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 June 30, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file No.
0-18899
TEI, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0284783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10235 W. LITTLE YORK, SUITE 405
HOUSTON, TEXAS 77040
(Address of principal executive office)
Registrant's telephone number, including area code: (281) 892-7160
TANKNOLOGY ENVIRONMENTAL, INC.
(Former name of registrant)
5225 HOLLISTER STREET, HOUSTON, TEXAS 77040
(713) 690-8265
(Former address and telephone number of principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than 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 [ ]
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of August 1, 1997 was 14,244,012.
<PAGE>
TEI, INC. AND SUBSIDIARIES
INDEX
-----
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
June 30, 1997 and December 31, 1996 (unaudited)......... 3
Condensed Consolidated Statement of Operations
for the Three and Six Months Ended June 30, 1997
and 1996 (unaudited).................................... 4
Condensed Consolidated Statement of Cash Flows for
the Six Months Ended June 30, 1997 and 1996 (unaudited). 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
PART III. SIGNATURES............................................... 14
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
June 30, December 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 11,624,325 $ 11,421,710
Short-term investments ....................... 16,095,360 18,425,979
Accounts receivable, net ..................... 497,653 420,556
Note receivable .............................. 56,745 91,349
Inventories, net ............................. 90,782 60,317
Deferred tax asset ........................... 400,870 447,202
Income tax receivable ........................ 107,676 --
Other current assets ......................... 606,142 735,716
------------ ------------
Total current assets ................ 29,479,553 31,602,829
PROPERTY AND EQUIPMENT, NET ..................... 4,687,844 5,547,864
INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION 2,391,676 2,494,873
DEFERRED TAX ASSET .............................. 2,127,925 1,450,248
NET ASSETS OF DISCONTINUED OPERATIONS AND
OTHER ASSETS .................................. 2,193,415 1,938,080
------------ ------------
Total assets ................................. $ 40,880,413 $ 43,033,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 234,199 $ 333,676
Accrued liabilities .......................... 1,498,561 2,267,245
------------ ------------
Total current liabilities ........... 1,732,760 2,600,921
------------ ------------
COMMITMENTS AND CONTINGENCIES (See Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; 10,000,000
shares authorized; no shares issued and
outstanding ................................ -- --
Common stock, $.01 par value; 100,000,000
shares authorized; 15,199,237 and 15,192,237
shares issued at June 30, 1997 and
December 31, 1996, respectively ............ 151,922 151,922
Additional paid-in capital ................... 33,123,377 33,109,657
Retained earnings ............................ 10,059,955 11,359,065
Treasury stock at cost, 955,225 shares,
at June 30, 1997 and December 31, 1996 ..... (4,187,671) (4,187,671)
------------ ------------
Total shareholders' equity ................... 39,147,653 40,432,973
------------ ------------
Total liabilities and shareholders' equity ... $ 40,880,413 $ 43,033,894
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996* 1997 1996*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES .................................. $ 689,128 $ 587,985 $ 1,296,753 $ 1,104,723
COST OF SERVICES .......................... 540,223 360,216 1,089,564 677,863
------------ ------------ ------------ ------------
Gross profit ........................... 148,905 227,769 207,189 426,860
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES ............................... 678,289 611,866 1,336,642 1,189,274
------------ ------------ ------------ ------------
Loss from operations ................... (529,384) (384,097) (1,129,453) (762,414)
OTHER INCOME .............................. 389,386 233,605 771,557 489,620
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes ................ (139,998) (150,492) (357,896) (272,794)
INCOME TAX (BENEFIT) EXPENSE .............. 24,959 (58,496) (48,786) (106,035)
------------ ------------ ------------ ------------
Loss from continuing operations ..... (164,957) (91,996) (309,110) (166,759)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX ................. (990,000) 313,836 (990,000) 45,480
------------ ------------ ------------ ------------
Net income (loss) ................... $ (1,154,957) $ 221,840 $ (1,299,110) $ (121,279)
============ ============ ============ ============
Loss per share from continuing
operations ............................. $ (0.01) $ (0.01) $ (0.02) $ (0.01)
Earnings (loss) per share from discontinued
operations ................................ (0.07) 0.02 (0.07) 0.00
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) PER SHARE ............. $ (0.08) $ 0.01 $ (0.09) $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ......................... 14,244,012 14,284,578 14,244,012 14,239,379
============ ============ ============ ============
</TABLE>
- --------------
* Reclassified
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................... $ (1,299,110) $ (121,279)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for disposition of discontinued operations 1,500,000 --
ESI operating loss charged to reserve for
discontinued operations .......................... (1,276,031) (1,352,542)
Depreciation and amortization ...................... 341,226 1,539,617
Net amortization of premiums and discounts on short-
term investments ................................. (339,111) (65,050)
Loss on disposal of assets ......................... 6,760 5,298
Deferred income taxes .............................. (631,345) 32,108
Deferred income .................................... -- (10,080)
Common stock issued to directors ................... 13,790 12,740
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net ... (42,493) 420,643
(Increase) decrease in inventories, net ........... (30,465) 105,278
Increase in income tax receivable ................. (107,676) (240,642)
Decrease in other current assets .................. 129,574 359,675
(Increase) decrease in net assets of discontinued
operations ..................................... (479,304) 344,887
Decrease in accounts payable and accrued
liabilities .................................... (868,161) (82,917)
------------ ------------
Total adjustments .............................. (1,783,236) 1,069,015
------------ ------------
Net cash (used in) provided by operating
activities .................................. (3,082,346) 947,736
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (306,008) (1,548,072)
Proceeds from the sale of assets ........................ 921,238 108,443
Purchase of short-term investments ...................... (16,841,166) (2,163,188)
Proceeds from maturities of short-term investments ...... 19,510,897 3,933,194
Increase in intangible assets ........................... -- (20,725)
------------ ------------
Net cash provided by investing activities ...... 3,284,961 309,652
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable ..................... -- (28,939)
------------ ------------
Net cash used in financing activities .......... -- (28,939)
------------ ------------
Net increase in cash and cash equivalents ...... 202,615 1,228,449
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD .................................................. 11,421,710 14,967,107
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 11,624,325 $ 16,195,556
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited condensed consolidated financial statements include the
accounts of TEI, Inc. and its wholly owned subsidiaries (the "Company"). The
unaudited condensed consolidated financial statements have been prepared
consistent with the accounting policies reflected in the audited consolidated
financial statements included in the Company's Form 10-K filed with the
Securities and Exchange Commission on March 31, 1997, and should be read in
conjunction therewith.
In management's opinion, the unaudited condensed consolidated financial
statements include all adjustments necessary for a fair presentation of the
Company's consolidated financial position at June 30, 1997, the consolidated
results of its operations for the three-month and six-month periods ended June
30, 1997 and 1996, and its consolidated cash flows for the six-month periods
ended June 30, 1997 and 1996. All such adjustments are of a normal recurring
nature. Interim results are not necessarily indicative of results for a full
year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of TEI, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. Prior year
amounts in the condensed consolidated statement of operations and related notes
thereto have been reclassified to reflect the Company's discontinued operations
consisting of Mankoff, Inc. ("Mankoff"), Engineered Systems, Inc. ("ESI"),
Tanknology Corporation International ("TCI"), Tanknology Canada (1988), Inc.,
("TCS"), and USTMAN Industries, Inc. ("USTMAN"), as discussed in Note 2. All
amounts included in these notes are from continuing operations unless otherwise
indicated.
The Company is a holding company whose only current continuing business is
wastewater processing and waste oil recycling in the Central Eastern United
States. The Company's remaining discontinued subsidiary, ESI, develops and
manufactures automated fuel systems and related products principally for large
international oil companies.
SHORT-TERM INVESTMENTS
Short-term investments are those with maturities greater than three months
when purchased.
The Company has classified all short-term investments as
available-for-sale. When purchased, securities are recorded at cost and adjusted
for unrealized holding gains and losses due to market fluctuations. Gains and
losses are recorded upon the sales of short-term investments based upon the
specific identification method. Unrealized gains and losses were not material
for any period presented.
INCOME TAXES
The Company utilizes the liability method for deferred income taxes. The
liability approach requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events recognized in the Company's
financial statements or tax returns. All expected future events other than
changes in the law or tax rates, are considered in estimating future tax
consequences.
The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statements and tax bases of assets and liabilities.
6
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EARNINGS PER COMMON SHARE
Primary earnings per share is based on the weighted average number of
shares outstanding during the period after consideration of the dilutive effect
of stock options or warrants reflected under the treasury stock method. Fully
diluted earnings per share are not presented because such amounts would be the
same as amounts computed for primary earnings per share.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, entitled "EARNINGS PER SHARE" ("SFAS No. 128"), in
1997. The Company is required to adopt the provisions of SFAS No. 128 for its
year ended December 31, 1997. Initial adoption of this standard is not expected
to have a material impact on the Company's financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, entitled "REPORTING COMPREHENSIVE INCOME" ("SFAS
No. 130"), in 1997. The Company is required to adopt the provisions of SFAS No.
130 for its year ended December 31, 1997. Initial adoption of this standard is
not expected to have a material impact on the Company's financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, entitled "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" ("SFAS No. 131"), in 1997. The Company is
required to adopt the provisions of SFAS No. 131 for its year ended December 31,
1997. Initial adoption of this standard is not expected to have a material
impact on the Company's financial statements.
2. DISCONTINUED OPERATIONS:
During 1995, the Board of Directors of the Company elected to discontinue
operations at its ESI subsidiary and put the assets of the business up for sale.
ESI's operations were discontinued as of December 31, 1995; however, as of June
30, 1997, ESI has not been sold or closed. During 1995, a provision for
estimated loss on disposition of ESI of $3,715,000, including write-off of
goodwill and estimated losses through the expected date of sale, was recorded
net of an income tax benefit of $1,914,000. During 1996, an additional provision
for estimated loss on disposition of ESI of $660,000 was recorded, net of an
income tax benefit of $340,000. During 1997, due to the lack of an adequate
offer to buy ESI in the time period originally anticipated by the Company, an
additional provision for estimated loss on disposition of ESI of $990,000 has
been recorded, net of an income tax benefit of $510,000. The amounts the Company
will ultimately realize could differ materially from the amounts assumed in
arriving at the estimated loss from discontinued operations. The remaining net
assets of ESI principally consist of accounts receivable, contracts in progress,
inventories, and property, plant and equipment offset by accrued liabilities,
including estimated losses through the revised expected date of sale. The
Company will fulfill all contract obligations of ESI and liquidate its assets
unless a buyer of the business assumes performance of its contracts in the near
future. ESI's revenues were $766,000 and $1,288,000 for the six months ended
June 30, 1997 and 1996, respectively. Operating losses for ESI totaled
$1,276,000 and $1,353,000 for the six months ended June 30, 1997 and 1996,
respectively. As a result of the utilization of a portion of the reserve for
disposition for these losses, net assets of discontinued operations increased
during the first half of 1997.
On October 25, 1996, the Company disposed of certain assets and
liabilities, which consisted of the stock of its wholly owned subsidiaries,
Tanknology Corporation International, including its cathodic protection division
d/b/a Tanknology Cathodic Protection, USTMAN Industries, Inc., and Tanknology
Canada (1988), Inc., collectively known as the "Tank Testing Group" to NDE
Environmental Corporation ("NDE"), a Delaware corporation, an unrelated third
party. The disposition of the Tank Testing Group was made pursuant to a Stock
Purchase Agreement (the "Agreement") between the Company and NDE dated October
7, 1996. The terms of the Agreement were determined by arm's-length negotiation
between the Company and NDE. The Company disposed of the Tank Testing Group in
consideration of the receipt of $12 million in cash. The Agreement calls for
adjustments to the purchase price of up to
7
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
$1 million for any working capital deficiencies and of up to $1.25 million for
liabilities relating to services performed by the Tank Testing Group prior to
October 25, 1996. Management does not believe any material working capital
deficiencies exist; however, a liability totaling $1.25 million has been accrued
for certain other potential liabilities. Revenues for the Tank Testing Group
were $18,926,000 for the year ended December 31, 1996.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June
30, 1997 and December 31, 1996 is presented below:
June 30, December 31,
1997 1996
---------- ----------
(unaudited)
Other current assets:
Interest receivable .............. $ 32,864 $ 31,016
Prepaid insurance ................ -- 127,497
Other ............................ 573,278 577,203
---------- ----------
Total other current assets ... $ 606,142 $ 735,716
========== ==========
Accrued liabilities:
Compensation ..................... $ 165,608 $ 322,771
State, federal, and foreign income
taxes .......................... -- 634,590
Warranty and claims reserves ..... 1,250,000 1,250,000
Other taxes ...................... 78,696 57,460
Other ............................ 4,257 2,424
---------- ----------
Total accrued liabilities .. $1,498,561 $2,267,245
========== ==========
4. COMMON STOCK AND STOCK OPTIONS:
On January 1, 1997, the Company issued 7,000 shares of Restricted Stock
with a market value of $13,790 to seven directors of the Company, in accordance
with its 1991 Nonemployee Director Plan.
5. COMMITMENTS AND CONTINGENCIES:
The Company is involved in litigation and routine claims from time to
time. Certain of the Company's litigation and claims are covered by insurance
with a maximum deductible of $50,000. In addition, the Company is contingently
liable for up to $1.25 million for liabilities relating to services performed by
the Tank Testing Group prior to October 25, 1996. The Company has recorded a
liability for the $1.25 million contingency as of December 31, 1996. In
Management's opinion, the litigation and claims in which the Company is
currently involved are not material to the Company's consolidated financial
position, results of operations or liquidity.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On October 25, 1996, the Company sold the assets and liabilities of its
three subsidiaries involved in underground storage tank services to NDE
Environmental, Inc. ("NDE"). The subsidiaries that were sold, ("the Tank Testing
Group"), consist of Tanknology Corporation International including its cathodic
protection division d/b/a Tanknology Cathodic Protection, USTMAN Industries,
Inc., and Tanknology Canada (1988), Inc. The Company disposed of the Tank
Testing Group in consideration of the receipt of $12,000,000 in cash. The Tank
Testing Group had revenues of $18,926,000 for the year ended December 31, 1996.
Pursuant to the agreement to sell the Tank Testing Group, at the annual
meeting of shareholders on April 24, 1997, the Company's shareholders elected to
change the name of the Company to TEI, Inc.
After the sale of the Tank Testing Group, the Company's continuing
operations consist of Energy Recovery Resources ("ERRI"), a wastewater and waste
oil treatment company located in Charlotte, North Carolina. The Company also
owns Engineered Systems, Inc. ("ESI"), based in Tempe, Arizona. ESI is a
provider of fuel system products. The Company elected to discontinue ESI in
December 1995 and is in the process of disposing of ESI. Accordingly, ESI has
been accounted for as a discontinued operation.
At June 30, 1997, the Company had approximately $28 million in cash, cash
equivalents, and marketable securities. At this time, the Company intends to
continue operating ERRI and has no immediate plan for reinvesting these funds
into any specific operating entity; however, management intends to evaluate
various strategies. All excess cash is invested in short-term, interest-bearing,
investment-grade securities, with a minimum rating of single "A".
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues from wastewater treatment and waste oil recycling services at the
Company's ERRI division increased by 17.2% from $588,000 during the three months
ended June 30, 1996 to $689,000 during the quarter ended June 30, 1997. Such
revenue improvement is mainly due to a greater volume of wastewater processed
during the first quarter of 1997 versus 1996.
Gross profit declined by $79,000 to $149,000 during the second three
months of 1997 from $228,000 during the prior-year period. When measured as a
percentage of sales, the gross margin declined to 21.6% during the 1997 quarter
from 38.8% during 1996. During the second quarter of 1997, all processing
operations were conducted from the Company's newly constructed treatment
facility in the Charlotte, North Carolina area. The new facility is larger, has
greater processing capabilities, and has higher associated fixed operating costs
such as depreciation and personnel than the old plant in which the Company
operated during the second quarter of 1996. Additionally, during the second
quarter of 1997, processing operations in the new facility were not as efficient
as that of the old facility due to the new equipment and processing techniques
employed and the learning curve involved with its operations. Management
believes that such operating costs will decline as a percentage of sales as
revenues increase.
Selling, general and administrative expenses increased $66,000 to $678,000
during the second three months of 1997 from $612,000 during the comparable
period in 1996, principally due to depreciation and the addition of management
and supervisory personnel at the new wastewater treatment processing plant at
ERRI.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
grew from $234,000 during the second three months of 1996 to $389,000 during the
comparable current-year period. This is primarily due to investment of the
proceeds from the Company's sale of the Tank Testing Group during the fourth
quarter of 1996.
During 1996, the Company sold the Tank Testing Group to an independent
third party. The Tank Testing Group recorded net income of $314,000 during the
second quarter of 1996. Such income is classified
9
<PAGE>
as income from discontinued operations during the April to June 1996 period.
During the second quarter of 1997, the Company recorded an additional provision
for disposition of ESI of $990,000, net of an income tax benefit of $510,000.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues from wastewater treatment and waste oil recycling services at the
Company's ERRI division increased by 17.4% from $1,105,000 during the six months
ended June 30, 1996 to $1,297,000 during the two quarters ended June 30, 1997.
Such revenue improvement is mainly due to a greater volume of wastewater
processed during the first half of 1997 versus 1996.
Gross profit declined by $220,000 to $207,000 during the first six months
of 1997 from $427,000 during the prior-year period. When measured as a
percentage of sales, the gross margin declined to 16% during the 1997 period
from 38.6% during 1996. During the first half of 1997, all processing operations
were conducted from the Company's newly constructed treatment facility in the
Charlotte, North Carolina area. The new facility is larger, has greater
processing capabilities, and has higher associated fixed operating costs such as
depreciation and personnel than the old plant in which the company operated
during most of 1996. Additionally, during the 1997 period, processing operations
in the new facility were not as efficient as that of the old facility due to the
new equipment and processing techniques employed, the learning curve involved
with its operations, and the costs of moving to the new plant. Management
believes that such operating costs will decline as a percentage of sales as
revenues increase.
Selling, general and administrative expenses increased $148,000 to
$1,337,000 during the first two quarters of 1997 from $1,189,000 during the
comparable period in 1996, principally due to deprecation and the addition of
management and supervisory personnel at the new wastewater treatment processing
plant at ERRI.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
grew from $490,000 during the first six months of 1996 to $772,000 during the
comparable current-year period. This is primarily due to an increase in the
amount invested as a result of the Company's sale of the Tank Testing Group
during the fourth quarter of 1996.
During 1996, the Company sold the Tank Testing Group to an independent
third party. The Tank Testing Group recorded net income of $45,000 during the
first half of 1996. Such income is classified as income from discontinued
operations during the January to June 1996 period. During the first half of
1997, the Company recorded a provision for disposition of ESI of $990,000, net
of an income tax benefit of $510,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash, cash equivalents, and short-term
investments of $27,720,000 and had no significant cash commitments of such funds
other than the normal requirements to operate the Company's continuing
operations and to fund expected losses at ESI until its disposition. These funds
are being invested in liquid high credit quality instruments pending any
decision by the Company's Board of Directors regarding the Company's future
direction. For the six months ended June 30, 1997, net cash used in operations
totaled $3,082,000 versus net cash provided by operations of $948,000 during the
same period in 1996. Current year cash used in operations is the result of a net
loss of $1,299,000, non-cash revenue and expenses of $385,000, and working
capital changes totaling $1,399,000.
Non-cash revenue and expenses for 1997 includes a $1.5 million provision
for disposition of ESI, offset by ESI's current year operating loss of
$1,276,000. Depreciation and amortization totaled $341,000 during 1997.
10
<PAGE>
Working capital changes during the January to June 1997 period include the
reduction of accounts payable and accrued liabilities of $868,000, primarily
related to the payment of accrued income taxes and compensation expenses.
Working capital changes also include an increase in the net assets of ESI of
$479,000, principally due to an increase in inventory to be used for completion
of contracts in progress during 1997.
Capital expenditures for the first half of 1997 were $306,000, mainly for
the purchase of machinery and processing equipment at ERRI. During the first six
months of 1997, the Company sold its former headquarters building and related
fixed assets in Houston receiving cash of approximately $921,000.
The Company's deferred tax asset increased from $1,897,000 at December 31,
1996 to $2,529,000 at June 30, 1997 principally as a result of net operating
losses from continuing operations and the accrual of additional anticipated
losses on discontinued operations through the estimated date of disposal or
liquidation. The Company has not provided a valuation allowance against its
deferred tax asset as the Company believes the net operating losses can be
utilized to offset future taxable income. However, if ERRI continues to incur
losses, general and administrative expenses continue to be higher than
anticipated or losses from discontinued operations are higher than anticipated,
a material charge to expense to record a valuation allowance against a portion
of the deferred tax asset could be required.
SEASONALITY
The Company experiences no noticeable seasonal variations in its
continuing business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is evaluating strategic and financial alternatives for
maximizing shareholder value. This may include, but is not limited to, an
acquisition or merger with another company that may or may not be in a business
complementary to that of the Company, a "going private" transaction in which
current directors and/or management would acquire the outstanding publicly held
shares of the Company, or some combination of the above alternatives. The
Company has not necessarily determined to pursue any of the above alternatives
at this time, nor are the Company's alternatives limited to the above items.
FORWARD-LOOKING STATEMENT
The statements contained in this Form 10-Q for the three and six months
ended June 30, 1997 that are not historical facts, including, but not limited
to, statements found in this Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, include forward-looking
statements and involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in the Form
10-Q could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: general economic conditions, competition, government regulation,
and possible future litigation, as well as the risks and uncertainties discussed
in this Form 10-Q, including without limitation, the portions referenced above,
and the uncertainties set forth from time to time in the Company's other public
reports and filings and public statements.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, entitled "EARNINGS PER SHARE" ("SFAS No. 128"), in
1997. The Company is required to adopt the provisions of SFAS No. 128 for its
year ended December 31, 1997. Initial adoption of this standard is not expected
to have a material impact on the Company's financial statements.
11
<PAGE>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, entitled "REPORTING COMPREHENSIVE INCOME" ("SFAS
No. 130"), in 1997. The Company is required to adopt the provisions of SFAS No.
130 for its year ended December 31, 1997. Initial adoption of this standard is
not expected to have a material impact on the Company's financial statements.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, entitled "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" ("SFAS No. 131"), in 1997. The Company is
required to adopt the provisions of SFAS No. 131 for its year ended December 31,
1997. Initial adoption of this standard is not expected to have a material
impact on the Company's financial statements.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation and routine claims from time to
time. Certain of the Company's litigation and claims are covered by insurance
with a maximum deductible of $50,000. In addition, the Company is contingently
liable for up to $1.25 million for liabilities relating to services performed by
the Tank Testing Group prior to October 25, 1996. The Company has recorded a
liability for the $1.25 million contingency as of December 31, 1996. In
Management's opinion, the total estimated litigation liability and related
insurance claims are not material to the Company's consolidated financial
position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on April 24, 1997. At
such meeting, the shareholders elected directors of the Company and voted to
amend the Articles of Incorporation to change the name of the Company to "TEI,
Inc." No other matters were voted on at the meeting.
The tabulation for the director nominees is as follows:
Nominee For Against Abstained Non votes
---------------- ----------- ------------ ------------ ------------
Donald R. Campbell 12,137,982 0 138,351 0
T. Craig Benson 12,124,652 0 151,681 0
The tabulation for the name change is as follows:
For Against Abstained Non votes
---------------- ----------- ------------ ------------ ------------
TEI, Inc. 12,165,244 91,374 19,715 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11.1A Computation of Earnings Per Common Share for the
Three and Six Months Ended June 30, 1997 and 1996.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three-month
period ended June 30, 1997.
13
<PAGE>
PART III.
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, thereunto duly authorized.
TEI, INC.
By /s/ RICK BERRY
Rick Berry
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
Date August 14, 1997
By /s/ DONALD R. CAMPBELL
Donald R. Campbell
President,
Chief Executive Officer and
Chief Operating Officer
Date August 14, 1997
14
EXHIBIT 11.1A
TEI, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
for the Three and Six Months Ended June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Computation of earnings per common share for the
three months ended June 30:
Net income (loss) applicable to common stock .................. $ (1,154,957) $ 221,840
============ ============
Weighted average number of common shares outstanding .......... 14,244,012 14,284,578
Common shares issuable under employee stock option plan ....... -- --
Less shares assumed repurchased with proceeds ................. -- --
------------ ------------
Weighted average common shares outstanding ................. 14,244,012 14,284,578
============ ============
Net earnings (loss) per common share ................... $ (0.08) $ 0.01
============ ============
1997 1996
------------ ------------
Computation of earnings per common share for the
six months ended June 30:
Net income (loss) applicable to common stock .................. $ (1,299,110) $ (121,279)
============ ============
Weighted average number of common shares outstanding .......... 14,244,012 14,239,379
Common shares issuable under employee stock option plan ....... -- --
Less shares assumed repurchased with proceeds ................. -- --
------------ ------------
Weighted average common shares outstanding ................. 14,244,012 14,239,379
============ ============
Net earnings (loss) per common share ................... $ (0.09) $ (0.01)
============ ============
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,624,325
<SECURITIES> 16,095,360
<RECEIVABLES> 705,232
<ALLOWANCES> 43,158
<INVENTORY> 90,782
<CURRENT-ASSETS> 29,479,553
<PP&E> 5,257,983
<DEPRECIATION> 570,139
<TOTAL-ASSETS> 40,880,413
<CURRENT-LIABILITIES> 1,732,760
<BONDS> 0
0
0
<COMMON> 151,992
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,880,413
<SALES> 0
<TOTAL-REVENUES> 1,296,753
<CGS> 1,089,564
<TOTAL-COSTS> 2,426,206
<OTHER-EXPENSES> (36,086)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (735,471)
<INCOME-PRETAX> (357,896)
<INCOME-TAX> (48,786)
<INCOME-CONTINUING> (309,110)
<DISCONTINUED> (990,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,299,110)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
