ITEM 7(a).Financial Statements of Thermal Solutions, Inc.
The Board of Directors
Thermal Solutions, Inc.:
We have audited the accompanying balance sheet of Thermal Solutions, Inc. as of December 31, 2003, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thermal Solutions, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Houston, Texas
June 30, 2004
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BALANCE SHEET
DECEMBER 31, 2003
| ASSETS | ||||
Current Assets: | ||||
Cash and cash equivalents | $ | 205,902 | ||
Receivables | 3,242,637 | |||
Related party notes receivable | 74,897 | |||
Inventories | 245,298 | |||
Prepaid expenses and other current assets | 94,417 | |||
Total Current Assets | 3,863,151 | |||
Property, plant and equipment | 5,513,981 | |||
Less accumulated depreciation | 2,387,564 | |||
| 3,126,417 | ||||
Other assets, net | 28,791 | |||
Total Assets | $ | 7,018,359 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current Liabilities: | ||||
Current portion of debt | $ | 370,590 | ||
Accounts payable | 414,175 | |||
Other accrued liabilities | 515,131 | |||
Total Current Liabilities | 1,299,896 | |||
Long-term debt | 114,059 | |||
Stockholders’ Equity: | ||||
Common stock, no par value, 1,000,000 shares authorized, 567,000 shares issued and outstanding | 870,624 | |||
Treasury stock at cost, 95,000 shares | (747,400 | ) | ||
Retained Earnings | 5,481,180 | |||
Total Stockholders’ Equity | 5,604,404 | |||
Total Liabilities and Stockholders’ Equity | $ | 7,018,359 | ||
See accompanying notes to financial statements.
2
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
Revenues: | ||||
Contract services | $ | 14,768,548 | ||
Equipment sales | 701,304 | |||
Total revenues | 15,469,852 | |||
Cost of goods sold | 8,361,867 | |||
Gross margin | 7,107,985 | |||
Selling, general and administrative expenses | 5,295,716 | |||
Depreciation expense | 773,463 | |||
Earnings from operations | 1,038,806 | |||
Other (income) expense: | ||||
Gain on disposal of assets | (9,319 | ) | ||
Interest expense | 47,478 | |||
Total other income | 38,159 | |||
Net income | $ | 1,000,647 | ||
See accompanying notes to financial statements.
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STATEMENT OF STOCKHOLDERS’ EQUITY
YEAR ENDED DECEMBER 31, 2003
| Common Stock | Treasury Stock | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||
Balances - January 1, 2003 | 566,000 | $ | 868,624 | 50,000 | $ | (371,650 | ) | $ | 4,482,057 | $ | 4,979,031 | ||||||||
Stock repurchased | — | — | 45,000 | (375,750 | ) | — | (375,750 | ) | |||||||||||
Exercise of stock options | 1,000 | 2,000 | — | — | — | 2,000 | |||||||||||||
Shareholder Distributions | — | — | — | — | (1,524 | ) | (1,524 | ) | |||||||||||
Net Income | — | — | — | — | 1,000,647 | 1,000,647 | |||||||||||||
Balances - December 31, 2003 | 567,000 | $ | 870,624 | 95,000 | $ | (747,400 | ) | $ | 5,481,180 | $ | 5,604,404 | ||||||||
See accompanying notes to financial statements.
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STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
Cash Flows From Operating Activities: | ||||
Net income | $ | 1,000,647 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation | 773,463 | |||
Bad debt expense | 174,813 | |||
Gain on disposal of assets | (9,319 | ) | ||
Changes in assets and liabilities, net of effects from business acquisitions: | ||||
(Increase) decrease: | ||||
Accounts receivable, net | 714,587 | |||
Related party notes receivable | 22,730 | |||
Inventories | (34,891 | ) | ||
Prepaid expenses and other current assets | (95,066 | ) | ||
Increase (decrease): | ||||
Accounts payable and accrued liabilities | (12,448 | ) | ||
Net cash provided by operating activities | $ | 2,534,516 | ||
Cash Flows From Investing Activities: | ||||
Capital expenditures | (1,092,926 | ) | ||
Proceeds from the sale of property and equipment | 55,534 | |||
Net cash used in investing activities | $ | (1,037,392 | ) | |
Cash Flows From Financing Activities: | ||||
Payments on notes payable | $ | (1,397,879 | ) | |
Exercise of stock options | 2,000 | |||
Repurchase of common stock | (375,750 | ) | ||
Shareholder distributions | (1,524 | ) | ||
Net cash used in financing activities | (1,773,153 | ) | ||
Net decrease in cash and cash equivalents | (276,029 | ) | ||
Cash and cash equivalents at beginning of year | 481,931 | |||
Cash and cash equivalents at end of year | $ | 205,902 | ||
Supplemental disclosure of cash flow information: | ||||
Cash paid during the period for interest | $ | 49,374 | ||
See accompanying notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Thermal Solutions, Inc. (the “Company”) was incorporated in 1997 in the State of Colorado. The Company provides various heat treatment services to industrial equipment in a variety of different industries. These services, which include electrical resistance and gas-fired combustion, are primarily utilized by industrial users to cure coatings, expand metal parts for assembly or disassembly, remove moisture from components, and provide preheat and post-weld heat treatment. The Company has 12 offices located throughout the United Sates.
Use of Estimates in Financial Statement Preparation
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid debt instruments with original maturities of less than three months.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Property, Plant and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Expenditures for property and equipment which substantially increase the useful lives of existing assets are capitalized at cost and depreciated. Routine expenditures for repairs and maintenance are expensed as incurred. Depreciation of property and equipment is computed by the straight-line method over the estimated useful lives for owned assets, ranging from 2 to 7 years, and the related lease terms for leasehold improvements.
Impairment of Long-Lived and Intangible Assets
In the event that facts and circumstances indicate that the cost of long-lived and intangible assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value is required.
Revenue Recognition
The Company generates most of its revenue by providing various heat treatment services to industrial facilities in the chemical, petrochemical, refining, pulp and paper, power and steel industries. Related revenues are recognized as services are rendered. The Company also generates revenue from the sale of heat treatment equipment. Equipment revenues are recognized only after delivery and customer acceptance has occurred.
Income Taxes
The Company elected to be treated as an S-corporation for income tax purposes. Accordingly, taxable income and losses of the Company are reported on the income tax returns of the Company’s stockholders and no provision for federal or state income taxes has been recorded on the accompanying financial statements.
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THERMAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Concentration of Credit Risk and Significant Vendors
Concentration of credit risk includes trade accounts receivable and cash and cash equivalents. The Company has no customers that represent more than 10% of gross accounts receivable or 10% of revenue for the year ended December 31, 2003. The Company routinely assesses the financial strength of its customers through periodic reviews of customer payment practices and charges customers for services using bank and credit cards in an effort to mitigate any risk of default. Allowances are maintained for potential credit losses.
Cash and cash equivalents may exceed federally insured limits but are placed with financial institutions management believes to be creditworthy.
The Company relies on a limited number of suppliers to provide raw materials and equipment for its services. Although management believes alternative vendors for these services could be found in a timely manner, any disruption of service or inability to deliver product could have an adverse effect on operating results.
The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, option contracts, or other foreign currency hedging arrangements.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable, accounts payable and debt obligations. The carrying amount of cash, cash equivalents, trade accounts receivable and trade accounts payable are representative of their respective fair values due to the short-term maturity of these instruments. Based upon the variable interest rate and terms available for similar types of debt, management believes the fair value of the Company’s debt obligations approximate their carrying value.
Advertising
The Company expenses advertising costs as incurred. During the year ended December 31, 2003, the Company incurred $68,477 in advertising costs.
New Accounting Standards
In November 2002, the EITF reached consensus on EITF No. 00-21,Revenue Arrangements with Multiple Deliverables, which established guidance to determine whether an entity should divide an arrangement with multiple deliverables into separate units of accounting. EITF No. 00-21 is required to be adopted for fiscal periods beginning after June 15, 2003. EITF No. 00-21 can be applied prospectively to new arrangements initiated after the date of adoption or as a cumulative catch-up adjustment. The adoption of EITF 00-21 has not had a material impact on the Company’s financial position or results of operations.
Stock-Based Compensation
The Company accounts for employee equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations (APB No. 25). APB No. 25 requires the Company to record compensation expense equal to the intrinsic value of equity awards, which is determined by the excess of the fair value of the underlying equity award over the strike price of such award. The Company applies the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which allows entities to continue to apply the provisions of APB No. 25 for transactions with employees, and provide pro forma disclosures for employee stock grants as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions. Compensation cost, if any, is amortized over the vesting period of the related grants. Compensation expense recognized that relates to the unvested portion of forfeited options, if any, is reversed at the time of forfeiture. The Company has determined that the pro forma expense associated with stock options outstanding during 2003 would be immaterial.
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THERMAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
2. RECEIVABLES
Receivables consist of:
Trade accounts receivable | $ | 3,316,783 | ||
Allowance for doubtful accounts | (74,146 | ) | ||
Total | $ | 3,242,637 | ||
The following summarizes the activity in the allowance for doubtful accounts:
Balance at beginning of year | $ | 79,500 | ||
Write off of bad debt | (180,167 | ) | ||
Bad debt expense | 174,813 | |||
Balance at end of year | $ | 74,146 | ||
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following as of December 31, 2003:
Life | 2003 | |||||
Contract machinery | 5 to 7 years | $ | 3,722,150 | |||
Vehicles | 5 years | 1,638,553 | ||||
Furniture and fixtures | 3 to 7 years | 139,825 | ||||
Leasehold improvements | 3 years | 13,453 | ||||
| 5,513,981 | ||||||
Accumulated depreciation | (2,387,564 | ) | ||||
| $ | 3,126,417 | |||||
4. LONG-TERM DEBT
During 2003, the Company amended its secured credit agreement (U.S. Bank Credit Agreement), which is collateralized by substantially all of the Company’s assets. Under this facility, the Company has availability of $2,000,000, of which $300,000 was outstanding as of December 31, 2003. Outstanding balances under the U.S. Bank Credit Agreement bear interest at prime less .25% (3.75% at December 31, 2003). The U.S. Bank Credit Agreement terminates and is payable in 2005.
The U.S. Bank Credit Agreement contains certain financial covenants related to minimum liquidity and minimum debt service on U.S. Bank debt as defined in the agreement. The Company was in compliance with all such covenants as of December 31, 2003.
In addition, the Company has financed the purchase of certain automobiles. The Company had $184,649 of vehicle loans outstanding as of December 31, 2003. The loans bear interest at an average of 2.39%.
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THERMAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Debt maturities required on the US Bank Credit Agreement and notes payable are as follows:
Year ending December 31: | |||
2004 | $ | 370,590 | |
2005 | 46,108 | ||
2006 | 36,684 | ||
2007 | 30,111 | ||
2008 | 1,156 | ||
Total | $ | 484,649 | |
All debt owed to US Bank was repaid as a result of the acquisition by Team as described in Note 9.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan which qualifies under Section 401(k) of the Internal Revenue Code. The plan covers all employees as defined in the agreement. Eligible employees may make voluntary contributions to the plan. The Company is not required to make matching contributions, and none were made for the year ended December 31, 2003.
6. COMMITMENTS
Lease Commitments
The Company leases certain equipment under lease agreements classified as operating leases. Additionally, the Company leases office and operational facilities in each location the Company operates its business. Aggregate minimum future equipment and facility rental payments for each of the next five years are as follows:
Year ending December 31, | Operating Leases | ||
2004 | $ | 279,634 | |
2005 | 185,497 | ||
2006 | 157,710 | ||
2007 | 109,300 | ||
2008 | — | ||
Total minimum payments | $ | 732,141 | |
Rent expense for the year ended December 31, 2003 was $303,522.
7. STOCKHOLDERS’ EQUITY
Common Stock
As of December 31, 2003, the Company had 1,000,000 shares of common stock authorized and 567,000 shares of common stock issued and outstanding. During 2003, the Company repurchased 45,000 shares of common stock from its shareholders for $375,750 or approximately $8.35 per share. These shares have not been formally retired and, accordingly, are included in treasury stock.
Stock Options
In 1997, the Company issued 5,000 shares of its common stock to an employee in exchange for a verbal non-interest bearing $10,000 non-recourse note. For accounting purposes, the shares and non-recourse note have been treated as stock options. During 2003, the Company forgave $2,000 of the note. For accounting purposes, the forgiveness has been treated as the exercise of options to acquire 1,000 shares of common stock and compensation expense of $2,000 was recognized.
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THERMAL SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
In 2002, an additional 3,500 options were granted to a Company employee. The options were to vest over a 36-month period but were forfeited in 2003.
The exercise price for the deemed “stock options” granted in 1997 and the stock options granted in 2002 equaled the fair market value of the Company’s common stock at the date of grant. The Company did not sell any common stock for notes subsequent to the 1997 sale and no stock options were granted during 2003.
8. RELATED PARTY TRANSACTIONS
At December 31, 2003, the Company had $74,897 in note receivables from various employees and an officer of the Company. In 2002, the Company’s board of directors authorized the Company to issue a $60,000 non-interest bearing note to the president of the Company due April 15, 2004. Upon the closing of the sale of the Company, as described in Note 9, the note was fully repaid.
9. SUBSEQUENT EVENTS
On April 15, 2004, Team, Inc. (“Team”) completed an acquisition of all of the outstanding capital stock of the Company. Pursuant to the terms of a stock purchase agreement dated and effective as of April 1, 2004 the Company became a wholly-owned subsidiary of Team.
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CONDENSED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS | ||||
Current Assets: | ||||
Cash and cash equivalents | $ | 43,196 | ||
Accounts receivable, net of allowance for doubtful accounts of $105,147 | 5,149,508 | |||
Inventories | 237,704 | |||
Prepaid expenses and other current assets | 168,279 | |||
Total Current Assets | 5,598,687 | |||
Property, Plant and Equipment, net of accumulated depreciation of $2,573,279 | 3,179,742 | |||
Other Assets | 27,111 | |||
Total Assets | $ | 8,805,540 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current Liabilities: | ||||
Current portion of long-term debt | $ | 870,590 | ||
Accounts payable | 809,386 | |||
Accrued liabilities | 921,965 | |||
Total Current Liabilities | 2,601,941 | |||
Long-term debt | 172,303 | |||
Total Liabilities | 2,774,244 | |||
Stockholders’ Equity: | ||||
Common stock, no par, 1,000,000 shares authorized 567,000 shares issued and outstanding | 870,624 | |||
Treasury stock at cost, 95,000 shares | (747,400 | ) | ||
Retained earnings | 5,908,072 | |||
Total Stockholders’ Equity | 6,031,296 | |||
Total Liabilities and Stockholders’ Equity | $ | 8,805,540 | ||
See notes to unaudited condensed financial statements.
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CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, | ||||||
| 2004 | 2003 | |||||
Revenues | ||||||
Contract Services | $ | 6,207,214 | $ | 5,274,829 | ||
Equipment sales | 564,114 | 615,880 | ||||
Total revenues | $ | 6,771,328 | $ | 5,890,709 | ||
Cost of goods sold | 4,604,046 | 4,215,807 | ||||
Gross Margin | 2,167,282 | 1,674,902 | ||||
Selling, general and administrative expenses | 1,156,132 | 915,619 | ||||
Earnings before interest | 1,011,150 | 759,283 | ||||
Interest expense, net | 1,079 | 19,084 | ||||
Net income | $ | 1,010,071 | $ | 740,199 | ||
See notes to unaudited condensed financial statements.
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CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 1,010,071 | $ | 740,199 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 187,395 | 195,400 | ||||||
Bad debt expense | 31,001 | — | ||||||
Change in assets and liabilities (Increase) decrease: | ||||||||
Accounts receivable | (1,937,872 | ) | (478,092 | ) | ||||
Related party notes receivable | 70,479 | (1,489 | ) | |||||
Inventories | 7,594 | 21,345 | ||||||
Prepaid expenses and other current assets | (69,444 | ) | (177,976 | ) | ||||
Increase (decrease): | ||||||||
Accounts payable | 395,211 | 33,352 | ||||||
Other accrued liabilities | (55,749 | ) | 141,628 | |||||
Net cash provided by (used in) operating activities | (361,314 | ) | 474,367 | |||||
Cash Flows From Investing Activities: | ||||||||
Capital expenditures | (239,040 | ) | (467,023 | ) | ||||
Net decrease in other assets | — | 853 | ||||||
Net cash used in investing activities | (239,040 | ) | (466,170 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Borrowings under credit agreements | 558,244 | 16,262 | ||||||
Repurchase of common stock | — | (204,750 | ) | |||||
Distributions to shareholders | (120,596 | ) | (3,400 | ) | ||||
Net cash provided by (used in) financing activities | 437,648 | (191,888 | ) | |||||
Net decrease in cash and cash equivalents | (162,706 | ) | (183,691 | ) | ||||
Cash and cash equivalents at beginning of period | 205,902 | 187,234 | ||||||
Cash and cash equivalents at end of period | $ | 43,196 | $ | 3,543 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 1,541 | $ | 19,083 | ||||
See notes to unaudited condensed financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | Method of Presentation |
General
The interim financial statements are unaudited, but in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in Thermal Solution, Inc.’s (“the Company”) December 31, 2003 audited financials as presented within this 8-K report.
New Accounting Standards
In November 2002, the EITF reached consensus on EITF No. 00-21,Revenue Arrangements with Multiple Deliverables, which established guidance to determine whether an entity should divide an arrangement with multiple deliverables into separate units of accounting. EITF No. 00-21 is required to be adopted for fiscal periods beginning after June 15, 2003. EITF No. 00-21 can be applied prospectively to new arrangements initiated after the date of adoption or as a cumulative catch-up adjustment. The adoption of EITF 00-21 has not had a material impact on the Company’s financial position or results of operations.
Stock-Based Compensation
The Company accounts for employee equity-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations (APB No. 25). APB No. 25 requires the Company to record compensation expense equal to the intrinsic value of equity awards, which is determined by the excess of the fair value of the underlying equity award over the strike price of such award. The Company applies the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which allows entities to continue to apply the provisions of APB No. 25 for transactions with employees, and provide pro forma disclosures for employee stock grants as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions. Compensation cost, if any, is amortized over the vesting period of the related grants. Compensation expense recognized that relates to the unvested portion of forfeited options, if any, is reversed at the time of forfeiture.
| 2. | Shareholder Distributions and Stock Repurchases |
During the three months ended March 31, 2004, a cash distribution was paid out to the shareholders of the Company in the amount of $120,596. In addition to this, the Company approved a distribution of $462,583 to its shareholders and accordingly recorded a corresponding liability. The distribution was made in April of 2003. In the three months ended March 31, 2003, a cash distribution of $3,400 was made.
During the three months ended March 31, 2003, the Company repurchased25,000 shares of common stock from its shareholders for $204,750 or approximately $8.19 per share. These shares have not been formally retired and, accordingly, are carried as treasury stock. No shares of the Company’s common stock were reacquired during the three months ended March 31, 2004.
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THERMAL SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Long-Term Debt |
Long-term debt consists of:
Revolving loan | $ | 800,000 | |
Equipment notes | 242,953 | ||
| 1,042,953 | |||
Less current portion | 870,590 | ||
Total | $ | 172,363 | |
| 4. | Related Party Transactions |
At March 31, 2004, the Company had $4,418 in notes receivable from various employees and an officer of the Company. In 2002, the Company’s board of directors authorized the Company to issue a $60,000 non-interest bearing note to the president of the Company due April 15, 2004. Upon the closing of the sale of the Company, as described in Note 5, the note was fully repaid.
| 5. | Subsequent Events |
On April 15, 2004, Team, Inc. (“Team”) completed an acquisition of all of the outstanding capital stock of the Company. Pursuant to the terms of a stock purchase agreement dated and effective as of April 1, 2004 the Company became a wholly-owned subsidiary of Team.
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ITEM 7(b).Pro Forma Consolidated Financial Information of Team, Inc. (Unaudited)
On April 15, 2004, Team, Inc. (“Team”) completed the acquisition of all of the outstanding capital stock of Thermal Solutions, Inc., a Colorado corporation (“TSI”). Pursuant to the terms of a Stock Purchase Agreement (the “Stock Purchase Agreement”) dated and effective as of April 1, 2004 among Team, Team Industrial Services, Inc., a Texas corporation and an indirect wholly-owned subsidiary of Team (“Team Industrial”), TSI, the TSI shareholders and Michael J. Urban as the shareholder representative, TSI became a wholly-owned subsidiary of Team Industrial.
Team paid consideration of approximately $9 million in cash, which included $1.3 million for the repayment of TSI’s debt and a $1.7 million adjustment for working capital acquired in excess of the minimum amount specified in the Stock Purchase Agreement, and issued 288,413 shares of its common stock, $0.30 par value per share (the “Team Stock”), pursuant to the Stock Purchase Agreement. Of such amounts, $500,000 in cash and 189,019 shares of Team Stock were deposited into an escrow fund (the “Escrow Fund”) that may be used by Team to satisfy working capital and accounts receivable adjustments and its indemnification rights under the Stock Purchase Agreement. (Amounts remaining in the Escrow Fund and not subject to pending claims are to be distributed to the former TSI shareholders over a three year period ending in April 2007.) The Escrow Fund was established pursuant to the terms of an Escrow Agreement (the “Escrow Agreement”) dated April 15, 2004 by and among Team, Team Industrial, TSI, the TSI shareholders, the shareholder representative and Compass Bank. The amount of the consideration contemplated by the Stock Purchase Agreement was determined through arm’s-length negotiations among the parties.
In connection with the consummation of these transactions, Team entered into Amendment No. 9 dated as of April 15, 2004 (the “Amendment”) with Bank of America, N.A. as successor to NationsBank, N.A. to a Credit Agreement dated August 28, 1998, as amended, among Team, Bank of America, N.A. as successor to NationsBank, N.A. (the “Credit Agreement”). Pursuant to the terms of the Amendment, the principal borrowing amount available to Team under a revolving credit facility was increased by $10 million to $22.5 million. Borrowings under the revolver generally bear interest at LIBOR plus 1.5 percent. The Amendment also extended the maturity date of the facility to April 15, 2006 from September 30, 2005. The cash amounts paid by Team pursuant to the Stock Purchase Agreement were funded by borrowings under the Credit Agreement.
The following unaudited pro forma consolidated statements of operations for the twelve months ended May 31, 2003 and the nine months ended February 29, 2004 give effect to the purchase by the Company of the capital stock of TSI as if the acquisition and related financing occurred on June 1, 2002 (the beginning of fiscal 2003). The pro forma consolidated balance sheet as of February 29, 2004 is presented as if the acquisition and related financing occurred on February 29, 2004.
The pro forma financial information is based on the historical consolidated financial statements of the Company and the historical financial statements of TSI and should be read in conjunction with such financial statements and accompanying notes. TSI’s historical statements of income are for the twelve months ended May 31, 2003 and the nine months ended February 29, 2004. The purchase method of accounting was used to prepare the pro forma financial statements using estimated fair values of the assets and liabilities of TSI. The purchase accounting adjustments to reflect the fair values of the assets and liabilities of TSI were based on management’s preliminary evaluation as of this filing date and are subject to change pending final evaluation of the fair values of the assets and liabilities.
The pro forma financial information does not purport to be indicative of either a) the results of operations which would have actually been obtained if the acquisition had occurred on the dates indicated, or b) the results of operations which will be reported in the future.
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