1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 28, 1998 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to --------------- --------------- Commission file number 1-9950 -------------------------------------- TEAM, INC. (Exact name of registrant as specified in its charter) Texas 74-1765729 -------------------------------- ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation Identification Number) or organization) 1019 South Hood Street, Alvin, Texas 77511 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (281) 331-6154 ---------------------------- ----------------------- 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 ------- ------- On March 25, 1998, there were 6,083,742 shares of the Registrant's common stock outstanding.
2 TEAM, INC. INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Page No. <S> <C> <C> Item 1. Financial Statements Consolidated Balance Sheets -- 3 February 28, 1998 and May 31, 1997 Consolidated Statements of Earnings -- 4 Three Months Ended February 28, 1998 and 1997 Nine Months Ended February 28, 1998 and 1997 Consolidated Statements of Cash Flows -- 5 Nine Months Ended February 28, 1998 and 1997 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis 7 of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 9 </TABLE>
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEAM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> FEBRUARY 28, MAY 31, 1998 1997 ------------- ------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 1,267,000 $ 1,672,000 Accounts receivable, net of allowance for doubtful accounts of $80,000 and $61,000 9,293,000 7,211,000 Materials and supplies 6,403,000 6,310,000 Prepaid expenses and other current assets 990,000 820,000 ------------- ------------- Total Current Assets 17,953,000 16,013,000 Property, Plant and Equipment: Land and buildings 6,855,000 6,526,000 Machinery and equipment 11,156,000 11,292,000 ------------- ------------- 18,011,000 17,818,000 Less accumulated depreciation and amortization 11,935,000 12,010,000 ------------- ------------- 6,076,000 5,808,000 Other Assets 1,984,000 2,247,000 ------------- ------------- $ 26,013,000 $ 24,068,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY <S> <C> <C> Current Liabilities: Current portion of long-term debt $ 263,000 $ 300,000 Accounts payable 1,731,000 740,000 Other accrued liabilities 2,703,000 3,298,000 Current income taxes payable -- 166,000 ------------- ------------- Total Current Liabilities 4,697,000 4,504,000 Long-term Debt and Other Obligations 6,257,000 7,601,000 Stockholders' Equity: Preferred stock, cumulative, par value $100 per share, 500,000 shares authorized, none issued -- -- Common stock, par value $.30 per share, 10,000,000 shares authorized, 6,057,042 and 5,259,542 shares issued at 1,817,000 1,578,000 February 28, 1998 and May 31, 1997, respectively Additional paid-in capital 27,031,000 25,123,000 Accumulated deficit (13,692,000) (14,641,000) Treasury stock at cost, 9,700 shares (97,000) (97,000) -------------- ------------- 15,059,000 11,963,000 ------------- ------------- $ 26,013,000 $ 24,068,000 ============= ============= </TABLE> See notes to consolidated financial statements 3
4 TEAM, INC. AND SUBSIDIARIES STATEMENTS OF EARNINGS <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 28, February 28, ----------------------------- ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------- <S> <C> <C> <C> <C> Revenues $ 11,483,000 $ 11,305,000 $ 33,428,000 $ 32,732,000 Operating expenses 6,744,000 6,437,000 19,382,000 18,414,000 Selling, general and administrative expenses 4,038,000 4,258,000 12,036,000 12,652,000 Interest 111,000 215,000 347,000 687,000 ------------ ------------ ------------ ------------ Earnings from continuing operations before income taxes 590,000 395,000 1,663,000 979,000 Provision for income taxes 275,000 185,000 714,000 450,000 ------------ ------------ ------------ ------------ Earnings from continuing operations, net of income taxes 315,000 210,000 949,000 529,000 Earnings from Military Housing projects discontinued operations, net -- -- -- 182,000 Estimated loss on sale of Military Housing projects discontinued operations, net -- -- -- (181,000) ------------ ------------ ------------ ------------ Net earnings $ 315,000 $ 210,000 $ 949,000 $ 530,000 ============ ============ ============ ============ NET EARNINGS PER COMMON SHARE - BASIC Net earnings from continuing operations $ 0.05 $ 0.04 $ 0.16 $ 0.10 Net earnings discontinued operations -- -- -- 0.00 ------------ ------------ ------------ ------------ Net earnings $ 0.05 $ 0.04 $ 0.16 $ 0.10 ============ ============ ============ ============ Weighted average number of shares outstanding 6,045,000 5,160,000 5,902,000 5,160,000 ============ ============ ============ ============ NET EARNINGS PER COMMON SHARE - DILUTED Net earnings from continuing operations $ 0.05 $ 0.04 $ 0.16 $ 0.10 Net earnings discontinued operations -- -- -- 0.00 ------------ ------------ ------------ ------------ Net earnings $ 0.05 $ 0.04 $ 0.16 0.10 ============ ============ ============ ============ Weighted average number of shares outstanding 6,227,000 5,160,000 6,095,000 5,160,000 ============ ============ ============ ============ </TABLE> See notes to consolidated financial statements. 4
5 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended February 28, ----------------------------- 1998 1997 ------------ ------------ <S> <C> <C> Cash Flows From Operating Activities: Net earnings $ 949,000 $ 530,000 Earnings from discontinued operations -- (1,000) ----------- ----------- Net earnings from continuing operations 949,000 529,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,094,000 1,050,000 Provision for doubtful accounts 20,000 -- Noncurrent deferred income taxes 561,000 353,000 Gain on sale of assets -- (21,000) Change in assets and liabilities: (Increase) decrease: Accounts receivable (2,102,000) 398,000 Materials and supplies (93,000) (286,000) Prepaid expenses and other assets (170,000) 96,000 Increase (decrease): Accounts payable 991,000 95,000 Other accrued liabilities (595,000) (573,000) Income taxes payable (166,000) 81,000 ----------- ----------- Net cash provided by continuing operating activities 489,000 1,722,000 Cash Flows From Discontinued Operations: Earnings from discontinued operations -- 1,000 Depreciation -- 1,093,000 Decrease in current assets -- 993,000 Increase in current liabilities -- (533,000) ----------- ----------- Net cash provided by discontinued operations -- 1,554,000 ----------- ----------- Net cash provided by operating activities 489,000 3,276,000 Cash Flows From Investing Activities: Capital expenditures (1,219,000) (1,103,000) Disposal of property and equipment 7,000 183,000 Decrease (increase) in other assets (264,000) 16,000 ----------- ----------- Net cash used in investing activities (1,476,000) (904,000) Cash Flows From Financing Activities: Payments under debt agreements and capital lease obligations - continuing (2,414,000) (2,067,000) Proceeds from borrowings 849,000 -- Payments under debt agreements - discontinued -- (1,041,000) Issuance of common stock 2,147,000 -- ----------- ----------- Net cash provided by (used in) financing activities 582,000 (3,108,000) ----------- ----------- Net decrease in cash and cash equivalents (405,000) (736,000) Cash and cash equivalents at beginning of year 1,672,000 2,037,000 ----------- ----------- Cash and cash equivalents at end of period $ 1,267,000 $ 1,301,000 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest: Operating $ 367,000 $ 701,000 Discontinued -- 3,274,000 ----------- ----------- $ 367,000 $ 3,975,000 =========== =========== Income taxes paid $ 440,000 $ 13,000 =========== =========== Income taxes refunded $ -- $ 4,000 =========== =========== </TABLE> See notes to consolidated financial statements. 5
6 TEAM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Method of Presentation General The interim financial statements are unaudited, but in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's annual report for the fiscal year ended May 31, 1997. 2. Dividends No dividends were paid during the first nine months of fiscal 1998 or 1997. Pursuant to the Company's Credit Agreement, the Company may not pay quarterly dividends without the consent of its senior lender. Future dividend payments will depend upon the Company's financial condition and other relevant matters. 3. Long-Term Debt As previously disclosed, the Company has extended its bank credit agreement with its primary lender. The revised agreement provides a $10,000,000 line of credit and the term was extended one year to December 31, 1999. The amount available for borrowings at the end of the quarter was $5.2 million. Also, during the quarter the Company entered into a Construction Loan Agreement for construction of an addition to an existing building, which will serve as the corporate facility. This loan for $750,000 is due August 2010 and bears interest at prime plus 0.5 percent and provides for 150 installments, the first six of which are interest only, the next 143 of which will be evenly monthly installments of principal and interest and the final installment being all unpaid principal and accrued interest. The lender, at its sole discretion, can adjust the interest rate on the loan in February 2005. The company also modified and extended an existing term loan with the same bank. The loan, to mature June 1999, was extended to February 2007 and the interest rate was reduced from prime plus 1.25 percent to prime plus 0.5 percent. Land and buildings secure both of these loans. 4. Other During the third quarter of fiscal year 1998, the Board of Directors of the Company approved the Team, Inc. 1998 Incentive Stock Option Plan which authorizes options to purchase 500,000 shares of common stock for key employees of the Company. Options granted under this Plan during the quarter totaled 269,000. 6
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1997 For the three-month period ended February 28, 1998, revenues were $11.5 million, a 2 percent improvement over revenues of $11.3 million reported in the same period of the prior fiscal year. Three of the Company's five service lines - - hot tapping, concrete repair and energy management services - showed sales gains during the quarter while leak repair and emissions control services had revenue declines. Gross margins declined from 43 percent to 41 percent. Ordinary compensation and material costs were factors in the decrease. Selling, general and administrative expenses for the current quarter showed a 5 percent improvement over the same period of the prior fiscal year. This was largely the result of lower charges for professional fees, insurance and certain compensation related items. Interest expense of $111,000 in the third quarter of fiscal 1998 was 48 percent lower than in the same period of the prior year due to reduced average borrowing levels. Pre-tax earnings of $590,000 for the third quarter increased from 1997 third quarter pre-tax earnings of $395,000. NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 For the nine-month period ended February 28, 1998, revenues totaled $33.4 million, 2 percent higher than revenues of $32.7 million reported in the same period last year. The increase in revenues was primarily due to significantly improved sales in the Company's hot tapping service line as well as improved sales in concrete repair and energy management services. This improvement was somewhat offset by declines in emissions control and leak repair services revenue. Gross margins declined from 44 percent to 42 percent for the first nine months of fiscal 1998 due to increases in operating expenses. Ordinary compensation and material costs were factors in the decrease. Selling, general and administrative expenses of $12.0 million for the first nine months were $616,000 or 5 percent lower than in the prior year. Less compensation related costs, professional fees and insurance were factors in the decrease. Interest expense of $347,000 in the first nine months of fiscal 1998 was 49 percent lower than in the same period of 1997 due to reduced borrowing levels. Pre-tax earnings of $1.7 million for the first nine months increased from pre-tax earnings of $979,000. 7
8 LIQUIDITY AND CAPITAL RESOURCES At February 28, 1998, the Company's working capital totaled $13.3 million, an increase of 1.8 million from working capital of $11.5 million at May 31, 1997. The Company has been able to finance its working capital requirements through its internally generated cash flow and its unused borrowing capacity under its bank credit agreement. As of February 28, 1998, cash and cash equivalents totaled $1.3 million, decreasing $405,000 in the first nine months of the current fiscal year. This cash decrease resulted mainly from $1,476,000 used in the Company's investing activities offset by $582,000 provided by the Company's financing activities and $489,000 provided by the Company's operating activities. See "Consolidated Statements of Cash Flows" for additional detail. Management expects that capital expenditures which are intended to provide for normal replacement of assets and new assets to support planned growth will approximate $2.0 million for fiscal 1998. Of this amount, $750,000 is for construction of an addition to an existing facility. All other planned capital expenditures are discretionary and will be made based on available funds. The Company's current and long-term debt and other obligations were $6.5 million at February 28, 1998, compared to $7.9 million at May 31, 1997. At the end of the third quarter, $3.0 million was owed to the Company's primary bank lender. The company paid down the revolving line of credit in the amount of $2.0 million during the first nine months using proceeds from the sale of common stock as described below. During the third quarter, the Company extended its bank credit agreement. The revised agreement, which expires December 31, 1999, provides a $10,000,000 line of credit. The amount available for borrowings at the end of the quarter was $5.2 million. Also, during the quarter the Company entered into a Construction Loan Agreement for construction of an addition to an existing building. This loan for $750,000 is due August 2010 and bears interest at prime plus 0.5 percent and provides for 150 installments, the first six of which are interest only, the next 143 of which will be evenly monthly installments of principal and interest and the final installment being all unpaid principal and accrued interest. The lender, at its sole discretion, can adjust the interest rate on the loan in February 2005. The company also modified and extended an existing term loan with the same bank. The loan, to mature June 1999, was extended to February 2007 and the interest rate was reduced from prime plus 1.25 percent to prime plus 0.5 percent. Land and buildings secure both of these loans. As previously reported, the Company completed the sale of 650,000 shares of Team's common stock for $3.00 per share to Armstrong International, Inc. in a private placement transaction. Proceeds from the sale were used to reduce the Company's long-term debt. Also, as previously reported, the Company signed a letter of intent with Wescon, S.A. of Singapore to provide leak sealing and hot tapping services in Singapore, Malaysia, Indonesia and Brunei. This letter of intent was terminated due to lack of progress in organizing the joint venture. The Company's management continues to assess other strategic alternatives. In addition, in the first quarter the Company signed a letter of intent for the potential sale of newly issued common stock to Wingate Partners, L.P. at $3.125 per share representing 50 percent of Team's issued and outstanding shares. This transaction is contingent upon the negotiation and consummation of a mutually acceptable business acquisition. It is expected that the proceeds of 8
9 such a stock sale to Wingate would be used for the purchase consideration for such a business acquisition. The Company is vigorously pursuing various acquisition candidates. The Company has extended this letter of intent with Wingate Partners through June 1998. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Construction Loan Agreement dated February 20, 1998, by and between Sterling Bank and Team, Inc. 10.2 Modification and Extension Agreement dated February 20, 1998, by and between Sterling Bank and Team, Inc. 10.3 Team Inc. 1998 Incentive Stock Option Plan 11 Statement Re Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K There were no Form 8-K Reports filed during the quarter ended February 28, 1998. 9
10 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. TEAM, INC. (Registrant) Date: March 31, 1998 /s/ WILLIAM A. RYAN -------------------------------------- William A. Ryan, Chairman of the Board and Chief Executive Officer /s/ MARGIE E. ROGERS -------------------------------------- Margie E. Rogers, Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer 10
11 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- Ex-10.1 Construction Loan Agreement dated February 20, 1998, by and between Sterling Bank and Team, Inc. Ex-10.2 Modification and Extension Agreement dated February 20, 1998, by and between Sterling Bank and Team, Inc. Ex-10.3 Team Inc. 1998 Incentive Stock Option Plan Ex-11 Statement Re Computation of Per Share Earnings Ex-27 Financial Data Schedule