996 1997 ------- ------- Raw materials............................................... $ 7,103 $ 6,910 Work in progress............................................ 7,731 5,027 Finished goods.............................................. 437 1,201 ------- ------- $15,271 $13,138 ======= =======
PROPERTY AND EQUIPMENT Property and equipment are stated at cost, including costs to ready assets for use. Depreciation and amortization of property and equipment is computed on the straight-line method over the estimated useful F-9 32 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) lives of the assets and is recognized as depreciation expense in the statement of operations. At December 31, 1996 and 1997, property and equipment was comprised of the following items:
ESTIMATED USEFUL LIVES 1996 1997 ---------- -------- -------- Land............................................... N/A $ 3,104 $ 3,647 Furniture and fixtures............................. 3-15 years 3,469 4,094 Machinery and equipment............................ 5-15 years 27,213 29,309 Buildings and improvements......................... 7-39 years 11,133 12,423 Leasehold improvements............................. 3-10 years 330 388 Tanks and trucks held for lease.................... 4-15 years 7,336 8,352 -------- -------- 52,585 58,213 Less accumulated depreciation and amortization..... (12,819) (16,015) -------- -------- Property and equipment, net........................ $ 39,766 $ 42,198 ======== ========
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. 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. INTANGIBLE ASSETS The excess of cost over net assets acquired, licenses, trademarks and tradenames are amortized on a straight-line basis over periods ranging from five to forty years. The Company monitors each entity's historical and expected performance in the context of the value assigned to acquisition intangibles and to the amortization period applied to each intangible asset. The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may not be sufficient to support recorded goodwill. The Company modifies the life and/or the carrying amount of an acquisition intangible if an impairment is identified. Amortization expense was $1,300, $1,400 and $2,695 for the years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 and 1997, other assets was comprised of the following items:
1996 1997 ------- ------- Excess of costs over net assets acquired, net of accumulated amortization of $6,116 and $7,787 at December 31, 1996 and 1997, respectively.............................................. $50,631 $65,867 Licenses, patents, trademarks and tradenames, net of accumulated amortization of $970 and $1,639 at December 31, 1996 and 1997, respectively........................... 12,525 11,607 Debt issuance costs, net of accumulated amortization of $45 at December 31, 1996...................................... 2,957 -- Other....................................................... 971 1,899 ------- ------- Other assets, net........................................... $67,084 $79,373 ======= =======
F-10 33 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME TAXES Deferred taxes are provided based on temporary differences between the book and tax basis of assets and liabilities using presently enacted tax rates. EARNINGS (LOSS) PER COMMON SHARE On December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share," which replaced primary and fully diluted earnings per share ("EPS") with basic and diluted EPS. SFAS No. 128 was applied to all periods presented. Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Weighted average number of shares of common stock outstanding for diluted EPS includes the dilutive effect of common stock equivalents. Diluted earnings per share is approximately equal to the total of the combined primary earnings per share previously reported by ITEQ and Astrotech, after giving consideration to the exchange ratio. The only reconciling difference between the numerators and denominators for basic and diluted earnings per share is the impact of common stock options and warrants outstanding calculated using the treasury stock method. TRANSLATION ADJUSTMENT The financial activity of the Company's non-U.S. operations located in Canada, Germany, England, Australia and Singapore are translated into U.S. dollars. 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 the Company's current financing agreement and approximates carrying value. 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 or secure obligations with letters of credit. PENDING ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, F-11 34 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company is currently assessing the impact that adoption of this statement will have on its financial position and results of operations. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the December 31, 1997 presentation. NOTE 2 -- BUSINESS COMBINATIONS Results of operations for business combinations accounted for as purchases are included in the accompanying consolidated financial statements since the date of acquisition. The allocations of the purchase price to the fair market value of the net assets acquired in the 1997 acquisitions are based on preliminary estimates of fair market values and may be revised when additional information concerning asset and liability valuations is obtained. With respect to business combinations accounted for as poolings-of-interests, the consolidated financial statements have been restated for all periods presented as if the companies had been combined since inception. ASTROTECH On October 28, 1997, the Company merged with Astrotech International Corporation ("Astrotech") in a transaction accounted for as a pooling-of-interests (the "Merger"). Astrotech is a designer, fabricator and supplier of proprietary storage tank products and services providing a range of inspection, engineering, construction and maintenance services for aboveground storage tanks and also offering mobile storage tank leasing services. Industries served include refining, petrochemical, wastewater treatment, agricultural, pulp and paper, mining, water storage, power generation and process systems. The Company issued approximately 9,541 shares of ITEQ common stock in exchange for all the outstanding shares of Astrotech common stock based on an exchange ratio of .93 of a share of ITEQ common stock for each share of Astrotech common stock outstanding. In addition, all outstanding options to purchase Astrotech common stock were converted into options to purchase shares of ITEQ common stock, as adjusted for the exchange ratio. In connection with the Merger, the Company amended and restated its Certificate of Incorporation to, among other things, increase its authorized shares of common stock from 30,000 to 40,000. Prior to the Merger, Astrotech used a fiscal year ending on September 30. Accordingly, the restated financial statements combine the September 30, 1995 and 1996 financial statements of Astrotech with the December 31, 1995 and 1996 financial statements of the Company. Revenues and earnings from continuing operations of Astrotech for the three month period ended December 31, 1996 were $33,804 and $1,181, respectively, with net earnings reflected as an adjustment to retained earnings effective January 1, 1997. F-12 35 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Combined and separate results of the Company and Astrotech during the periods proceeding the merger were as follows:
EARNINGS FROM NET CONTINUING EARNINGS REVENUES OPERATIONS (LOSS) -------- ------------- -------- Nine months ended September 30, 1997 (unaudited): ITEQ............................................ $131,479 $5,372 $ 546 Astrotech....................................... 110,943 3,531 3,531 -------- ------ ------ Combined..................................... $242,422 $8,903 $4,077 ======== ====== ====== 1996: ITEQ............................................ $ 86,077 $1,456 $ (86) Astrotech....................................... 122,738 4,010 4,010 -------- ------ ------ Combined..................................... $208,815 $5,466 $3,924 ======== ====== ====== 1995: ITEQ............................................ $ 74,549 $1,558 $ 760 Astrotech....................................... 100,424 2,731 2,731 -------- ------ ------ Combined..................................... $174,973 $4,289 $3,491 ======== ====== ======
EXELL Effective August 1, 1997, the Company purchased all of the capital stock of Exell, Inc. ("Exell") for total cash consideration of approximately $8,088 plus assumption of certain liabilities. The cash consideration consisted of $7,864 in purchase price and $224 for related acquisition expenses. Exell is a manufacturer of shell and tube heat exchangers and was previously a competitor of the Company's Ohmstede operation. For its fiscal year ended September 30, 1996, Exell reported revenues of approximately $26,779. 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............................................. $1,424 Property and equipment...................................... 1,422 Excess of costs over net assets acquired.................... 5,242 ------ Total purchase price...................................... $8,088 ======
TRUSCO On May 1, 1997, the Company purchased all of the issued and outstanding shares of capital stock of Trusco Tank, Inc. ("Trusco") and two parcels of real property used in Trusco's business and owned by two of its shareholders. Trusco is a designer, fabricator and field erector of steel structures, including storage tanks, pressure vessels and shop-built tanks (both aboveground and underground). Trusco's customers include municipal water districts, wastewater treatment facilities, oil companies, industrial facilities, wineries and various process industries. The base purchase price of $11,458 consisted of $10,958 in cash and $500 of acquisition-related expenses. In addition, Astrotech repaid Trusco's existing bank obligations totaling $4,500. F-13 36 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The purchase price has been allocated to the assets purchased and liabilities assumed based upon the estimated fair values at the date of acquisition as follows: Working capital............................................. $ 4,800 Property and equipment...................................... 3,658 Debt assumed................................................ (4,726) Excess of costs over net assets acquired.................... 7,726 ------- Total purchase price.............................. $11,458 =======
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 $52,924 consisting of $52,000 for Ohmstede's stock and $924 for related acquisition costs. Assets not purchased included the majority of receivables due from 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 $600 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. 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 =======
GRAVER On March 28, 1996, the Company purchased Graver Holding Company and its wholly-owned subsidiary, Graver Tank & Mfg. Co., Inc. (collectively "Graver"). Graver designs, manufactures and erects storage tanks and pressure vessels for the petroleum and process industries. Graver also provides nickel-clad installations for the power generation and air pollution industries, providing fabrication and erection of scrubbers and stack liners. The base purchase price of approximately $2,900 consisted of approximately $2,750 in cash and approximately $150 of acquisition-related expenses. The seller has been paid additional cash proceeds of approximately $1,250 pursuant to the terms of an earn-out arrangement based on future profits, as defined. The profits under the earn-out agreement were achieved as of December 31, 1997. In addition, Astrotech repaid Graver's existing bank obligations totaling approximately $2,400. Net assets acquired were approximately $4,696 and costs of the acquisition in excess of net assets of the business acquired were approximately $870. Subsequent to the acquisition, additional consideration in the form of earn-out payments of $984 have been paid as of December 31, 1997 and recorded as costs in excess of net assets acquired. F-14 37 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PRO FORMA RESULTS OF OPERATIONS The following unaudited pro forma consolidated results of operations assume that the purchase of Exell, Trusco, Ohmstede and Graver occurred on January 1, 1996:
AS PRO REPORTED FORMA ITEQ 1997 EXELL TRUSCO 1997 --------- ------- ------ -------- Revenues............................................... $335,599 $15,166 $7,571 $358,336 Earnings (Loss) from continuing operations............. 35 367 (71) 331 Net earning (loss)..................................... (6,001) 367 (71) (5,705) Basic earnings (loss) per common share: From continuing operations........................... -- .02 -- .02 Net earnings (loss).................................. (.25) .02 -- (.23) Diluted earnings (loss) per common share: From continuing operations........................... -- .01 -- .01 Net earnings (loss).................................. (.23) .01 -- (.22)
AS PRO REPORTED FORMA ITEQ 1996 EXELL TRUSCO OHMSTEDE GRAVER 1996 --------- ------- ------- -------- ------- -------- Revenues.......................... $208,815 $26,779 $24,809 $83,124 $10,389 $353,916 Earnings (Loss) from continuing operations...................... 5,466 406 950 2,339 (666) 8,495 Net earnings (loss)............... 3,924 406 950 2,339 (666) 6,953 Basic earnings (loss) per common share: From continuing operations...... .26 .02 .05 .11 (.03) .41 Net earnings (loss)............. .19 .02 .05 .11 (.03) .34 Diluted earnings (loss) per common share: From continuing operations...... .26 .02 .04 .11 (.03) .40 Net earnings (loss)............. .19 .02 .04 .11 (.03) .33
The pro forma financial information may not necessarily be indicative of the Company's results of operations that would have occurred had the transaction been effected on the assumed dates, nor do the pro forma results purport to indicate the Company's results of operations for any future period. NOTE 3 -- MERGER, ACQUISITION AND RESTRUCTURING COSTS During the fourth quarter of 1997, the Company recorded nonrecurring charges totaling $17,956 in connection with the merger with Astrotech and related restructuring of operations including the elimination of excess capacity and duplicate facilities. Of this amount, (i) transaction costs totaled $5,145, which consisted of professional fees paid to financial advisors, accountants and attorneys, (ii) costs to combine the operations of the Company and Astrotech included write-downs for duplicate facilities and excess capacity of $5,276, (iii) severance costs and other benefits totaled $4,221 and (iv) business integration and reorganization costs totaled $3,314. Transaction costs include professional expenses of $361 related to the terminated purchase agreement with Matrix Service Company. Approximately $5,055 of the asset write-down was non-cash. During 1996, the Company incurred a restructuring charge of $2,022. 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 F-15 38 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) overall cost structure including employee severance, lease and other contract buyouts, inventory and other asset impairments, losses related to termination of unprofitable business lines, excess machinery disposal and other related costs. The following table summarizes the major components of the restructuring charge: Termination pay and benefits................................ $1,204 Office relocation and consolidation......................... 462 Legal....................................................... 242 Other....................................................... 114 ------ $2,022 ======
When the Company committed to its restructuring plan during the first quarter of 1996, 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 $900 in severance pay and benefits, unpaid as of December 31, 1996, was paid during the first quarter of 1997. Substantially all of the terminated employees were either in management positions or were professionals including engineers and accountants. During the fourth quarter of 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 $170. 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. Costs incurred to date, estimated earnings and the related progress billings to date on contracts in progress are as follows:
1996 1997 --------- --------- Costs incurred to date...................................... $ 148,646 $ 203,243 Estimated earnings.......................................... 32,851 53,402 --------- --------- Revenue recognized.......................................... 181,497 256,645 Progress billings to date................................... (162,261) (234,815) Costs incurred for which no revenues were recognized to date...................................................... 955 140 --------- --------- $ 20,191 $ 21,970 ========= =========
The preceding is included in the accompanying consolidated balance sheets as follows:
1996 1997 --------- --------- Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $ 26,736 $ 30,164 Billings in excess of costs and estimated earnings on uncompleted contracts..................................... (6,545) (8,194) --------- --------- $ 20,191 $ 21,970 ========= =========
F-16 39 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 5 -- LONG-TERM OBLIGATIONS Long-term obligations consist of the following as of December 31, 1996 and 1997:
1996 1997 ------- ------- Revolving loan facility..................................... $ -- $89,936 Secured term loan note with interest fluctuating with the Offshore Rate or Base Rate................................ 35,000 -- Secured note under a credit facility totaling $38,000 with interest fluctuating with the Offshore Rate or Base Rate...................................................... 25,400 -- Term loan, with interest at the Company's option at either lender's base rate plus a spread ranging from 1/4 to 1/2 percent or at various LIBOR rates plus a spread ranging from 1 3/4 to 2 3/4 percent............................... 8,700 -- Line of credit of up to $14,000 with interest at the Company's option at either Bank One's base rate plus a spread ranging from zero to 1/4 percent or at various LIBOR rates plus a spread ranging from 1 1/2 to 2 1/2 percent................................................... 7,452 -- Unsecured senior subordinated notes bearing interest at 12% through 1997 net of debt discount of $2,288 related to issuance of detachable warrants........................... 12,712 -- Other....................................................... 4,876 122 ------- ------- 94,140 90,058 Less current maturities..................................... (9,455) (104) ------- ------- Long-term obligations, net of current maturities............ $84,685 $89,954 ======= =======
Scheduled maturities of long-term obligations are as follows: 1998................................................... $ 104 1999................................................... 18 2000................................................... -- 2001................................................... -- 2002................................................... 89,936 ------- $90,058 =======
REVOLVING LOAN FACILITY In October 1997, in connection with the Astrotech Merger, the Company refinanced its and Astrotech's existing credit facilities under a new revolving credit facility (the "New Credit Facility") with various financial institutions with a commitment amount of up to $175,000 maturing in 5 years and bearing interest, at the Company's option, at BankBoston, N.A.'s customary base rate or at BankBoston's eurodollar rate plus, in either case, an agreed upon margin ranging from 0% to .25% for the applicable base rate margin, and from 1% to 1.75% for the applicable eurodollar rate margin. The applicable interest rate on amounts outstanding at December 31, 1997 was 6.97%. A commitment fee ranging from 0.25% to 0.5% per annum is payable on the unused portion of the New Credit Facility. The New Credit Facility is secured by substantially all of the assets of the Company, a pledge of the stock of the Company's domestic subsidiaries, and guarantees entered into by such subsidiaries. The Company's credit facility requires the Company to maintain certain levels of working capital and stockholders' equity and contains other restrictive covenants. Such instruments also limit the ability of the F-17 40 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Company to incur additional indebtedness and to make acquisitions and certain investments. At December 31, 1997, the Company was in compliance with the provisions of its debt agreements. PRIOR CREDIT FACILITY On November 18, 1996, the Company revised its financing agreement to, among other things, increase its prior credit facilities with participating financial institutions ("Lenders"). The Company's prior credit facilities consisted of a $35,000 secured term loan and a $38,000 secured revolving credit facility. The interest on the term loan was at the lender's Offshore Rate ("Offshore Rate"), as defined, plus a spread, and the interest on the line of credit was at the Offshore Rate or the base rate, as defined, plus spreads. The spreads ranged from 2% to 3% above the Offshore Rate and from 0.25% to 1.25% above the base rate. The spread increased or decreased based on the Company's leverage ratio. Substantially all of the assets of the Company served as collateral. In October 1997, the Company refinanced these credit facilities and incurred an extraordinary charge of $1,630 ($1,043 net of taxes) related to the write-off of debt issuance costs from these previous credit facilities. SUBORDINATED NOTES In addition to the prior credit facilities, on November 18, 1996, the Company entered into two Senior Subordinated Notes ("Subordinated Notes")for approximately $13,000 and $2,000, respectively. The interest on the Subordinated Notes was at 12% through December 31, 1997 and increased by 0.5% per year for each year until paid. As further consideration, the Lender 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 $2,300, which was reflected as equity and as a debt discount at the date of their issuance. During the quarter ended September 30, 1997, the Company repaid its subordinated notes using available proceeds under its New Credit facility. The Company incurred an extraordinary loss of $3,182 ($2,037 net of taxes), related to the write-off of unamortized debt discount and issuance costs. 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-cancelable leases:
YEAR ENDING DECEMBER 31, - ------------ 1998................................................................. $1,225 1999................................................................. 1,076 2000................................................................. 910 2001................................................................. 694 2002................................................................. 544 ------ Total................................................................ $4,449 ======
The leases provide for payment of maintenance and other expenses by the Company. Rent expense was approximately $1,800, $1,900 and $1,437 for the years ended December 31, 1995, 1996 and 1997. F-18 41 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 7 -- INCOME TAXES Provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------- Current: Federal................................................. $ 830 $ 559 $ 5,483 State................................................... 610 492 853 Foreign................................................. 150 320 557 ------ ------ ------- Total current provision................................... 1,590 1,371 6,893 ------ ------ ------- Deferred: Federal................................................. 1,591 1,629 (3,867) State................................................... (71) 58 (567) Foreign................................................. -- 337 (115) ------ ------ ------- Total deferred provision.................................. 1,520 2,024 (4,549) ------ ------ ------- Income tax provision...................................... $3,110 $3,395 $ 2,344 ====== ====== =======
The earnings before taxes relating to foreign operations totaled approximately $530, $1,870 and $1,400 for the years ended December 31, 1995, 1996 and 1997, respectively. 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, ------------------- 1996 1997 ------- ------- Net current deferred income tax assets (liabilities): Compensation recognition.................................. $ 382 $ 632 Accruals.................................................. 2,053 4,506 Tax benefit carry forwards................................ 1,870 2,387 Contract accounting....................................... (316) 64 Other..................................................... 32 -- ------- ------- $ 4,021 $ 7,589 ======= ======= Net non-current deferred income tax assets (liabilities): Tax benefit carry forwards................................ $ 508 $ 1,230 Property and equipment.................................... (4,483) (4,930) Intangible assets......................................... (313) (914) Other..................................................... 2 -- Valuation allowance....................................... (146) (146) ------- ------- $(4,432) $(4,760) ======= =======
The valuation allowance relates to deferred tax assets for losses incurred by foreign subsidiaries. These losses will be carried forward to future years and are not expected to expire. As of December 31, 1996 and 1997, the Company had regular U.S. and foreign net operating losses carried forward for tax reporting purposes totaling approximately $3,256 and $7,298, respectively. F-19 42 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Differences between the Company's effective income tax rate and the statutory federal income tax rate are as follows:
DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Tax provision at the federal statutory income tax rate... $2,516 $3,014 $ 833 Differences in foreign versus U.S. tax rates............. 34 16 68 State income taxes, net of federal benefit............... 353 386 116 Amortization of intangible assets........................ 298 300 349 Non-deductible acquisition costs......................... 234 -- 910 Valuation allowance...................................... (377) (270) -- Other.................................................... 52 (51) 68 ------ ------ ------ Total tax provision............................ $3,110 $3,395 $2,344 ====== ====== ======
The valuation allowance was reduced by $377 and $270 for the years ended December 31, 1995 and 1996 in order to properly recognize the portion of the Company's deferred tax asset which was more likely than not to be realized. NOTE 8 -- STOCK OFFERING In May 1997, the Company sold approximately 5,058 shares of common stock. The primary use of the offering net proceeds of $31,795 was to reduce debt incurred for the Company's acquisition program. NOTE 9 -- STOCK WARRANTS AND OPTIONS STOCK WARRANTS Following is a summary of the warrants outstanding at December 31, 1997:
STOCK EXERCISE ISSUABLE PRICE DATE UPON PER EXPIRATION DESCRIPTION ISSUED EXERCISE SHARE DATE ----------- ------ -------- -------- ---------- Warrants...................................... 4/96 34 $4.72 4/98 Subordinated debt warrants.................... 11/96 1,760 $5.10 11/03 ----- Total....................................... 1,794 =====
In 1997, warrants for 190 shares were exercised for net proceeds of $857. The exercise price of the subordinated debt warrants is 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 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, is the fair market value of the Company's stock at the date of grant and 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. F-20 43 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. Options may not be transferred by the optionee other than by will or the laws of descent and distribution. Prior to merger, Astrotech maintained four stock option plans for its employees and nonemployee directors, the 1984 Stock Option Plan, the 1989 Stock Incentive Plan, the 1994 Stock Option Plan for Employees of BMT (the "BMT Plan") and the 1995 Nonemployee Directors Stock Option Plan. The numbers of options and exercise price per share was converted to ITEQ options in accordance with the exchange rate in the merger agreement. The merger effected no other terms of any of the plans. All outstanding options, except for grants under the BMT Plan, are fully exercisable. The BMT Plan options issued vest at the rate of 20% per year after the first anniversary from the date of grant. 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 1997 ------ ------ ------- Net earnings (loss): As reported........................................... $3,491 $3,924 $(6,001) Pro forma............................................. 3,461 3,767 (6,446) Basic net earnings (loss) per common share: As reported........................................... .17 .19 (.25) Pro forma............................................. .17 .18 (.27) Diluted net earnings (loss) per common share: As reported........................................... .17 .19 (.23) Pro forma............................................. .17 .18 (.27)
Because the SFAS No. 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 table above excludes $85 of expense related to immediately vested options granted to Astrotech employees in October 1996. Astrotech's net earnings for three months ended December 31, 1996, of $1,181 would have been $1,096 on a pro forma basis. 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 1997 GRANTS ----------- ----------- ----------- Expected dividend yield.......... 0% 0% 0% Expected stock price volatility..................... 39.74%-45.09% 42.88%-44.85% 54.17%-61.78% Risk free interest rate.......... 5.43%-6.48% 5.38%-6.93% 5.51%-5.57% Expected life of options......... 5 to 10 years 4.25 to 10 years 5 to 10 years
F-21 44 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Stock option grants for 1995 reflect only ITEQ grants. Stock option grants for 1996 and 1997 include both ITEQ and Astrotech grants. A summary of the status of the Company's stock option plans at December 31, 1995, 1996 and 1997 and changes during the years then ended is presented in the table below:
1995 1996 1997 ------------------ ------------------ ------------------ WTD AVG WTD AVG WTD AVG SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE ------ --------- ------ --------- ------ --------- Outstanding at beginning of year........................... 1,503 $ 3.75 1,774 $ 3.55 1,907 $ 3.60 Granted.......................... 342 2.68 418 3.65 453 7.35 Exercised........................ (4) (1.41) (70) (2.70) (967) (3.67) Forfeited........................ (47) (3.52) (201) (3.42) (100) (3.65) Expired.......................... (20) (4.82) (14) (4.71) -- -- ------ ------ ------ ------ ------ ------ Outstanding at end of year....... 1,774 $ 3.55 1,907 $ 3.60 1,293 $ 4.81 ====== ====== ====== ====== ====== ====== Exercisable at end of year....... 960 $ 3.73 1,302 $ 3.71 553 $ 3.78 ====== ====== ====== ====== ====== ====== Weighted average fair value of options granted................ $ 1.19 $ 1.82 $ 5.16 ====== ====== ======
The options outstanding at December 31, 1997 have exercise prices between $1.22 and $13.94 and a weighted average remaining contractual life of 5.4 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, 1996 and 1997, 15 and 9 shares, respectively, were issued under the plan. NOTE 10 -- DISCONTINUED OPERATIONS During August 1997 and effective on August 31, 1997, management of ITEQ adopted plans to discontinue certain of its low margin generic fabrication operations at its Allied subsidiary. Certain of the net assets of Allied's operations will be liquidated as remaining orders in process are completed. The estimated completion date of the net asset liquidation is the third quarter of 1998. The Allied facility will not be disposed as it will be used in the Company's facility consolidation effort. The net assets of Allied are included in the December 31, 1997 consolidated balance sheet and are summarized as follows: Due on contracts and other receivables, net................. $2,192 Costs and estimated earnings in excess of billings on uncompleted contracts..................................... 2,185 Inventories................................................. 1,822 Other assets................................................ 79 ------ Total assets...................................... 6,278 ------ Accounts payable............................................ 752 Accrued liabilities including estimated losses from disposal.................................................. 1,194 ------ Total liabilities................................. 1,946 ------ Net assets of discontinued operations....................... $4,332 ======
Management believes the liability for the estimated loss on disposal of discontinued operations is adequate. The adequacy of this liability will be evaluated each quarter. F-22 45 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales from discontinued operations were $38,707, $24,779 and $15,297 for the years ended 1995, 1996 and 1997, respectively. Summary operating results through August 31, the date of measurement, for 1997 were as follows: Revenues.................................................... $11,800 Operating loss.............................................. 578 Interest expense............................................ 1,030 Loss before income taxes.................................... 1,608 Income tax benefit.......................................... 547 Net loss from discontinued operations....................... 1,061
Operating losses during the phase out period have been included in the loss on disposal of discontinued operations in the accompanying financial statements. Losses of $2,401 have been incurred through December 31, 1997. Interest expense has been allocated based on intercompany debt balances. After tax interest expense of $193 has been included in the estimated loss on disposal. Discontinued operations have not been separated in the consolidated statements of cash flows and, therefore, amounts for certain captions will not agree with the respective consolidated statement of operations. 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 1995 and 1996 net earnings is as follows:
INCREASE/(DECREASE) ------------------- 1995 1996 --------- ------ Net earnings (loss)......................................... $(1,608) $321 Basic net earnings (loss) per common share.................. (.08) .02 Diluted net earnings (loss) per common share................ (.08) .02
The balance of retained earnings at December 31, 1995 was reduced by $1,514, for the effect (net of income taxes) of applying retroactively the revised method of accounting. NOTE 11 -- CONTINGENCIES LITIGATION On March 19, 1996, the Company's HMT, Inc. subsidiary ("HMT") was served with a complaint filed in Superior Court of California, County of Contra Costa. This matter arises out of a tank fire which occurred in June of 1995, at a refinery in northern California, where HMT employees were replacing seals on an aboveground storage tank. In October 1997, HMT entered into a Settlement Agreement effectively terminating this matter. The Company's insurance carrier funded the settlement amount of $500, subject to the Company's self-insured retentive limits, under the applicable insurance policy. Certain of the Company's subsidiaries are parties to legal proceedings in the ordinary course of business. While the outcome of lawsuits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition, results of operations or liquidity of the Company. F-23 46 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INSURANCE Prior to November 1997, Astrotech's insurance program for workers' compensation and general liability was partially self-insured. Estimated costs of claims outstanding of approximately $3,700 at December 31, 1997 under these self-insurance agreements are included in accrued liabilities in the accompanying consolidated balance sheet. It is possible that the ultimate cost of claims outstanding could differ from management's current estimates. NOTE 12 -- RETIREMENT PLANS The Company maintains several defined contribution plans covering substantially all of its employees. Employees may contribute to these plans and contributions may be matched at the Company's discretion in varying amounts. The Company also contributes to union-sponsored retirement plans for its employees covered under collective bargaining agreements. Amounts contributed are determined based upon a percentage of wages paid or amounts per hour worked by such employees or a match of the employees' contributions. NOTE 13 -- MAJOR CUSTOMERS AND FOREIGN OPERATIONS Due to the nature of the Company's business, contracts are generally nonrecurring. For the years ended December 31, 1995, 1996 and 1997, no single customer accounted for 10% of revenues. Financial data by geographical area is as follows:
1995 1996 1997 -------- -------- -------- Revenue: North America...................................... $158,032 $186,268 $309,602 Europe............................................. 10,253 13,106 13,043 Asia............................................... 6,688 9,441 12,954 -------- -------- -------- Total...................................... $174,973 $208,815 $335,599 ======== ======== ======== Operating profit(1): North America...................................... $ 8,244 $ 12,231 $ 24,266 Europe............................................. 520 878 709 Asia............................................... 264 634 812 -------- -------- -------- Total...................................... $ 9,028 $ 13,743 $ 25,787 ======== ======== ======== Identifiable assets: North America...................................... $125,765 $211,418 $245,847 Europe............................................. 7,678 9,471 10,717 Asia............................................... 3,952 3,863 4,923 -------- -------- -------- Total...................................... $137,395 $224,752 $261,487 ======== ======== ========
- --------------- (1) Before merger, acquisition and restructuring costs of $170, $2,022 and $17,956 for 1995, 1996 and 1997, respectively. Including exports, international sales accounted for approximately 15% of total revenue in 1997. F-24 47 ITEQ, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 14 -- UNAUDITED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------- 1997 Revenues.............................................. $74,079 $78,210 $90,133 $ 93,177 Earnings (loss) from continuing operations............ 2,263 2,787 3,853 (8,868) Net earnings (loss)................................. 1,905 2,321 (149) (10,078) Basic earnings per share: From continuing operations.......................... .11 .12 .15 (.33) Net earnings (loss)................................. .09 .10 (.01) (.38) Diluted earnings per share: From continuing operations.......................... .10 .11 .14 (.33) Net earnings (loss)................................. .09 .10 (.01) (.38) 1996 Revenues.............................................. $42,161 $42,443 $50,017 $ 74,194 Earnings from continuing operations................... 112 1,570 1,521 2,263 Net earnings (loss)................................. (1,031) 685 1,995 2,275 Basic earnings per share: From continuing operations.......................... .01 .08 .07 .11 Net earnings (loss)................................. (.05) .03 .10 .11 Diluted earnings per share: From continuing operations.......................... .01 .08 .07 .11 Net earning (loss).................................. (.05) .03 .10 .11
F-25 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 24th day of March, 1998. ITEQ, Inc. (Registrant) By /s/ MARK E. JOHNSON ----------------------------------- (Mark E. Johnson) Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated and on the 24th day of March, 1998.
SIGNATURE TITLE --------- ----- /s/ MARK E. JOHNSON Director, Chairman of the Board - ----------------------------------------------------- and Chief Executive Officer (Mark E. Johnson) (Principal Executive Officer) /s/ LAWRANCE W. MCAFEE Director, Executive Vice - ----------------------------------------------------- President, Chief Financial (Lawrance W. McAfee) Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) /s/ PIERRE S. MELCHER Director - ----------------------------------------------------- (Pierre S. Melcher) /s/ THOMAS N. AMONETT Director - ----------------------------------------------------- (Thomas N. Amonett) /s/ T. WILLIAM PORTER Director - ----------------------------------------------------- (T. William Porter) /s/ JAMES L. RAINEY Director - ----------------------------------------------------- (James L. Rainey) /s/ JAMES A. READ Director - ----------------------------------------------------- (James A. Read) /s/ NATHAN M. AVERY Director - ----------------------------------------------------- (Nathan M. Avery)
49 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant. (Filed as Appendix E to the Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 3.2 -- Amended and Restated Bylaws of the Registrant. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining the rights of holders of Common Stock. 4.2 -- Revolving Credit Agreement dated as of October 28, 1997 by and among the Registrant, the Guarantors and various lending institutions including Deutsche Bank AG as Documentation Agent and BankBoston, N.A. as Agent. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 4.3 -- Warrant Agreement, dated November 18, 1996, between the Registrant and International Mezzanine Capital, B.V. ("Mezzanine"). (Filed as an exhibit to Form 8-K dated December 5, 1996 and incorporated herein by reference). 4.4 -- Warrant Agreement dated November 18, 1996, between the Registrant 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 -- 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). 4.6 -- 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). 4.7 -- 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 -- Plan and Agreement of Merger dated as of June 30, 1997, by and between the Registrant and Astrotech International Corporation ("Astrotech"). (Filed as Appendix A to the Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 10.2 -- Stock Purchase Agreement dated as of April 30, 1997, by and between Jared A. Trussler, Ray E. Crosno and Leslie D. Scott ("Sellers") and Astrotech (predecessor-in-interest to the Registrant). (Filed as an exhibit to Form 8-K of Astrotech dated as of May 14, 1997 and incorporated herein by reference). 10.3 -- Stock Purchase Agreement, dated April 24, 1997, among the owners of Exell Inc. ("Exell") and the Registrant. (Filed as an exhibit to Amendment No. 2 to the Registrant's Registration Statement on Form S-2 (No. 333-23245) and incorporated herein by reference). 10.4 -- First and Second Amendment to Exell Stock Purchase Agreement among the owners of Exell and the Registrant. (Filed as an exhibit to Form 10-Q for the quarter ending June 30, 1997 and incorporated herein by reference). 10.5 -- Amendment No. 2, as of February 28, 1997, to the Stock Purchase Agreement dated February 7, 1994, by and among Astrotech (predecessor-in-interest to the Registrant), Brown-Minneapolis Tank & Fabricating Company ("BMT") and Irwin Jacobs. (Filed as an exhibit to Form 10-Q for the quarter ended March 31, 1997 of Astrotech and incorporated herein by reference).
50
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.6 -- Purchase and Sale Agreement, dated as of the Effective Date (as defined therein), between Babel, Miller & Blackwell Partnership (the "Partnership") and the Registrant. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.7 -- First Amendment to Purchase and Sale Agreement, effective August 13, 1997, among the Partnership, Beaumont Franklin Street Properties, L.L.C. ("BFSP"), Neches Street Properties, L.L.C. ("NSP") and the Registrant. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.8 -- 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). 10.9 -- Stock Purchase Agreement dated March 7, 1996, by and among Astrotech (predecessor-in-interest to the Registrant), Timothy J. McDavid, Graver Holding Company and Graver Tank & Mfg. Co. (Filed as an exhibit to Astrotech's Form 8-K dated April 10, 1996 and incorporated herein by reference). 10.10 -- 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). 10.11 -- Employment Agreement dated September 30, 1997 for Mark E. Johnson. (Filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference). 10.12 -- Employment Agreement dated May 15, 1997, between the Registrant and John Camardella. (Filed as an exhibit to Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). 10.13 -- 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). 10.14 -- 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). 10.15 -- 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). 10.16 -- Director Stock Option Plan, as amended. (Plan filed as an exhibit to Proxy Statement for Annual Meeting of Stockholders held 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). 10.17 -- Amended and Restated ITEQ 1990 Stock Option Plan. (Filed as Appendix D to Joint Proxy Statement/Prospectus of the Registrant and Astrotech on October 3, 1997 and incorporated herein by reference). 10.18 -- 1984 Stock Option Plan. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-3360) and incorporated herein by reference). 10.19 -- 1989 Stock Incentive Plan. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-2975) and incorporated herein by reference). 10.20 -- The 1994 Stock Option Plan for the Employees of BMT. (Filed as an exhibit to Astrotech's Registration Statement on Form S-8 (No. 33-85106) and incorporated herein by reference).
51
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.21 -- 1995 Non-Employee Directors' Stock Option Plan. (Filed as an exhibit to Astrotech's Proxy Statement of Astrotech for the Annual Meeting of Shareholders filed on or about April 10, 1995 and incorporated herein by reference). 10.22 -- Lease, dated August 13, 1997 among Beaumont Franklin Street Properties, L.L.C., Neches Street Properties, L.L.C. and Exell. (Filed as an exhibit to Form 8-K dated August 28, 1997 and incorporated herein by reference). 10.23 -- 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). 10.24 -- 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 Coopers & Lybrand, L.L.P. *27 -- Financial Data Schedule.
- --------------- * 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 March 5, 1998 related to the consolidated financial statements of ITEQ, Inc. and subsidiaries included in this Form 10-K, into ITEQ's previously filed Registration Statements on Form S-8 (Files No. 333-09051, 33-68516, 33-68518 and 33-68636) and into ITEQ's previously filed Registration Statement File No. 333-39367 on Form S-3. ARTHUR ANDERSEN LLP Houston, TX March 24, 1998 EX-23.2 3 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of ITEQ, Inc. on Form S-8 (Files No. 333-09051, 33-68516, 33-68518 and 33-68636) and the Registration Statement of ITEQ, Inc. on Form S-3 (File No. 333-39367) of our report dated December 6, 1996, on our audit of the consolidated financial statements of Astrotech International Corporation and subsidiaries as of September 30, 1996, and for each of the two years in the period ended September 30, 1996. COOPERS & LYBRAND L.L.P. Pittsburgh, Pennsylvania March 23, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 9,681 6,990 0 0 72,140 62,720 0 0 13,138 15,271 139,916 117,902 42,198 39,766 0 0 261,487 224,752 75,385 75,329 0 0 0 0 0 0 27 21 91,361 60,285 261,487 224,752 335,599 208,815 335,599 208,815 260,117 159,637 260,117 159,637 67,651 37,457 0 0 5,971 3,084 2,379 8,861 2,344 3,395 35 5,466 (2,956) (1,542) (3,080) 0 0 0 (6,001) 3,924 (.25) .19 (.23) .19
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