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 29, 1996 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 1-8604 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 (713) 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 April 1, 1996, there were 5,159,842 shares of the Registrant's common stock outstanding.
2 TEAM, INC. INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets -- 3 February 29, 1996 and May 31, 1995 Consolidated Statements of Operations -- 4 Three Months Ended February 29, 1996 and February 28, 1995 Nine Months Ended February 29, 1996 and February 28, 1995 Consolidated Statements of Cash Flows -- 5 Nine Months Ended February 29, 1996 and February 28, 1995 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis 8 of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 2
3 ITEM 1. FINANCIAL STATEMENTS TEAM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> February 29, May 31, 1996 1995 ----------- ----------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 2,775,000 $ 3,154,000 Accounts receivable, net of allowance for doubtful accounts of $204,000 and $204,000 8,446,000 8,408,000 Materials and supplies 5,748,000 6,641,000 Prepaid expenses and other current assets 1,483,000 1,374,000 ----------- ----------- Total current assets 18,452,000 19,577,000 Net Assets of Discontinued Operations -- 124,000 Property, Plant and Equipment: Land and buildings 6,881,000 6,889,000 Machinery and equipment 11,300,000 10,864,000 ----------- ----------- 18,181,000 17,753,000 Less accumulated depreciation and amortization 12,535,000 11,641,000 ----------- ----------- 5,646,000 6,112,000 Military Housing Projects: Restricted cash and other assets 1,707,000 2,897,000 Land and buildings, net of accumulated depreciation of $5,804,000 and $4,710,000 41,487,000 42,581,000 ----------- ----------- 43,194,000 45,478,000 Goodwill, Net of Accumulated Amortization -- 5,583,000 Other Assets 3,781,000 3,184,000 ----------- ----------- $71,073,000 $80,058,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $10,984,000 $ 1,344,000 Accounts payable 758,000 742,000 Other accrued liabilities 4,027,000 2,705,000 ----------- ----------- Total Current Liabilities 15,769,000 4,791,000 Long-term Debt and Other Obligations 3,697,000 13,627,000 Military Housing Projects' Non-recourse Obligations: Debt 38,765,000 39,722,000 Other 749,000 1,595,000 ----------- ----------- 39,514,000 41,317,000 Stockholder's 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, 5,169,542 shares issued 1,551,000 1,551,000 Additional paid-in capital 24,992,000 24,992,000 Accumulated deficit (14,353,000) (6,123,000) Treasury stock at cost, 9,700 shares (97,000) (97,000) ----------- ----------- 12,093,000 20,323,000 ----------- ----------- $71,073,000 $80,058,000 =========== =========== </TABLE> See notes to consolidated financial statements 3
4 TEAM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Three Months Ended Nine Months Ended -------------------------- --------------------------- February 29, February 28, February 29, February 28, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Operating revenue $11,747,000 $13,143,000 $35,340,000 $38,688,000 Military Housing Project lease revenue 1,259,000 1,250,000 3,771,000 3,660,000 ----------- ----------- ---------- ----------- 13,006,000 14,393,000 39,111,000 42,348,000 Operating costs and expenses: Operating expenses 6,228,000 6,841,000 19,000,000 20,219,000 Selling, general and administrative expenses 7,802,000 5,558,000 18,119,000 17,594,000 Interest 287,000 367,000 913,000 1,130,000 Writedown of assets 5,997,000 -- 5,997,000 1,421,000 ----------- ----------- ---------- ----------- 20,314,000 12,766,000 44,029,000 40,364,000 Military Housing Project Costs and Expenses: Operating expenses 578,000 566,000 1,691,000 1,517,000 General and administrative expenses 190,000 329,000 301,000 1,081,000 Interest 829,000 849,000 2,502,000 2,561,000 Writedown of assets -- -- -- 4,832,000 ----------- ----------- ---------- ----------- 1,597,000 1,744,000 4,494,000 9,991,000 Loss from Continuing Operations before Income Taxes (8,905,000) (117,000) (9,412,000) (8,007,000) Income Tax Benefit (1,189,000) (41,000) (1,182,000) (2,551,000) ----------- ----------- ---------- ----------- Loss from Continuing Operations, Net of Income Taxes (7,716,000) (76,000) (8,230,000) (5,456,000) Earnings (Loss) on Discontinued Operations, Net of Income Taxes -- 116,000 -- (324,000) Change in Estimated Loss on Sale of Discontinued Operations, Net of Income Taxes -- -- -- (457,000) ----------- ----------- ---------- ----------- Net Earnings (Loss) $(7,716,000) $ 40,000 $(8,230,000) $(6,237,000) =========== =========== =========== =========== Net Loss Per Common Share: Loss from Continuing Operations $ (1.50) $ (0.01) $ (1.59) $ (1.06) Earnings (Loss) from Discontinued Operations -- 0.02 -- (0.06) Change in Estimated Loss on Sale of Discontinued Operations -- -- -- (0.09) ----------- ----------- ---------- ----------- Net Income (Loss) $ (1.50) $ 0.01 $ (1.59) $ (1.21) =========== =========== =========== =========== Weighted number of shares outstanding 5,160,000 5,160,000 5,181,000 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 29, February 28, 1996 1995 ------------ ------------ <S> <C> <C> Cash Flows From Operating Activities: Loss from continuing operations, net of income taxes $(8,230,000) $(5,456,000) Adjustments to reconcile loss from continuing operations, net of income taxes, to net cash provided by operating activities: Depreciation and amortization 2,674,000 3,021,000 Provision for doubtful accounts -- 201,000 and notes receivable (Gain) Loss on sale of assets 3,000 (14,000) Writedown of assets 5,997,000 6,253,000 Noncurrent deferred income taxes (733,000) (1,798,000) Change in assets and liabilities: (Increase) decrease: Accounts receivable (38,000) 1,228,000 Materials and supplies 493,000 711,000 Prepaid expenses and other assets (122,000) (306,000) Increase (decrease): Accounts payable 16,000 (1,062,000) Other accrued liabilities 1,072,000 (1,072,000) Income taxes payable -- (895,000) ----------- ----------- Net cash provided by operating activities 1,132,000 811,000 Cash Flows from Investing Activities: Capital expenditures (434,000) (311,000) Disposal of property and equipment 4,000 34,000 Cash received on sale of company -- 4,550,000 Decrease (increase) in other assets (18,000) 286,000 Decrease in net assets of discontinued operatio 124,000 838,000 Decrease in military housing projects' restricted cash and other assets 1,190,000 1,059,000 ----------- ----------- Net cash provided by investing activities 866,000 6,456,000 Cash Flows From Financing Activities: Payments under debt agreements and capital lease obligations (2,329,000) (7,475,000) Increase in other long term obligations 1,755,000 -- Borrowings under debt agreements -- 272,000 Payments on military housing projects' non-recourse debt (957,000) (881,000) Decrease in military housing projects' other non-recourse obligations (846,000) (783,000) ----------- ----------- Net cash used in financing activities (2,377,000) (8,867,000) ----------- ----------- Net decrease in cash and cash equivalents (379,000) (1,600,000) Cash and cash equivalents at beginning of year 3,154,000 3,728,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,775,000 $ 2,128,000 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest: Operating interest $ 933,000 $ 1,445,000 Military housing projects 3,376,000 3,433,000 ----------- ----------- $ 4,309,000 $ 4,878,000 =========== =========== Taxes paid $ 122,000 $ 542,000 =========== =========== Tax refunds $ 721,000 $ -- =========== =========== </TABLE> Supplemental schedule of non-cash financing activities: During the periods ended February 29, 1996 and February 28, 1995, computer hardware and software acquired under capital lease obligations amounted to $195,000 and $254,000, respectively. 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, 1995. The February 28, 1995 financial statements have been restated to reflect the Transportation Services segment as discontinued operations. 2. Dividends No dividends were paid during the first nine months of fiscal 1996 or 1995. 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. Pre-Tax Charges The loss from continuing operations for the third quarter included pre-tax charges of $6.0 million representing writedowns in the carrying value of certain of the Company's assets. This charge primarily reflected the $5.3 million write-off of goodwill as it pertained to the Environmental Consulting and Engineering Division and a $400,000 writeoff of obsolete inventory. In addition, the Company recorded $2.3 million of additional general and administrative expenses. These charges primarily represent certain compensation arrangements with former employees. 4. Other The Company's management continues to market the Military Housing Projects, but currently no negotiations are in progress. 6
7 5. Debt and Credit Arrangements Team's credit facility with its primary lender consists of a Term Loan and a revolving line of credit, both of which mature on December 1, 1996. The balance due at February 29, 1996 on the Term Loan was $3,250,000, while the balance on the revolving line of credit was $7,452,000. Both of these amounts are included in the current portion of long term debt. The Company has obtained a waiver for violation of a covenant of its credit agreement which occurred as a result of the pre-tax charges and additional general and administrative expenses as discussed in Note 3 herein. 7
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's primary operations consist of industrial repair services, environmental engineering and consulting, and air emission monitoring services. The Company also owns three Federal Section 801 housing projects ("Military Housing" segment), which are presently leased to the Departments of the Army, Navy and Air Force pursuant to long-term lease agreements. The following table sets forth for the periods indicated (i) the percentage which certain items in the financial statements of the Company bear to revenues and (ii) the percentage change in the dollar amount of such items from period to period: <TABLE> <CAPTION> Percentage of Income Increase/(Decrease) ------------------------------------------------ ----------------------------- Three Months Ended Nine Months Ended Three Months Nine Months Feb. 29, Feb. 28, Feb. 29, Feb. 28, Ended Ended 1996 1995 1996 1995 2/29 2/29 1996 1996 ------ ----- ------ ------ ------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues: Core businesses 90.3 % 91.3 % 90.4 % 91.4 % (10.6) (8.7) % Military housing project lease revenue 9.7 8.7 9.6 8.6 0.7 3.0 ------ ----- ------ ------ Total Revenue 100.0 % 100.0 % 100.0 % 100.0 % (9.6)% (7.6)% Core Business Costs and Expenses: Operating expenses 47.9 % 47.5 % 48.6 % 47.7 % (9.0)% (6.0)% SG&A expenses 60.0 38.6 46.3 41.5 40.4 3.0 Interest 2.2 2.6 2.3 2.7 (21.8) (19.2) Writedown of assets 46.1 0 15.3 3.4 NM NM ------ ----- ------ ------ 156.2 % 88.7 % 112.5 % 95.3 % 59.1 % 9.1 % Military Housing Projects: Operating expenses 4.4 3.9 4.3 3.6 2.1 11.5 G&A expenses 1.5 2.3 0.8 2.6 (42.2) (72.2) Interest 6.4 5.9 6.4 6.0 (2.4) (2.3) Writedown of assets 0 0 0 11.4 0 (100.0) ------ ----- ------ ------ 12.3 % 12.1 % 11.5 % 23.6 % (8.4)% (55.0)% Loss from continuing operations before income taxes (68.5) (0.8) (24.0) (18.9) NM (17.5) Income Tax Benefit (9.1) (0.3) (3.0) (6.0) NM (53.7) ------ ------ ------ ------ Earnings (Loss) from continuing operations net of income taxes (59.4)% (0.5)% (21.0)% (12.9)% NM (50.8)% ====== ====== ====== ====== ====== ======= </TABLE> NM - not meaningful 8
9 RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1995 Primary Operations: For the three month period ended February 29, 1996, revenues from the Company's environmental services business totaled $11.7 million, 10.6 percent lower than revenues of $13.1 million reported in the same period of the prior fiscal year. This decrease resulted from lower revenues from the Company's emissions monitoring and environmental consulting and engineering services, primarily as a result of reduced reporting requirements by many of the Company's customers, due to the slowdown in environmental regulatory activity. In addition, some of the Company's customers have implemented internal reporting for emissions control services. The Company's leak sealing services business experienced a small increase in revenue. Operating expenses in the Company's primary operations declined by 9.0 percent from the third quarter of the prior year, primarily due to lower personnel related costs. However, gross profit margins declined from 48.0 percent to 47.0 percent, as the Company was not able to reduce costs sufficiently to offset the decline in revenues. Selling, general and administrative expenses of $7.8 million in the three month period ended February 29, 1996 were $2,244,000 or 40.4 percent higher than in the prior year. This increase was the result of $2.3 million of additional general and administrative expenses that related primarily to certain compensation arrangements of former employees. Excluding these expenses, general and administrative expenses are consistent with the same period in the prior year. The writedown of assets of $6.0 million primarily reflected a $5.3 million write-off of goodwill and a $400,000 write-off of obsolete inventory. Interest expense of $287,000 in the three month period ended February 29, 1996 was 21.8 percent lower than in the same period of the prior year due to reduced average borrowing levels. The Company incurred a pre-tax operating loss on its primary operations of $377,000 in the quarter ended February 28, 1995 compared to a pre-tax operating loss of $8.6 million in the current year ($298,000 pre-tax operating loss in the current year excluding the effect of the writedown of assets and the additional general and administrative expenses). Military Housing Projects: For the three month period ended February 29, 1996, revenues of $1.3 million were consistent with revenues in the prior year period. The pre-tax loss from military housing was $338,000 compared to a loss of $494,000 in the same quarter of the prior year. Reduced legal fees, associated with the settlement of litigation with the general contractor of the projects in March 1995, accounted for the change. For the three month period ended February 29, 1996, the Company recorded a net loss of $7,716,000 ($341,000 excluding the writedown of assets and the additional general and administrative expenses) which compares to a loss from continuing operations of $76,000 for the same period last year. 9
10 NINE MONTHS ENDED FEBRUARY 29, 1996 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1995 Primary Operations: For the nine month period ended February 29, 1996, revenues from the Company's environmental services business were $35.3 million, $3.4 million, or 8.7% lower than revenues of $38.7 million in the comparable period last year. Reduced demand for the Company's emissions monitoring and environmental consulting and engineering services accounted for the majority of this decrease. Operating expenses in the nine months ended February 29, 1996 were $19.0 million, 6.0% lower than operating expenses in the same period last year. The Company has reduced personnel related costs; however, due to competitive pressures, the cost decreases have not offset in full the decline in revenues. Selling, general and administrative expenses were $18.1 million in the nine month period ended February 29, 1996, $525,000 higher than in the prior year. However, this increase was the result of $2.3 million of additional general and administrative expenses that related primarily to certain compensation arrangements of former employees. Excluding these expenses, general and administrative expenses are $1.8 million lower than in the prior year, primarily due to the continuing impact of cost reduction programs. Military Housing Projects: For the nine months ended February 29, 1996, revenues were $3.8 million, $111,000 higher than revenues in the prior year due to increased maintenance revenues. The pre-tax loss was $723,000 in the nine month period ended February 29, 1996, compared to a loss of $6.3 million ($1.5 million excluding the effects of the writedown of assets) in the comparable period of the prior year. Reduced legal fees accounted for the change. The Company recorded a net loss for the nine months ended February 29, 1996 of $8.2 million, $2.7 million higher than the $5.5 million net loss recorded in the same period last year. Excluding the writedowns of $6.0 million and additional general and administrative expenses of $2.3 million in 1996 and the $6.3 million writedown in 1995, the net loss for the nine months ended February 29, 1996 was $856,000, substantially lower than the net loss from continuing operations of $1.3 million last year. Including the net change in estimate on sale of discontinued operations of $457,000 and the net loss of $324,000 on the discontinued transportation segment, the Company's net loss was $2.1 million for the nine months ended February 28, 1995. LIQUIDITY AND CAPITAL RESOURCES At February 29, 1996, the Company's working capital totaled $2.7 million, a decrease of $12.1 million from working capital of $14.8 million at May 31, 1995. This decrease was primarily attributable to the reclassification of long term debt to current debt due to our credit agreements maturing in December, 1996. The Company has been able to finance its working capital requirements through its internally generated cash flow. 10
11 For the nine month period ended February 29, 1996, net cash provided from operations totaled $1.1 million. Capital expenditures totaled $434,000 during the nine month period ending February 29, 1996 as a result of the replacement of equipment used in the Company's operations. The Company reduced its revolving line of credit and other long-term debt by $2.0 million during the nine month period ended February 29, 1996. Payments on military housing non-recourse debt were $957,000 during the first three quarters. These payments were made with rental receipts deposited in the military housing projects' restricted cash account. Management expects that capital expenditures for fiscal 1996 will be approximately $750,000, as the Company plans to replace, upgrade and expand its data collection, computer and other operating equipment. All planned capital expenditures are discretionary and will be made based on the availability of funds. Management continues to market the Military Housing Projects, but currently no negotiations are in progress. The Company's current and long-term debt, excluding non-recourse debt of $38.8 million of the Military Housing Projects, was $12.9 million at February 29, 1996 compared to $14.9 million at May 31, 1995. Of this amount, $10.7 million was owed to the Company's primary bank lender. At the end of the third quarter of fiscal year 1996, the Company was in violation of a covenant under its credit agreement with the bank, which has been waived by the bank. (See Note 5 to Notes to Consolidated Financial Statements). Company management anticipates negotiations with the bank to amend the credit agreement wherein maturity dates would be extended and financial covenants would be revised so that the Company will remain in compliance with the credit agreement. 11
12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amendment and Supplement to Amended and Restated Credit Agreement, and Note Modification Agreement by and between Team, Inc. and Texas Commerce Bank National Association effective as of September 13, 1995. 10.2 Sixth Amendment and Restatement of the Team, Inc. Employee Stock Ownership Plan. 10.3 Ninth Amendment and Restatement of the Team, Inc. Salary Deferral Plan. 10.4 Letter Agreement dated April 12, 1996 by and between Texas Commerce Bank National Association and Team, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K There were no Form 8-K Reports filed during the quarter ended February 29, 1996. 12
13 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: April 15, 1996 WILLIAM A. RYAN -------------------------------------- William A. Ryan, Chairman of the Board, President and Chief Executive Officer MARGIE E. ROGERS -------------------------------------- Margie E. Rogers, Treasurer and Chief Accounting Officer 13
14 EXHIBIT INDEX 10.1 First Amendment and Supplement to Amended and Restated Credit Agreement, and Note Modification Agreement by and between Team, Inc. and Texas Commerce Bank National Association effective as of September 13, 1995. 10.2 Sixth Amendment and Restatement of the Team, Inc. Employee Stock Ownership Plan. 10.3 Ninth Amendment and Restatement of the Team, Inc. Salary Deferral Plan. 10.4 Letter Agreement dated April 12, 1996 by and between Texas Commerce Bank National Association and Team, Inc. 27 Financial Data Schedule