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, 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 August 1, 1998 was 14,251,012.
<PAGE>
TEI, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30,
1998 and December 31, 1997 (unaudited)................ 3
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended June 30, 1998 and 1997
(unaudited)........................................... 4
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 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................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 12
Item 4. Submission of Matters to a Vote of Security Holders... 12
Item 6. Exhibits and Reports on Form 8-K...................... 12
PART III. SIGNATURES 13
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 13,191,678 $ 12,810,100
Short-term investments ............................... 14,456,491 15,516,366
Accounts receivable, net ............................. 926,166 639,678
Deferred tax asset ................................... 552,553 515,611
Income tax receivable ................................ 1,512,115 1,512,115
Other current assets ................................. 449,817 417,542
------------ ------------
Total current assets ........................ 31,088,820 31,411,412
PROPERTY AND EQUIPMENT, NET ............................. 4,931,798 4,789,141
INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION ........ 2,185,282 2,288,479
DEFERRED TAX ASSET ...................................... 142,236 176,383
NET ASSETS OF DISCONTINUED OPERATIONS AND
OTHER ASSETS .................................... 718,274 377,306
------------ ------------
Total assets ......................................... $ 39,066,410 $ 39,042,721
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................... $ 282,402 $ 344,040
Accrued liabilities .................................. 1,117,031 1,033,534
------------ ------------
Total current liabilities ................... 1,399,433 1,377,574
------------ ------------
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; 15,206,237 and 15,199,237 shares issued at
June 30, 1998 and December 31, 1997, respectively .... 152,062 151,992
Additional paid-in capital ........................... 33,134,997 33,123,377
Retained earnings .................................... 8,567,589 8,577,449
Treasury stock at cost, 955,225 shares, at June 30,
1998 and December 31, 1997 ........................... (4,187,671) (4,187,671)
------------ ------------
Total shareholders' equity ........................... 37,666,977 37,665,147
------------ ------------
Total liabilities and shareholders' equity ........... $ 39,066,410 $ 39,042,721
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
TEI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES .................................... $ 825,773 $ 689,128 $ 1,556,194 $ 1,296,753
COST OF SERVICES ............................ 461,047 540,223 974,961 1,089,564
------------ ------------ ------------ ------------
Gross profit ............................. 364,726 148,905 581,233 207,189
SELLING, GENERAL & ADMINISTRATIVE
EXPENSE .................................. 623,536 678,289 1,363,118 1,336,642
------------ ------------ ------------ ------------
Loss from operations ..................... (258,810) (529,384) (781,885) (1,129,453)
OTHER INCOME ................................ 383,390 389,386 769,230 771,557
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes ........... 124,580 (139,998) (12,655) (357,896)
INCOME TAX EXPENSE (BENEFIT) ................ 43,865 24,959 (2,795) (48,786)
------------ ------------ ------------ ------------
Income (loss) from continuing
operations ...................... ........ 80,715 (164,957) (9,860) (309,110)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX ............................... - (990,000) - (990,000)
------------ ------------ ------------ ------------
Net income (loss) ..................... $ 80,715 $ (1,154,957) $ (9,860) $ (1,299,110)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE:
From continuing operations ............... $ 0.01 $ (0.01) $ 0.00 $ (0.02)
From discontinued operations ............. - (0.07) - (0.07)
------------ ------------ ------------ ------------
Net earnings (loss) per share ............... $ 0.01 $ (0.08) $ 0.00 $ (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)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................... $ (9,860) $ (1,299,110)
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 .......... -- (1,276,032)
Depreciation and amortization .......... 356,464 341,226
Net amortization of premiums and
discounts on short-term investments .. (422,958) (339,111)
(Gain) loss on disposal of assets ...... (8,871) 6,760
Deferred income taxes .................. (2,795) (631,345)
Common stock issued to directors ....... 11,690 13,790
Change in assets and liabilities:
Increase in accounts and note
receivable, net ..................... (163,084) (247,162)
Decrease in earnings in excess of
billings ............................ -- 157,689
Increase in income tax receivable ..... -- (107,676)
Increase in other current assets ...... (50,568) (520,287)
Increase in other noncurrent assets ... (101,033) --
Decrease in accounts payable and
accrued liabilities ................. (323,187) (636,315)
-------------- -------------
Total adjustments .................. (704,342) (1,738,463)
-------------- -------------
Net cash used in operating
activities ....................... (714,202) (3,037,573)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................ (402,787) (350,781)
Proceeds from the sale of assets ............ 15,733 921,238
Purchase of short-term investments .......... (16,026,345) (16,841,166)
Proceeds from maturities of short-term
investments ............................... 17,509,179 19,510,897
-------------- -------------
Net cash provided by investing
activities ....................... 1,095,780 3,240,188
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable ......... -- --
Net cash used in financing
activities ....................... -- --
Net increase in cash and cash
equivalents ...................... 381,578 202,615
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .................................... 12,810,100 11,421,710
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 13,191,678 $ 11,624,325
============== =============
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 June 30, 1998, the consolidated
results of its operations for the three-month and six-month periods ended June
30, 1998 and 1997, and its consolidated cash flows for the six-month periods
ended June 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.
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 presently has no plans to dispose of its wastewater treatment
business. However, should circumstances change such that the Company decides to
sell rather than operate its Energy Recovery Resources, Inc. subsidiary
("ERRI"), the Company may not be able to recover all of its investment.
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 anti-dilutive. All prior periods presented have been
restated to conform to the new requirements.
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.
6
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. 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.
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. However, should the amounts collected from the customers exceed the
purchaser's cost to complete the contracts, a portion of the collections in
excess of the cost to complete will be paid to the Company. The Company
estimates that it will not incur any additional losses with respect to contracts
to be completed by the purchaser; however, the Company has experienced
significant changes in these estimates in the past and it is reasonably possible
that such changes could occur in 1998. ESI's revenues and operating losses were
$766,000 and $1,276,000, respectively, for the six months ended June 30, 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 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.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at June
30, 1998 and December 31, 1997 is presented below:
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(unaudited)
Other current assets:
Interest receivable................ $ 17,258 $ 19,401
Prepaid insurance.................. 6,058 190,484
Finished goods inventories......... 309,783 178,839
Other.............................. 116,718 28,818
------------ ------------
Total other current assets.. $ 449,817 $ 417,542
============ ============
Accrued liabilities:
Compensation...................... $135,739 $123,364
Claims reserves................... 829,435 829,435
Other taxes....................... 80,778 79,604
Other............................. 71,079 1,131
------------ ------------
Total accrued liabilities... $1,117,031 $1,033,534
============ ============
7
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. 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.
5. EARNINGS (LOSS) PER COMMON SHARE:
In 1997, the Company adopted the provisions of SFAS No. 128, "EARNINGS PER
SHARE." All prior periods presented have been restated to conform to the new
requirements.
1998 1997
---- ----
Computation of basic and diluted earnings per
common share for the three months ended
June 30:
Net income (loss) applicable to common stock $ 80,715 $ (1,154,957)
============ ============
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 earnings (loss) per common
share ............................. $ 0.01 $ (0.08)
============ ============
1998 1997
------------ ------------
Computation of basic and diluted earnings per
common share for the six months ended June 30:
Net income (loss) applicable to
common stock............................... $ (9,860) $ (1,299,110)
============ ============
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 earnings (loss) per common
share ............................. $ 0.00 $ (0.09)
============ ============
6. 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 June 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.
8
<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 Energy Recovery Resources, Inc. ("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 June 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 JUNE 30, 1998 COMPARED TO THREE MONTHS
ENDED JUNE 30, 1997
Revenues from wastewater treatment and waste oil recycling services at
the Company's ERRI division increased by 20% to $826,000 during the three
months ended June 30, 1998 from $689,000 during the quarter ended June 30,
1997. Such revenue improvement is mainly due to a greater volume of
wastewater processed during the second quarter of 1998 versus the second
quarter of 1997.
Gross profit increased by 145% to $365,000 during the second three
months of 1998 from $149,000 during the prior-year period. When measured
as a percentage of sales, the gross margin increased to 44% during the
1998 quarter from 22% during 1997. Such gross profit and margin
improvement is due to the revenue increase as well as improved operating
efficiencies brought about by the implementation of new processing
techniques and the addition of new processing equipment that have reduced
such operating costs as chemicals and supplies, utilities, and repairs and
maintenance.
Selling, general and administrative expenses decreased by $54,000 to
$624,000 during the April to June 1998 quarter from $678,000 during the
comparable quarter in 1997. This reduction is due to reduced payroll.
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 $383,000 during the second quarter of 1998 compared to
$389,000 during the prior-year quarter.
During the three months ended June 30, 1998, the Company earned
$81,000 compared to a loss of $1,155,000 during the second quarter of
1997. Such 1997 loss includes a $990,000 provision for disposition of ESI.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Revenues from wastewater treatment and waste oil recycling services at
the Company's ERRI division increased by 20% from $1,297,000 during the
six months ended June 30, 1997 to $1,556,000 during the six months ended
June 30, 1998. Such revenue improvement is mainly due to a greater volume
of wastewater processed during 1998 versus 1997.
Gross profit increased by 181% to $581,000 during the first half of
1998 from $207,000 during the prior-year period. When measured as a
percentage of sales, the gross margin increased to 37% during the first
six months of 1998 from 16% during 1997. Such gross profit and margin
improvement is due to the revenue increase as well as improved operating
efficiencies brought about by the implementation of new processing
techniques and the addition of new processing equipment that have reduced
such operating costs as chemicals and supplies, utilities, and repairs and
maintenance.
9
<PAGE>
Selling, general and administrative expenses increased by $26,000 to
$1,363,000 during the January to June 1998 period from $1,337,000 during the
comparable half of 1997.
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 $769,000 during the first six months of 1998 compared to $772,000 during
the first six months of 1997.
During the six months ended June 30, 1998, the Company recorded a loss of
$10,000 compared to a loss of $1,299,000 during the first six months of 1997.
Such 1997 loss includes a $990,000 provision for disposition of ESI.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash, cash equivalents, and short-term
investments of $27,648,000 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 six months ended June 30, 1998, net cash
used in operations totaled $714,000 versus $3,038,000 during the same period in
1997. Current year cash used in operations is the result of a net loss of
$10,000, non-cash revenue and expenses of $66,000, and working capital changes
totaling $638,000.
Working capital changes during the January to June 1998 period include the
reduction of accounts payable and accrued liabilities of $323,000, primarily
related to the payment of accrued compensation expenses. Working capital changes
also include an increase in accounts receivable and inventories partially as a
result of increased revenues at ERRI.
Due to the weak demand for oil in ERRI's operating area over the last six
months and the resulting low oil prices, its customers are experiencing
declining demand and margins and are purchasing smaller volumes of reclaimed
oil, despite the fact that 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 six months and those balances 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 half of 1998 were $403,000, 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 June 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 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. Should the amounts
collected from customers exceed the costs to complete the contracts, a portion
of the excess collections will be paid to the Company resulting in income. The
Company does not expect to incur losses on the contracts; however, the estimates
of expected costs of such contracts have been significantly revised in the past
and it is reasonably possible that significant revisions could occur in the
future.
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
10
<PAGE>
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 presently has no plans to dispose of its wastewater treatment
business. However, should circumstances change such that the Company decided to
sell rather than operate ERRI, the Company may not be able to recover all of its
investment.
FORWARD-LOOKING STATEMENT
The statements contained in this Form 10-Q for the quarter ended June 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 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
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.
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 would not be
able to correctly process certain data, or in extreme situations, could cause
the entire system to be disabled. In 1992, the Company purchased and developed
new software, which it has tested and believes is Year 2000 compliant. The
Company believes that its current systems, which are significant to operations
are or are expected to be Year 2000 compliant.
The Company has initiated discussions with its significant suppliers and
customers to determine the extent to which their failure to correct their own
Year 2000 issues could affect the Company. The Company cannot guarantee that
Year 2000 problems, if any, in other companies' systems on which it relies will
be timely resolved or that other companies' failure to resolve such problems, or
resolutions incompatible with the Company's systems, would not have a material
adverse effect on the Company.
11
<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 June 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
The Company held its annual meeting of shareholders on April 29, 1998. At
such meeting, the shareholders elected directors of the Company. No other
matters were voted on at the meeting.
The tabulation for the director nominees is as follows:
NOMINEE FOR AGAINST ABSTAINED NON VOTES
---------------- ------------- ----------- ----------- ------------
Tony Coelho 11,180,953 0 125,450 0
Samuel W. Rizzo 11,192,618 0 113,785 0
W. Blair Waltrip 11,192,018 0 114,385 0
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 June 30, 1998.
12
<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 August 14, 1998
13
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