SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998, 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.)
2900 N. LOOP WEST, SUITE 1230
HOUSTON, TEXAS 77092
(Address of principal executive office)
Registrant's telephone number, including area code: (713) 263-7283
10235 W. LITTLE YORK, SUITE 405
HOUSTON, TEXAS 77040
(713) 983-7160
(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 $0.01 per share,
outstanding as of November 1, 1998 was 14,251,012.
Page 1
Index to Exhibits
appears on page 14
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TEI, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE(S)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND
DECEMBER 31, 1997 (UNAUDITED)..................................................... 3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)......................... 4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)..................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................. 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 14
PART III. SIGNATURES.................................................................................... 15
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.........................................................$ 15,173,306 $ 12,810,100
Short-term investments ............................................................ 13,617,153 15,516,366
Accounts receivable, net .......................................................... 675,887 639,678
Deferred tax asset ................................................................ 561,133 515,611
Income tax receivable ............................................................. -- 1,512,115
Other current assets .............................................................. 538,206 417,542
------------ ------------
Total current assets ................................................ 30,565,685 31,411,412
PROPERTY AND EQUIPMENT, NET .......................................................... 5,008,344 4,789,141
INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION ..................................... 2,133,683 2,288,479
DEFERRED TAX ASSET ................................................................... 287,296 176,383
NET ASSETS OF DISCONTINUED OPERATIONS AND
OTHER ASSETS ............................................................ 788,031 377,306
------------ ------------
Total assets......................................................................$ 38,783,039 $ 39,042,721
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................$ 408,746 $ 344,040
Accrued liabilities ............................................................... 997,853 1,033,534
------------ ------------
Total current liabilities ........................................... 1,406,599 1,377,574
COMMITMENTS AND CONTINGENCIES (See Note 7)
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;
15,206,237 and 15,199,237 shares issued at September 30, 1998 and
December 31, 1997, respectively ...................................... 152,062 151,992
Additional paid-in capital ........................................................ 33,134,997 33,123,377
Retained earnings ................................................................. 8,308,252 8,577,449
Treasury stock at cost, 955,225 shares, at September 30, 1998 and
December 31, 1997 .................................................... (4,187,671) (4,187,671)
Net unrealized loss on investments available for sale,
net of deferred taxes of $16,800 ............................................... (31,200) --
------------ ------------
Total shareholders' equity ........................................................ 37,376,440 37,665,147
------------ ------------
Total liabilities and shareholders' equity........................................$ 38,783,039 $ 39,042,721
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
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TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES ....................................................... $ 730,993 $ 769,613 $ 2,287,187 $ 2,066,366
COST OF SERVICES ............................................... 785,227 473,724 1,760,188 1,563,288
------------ ------------ ------------ ------------
Gross profit (loss) ....................................... (54,234) 295,889 526,999 503,078
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES .................................................. 568,899 683,622 1,932,017 2,020,264
------------ ------------ ------------ ------------
Loss from operations ...................................... (623,133) (387,733) (1,405,018) (1,517,186)
OTHER INCOME ................................................... 393,956 373,850 1,163,186 1,145,407
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes ....... (229,177) (13,883) (241,832) (371,779)
INCOME TAX BENEFIT ............................................. (78,340) -- (81,135) (48,786)
------------ ------------ ------------ ------------
Loss from continuing operations ........................... (150,837) (13,883) (160,697) (322,993)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX ................................................ (108,500) -- (108,500) (990,000)
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (259,337) $ (13,883) $ (269,197) $ (1,312,993)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE:
From continuing operations ................................ $ (0.01) $ 0.00 $ (0.01) $ (0.02)
From discontinued operations .............................. (0.01) 0.00 (0.01) (0.07)
------------ ------------ ------------ ------------
Net loss per share ............................................. $ (0.02) $ 0.00 $ (0.02) $ (0.09)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ............................................... 14,251,012 14,244,012 14,251,012 14,244,012
============ ============ ============ ============
</TABLE>
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>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (269,197) $ (1,312,993)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Provision for disposition of discontinued operations ....... 167,000 1,500,000
ESI operating loss charged to reserve for discontinued
operations .............................................. -- (1,520,070)
Depreciation and amortization .............................. 542,541 506,071
Net amortization of premiums and discounts on short-
term investments ........................................ (620,047) (553,891)
Gain on disposal of assets ................................. (8,871) (63,664)
Deferred income taxes ...................................... (139,635) (650,643)
Common stock issued to directors ........................... 11,690 13,790
Change in assets and liabilities:
Decrease (increase) in accounts and note receivable,
net ................................................... 87,195 (802,904)
Decrease in earnings in excess of billings .............. -- 138,600
Decrease (increase) in income tax receivable ............ 1,512,115 (92,963)
Increase in other current assets ........................ (109,707) (516,219)
Increase in other noncurrent assets ..................... (369,588) --
Decrease in accounts payable and accrued
liabilities ........................................... (313,473) (677,390)
------------ ------------
Total adjustments ................................... 759,220 (2,719,283)
------------ ------------
Net cash provided by (used in) operating activities . 490,023 (4,032,276)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (613,811) (450,127)
Proceeds from the sale of assets ................................. 15,733 2,492,284
Purchase of short-term investments ............................... (21,376,663) (25,267,818)
Proceeds from maturities of short-term investments ............... 23,847,924 29,839,253
------------ ------------
Net cash provided by investing activities ........... 1,873,183 6,613,592
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES .................................. -- --
------------ ------------
Net increase in cash and cash equivalents ........... 2,363,206 2,581,316
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ........................................................... 12,810,100 11,421,710
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 15,173,306 $ 14,003,026
============ ============
</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, 1998, 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 September 30, 1998, the
consolidated results of its operations for the three-month and nine-month
periods ended September 30, 1998 and 1997, and its consolidated cash flows for
the nine-month periods ended September 30, 1998 and 1997. All such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative
of results for a full year.
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. It replaces the
presentation of primary earnings per share with a presentation of earnings per
common share and fully diluted earnings per share with earnings per common share
- - assuming dilution. In the periods presented, outstanding stock options are not
included in the computation of earnings per common share - assuming dilution as
the options' effects are antidilutive.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period, except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Initial adoption of this standard had no impact on the
Company's financial statements.
2. RECENT EVENTS:
During April 1998, the Company entered into letters of intent with a
group of three financial service firms. Under the terms of the agreements, the
Company would organize a newly formed subsidiary corporation that would acquire
all ownership of the three firms in a stock-for-stock transaction. TEI would
file a proxy statement and registration statement with the SEC. Upon the
appropriate approvals of the SEC and Nasdaq for the registration and stock
listing, TEI would merge into the subsidiary. Current shareholders of TEI would
own slightly more than 50% of the new company, and current shareholders and
partners of the three financial service firms would own slightly less than 50%
of the new company. The letters of intent are subject to: i) approval of
shareholders of TEI, ii) receipt of approvals by all governmental organizations
having jurisdiction over the parties involved in the transaction, iii) receipt
of a financial fairness opinion from an investment banking firm, iv) absence of
adverse changes in the financial condition of the parties involved in the
transaction, v) SEC and Nasdaq approvals for registration and listing of the new
company's shares, and vi) other related conditions. This transaction is subject
to the consummation of a definitive agreement among all the parties.
The Company's wastewater treatment business is performing at levels
below expectations and, should the merger referred to above be consummated,
would be the only non-financial service business owned and operated by the
Company. As a result, management is considering alternatives including selling
Energy Recovery Resources, Inc.
6
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
("ERRI"), although no decision has been made. ERRI incurred an operating loss of
$356,000 for the three months ended September 30, 1998, including noncash
charges for depreciation and amortization of $184,000, and a $47,000 pre-tax
loss to write down waste oil inventory to its estimated market value. Further
inventory write-down could occur. In addition, if management is unable to
improve profitability of ERRI, the goodwill associated with that business may be
impaired. Should the Company elect to sell ERRI, the Company may not recover all
of its investment.
3. DISCONTINUED OPERATIONS:
The Board of Directors of the Company elected to discontinue operations
at its Engineered Systems, Inc. subsidiary ("ESI"), as of December 31, 1995.
ESI's revenues and operating losses were $1,655,000 and $1,520,000,
respectively, for the nine months ended September 30, 1997. Certain assets of
ESI were sold on December 23, 1997, for a $500,000 note due in 2002. The
purchaser has also agreed to complete customer contracts that were in process at
the time of the sale; however, the Company remains primarily responsible for
completing such contracts. Should the purchaser's cost to complete the contracts
exceed the amounts collected from the customers, the Company is liable to
reimburse the purchaser for the excess contract completion costs. The Company
continues to experience significant changes in these estimates and it is
reasonably possible that such changes could occur in the future resulting in
additional losses to the Company. The purchaser has notified the Company that
delays and installation problems on several contracts have significantly
increased estimated costs to complete those contracts. As a result, the Company
has recorded an additional charge to discontinued operations of $109,000, net of
tax to increase the liability for estimates to complete ESI projects.
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 an
unrelated third party for $12 million in cash. The disposition of the Tank
Testing Group was made pursuant to a Stock Purchase Agreement (the "Agreement")
that calls for adjustments to the purchase price of up to $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. A
liability totaling $829,000 has been accrued for potential liabilities related
to the Agreement.
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at
September 30, 1998 and December 31, 1997 is presented below:
September 30, December 31,
1998 1997
---------- ------------
(unaudited)
Other current assets:
Interest receivable ..................... $ 12,913 $ 19,401
Prepaid insurance ....................... 194,700 190,484
Finished goods inventories, net ......... 275,280 178,839
Other ................................... 55,313 28,818
---------- ----------
Total other current assets .......... $ 538,206 $ 417,542
========== ==========
Accrued liabilities:
Compensation ............................ $ 112,195 $ 123,364
Claims reserves ......................... 829,435 829,435
Other taxes ............................. 53,196 79,604
Other ................................... 3,027 1,131
---------- ----------
Total accrued liabilities ........... $ 997,853 $1,033,534
========== ==========
7
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Net assets of discontinued operations and other assets:
Capitalized merger costs .................................................. $370,160 $--
Net assets of discontinued operations ..................................... 417,871 377,306
-------- --------
Total net assets of discontinued operations and other assets .......... $788,031 $377,306
======== ========
</TABLE>
5. COMMON STOCK AND STOCK OPTIONS:
On January 1, 1998, the Company issued 7,000 shares of Restricted Stock
with a market value of $11,690 to seven directors of the Company, in accordance
with its 1991 Nonemployee Director Plan.
6. EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) per common share is computed as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Computation of basic and diluted earnings per common share for the three months
ended September 30:
Net loss applicable to common stock ..................................... $ (259,337) $ (13,883)
------------ ------------
Weighted average number of common shares outstanding .................... 14,251,012 14,244,012
Common shares issuable under employee stock option plan ................. -- --
Less shares assumed repurchased with proceeds ........................... -- --
------------ ------------
Weighted average common shares outstanding .......................... 14,251,012 14,244,012
============ ============
Net loss per common share ..................................... $ (0.02) $ 0.00
============ ============
1998 1997
------------ ------------
Computation of basic and diluted earnings per common share for the nine months
ended September 30:
Net loss applicable to common stock ..................................... $ (269,197) $ (1,312,993)
============ ============
Weighted average number of common shares outstanding .................... 14,251,012 14,244,012
Common shares issuable under employee stock option plan ................. -- --
Less shares assumed repurchased with proceeds ........................... -- --
------------ ------------
Weighted average common shares outstanding .......................... 14,251,012 14,244,012
============ ============
Net loss per common share ..................................... $ (0.02) $ (0.09)
============ ============
</TABLE>
Stock options outstanding of 682,500 and 724,500 at September 30, 1998
and 1997, respectively, have not been included in diluted earnings per common
share because to do so would have been antidilutive for the periods presented.
8
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TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. 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 an
$829,000 liability for that contingency as of September 30, 1998. 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
TEI was incorporated in 1989 for the purpose of acquiring and operating
businesses involved in various aspects of underground and above ground tank
testing and related services. In 1994, the Company acquired its ERRI subsidiary
that performs wastewater treatment. Beginning in 1995, the Company began
disposing of its various tank testing-related businesses and completed this
divestiture program in 1997. As of September 30, 1998, the Company's continuing
operations consist of ERRI and various corporate activities. All of the
Company's tank testing and related services operations are presented as
discontinued operations.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues from wastewater treatment and waste oil recycling services at the
Company's ERRI division decreased by 5% to $731,000 during the three months
ended September 30, 1998 from $770,000 during the quarter ended September 30,
1997. Such revenue contraction is mainly due to lower revenues from the sale of
recycled waste oil caused by a drop in the price of oil from 1997 to 1998.
The Company sold 874,000 gallons of recycled oil during the three months ended
September 30, 1998 at an average price of $0.16 per gallon versus sales of
958,000 gallons of recycled oil at an average price of $0.21 per gallon during
the three months ended September 30, 1997.
Gross profit decreased by $350,000 from $296,000 during the third quarter
of 1997 to a loss of $54,000 during the comparable current year quarter. Such
gross profit decline is primarily due to higher maintenance, chemical, and other
processing costs during the 1998 quarter caused by equipment breakdowns and
operating inefficiencies and a $47,000 write-down of inventories to estimated
market value.
Selling, general and administrative expenses decreased by $115,000 to
$569,000 during the July to September 1998 quarter from $684,000 during the
comparable quarter in 1997. This reduction is due to reduced payroll and legal
costs.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
totaled $394,000 during the third quarter of 1998 compared to $374,000 during
the prior-year quarter.
During the three months ended September 30, 1998, the Company recorded a
loss of $259,000 compared to a loss of $14,000 during the third quarter of 1997.
The 1998 loss includes a $109,000 charge to discontinued operations to increase
the liability estimates to complete its ESI projects.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues from wastewater treatment and waste oil recycling services at the
Company's ERRI division increased by 11% from $2,066,000 during the nine months
ended September 30, 1997 to $2,287,000 during the nine months ended September
30, 1998. Such revenue improvement is mainly due to a greater volume of
wastewater processed during 1998 versus 1997.
The Company sold 2,052,000 gallons of recycled oil during the nine months
ended September 30, 1998 at an average price of $0.17 per gallon versus sales of
2,548,000 gallons of recycled oil at an average price of $0.21 per gallon during
the nine months ended September 30, 1997.
Gross profit increased by 5% to $527,000 during the first nine months of
1998 from $503,000 during the prior-year period. When measured as a percentage
of sales, the gross margin decreased to 23% during the first nine months of 1998
from 24% during 1997. Such gross profit improvement is principally due to the
10
<PAGE>
revenue increase partially offset by increased costs for the three months ended
September 30, 1998 as described above.
Selling, general and administrative expenses decreased by $88,000 to
$1,932,000 during the January to September 1998 period from $2,020,000 during
the comparable quarters of 1997 primarily due to lower legal and payroll costs.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
totaled $1,163,000 during the first nine months of 1998 compared to $1,145,000
during the first nine months of 1997.
During the nine months ended September 30, 1998, the Company recorded a
loss of $269,000 compared to a loss of $1,313,000 during the first nine months
of 1997. Such 1997 loss includes a $990,000 provision for disposition of ESI.
The 1998 loss includes a $109,000 charge to discontinued operations to increase
the liability for estimates to complete ESI projects.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash, cash equivalents, and
short-term investments of $28,790,000 and had no significant cash commitments of
such funds other than the normal requirements to operate the Company's
continuing operations. 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 nine months ended September
30, 1998, net cash provided by operations totaled $490,000 versus net cash used
in operations of $4,032,000 during the same period in 1997. Current year cash
provided by operations is the result of working capital changes totaling
$807,000, and partially offset by a net loss of $269,000, and non-cash revenue
and expenses of $47,000.
Working capital changes during the January to September 1998 period
include the reduction of accounts payable and accrued liabilities of $313,000,
primarily related to the payment of accrued compensation expenses. Working
capital changes also include a decrease in income tax receivable due to the
collection of such tax; and an increase in other noncurrent assets, comprised of
prepaid merger expenses related to the Company's planned merger with a group of
three financial service firms.
Due to the weak demand for oil in ERRI's operating area over the last nine
months and the resulting low prices, its customers are experiencing declining
demand and margins and are purchasing smaller volumes of reclaimed oil, despite
the fact that the wastewater processing volume is increasing. As a result, ERRI
has experienced increases in the levels of accounts receivable and inventory.
Plans are in place to reduce accounts receivable and inventory levels over the
next three months and those balances are expected to return to more normal
levels; however, if oil prices remain at current levels for an extended period
or if significant customers experience continued liquidity problems, ERRI may
incur losses due to bad debts or excess inventory.
Capital expenditures for the first three quarters of 1998 were $614,000,
mainly for the purchase of machinery and processing equipment at ERRI.
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 an
$829,000 liability for that contingency as of September 30, 1998. 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.
In December 1997, the Company sold certain assets of ESI for a $500,000
interest-bearing note due in 2002. The purchaser also agreed to complete
customer contracts in process at the date of sale; however, the
11
<PAGE>
Company remains primarily responsible for these contracts. Should the
purchasers' cost to complete the contracts exceed the amount remaining to be
collected from customers of approximately $2,000,000, the Company will be
required to reimburse the purchaser, which will result in losses to the Company.
The Company continues to experience significant changes in these estimates and
it is reasonably possible that such changes could occur in the future resulting
in additional losses to the Company. The purchaser has notified the Company that
delays and installation problems on several contracts have significantly
increased estimated costs to complete those contracts. As a result, the Company
has recorded an additional charge to discontinued operations of $109,000, net of
tax to increase the liability estimates to complete its ESI projects.
SEASONALITY
The Company experiences no noticeable seasonal variations in its
continuing business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
During April 1998, the Company entered into letters of intent with a group
of three financial service firms. Under the terms of the agreements, the Company
would organize a newly formed subsidiary corporation that would acquire all
ownership of the three firms in a stock-for-stock transaction. TEI would file a
proxy statement and registration statement with the SEC. Upon the appropriate
approvals of the SEC and Nasdaq for the registration and stock listing, TEI
would merge into the subsidiary. Current shareholders of TEI would own slightly
more than 50% of the new company, and current shareholders and partners of the
three financial service firms would own slightly less than 50% of the new
company. The letters of intent are subject to: i) approval of shareholders of
TEI, ii) receipt of approvals by all governmental organizations having
jurisdiction over the parties involved in the transaction, iii) receipt of a
financial fairness opinion from an investment banking firm, iv) absence of
adverse changes in the financial condition of the parties involved in the
transaction, v) SEC and Nasdaq approvals for registration and listing of the new
company's shares, and vi) other related conditions. This transaction is subject
to the consummation of a definitive agreement among all the parties.
The Company's wastewater treatment business is performing at levels below
expectations and, should the merger referred to above be consummated, would be
the only non-financial service business owned and operated by the Company. As a
result, management is considering alternatives including selling ERRI, although
no decision has been made. ERRI incurred an operating loss of $356,000 for the
three months ended September 30, 1998, including noncash charges for
depreciation and amortization of $184,000, and a $47,000 pre-tax loss to
write-down waste oil inventory to its estimated market value. Further inventory
write-down could occur. In addition, if management is unable to improve
profitability of ERRI, the goodwill associated with that business may be
impaired. Should the Company elect to sell ERRI, the Company may not recover all
of its investment.
YEAR 2000 IMPACT
The "Year 2000" problem refers to the inability of computer programs to
correctly interpret the century from a date in which the year is represented by
only two digits. A computer system that is not Year 2000 compliant could not
correctly process certain data, or in extreme situations, could disable the
entire system.
TEI has developed the following multi-phase plan to resolve potential Year
2000 problems relating to its information technology ("IT") systems and embedded
chip technology at its ERRI liquid waste facility:
Phase I: Identify and evaluate all IT systems and embedded chip technology
according to their potential business impact.
Phase II: Identify IT systems and embedded chip technology that use date
functions and assess them for Year 2000 functionality.
Phase III: Reprogram or replace equipment/systems, where necessary, to ensure
Year 2000 readiness.
Phase IV: Test code modifications and material equipment/systems to ensure
successful operation in a post-1999 environment.
12
<PAGE>
Phase V: Adoption of contingency plans in the case of potential Year 2000
failures.
TEI has completed Phase I and is now identifying IT systems and embedded
chip technology using date functions and assessing them for Year 2000 compliance
under Phase II. In addition, in 1992, TEI purchased and developed new accounting
software, which it has tested and believes is Year 2000 compliant.
TEI relies on many third-party vendors and suppliers for a variety of
goods and services, including operating supplies, banking, telecommunications
and utilities, such as water and electricity. Many of TEI's operations would be
adversely affected if these supplies and services were curtailed as a result of
a vendor's or supplier's Year 2000 problems. TEI is contacting those third party
vendors and suppliers whose services, if curtailed, would have an adverse effect
of TEI, to ensure that they have an effective plan to address the Year 2000
problem. However, TEI has received to date little information from these vendors
and suppliers and does not have sufficient information to assess whether its
third-party relationships will be Year 2000 ready. TEI intends to make further
inquiry in February 1999 with those material vendors and suppliers who do not
respond by January 31, 1999.
TEI has incurred approximately $6,000 for Year 2000 costs as of September
30, 1998, and estimates that its total Year 2000 costs will not exceed $100,000.
The Company expects cash on hand, cash from operations and available borrowing
to be sufficient to fund these expenditures.
If TEI's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process customer orders, process financial transactions, bill customers or
report accurate data to management, shareholders and customers, as well as
business interruptions or shutdowns, financial losses and litigation related to
Year 2000 issues.
TEI has begun to develop contingency/recovery plans aimed at ensuring the
continuity of critical business functions before and after December 31, 1999. As
part of this process, TEI plans to develop reasonably likely failure scenarios
for its critical IT systems, embedded chip technology in its ERRI liquid waste
facility, and material third-party relationships. Once these scenarios are
identified, TEI will develop plans designed to reduce the impact to TEI, and
provide methods of returning to normal operations, if one or more of those
scenarios occur. TEI cannot guarantee that it will be able to resolve all of its
Year 2000 issues, and any critical unresolved Year 2000 issues at TEI or any of
its material third parties could have a material adverse effect on TEI's results
of operations and financial condition. TEI expects its contingency and recovery
planning to be substantially complete by September 30, 1999.
FORWARD-LOOKING STATEMENT
The statements contained in this Form 10-Q for the quarter ended September
30, 1998 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, are 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 this 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
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is effective for the Company for the year
ended December 31, 1998. Initial adoption of this standard had no impact on the
Company's financial statements.
13
<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 an
$829,000 liability for that contingency as of September 30, 1998. 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
There were no matters submitted to the Company's security holders
during the third quarter ended September 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 September 30, 1998.
14
<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/ DONALD R. CAMPBELL
-----------------------------------------
Donald R. Campbell
President,
Chief Executive Officer,
Chief Operating Officer, and Secretary
(Principal Executive, Financial, and
Accounting Officer)
Date November 19, 1998
-----------------------------------------
15
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