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UNITED STATES
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 August 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-9950
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TEAM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1765729
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Hermann Drive, Alvin, Texas 77511
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (281) 331-6154
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--------------------------------------
Indicate by checkmark 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 October 11, 2002, there were 7,736,817 shares of the Registrant's common
stock outstanding.
TEAM, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- 1
August 31, 2002 (Unaudited) and May 31, 2002
Consolidated Condensed Statements of Operations
(Unaudited) -- 2
Three Months Ended August 31, 2002 and 2001
Consolidated Condensed Statements of Cash Flows
(Unaudited) -- 3
Three Months Ended August 31, 2002 and 2001
Notes to Unaudited Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis 8
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure 13
about Market Risk
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
CERTIFICATIONS 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AUGUST 31, MAY 31,
ASSETS 2002 2002
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,821,000 $ 823,000
Accounts receivable, net of allowance for doubtful
accounts of $549,000 and $511,000 14,620,000 17,250,000
Inventories 9,030,000 8,802,000
Prepaid expenses and other current assets 1,650,000 1,198,000
------------ ------------
Total Current Assets 27,121,000 28,073,000
Property, Plant and Equipment, net of accumulated
depreciation of $16,194,000 and $15,719,000 11,827,000 11,937,000
Goodwill, net of accumulated amortization
of $922,000 10,049,000 10,049,000
Other Assets 992,000 1,130,000
------------ ------------
Total Assets $ 49,989,000 $ 51,189,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,503,000 $ 1,512,000
Accounts payable 1,601,000 2,953,000
Accrued liabilities 4,239,000 4,294,000
Income taxes payable 520,000 621,000
------------ ------------
Total Current Liabilities 7,863,000 9,380,000
Long-term debt 11,188,000 11,978,000
Other long-term liabilities 1,390,000 1,476,000
Minority Interest 201,000 173,000
------------ ------------
Total liabilities 20,642,000 23,007,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 500,000 shares authorized, none issued
Common stock, par value $.30 per share, 30,000,000 shares
authorized, 8,459,637 and 8,331,132 shares issued at
August 31, 2002 and May 31, 2002, respectively 2,538,000 2,499,000
Additional paid-in capital 33,458,000 32,961,000
Accumulated deficit (3,522,000) (4,670,000)
Accumulated other comprehensive loss (62,000) (57,000)
Treasury stock at cost, 721,320 and 658,520 shares (3,065,000) (2,551,000)
------------ ------------
Total Stockholders' Equity 29,347,000 28,182,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 49,989,000 $ 51,189,000
============ ============
See notes to unaudited consolidated condensed financial statements.
-1-
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
----------------------------
2002 2001
------------ ------------
Revenues $ 22,008,000 $ 19,828,000
Operating expenses 12,977,000 11,645,000
------------ ------------
Gross Margin 9,031,000 8,183,000
Selling, general and administrative expenses 6,993,000 6,578,000
Goodwill amortization -- 68,000
Non-cash G&A compensation cost 21,000 --
------------ ------------
Earnings before interest and income taxes 2,017,000 1,537,000
Interest 159,000 240,000
------------ ------------
Earnings before income taxes 1,858,000 1,297,000
Provision for income taxes 710,000 495,000
------------ ------------
Net income $ 1,148,000 $ 802,000
============ ============
Net income per common share:
Basic $ 0.15 $ 0.10
============ ============
Diluted $ 0.14 $ 0.10
============ ============
Weighted average number of shares outstanding:
Basic 7,703,000 7,699,000
============ ============
Diluted 8,490,000 7,984,000
============ ============
See notes to unaudited consolidated condensed financial statements.
-2-
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
---------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net income $ 1,148,000 $ 802,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 608,000 659,000
Allowance for doubtful accounts 73,000 10,000
Equity in (earnings) loss of unconsolidated subsidiary 1,000 (9,000)
Non-cash G&A compensation cost 21,000 --
Change in assets and liabilities
(Increase) decrease:
Accounts receivable 2,557,000 611,000
Inventories (228,000) (180,000)
Prepaid expenses and other current assets (351,000) (484,000)
Increase (decrease):
Accounts payable (1,352,000) 257,000
Accrued liabilities (35,000) 250,000
Income taxes payable (101,000) (6,000)
----------- -----------
Net cash provided by operating activities 2,341,000 1,910,000
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (351,000) (446,000)
Additions to Rental and Demo Machines (91,000) (17,000)
Proceeds from sale of assets 8,000 29,000
Other 46,000 (62,000)
----------- -----------
Net cash used in investing activities (388,000) (496,000)
----------- -----------
Cash Flows From Financing Activities:
Payments under debt agreements and other long-term liabilities (858,000) (489,000)
Repurchase of common stock (514,000) (995,000)
Issuance of common stock 417,000 123,000
----------- -----------
Net cash used in financing activities (955,000) (1,361,000)
----------- -----------
Net increase in cash and cash equivalents 998,000 53,000
Cash and cash equivalents at beginning of year 823,000 968,000
----------- -----------
Cash and cash equivalents at end of period $ 1,821,000 $ 1,021,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 165,000 $ 267,000
=========== ===========
Income taxes paid $ 776,000 $ 502,000
=========== ===========
See notes to unaudited consolidated condensed financial statements.
-3-
TEAM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
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 consolidated condensed balance sheet at May 31, 2002 is derived from
the May 31, 2002 audited consolidated financial statements. 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 Team, Inc.'s
("the Company") annual report on Form 10-K for the fiscal year ended May
31, 2002.
New Accounting Standards
Statement of Financial Accounting Standards No. 142 Accounting for
Goodwill and Other Intangible Assets ("SFAS No. 142") became effective for
the Company as of June 1, 2002. According to SFAS No. 142, goodwill that
arises from purchases after June 30, 2001 cannot be amortized. In addition,
SFAS No. 142 requires that amortization of existing goodwill will cease on
the first day of the adoption year. Accordingly, the Company stopped
recording the amortization of goodwill as a charge to earnings effective as
of the beginning of the current year.
The following table sets forth the pro-forma impact on the prior year
had the provisions of the new standard been applied as of June 1, 2001:
Three Months Ended
August 31,
--------------------------
2002 2001
------------ ----------
Reported net income $ 1,148,000 $ 802,000
Add back: Goodwill amortization -- 68,000
------------ ----------
Adjusted net income $ 1,148,000 $ 870,000
============ ==========
Basic earnings per share:
Reported net income $ 0.15 $ 0.10
Goodwill amortization -- 0.01
Adjusted net income $ 0.15 $ 0.11
============ ==========
Diluted earnings per share:
Reported net income $ 0.14 $ 0.10
Goodwill amortization -- 0.01
Adjusted net income $ 0.14 $ 0.11
============ ==========
-4-
Under the transition provisions of SFAS No. 142, the Company has until
November 30, 2002 to test goodwill for impairment. Any impairment charge
resulting from the initial application of the new standard would then be
classified as the cumulative effect of a change in accounting principle.
Thereafter, goodwill will be tested for impairment at least annually and
impairment losses will, generally, be presented in the operating section of
the income statement. The Company is working on the first step of the
transitional goodwill impairment test using cash flow and EBITDA multiple
models to assess the goodwill in both the industrial services business
segment ($7.1 million) and in the equipment sales and rental business
segment ($2.9 million). Based upon the initial testing management currently
believes that there will be no goodwill impairment as of June 1, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations
associated with the retirement of long-lived assets, except for certain
obligations of lessees. SFAS 143 is effective for the Company in June 2003.
Management is in the process of evaluating the impact of the adoption of
Statement 143.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," was issued
in April 2002. SFAS No. 145 provides guidance for income statement
classification of gains and losses on extinguishment of debt and accounting
for certain lease modifications that have economic effects that are similar
to sale-leaseback transactions. SFAS No. 145 is effective for the Company
in June 2003. The Company is evaluating the impact of SFAS No. 145.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued
in June 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." SFAS No. 146 is effective for the
Company in June 2003. The Company is evaluating the impact of SFAS No. 146.
2. Dividends and Stock Repurchases
No dividends were paid during the three months ended August 31, 2002.
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.
In the three months ended August 31, 2002, the Company reacquired
62,800 shares pursuant to an open-market repurchase plan at a weighted
average price of $8.18 per share. These shares have not been formally
retired and, accordingly, these shares are carried as treasury stock.
The Company is authorized by it Board of Directors and lender to
expend up to an additional $1.0 million on open market repurchases.
3. Earnings Per Share
In 1998 the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 128, "Earnings per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS").
There is no difference, for either of the periods presented, in the amount
of net income (numerator) used in the computation of basic and diluted
earnings per share. With respect to the number of weighted average shares
outstanding (denominator), diluted shares reflects only the pro forma
exercise of options to acquire common stock to the extent that the options'
exercise prices are less than the average market price of common shares
during the period.
-5-
4. Inventories
Inventories consist of:
August 31, May 31,
2002 2002
------------ ------------
Raw materials $ 1,009,000 $ 953,000
Finished goods and work in progress 8,021,000 7,849,000
------------ ------------
Total $ 9,030,000 $ 8,802,000
============ ============
5. Long-term debt
Long-term debt consists of:
August 31, May 31,
2002 2002
------------ ------------
Revolving loan $ 5,500,000 $ 5,919,000
Term and mortgage notes 7,170,000 7,540,000
Capital lease obligations 21,000 31,000
------------ ------------
12,691,000 13,490,000
Less current portion 1,503,000 1,512,000
------------ ------------
Total $ 11,188,000 $ 11,978,000
============ ============
6. Industry Segment Information
The Company has two reportable segments: industrial services and
equipment sales and rentals. The industrial services segment includes
services consisting of leak repair, hot tapping, emissions control
monitoring, field machining, and NDT inspection. The equipment sales and
rental segment is comprised solely of the operations of a wholly owned
subsidiary, Climax Portable Machine Tools, Inc.
The Company evaluates performance based on earnings before interest
and income taxes. Inter-segment sales are eliminated in the operating
measures used by the company to evaluate segment performance and have,
therefore, been eliminated in the following schedules. Interest is not
allocated down to the segments.
-6-
THREE MONTHS ENDED AUGUST 31, 2002
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
----------- --------------- ----------- -----------
Revenues $19,032,000 $ 2,976,000 $ -- $22,008,000
=========== =========== =========== ===========
Earnings before interest & taxes 2,812,000 256,000 (1,051,000) 2,017,000
Interest -- -- 159,000 159,000
----------- ----------- ----------- -----------
Earnings before income taxes 2,812,000 256,000 (1,210,000) 1,858,000
=========== =========== =========== ===========
Depreciation and amortization 362,000 146,000 100,000 608,000
=========== =========== =========== ===========
Capital expenditures 324,000 9,000 18,000 351,000
=========== =========== =========== ===========
Identifiable assets $33,855,000 $11,738,000 $ 4,396,000 $49,989,000
=========== =========== =========== ===========
THREE MONTHS ENDED AUGUST 31, 2001
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
----------- --------------- ----------- -----------
Revenues $17,348,000 $ 2,480,000 $ -- $19,828,000
=========== =========== =========== ===========
Earnings before interest & taxes 2,507,000 4,000 (974,000) 1,537,000
Interest -- -- 240,000 240,000
----------- ----------- ----------- -----------
Earnings before income taxes 2,507,000 4,000 (1,214,000) 1,297,000
=========== =========== =========== ===========
Depreciation and amortization 406,000 171,000 82,000 659,000
=========== =========== =========== ===========
Capital expenditures 376,000 30,000 40,000 446,000
=========== =========== =========== ===========
Identifiable assets $32,161,000 $11,606,000 $ 4,259,000 $48,026,000
=========== =========== =========== ===========
7. Comprehensive income
Comprehensive income represents the change in the Company's equity from
transactions and other events and circumstances from non-owner sources and
includes all changes in equity except those resulting from investments by
owners and distributions to owners.
Comprehensive income is as follows:
Three Months Ended
August 31,
---------------------------
2002 2001
----------- ---------
Net income $ 1,148,000 $ 802,000
Other comprehensive loss:
Unrealized loss on derivative instruments
net of $3,000 and $38,000 tax benefit, respectively (5,000) (65,000)
----------- ---------
Comprehensive income $ 1,143,000 $ 737,000
=========== =========
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2002 COMPARED
TO THREE MONTHS ENDED AUGUST 31, 2001
Revenues for the quarter ended August 31, 2002 were $22.0 million compared
to $19.8 million for the corresponding period of the preceding year. Operating
margins (shown as "gross margin" in the Consolidated Condensed Statements of
Operations) were 41.0% of revenues in the first quarter of fiscal 2002, a slight
decrease from 41.3% in the same quarter last year. Net income increased to
$1,148 thousand ($.14 per share) as compared to $802 thousand ($.10 per share)
in last year's quarter.
Industrial services segment revenues were $19.0 million in the August 2002
quarter, an increase of $1.7 million (10%) over the prior year. The following
table sets forth the revenue composition of industrial services between newer
service lines (NDT inspection, field machining and technical bolting) and our
traditional service offerings (principally, leak repair, hot tapping, and
fugitive emissions monitoring) for the August 31 quarter:
INCREASE
-----------------
2002 2001 $ %
------------ ------------
Traditional services $ 13,251,000 $ 12,233,000 $ 1,018,000 8%
New services 5,781,000 5,115,000 $ 666,000 13%
------------ ------------ -----------------
$ 19,032,000 $ 17,348,000 $ 1,684,000 10%
============ ============ =================
The 8% increase in revenues from traditional services is attributable, in
part, to two new multi-service, multi-location contracts that came on stream
during the last quarter of fiscal 2002. We believe that we operated in a very
difficult market in the August 2002 quarter due to tight operating margins
experienced by many of our customers. While demand for our traditional services
is, generally, a function of the population of high-temperature, high-pressure
piping systems it is also somewhat related, especially for leak repair and hot
tapping, to the operating performance of our customers--particularly in the
refining, pipeline, and petrochemical industries. Generally, as those customers'
margins improve, more funds are expended for the specialized industrial services
that we offer. Conversely, as margins deteriorate, discretionary maintenance
projects might be deferred.
Growth in new services came entirely from field machining and technical
bolting services. Inspection (which comprises about $3.8 million of new service
revenues) was basically flat year over year, due primarily to a decline in
pipeline-associated activity. We believe that much of this decline in activity
is temporary in nature and is associated with general financial pressures facing
many of our large, diversified energy customers.
While industrial services segment revenues were up 10% in the aggregate,
operating profits for that segment (earnings before interest and taxes) were up
12%, increasing to $2.8 million in the August 2002 quarter versus $2.5 million
in the same quarter last year. Operating margins were negatively impacted by
substantial increases in liability and casualty insurance costs, which were up
by more than $100 thousand (40%) year over year, and by an additional bad debt
reserve of approximately $70 thousand.
The equipment sales and rental segment (the "Climax" business) continued to
report substantially improved results in the August 2002 quarter, with revenues
of $3.0 million versus $2.5 million in the same
-8-
quarter last year, an increase of 20%. The operating profit of this segment was
$256 thousand compared to basically a break-even quarter last year. The improved
operating profit reflects a slightly lower operating margin (42.9% in 2002
versus 43.5% in 2001) coupled with an overall 5.2% reduction in selling, general
and administrative costs due to the personnel reductions implemented in December
2001.
Total corporate general and administrative costs were $1,051 thousand in
the August 2002 quarter, versus $974 thousand in the same quarter last year. The
increase of $77 thousand is due primarily to non-cash compensation G&A cost of
$20 thousand, coupled with increased investor relations activities ($30
thousand).
Interest expense was $81 thousand less in the current year's quarter than
in the same quarter last year due to 1) a significant reduction in the amount of
debt outstanding during the quarter and 2) general rate reductions by the
Federal Reserve Bank over the past year.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2002, our liquid working capital (cash and accounts
receivable, less current liabilities) totaled $8.6 million, which is virtually
the same as at May 31, 2002. During the August 2002 quarter, we reduced our
total outstanding debt by $800 thousand as a result of cash flow from
operations. We generally utilize excess operating funds to automatically reduce
the amount outstanding under the revolving credit facility. However, cash
balances increased by $1 million from May 31, 2002 since there was no additional
debt that could be repaid until September 2002, which was the earliest maturity
of outstanding debt at the end of the quarter.
In the opinion of management, we currently have sufficient funds and
adequate financial sources available to meet our anticipated liquidity needs.
Management believes that cash flows from operations, cash balances and available
borrowings will be sufficient for the foreseeable future to finance anticipated
working capital requirements, capital expenditures and debt service
requirements.
We have a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2003, (ii) $9,500,000 in
term loans for business acquisitions and (iii) a $2,000,000 mortgage loan.
Amounts borrowed against the term loans are due in quarterly installments in the
amount of $339,000 until the loans mature on September 30, 2003. Amounts
borrowed against the mortgage loan are repaid in quarterly installments of
$31,000 until its maturity date of September 30, 2008. Amounts outstanding under
the credit facility bear interest at a marginal rate over either the LIBOR rate
or the prime rate. At August 31, 2002, our marginal rate was 1.5% over the LIBOR
rate. The weighted average rate on outstanding borrowings at August 31, 2002 is
approximately 4.2%. The Company also pays a commitment fee of .25% per annum on
the average amount of the unused availability under the revolving loan.
The Company entered into an interest rate swap agreement that expires
in September 2003 and which qualifies as a cash flow hedge under SFAS No. 133.
The agreement was entered into in 1998 to hedge the exposure of an increase in
interest rates. Pursuant to this agreement, which covers approximately $2.7
million of outstanding debt, the Company exchanged a variable LIBOR rate for a
fixed LIBOR rate of approximately 5.2%.
As the interest rates on the credit facility are based on market rates, the
fair value of amounts outstanding under the facility approximate the carrying
value. The interest rate swap agreements, which have no carrying value, had a
negative mark-to-market value of approximately $100,000 and $92,000 at August
31, 2002 and May 31, 2002, respectively. The fair value of interest rate swaps
is estimated by discounting expected cash flows using quoted market interest
rates.
Loans under the credit facility are secured by substantially all of the
assets of the Company. The terms of the agreement require the maintenance of
certain financial ratios and limit investments, liens, leases and indebtedness,
and dividends, among other things. At August 31, 2002, the Company was in
compliance with all credit facility covenants.
-9-
At August 31, 2002, the Company was contingently liable for $1.6 million in
outstanding stand-by letters of credit and, at that date, approximately $5.4
million was available to borrow under the credit facility.
CRITICAL ACCOUNTING POLICIES
Goodwill - The Company has $10.0 million of recorded goodwill associated
with business acquisitions made in fiscal year 1999. Of that amount,
approximately $7.1 million is associated with the industrial services segment
and $2.9 million is associated with the equipment sales and rental business.
Through May 31, 2002, goodwill was being amortized over 40 years and its
carrying value was periodically evaluated using management's estimate of future
undiscounted cash flows in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Under SFAS No. 121, there has been
no impairment of the Company's recorded goodwill. Effective at the beginning of
the Company's current fiscal year, June 1, 2002, we have adopted the provisions
of SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that
goodwill no longer be amortized but be reviewed for impairment at least annually
using a methodology that is different than the methodology required under SFAS
No. 121. Management is presently evaluating the impact of SFAS No. 142 on the
consolidated financial statements. At present, management does not expect there
to be any adjustment to the carrying value of goodwill as a result of the
adoption of SFAS No. 142.
Revenue Recognition - The Company derives its revenues by providing a
variety of industrial services including leak repair, hot tapping, emissions
control services, field machining and inspection services. In addition, the
Company sells and rents portable machine tools through one of its subsidiaries.
For all of these services, revenues are recognized when services are rendered or
when product is shipped and risk of ownership passes to the customer.
Deferred Income Taxes - The Company records deferred income tax assets and
liabilities related to temporary differences between the book and tax bases of
assets and liabilities. The Company computes its deferred tax balances by
multiplying these temporary differences by the current tax rates. If deferred
tax assets exceed deferred tax liabilities, the Company must estimate whether
those net deferred asset amounts will be realized in the future. A valuation
allowance is then provided for the net deferred asset amounts that are not
likely to be realized. As of August 31, 2002 management believes that it is more
likely than not that the Company will have sufficient future taxable income to
allow it to realize the benefits of the net deferred tax assets. Accordingly, no
valuation allowance has been recorded.
Loss Contingencies - The Company is involved in various lawsuits and claims
encountered in the normal course of business. When such a matter arises and
periodically thereafter, management consults with its legal counsel and
evaluates the merits of the claim based on the facts available at that time.
Currently, the Company is involved with two significant matters, which are
summarized in Legal Proceedings in Part II. In management's opinion, an adequate
accrual has been made as of August 31, 2002 and May 31, 2002 to provide for any
losses that may arise from these contingencies.
OTHER CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company enters into capital leases related to certain computer and
equipment and software, as well as operating leases related to facilities and
transportation and other equipment. These operating leases are over terms
ranging from one to five years with typical renewal options and escalation
clauses.
The Company is occasionally required to post letters of credit
generally issued by a bank as collateral under certain agreements. A letter of
credit commits the issuer to remit specified amounts to the holder, if the
holder demonstrates that the Company has failed to meet its obligations under
the letter of credit. If this were to occur, the Company would be obligated to
reimburse the issuer for any payments the issuer was required to remit to the
holder of the letter of credit. To date, the Company has not had any claims made
against a letter of
-10-
credit that resulted in a payment made be the issuer or the Company to the
holder. The Company believes that it is unlikely that it will have to fund
claims made under letters of credit in the foreseeable future.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 142 Accounting for Goodwill
and Other Intangible Assets ("SFAS No. 142") became effective for the Company as
of June 1, 2002. According to SFAS No. 142, goodwill that arises from purchases
after June 30, 2001 cannot be amortized. In addition, SFAS No. 142 requires that
amortization of existing goodwill will cease on the first day of the adoption
year. Accordingly, the Company stopped recording the amortization of goodwill as
a charge to earnings effective as of the beginning of the current year.
Under the transition provisions of SFAS No. 142, the Company has until
November 30, 2002 to test goodwill for impairment. Any impairment charge
resulting from the initial application of the new standard would then be
classified as the cumulative effect of a change in accounting principle.
Thereafter, goodwill will be tested for impairment at least annually and
impairment losses will, generally, be presented in the operating section of the
income statement. The Company is working on the first step of the transitional
goodwill impairment test using cash flow and EBITDA multiple models to assess
the goodwill in both the industrial services business segment ($7.1 million) and
in the equipment sales and rental business segment ($2.9 million). Based upon
the initial testing management currently believes that there will be no goodwill
impairment as of June 1, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations associated
with the retirement of long-lived assets, except for certain obligations of
lessees. SFAS 143 is effective for the Company in June 2003. Management is in
the process of evaluating the impact of the adoption of Statement 143.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13 and Technical Corrections," was issued in April 2002.
SFAS No. 145 provides guidance for income statement classification of gains and
losses on extinguishment of debt and accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 is effective for the Company in June 2003. The Company is evaluating the
impact of SFAS No. 145.
SFAS No. 146, "Accounting for Exit or Disposal Activities" was issued in
June 2002. SFAS No. 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 is effective for the Company in June 2003. The Company
is evaluating the impact of SFAS No. 146.
-11-
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Any forward-looking information contained herein is being provided in
accordance with the provisions of the Private Securities Litigation Reform Act.
Such information is subject to certain assumptions and beliefs based on current
information known to the Company and is subject to factors that could result in
actual results differing materially from those anticipated in any
forward-looking statements contained herein. Such factors include domestic and
international economic activity, interest rates, market conditions for the
Company's customers, regulatory changes and legal proceedings, and the Company's
successful implementation of its internal operating plans. Accordingly, there
can be no assurance that any forward-looking statements contained herein will
occur or that objectives will be achieved.
-12-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company holds certain floating-rate obligations. The exposure of these
obligations to increase in short-term interest rates is limited by interest rate
swap agreements entered into by the Company. There were no material quantitative
or qualitative changes during the first three months of fiscal 2003 in the
Company's market risk sensitive instruments.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and its chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in
Exchange Act rules 13a-14(c) and 15d-14(c)) as of a date within 90 days of the
filing date of this quarterly report and have concluded that such controls are
effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2002, a jury verdict was rendered against the Company in an
employment related case brought in the United States District Court for the
Western District of Louisiana. The case involves allegations of misconduct by
personnel in one of the Company's branches during the years 1998 and 1999. In
August 2002, the Court ruled on certain post-trial motions and in September
2002, a judgment was entered against the Company, with respect to one of the two
plaintiffs, in the amount of $302,500 plus legal fees and costs of approximately
$46 thousand. With respect to the second plaintiff, the Court set aside the jury
verdict and granted the Company's motion for a new trial on a specific issue.
The Company is presently evaluating its legal options with respect to this case.
In management's opinion, an adequate accrual has been made in the financial
statements as of August 31, 2002 and May 31, 2002 to provide for the probable
amount of loss in this case.
In December 2001, the Company was named a defendant in a lawsuit, along
with 18 other parties, alleging that a former subsidiary, French Ltd.
("French"), was involved in the illegal disposal of hazardous substances during
the years 1969 and 1970. The plaintiff's allege that Team is a
successor-in-interest to French and is, therefore, liable for contribution to a
settlement embodied in a consent decree entered into by the plaintiffs with the
EPA in 1998. French was acquired by Team in 1978 and sold back to its prior
owner in 1984. The case is early in the discovery stage and the Company is
unable to estimate a range of potential loss, if any, with respect to this
matter. However, the Company vigorously denies that it is a
successor-in-interest of French and that it has any responsibility in this
matter.
The Company and certain subsidiaries are involved in various other lawsuits
and are subject to various claims and proceedings encountered in the normal
conduct of business. In the opinion of management, any uninsured losses that
might arise from these lawsuits and proceedings will not have a materially
adverse effect on the Company's consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
99.1 Certification for Chief Executive Officer
99.2 Certification for Chief Financial Officer
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31, 2002.
-13-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
TEAM, INC
(Registrant)
Date: October 15, 2002
/s/ PHILIP J. HAWK
--------------------------------------
Philip J. Hawk
Chief Executive Officer and Director
/s/ TED W. OWEN
--------------------------------------
Ted W. Owen, Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
-14-
CERTIFICATIONS
I, Philip J. Hawk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Team, Inc., ("Team");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. Team's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Team's other certifying officer and I have disclosed, based on our most
recent evaluation, to Team's auditors and audit committee of Team's board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. Team's other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ PHILIP J. HAWK
-------------------------------------
Philip J. Hawk
Chief Executive Officer
-15-
I, Ted W. Owen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Team, Inc., ("Team");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. Team's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Team's other certifying officer and I have disclosed, based on our most
recent evaluation, to Team's auditors and audit committee of Team's board of
directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. Team's other certifying officer and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ TED W. OWEN
---------------------------------
Ted W. Owen
Vice President and
Chief Financial Officer
-16-
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
99.1 Certification for Chief Executive Officer
99.2 Certification for Chief Financial Officer