Washington, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file No.
0-18899
TEI, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0284783
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
10235 W. LITTLE YORK, SUITE 405
HOUSTON, TEXAS 77040
(Address of principal executive office)
Registrant's telephone number, including area code (713) 983-7160
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 6, 1998, the registrant had 14,251,012 outstanding shares of
Common Stock, par value $0.01 per share, and at such date, the aggregate market
value of the shares of Common Stock held by non-affiliates of the registrant was
$14.3 million. For purposes of this computation, all officers, directors and 5%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Notice of Annual Meeting of Shareholders and definitive
Proxy Statement pertaining to the 1998 Annual Meeting of Shareholders (the
"Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein
by Reference into Part III of this report.
TEI, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I.
Item 1. Business................................................................................................3
Item 2. Properties..............................................................................................5
Item 3. Legal Proceedings.......................................................................................5
Item 4. Submission of Matters to a Vote of Security Holders.....................................................5
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...............................6
Item 6. Selected Financial Data.................................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................8
Item 7A. Quantitative and Qualitative Exposure About Market Risk................................................11
Item 8. Financial Statements and Supplementary Data............................................................12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................32
PART III.
Item 10. Directors and Executive Officers of the Registrant.....................................................33
Item 11. Executive Compensation.................................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................33
Item 13. Certain Relationships and Related Transactions.........................................................33
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................34
2
PART I.
ITEM 1. BUSINESS
GENERAL
The Company is a holding company that conducts its business through
various wholly owned subsidiaries. The Company was incorporated in the State of
Texas in June 1989, for the purpose of acquiring all of the outstanding stock of
Tanknology Corporation International ("Tanknology") in a reorganization in
connection with a private offering of securities by the Company. During 1995,
1996, and 1997, the Company disposed of all of its operations except for Energy
Recovery Resources, Inc. ("ERRI"), which it acquired during 1994. ERRI performs
wastewater treatment, waste oil recycling, and the recovery and handling of
other non-hazardous fluid wastes for owners and operators of underground storage
tanks ("USTs"), aboveground storage tanks ("ASTs"), and other commercial and
industrial waste generators.
The operations the Company disposed of include: (i) Tanknology, a provider
of leak detection services for USTs and ASTs using the VacuTect(R) process, a
patented nonvolumetric method owned by Tanknology (Tanknology was incorporated
in 1988 and sold in October 1996); (ii) Tanknology Canada (1988), Inc.,
("Tanknology Canada"), a provider of leak detection services in Canada
(Tanknology Canada was incorporated in 1988 and sold in October 1996); (iii)
USTMAN Industries, Inc. ("USTMAN"), a provider of statistical inventory
reconciliation ("SIR") leak detection services to owners and operators of USTs
(USTMAN was purchased in 1992 and sold in October 1996); (iv) Mankoff Equipment,
Inc. ("Mankoff"), a provider of remediation services, tank upgrades, and other
environmental products and services to owners and operators of USTs and ASTs
(Mankoff was acquired in 1993 and sold in December 1995); (v) Engineered
Systems, Inc. ("ESI"), a designer and manufacturer of automated systems and
products for petroleum-oriented companies for use in bulk liquid loading
terminals, fuel management, pipeline supervision, environmental data gathering,
and access control (ESI was purchased in 1993 and sold in December 1997).
Tanknology, including its cathodic protection division d/b/a/ Tanknology
Cathodic Protection, USTMAN, and Tanknology Canada are known collectively as the
Tank Testing Group.
The principal executive offices of the Company are located at 10235 W.
Little York, Suite 405, Houston, Texas 77040, and its telephone number is (713)
983-7160.
OPERATIONS
WASTEWATER TREATMENT AND WASTE OIL RECYCLING
The Company, through its ERRI subsidiary, provides wastewater treatment,
waste oil recycling, and the recovery and handling of other non-hazardous fluid
wastes. Its customers include owners and operators of USTs and ASTs and other
storage facilities, as well as commercial and industrial businesses that need to
dispose of oil, chemicals, and wastewater generated by or used in their
operations.
Treated water is processed to meet local quality standards before being
discharged into the sanitary sewer. Waste oil is recycled into high quality, low
sulfur, high energy substitutes for Number 2 through Number 4 fuel oil. The
recycled oil is then sold to asphalt plants, fuel blending companies, and
various other industrial accounts, such as concrete and textile plants.
Any unusable, non-recoverable oils are transported to an incineration plant.
BUSINESS STRATEGY
The Company's Board of Directors is evaluating various alternatives to
utilize the Company's status as a public company and its large cash reserves to
increase shareholder value. ERRI's business strategy includes capitalizing on
the opportunities for growth in its service area. The Company has constructed a
new processing facility and expanded its wastewater and waste oil treatment
business in the Charlotte, North Carolina area. The new facility has increased
the capacity of wastewater and waste oil that can be treated and is capable of
processing certain products that could not be handled at the Company's former
location from which ERRI relocated during 1996.
3
In addition to its investment in ERRI, the Company has cash and liquid
investments of $28,326,000 at December 31, 1997. The Company and its Board of
Directors are evaluating alternatives for use of these excess funds.
MARKETING
The Company's products and services are marketed primarily to wastewater
and waste oil generators. The Company's marketing efforts include trade
publication advertising, presentation of services at trade shows, and personal
sales calls. The Company's sales force consists of sales managers and
independent sales agents who are paid commissions. In addition to the Company's
headquarters in Houston, Texas, at December 31, 1997, the Company's ERRI
subsidiary operates in its own treatment plant in the Charlotte, North Carolina
area.
The Company performs service work for customers pursuant to a standard
written service order, specified contract, or under longer-term negotiated
agreements.
During 1997 and 1996, the Company provided wastewater treatment and waste
oil recycling services to approximately 635 and 700 customers, respectively.
During the year ended December 31, 1997, three customers accounted for
approximately 15.8%, 13.4%, and 12.3%, respectively, of the Company's total
revenues from continuing operations. During the year ended December 31, 1996,
one customer accounted for approximately 12% of the Company's total revenues
from continuing operations.
RESEARCH AND DEVELOPMENT
The Company is not currently involved in any research and development
projects.
FOREIGN OPERATIONS
The Company generated no revenues from foreign sources from continuing
operations during 1997, 1996, and 1995.
PERSONNEL
As of December 31, 1997, the Company employed 59 people. None of the
Company's employees are represented by a labor union. The Company considers
relations with its employees to be satisfactory.
COMPETITION
The Company's ERRI subsidiary operates predominantly within a 150-mile
radius of Charlotte, North Carolina and competes with several regional and
national wastewater treatment and waste oil recycling firms. Competition is
based on price, service, reliability, reputation, and plant capabilities. Many
of these competitors are substantially larger and have significantly greater
capital and other resources than the Company.
INSURANCE
The Company's business, which involves working with volatile and hazardous
substances, exposes it to substantial risks for which the Company could be held
liable for damage to persons or property caused by any release, spill, fire, or
explosion that occurs as a result of the conduct of its business. Such liability
could be on the basis of negligence, strict liability, contract, or otherwise.
The Company has obtained pollution and professional liability insurance in
addition to its general liability, automobile liability, and workers
compensation insurance. This insurance is subject to coverage limits. Therefore,
there can be no assurance that liabilities that may be incurred by the Company
will be covered by its insurance policies or, if covered, that the dollar amount
of such liabilities will not exceed the Company's coverage limits. Even a
partially uninsured claim, if successful and of significant magnitude, could
have a material adverse effect on the Company's financial condition.
4
TRADEMARKS AND PATENTS
The Company has no patents or marks registered with the U.S. Patent and
Trademark Office.
GOVERNMENT REGULATIONS
The Clean Water Act of 1972, The Safe Drinking Water Act of 1974, Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), and The
Comprehensive Environmental Response Compensation and Liability Act of 1980 are
federal regulations that govern the treatment of water and wastewater. In
addition, local and state governmental agencies have established stringent
standards limiting the type and quantity of chemicals and wastewater that can be
discharged into the local sewer systems and waterways by individuals and
commercial entities. These regulations prohibit the discharge of any pollutant
into the public waterway that will interfere with the operation or performance
of the public treatment facility. In many instances, wastewater may be
pretreated to remove the pollutant. After the pollutant is removed, the
wastewater may be discharged into the public waterway.
Used oil is defined as any oil refined from crude oil or synthetic oil
and, as a result of use, storage, or handling, has become unsuitable for its
original purpose due to the presence of impurities or loss of original
properties, but which may be suitable for further use and is economically
recyclable. RCRA, as well as many state and local regulations, prohibits anyone
from collecting, transporting, storing, recycling, using or disposing of used
oil in any manner that endangers public health or welfare. Processors and
transporters of used oil must obtain operating permits issued by local
governmental authorities, and are required to comply with certain regulations
related to the processing facility, waste oil storage, and documentation and
reporting of activities. Wastewater processing and waste oil recycling are
performed through the Company's ERRI subsidiary.
ITEM 2. PROPERTIES
The Company's principal offices are located in an office building at 10235
W. Little York, Suite 405, Houston, Texas, which the Company rents. Most
administrative functions are conducted from such facility. ERRI's office and
processing plant is located on a six-acre site in the Charlotte, North Carolina
area. The Company believes that its existing facilities and equipment are well
maintained, are in good operating condition and are suitable and adequate for
their intended purposes.
ITEM 3. 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 December 31, 1997. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter ended December 31, 1997.
5
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the Symbol "TANK." The Common Stock began trading
on June 19, 1991. Prior to that time, there was no established public trading
market for the Common Stock. The following table sets forth the quarterly high
and low sale prices of the Common Stock, as reported on the NASDAQ National
Market for the calendar quarters indicated:
CALENDAR PERIOD HIGH LOW
----------------------------- --------- ---------
1997:
First Quarter................ 2-5/16 1-9/16
Second Quarter............... 1-15/16 1-9/16
Third Quarter................ 1-15/16 1-17/32
Fourth Quarter............... 2-1/4 1-17/32
1996:
First Quarter................ 3-1/4 1-5/8
Second Quarter............... 3-1/32 2-1/8
Third Quarter................ 2-7/16 1-13/16
Fourth Quarter............... 2-1/2 1-13/16
As of March 6, 1998, there were 301 record holders of the Common Stock. To
date, the Company has not paid cash dividends on its Common Stock. It is the
policy of the Company to continue retaining earnings for use in the Company's
operations and to fund the Company's future activities.
On March 26, 1992, the Board of Directors approved the repurchase by the
Company of up to 500,000 shares of its Common Stock in private or public
transactions. On January 19, 1993 and July 19, 1994, the Board increased the
authorization by another 500,000 and 1,000,000 shares, respectively. As of March
6, 1998 the Company had purchased 955,225 shares pursuant to such program;
however, no shares were repurchased during 1996 and 1997.
6
ITEM 6. SELECTED FINANCIAL DATA
During 1995, 1996, and 1997, the Company disposed of all of its operations
except for ERRI. The Company acquired ERRI during 1994. See Notes 1 and 2 to the
Consolidated Financial Statements.
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues .................................. $ 2,725,749 $ 2,199,154 $ 2,374,637 $ 2,477,349 $ --
Cost of services .......................... 2,190,367 1,554,132 1,316,499 1,337,769 --
------------ ------------ ------------ ------------ ------------
Gross profit .............................. 535,382 645,022 1,058,138 1,139,580 --
Selling, general and administrative
expenses ......................... 2,625,133 2,428,537 2,197,363 1,921,482 1,335,170
------------ ------------ ------------ ------------ ------------
Loss from operations ...................... (2,089,751) (1,783,515) (1,139,225) (781,902) (1,335,170)
Other income (expense), net ............... 1,530,264 910,142 749,013 251,413 324,156
------------ ------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes .............. (559,487) (873,373) (390,212) (530,489) (1,011,014)
Benefit for income taxes .................. (159,585) (339,476) (150,687) (199,592) (384,185)
------------ ------------ ------------ ------------ ------------
Loss from continuing
operations ....................... (399,902) (533,897) (239,525) (330,897) (626,829)
Income (loss) from discontinued
operations ....................... (2,381,714) 1,288,997 (8,349,580) 1,873,875 5,544,274
------------ ------------ ------------ ------------ ------------
Net income (loss) ......................... $ (2,781,616) $ 755,100 $ (8,589,105) $ 1,542,978 $ 4,917,445
============ ============ ============ ============ ============
Basic and diluted earnings (loss)
per share:
From continuing operations ............ $ (0.03) $ (0.04) $ (0.01) $ (0.02) $ (0.04)
From discontinued operations .......... (0.17) 0.09 (0.59) 0.13 0.37
------------ ------------ ------------ ------------ ------------
Net earnings (loss) per share ......... $ (0.20) $ 0.05 $ (0.60) $ 0.11 $ 0.33
============ ============ ============ ============ ============
Weighted average common shares
outstanding ...................... 14,244,012 14,237,012 14,230,012 14,420,406 14,740,537
============ ============ ============ ============ ============
AS OF DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 12,810,100 $ 11,421,710 $ 14,967,107 $ 6,249,636 $ 6,344,025
Short-term investments .................... 15,516,366 18,425,979 3,694,873 7,483,075 9,841,270
Working capital ........................... 30,033,838 29,001,908 24,896,104 26,300,941 29,146,392
Total assets .............................. 39,042,721 43,033,894 42,276,610 52,917,420 55,358,301
Long-term debt, excluding
current maturities ............... -- -- -- -- --
Total shareholders' equity ................ 37,665,147 40,432,973 39,665,133 48,238,488 48,841,217
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Selected
Financial Data" included elsewhere in this Report.
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 December 31, 1997, 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.
The following table sets forth, for continuing operations for the periods
indicated, the percentage relationship that certain items in the Company's
Statement of Operations bear to revenues:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------ ------ ------
Revenues ..................................................................... 100.0% 100.0% 100.0 %
Cost of services ............................................................. 80.4 70.7 55.4
------ ------ ------
Gross profit ................................................................. 19.6 29.3 44.6
Selling, general and administrative expenses ................................. 96.3 110.4 92.6
------ ------ ------
Loss from operations ......................................................... (76.7) (81.1) (48.0)
Other income (expense), net .................................................. 56.1 41.4 31.6
------ ------ ------
Loss from continuing operations
before income taxes ................................................. (20.6) (39.7) (16.4)
Income tax benefit ........................................................... (5.9) (15.4) (6.3)
------ ------ ------
Loss from continuing operations .............................................. (14.7) (24.3) (10.1)
Income (loss) from discontinued operations and
gain (loss) on sale of discontinued operations ...................... (87.3) 58.6 (351.6)
------ ------ ------
Net income (loss) ............................................................ (102.0)% 34.3% (361.7%
====== ====== ======
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO
YEAR ENDED DECEMBER 31, 1996
Revenues from wastewater treatment and waste oil recycling services at the
Company's Energy Recovery Resources, Inc. ("ERRI") division increased by 24%
from $2,199,000 during the year ended December 31, 1996 to $2,726,000 during the
year ended December 31, 1997. Such revenue improvement is mainly due to a
greater volume of wastewater processed during 1997.
Gross profit declined by $110,000 to $535,000 during 1997 from $645,000
during 1996. When measured as a percentage of sales, the gross margin declined
to 19.6% during 1997 from 29.3% during the previous year. During 1997, all
processing operations were conducted from the Company's newly constructed
treatment facility in the Charlotte, North Carolina area. The new facility is
larger, has greater processing capabilities, and has higher associated fixed
operating costs such as depreciation and personnel than the old plant in which
the Company operated during most of 1996. Additionally, during 1997, processing
operations in the new facility were not as efficient as that of the old facility
due to the new equipment and processing techniques employed, the learning curve
involved with its operations, and the costs of moving to the new plant. As a
result
8
of these issues, the Company is continuing to make modifications to the plant
which it expects should improve operations in the future. Management believes
that in the future such operating costs will decline as a percentage of sales as
revenues increase.
Selling, general, and administrative expenses increased by $197,000 to
$2,625,000 during 1997 from $2,428,000 during 1996, mainly due to depreciation
and the addition of management and supervisory personnel at the new wastewater
treatment processing plant at ERRI, professional fees, partially offset by
personnel reductions and lower facility costs at the Company's headquarters in
Houston.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
grew from $910,000 during 1996 to $1,530,000 during 1997. This is principally
due to an increase in the amount of cash invested as a result of the Company's
sale of the Tank Testing Group during the fourth quarter of 1996.
Losses from discontinued operations net of tax were $2,382,000 in 1997
compared to a gain of $1,289,000 in 1996. The 1996 gain consisted of $672,000 of
income from operations and $1,277,000 of gain on disposition of the Tank Testing
Group, partially offset by losses of $660,000 at ESI. The Company originally
expected to complete the disposition of ESI prior to December 31, 1996. However,
as of year-end 1996, ESI had not been sold. As a result of the longer than
anticipated period of disposal, the Company recorded an additional reserve of
$660,000 during the fourth quarter of 1996, net of an income tax benefit of
$340,000. ESI incurred operating losses of $2,163,000 during 1996, which were
anticipated and charged against the initial reserve for discontinued operations
recorded by the Company. The loss in 1997 related to the operations and disposal
of ESI. Such loss consisted of $2,194,000 due to operating losses at ESI
including a change in estimated income tax expense of approximately
$517,000,resulting from unanticipated delays in the disposition and $188,000 of
loss on disposition, which occurred in December 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Revenues from wastewater treatment and waste oil recycling services at
ERRI declined by 7.4% from $2,375,000 during the year ended December 31, 1995 to
$2,199,000 during the year ended December 31, 1996. Such revenue decrease was
primarily due to operational delays caused by the relocation of ERRI's
processing equipment to the newly constructed treatment facility in the
Charlotte, North Carolina area. The transfer of the processing equipment took
place in stages over the course of the year, but was essentially completed by
year-end 1996.
Gross profit declined by $413,000 to $645,000 during 1996 from $1,058,000
during 1995. When measured as a percentage of sales, the gross margin declined
to 29.3% during 1996 from 44.6% during the previous year. During 1996, the
Company incurred personnel and transportation costs associated with ERRI's move
to its new location. Other redundant costs related to the operation of two
processing plants were also incurred during 1996. Additionally, during 1996
processing operations in the new facility were not as efficient as that of the
old facility due to the new equipment and processing techniques employed and the
learning curve involved with its operation.
Selling, general, and administrative expenses increased $231,000 to
$2,428,000 in 1996 from $2,197,000 during 1995, mainly due to the addition of
management and supervisory personnel needed to start-up and operate the new more
complex processing facility.
Other income and expense, consisting mainly of interest earned on the
Company's investments, and gains and losses on the disposition of fixed assets,
grew from $749,000 during 1995 to $910,000 during 1996, principally due to an
increase in the amount invested as a result of the Company's sale of the Tank
Testing Group during the fourth quarter of 1996. A substantial portion of
selling, general, and administrative expense represents general corporate
overhead, which management did not allocate to discontinued operations.
During 1996, the Company sold the Tank Testing Group to an independent
third party. The Company recorded a gain on the sale of the Tank Testing Group
of $1,277,000, net of a provision for income taxes of $788,000. The Tank Testing
9
Group earned $672,000 from operations during 1996, versus $1,055,000 during
1995, principally as a result of higher revenues during 1995. During 1995, the
Company sold its Mankoff subsidiary to a private investor for cash and notes
totaling $2.3 million. The sale resulted in a loss from discontinued operations
of $3,610,000. In addition, Mankoff incurred operating losses of $364,000 during
1995. During 1995, the Board of Directors authorized the Company to dispose of
its ESI subsidiary. In conjunction with the planned disposition, the Company
recorded a loss from discontinued operations of its ESI operation of $3,715,000
during 1995, net of an income tax benefit of $1,914,000.
SEASONALITY
The Company experiences no noticeable seasonal variations in its
continuing business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash, cash equivalents, and
short-term investments of $28,326,000 and had no significant cash commitments of
such funds in excess of requirements to operate the Company's continuing
operations. These funds are being invested pending any decision by the Company's
Board of Directors regarding the Company's future direction. For the year ended
December 31, 1997, net cash used in operations totaled $4,083,000 versus net
cash provided by operations of $1,711,000 during 1996. Current year cash used in
operations is the result of a net loss of $2,782,000, and working capital
changes totaling $2,561,000.
Capital expenditures for 1997 were $682,000, mainly for the purchase of
machinery and processing equipment at ERRI relating to modifications to the
Company's newly constructed wastewater treatment plant. The plant has
experienced start up issues which have limited capacity and increased the cost
of the plant. In addition, the Company recorded goodwill in connection with the
acquisition of ERRI with a carrying value of $2,278,000 at December 31, 1997.
The carrying value of the plant and of the goodwill may be in excess of fair
value at December 31, 1997; however, the Company believes it will recover its
investments through operations. During 1997, the Company sold its former
headquarters building and related fixed assets in Houston, as well as ESI's
headquarters building in Tempe, Arizona receiving cash of approximately
$2,492,000.
Accounts payable and accrued liabilities decreased by $1,241,000, as a
result of a reduction in accrued compensation and state and federal income taxes
payable and also a reduction of $420,000 in the amount reserved for the
Company's contingent liability relating to services performed by the Tank
Testing Group prior to its sale in October 1996.
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 December 31, 1997. 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.
10
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is evaluating strategic and financial alternatives for
maximizing shareholder value. This may include, but is not limited to, an
acquisition or merger with another company that may or may not be in a business
complementary to that of the Company, a "going private" transaction in which
current Directors and/or management would acquire the outstanding publicly-held
shares of the Company, or some combination of the above alternatives. The
Company has not necessarily determined to pursue any of the above alternatives
at this time, nor are the Company's alternatives limited to the above items.
FORWARD-LOOKING STATEMENT
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in Item 1. Business and this Item 7. 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 Annual Report 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 Annual Report, including without limitation, the
portions referenced above, and the uncertainties set forth from time to time in
the Company's other public reports, 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 is not expected to
have a material 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE EXPOSURE ABOUT MARKET RISK.
Not applicable.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEI, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants.........................................13
Consolidated Balance Sheet as of December 31, 1997 and 1996 ..............14
Consolidated Statement of Operations
for the three years in the period ended December 31, 1997...........15
Consolidated Statement of Shareholders' Equity
for the three years in the period ended December 31, 1997...........16
Consolidated Statement of Cash Flows
for the three years in the period ended December 31, 1997...........17
Notes to Consolidated Financial Statements................................18
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
TEI, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of TEI, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TEI, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 17, 1998
13
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, December 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................. $ 12,810,100 $ 11,421,710
Short-term investments .................... 15,516,366 18,425,979
Accounts receivable, net .................. 639,678 511,905
Deferred tax asset ........................ 515,611 447,202
Income tax receivable ..................... 1,512,115 --
Other current assets ...................... 417,542 796,033
------------ ------------
Total current assets ................ 31,411,412 31,602,829
PROPERTY AND EQUIPMENT, NET .................. 4,789,141 5,547,864
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION ........................... 2,288,479 2,494,873
DEFERRED TAX ASSET ........................... 176,383 1,450,248
NET ASSETS OF DISCONTINUED OPERATIONS AND
OTHER ASSETS ........................... 377,306 1,938,080
------------ ------------
Total assets .............................. $ 39,042,721 $ 43,033,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................... $ 344,040 $ 333,676
Accrued liabilities ....................... 1,033,534 2,267,245
------------ ------------
Total current liabilities ........... 1,377,574 2,600,921
------------ ------------
COMMITMENTS AND CONTINGENCIES (See Note 9)
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 151,992
authorized; 15,199,237 and
15,192,237 shares issued at
December 31, 1997 and 1996,
respectively ............................ 151,992 151,922
Additional paid-in capital ................ 33,123,377 33,109,657
Retained earnings ......................... 8,577,449 11,359,065
Treasury stock at cost, 955,225
shares, at December 31, 1997
and 1996 ................................ (4,187,671) (4,187,671)
------------ ------------
Total shareholders' equity ................ 37,665,147 40,432,973
------------ ------------
Total liabilities and
shareholders' equity .................... $ 39,042,721 $ 43,033,894
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
14
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
------------ ------------ ------------
REVENUES ................................... $ 2,725,749 $ 2,199,154 $ 2,374,637
COST OF SERVICES ........................... 2,190,367 1,554,132 1,316,499
------------ ------------ ------------
Gross profit ......................... 535,382 645,022 1,058,138
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................. 2,625,133 2,428,537 2,197,363
------------ ------------ ------------
Loss from operations ................. (2,089,751) (1,783,515) (1,139,225)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ...................... 1,491,913 1,056,874 745,568
Interest expense ..................... (6,748) (4,715) (33)
Other income (expense), net .......... 45,099 (142,017) 3,478
------------ ------------ ------------
Total other income (expense), net . 1,530,264 910,142 749,013
------------ ------------ ------------
Loss before income taxes .......... (559,487) (873,373) (390,212)
INCOME TAX BENEFIT ......................... (159,585) (339,476) (150,687)
------------ ------------ ------------
Loss from continuing operations ...... (399,902) (533,897) (239,525)
Net income (loss) from discontinued
operations, net of tax ............ (2,193,860) 12,098 (4,739,338)
Gain (loss) on disposition of
discontinued operations,
net of tax ........................ (187,854) 1,276,899 (3,610,242)
------------ ------------ ------------
Net income (loss) .................... $ (2,781,616) $ 755,100 $ (8,589,105)
============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
From continuing operations ........... $ (0.03) $ (0.04) $ (0.01)
From discontinued operations ......... (0.17) 0.09 (0.59)
------------ ------------ ------------
Net earnings (loss) per share ........ $ (0.20) $ 0.05 $ (0.60)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING .......................... 14,244,012 14,237,012 14,230,012
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
15
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Common Stock Treasury Stock Additional Total
---------------------- ------------------------ Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
---------- -------- -------- ----------- ----------- ------------ ------------
Balance, December 31, 1994 . 15,178,237 $151,782 (955,225) $(4,187,671) $33,081,307 $ 19,193,070 $ 48,238,488
Issuance of common stock to
nonemployee directors ... 7,000 70 -- -- 15,680 -- 15,750
Net loss ................... -- -- -- -- -- (8,589,105) (8,589,105)
---------- -------- -------- ----------- ----------- ------------ ------------
Balance, December 31, 1995 . 15,185,237 151,852 (955,225) (4,187,671) 33,096,987 10,603,965 39,665,133
Issuance of common stock to
nonemployee directors ... 7,000 70 -- -- 12,670 -- 12,740
Net income ................. -- -- -- -- -- 755,100 755,100
---------- -------- -------- ----------- ----------- ------------ ------------
Balance, December 31, 1996 . 15,192,237 151,922 (955,225) (4,187,671) 33,109,657 11,359,065 40,432,973
Issuance of common stock to
nonemployee directors ... 7,000 70 -- -- 13,720 -- 13,790
Net loss ................... -- -- -- -- -- (2,781,616) (2,781,616)
---------- -------- -------- ----------- ----------- ------------ ------------
Balance, December 31, 1997 . 15,199,237 $151,992 (955,225) $(4,187,671) $33,123,377 $ 8,577,449 $ 37,665,147
========== ======== ======== =========== =========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
16
TEI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (2,781,616) $ 755,100 $ (8,589,105)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for disposition of discontinued operations ................. 2,187,210 1,000,000 7,521,209
(Gain) loss on disposition of discontinued operations ................ 187,854 (2,065,228) 3,610,242
ESI operating loss charged to reserve for discontinued
operations ....................................................... (2,193,860) (2,163,317) --
Depreciation and amortization ........................................ 674,538 2,598,411 3,758,893
Net amortization of premiums and discounts on short-term
investments ...................................................... (752,069) (234,897) (216,110)
Gain on disposal of assets ........................................... (63,664) -- (8,529)
Deferred income taxes ................................................ 1,205,456 (232,838) (2,388,559)
Deferred income ...................................................... -- (16,430) (20,160)
Common stock issued to directors ..................................... 13,790 12,740 15,750
Changes in assets and liabilities, including
discontinued operations:
(Increase) decrease in accounts receivable, net ................ (135,806) (136,149) 2,028,855
Decrease (increase) in costs and estimated earnings in
excess of billings on uncompleted contracts ................ 309,375 (230,304) (672,616)
(Increase) decrease in inventories, net ........................ (530,633) 595,206 1,004,140
(Increase) decrease in income tax receivable ................... (1,512,115) 2,106,678 (2,106,678)
Decrease (increase) in other current assets .................... 549,354 (834,414) 604,231
(Decrease) increase in accounts payable and accrued
liabilities ................................................. (1,241,198) 556,113 1,109,363
------------ ------------ ------------
Total adjustments ........................................... (1,301,768) 955,571 14,240,031
------------ ------------ ------------
Net cash provided by (used in) operating activities ......... (4,083,384) 1,710,671 5,650,926
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (682,192) (1,987,458) (2,472,825)
Proceeds from the disposition of discontinued operations ............. -- 12,000,000 1,500,000
Proceeds from the sale of assets ..................................... 2,492,284 -- 322,149
Purchases of short-term investments .................................. (35,693,443) (20,193,368) (11,703,150)
Proceeds from maturities of short-term investments ................... 39,355,125 5,697,159 15,707,462
Increase in intangible assets ........................................ -- (44,763) (139,006)
------------ ------------ ------------
Net cash provided by (used in) investing activities ......... 5,471,774 (4,528,430) 3,214,630
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable .................................. -- (28,939) (148,085)
------------ ------------ ------------
Net cash used in financing activities ....................... -- (28,939) (148,085)
------------ ------------ ------------
CASH OF BUSINESSES SOLD ................................................... -- (698,699) --
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........ 1,388,390 (3,545,397) 8,717,471
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................ 11,421,710 14,967,107 6,249,636
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................. $ 12,810,100 $ 11,421,710 $ 14,967,107
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
17
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of TEI, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. Prior year
amounts in the consolidated statement of operations and related notes thereto
have been reclassified to reflect the Company's discontinued operations
consisting of Mankoff, Inc. ("Mankoff"), Engineered Systems, Inc. ("ESI"),
Tanknology Corporation International ("TCI"), Tanknology Canada (1988), Inc.,
("TCS"), and USTMAN Industries, Inc. ("USTMAN"), as discussed in Note 2. All
footnote amounts related to the statement of operations are from continuing
operations unless otherwise indicated.
The Company is a holding company whose only current continuing business is
wastewater processing and waste oil recycling in the Central Eastern United
States.
REVENUE RECOGNITION
The Company generates revenues primarily through the treatment of
wastewater and the sale of recycled waste oil. Revenues are recognized at the
time the services are rendered. During the year ended December 31, 1997, three
customers accounted for approximately 15.8%, 13.4%, and 12.3%, respectively, of
the Company's total revenues from continuing operations. During the year ended
December 31, 1996, one customer accounted for approximately 12% of the Company's
total revenues from continuing operations.
CASH EQUIVALENTS
The Company considers all highly liquid investment instruments with
original maturities of three months or less when purchased to be cash
equivalents.
SHORT-TERM INVESTMENTS
Short-term investments are those with maturities greater than three months
when purchased. The Company has classified all short-term investments as
available-for-sale. When purchased, securities are recorded at cost and adjusted
for unrealized holding gains and losses due to market fluctuations. Gains and
losses are recorded upon the sales of short-term investments based upon the
specific identification method.
INVENTORIES
Inventories, which are classified in other current assets, are stated at
the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method. Buildings are depreciated over 20 to 40 years and
other property and equipment are depreciated over five to ten years.
Depreciation expense was $468,142, $295,343, and $208,853 for the years ended
December 31, 1997, 1996, and 1995, respectively. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
18
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INCOME TAXES
The Company utilizes the liability method for deferred income taxes. The
liability approach requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events recognized in the Company's
financial statements or tax returns. All expected future events other than
changes in the law or tax rates, are considered in estimating future tax
consequences.
The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statements and tax bases of assets and liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments, and accounts receivable.
The Company maintains cash balances with several banks. Cash and cash
equivalents includes investments in a certificate of deposit, commercial paper,
and U.S. Government Securities that mature in no more than 90 days from the date
of purchase. Short-term investments include commercial paper, U.S. Government
Securities, municipal bonds, mutual funds, and mortgage backed securities. Such
investments are recorded at cost and adjusted for fluctuations in market values.
At December 31, 1997, approximately $7,820,000, $2,310,000, $2,495,000,
$15,244,000, and $101,000, respectively, were held in trust by five separate
investment managers. At December 31, 1996, approximately $20,326,000,
$4,469,000, $2,354,000, and $2,189,000, respectively, were held in trust by four
separate investment managers.
The Company grants credit to its customers who consist primarily of
commercial and industrial wastewater and waste oil generators. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, requires no collateral from its customers. The provision for doubtful
accounts for the years ended December 31, 1997, 1996, and 1995, was $31,499,
$30,996, and $65,768, respectively. The allowance for doubtful accounts at
December 31, 1997 and 1996 was $9,945 and $44,427, respectively.
MANAGEMENT'S ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of consolidated
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
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 is not expected to
have a material impact on the Company's financial statements.
19
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. DISCONTINUED OPERATIONS
During 1995, the Board of Directors of the Company elected to discontinue
operations at its Mankoff and ESI subsidiaries. Mankoff's operations were
discontinued as of June 30, 1995. Mankoff's revenues were $6,353,000 for the
year ended December 31, 1995. Mankoff was sold on December 21, 1995, for
$1,500,000 in cash and two 24 month non-interest bearing notes receivable
totaling $805,000. The purchaser has also assumed the performance of all
contract obligations of Mankoff. A loss on disposition of Mankoff of $3,610,000
net of an income tax benefit of $1,892,000 was recorded in 1995 as a result of
the sale.
ESI's operations were discontinued as of December 31, 1995. Certain assets
of ESI were sold on December 23, 1997, for a $500,000 interest bearing note due
in 2002. The purchaser has also agreed to complete customer contracts that were
in process at the time of the sale. 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 were $1,954,000, $3,322,000, and $3,718,000 for
the years ended December 31, 1997, 1996, and 1995, respectively. During 1995, a
provision for estimated loss on disposition of ESI of $3,715,000, including
write-off of goodwill and estimated losses through the then expected date of
sale, was recorded net of an income tax benefit of $1,914,000. During 1996, an
additional provision for estimated loss on disposition of ESI of $660,000 was
recorded, net of an income tax benefit of $340,000. Due to unanticipated delays
in the disposition of ESI, the Company recorded an additional provision of
$990,000, net of tax in the second quarter of 1997. Upon the sale of the assets
of ESI in the fourth quarter of 1997, the Company incurred additional losses of
$1,392,000. The additional losses in the fourth quarter were primarily due to
unanticipated costs associated with contracts in process and a change in
estimate for income taxes of approximately $517,000 related to the delays in
disposition.
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. The disposition of the Tank Testing Group was made
pursuant to a Stock Purchase Agreement (the "Agreement") dated October 7, 1996.
The Company disposed of the Tank Testing Group in consideration of the receipt
of $12 million in cash. The Agreement calls for adjustments to the purchase
price of up to $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 Tank Testing Group. Revenues for the
Tank Testing Group were $18,926,000, and $24,607,000 for the years ended
December 31, 1996 and 1995, respectively.
20
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A summary of discontinued operations for the three years in the period ended
December 31, 1997 are as follows:
1997 1996 1995
------------ ------------ ------------
Revenues............................. $ 1,954,008 $ 18,925,828 $ 34,678,328
============ ============ ============
Net income (loss) from discontinued
operations, net of tax......... $(2,193,860) $ 12,098 $(4,739,338)
Gain (loss) on disposition of
discontinued operations,
net of tax..................... (187,854) 1,276,899 (3,610,242)
------------ ------------ ------------
Income (loss) from discontinued
operations, net of tax......... $(2,381,714) $ 1,288,997 $(8,349,580)
============ ============ ============
Net assets of discontinued operations at December 31, 1997 and 1996 consist of
the following:
1997 1996
------------ ------------
Working capital...................... $ (22,694) $ 1,490,611
Long term assets..................... 400,000 1,447,469
Accrued losses....................... -- (1,000,000)
------------ ------------
Net assets........................... $ 377,306 $ 1,938,080
============ ============
During 1997, 1996, and 1995, ESI incurred losses of $2,193,860, $2,163,317, and
$1,715,675, respectively, which were charged to the reserve for disposition.
21
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts at
December 31, 1997 and 1996 is presented below:
December 31,
-----------------------------
1997 1996
----------- -----------
Other current assets:
Interest receivable ...................... $ 19,401 $ 31,016
Prepaid insurance ........................ 190,484 127,497
Finished goods inventories ............... 178,839 60,317
Other .................................... 28,818 577,203
----------- -----------
Total other current assets .......... $ 417,542 $ 796,033
=========== ===========
Property and equipment:
Buildings and improvements ............... $ 2,347,316 3,196,998
Furniture, fixtures and equipment ........ 2,825,068 2,794,047
Land ..................................... 189,260 559,520
Plant construction in progress ........... 227,751 5,344
----------- -----------
Total property and equipment ........ 5,589,395 6,555,909
Accumulated depreciation ................. (800,254) (1,008,045)
----------- -----------
Net property and equipment .......... $ 4,789,141 $ 5,547,864
=========== ===========
Construction in progress relates to modifications to the Company's newly
constructed wastewater treatment plant. The plant has experienced start up
related issues which have limited capacity and increased the cost of the plant.
The Company believes that it will recover its investment through operations over
the life of the plant; however, the cost of the plant may be in excess of its
fair value at December 31, 1997.
December 31,
---------------------------
1997 1996
------------ ------------
Accrued liabilities:
Compensation ........................$ 123,364 $ 322,771
Claims reserves ..................... 829,435 1,250,000
State, federal and foreign
income taxes....................... -- 634,590
Other taxes.......................... 79,604 57,460
Other................................ 1,131 2,424
------------ ------------
Total accrued liabilities......$ 1,033,534 $ 2,267,245
============ ============
22
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. SHORT-TERM INVESTMENTS
The Company's investments in cash equivalents and short-term investments,
all of which mature within one year, consist of a certificate of deposit and
debt securities that are classified as available-for-sale and are recorded at
cost and adjusted for unrealized holding gains and losses due to market value
fluctuations. A summary of the estimated fair values of investments at December
31, 1997 and 1996 follows:
1997 1996
------------ ------------
Money market mutual funds ................ $ 2,309,900 $ 2,188,667
U.S. Government agency obligations ....... 5,506,311 20,939,007
Corporate bonds .......................... 9,046,667 4,469,000
Certificate of deposit ................... 101,010 --
Commercial paper ......................... 11,005,807 1,740,988
Less: Cash equivalents .................. (12,453,329) (10,911,683)
------------ ------------
Total short-term investments ....... $ 15,516,366 $ 18,425,979
============ ============
5. INTANGIBLE ASSETS
Excess of costs over net assets acquired resulted from the acquisition of
ERRI and is being amortized over fifteen years. Amortization expense related to
intangibles was $206,394 for each of the three years in the period ended
December 31, 1997. Accumulated amortization related to intangible assets was
$807,435 and $601,041 at December 31, 1997 and 1996, respectively. Although the
Company believes it will recover its investment in ERRI through operations, its
aggregate investment in ERRI may be greater than its fair value at December 31,
1997.
6. INCOME TAXES
The components of the income tax provision (benefit) for the years ended
December 31, 1997, 1996, and 1995 were as follows:
Year Ended December 31,
-------------------------------------------
1997 1996 1995
--------- ----------- -----------
Continuing operations:
Federal-current ............. $(186,014) $ (126,397) $ (111,585)
Federal-deferred ............ (13,662) (148,640) (11,786)
State-current ............... 20,548 (37,009) (23,992)
State-deferred .............. 19,543 (27,430) (3,324)
--------- ----------- -----------
Total continuing ........ (159,585) (339,476) (150,687)
Discontinued operations ..... 6,650 1,036,640 (3,915,175)
--------- ----------- -----------
Total ................... $(152,935) $ 697,164 $(4,065,892)
========= =========== ===========
23
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The difference between the effective tax rate reflected in the income tax
benefit for continuing operations and the statutory federal rate is analyzed as
follows:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
Amount computed using the
statutory rate ............... $(190,226) $(296,946) $(132,672)
State taxes, net of
federal benefit .............. 26,426 (42,530) (18,015)
Other .......................... 4,215 -- --
--------- --------- ---------
Total ................ $(159,585) $(339,476) $(150,687)
========= ========= =========
The effective tax rates for continuing operations for the years ended
December 31, 1997, 1996, and 1995 were 28.5%, 38.9%, and 38.6%, respectively.
The effective tax rate for discontinued operations was approximately .3%, 44%,
and 32% for the years ended December 31, 1997, 1996, and 1995, respectively.
24
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of the deferred tax assets and liabilities are as follows:
Year Ended December 31,
-------------------------
1997 1996
--------- -----------
Current deferred tax assets (liabilities):
Net operating loss carry forward ................. $ 285,312 $ --
Difference in recognition of accrued expenses .... 163,338 87,121
Difference in recognition of allowance for
doubtful accounts ................................ 66,961 257,543
Difference in recognition of loss on building .... -- 51,000
Difference in recognition of other expenses ...... -- 51,538
--------- -----------
Total current deferred asset ............... 515,611 447,202
--------- -----------
Noncurrent deferred tax assets
(liabilities):
Difference in recognition of loss on
disposition of ESI ............................... -- 1,628,584
Difference in bases of property
and equipment acquired ........................... -- (312,634)
Difference in accumulated depreciation
and amortization ................................. (435,937) (378,333)
Difference in deducting construction
period interest .................................. 41,530 41,523
Difference in recognition of accrued
expenses ......................................... 288,660 425,750
Difference in recognition of allowance
for other receivables ............................ 136,340 --
Difference in other expenses ..................... 145,790 45,358
--------- -----------
Total noncurrent deferred asset ............ 176,383 1,450,248
--------- -----------
Net deferred income taxes ............... $ 691,994 $ 1,897,450
========= ===========
25
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS AND CONTINGENCIES
Total rental expense for operating leases, none of which extend beyond
December 31, 1998, for the years ended December 31, 1997, 1996, and 1995 was
$91,718, $67,116, and $48,196, respectively.
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 December 31, 1997. 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 cash flows.
8. STOCK OPTIONS
The Board of Directors has reserved 1,000,000 authorized shares of its
Common Stock for the purpose of issuing nonincentive stock options, incentive
stock options, and restricted stock awards to key employees under its 1989 Stock
Option Plan. The exercise price for a nonincentive stock option shall not be
less than 85% of the fair market value of the Common Stock on the date of grant.
The exercise price for each incentive stock option granted may not be less than
the fair market value of the Company stock on the date of grant. For those
incentive stock optionees owning more than 10% of the Company's Common Stock on
the date the options are granted, the option price per share for an incentive
stock option shall not be less than 110% of the fair market value on the date of
the grant. The purchase price for restricted stock may be equal to or less than
par value and may be zero. Effective January 26, 1995, the Board of Directors of
the Company approved the cancellation of 129,167 employee stock options, with
exercise prices ranging from $4.50 to $7.50, and the subsequent issuance of
160,000 stock options, with an exercise price of $2.41 to certain employees. The
options under the plan vest on graded schedule depending on the Company's stock
price. Fifteen percent of all options are vested immediately as of the date of
grant and an additional 15% will vest on the third anniversary of the date of
grant. An additional 70% will vest within 3 years if the Company's stock price
equals or exceeds certain criteria. Otherwise, these options will vest on the
tenth anniversary of the date of grant.
A total of 800,000 shares of Common Stock were reserved for issuance under
the 1991 Nonemployee Director Stock Option Plan, which authorized the granting
of nonincentive stock options to purchase Common Stock and restricted stock
awards subject to certain restrictions to nonemployee directors. Under the
original plan, each eligible nonemployee director received (i) a Director Option
to Purchase 6,000 shares of common stock on January 1 of each year, beginning
January 1, 1993, and (ii) 1,000 shares of restricted stock (collectively, an
"Award"). Each director option will expire five (5) years after the date of
grant. The purchase price for each share of restricted stock shall be zero.
Effective with the January 1, 1995 issue date, the 1991 Nonemployee Director
Stock Option Plan was amended to eliminate the annual issuance of the Director
Option to Purchase 6,000 shares of Common Stock to nonemployee directors.
The Company had 943,895, 697,295, and 549,529 shares of Common Stock
available for grant under existing stock option plans at December 31, 1997,
1996, and 1995, respectively.
26
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth pertinent information regarding stock option
transactions for each of the three years in the period ended December 31, 1997:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at January 1, 1995 .............. 1,420,965 $3.75
Granted ........................................ 160,000 $2.41
Cancelled/Forfeited ............................ (462,099) $3.88
---------
Outstanding at December 31, 1995 ............ 1,118,866 $3.47
Granted ........................................ 0 $
Cancelled/Forfeited ............................ (147,766) $5.29
---------
Outstanding at December 31, 1996 ............ 971,100 $3.19
Granted ........................................ 0 $
Cancelled/Forfeited ............................ (246,600) $4.30
---------
Outstanding at December 31, 1997 ............ 724,500 $2.83
=========
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate
of 7.82%; the expected life of options is 8.2 years; and volatility of 40.6% for
the grants.
The following tables summarize information related to stock options
outstanding and exercisable at December 31, 1997 and 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/97 CONTR. LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
$2.41 to $5.00 672,000 7.50 $2.58 363,000 $2.67
$5.01 to $6.13 52,500 1.0 $6.01 52,500 $6.01
- -------------- ----------- ------------ --------------- --------------- --------------
$2.41 to $6.13 724,500 7.03 $2.83 415,500 $3.09
27
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WGTD. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WGTD. AVG. EXERCISABLE AT WGTD. AVG.
EXERCISE PRICES AT 12/31/96 CONTR. LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
$2.41 to $5.00 847,000 7.83 $2.62 310,000 $2.87
$5.01 to $9.125 124,100 5.88 $7.08 111,933 $7.19
--------------- ----------- ----------- -------------- -------------- --------------
$2.41 to $9.125 971,100 7.58 $3.19 421,933 $4.02
During 1996 the Company adopted the disclosure provision of Statement of
Financial Accounting Standard No. 123 "Accounting for Stock Based Compensation."
The Company continues to account for its stock-based compensation plans using
the accounting prescribed by APB Opinion 25.
Had the compensation cost for the Company's stock-base compensation plan
been determined in accordance with the accounting requirements of SFAS 123, the
Company's net income and net income per common share for 1997 would approximate
the pro forma amounts below:
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Loss from continuing operations - as reported $ (399,902) $ (533,897) $ (239,525)
Loss from continuing operations - pro forma . $ (390,948) $ (540,197) $ (285,525)
Continuing operations (loss) per share -
as reported ............................. $ (0.03) $ (0.04) $ (0.01)
Continuing operations (loss) per share -
pro forma ............................... $ (0.03) $ (0.04) $ (0.02)
28
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. 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. The calculation of the basic and diluted per-share computations
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ----------- ------------
Computation of basic and diluted earnings
(loss) per common share:
Net income (loss) applicable to common stock . $ (2,781,616) $ 755,100 $ (8,589,105)
============ =========== ============
Computation of primary earnings (loss) per share:
Weighted average number of common shares
outstanding ........................... 14,244,012 14,237,012 14,230,012
Common shares issuable under stock option
plan .................................. -- -- --
Less shares assumed repurchased with
proceeds .............................. -- -- --
Weighted average common and equivalent
shares outstanding .................... 14,244,012 14,237,012 14,230,012
============ =========== ============
Basic and diluted earnings (loss) per
common share ............................. $ (0.20) $ 0.05 $ (0.60)
============ =========== ============
10. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
par value $.10 per share. Such shares of Preferred Stock may be issued from time
to time by the Board of Directors, without action by the shareholders, in one or
more series with such designations, preferences and special rights and
qualifications, limitations, and restrictions as may be designated by the Board
of Directors prior to the issuance of such series.
11. RELATED PARTIES
The Company issued Common Stock in lieu of cash to nonemployee directors
totaling $13,790, $12,740, and $15,750 during 1997, 1996, and 1995,
respectively. The Company purchased diesel and boiler fuel from a company owned
by the President of ERRI totaling $159,000 and $59,000 during 1997 and 1996,
respectively.
29
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RETIREMENT PLANS
The Company maintains defined contribution plans that allow all employees
after attaining one year of service with the Company to contribute through
payroll deductions for investment in various funds established by the plan.
Company contributions are discretionary and, in 1997, 1996, and 1995, no
contributions were made to the plan.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was approximately $6,700, $5,000, and
$12,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The
Company paid approximately $846,000, $286,000, and $1,354,000 in cash for income
taxes during the years ended December 31, 1997, 1996, and 1995, respectively,
and received approximately $72,000 and $1,588,000 in cash from income tax
refunds during the years ended December 31, 1997 and 1996, respectively. The
Company received no income tax refunds during 1995. The Company issued notes
payable for insurance premiums of approximately $145,000 for the year ended
December 31, 1995. In 1997 and 1995, the Company issued notes receivable of
$500,000 and $805,000, respectively, in connection with dispositions of
discontinued operations.
30
TEI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. UNAUDITED QUARTERLY FINANCIAL DATA
Three Months Ended
------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
------------ ------------ ------------ ------------
Revenues ........................................... $ 607,000 $ 689,000 $ 770,000 $ 659,000
Cost of services ................................... 549,000 540,000 474,000 627,000
------------ ------------ ------------ ------------
Gross profit ....................................... 58,000 149,000 296,000 32,000
General and administrative expenses ................ 658,000 678,000 684,000 605,000
------------ ------------ ------------ ------------
Loss from operations ............................... (600,000) (529,000) (388,000) (573,000)
Other income (expense), net ........................ 382,000 389,000 374,000 385,000
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes ......................... (218,000) (140,000) (14,000) (188,000)
Provision (benefit) for income taxes ............... (74,000) 25,000 -- (111,000)
------------ ------------ ------------ ------------
Loss from continuing operations ............. (144,000) (165,000) (14,000) (77,000)
Loss from discontinued operations .................. -- (990,000) -- (1,392,000)
------------ ------------ ------------ ------------
Net income (loss) .................................. $ (144,000) $ (1,155,000) $ (14,000) $ (1,469,000)
============ ============ ============ ============
Basic and diluted earnings (loss) per share:
From continuing operations .................. $ (0.01) $ (0.01) $ 0.00 $ (0.01)
From discontinued operations ................ 0.00 (0.07) -- (0.10)
------------ ------------ ------------ ------------
Net earnings (loss) per share ............... $ (0.01) $ (0.08) $ 0.00 $ (0.11)
============ ============ ============ ============
Weighted average common shares outstanding ......... 14,244,000 14,244,000 14,244,000 14,244,000
============ ============ ============ ============
Three Months Ended
------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
------------ ------------ ------------ ------------
Revenues ........................................... $ 517,000 $ 588,000 $ 513,000 $ 581,000
Cost of services ................................... 318,000 360,000 390,000 486,000
------------ ------------ ------------ ------------
Gross profit ....................................... 199,000 228,000 123,000 95,000
General and administrative expenses ................ 577,000 612,000 612,000 627,000
------------ ------------ ------------ ------------
Loss from operations ............................... (378,000) (384,000) (489,000) (532,000)
Other income (expense), net ........................ 256,000 234,000 225,000 196,000
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes ......................... (122,000) (150,000) (264,000) (336,000)
Benefit for income taxes ........................... (47,000) (58,000) (103,000) (130,000)
------------ ------------ ------------ ------------
Loss from continuing operations ............. (75,000) (92,000) (161,000) (206,000)
Income (loss) from discontinued operations ......... (268,000) 314,000 566,000 677,000
------------ ------------ ------------ ------------
Net income (loss) .................................. $ (343,000) $ 222,000 $ 405,000 $ 471,000
============ ============ ============ ============
Basic and diluted earnings (loss) per share:
From continuing operations .................. $ 0.00 $ (0.01) $ (0.01) $ (0.02)
From discontinued operations ................ (0.02) 0.02 0.04 0.05
------------ ------------ ------------ ------------
Net earnings (loss) per share ............... $ (0.02) $ 0.01 $ 0.03 $ 0.03
============ ============ ============ ============
Weighted average common shares outstanding ......... 14,237,000 14,237,000 14,237,000 14,237,000
============ ============ ============ ============
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure
matters with its independent accountants to report under this Item 9.
32
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item 10 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item 12 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 13 is incorporated herein
by reference to the Company's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of the Company and Report of Independent
Accountants are included under Part II Item 8 of this Form 10-K.
PAGE
----
Report of Independent Accountants.....................................14
Consolidated Balance Sheet as of December 31, 1997 and 1996 ..........15
Consolidated Statement of Operations
for the three years in the period ended December 31, 1997..........16
Consolidated Statement of Shareholders' Equity
for the three years in the period ended December 31, 1997..........17
Consolidated Statement of Cash Flows
for the three years in the period ended December 31, 1997..........18
Notes to Consolidated Financial Statements............................19
2. Financial Statement Schedules
The following financial statement schedules should be read in
conjunction with the consolidated financial statements and notes
thereto.
Report of Independent Accountants....................................S-1
Schedule I-- Valuation and qualifying accounts......................S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or
the required information is included elsewhere in the financial
statements.
3. Exhibits
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Index to Exhibits contained elsewhere herein.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended December 31, 1997.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 1998.
TEI, INC.
By: /s/ DONALD R. CAMPBELL
Donald R. Campbell, President, Chief Executive
Officer, Chief Operating Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ----------------------- ------------------------------ --------------
/s/ R. L. WALTRIP Chairman of the Board March 27, 1998
R. L. Waltrip
/s/ DONALD R. CAMPBELL President, Chief Executive Officer, March 27, 1998
Donald R. Campbell Chief Operating Officer and Director
(Principal Executive Officer)
/s/ RICK BERRY Executive Vice President, Chief March 27, 1998
Rick Berry Financial Officer, Secretary,
and Treasurer (Principal Financial
and Accounting Officer)
/s/ T. G. BOGLE Director March 27, 1998
T.G. Bogle
/s/ SAMUEL W. RIZZO Director March 27, 1998
Samuel W. Rizzo
/s/ T. CRAIG BENSON Director March 27, 1998
T. Craig Benson
/s/ TONY COELHO Director March 27, 1998
Tony Coelho
/s/ JAMES H. GREER Director March 27, 1998
James H. Greer
/s/ W. BLAIR WALTRIP Director March 27, 1998
W. Blair Waltrip
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
TEI, Inc. and Subsidiaries:
Our report on the consolidated financial statements of TEI, Inc. and
Subsidiaries is included on page 14 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in Item 14(a) on page 33 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 17, 1998
S-1
SCHEDULE II
TEI, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
==================================================================================================================================
COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------------
Charged to
Balance at other
beginning of accounts-- Deductions-- Balance at
Description period Additions describe describe end of period
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Allowance for doubtful accounts (B)
and notes ....................... $ 849,427 $ 452,065 $ -- $ (870,982)(C) $ 430,510
============== =============== ============== =============== ==============
Reserve for slow moving and obsolete
inventory ....................... $ -- $ -- $ -- $ -- $ --
============== =============== ============== =============== ==============
DECEMBER 31, 1996
Allowance for doubtful accounts
and notes ....................... $ 1,199,286 $ 30,996 $ (380,855)(A) $ -- $ 849,427
============== =============== ============== =============== ==============
Reserve for slow moving and obsolete
inventory ....................... $ 510,480 $ -- $ (510,480)(A) $ -- $ --
============== =============== ============== =============== ==============
DECEMBER 31, 1995
Allowance for doubtful accounts
and notes ....................... $ 876,737 $ 1,092,869 $ (540,623)(A) $ (229,697)(B) $ 1,199,286
============== =============== ============== =============== ==============
Reserve for slow moving and obsolete
inventory ....................... $ 90,000 $ 420,480 $ -- $ -- $ 510,480
============== =============== ============== =============== ==============
(A) Amounts were reclassified to net assets of discontinued operations.
(B) Represents the reversal of the allowance on receivables that were
determined to be uncollectible and were written off.
(C) Includes $178,425 attributable to discontinued operations.
S-2
INDEX TO EXHIBITS
Exhibit Number Exhibit
-------------- -------
* 3.1 Articles of Incorporation of the Company (Exhibit 3.1).
* 3.2 Amendment to Articles of Incorporation of the Company (Exhibit 3.2).
* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3).
* 10.1 Asset Purchase, Non-Compete and Confidentiality Agreement between
Tanknology, 381651 Alberta Ltd., T.E. (Ed) Adams and J. Gordon Adams
dated July 15, 1988 (Exhibit 10.1).
* 10.2 Assignment of Canadian Patent No. 1,185,693 from Thomas E. Adams to
Tanknology dated July 18, 1988 (Exhibit 10.2).
* 10.3 Assignment of U.S. Letters Patent No. 4,462,249 from T. Edwin Adams
to Tanknology dated July 18, 1988 (Exhibit 10.3).
* 10.4 Trademark, Service Mark and Tradename Assignment from Tanknology
Canada Ltd. to Tanknology dated July 18, 1988 (Exhibit 10.4).
(2) 10.5 Credit Agreement, dated July 15, 1994, by the
Company as borrower, to Texas Commerce Bank National
Association (Exhibit 10.5).
(3) 10.6 First Amendment to Credit Agreement, dated July 14,
1995, by the Company as borrower, to Texas Commerce Bank
National Association (Exhibit 10.6).
+**** 10.7 1989 Stock Option Plan for the Company, as amended (Exhibit 10.6).
+* 10.8 Form of Incentive Stock Option Agreement for use in connection with the
1989 Stock Option Plan of the Company (Exhibit 10.9).
+* 10.9 Form of Nonincentive Stock Option Agreement for use in connection with
the 1989 Stock Option Plan of the Company (Exhibit 10.10).
+* 10.10 Nondisclosure Agreement to be used in conjunction with certain options
granted under the 1989 Stock Option Plan of the Company (Exhibit 10.11).
** 10.11 License Agreement between Tanknology and GEC Avery Limited, dated
December 30, 1991 (Exhibit 10.16).
** 10.12 License Agreement between Tanknology and Fulton Hogan Canterbury,
Limited, dated October 31, 1991 (Exhibit 10.17).
+** 10.13 Consulting Agreement, dated December 10, 1991, between the Company
and T.G. Bogle (Exhibit 10.18).
*** 10.14 Stock Purchase Agreement between Tanknology Environmental, Inc. and
Square D Company dated July 16, 1992 (Exhibit 10.2).
**** 10.15 Asset Purchase Agreement between Tanknology Environmental, Inc. and
USTMAN Industries, Inc. (Exhibit 10.14).
+**** 10.16 1991 Nonemployee Director Stock Option Plan (Exhibit 10.15).
INDEX TO EXHIBITS
Exhibit Number Exhibit
-------------- -------
***** 10.17 Asset Purchase Agreement between Tanknology Environmental, Inc. and
Mankoff Equipment, Inc. (Exhibit 2).
+***** 10.18 Noncompete Agreement between Tanknology Environmental, Inc. and
Curt J. Mankoff (Exhibit 10).
(1) 10.19 Asset Purchase Agreement between Tanknology Environmental, Inc. and
Jack Holder Enterprises, Inc. dated January 31, 1994 (Exhibit 10.18).
(3) 10.20 Agreement to sell assets, dated December 22, 1995, between Mankoff,
Inc. and Donald Kooperman (Exhibit 10.20).
(3) 10.21 Installment note between Mankoff, Inc. and Continental Environmental,
Inc., dated December 20, 1995 (Exhibit 10.21).
(3) 10.22 License Agreement between Tanknology Worldwide and Fulton Hogan
Limited, dated April 1, 1995 (Exhibit 10.22).
(4) 10.23 Stock Purchase Agreement between Tanknology Environmental, Inc. and
NDE Environmental Corporation dated October 7, 1996 (Exhibit 2).
10.24 Asset Purchase Agreement between Tanknology/Engineered
Systems Inc.; TEI, Inc.; and Sorrento Electronics, Inc.
dated December 23, 1997 (Exhibit 10.24).
* 16.1 Letter re change in certifying accountant (Exhibit 16.1).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
- ---------------
* Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's Registration Statement on Form S-1, File No. 33-36822.
** Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's 1991 Form 10-K, File No. 0-18899.
*** Incorporated by reference to the exhibit shown in parenthesis filed in the
Form 8-K dated July 16, 1992, File No. 0-18899.
**** Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's 1992 Form 10-K, File No. 0-18899.
***** Incorporated by reference to the exhibit shown in parenthesis filed in the
Form 8-K dated October 1, 1993, File No. 0-18899.
+ Compensation plan, benefit plan or employment contract or arrangement.
(1) Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's 1994 Form 10-K, File No. 0-18899.
(2) Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's 1995 Form 10-K, File No. 0-18899.
(3) Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's 1995 Form 10-K, File No. 0-18899.
(4) Incorporated by reference to the exhibit shown in parenthesis filed in the
Form 8-K dated October 25, 1996, File No. 0-18899.