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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
COMMISSION FILE NUMBER 1-9307
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-2731074
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
19103 GUNDLE ROAD 77073
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 443-8564
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
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. /X/
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $45,500,000 as of May 10, 1995. All share amounts
included herein have been restated to reflect all previous stock splits.
The number of shares outstanding of the issuer's common stock, $.01 par
value, as of May 10, 1995 was 10,691,926 shares.
THE FOLLOWING DOCUMENT IS INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-K:
Proxy Statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 with respect to the 1995 annual meeting of shareholders.
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1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 9
Item 3. Legal Proceedings............................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 10
Item 6. Selected Financial Data....................................................... 10
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition................................................................... 11
Item 8. Consolidated Financial Statements and Supplementary Data...................... 14
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................ 31
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 31
Item 11. Executive Compensation........................................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 31
Item 13. Certain Relationships and Related Transactions................................ 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 31
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PART I
ITEM 1. BUSINESS.
Introduction
Gundle Environmental Systems, Inc. ("Gundle" or the "Company") is a leading
supplier of innovative, quality barrier products and systems used in managing
and protecting water and other resources.
Gundle is a Delaware corporation formed in 1986. The Company's principal
executive offices are located at 19103 Gundle Road, Houston, Texas 77073. The
Company's telephone number is (713) 443-8564.
Recent Developments
On March 28, 1995, the Company entered into a Merger Agreement with SLT
Environmental, Inc. ("SLT"). SLT manufactures and installs engineered synthetic
lining systems for industrial and mining companies, government agencies and
municipalities, among other entities, that own or operate waste processing
treatment or containment facilities. SLT's synthetic lining materials are
manufactured at plants located in Rechlin, Germany and Houston, Texas. If the
merger is approved by the stockholders of the Company and is consummated, SLT
will be merged into the Company with the Company being the surviving
corporation.
Upon consummation of the merger, Wembley, Ltd., a British Virgin Islands
company ("Wembley") who owns all the outstanding shares of the SLT Common Stock,
will receive in exchange for its SLT Common Stock, 7,000,000 shares of the
Company's Common Stock, or approximately 41% of the issued and outstanding
Common Stock of the Company after the merger.
For information concerning the proforma effects of the merger, see Note 17
of the Notes to Consolidated Financial Statements included herein under Item 8.
The merger is subject to a number of conditions, and there is no necessary
assurance that it will be consummated.
General
The Company manufactures and installs synthetic lining systems and products
principally for the prevention of groundwater contamination from municipal and
industrial sources, and for the containment of water and industrial liquids and
solids. The Company markets its lining systems primarily to waste management,
industrial and mining companies, municipalities and other governmental agencies
that own or operate waste, material processing, water treatment or containment
facilities, as well as to engineering firms and construction contractors that
serve these industries. During the three year period ended March 31, 1995, the
Company sold over 1 billion square feet of polyethylene membrane to customers in
the United States and more than 70 other countries.
In the United States, the Company may sell products directly to its
customers or provide completely installed lining systems. Outside the United
States, the Company sells products primarily through independent distributors to
customers who install the lining systems themselves, usually with the assistance
of the independent distributors who have been trained by the Company to market
and/or install the Company's products. The Company has also increased its own
international installation capability, and recently purchased an installation
company in the United Kingdom.
Lining systems installed by the Company are designed by its customers to
meet their particular containment requirements, ranging from a single lining to
more complex systems consisting of several liners interlayered with drainage
materials, geotextiles and geogrids. The principal components of the Company's
lining systems are 22.5 or 34.5 foot wide synthetic resin sheets manufactured by
the Company primarily from high density polyethylene ("HDPE") resin and certain
chemical additives using a formula and production process developed by the
Company. The Company's sheets are generally welded together on the customer's
job site using the Company's proprietary hot wedge or extrusion welding methods.
The welded seams on lining systems installed by the Company are tested as part
of its quality assurance program.
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The Company believes that its manufacturing capabilities, welding processes
and use of high quality resins enable it to produce and install lining systems
of the highest quality. The Company provides its customers in the United States
with a single source for the manufacture, installation and testing of lining
systems. The Company believes that it is one of five domestic suppliers of HDPE
sheet that also provide installation services.
The Company's employee base, technical capabilities and onsite facilities
allow it to design, modify and install equipment, compound its proprietary resin
formulation, fabricate and manufacture other essential non-sheet items used for
or in conjunction with liner installations, and perform laboratory tests on raw
materials, finished product, field samples and new product developments.
Economies of scale in purchasing raw materials and the efficiencies of its
manufacturing process enable the Company to bid on construction projects
requiring the installation of lining systems on a price competitive basis
without compromising the quality of its materials or installation services.
Synthetic Liner Industry
The Company manufactures flexible membrane liners ("FMLs") which compete
directly in some cases with coated textiles and soils as well as FMLs made from
other resins. The principal types of FMLs presently available are HDPE and other
variations of polyethylene, such as very low density ("VLDPE") and linear low
density ("LLDPE"), polyvinyl chloride ("PVC"), ethylene propylene diene
terpolymer ("EPDM"), scrim-reinforced chlorosulphonated polyethylene
("Hypalon"), polypropylene or combinations or variations of these synthetics.
Polyethylene membranes have several physical advantages over PVC,
scrim-reinforced membranes and other resin formulations, including chemical
resistance characteristics (e.g., their resistance to various acids, alkalis,
aromatic solvents and oils) as well as certain strength characteristics (e.g.,
their relative impermeability, puncture resistance and tendency to stretch
rather than tear in response to certain types of pressure). HDPE sheeting
represents a major portion of the synthetic liner market, particularly for
municipal solid waste and other environmentally critical applications. The
Company believes the market for synthetic liners in general and polyethylene
liners in particular continues to expand as engineers become more familiar with
the quality, utility and breadth of product options involving liners
manufactured from HDPE, VLDPE, LLDPE and combinations thereof.
The Company believes that significant factors in the growth of the market
for FMLs include: regulatory requirements at the federal and state level
relating to the storage of hazardous and non-hazardous substances (see
"Regulatory Background"); increasing public concern for the environment and for
protecting ground water; cost benefits of synthetic liners when compared to more
traditional containments such as soil, concrete and steel; functional
improvements in operations associated with flexible membrane barriers; and the
inert, sanitary characteristic of polyethylene liners which makes them usable
for potable water containment or conveyance and aquaculture ponds.
Regulatory Background
In the past two decades, substantial regulations have been enacted
worldwide relating to the management, treatment, storage and disposal of waste
materials. The Company believes that these regulations have enhanced the market
for the Company's lining systems and helped establish the quality and utility of
HDPE, LLDPE and VLDPE lining systems in general.
The principal U.S. federal regulation which has influenced the market for
the Company's products is the Resource Conservation and Recovery Act of 1976
("RCRA"). RCRA provides a comprehensive scheme for the regulation of waste
facilities and the storage, treatment and disposal of wastes. The Environmental
Protection Agency (the "EPA"), which is charged with implementing, administering
and enforcing RCRA, has adopted regulations under RCRA governing the management
and disposal of wastes, including standards for storage areas, incinerators and
landfills.
RCRA legislation is divided into a number of subtitles, including "Subtitle
C -- Hazardous Waste Management" and "Subtitle D -- Solid Waste Disposal
Facility Criteria." Regarding synthetic liners, Subtitle
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D is the most important of these regulations as it impacts the disposal of all
municipal solid waste ("MSW") at roughly 3,500 MSW landfill sites in the
country. Subtitle D governs the methods by which MSW landfills are sited,
designed, built, operated and closed, and imposes strict compliance standards
with regard to groundwater protection.
The EPA published the Subtitle D regulations as a federal rule on October
9, 1991 with an implementation date of October 9, 1993. The EPA granted an
extension of the deadline to April 9, 1994 for small facilities receiving less
than 100 tons of waste per day or which were affected by the 1993 Midwest
floods. Other very small facilities which meet specific criteria have until
October 9, 1995 to comply with the regulations. The EPA intended for Subtitle D
to be enforced at the state level and has encouraged states to create their own
guidelines which meet or exceed the federal guidelines and to apply for
"approved status" as a regulatory agency to oversee permitting and compliance.
As of February 28, 1995, 47 states have received full or partial approval of
their state Subtitle D programs. The remaining three states have been given
tentative approval and are expected to receive final approval during the year.
"Approved" state programs can permit facilities using alternatives to the
federally specified criteria. Alternative liner designs must be proven to be as
effective as the minimum design standard. Subtitle D specifies use of a
composite liner system consisting of highly impermeable clay plus a geomembrane.
The geomembrane must be at least 30 mils thick. At least seven states require
HDPE geomembranes. At least another 8 states require a minimum thickness of 60
mils. HDPE liners have been installed in landfills in every state. The Company
believes that a broad range of factors favor use of HDPE geomembranes in
landfills, including material properties, extensive experience and history.
The Hazardous and Solid Waste Amendments of 1984 (the "1984 Amendments") to
RCRA's Subtitle C expanded its scope by, among other things, prescribing more
stringent standards for hazardous waste landfills. The 1984 Amendments require
that all new hazardous waste landfills use lining systems composed of two or
more liners with leachate collection and drainage systems above and between each
liner (a "Double Liner System"). These lining systems are required to be
constructed of materials resistant to the hazardous materials to be contained in
the landfill. Each new lining system installed to contain hazardous waste in
accordance with RCRA must be approved by the EPA. The 1984 Amendments also
require the use of a Double Liner System for all surface impoundments or ponds
used in the containment of certain hazardous liquids. The welds joining
individual sections of synthetic lining systems must also be tested in
compliance with EPA procedures. The Company believes that, of the lining systems
for hazardous waste landfill sites that have received EPA approval under RCRA
since 1984, HDPE lining systems have been the most widely used.
The House of Representatives passed H.R.9 Wage Enhancement and Job Creation
Act as part of the Republicans Contract With America. Contained within this bill
is language which calls for a roll-back of EPA regulations and new guidelines
for scrutinizing potential regulations. These guidelines could effectively
prevent any new environmental regulations. The Company believes that the Act
will be modified within the Senate and that state Subtitle D requirements will
be maintained. Industries which have already complied with regulations are
lobbying Congress to retain regulations which would force competitors to upgrade
their facilities and incur the same costs.
In addition to regulation directly mandating the use of synthetic liners,
other federal and state regulations requiring the cleanup of waste disposal
sites (and imposing substantial liability for the failure to do so) have led to
an increasing use of synthetic lining systems by both private and public owners
and operators of waste sites. The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (commonly known as "CERCLA" or the
"Superfund" legislation), was enacted in response to the dangers of uncontrolled
hazardous waste sites. In relevant part, CERCLA subjects owners and operators of
hazardous waste sites to joint and several liability for costs of cleanup and
damages to natural resources resulting from the release of hazardous substances
into the environment. The Superfund legislation further authorizes the EPA to
compel these owners and operators to clean up hazardous waste sites and, if they
fail to do so, authorizes the EPA to perform the cleanup work, using funds
appropriated for that purpose by Congress, and thereafter to pursue owners or
operators for reimbursement.
In light of the slow pace and tremendous cost of Superfund cleanup, the
Congress and the EPA have sought to accelerate cleanup and reduce costs by
prescribing "presumptive remedies" for preventing
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groundwater and soil contamination and human exposure to hazardous wastes. In
1994, the EPA published its presumptive remedy for use at MSW landfills, which
accounted for 230 identified Superfund sites. The presumptive remedy includes
use of a liner cap over the area and containment of subterranean hazardous waste
plumes. The Company believes its products directly address this application.
Other federal statutes believed to have led to the increased use of
synthetic liners include the Federal Water Pollution Control Act (Clean Water
Act), the Toxic Substances Control Act and the Clean Air Act. EPA regulations
and some state regulations also require that gypsum waste, a by-product of
phosphate mining, be stored in lined facilities. In addition, all states have
enacted statutes regulating the handling and storage of hazardous substances,
specifically petroleum products and other chemicals contained in tanks or
lagoons.
Also, other activities around the world which involve intensive water use
or which can have impacts on groundwater quality have been regulated or targeted
for regulation. These activities include agricultural irrigation, livestock
feedlots, dairy facilities, aquaculture facilities, and industrial and public
stormwater runoff containment areas.
Products
The Company produces a variety of products that are used in containment
systems. The Company's principal product is a smooth-finished HDPE sheet
marketed under the trade name "Gundline(R) HD". The sale and installation of
Gundline(R) HD accounted for approximately 35%, 44%, and 52% of the Company's
sales in fiscal 1995, 1994 and 1993, respectively. The Company manufactures
Gundline(R) HD sheet in thicknesses from 20 to 140 mil (one mil equals 1/1000 of
an inch) in seamless widths of 22.5 feet and 34.5 feet. The Company believes
that no other company produces HDPE sheets suitable for waste containment in
this variety of thicknesses and in such great widths. Sheet width and
consequently the number of seams required for installation is critical. Seaming
represents the major technical difficulty for liner installation. A greater
number of seams requires more technical labor, more testing and more potential
for liner failure.
The Company also manufactures and sells textured HDPE sheet, marketed under
the trade name "Gundline(R) HDT," for use on sloping terrain, or where a high
friction interface is required.
The Company manufactures sheeting using other resins including other
polyethylene variations (e.g., VLDPE and LLDPE) and polypropylene. The Company's
current sole supplier for VLDPE resin has withdrawn from the geomembrane market
and is currently only fulfilling previous obligations to geomembrane
manufacturers. A replacement supplier for VLDPE is expected to begin delivering
product during the 1996 fiscal year. Gundle's newest sheet product is a
polypropylene sheet which it markets under the trade name "Gundline(R) FP".
Gundline(R) FP exhibits many of the benefits of both HDPE and VLDPE sheeting and
is manufactured on the same production lines. Gundline(R) FP is also offered in
a textured form. The Company markets Gundline(R) FP as a highly flexible
membrane with chemical compatibility and temperature tolerance characteristics
superior to PVC and other FML products. Applications include landfill caps, high
temperature liquid impoundments, exposed lagoons, and floating covers. The
Company also manufacturers a special thin profile sheet (from 12 to 30 mils)
made from co-extruded VLDPE and LLDPE, which it markets under the trade name
"Gundguard(R)". "Gundguard(R)" is manufactured in seamless widths of 22.5 feet.
New product developments utilize the Company's co-extrusion capability to
produce sheets with layers consisting of different materials. When co-extruded,
these layers become molecularly integrated such that they cannot delaminate.
Many combinations and variations are possible. The Company has been awarded a
patent for its white-surfaced sheet which it markets as Gundline(R) HDW. By
reflecting radiant heat, Gundline(R) HDW reduces the expansion/contraction
(wrinkling/bridging) of the liner, both during installation and under long-term
exposure, and protects subgrade soils from desiccation. Under identical exposure
conditions, white-surfaced sheets have recorded temperatures as much as 80(++)F
lower than standard black geomembranes. In addition, white-surfaced sheets
greatly improve installation damage detection and quality by revealing scoring
and abrasion as black marks exposed against the white surface. Gundle also
manufactures Gundline HDW(R) with a textured surface.
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A patent has also been awarded for the Company's "Gundline(R) HDC" product
which incorporates a proprietary conductive layer and allows for 100% electric
spark testing of the installed liner. Unlike traditional electric leak detection
surveys, Gundline(R) HDC spark testing does not require flooding of the
containment system with water, which can be expensive and time consuming and of
uncertain reliability. The Company believes Gundline(R) HDC allows for more
reliable testing, even for extremely small holes that previously might not have
been detected with traditional electric leak detection surveys.
The Company manufactures a high density polyethylene net, marketed as
"Gundnet(R)". Gundnet(R) consists of two sets of HDPE strands intertwined to
form a net along which fluid may be conveyed for drainage.
The Company bonds geotextiles to one or both sides of the Gundnet(R)
drainage net and markets this product under the trade name "Fabrinet(R)".
Fabrinet(R) allows one-step installation of drainage media for primary leachate
collection.
The Company owns a plant in Spearfish, South Dakota, which manufactures
Gundseal(R), a product that combines the Company's various sheet products with
highly expansive sodium bentonite clay. The clay layer is adhered to the sheet
using a proprietary nontoxic adhesive. Gundseal(R) is the only single composite
liner product made in the world. Gundseal(R) is marketed as a geosynthetic clay
liner (GCL) and competes directly with three geotextile-clad clay blankets. As a
GCL, Gundseal(R) is the only product which can provide true "intimate" contact
between a flexible membrane liner and a factory-controlled bentonite clay layer.
The benefit of the clay layer is that its high swelling capacity seals punctures
in an overlaying FML.
The Company distributes and installs and has exclusive marketing rights to
certain other products manufactured by others as part of its turnkey
installation capability. These products include a patented high-flow net and a
unique, installed leak detection system. Other third party products such as
geogrids, piping and geotextiles are marketed, distributed and installed by the
Company under non-exclusive agreements.
The Company operates seven continuous flow extrusion lines. Raw materials
are delivered to the plant by railcar, conveyed into material storage silos,
then pneumatically transported to a blending or "compounding" facility. The
compounding facility is specifically designed to mix, blend and pelletize
(pre-compound) the polyethylene with an optimum dispersion of additives and
carbon black. This process enhances the quality of the final product and
improves productivity. The pre-compounded material is stored in silos and
subsequently used as feed stock for the extrusion lines which melt the
pre-compound and extrude it through large circular dies into a tube of finished
membrane. The membrane is then conveyed over a system of rollers to a slitting
and opening device and then to rolling machines, where it is wound into finished
rolls. Material handling equipment then moves the finished membrane to a storage
yard for shipment to the job site. The production facility operates on a 24 hour
per day basis, seven days a week, throughout the year.
The Company operates three additional lesser-capacity drainage net
extrusion lines. An eleventh, small capacity extrusion line is used by the
Company's research personnel on an as-needed basis for testing new materials and
production processes. All of the Company's extrusion lines are capable of using
different types of resins for the manufacture of its products.
The Company often provides its customers in the United States with
completely installed and tested lining systems. The Company employs
approximately 250 trained technicians and supervisors who travel to customer job
sites and install the lining materials. The sheets are joined in the field using
the Company's proprietary hot wedge or extrusion welders. The hot wedge welder
operates by propelling itself along the sheets that are to be joined and draws a
hot metal wedge between them. The heated sheets are then fed between pressure
rollers, creating a dual track seam. The extrusion welder operates by extruding
heated resin through the dual head of the welder, and integrating such material
with the resin of the sheets that are to be joined. Both the hot wedge and
extrusion weld result in a homogeneous bond between the sheets, thereby offering
the same chemical resistance as the sheet.
Because of the homogeneous bond created with the sheet, the Company
believes its welding methods are superior to other methods. Sheets of PVC and
Hypalon typically are glued together in the field. This process
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results in a bond which the Company believes is not sufficiently strong or
impermeable for certain applications, especially those involving hazardous and
toxic materials.
The Company conducts its own laboratory and on-site testing of its
installations. The laboratory tests measure the resistance of FMLs to materials
and conditions that are expected to be found in particular environments. Among
other things, the Company tests the strength and adequacy of the welds on the
liners it installs by some combination of the following methods: cutting samples
from the liners and destructively testing the weld seam, pressure testing an air
channel created in the length of the weld during hot wedge welding and
performing vacuum testing for the airtightness of the extrusion weld seam. The
Company considers the testing of its products and the maintenance of high
quality standards essential to the successful operation of its business.
The Company's research and development efforts focus on the development of
new products, new quality control procedures, and new, more efficient
manufacturing and installation techniques. Concepts are generated by the
Company's internal research efforts, as well as through contacts with potential
customers and professionals in the field. The Company's research and development
expenditures during the years ended March 31, 1995, 1994 and 1993 were $840,000,
$951,000 and $1,066,000, respectively.
Raw Materials
The principal raw material used by the Company is a high grade polyethylene
resin. The Company conducts initial screening tests of the resins upon delivery
as part of its quality control program. The Company currently purchases
polyethylene resins from several suppliers, and other sources are available. The
Company uses different types of resins (e.g., HDPE, VLDPE, LLDPE, and
polypropylene), pigments and other proprietary formulations to manufacture
various products. The Company also purchases certain anti-oxidants and
stabilizers that are mixed with the resin to increase performance and product
life. These additives are commodity materials available from many sources.
Polyethylene resin occasionally is in short supply and is subject to
substantial price fluctuation in response to market demand. The Company has not
encountered any significant difficulty to date in obtaining raw materials in
sufficient quantities to support its operations at current or expected near-term
future levels. However, any significant interruption in raw material supplies or
abrupt increases in raw material prices could have an adverse effect upon the
Company's operations.
Applications
The following table sets forth the principal applications of the Company's
lining systems and the dollar amounts (in thousands) and percentages of net
sales for each application for the past three fiscal years.
SALES BY MARKET APPLICATION
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1995 % 1994 % 1993 %
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Solid Waste Containment........... $ 77,958 58.5% $ 61,197 51.3% $ 60,338 53.0%
Mining............................ 9,170 6.9 11,917 10.0 7,514 6.6
Hazardous Waste Containment....... 5,145 3.9 6,105 5.1 6,603 5.8
Liquid Containment................ 24,059 18.1 19,414 16.3 19,126 16.8
Other Applications................ 16,792 12.6 20,613 17.3 20,264 17.8
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Total Net Sales................... $133,124 100.0% $119,246 100.0% $113,845 100.0%
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Solid Waste Containment. Solid waste containment applications for synthetic
liners include the lining of new landfill sites, or new cells within existing
landfill sites, to be used for the disposal or storage of non-hazardous waste.
Subtitle D of RCRA requires the use of FMLs in all new or expanded MSW landfill
cells.
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(See "Regulatory Background.") The Company estimates that less than half of all
MSW landfills currently employ synthetic lining systems.
Synthetic liners are increasingly used to cover or "cap" unlined landfill
sites to prevent rainwater from creating excessive leachate which may seep into
the underlying groundwater, and to cap lined landfill cells to meet federal and
state Subtitle D guidelines. Synthetic liner covers also are used to collect
methane gas which is naturally produced as waste decays for use as fuel or to
meet Clean Air Act regulations.
Mining. Synthetic liners are employed for various purposes in the mining
industry. Liners are used for the containment of chemicals used in the mining of
gold, silver and copper. These minerals are dissolved or "leached" from the ore
by chemical solutions which are circulated through ore-bearing rock deposited on
top of a liner pad. The synthetic liner acts as a collection and drainage system
for the mineral-bearing solution. Sales of synthetic liners to the mining
industry are a direct result of the introduction of leaching processes in gold,
silver and copper mines. Leaching is a lower cost recovery technique, as
compared with traditional, labor-intensive mining techniques for the separation
of minerals from ore and also permits the extraction of minerals from low-grade
ore which previously was not processed.
Synthetic liners are also used in various mining applications to contain
the spent ore, or tailings, and for containment of the various chemical
solutions after the leaching process. Containment of tailings is important to
the preservation of the environment in that such tailings usually contain traces
of the chemicals used in the mining processes.
Gypsum, a byproduct of the phosphate mining industry, becomes acidic during
the mining process and has been regulated to require containment systems. The
Company believes the gypsum market represents a significant segment of the
overall mining application market.
Hazardous Waste Containment. Synthetic liners are used for containment of
both solid and liquid hazardous waste. RCRA mandates the use of synthetic lining
systems at all new hazardous waste landfill sites and at all new ponds
containing certain hazardous liquids.
Liquid Containment. Applications such as aquaculture ponds, wastewater
ponds for municipal sewage treatment, industrial process liquid containment,
stormwater runoff containment, potable water reservoirs, irrigation canals,
erosion control along banks, and decorative ponds often require the use of
liners to contain water.
Other Applications. Synthetic liners are used in various other industrial
and non-industrial applications, including tank lining and secondary
containment, tunnel waterproofing and prefabricated products. Synthetic liners
also are used as floating covers on liquid or semi-solid surfaces to protect the
covered elements from water and other elements in the environment, control odor,
promote anaerobic digestion of organic wastes and capture the resultant methane
gas produced. The Company is continually evaluating other industries in which
its lining systems might have commercially viable applications.
Marketing and Sales
In the United States, the Company conducts a direct sales effort focused on
engineers, general contractors, facility owners and government officials who are
responsible for designing projects and awarding construction contracts involving
the installation of synthetic lining systems. The Company sells material to a
select group of domestic installation companies and also utilizes manufacturers'
representatives for specialized industrial applications.
The Company's sales efforts outside the United States are conducted through
a network of independent distributors in 60 countries who sell the Company's
products on a direct or commission basis. During fiscal 1995, the Company
purchased an installation company to service customers in the United Kingdom.
The Company also maintains a technical support and development office in France.
The Company advertises in the United States in specialized trade
publications and by direct mail to its customers and potential customers, and
participates in trade conventions and conducts industry seminars domestically
and abroad. The Company also gives presentations to state and local
administrators regarding the
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available technology for the containment of waste materials and the advantages
offered by the Company's products.
The Company sells liners in the United States generally through
construction contracts awarded on the basis of a competitive bidding process or
directly to independent installers. When the Company makes sales pursuant to
construction contracts, the customer's bid proposal specifies the design and
performance criteria for the lining system to be constructed. If the Company is
awarded the contract, the remainder of the contractual terms are negotiated with
the customer, or with the customer's general contractor. The contract price
covers the cost of manufacturing the lining material, other third party products
and the labor and other costs involved in installation, welding and testing. The
Company also may indemnify the site owner or general contractor for certain
damages resulting from the negligence of the Company's employees. The Company
often is required to post bid and performance bonds covering the full amount of
an installation contract. In most contracts, the Company provides the customer
with specified warranties as to material quality and workmanship. These
warranties may last for up to 20 years, but are generally limited to repair or
replacement by the Company of the defective liner or installation up to the
dollar amount of the contract involved, on a prorated basis.
In fiscal 1995 and 1994, 70% of the Company's net sales were to customers
in the United States and 30% to customers in other countries, as compared to 74%
in the United States and 26% in other countries in fiscal 1993. With the
exception of the Company's U.K. installation subsidiary, most of the Company's
overseas contracts are denominated in United States dollars and the Company is
not exposed to significant currency restrictions or foreign exchange risks. See
Notes 2 and 13 of the Notes to Consolidated Financial Statements.
Due to the large size of some of the Company's lining projects, certain
customers may account for 10% or more of the Company's net sales for any year.
During fiscal 1995 and 1993, no single customer accounted for 10% or more of the
Company's net sales. During fiscal 1994, net sales by the Company to one
customer accounted for approximately 10% of the Company's net sales. The Company
believes that the loss of any one customer would not have a material adverse
effect on the Company's financial position or results of operations.
Product Liability and Insurance
Although the Company is not exposed to the type of potential liability that
might arise from being in the business of handling, transporting or storing
hazardous wastes or materials, the Company could be susceptible to liability for
environmental damage or personal injury resulting from defects in the Company's
products or negligence by Company employees in the installation of its lining
systems. Such liability could be substantial because of the potential that
hazardous or other waste materials might leak out of their containment system
into the environment. The Company maintains product liability insurance, which
includes pollution coverage, in amounts which it believes to be prudent.
However, there is no assurance that this coverage will remain available to the
Company. The Company has experienced no material losses from defects in products
and installations. However, the Company's claims experience to date may not be a
meaningful measure of its potential exposure for product liability.
Backlog
The backlog of unfilled orders at March 31, 1995 was $37.5 million compared
with $40.9 million at March 31, 1994. The decline in backlog was the result of
lower incoming orders in the fourth quarter as the Company raised prices to
offset increased raw material costs. It is anticipated that, subject to weather
and other construction-related delays, the majority of the value of construction
contracts and customer purchase orders included in backlog at March 31, 1995
will be completed or filled prior to December 31, 1995. Contracts and
commitments for products and services are occasionally varied, modified or
canceled by mutual consent.
Seasonality and Other Business Conditions
The Company's operations are subject to seasonal fluctuation, with the
greatest volume of product deliveries and installations typically occurring
during the summer and fall. In addition, scheduled deliveries
8
<PAGE> 11
are often subject to delay at the customers' request to correspond with
customers' annual budgetary and permitting cycles. The Company has sought to
lessen such fluctuations through a variety of customer incentive programs
intended to encourage product deliveries during the slower seasons. See
Supplementary Data.
Competition
The Company believes that, although there are approximately 30 companies
engaged in the production of synthetic liners worldwide, five HDPE manufacturers
and eight alternative FML manufacturers compete directly with the Company in the
United States, and approximately fourteen HDPE manufacturers and six alternative
FML manufacturers compete directly with the Company internationally. The
principal competitive factors within the synthetic liner market are performance
of the lining system, installation capability and price. The Company believes
that it has been able to maintain its position within the synthetic lining
market because of the performance advantages of the Company's lining systems
over other types of liners available, the convenience to the customer of having
the Company take sole responsibility for the manufacture, installation and
testing of its lining systems and by being price competitive. Although the
Company is a leading supplier of synthetic lining systems, certain of the
Company's existing competitors are subsidiaries of larger companies that have
greater financial resources than the Company. Furthermore, the possibility
exists that companies with more significant resources than the Company could
enter the synthetic lining market.
Employees
As of March 31, 1995, the Company had 534 employees, of whom 128 were
employed in manufacturing, 274 in installation, and 132 were executive,
administrative, marketing and accounting personnel. During peak construction
periods in the summer and fall months, the Company's workforce increases. During
the winter months, the Company's workforce is maintained at levels somewhat
below the peak staffing levels experienced during the summer and fall months.
The Company's full-time employees are not unionized and the Company has never
experienced a strike or walkout. The Company hires union laborers on a temporary
basis when required in connection with a particular installation project. The
Company believes its employee relations are satisfactory.
Patents and Proprietary Information
The Company has been awarded patents for the "Gundline(R) HDW",
"Gundseal(R)" and "Gundline(R) HDC" product lines, for a leak detection system
for pipe boot construction and for its extrusion welder. The Company's
manufacturing, welding and testing processes also involve proprietary
information and know-how. See "Products and Services."
ITEM 2. PROPERTIES.
The Company's principal offices and manufacturing facilities are situated
on a 21.5-acre tract of Company-owned land located in an industrial park in
north Houston. The manufacturing plant is a 67,000 square foot building of metal
skin over steel frame construction which contains seven continuous flow liner
extrusion lines. The Company's manufacturing facility also houses three
continuous flow drainage net extruders and a small capacity research extruder.
The Company also maintains and operates a compounding facility. This 6,700
square foot facility, also of metal construction, enables the Company to produce
a blended pellet material of proprietary formulation for direct use as a liner
material. Production of this compound in-house has reduced production costs,
increased quality and increased production capacity.
Fabrication services and equipment are housed in a 12,000 square foot
facility located on premises.
The Company has 31,400 square feet of office space in two buildings,
housing executive, administrative, marketing and accounting personnel.
The Company also has a manufacturing facility located in Spearfish, South
Dakota, that manufactures the Company's composite liner, Gundseal(R). This
16,000 square foot facility contains one production line.
9
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
For information concerning various legal proceedings involving the Company,
see Note 16 of the Notes to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The common stock of the Company trades on the American Stock Exchange under
the symbol GUN. The following table shows the range of high and low closing
prices for the common stock for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1995 1994
-------------- --------------
HIGH LOW HIGH LOW
----- ---- ----- ----
<S> <C> <C> <C> <C>
First Quarter...................................... $6 7/8 $5 5/8 $ 8 $6 3/8
Second Quarter..................................... 6 3/8 4 5/8 11 1/2 6 1/2
Third Quarter...................................... 6 1/8 4 7/8 11 7/8 6 3/4
Fourth Quarter..................................... 5 7/8 5 8 3/8 6 1/2
</TABLE>
The approximate number of record holders of the Company's common stock at
May 11, 1995, was 650. Management estimates that the aggregate number of
beneficial holders exceeds 7,000.
ITEM 6. SELECTED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $133,124 $ 119,246 $ 113,845 $ 132,664 $ 129,111
Gross profit................ 22,852 26,145 21,359 35,612 27,229
Operating income............ 7,010 10,542 3,985 18,410 13,829
Interest expense, net....... 2,219 2,034 2,195 2,556 3,520
Income before income
taxes.................... 3,240 7,753 506 14,403 9,358
Net income (loss)........... 1,397 4,943 (88) 9,374 6,188
Earnings (loss) per common
share.................... 0.14 0.48 (0.01) 0.89 0.65
BALANCE SHEET DATA:
Working capital............. $ 45,662 $ 41,436 $ 38,263 $ 44,897 $ 31,122
Total assets................ 124,130 113,256 108,223 117,693 104,021
Total long-term debt........ 26,383 25,000 25,000 28,981 37,499
Stockholders' equity........ 72,386 71,003 67,448 70,125 46,152
</TABLE>
The Company's historical financial data for each of the four fiscal years
ended March 31, 1994 has been restated to reflect a change in the Company's
method of determining percentage of completion for installation contracts from
the units-installed method to the cost-to-cost method. See Note 2 of the Notes
to the Consolidated Financial Statements.
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
The following table sets forth certain items included in Selected Financial
Data, as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................................. 100.0% 100.0% 100.0%
Gross profit.............................................. 17.2 21.9 18.8
Operating income.......................................... 5.3 8.8 3.5
Interest expense, net..................................... 1.7 1.7 1.9
Income before income taxes................................ 2.4 6.5 .4
Net income (loss)......................................... 1.0 4.1 (.1)
</TABLE>
Year Ended March 31, 1995 Versus Year Ended March 31, 1994
The Company's net sales increased $13,878,000 or 12% in fiscal 1995
compared with fiscal 1994 as a result of overall price increases of 8% and unit
volume increases of 4%. Product pricing increased 10% domestically and 1%
internationally, while unit volume was up 6% and 1%, respectively. During fiscal
1995, over 42% of the Company's products were sold through installation
contracts versus 36% in the prior year.
Gross profit decreased $3,293,000 or 13% from fiscal 1994 to fiscal 1995.
As a percentage of sales, the margin decreased to 17% from 22%. Raw material
costs increased substantially during fiscal 1995 and reduced the margins on a
number of installation contracts that were awarded at fixed prices early in the
year. In addition, cost overruns and contract settlements on certain
installation contracts reduced the Company's profitability.
Selling, general and administrative expenses increased $239,000 or 2% from
year to year. As a percentage of sales, these expenses declined from 13% to 12%.
The increase in S, G & A expenses is the result of the addition of Gundle
Taggart, the Company's U.K. sales and installation subsidiary. Excluding Gundle
Taggart, expenses were down approximately $500,000 due primarily to decreased
sales and marketing expense.
Net interest expense increased $185,000 or 9% from fiscal 1994 to fiscal
1995 due to the addition of $1,383,000 of debt in conjunction with the purchase
of P.G. Technology, Inc. and increased investment in working capital,
particularly inventory caused by higher raw material costs, and the increased
level of sales.
The $850,000 of merger expenses relate to the proposed merger of the
Company with SLT Environmental, Inc. (SLT). See Item 1. Business -- Recent
Developments.
The Company's provision for income taxes was $1,843,000 and $2,810,000 for
fiscal 1995 and 1994, respectively. The tax provisions in both years were
provided at the statutory rates adjusted for certain permanent differences. The
effective tax rate of 57% in fiscal 1995 resulted from the increase in the
disallowance percentage from 20% to 50% for meals and entertainment expenses and
the current treatment of the $850,000 of merger expenses as nondeductible.
Year Ended March 31, 1994 Versus Year Ended March 31, 1993
The Company's net sales increased $5,401,000 or 5% in fiscal 1994 as
compared with fiscal 1993 due to increased unit sales volume partially offset by
decreased selling prices. Demand for the Company's products and services grew
significantly in fiscal 1994. Unit sales volume increased approximately 6%
domestically and 39% internationally. Pricing for the Company's products and
services fell sharply during fiscal 1994 in both the domestic and international
markets. Domestic pricing was down 9% while international pricing decreased over
14%. The decrease in pricing was driven by increased competitive manufacturing
capacity in the industry and reduced raw material prices in fiscal 1994.
11
<PAGE> 14
Gross profit increased $4,786,000 or 22% from year to year as a result of
increased sales volume and improved margins. Gross profit as a percentage of
sales increased to 22% from 19% last year primarily due to significant
productivity improvements in manufacturing and installation, increased plant
capacity utilization and lower raw material costs which more than offset the
decline in prices in fiscal 1994.
Selling, general and administrative expenses decreased $1,771,000 or 10%.
As a percentage of sales S, G & A expenses decreased from 15% to 13%. This
decrease was primarily due to the workforce reduction that took place in the
fourth quarter of fiscal 1993.
Net interest expense of $2,034,000 in fiscal 1994 represents a reduction of
$161,000 from the prior year. This decrease was principally related to the
retirement of $4,059,000 of 12 7/8% senior subordinated notes on July 1, 1992.
Other expenses decreased $529,000 from fiscal 1993 primarily due to more
favorable operating results in fiscal 1994 of the Company's 50% owned
partnership (see Note 18 of the Notes to Consolidated Financial Statements).
The Company's provision for income taxes was $2,810,000 and $594,000 for
fiscal 1994 and 1993, respectively. The tax provisions in both years were
provided at the statutory rates adjusted for certain permanent differences. In
fiscal 1993, the Texas franchise tax was revised, effective for years ending
December 31, 1991 and after, to include an income tax component that resulted in
a charge to income taxes of $400,000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had working capital of $45,662,000, of which
$13,227,000 was cash and cash equivalents. The Company's cash, inventory and
receivable balances fluctuate from quarter to quarter due to the seasonality of
sales. The Company's capital structure consisted of $26,383,000 in total
long-term debt and $72,386,000 in stockholders' equity at March 31, 1995.
The Company has a $20,000,000 revolving line of credit (the "Revolver").
Under the terms of the agreement, the Revolver is unsecured and bears interest
at the Company's option, at the bank's prime rate or the reserve adjusted LIBOR
plus an applicable margin based on the ratio of funded debt to total
capitalization, and matures on March 17, 1997. At March 31, 1995 and May 3,
1994, there was no balance outstanding on the Revolver. However, letters of
credit issued under this facility totaled $2,750,000, thereby reducing the March
31, 1995 balance available under this facility to $17,250,000 (see Note 8 of the
Notes to Consolidated Financial Statements). The letters of credit issued under
this facility primarily secure performance of installation contracts and
self-insurance programs.
On March 28, 1995 the Company signed a definitive agreement to merge with
SLT. Under the terms of the agreement, SLT will merge with the Company in
exchange for 7 million shares of the Company's common stock. Based on the $5 3/8
per share closing price of the Company's stock on March 28, 1995 and SLT's March
31, 1995 debt of $36,500,000, the value of the proposed acquisition is
approximately $74,000,000. The stockholder of SLT, which is a privately owned
company, will own approximately 41 percent of the outstanding shares of the new
entity. See Note 17 of the Notes to Consolidated Financial Statements.
In connection with the merger, the Company expects to replace its existing
$20,000,000 revolver, with a $35,000,000 revolving and term credit facility to
be provided by a syndicate of commercial banks (the "New Credit Facility") and
to issue an additional $25,000,000 of senior notes (the "New Notes"), thus
increasing the Company's credit availability to $60,000,000 from the present
$20,000,000. Upon consummation of the merger, the Company expects to issue the
New Notes and make borrowings under the New Credit Facility in an amount
sufficient to retire all SLT's outstanding indebtedness, which aggregated
approximately $36,500,000 at March 31, 1995.
In general, the New Credit Facility and the New Notes will contain
restrictions with respect to the incurrence of additional indebtedness, the
payment of cash dividends or similar restricted payments, the ability of the
Company to consolidate or merge into another corporation or transfer or sell
assets, unless certain
12
<PAGE> 15
criteria are met. The New Credit Facility and the New Notes will also require
the maintenance of certain financial ratios and a specified level of
consolidated net worth.
The Company believes that its cash balance, cash generated by operations
and the balance available under the Revolver are adequate to meet these and any
other foreseeable cash requirements during calendar 1995.
Pricing for the Company's products and services are principally driven by
worldwide manufacturing capacity in the industry and raw material pricing. In
fiscal 1995, worldwide manufacturing capacity increased significantly as two of
the Company's primary competitors added capacity along with three new
competitors entering the market. The Company's primary raw material occasionally
is in short supply and is subject to substantial price fluctuation in response
to market demand. Any additional increase in worldwide manufacturing capacity,
interruption in raw material supply or abrupt raw material price increase could
have an adverse effect upon the Company's operations. Inflation has not had a
significant impact on the Company's operations.
13
<PAGE> 16
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gundle Environmental Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Gundle
Environmental Systems, Inc. (a Delaware corporation -- the "Company") and
subsidiaries as of March 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for the three years in
the period ended March 31, 1995. 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 financial position of Gundle Environmental
Systems, Inc. and subsidiaries as of March 31, 1995 and 1994, and the results of
their operations and their cash flows for the three years in the period ended
March 31, 1995 in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for revenue recognition for
installation contracts.
ARTHUR ANDERSEN LLP
Houston, Texas
May 3, 1995
14
<PAGE> 17
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
(AS
RESTATED)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 13,227 $ 13,264
Accounts receivable:
Trade............................................................. 29,524 25,739
Other............................................................. 277 463
Costs and estimated earnings in excess of billings on contracts in
progress.......................................................... 3,664 2,854
Inventory............................................................ 17,887 10,868
Deferred income taxes................................................ 2,375 1,123
Prepaid expenses and other........................................... 443 1,211
-------- --------
Total current assets......................................... 67,397 55,522
Property, plant and equipment, net..................................... 32,744 31,864
Excess of purchase price over fair value of net assets acquired, net... 23,787 22,300
Other assets........................................................... 202 3,570
-------- --------
$124,130 $113,256
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 21,356 $ 13,746
Billings in excess of costs and estimated earnings on contracts in
progress.......................................................... 91 229
Current portion of long-term debt.................................... 96 --
Income taxes payable................................................. 192 111
-------- --------
Total current liabilities.................................... 21,735 14,086
Deferred income taxes.................................................. 3,722 3,167
Long-term debt......................................................... 26,287 25,000
Stockholders' equity:
Preferred Stock, no par value, 1,000 shares authorized, no shares
issued or outstanding............................................. -- --
Common Stock, $.01 par value, 15,000,000 shares authorized,
10,691,926 and 10,684,568 shares issued and outstanding........... 107 107
Additional paid-in capital........................................... 40,802 40,765
Retained earnings.................................................... 35,795 34,398
Cumulative translation adjustment.................................... (51) --
-------- --------
76,653 75,270
Treasury Stock at cost, 500,000 shares............................... (4,267) (4,267)
-------- --------
Total stockholders' equity........................................ 72,386 71,003
-------- --------
$124,130 $113,256
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1995 1994 1993
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Net sales............................................... $133,124 $ 119,246 $ 113,845
Cost of sales........................................... 110,272 93,101 92,486
-------- ------------- -------------
Gross profit............................................ 22,852 26,145 21,359
Selling, general and administrative expenses............ 15,842 15,603 17,374
-------- ------------- -------------
Operating income........................................ 7,010 10,542 3,985
Other expenses:
Interest expense, net................................. 2,219 2,034 2,195
Amortization of goodwill.............................. 700 688 688
Merger expenses....................................... 850 -- --
Other, net............................................ 1 67 596
-------- ------------- -------------
Income before income taxes.............................. 3,240 7,753 506
Provision for income taxes.............................. 1,843 2,810 594
-------- ------------- -------------
Net income (loss)....................................... $ 1,397 $ 4,943 $ (88)
======== ========= =========
Earnings(loss) per common share......................... $ .14 $ .48 $ (.01)
======== ========= =========
Weighted average common shares outstanding.............. 10,186 10,260 10,455
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
----------------- ----------------- PAID-IN RETAINED TRANSLATION -----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES AMOUNT TOTAL
------ ------- ------- ------- ----------- --------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1992
(as
restated)... -- -- 10,639 $ 106 $40,476 $29,543 -- -- -- $70,125
Exercise of
stock
options..... -- -- 4 -- 25 -- -- -- -- 25
Purchases
under the
Employee
Stock
Purchase
Plan........ -- -- 6 -- 44 -- -- -- -- 44
Purchases of
Treasury
Stock....... -- -- -- -- -- -- -- 280 (2,658 ) (2,658)
Net (loss).... -- -- -- -- -- (88) -- -- -- (88)
------ ------- ------- ------- ----------- --------- ----- ------- ------- -------
Balance at
March 31, 1993
(as
restated)... -- -- 10,649 106 40,545 29,455 -- 280 (2,658 ) 67,448
Exercise of
stock
options..... -- -- 27 1 163 -- -- -- -- 164
Purchases
under the
Employee
Stock
Purchase
Plan........ -- -- 8 -- 57 -- -- -- -- 57
Purchases of
Treasury
Stock....... -- -- -- -- -- -- -- 220 (1,609 ) (1,609)
Net income.... -- -- -- -- -- 4,943 -- -- -- 4,943
------ ------- ------- ------- ----------- --------- ----- ------- ------- -------
Balance at
March 31, 1994
(as
restated)... -- -- 10,684 107 40,765 34,398 -- 500 (4,267 ) 71,003
Exercise of
stock
options..... -- -- 1 -- 5 -- -- -- -- 5
Purchases
under the
Employee
Stock
Purchase
Plan........ -- -- 7 -- 32 -- -- -- -- 32
Cumulative
translation
adjustment.. -- -- -- -- -- -- (51) -- -- (51)
Net income.... -- -- -- -- -- 1,397 -- -- -- 1,397
------ ------- ------- ------- ----------- --------- ----- ------- ------- -------
Balance at
March 31,
1995........ -- -- 10,692 $ 107 $40,802 $35,795 $(51) 500 $(4,267) $72,386
====== ======= ======= ======= ========= ======= ========== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 20
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1995 1994 1993
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 1,397 $ 4,943 $ (88)
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................ 4,991 5,012 4,655
Amortization of goodwill............................ 700 688 688
Amortization of debt issuance costs and discount.... 32 32 148
Deferred income taxes............................... (697) 565 (805)
Increase (decrease) in cash due to changes in assets
and liabilities:
Accounts receivable, net.......................... (1,536) (9,435) 10,136
Costs and estimated earnings in excess of billings
on contracts in progress....................... (810) (95) 2,451
Inventory......................................... (6,452) (2,120) 1,987
Prepaid expenses and other, net................... 895 884 (1,574)
Accounts payable and accrued liabilities.......... 6,844 1,176 (3,189)
Billings in excess of costs and estimated earnings
on contracts in progress....................... (138) 55 117
Income taxes payable.............................. 81 (164) 275
------- ------------- -------------
Net cash provided by operating activities...... 5,307 1,541 14,801
------- ------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment, net........ (3,559) (6,347) (5,387)
Payments for acquisition of a business, net of cash
acquired............................................ (880) -- --
Advances to affiliates and other, net.................. (891) (145) 117
------- ------------- -------------
Net cash used in investing activities.......... (5,330) (6,492) (5,270)
------- ------------- -------------
Cash flows from financing activities:
Retirements of long-term debt.......................... -- -- (4,059)
Proceeds from the exercise of stock options and
purchases under the employee stock purchase plan.... 37 220 69
Repurchase of common stock............................. -- (1,609) (2,658)
------- ------------- -------------
Net cash provided by (used in) financing
activities................................... 37 (1,389) (6,648)
------- ------------- -------------
Effect of exchange rate changes on cash.................. (51) -- --
------- ------------- -------------
Net increase (decrease) in cash and cash equivalents..... (37) (6,340) 2,883
Cash and cash equivalents at beginning of year........... 13,264 19,604 16,721
------- ------------- -------------
Cash and cash equivalents at end of year................. $13,227 $13,264 $19,604
======= ========= =========
Cash paid for interest................................... $ 2,821 $ 2,792 $ 2,921
======= ========= =========
Cash paid for income taxes............................... $ 1,875 $ 1,499 $ 1,770
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 21
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION --
Organization --
Gundle Environmental Systems, Inc. (the "Company"), a Delaware corporation,
was incorporated in August 1986, and through its wholly owned subsidiaries is
primarily engaged in the manufacture, sale and installation of polyethylene
lining systems.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Fiscal year --
The Company's fiscal year for financial reporting purposes ends on March 31
of the year stated and begins on April 1 of the previous year. For example,
"Fiscal 1995" commenced on April 1, 1994 and ended March 31, 1995. For income
tax purposes, the Company is on a calendar year basis. On April 17, 1995, the
Company elected to change its year end to December 31, effective December 31,
1995.
Consolidation --
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Investments in partially owned
entities in which ownership ranges from 20 to 50 percent are accounted for using
the equity method. All material intercompany balances and transactions have been
eliminated.
Cash Equivalents --
The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents.
Inventory --
Inventory is stated at the lower of cost or market. Cost, which includes
material, labor and overhead, is determined by the weighted average cost method.
Property, plant and equipment --
Costs of additions and major improvements are capitalized, whereas
maintenance and repairs which do not improve or extend the life of the asset are
charged to expense as incurred. When items are retired or otherwise disposed of,
income is charged or credited for the difference between net book value and
proceeds realized thereon. Interest costs incurred in construction of assets are
capitalized and depreciated over the useful life of the asset. Depreciation is
computed using the straight-line method, based on estimated useful lives ranging
from three to 15 years. Total repairs and maintenance expense during fiscal
1995, 1994 and 1993 was $1,732,000, $1,734,000 and $1,620,000, respectively.
Excess of purchase price over fair value of net assets acquired --
The excess of the aggregate price paid by the Company in the acquisition of
businesses, accounted for as a purchase, over the fair market value of the net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. As of March 31, 1995 and 1994, accumulated amortization was $5,917,000
and $5,217,000, respectively.
Revenue and cost recognition --
The Company recognizes revenue upon shipment of product to the customer
except when work is being performed under an installation contract. Revenues
from installation contracts are recognized on the
19
<PAGE> 22
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract.
Cost of sales includes all direct material and labor costs, and indirect
costs such as indirect labor, depreciation, insurance, supplies, tools and
repairs.
Selling, general and administrative costs are charged to expense as
incurred.
Provisions for the total estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions, estimated profitability and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
Deferred costs --
Debt issuance costs are amortized using the effective interest rate method
over the period the related debt is anticipated to be outstanding.
Income taxes --
Deferred income taxes are provided for timing differences in the
recognition of expenses for income tax and financial reporting purposes. These
differences result primarily from the accelerated depreciation of property,
plant and equipment and accrued expenses not currently deductible for tax
purposes.
Foreign currency translation --
Results of operations for foreign subsidiaries with functional currencies
other than the U.S. dollar are translated using average exchange rates during
the year. Assets and liabilities of these foreign subsidiaries are translated
using the exchange rates in effect at the balance sheet date and the resulting
translation adjustments are recognized as a separate component of stockholders'
equity. Gains and losses arising from foreign currency transactions are
recognized in income as incurred.
Earnings per common share --
Earnings per common share is based on the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
(outstanding options to purchase shares of common stock) are computed using the
treasury stock method and were excluded from the earnings per share calculations
as dilution was less than 3%.
Change in accounting method --
Prior to fiscal 1995, the Company recognized revenues from installation
contracts on the percentage of completion method, measured by the percentage of
lining material deployed and installed to date to the total estimated lining
material to be installed for each contract (units-installed method). During
fiscal 1995, the Company changed its method of determining percentage of
completion from the units-installed method to the cost-to-cost method. Under the
cost-to-cost method, revenues are recognized based on the percentage of costs
incurred to total estimated costs for each contract. The Company believes the
change to the cost-to-cost
20
<PAGE> 23
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method results in a better measurement of the overall economic performance
through its installation contracts. The impact of this change for the years
ended March 31, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ----- ------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss)................................... $ (6) $ (99) $ (639)
==== ===== ======
Earnings (loss) per common share.................... $ -- $(.01) $ (.06)
==== ===== ======
</TABLE>
Reclassifications --
The accompanying consolidated financial statements for fiscal 1994 and 1993
contain certain reclassifications to conform with the presentation used in
fiscal 1995.
(3) TRADE RECEIVABLES --
Trade receivables consisted of the following at March 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Direct sales............................................. $18,328 $15,123
Contracts:
Completed.............................................. 10,103 5,450
In progress............................................ 2,293 4,728
Retainage.............................................. 1,168 1,294
------- -------
31,892 26,595
Allowance for doubtful accounts.......................... (2,368) (856)
------- -------
$29,524 $25,739
======= =======
</TABLE>
(4) ACCOUNTING FOR INSTALLATION CONTRACTS --
The following summarizes installation contracts in progress at March 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Costs incurred on contracts in progress.................. $20,069 $24,998
Estimated earnings, net of losses........................ 4,925 5,807
------- -------
24,994 30,805
Less -- billings to date............................... 21,421 28,180
------- -------
$ 3,573 $ 2,625
======= =======
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
contracts in progress............................... $ 3,664 $ 2,854
Billings in excess of costs and estimated earnings on
contracts in progress............................... (91) (229)
------- -------
$ 3,573 $ 2,625
======= =======
</TABLE>
21
<PAGE> 24
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVENTORY --
Inventory consisted of the following at March 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies............................... $ 5,636 $ 4,510
Finished goods........................................... 12,251 6,358
------- -------
$17,887 $10,868
======= =======
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment consisted of the following at March 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 1,691 $ 1,630
Buildings and improvements............................. 10,368 9,041
Machinery and equipment................................ 47,974 42,601
Furniture and fixtures................................. 536 527
-------- --------
60,569 53,799
Less -- accumulated depreciation....................... (27,825) (21,935)
-------- --------
$ 32,744 $ 31,864
======== ========
</TABLE>
(7) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
Accounts payable and accrued liabilities consisted of the following at
March 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trade accounts payable................................. $ 12,524 $ 7,267
Self-insurance reserves................................ 3,266 2,633
Taxes, other than income............................... 878 1,302
Other accrued liabilities.............................. 4,688 2,544
-------- --------
$ 21,356 $ 13,746
======== ========
</TABLE>
(8) LONG-TERM DEBT --
Long-term debt consisted of the following at March 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit payable to NationsBank of Texas,
interest due quarterly................................. $ -- $ --
Senior Notes due June 15, 2000, with required annual
principal payments of $5,000,000 beginning June 15,
1996, interest payable quarterly at 11.17%............. 25,000 25,000
8% Promissory Note due December 31, 2004, with required
annual principal and interest payments of $206,000
beginning December 31, 1995............................ 1,383 --
------- -------
26,383 25,000
Less -- current maturities............................... 96 --
------- -------
$26,287 $25,000
======= =======
</TABLE>
22
<PAGE> 25
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a $20,000,000 revolving line of credit agreement which
matures on March 17, 1997. Interest on outstanding borrowings is charged, at the
Company's option, at the bank's prime rate or the reserve adjusted LIBOR plus an
applicable margin based on the ratio of funded debt to total capitalization. An
annual commitment fee of 1/4% is payable on any unused portion of the facility.
Under the terms of the revolving line of credit agreement, the Company is
subject to certain borrowing base requirements and may not pledge its assets as
collateral for any borrowings except as specified in the agreement. As of May 3,
1995, there was no outstanding balance under this line of credit. However,
letters of credit issued under this facility totaled $2,750,000, thereby
reducing the balance available to $17,250,000. The letters of credit primarily
secure performance of installation contracts and self-insurance programs.
The Senior Notes, which are unsecured, require quarterly interest payments
at a rate of 11.17%, which began September 15, 1990, and annual principal
payments of $5,000,000 beginning June 15, 1996. The terms of the Senior Notes
place various restrictions on the Company's ability to pay dividends or make
certain other payments, incur additional debt, consolidate or merge into another
corporation or sell assets unless certain other criteria are met. The Senior
Notes also require the Company to maintain certain financial ratios and a
specified level of consolidated net worth.
On July 1, 1992, the Company retired the remaining $4,059,000 outstanding
balance of the 12 7/8% Senior Subordinated Notes ("the Notes"). The Notes were
unsecured and subordinated to effectively all indebtedness of the Company. The
Notes by their terms were redeemable at the Company's option beginning July 1,
1992 at a premium of 3.68% of the principal amount of the Notes. On May 21,
1991, the Company repurchased $8,241,000 of the Notes. The gain or loss on
retirement of this debt was not material to the Company's financial position or
results of operations.
The 8% Promissory Note, which is unsecured, requires ten annual interest
and principal payments of $206,000 beginning December 31, 1995 and ending
December 31, 2004.
Summarized below are the maturities of long-term debt of the Company during
the next five years and thereafter (in thousands).
<TABLE>
<CAPTION>
YEAR
ENDING
MARCH 31,
- ---------
<S> <C>
1996......................................................... $ 96
1997......................................................... 5,103
1998......................................................... 5,111
1999......................................................... 5,120
2000......................................................... 5,130
Thereafter................................................... 5,823
-------
$26,383
=======
</TABLE>
(9) STOCKHOLDERS' EQUITY --
On June 1, 1992, the Company's board of directors adopted a stock
repurchase plan under which the company was authorized to repurchase up to
500,000 shares of its outstanding common stock in open market transactions
depending on market conditions. As of March 31, 1995 and 1994, stockholders'
equity included 500,000 shares repurchased under the plan at an aggregate cost
of $4,267,000.
The Company's board of directors adopted a qualified employee stock
purchase plan on October 16, 1991, effective January 1, 1992. The plan
authorizes the issuance of up to 100,000 shares of common stock for purchase by
participating employees at a 15% discount from the market price. As of March 31,
1995 and 1994, 20,217 and 13,797 shares, respectively, had been issued under
this plan.
23
<PAGE> 26
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1986, the Company's board of directors adopted an employee stock option
plan (the "1986 Plan"), which permits the grant of up to 850,000 stock options.
The plan permits the grant of both "incentive" and "non-qualified" stock options
to employees of the Company. Each option is exercisable for a period of up to
ten years after it is granted. Unless the terms of the option specify otherwise,
options may be exercised in respect of 33 1/3%, 66 2/3% and 100% of the shares
covered, upon the third, fourth and fifth anniversaries of the date of grant.
The option price cannot be less than the fair market value of the shares on the
date the option is granted.
During 1988, the Company's board of directors adopted a stock option plan
(the "1988 Plan"), which permits the grant of up to 75,000 "non-qualified" stock
options to non-employee directors. The terms of this plan are substantially the
same as those of the employee stock option plan.
The stock option activity under each plan is set forth below:
<TABLE>
<CAPTION>
1986 PLAN 1988 PLAN
-------------------------------- --------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
UNDER OPTION PER SHARE UNDER OPTION PER SHARE
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1992... 621,290 $4.27 to $18.00 40,000 $8.25 to $16.17
Granted....................... 12,500 $7.63 to $15.00 5,000 $9.13
Exercised..................... (3,688) $4.27 to $ 8.13 -- --
Cancelled..................... (93,298) $8.25 to $18.00 -- --
------------ --------------- ------------ ---------------
Outstanding at March 31, 1993... 536,804 $4.27 to $18.00 45,000 $8.25 to $16.17
Granted....................... 98,000 $7.38 to $11.13 -- --
Exercised..................... (27,469) $4.27 to $ 8.25 -- --
Cancelled..................... (140,073) $7.63 to $18.00 -- --
------------ --------------- ------------ ---------------
Outstanding at March 31, 1994... 467,262 $4.27 to $16.92 45,000 $8.25 to $16.17
Granted....................... 70,500 $5.25 5,000 $6.25
Exercised..................... (938) $4.27 -- --
Cancelled..................... (99,879) $7.63 to $15.63 -- --
------------ --------------- ------------ ---------------
Outstanding at March 31, 1995... 436,945 $4.27 to $16.92 50,000 $6.25 to $16.17
========== ============= ========== =============
Options exercisable............. 222,899 $4.27 to $16.92 33,332 $8.25 to $16.17
========== ============= ========== =============
Options available for future
grants........................ 303,742 25,000
========== ==========
</TABLE>
In 1993, pursuant to an employment agreement with an officer, the Company's
board of directors granted the officer a non-qualified stock option to purchase
100,000 shares of the Company's common stock. The option price is equal to the
fair market value of the shares on the date of the grant. The option is
exercisable for a period of up to ten years after the grant date and may be
exercised in respect of 33 1/3%, 66 2/3% and 100% upon the first, second and
third anniversaries of the date of the grant. At March 31, 1995, 33,333 shares
were exercisable under this agreement.
(10) INCOME TAXES --
The provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.......................................... $2,540 $2,245 $1,399
Deferred......................................... (697) 565 (805)
------ ------ ------
$1,843 $2,810 $ 594
====== ====== ======
</TABLE>
24
<PAGE> 27
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision for income taxes and income taxes
computed by applying the statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision at statutory rate.................. $1,102 $2,636 $ 172
Add (deduct):
Merger costs................................... 289 -- --
Amortization of goodwill....................... 234 234 234
Meals and entertainment disallowance........... 285 108 142
Nontaxable Foreign Sales Corporation........... (157) (326) (250)
State income taxes............................. 101 249 400
Other.......................................... (11) (91) (104)
------ ------ ------
$1,843 $2,810 $ 594
====== ====== ======
</TABLE>
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities were as follows at March 31:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued expenses for financial reporting purposes........ $2,375 $1,123
====== ======
Deferred tax liabilities:
Excess of tax depreciation over book depreciation........ $3,722 $2,932
Other.................................................... -- 235
------ ------
Total deferred tax liabilities........................ $3,722 $3,167
====== ======
</TABLE>
In the opinion of management, no valuation allowance on the deferred tax
assets is necessary at March 31, 1995 and 1994.
(11) RELATED-PARTY TRANSACTIONS --
During the fiscal years ended March 31, 1995, 1994 and 1993, the Company
had no material related party transactions other than those discussed in Note
18.
(12) EMPLOYEE BENEFIT PLANS --
The Company has a defined contribution employee benefit plan under which
substantially all employees are eligible to participate. The Company contributed
$311,000, $298,000 and $320,000 to the plan during the years ended March 31,
1995, 1994 and 1993, respectively. Under the terms of the plan, contributions to
the plan may be discontinued at any time.
The Company has a non-qualified bonus arrangement whereby a portion of
annual net income may be contributed to a bonus pool for allocation to all
eligible employees. Contributions under this plan are at the discretion of the
board of directors.
25
<PAGE> 28
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) INTERNATIONAL SALES --
The Company had export sales of $40,290,000, $35,276,000 and $30,013,000
during the years ended March 31, 1995, 1994 and 1993, respectively.
(14) SALES TO SIGNIFICANT CUSTOMERS --
During fiscal 1995 and 1993, no single customer accounted for 10% or
greater of total net sales. During fiscal 1994, one customer accounted for
approximately 10% of total net sales.
(15) RESEARCH AND DEVELOPMENT COSTS --
Research and development costs are charged to expense as incurred. The
amounts of research and development expenditures during the years ended March
31, 1995, 1994 and 1993 were $840,000, $951,000, and $1,066,000, respectively.
(16) COMMITMENTS AND CONTINGENCIES --
Product warranties and insurance coverage --
The Company's products are sold and installed with specified warranties as
to material quality and workmanship. These warranties may last for up to 20
years, but are generally limited to repair or replacement by the Company of the
defective liner or the dollar amount of the contract involved, amortized over a
period of years. The Company may also indemnify the site owner or general
contractor for other damages resulting from negligence of the Company's
employees. The Company is often required to post bid and performance bonds
covering the full amount of an installation contract.
Although the Company is not exposed to the type of potential liability that
might arise from being in the business of handling, transporting or storing
hazardous waste or materials, the Company could be susceptible to liability for
environmental damage or personal injury resulting from defects in the Company's
products or negligence by Company employees in the installation of its lining
systems. Such liability could be substantial because of the potential that
hazardous or other waste materials might leak out of their containment system
into the environment. The Company maintains product liability insurance, which
includes pollution coverage, in amounts which it believes to be prudent.
However, there is no assurance that this coverage will remain available to the
Company. While the Company's claims experience to date may not be a meaningful
measure of its potential exposure for product liability, the Company has
experienced no material losses from defects in products and installations.
Litigation and claims --
The Company is involved in litigation arising in the ordinary course of
business, which, in the opinion of management, will not have a material adverse
effect on the Company's financial position or results of operations.
Operating Leases --
The Company leases certain equipment through operating lease arrangements
of varying terms. Annual rental expense under the terms of non-cancellable
operating leases is less than 1% of consolidated revenues.
(17) MERGER WITH SLT ENVIRONMENTAL, INC. --
On March 28, 1995, the Company announced an agreement to merge with SLT
Environmental, Inc. (SLT). The agreement provides that, upon consummation of the
merger, stockholders of SLT will receive 7,000,000 shares of the Company's
common stock for all issued and outstanding shares of SLT
26
<PAGE> 29
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock. The merger is subject to shareholder and governmental approval. If
approved, the merger will be accounted for as a pooling of interests. SLT's year
end for financial reporting purposes is December 31. The supplemental pro forma
unaudited income statement information reported below reflects the combination
of the Company's results for years ending March 31, 1995, 1994 and 1993 with
that of SLT for the years ending December 31, 1994, 1993 and 1992, respectively
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(UNAUDITED)
Net sales.................................................. $223,937 $191,251 $185,443
======== ======== ========
Net income................................................. $ 5,999 $ 4,906 $ 1,010
======== ======== ========
Earnings per share......................................... $ .35 $ .28 $ .06
======== ======== ========
</TABLE>
Expenses associated with the merger of $850,000 have been reflected in the
Company's results of operations for the year ended March 31, 1995.
(18) ACQUISITION --
On December 16, 1994, the Company purchased 99.999% of its partner's 50%
interest in PG Technology Co. (PG Tech) for $1,883,000. The Company paid
$500,000 in cash and issued a note payable of $1,383,000. The note is payable
over ten years and bears interest at 8%. The acquisition was recorded using the
purchase method of accounting.
PG Tech manufactures and sells a composite liner product combining
polyethylene liner and bentonite clay. The manufacturing facility is located in
Spearfish, South Dakota.
27
<PAGE> 30
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
SUPPLEMENTARY DATA
Consolidated quarterly financial data (Unaudited) --
Unaudited quarterly information for fiscal 1995 and 1994 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1994
------------------------------------- -------------------------------------
QUARTER QUARTER
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $26,383 $46,755 $38,798 $21,188 $29,171 $38,378 $31,118 $20,579
Gross profit............ 5,584 9,037 6,114 2,117 7,145 9,255 5,876 3,869
Income (loss) before
income taxes.......... 874 4,311 1,099 (3,044) 2,924 4,342 1,540 (1,053)
Net income (loss)....... 554 2,675 673 (2,505) 1,894 2,717 991 (659)
Earnings (loss) per
common share.......... .05 .26 .07 (.25) .18 .26 .10 (.06)
</TABLE>
The above data should be read in conjunction with the consolidated
financial statements and notes thereto.
28
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To Gundle Environmental Systems, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Gundle Environmental Systems, Inc. and
subsidiaries (the Company) included in this Form 10-K, and have issued our
report thereon dated May 3, 1995. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in the index on page 31 for the Company are the responsibility
of the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
May 3, 1995
29
<PAGE> 32
SCHEDULE II
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
DESCRIPTION OF YEAR TO EXPENSE WRITEOFFS OF YEAR
- --------------------------------------------------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C>
March 31, 1993:
Allowance for doubtful accounts.................. $ 797 $1,170 $ 688 $ 1,279
======== ======== ======= ======
March 31, 1994:
Allowance for doubtful accounts.................. $1,279 $ 175 $ 598 $ 856
======== ======== ======= ======
March 31, 1995:
Allowance for doubtful accounts.................. $ 856 $2,429 $ 917 $ 2,368
======== ======== ======= ======
</TABLE>
30
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Part III (Items 10 through 13) is omitted since the Company expects to file
with the Securities and Exchange Commission within 120 days following March 31,
1995, definitive proxy materials pursuant to Regulation 14A under the Securities
Exchange Act of 1934 involving the annual election of directors and certain
other matters. If for any reason such a statement is not so filed, this Report
will be appropriately amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial statements (see financial statements at pages 14-27)
(a)(2) Supplementary data (see page 28)
(a)(3) Financial schedule (see pages 29-30)
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above are omitted since the information required to be
submitted has been included in the financial statements or the notes thereto, or
the schedules are not required.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------------------
<S> <C>
2-A -- Plan Agreement of Merger dated March 28, 1995 between the Company
and SLT Environmental, Inc. (Exhibit A to Registrant's Preliminary
Proxy Statement filed on May 4, 1995 is incorporated herein by
reference).
3-A -- Articles of Incorporation as amended (Exhibits 3.1, 3.2 and 3.3 to
Registrant's Registration Statement No. 33-9809 are incorporated
herein by reference).
3-B -- Bylaws (Exhibit 3.4 to Registrant's Registration Statement No.
33-9809 is incorporated herein by reference).
4-A -- Loan Agreement dated as of October 31, 1991, between Gundle
Environmental Systems, Inc. and NCNB Texas National Bank (Exhibit
4-I to Registrant's Form 10-K for the year ended December 31, 1991
is incorporated herein by reference).
4-B -- Amendment dated January 18, 1994 to Exhibit 4-A.
4-C -- Note Agreement dated as of June 15, 1990, between Gundle
Environmental Systems, Inc. and certain institutions covering the
$25,000,000 of 11.17% Senior Notes due June 15, 2000 (Exhibit 4-J to
the Registrant's Form 10-K for the year ended December 31, 1990 is
incorporated herein by reference).
4-D -- Amendment dated March 17, 1995 to Exhibit 4-A.
10-A -- Employment Agreement dated as of June 1, 1993 between Thomas L.
Caltrider and the Registrant.
10-B -- Registrant's stock option plan (Exhibit 10.11 to Registrant's
Registration Statement No. 33-9809 is incorporated herein by
reference).
10-E -- Registrant's 1988 Non-Qualified Stock Option Plan for Non-Employee
Directors, as amended to date.
11 -- Computation of per share earnings (see financial statements at page
20).
18-A -- Independent public accounts preferability letter regarding changes
in accounting method.
21 -- Subsidiaries.
27 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
(c) Exhibits (see Item (a)(3), above).
(d) Additional financial statements (see Items (a)(1) and (a)(2) above).
31
<PAGE> 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 THE 11TH DAY OF
MAY, 1995.
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
By THOMAS L. CALTRIDER
------------------------------------
Thomas L. Caltrider, President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED ON THE 11TH DAY OF MAY, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
THOMAS L. CALTRIDER Director and Principal
- --------------------------------------------- Executive Officer
THOMAS L. CALTRIDER
ROGER J. KLATT Principal Financial and
- --------------------------------------------- Accounting Officer
ROGER J. KLATT
STEVEN M. FRIEDMAN Director
- ---------------------------------------------
STEVEN M. FRIEDMAN
GEORGE J. MCNALLY Director
- ---------------------------------------------
GEORGE J. MCNALLY
WILLIAM P. O'CONNELL Director
- ---------------------------------------------
WILLIAM P. O'CONNELL
T. WILLIAM PORTER Director
- ---------------------------------------------
T. WILLIAM PORTER
HUGH L. RICE Director
- ---------------------------------------------
HUGH L. RICE
BRIAN D. YOUNG Director and Chairman of the
- --------------------------------------------- Board
BRIAN D. YOUNG
</TABLE>
32
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------------------
<S> <C>
4-D -- Amendment dated March 17, 1995 to Exhibit 4-A.
18-A -- Independent public accounts preferability letter regarding changes
in accounting method.
21 -- Subsidiaries.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 4-D
FIFTH AMENDMENT AND WAIVER
TO LOAN AGREEMENT
FIFTH AMENDMENT AND WAIVER, dated as of March 17, 1995 (this "Fifth
Agreement and Waiver"), to LOAN AGREEMENT, dated as of October 31, 1991 (as
heretofore amended or modified, the "Loan Agreement"), between GUNDLE
ENVIRONMENTAL SYSTEMS, INC., a Delaware corporation (the "Borrower"), and
NATIONSBANK OF TEXAS, N.A., formerly known as NCNB TEXAS NATIONAL BANK (the
"Bank").
W I T N E S S E T H :
WHEREAS, the Borrower has requested that the Bank waive certain provisions
of the Loan Agreement as herein provided, and the Bank has agreed to waive such
provisions, but only on the terms and subject to the conditions herein set
forth; and
WHEREAS, the Borrower has requested that the Bank amend the Loan Agreement
in the manner set forth below, and the Bank is willing to accede to the
requests of Borrower upon the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and for good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
agree as follows:
1. Definitions. Unless otherwise specifically defined herein, all defined
terms used herein shall have their respective meanings set forth in
Exhibit A to the Loan Agreement.
2. Waivers.
(a) Limited Waiver of Section 9.c) of the Loan Agreement. The Bank
hereby waives any default or Event of Default under Section 9.c)
of the Loan Agreement resulting solely from the occurrence on
August 31, 1993 of a "prohibited transaction" under Section 406
of ERISA between the Borrower and the Gundle Environmental
Systems, Inc. Employee 401(k) Plan and Trust.
(b) Limited Waiver of Section 10.3) of the Loan Agreement. The Bank
hereby waives any default or Event of Default under Section
10.e) of the Loan Agreement resulting solely from the sale by
the Borrower of fifty-one percent (51%) of the capital stock of
a wholly-owned Subsidiary on August 25, 1994 and consents to
such sale.
(c) Scope of Waivers. The scope of the waivers set forth herein is
expressly limited to the actions waived herein and does not
extend to any other or future breaches, violations, defaults, or
Events of Default under the Loan Agreement or any other
documents executed in connection therewith.
3. Amendments.
(a) Amendment of Section 5.c) of the Loan Agreement. Section 5.c) of
the Loan Agreement is hereby amended by deleting it in its
entirety and substituting in lieu thereof the following:
- --------------------------------------------------------------------------------
PAGE 1 OF 4
<PAGE> 2
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
"c) Extended Maturity Letters of Credit. Letters of Credit issued
may have terms that exceed the Maturity Date, but no such
Letter of Credit shall have an expiry date more than 365
days after the Maturity Date. Immediately before the
Maturity Date, upon the Bank's request, the Borrower will
provide cash collateral for any Letter of Credit with a
term exceeding the Maturity Date and will execute all
necessary documents such as the Bank's form Assignment of
Accounts to grant the Bank a security interest in such cash
collateral."
(b) Amendment of Section 10.k) of the Loan Agreement. Section 10.k)
of the Loan Agreement is hereby amended by deleting it in its
entirety and substituting in lieu thereof the following:
"k) Consolidated Net Worth. The Borrower will not permit its
Consolidated Net Worth to be less than $41,000,000 plus 25
percent of its Consolidated Net Income for the period from
and after September 30, 1994 to and including any date of
determination, computed on a cumulative basis for said
entire period, provided however, that if the Borrower's
Consolidated Net Income for any fiscal year is negative,
then the Borrower's Consolidated Net Income for such fiscal
year shall be deemed to equal zero for the purposes of this
paragraph."
(c) Amendment of Exhibit A to the Loan Agreement. Exhibit A to the
Loan Agreement is hereby amended by deleting in its entirety the
definition of "Maturity Date" and substituting in lieu thereof
the following definition:
" 'Maturity Date' shall mean March 17, 1997."
4. Representations and Warranties. In order to induce the Bank to execute
and deliver this Fifth Amendment and Waiver, the Borrower hereby
represents to the Bank that as of the date hereof, each of the
representations and warranties set forth in the Loan Agreement are
and shall be and remain true and correct (except that the
representation and warranty set forth in Section 8.h) shall be deemed
to refer to the financial statements of the Borrower dated December
31, 1994) and the Borrower is in full compliance with all of the
terms and conditions of the Loan Agreement, and neither an Event of
Default, as defined in the Loan Agreement, nor any event which with
the lapse of time or notice or both could become an Event of Default
has occurred and is continuing thereunder or shall result after
giving effect to this Fifth Agreement and Waiver.
5. Conditions of Effectiveness. This Fifth Amendment and Waiver shall
become effective on the date (the "Effective Date") when, and only
when the Bank shall have executed a counterpart of this Fifth
Amendment and Waiver and received each of the following in form and
substance satisfactory to it:
(a) counterparts of this Fifth Amendment and Waiver executed by
Borrower and consented and agreed to by each of the Guarantors;
and
(b) a promissory note, in the form of Exhibit A attached hereto, in
renewal, extension and replacement, but not in novation or
discharge of the Note executed by Borrower; and
- --------------------------------------------------------------------------------
PAGE 2 OF 4
<PAGE> 3
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(c) a duly executed certificate, dated as of the Effective Date, of
the Secretary or an Assistant Secretary of the Borrower and each
Guarantor as to attached resolutions of the Boards of Directors
of Borrower and each Guarantor then in full force and effect
authorizing the execution, delivery and performance of each Loan
Document to which the Borrower or any Guarantor is a party and
the incumbency and signatures of those of its officers
authorized to act with respect to each Loan Document to which
the Borrower or any Guarantor is a party; and
(d) such other documents as Bank may reasonably request.
6. Continuing Effect of Loan Agreement. This Fifth Amendment and Waiver
shall not constitute an amendment or waiver of any provision of the
Loan Agreement not expressly referred to herein and shall not be
construed as an amendment, waiver or consent to any action on the
part of the Borrower that would require an amendment, waiver or
consent of the Bank except as expressly stated herein. Except as
expressly amended and waived hereby, the provisions of the Loan
Agreement are and shall remain in full force and effect.
7. Ratification by Guarantors. Each of the Guarantors hereby acknowledges
and agrees that (a) its Guaranty was given for full and fair
consideration, direct or indirect, (b) the Guarantors do not have any
defense to, right of setoff against, or claims or counterclaims with
respect to the Bank or its Guaranty, and (c) its Guaranty is hereby
ratified and confirmed and is in full force and effect in favor of
the Bank.
8. Loan Agreement as Amended. All references to the Loan Agreement in any
document heretofore or hereafter executed in connection with the
transactions contemplated in the Loan Agreement shall be deemed to
refer to the Loan Agreement as amended by this Fifth Amendment and
Waiver.
9. Counterparts. This Fifth Amendment and Waiver may be executed by the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the
same instrument.
10. GOVERNING LAW. THIS FIFTH AMENDMENT AND WAIVER SHALL BE
GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS.
11. NOTICE OF FINAL AGREEMENT. THIS FIFTH AMENDMENT AND WAIVER AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
- --------------------------------------------------------------------------------
PAGE 3 OF 4
<PAGE> 4
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment
and Waiver as of the date and year first above written.
NATIONSBANK OF TEXAS, N.A.
By: /s/ C. TODD KULP
-------------------------------
C. Todd Kulp
Vice President
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
By: /s/ ROGER J. KLATT
-------------------------------
Roger J. Klatt
Senior Vice President, CFO
EXECUTED BY THE UNDERSIGNED GUARANTORS AS OF THE DATE HEREOF FOR
THE PURPOSE OF ACKNOWLEDGING AND EVIDENCING THEIR CONSENT AND
AGREEMENT TO THE TERMS HEREOF.
GUNDLE LINING SYSTEMS, INC.
By: /s/ ROGER J. KLATT
-------------------------------
Its: Sr. V.P. -- CFO
------------------------------
GUNDLE LINING CONSTRUCTION CORP.
By: /s/ ROGER J. KLATT
-------------------------------
Its: Sr. V.P. -- CFO
------------------------------
GUNDLE VENTURES, INC.
By: /s/ ROGER J. KLATT
-------------------------------
Its: Sr. V.P. -- CFO
------------------------------
- --------------------------------------------------------------------------------
PAGE 4 OF 4
<PAGE> 5
EXHIBIT A
REVOLVING CREDIT PROMISSORY NOTE
$20,000,000 Houston, Texas March 17, 1995
FOR VALUE RECEIVED, on or before March 17, 1997, the undersigned, referred
to herein as the "Borrower", promises to pay to the order of NationsBank of
Texas, N.A. (formerly known as NCNB Texas National Bank), referred to herein as
the "Bank", the principal sum of TWENTY MILLION AND N0/100 DOLLARS
($20,000,000), or so much thereof as may from time to time be advanced,
together with interest accrued on the unpaid balance hereof, as set forth
below.
1. Loan Agreement. This Note is the Note referred to in the Loan
Agreement dated October 31, 1991 (as heretofore amended or modified,
the "Loan Agreement") between the Borrower and the Bank, and is
entitled to the benefits and subject to the terms thereof. This Note
is executed in renewal, extension and replacement, but not in
novation or discharge of, that certain Revolving Credit Promissory
Note dated January 18, 1994, in the principal amount of $20,000,000,
executed by Borrower, payable to the order of the Bank. Reference is
made to the Loan Agreement for a statement of the rights and
obligations of the Borrower, and a statement of the terms and
conditions under which the line of credit represented by this Note is
being made available to the Borrower. Unless the context hereof
otherwise requires or provides, the capitalized terms used herein
shall have the same meanings as provided therefor in the Loan
Agreement.
2. Interest Rates. The unpaid principal amount of this Note shall, at the
option of the Borrower, bear interest as Prime Rate Advances, Agreed
Rate Advances, and LIBOR Advances.
3. Payment of Interest. Interest hereunder shall be payable as provided
for in the Loan Agreement.
4. Payment of Principal. The outstanding principal balance of this Note
shall be due and payable as provided for in the Loan Agreement.
5. Past-Due Principal and Interest. Any and all payments of principal or
(to the extent allowed by law) interest, or both, which are not made
when they are due and payable under this Note shall bear interest as
provided for in the Loan Agreement.
6. Default. If default is made in the payment of any installment of
principal or interest under this Note, promptly when the same shall
be due and payable hereunder, or if there is any Event of Default
under the Loan Agreement, then the Bank shall have the right and
option, without giving notice, to declare the unpaid balance of the
principal and accrued but unpaid interest on this Note at once due
and payable, and to exercise any and all of the rights and remedies
provided to Bank under this Note, the Loan Agreement, and applicable
law. No failure or delay on the part of the Bank in exercising any
right, power or privilege hereunder shall operate as a waiver thereof.
7. Waiver. The Borrower, sureties, endorsers, guarantors and any other
party now or hereafter liable for the payment of this Note in whole
or in part, hereby severally (a) waive presentment for payment,
notice of nonpayment, protest, notice of protest, notice of intent to
accelerate, notice of acceleration and, except as specifically
provided for in the Loan Agreement, all other notices, filing of suit
and diligence in collecting this Note or enforcing
<PAGE> 6
any other security with respect to same, (b) agree to any release of
any parties primarily or secondarily liable hereon, (c) agree that
the Bank shall not be required first to institute suit or exhaust its
remedies hereon against the Borrower, or others liable or to become
liable hereon or to enforce its rights against them or any security
with respect to same, and (d) consent to any extension or
postponement of time of payment of this Note and to any other
indulgence with respect hereto without notice thereof to any of them.
8. Attorneys' Fees. If this Note is not paid at maturity and is placed in
the hands of an attorney for collection, or if it is collected
through a bankruptcy or any other court after maturity, then the Bank
shall be entitled to reasonable attorneys' fees and court costs
for collection.
9. Limitation of Agreements. As provided for in the Loan Agreement, the
amount paid or agreed to be paid to the Bank for the use,
forbearance, or detention of the money to be loaned under this Note
or otherwise or for the payment or performance of any covenant or
obligation contained herein or in the Loan Agreement shall not exceed
the maximum amount permissible under applicable law, as now
existing or as hereafter amended.
10. Governing Law and Venue. This Note and the rights and obligations of
the parties hereunder shall be governed by the laws of the United
States of America and by the substantive internal laws of the State
of Texas, and is performable in Harris County, Texas.
11. Binding Effect. This Note shall be binding upon and inure to the
benefit of the Borrower, its legal representatives, successors and
assigns, and shall inure to the benefit of the Bank and its legal
representatives, successors and assigns.
12. Miscellaneous. The Note may not be changed, amended or modified
orally. If any provision of this Note is held to be invalid or
unenforceable by a court of competent jurisdiction, the other
provisions of this Note shall remain in full force and effect and
shall be liberally construed in favor of the Bank. Time is of the
essence with respect to all of the Borrower's obligations and
agreements under this Note. Wherever used, the words "Bank" and
"Borrower" shall be deemed to include the respective successors and
assigns of the Bank and of the Borrower. Chapter 15 of the Texas
Credit Code, TEX. REV. CIV. STAT. ANN. art. 5069 - Chapter 15, shall
not apply to this Note.
THIS NOTE AND THE RELATED LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
GUNDLE ENVIRONMENTAL SYSTEMS, INC.,
a Delaware Corporation
By: /s/ ROGER J. KLATT
---------------------------------------
Roger J. Klatt
Senior Vice President, CFO
<PAGE> 1
Exhibit 18-A
May 3, 1995
Gundle Environmental Systems, Inc.
19103 Gundle Road
Houston, Texas 77073
RE: Form 10-K Report for the year ended March 31, 1995
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of March 31, 1995, the Company changed their percentage of completion method
of accounting for revenue recognition for installation contracts from the
units installed method, (measured by the percentage of lining material deployed
and installed to date to the total estimated lining material to be installed
for each contract) to the cost-to-cost method, (measured by the percentage of
costs incurred to total estimated costs for each contract). According to
the management of the Company, this change was made as it results in a better
measurement of the overall economic performance of the Company's installation
contracts.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we
have reviewed the pertinent factors, including those related to financial
reporting, in this particular case on a subjective basis, and our opinion stated
below is based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to
an acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under
the circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
Very truly yours,
<PAGE> 1
EXHIBIT 21
GUNDLE ENVIRONMENTAL SYSTEMS, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Effective
Entity Name Incorporation Ownership
----------- --------------- ---------
<S> <C> <C>
Gundle Lining Systems, Inc. Delaware 100%
Gundle Lining Construction Corp. Delaware 100%
Gundle Plastics, Inc. Texas 100%
Gundle International Sales, Ltd. Barbados 100%
Gundle International, Inc. Delaware 100%
Gundle Taggart Environmental, Ltd. United Kingdom 100%
Gundle GmbH Germany 100%
Gundle, Ltd. United Kingdom 100%
Gundle Enviromental, Ltd. United Kingdom 100%
Gundle Ventures, Inc. South Dakota 100%
PG Technology Company South Dakota 100%
Gundwater, Inc. Nevada 100%
Nuserve Construction Corp. Texas 100%
Gundle Sub Corp. Delaware 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 13,227
<SECURITIES> 0
<RECEIVABLES> 32,169
<ALLOWANCES> 2,368
<INVENTORY> 17,887
<CURRENT-ASSETS> 67,397
<PP&E> 60,569
<DEPRECIATION> 27,825
<TOTAL-ASSETS> 124,130
<CURRENT-LIABILITIES> 21,735
<BONDS> 26,287
<COMMON> 107
0
0
<OTHER-SE> 72,279
<TOTAL-LIABILITY-AND-EQUITY> 124,130
<SALES> 0
<TOTAL-REVENUES> 133,124
<CGS> 110,272
<TOTAL-COSTS> 110,272
<OTHER-EXPENSES> 15,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,219
<INCOME-PRETAX> 3,240
<INCOME-TAX> 1,843
<INCOME-CONTINUING> 1,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,397
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
