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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, 2003
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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.
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(Exact name of registrant as specified in its charter)
Texas 74-1765729
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Hermann Drive, Alvin, Texas 77511
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(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 9, 2003, there were 7,594,204 shares of the Registrant's
common stock outstanding.
TEAM, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets -- 1
August 31, 2003 (Unaudited) and May 31, 2003
Consolidated Condensed Statements of Operations
(Unaudited) -- 2
Three Months Ended
August 31, 2003 and 2002
Consolidated Condensed Statements of Cash Flows
(Unaudited) -- 3
Three Months Ended
August 31, 2003 and 2002
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 12
about Market Risk
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AUGUST 31, MAY 31,
ASSETS 2003 2003
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 788,000 $ 854,000
Accounts receivable, net of allowance for doubtful
accounts of $580,000 and $533,000 20,085,000 17,707,000
Inventories 9,226,000 9,498,000
Prepaid expenses and other current assets 1,930,000 1,358,000
------------ ------------
Total Current Assets 32,029,000 29,417,000
Property, plant and equipment, net of accumulated
depreciation of $18,045,000 and $17,542,000 13,005,000 12,268,000
Goodwill, net of accumulated amortization
of $922,000 10,049,000 10,049,000
Other assets 432,000 490,000
------------ ------------
Total Assets $ 55,515,000 $ 52,224,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,482,000 $ 1,482,000
Accounts payable 4,024,000 3,195,000
Accrued liabilities 3,967,000 5,027,000
Income taxes payable 774,000 --
------------ ------------
Total Current Liabilities 10,247,000 9,704,000
Long-term debt 11,186,000 9,577,000
Other long-term liabilities 930,000 990,000
Minority interest 270,000 218,000
------------ ------------
Total Liabilities 22,633,000 20,489,000
------------ ------------
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, 8,612,512 and 8,587,512 shares issued at
August 31, 2003 and May 31, 2003, respectively 2,584,000 2,576,000
Additional paid-in capital 34,235,000 34,065,000
Retained earnings (accumulated deficit) 1,094,000 (268,000)
Accumulated other comprehensive income (loss) 1,000 (1,000)
Treasury stock at cost, 1,018,308 and 968,308 shares (5,032,000) (4,637,000)
------------ ------------
Total Stockholders' Equity 32,882,000 31,735,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 55,515,000 $ 52,224,000
============ ============
See notes to unaudited consolidated condensed financial statements.
-1-
TEAM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
2003 2002
------------ ------------
Revenues $ 24,918,000 $ 22,008,000
Operating expenses 14,806,000 12,977,000
------------ ------------
Gross Margin 10,112,000 9,031,000
Selling, general and administrative expenses 7,718,000 6,993,000
Non-cash G&A compensation cost 31,000 21,000
------------ ------------
Earnings before interest and income taxes 2,363,000 2,017,000
Interest 145,000 159,000
------------ ------------
Earnings before income taxes 2,218,000 1,858,000
Provision for income taxes 856,000 710,000
------------ ------------
Net income $ 1,362,000 $ 1,148,000
============ ============
Net income per common share:
Basic $ 0.18 $ 0.15
============ ============
Diluted $ 0.17 $ 0.14
============ ============
Weighted average number of shares outstanding:
Basic 7,610,000 7,703,000
============ ============
Diluted 8,250,000 8,490,000
============ ============
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,
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net income $ 1,362,000 $ 1,148,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 657,000 608,000
Allowance for doubtful accounts 47,000 73,000
Equity in (earnings) loss of unconsolidated subsidiary (66,000) 1,000
Non-cash G&A compensation cost 31,000 21,000
Change in assets and liabilities
(Increase) decrease:
Accounts receivable (2,425,000) 2,557,000
Inventories 272,000 (228,000)
Prepaid expenses and other current assets (535,000) (351,000)
Increase (decrease):
Accounts payable 829,000 (1,352,000)
Accrued liabilities (987,000) (35,000)
Income taxes payable 808,000 (101,000)
------------ ------------
Net cash (used in ) provided by operating activities (7,000) 2,341,000
------------ ------------
Cash Flows From Investing Activities:
Capital expenditures (1,315,000) (351,000)
Additions to rental and demo machines (22,000) (91,000)
Proceeds from sale of assets 1,000 8,000
Other 70,000 46,000
------------ ------------
Net cash used in investing activities (1,266,000) (388,000)
------------ ------------
Cash Flows From Financing Activities:
Borrowings (payments) under debt agreements
and other long-term liabilities 1,549,000 (858,000)
Repurchase of common stock (395,000) (514,000)
Issuance of common stock 53,000 417,000
------------ ------------
Net cash provided by (used in) financing activities 1,207,000 (955,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (66,000) 998,000
Cash and cash equivalents at beginning of year 854,000 823,000
------------ ------------
Cash and cash equivalents at end of period $ 788,000 $ 1,821,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 153,000 $ 165,000
============ ============
Income taxes paid $ 25,000 $ 776,000
============ ============
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, 2003 is derived from
the May 31, 2003 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, 2003.
New Accounting Standards
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 became effective for the Company in June
2003. The adoption of Statement 143 has not impacted the Company's
financial statements.
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
disposal activities occurring after December 31, 2002. The adoption of SFAS
No 146 has not impacted the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in these notes to the consolidated
financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for the options granted after this date was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for August 31, 2003 and
2002, respectively: risk-free interest rate of 1.9% and 1.8%; volatility
factor of the expected market price of the Company's common stock of 32.4%
and 35.6%; expected dividend yield percentage of 0.0% for each period; and
a weighted average expected life of the option of three years for each
period.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models
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require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The Company's pro forma information, as if the fair value method
described above had been adopted, is as follows:
THREE MONTHS ENDED
AUGUST 31,
-----------------------------
2003 2002
------------ ------------
Net income - as reported $ 1,362,000 $ 1,148,000
Stock based employee compensation expense
included in reported net income 31,000 21,000
Total stock-based employee compensation
expense determined under fair value based
method for all awards (44,000) (41,000)
------------ ------------
Pro forma net income $ 1,349,000 $ 1,128,000
============ ============
Earnings per share - Basic $ 0.18 $ 0.15
============ ============
Pro forma earnings per share--Basic $ 0.18 $ 0.15
============ ============
Earnings per share - diluted $ 0.17 $ 0.14
============ ============
Pro forma earnings per share--diluted $ 0.16 $ 0.13
============ ============
The Company has reviewed other new accounting standards not identified
above and does not believe any other new standard will have a material
impact on the Company's financial position or operating results.
2. Dividends and Stock Repurchases
No dividends were paid during the three months ended August 31, 2003.
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, 2003, the Company reacquired
50,000 shares pursuant to an open-market repurchase plan at a weighted
average price of $7.89 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 $1.1 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
-5-
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. There were 225,500 shares of Common Stock outstanding
for the three-months ended August 31, 2003, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the Common Stock. For the
three-months ended August 31, 2002, all outstanding options were "in the
money" and therefore, no options were excluded from the computation of
diluted EPS in that period.
4. Inventories
Inventories consist of:
August 31, May 31,
2003 2003
------------ ------------
Raw materials $ 1,029,000 $ 1,084,000
Finished goods and work in progress 8,197,000 8,414,000
------------ ------------
Total $ 9,226,000 $ 9,498,000
============ ============
5. Long-term debt
Long-term debt consists of:
August 31, May 31,
2003 2003
------------ ------------
Revolving loan $ 6,980,000 $ 5,000,000
Term and mortgage notes 5,688,000 6,059,000
------------ ------------
12,668,000 11,059,000
Less current portion 1,482,000 1,482,000
------------ ------------
Total $ 11,186,000 $ 9,577,000
============ ============
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, 2003
Industrial Equipment Corporate
Services Sales & Rentals & Other Total
-------------- --------------- -------------- --------------
Revenues $ 22,315,000 $ 2,603,000 $ -- $ 24,918,000
============== ============== ============== ==============
Earnings before interest & taxes 3,650,000 (95,000) (1,192,000) 2,363,000
Interest -- -- 145,000 145,000
-------------- -------------- -------------- --------------
Earnings before income taxes 3,650,000 (95,000) (1,337,000) 2,218,000
============== ============== ============== ==============
Depreciation and amortization 394,000 165,000 98,000 657,000
============== ============== ============== ==============
Capital expenditures 1,270,000 45,000 -- 1,315,000
============== ============== ============== ==============
Identifiable assets $ 39,010,000 $ 11,331,000 $ 5,174,000 $ 55,515,000
============== ============== ============== ==============
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
============== ============== ============== ==============
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,
------------------------------
2003 2002
------------ ------------
Net income $ 1,362,000 $ 1,148,000
Other comprehensive gain (loss):
Unrealized loss on derivative instruments
net of $8,000 and $3,000 tax benefit, respectively (13,000) (5,000)
Foreign currency translation adjustment 15,000 --
------------ ------------
Comprehensive income $ 1,364,000 $ 1,143,000
============ ============
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2003 COMPARED
TO THREE MONTHS ENDED AUGUST 31, 2002
Revenues for the quarter ended August 31, 2003 were $24.9 million compared
to $22.0 million for the corresponding period of the preceding year. Operating
margins (shown as "gross margin" in the Consolidated Condensed Statements of
Operations) were 40.6% of revenues in the first quarter of fiscal 2004, a slight
decrease from 41.0% in the same quarter last year. Net income increased to
$1,362 thousand ($.17 per diluted share) as compared to $1,148 thousand ($.14
per diluted share) in last year's quarter.
The industrial services segment revenues were $22.3 million in the August
2003 quarter, an increase of $3.3 million (17%) over the prior year. Operating
profits for the segment (earnings before interest and taxes) were up 30%,
increasing to $3.7 million in the August 2003 quarter versus $2.8 million in the
same quarter last year. The industrial services segment benefited from double
digit growth in several of its service lines--including on-stream leak repair,
hot-tapping, field machining and the new field valve repair service line. Valve
repair revenues exceeded $1 million in the quarter, in only the second full
quarter in this offering, due to the completion of a significant turnaround
project in the quarter. NDT Inspection revenues declined in the quarter by 15%
due to significantly reduced pipeline projects versus the prior year quarter.
The equipment sales and rental segment (the "Climax" business) struggled
during the quarter with lower sales and a weaker product mix. Sales were $2.6
million, down 13% from the prior year first quarter. In addition, a greater
portion of the sales in the quarter were related to resale items not
manufactured by Climax and, typically having lower gross margins. As a result,
the segment reported a loss of $95 thousand in the quarter versus an operating
profit of $256 thousand in last year's quarter. The current quarter loss
includes professional fees of approximately $95 thousand associated with the
sales tax matter discussed in prior filings.
Total corporate general and administrative costs were $1,192 thousand in
the August 2003 quarter, versus $1,051 thousand in the same quarter last year.
The increase of $141 thousand is due primarily to increases in legal and
professional fees ($60 thousand), non-cash compensation G&A cost ($10 thousand),
and incentive compensation accruals ($30 thousand), as well as certain charges
whose timing is different than last year ($30 thousand).
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2003, our liquid working capital (cash and accounts
receivable, less current liabilities) totaled $10.6 million, which is up $1.7
million from May 31, 2003. During the August 2003 quarter, we increased our
total outstanding debt by $1.6 million. This increase was due to 1) accounts
receivable growth of $2 million in the quarter primarily as a result of an
individually significant turnaround project completed in August 2003 and 2)
expenditures of $1.3 million for equipment associated primarily with the valve
repair business and for an upgrade of our emissions monitoring hardware. We
expect capital expenditures for all of fiscal 2004 to be on the high end of our
usual spending pattern of $2 to $3 million per year.
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.
The Company has a $24 million bank credit facility that consists of: (i) a
$12,500,000 revolving loan, which matures September 30, 2005, (ii) $9,500,000 in
term loans for business acquisitions and (iii) a
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$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, 2005. 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, 2003, our marginal
rate was 1.5% over the LIBOR rate. The weighted average rate on outstanding
borrowings at August 31, 2003 is approximately 3.7%. 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 expired in
September 2003 and which qualified 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 covered approximately $2.1
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 agreement, which had no carrying value, had a
negative mark-to-market value of approximately $22,000 and $43,000 at August 31,
2003 and May 31, 2003, 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, 2003, the Company was in
compliance with all credit facility covenants.
At August 31, 2003, the Company was contingently liable for $2.1 million in
outstanding stand-by letters of credit and, at that date, approximately $4.0
million was available to borrow under the credit facility.
CRITICAL ACCOUNTING POLICIES
Goodwill - SFAS No. 142 Accounting for Goodwill and Other Intangible
Assets 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 fiscal 2003.
The Company had six months from the date it initially applied SFAS No. 142
to test goodwill for impairment. Thereafter, goodwill must be tested for
impairment at least annually and impairment losses, if any, will be presented in
the operating section of the income statement. The Company has completed the
required annual impairment test for fiscal 2003 and determined that there was no
impairment of goodwill as of May 31, 2003. The impairment test for the current
fiscal year will not be performed until the end of the fiscal year.
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
-9-
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, 2003
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 legal matters, which are
summarized in Legal Proceedings in Part II.
Additionally, At May 31, 2003, a $150 thousand loss provision was made with
respect to a sales tax matter involving Climax Portable Machine Tools, Inc., a
wholly-owned subsidiary. The fiscal 2003 provision represents management's
estimate of the probable loss that Climax will incur with respect to the matter,
however, the ultimate outcome is subject to a great deal of variables and cannot
be determined with a certainty. Management believes this issue will be fully
resolved over the course of the current fiscal year and that the ultimate
outcome, even if different that the amount provided, will not have a significant
impact on the future operating results of Climax.
In management's opinion, an adequate accrual has been made as of August 31,
2003 and May 31, 2003 to provide for any losses that may arise from those
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 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
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 became effective for the Company in June 2003. The adoption of
Statement 143 has not impacted the Company's financial statements.
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 disposal activities occurring after
December 31, 2002. The adoption of SFAS No 146 has not impacted the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition
-10-
for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to the consolidated financial statements.
The company has reviewed other new accounting standards not identified
above and does not believe any other new standards will have a material impact
on the Company's financial position or operating results.
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.
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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 2004 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-15(e) and 15d-15(e)) as of August 31, 2003, 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 determined that,
with respect to one of the two plaintiffs, a $300,000 judgment was entered
against the Company. In December 2002, the Company settled the lawsuit with
respect to that plaintiff for an amount less than the judgment entered. With
respect to the second plaintiff, the Court set aside the jury verdict on most
points and granted the Company's motion for a new trial on a specific issue. The
second plaintiff has appealed the District Court's decision, which is currently
pending in the United States Court of Appeals for the Fifth Circuit. The Company
is presently evaluating its legal options with respect to this case. In
management's opinion, an adequate accrual was made in the financial statements
as of August 31, 2003 and May 31, 2003 to provide for the probable amount of
loss in this case.
In December 2001, the Company and 18 other defendants were sued in a
lawsuit styled Lyondell Chemical Company and Atlantic Richfield Company v. Ethyl
Corporation et al in the United States District Court for the Eastern District
of Texas, Beaumont Division. Other defendants have subsequently been added. The
suit seeks contribution for clean-up costs expended by the plaintiffs in
cleaning up an EPA Superfund site at which hazardous wastes were disposed. A
former subsidiary of the Company acquired in 1978 and sold back to the prior
owner in 1984, had allegedly disposed of hazardous wastes at the site during the
period 1969-1976, years before the Company owned it. The plaintiff's allege that
the Company is a legal successor-in-interest to the former subsidiary and liable
for its prior liabilities. The case is in the discovery stage and it is not
possible at this time to estimate reasonably or accurately the likelihood or
amount of any potential liability in this matter, if any. The Company vigorously
denies that it is a successor-in-interest to the former subsidiary and that it
has any liability in the 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
31.1 Certification for Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification for Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification for Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification for Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed (1) report on Form 8-K during the quarter ended August
31, 2003, covering a press release announcing its earnings for the quarter ended
May 31, 2003. The date of the report was July 16, 2003.
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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, 2003
/s/ PHILIP J. HAWK
Philip J. Hawk
Chief Executive Officer and Director
/s/ TED W. OWEN
Ted W. Owen, Senior Vice President -
Finance and Administration
(Principal Financial Officer and
Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
31.1 Certification for Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification for Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification for Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification for Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002