U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB/A
Amendment No. 1
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________
Commission File Number: 1-10361
NDE ENVIRONMENTAL CORPORATION
(Name of small business issuer in its charter)
Delaware 95-3634420
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization:
8900 Shoal Creek Boulevard, Building 200
Austin, Texas 78757
Address of principal executive offices
Issuer's telephone number, including area code: (512) 451-6334
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended December 31, 1996 were
$15,939,126.
The aggregate market value of voting stock held by non-affiliates of the Issuer
as of April 2, 1997 was approximately $551,991.
As of April 2, 1997, there were 15,978,610 outstanding shares of Common Stock,
$0.0001 par value, of the Issuer.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
The Registrant hereby amends its Annual Report on Form 10-KSB originally
filed with the Securities and Exchange Commission on April 15, 1997, pursuant to
instruction E(3) to Form 10-KSB, by completing Items 9-13 appearing in Part III
thereof. In addition to the Part III information, the Annual Report on Form
10-KSB/A (Amendment No.1) includes all information required by Part I and Part
II of Form 10-KSB that the Registrant included in its original Form 10-KSB
filing on April 15, 1997.
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
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Table of Contents
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PART I
Item 1. Description of Business......................................4
Item 2. Description of Property.....................................12
Item 3. Legal Proceedings...........................................12
Item 4. Submission of Matters to a Vote of Security Holders.........12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....13
Item 6. Management's Discussion and Analysis or Plan of Operation...13
Item 7. Financial Statements .......................................17
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................17
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.......................................................18
Item 10. Executive Compensation......................................19
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................22
Item 12. Certain Relationships and Related Transactions..............25
Item 13. Exhibits and Reports on Form 8-k............................25
SIGNATURES....................................................................31
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
NDE Environmental Corporation (the "Company" or "NDE") was incorporated in
Delaware in 1988. The Company is a holding company that conducts business
through its wholly-owned subsidiaries. At December 31, 1996, the Company's
subsidiaries included Tanknology/NDE Corporation, USTMAN Industries, Inc.
("USTMAN"), Tanknology Canada (1988) Inc. ("Tanknology Canada"), NDE
Environmental Canada Corporation ("NDE Canada"), ProEco, Inc. ("ProEco"), EcoAm,
Inc., and ProEco, Ltd. The Company provides environmental compliance services,
installation of products, and consulting to owners and operators of aboveground
and underground storage tanks ("USTs") in the United States and internationally
through licensees. Customers purchase the Company's services primarily to remain
in compliance with laws pertaining to environmental protection and to conduct
their operations in a manner that limits their exposure to liability for
incidental environmental damage.
Forward-Looking Statements
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. The words "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may," and similar
expressions are intended to identify forward- looking statements. No assurance
can be given that actual results may not differ materially from those in the
forward-looking statements herein for reasons including the effect of
competition, changes in Environmental Protection Agency ("EPA") and other
regulations affecting the Company or its customers, the outcome of litigation,
the loss of a significant customer or group of customers, problems with the
Company's information management system, or technological obsolescence.
Mergers and Acquisitions
The Company's business has developed primarily through a series of
acquisitions since March 1990. The Company has acquired testing technology,
licenses, testing vehicles and other assets.
Tanknology Acquisition
On October 25, 1996, the Company acquired substantially all of the
operating assets and liabilities of the Tanknology UST Group of Tanknology
Environmental, Inc., (the "Acquisition"). The Tanknology UST Group's operations
were principally conducted through three subsidiaries of Tanknology
Environmental, Inc.: Tanknology Corporation International ("TCI"), Tanknology
Canada, and USTMAN. The Acquisition was accomplished by means of the Company's
purchase of all of the issued and outstanding capital stock of the subsidiaries.
TCI was engaged in substantially the same business, in the same market, as
the Company and was the Company's largest direct domestic competitor.
Additionally, TCI was a provider of UST corrosion protection services, a service
not formerly offered by NDE. Immediately following the Acquisition, the Company
caused its primary operating subsidiary, NDE Testing & Equipment, Inc., to merge
with and into TCI, and the surviving corporation changed its name to
Tanknology/NDE Corporation. The combined entity comprises the largest component
of the Company's domestic operations, Field Services. Management expects the
combination to result in a significant increase in market share and elimination
of duplicate administrative costs. However, all forward-looking statements
contained in this description of the Company's business are based on
management's current knowledge of factors affecting NDE's business. NDE's actual
results may differ materially if these assumptions prove invalid. A list of
certain risks that may affect the Company's operating results is presented in
Item 6.
USTMAN
USTMAN provides statistical inventory reconciliation ("SIR") services. SIR
meets the post-1998 Environmental Protection Agency ("EPA") precision
requirement for leak detection, and management believes that SIR is among the
least costly methods of complying with certain regulations. SIR may also
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
identify other conditions of concern to tank operators such as pilferage or
flaws in record keeping.
Gilbarco Acquisition
On April 11, 1994, the Company acquired the principal assets of the
Environmental Services Division of Gilbarco, ("Gilbarco ESD"), a division
engaged in testing USTs. In the Gilbarco ESD acquisition, the Company acquired
tank testing vehicles, related tank testing equipment, ancillary equipment,
testing systems, regulatory approvals, intellectual property rights, customer
information, supplier and distributor information, and other intangible assets.
In 1996, the Company recognized an extraordinary gain of $1,813,149 related to
early retirement and settlement of debt incurred in conjunction with the
Gilbarco ESD acquisition and an $833,321 writedown of the acquired vehicles and
test equipment due to permanent impairment of their value.
Canada
An element of the Company's strategy is to focus financial, management, and
other resources on operations in the United States and leverage its technology
base internationally through licensing arrangements. Consistent with this
strategy, in 1995, NDE made the decision to phase out its operations in Canada
and entered into a licensing agreement for western Canada. In 1996, the Company
secured a licensee for the eastern part of Canada, and prior to the Acquisition,
ceased the operations of NDE Canada. On February 20, 1997 (subsequent to the
Company's 1996 fiscal year end), the Company sold substantially all of the
operating assets of Tanknology Canada to the Company's eastern Canada licensee.
Lines of Business
The Company offers comprehensive services to its customer base of retail
and non-retail fuel distributors who own or operate USTs.
Field Services
The principal business of the Company's Field Services division ("Field
Services") is the precision testing of petroleum USTs and associated piping to
detect leaks. This service also is referred to as "tightness testing" or
"integrity testing." UST owners or operators purchase testing services:
o to comply with regulations
o to certify the system as tight after work has been performed on the
system
o to investigate inventory discrepancies
o to satisfy environmental liability concerns
o to investigate the site for evidence of pollution or a fire hazard
The Company uses a number of proprietary systems to perform tightness
testing on USTs. All of the Company's systems have been certified by independent
laboratories as meeting EPA standards for UST testing methods. UST testing has
the following general characteristics:
o it is performed periodically
o the test system is moved between UST locations by van, truck, or trailer
o the test is precise -- capable of reliably detecting leaks smaller than
0.1 gallon per hour
o the preferred testing method may differ based upon environmental or
business conditions, state regulations, tank type, design or contents,
owner or operator preference, and other variables
Field Services provides "Stage II Testing" to ensure functionality of Stage
II equipment and to verify that it does not leak. During refueling, this
equipment collects vapor emissions displaced from the tank receiving the fuel
and incinerates or returns the vapor to the UST. Limitations on fuel vapor
emissions are designed to help reduce ozone layer depletion. NDE also provides
pipeline and container leak detection services ("Specialty Testing"). Specialty
Testing vehicles are equipped to perform either hydrostatic or acoustic pipeline
testing and large storage tank testing.
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Field Services offers installation of Automatic Tank Gauging Systems
("ATGS"). No significant revenue was derived by the Company from this line of
business in 1996. ATGS consist of a probe permanently installed in the tank and
wired to a monitor to provide information on product level and temperature.
These systems automatically calculate the changes in product volume that can
indicate a leaking tank. ATGS meet regulatory requirements as a replacement for
manual inventory control (see Government Regulations - Leak Detection).
Field Services also offers cathodic protection installation and a variety
of other corrosion protection services including video internal tank inspection
("Petroscope") , compliance testing, and maintenance. The EPA requires all USTs
and associated underground piping to be upgraded with corrosion protection by
December 22, 1998 (see Government Regulations). Cathodic protection is required
unless the UST system is lined with or made of noncorrodible material. Corrosion
of USTs is eliminated by proper application of cathodic protection. Cathodic
protection prevents corrosion by making the entire steel surface act as the
cathode of an electrochemical cell, transferring corrosion from the UST's metal
surface to an external anode.
In addition to testing and upgrading UST systems, Field Services also
provides overfill protection, UST cleaning and value added site services,
including survey and compilation of site information, and minor maintenance.
Field Services may, as a customer service, subcontract the upgrading of USTs
with spill protection but typically does not provide secondary containment,
interstitial monitoring, or groundwater or vapor monitoring.
Field Services markets its services and products primarily to gasoline
retailers (e.g., major oil companies, independent fuel retailers and convenience
store chains), businesses with vehicle fleets that are fueled from internally-
operated USTs (e.g., vehicle rental companies, package delivery services or
product distributors), and tank owners or operators who maintain tanks as a
source of emergency power (e.g., hospitals and hotels). In 1996, Field Services
revenues were approximately $14 million, or 87%, of the Company's consolidated
revenues.
Compliance Management Services
In 1995, the Company established its Compliance Management Services
division ("CMS") to enable tank owners and operators to outsource the regulatory
compliance function. CMS provides turn-key administrative, managerial,
technical, data processing, and regulatory liaison services. CMS helps UST
owners and operators coordinate regulated activities and manage their
relationship with regulators. On behalf of its customers, CMS can:
o administer UST systems in compliance with regulations
o acquire and maintain operating and regulatory permits
o respond to, report on and manage environmental incidents
o report in accordance with SARA III community right-to-know requirements
o resolve environmental notices of violation
o track hazardous waste transportation via manifest
o manage the liabilities associated with the operation of USTs and storage
of hazardous material
o assist in UST owner or operator management reporting and capital
budgeting
o coordinate construction, maintenance, testing and contractor oversight
o coordinate the provision of services from the customer's other UST
vendors
Currently the CMS manages the environmental compliance for approximately
11,000 tanks in the United States.
Statistical Inventory Reconciliation ("SIR")
SIR is a computerized statistical model that analyzes common inventory data
with statistical formulas and procedures. Tank operators provide USTMAN with
daily inventory information including beginning and ending inventory levels,
product receipts and sales. USTMAN's software produces a trend analysis by which
leaks and inventory shrinkage due to other causes can be identified and
detected. USTMAN software meets all existing EPA protocols for SIR.
There is a complementary relationship between SIR and tank tightness
testing: A customer may request SIR as an alternative to some tank tests, but
demand for other tests may be generated in response to SIR findings. It may be
advisable to conduct tightness testing before SIR monitoring begins and when SIR
monitoring indicates that tanks are "leaking." Before the Acquisition, NDE
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
employed USTMAN as a subcontractor. Since the Acquisition, USTMAN serves as a
source of referrals for tightness testing work.
Government Regulations
In response to concerns about ground water contamination, Congress included
UST amendments in the 1984 Resource Conservation and Recovery Act ("RCRA"). The
RCRA amendments lead to Federal UST regulations (40 CFR Part 280) that went into
effect in late 1988. The regulations distinguish between "existing" and "new"
USTs. Currently, this distinction is interpreted to apply different regulatory
requirements based on whether the UST was installed before or after December 22,
1988. State regulatory agencies were empowered to require earlier deadlines or
additional requirements.
Tank upgrades
Federal rules require USTs installed before December 22, 1988 ("existing"
USTs) to be upgraded with spill protection, overfill protection and corrosion
protection by December 22, 1998. Owners and operators of existing USTs must
either upgrade or close them. Failure to comply timely can result in citations,
fines and reduction or elimination of insurance coverage provided by third-party
firms or state reimbursement funds.
When closing a UST (including closing prior to replacement), the owner or
operator must notify the state regulatory authority before taking the UST out of
service in case the regulators want to monitor the activity. The owner or
operator must determine if releases from the UST have contaminated the
environment using the results of vapor or groundwater monitoring or a site
assessment. The state may require additional closure assessment measures. If
contamination is found, corrective action must be taken. Upgrading the tank, as
opposed to replacing it, postpones these requirements.
To meet the corrosion protection upgrade requirements, existing steel tanks
must have cathodic protection, or be lined with noncorrodible material (such as
fiberglass), or both. Existing steel piping must have cathodic protection. Tanks
or piping made of noncorrodible material do not have to be upgraded to meet the
corrosion protection requirement.
If a UST owner or operator decides to upgrade by adding cathodic protection
without also adding a lining, the integrity of the tank must be assessed by an
approved monthly monitoring method, two tightness tests or an internal
inspection. Regulations require a qualified cathodic protection expert to
design, supervise installation, and inspect cathodic protection systems. Most
cathodic protection systems also require bimonthly inspections.
Leak Detection
Since December 1993, leak detection has been required for all USTs. Owners
or operators of USTs that do not have a leak detection method can be cited for
violations and fined. Leak detection violations can prevent the owner or
operator from obtaining legally required insurance coverage and reimbursement
for cleanup costs.
There are two categories of leak detection: "tightness testing" and
"monthly monitoring." Monthly monitoring methods must be able to detect leaks of
0.2 gallons per hour with a probability of detection of at least 95 percent and
a probability of false alarm of no more than 5 percent. Tightness testing
methods must be able to detect a 0.1 gallon-per-hour leak with at least a 95
percent probability of detection and no more than a 5 percent probability of
false alarm.
Monthly monitoring is required for all "new" USTs after installation or
"upgraded" USTs within 10 years or upgrade. Such methods include: SIR, ATGS,
secondary containment with interstitial monitoring, vapor or groundwater
monitoring or other methods approved by the state regulatory authority that are
at least as precise as the EPA requirements.
ATGS provide an alternative to SIR, as a replacement to manual inventory
control procedures, to meet leak detection requirements in combination with tank
tightness testing or SIR. Secondary containment consists of using a barrier, an
outer wall, a vault, or a liner around the UST or piping. Leaked product from
the inner tank or piping is directed toward an interstitial monitor located
between the inner tank or piping and the outer barrier.
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Tightness testing combined with inventory control is an acceptable method
of leak detection for existing USTs that have not been upgraded or for USTs that
have been upgraded or installed within the last 10 years. For existing tanks
that have not been upgraded, tightness must be tested annually if tightness
testing combined with inventory control are relied upon as the leak detection
method. New or upgraded tanks using this method must be tested every five years.
Inventory control requires comparing "stick" inventory (daily measurements of
tank contents using a calibrated "stick," conversion chart, and mathematical
calculations) to "book" inventory (calculated from initial inventory, deliveries
and dispensing).
Tightness testing combined with inventory control does not meet leak
detection requirements for all types of piping. If certain design criteria are
not met, a suction line requires a line tightness test every three years,
monthly SIR, monthly interstitial monitoring, or monthly vapor or groundwater
monitoring. Pressurized piping must be equipped with certain hardware and
receive an annual tightness test or be equipped with monthly SIR, monthly
interstitial monitoring, or monthly vapor or groundwater monitoring.
SIR may be used currently and indefinitely to meet the leak detection
requirement for existing, upgraded, or new tanks and is one of the options for
leak detection with suction and pressurized piping. Generally, few product or
site restrictions apply to the use of SIR.
With a probability of detection of at least 95 percent and a probability of
false alarm of no more than 5 percent, SIR must be able to detect leaks of:
o 0.2 gallons per hour to serve as a monthly monitoring method
o 0.1 gallons per hour to serve as a replacement for tank tightness testing
o 0.08 gallons per hour to serve as a replacement for pipe tightness
testing
Approximately 20 state regulatory authorities will accept SIR on the same
basis as EPA. Many states impose some restrictions on the use of SIR, and a few
states do not accept it.
Vapor monitoring measures product "fumes" in the soil around the UST to
check for a leak. This method requires installation of carefully placed
monitoring wells. Vapor monitoring can be performed manually on a periodic basis
or continuously using permanently installed equipment. Groundwater monitoring
senses the presence of liquid product floating on the groundwater. This method
requires installation of monitoring wells at strategic locations in the ground
near the tank and along the piping runs. It cannot be used at sites where
groundwater is more than 20 feet below the surface. Both of these methods risk
attributing releases from other sources to the tank they were installed to
monitor.
The Clean Air Act requires Stage II vapor recovery systems to be installed
in ozone non-attainment areas designated by the EPA, typically in large
metropolitan areas. Management anticipates a future increase in the aggregate
size of non- attainment areas.
Some state and local jurisdictions have adopted regulations regarding
testing of UST's that are stricter than EPA regulations. The failure of the
Company's testing systems to comply with any such current or future regulations
or the failure of the Company to obtain any necessary certifications could have
a material adverse impact on the revenues and the operating results of the
Company. Management believes the Company and all of its testing methods,
services and practices are currently in compliance with all existing EPA
regulations for which a lack of compliance would have a material adverse impact
on the operating results of the Company.
Distribution
Geographical
During 1994, the Company moved its headquarters from Torrance, California
to Austin, Texas. One advantage of the move is that the central time zone
enables the Company to better serve its nationwide customer base.
Field Services distributes its services throughout the United States
utilizing approximately 175 company-owned and operated service vehicles. Sales
and operations are managed through 11 regional offices as well as the Company
headquarters.
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
CMS markets to Field Services customers and prospects, trade show
attendees, and recipients of industry trade publications. CMS services are
marketed by CMS division personnel based at the Company's headquarters, by the
corporate sales and marketing departments, and by regional Field Services office
management and salespersons. CMS services are performed primarily at the Company
headquarters. The Company also has customer-dedicated locations in California
and Virginia.
USTMAN provides SIR services nationally and internationally from its
offices in Denver, Colorado. Seven salespersons market the service, and eight
independent providers employ USTMAN software under license. SIR data is
transmitted from customer sites to USTMAN via hard copy, fax, diskette, and
telephone line data transmission based on customer preference.
Information Systems and Products
NDEOE and USTLine are the trade names for a group of proprietary
information systems that facilitate the environmental compliance of UST
installations. NDEOE and USTLine were developed in response to the growing
informational needs of tank owners and operators in their efforts to manage
complex regulatory, risk avoidance and operational requirements. While USTLine
and NDEOE are not sold individually, they represent a value-added method of
distribution which, management believes, gives the Company a competitive
advantage in serving large customers with:
o many tanks under management
o geographical coverage spanning regulatory jurisdictions with different
compliance requirements
o USTs distant from managerial oversight
NDEOE is primarily used by Field Services. It integrates the scheduling of
tests, the deployment of the service technicians and test vehicle fleet, and the
collection, analysis and reporting of test data and billing information.
Technicians are equipped with laptop computers, and they input data into NDEOE
while on-site. The NDEOE database provides comprehensive information about
customers' UST systems which is useful for their operational and regulatory
compliance functions and which can be sorted and analyzed electronically.
USTLine is an information management and distribution product that provides
customers access to the NDEOE system via the internet. NDE installed the first
USTLine system in a customer's office in March 1994. Since that time, NDE has
installed approximately 30 systems at various customers' facilities.
NDE's database management system features the flexibility necessary to
efficiently build a bank of information obtained from a variety of sources. For
example, information regarding ground water level might best be obtained by
NDE's technician while visiting the site, while regulatory information would be
maintained on an associated database by NDE regulatory affairs personnel and
tied to a particular site location via zip codes. Customer-specific information
could either be entered by the customer via USTLine or supplied to NDE personnel
either on disk or in hard copy.
Master databases are centrally managed at NDE's Austin headquarters.
Customized reports are generated which meet the needs of each particular client
or regulator. The NDE database management systems have the built-in flexibility
required to generate specific report formats based on the needs of the
individual customer. Reports can be faxed or hard copies can be printed and
mailed to the customer and/or regulatory agency. Alternately, the customer may
utilize NDE's USTLine service which provides instant access to up-to-date
information regarding all of the customer's sites. USTLine also allows customers
to print reports in their offices whenever required.
These systems add value for UST owners in the following ways:
o lower costs resulting from diminished paper processing and archival
requirements
o increased efficiency and speed through computerized storage, filing,
sorting, and data retrieval
o real-time access to testing schedules, test results and site surveys
o enhanced communication with NDE through integrated E-Mail
o increased efficiency in planning, budgeting, and scheduling due to the
integrated data-base management tools
o reduced re-keying of data; USTLine data can be exported to most customer
systems
o enhanced regional emergency response (e.g., earthquake); the USTLine
system can sort the data by proximity to a particular landmark and other
site characteristics
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
International
Through ProEco, Inc., its wholly-owned subsidiary, NDE licenses technology
to service providers in Australia, Brazil, Canada, Chile, Ireland, Italy, Korea,
Mexico, Malaysia, New Zealand, Puerto Rico, Portugal, and the United Kingdom.
Service providers receive a license for specific countries and purchase or lease
equipment from NDE. NDE typically reviews the data, issues the test report,
provides technical support, and receives processing fees on each test.
Competition
In the Acquisition, the Company acquired TCI, formerly the Company's
primary national competitor. However, the Company continues to face competition
for UST testing services from a number of smaller testing companies serving
local or regional customers and using inexpensive technology. Prices for
tightness testing have continued to decline due to excess supply. Competitors
may refine existing technologies or develop new systems that render the
Company's technology obsolete or less competitive.
Total demand for domestic UST testing is declining. Virtually all of the
current demand for the Company's UST testing services is from the owners or
operators of USTs that were installed prior to 1988 and have not been upgraded
in accordance with the EPA's 1988 requirements. The owners or operators of these
USTs may continue to use annual tightness testing to meet EPA requirements only
until December 22, 1998. After that date, they must close or upgrade the tanks.
Many of these owners or operators may elect to close their USTs instead of
upgrading them. For those who elect to upgrade (by either modifying or replacing
the existing UST), the frequency of tightness testing will decline. After
upgrade, the frequency with which tightness tests will be ordered will depend on
the choice of UST upgrade and leak detection method. For example, the new or
upgraded tank may need to be tested every two years, five years or not at all,
rather than annually. It is currently anticipated that the rate of UST closure
and upgrade trends will increase as the 1998 deadline approaches.
Cathodic protection is one of the two viable corrosion protection
alternatives for owners or operators of steel USTs who wish to upgrade rather
than close or replace their USTs. For the same reasons that annual tightness
testing demand is declining, the Company expects strong demand for cathodic
protection services through a period ending shortly after December 22, 1998.
However, the degree to which the company will experience a significant increase
in cathodic protection revenue or profits is not clear. Barriers to entry into
the business of providing cathodic protection services are low. "Small" owners
or operators (those with relatively few tanks) may experience financial hardship
relating to the upgrade and are likely to be very price sensitive. Owners or
operators who operate nationwide have the ability to exact price concessions
from installation providers.
The size of the market for SIR and for pipeline leak detection services is
expected to increase as the number of USTs subject to monthly monitoring
requirements increases. However, both SIR and cathodic protection are provided
by a number of vendors. Demand for Stage II testing services will increase if
more metropolitan areas meet the "non-attainment area" definition in The Clean
Air Act.
The Company does not believe that the CMS division currently has
significant direct competition, and it has developed a strategy designed to
bring more USTs under CMS management.
Customers
The Company provides UST services to oil companies, independently owned
gasoline retailers, convenience store operators, fleet owners, government
facilities, and other operators of USTs. Below are selected customers (in
alphabetical order) within a few of the Company's major customer groups. The
organizations listed are not meant to be representative of the Company's entire
customer base, but are meant to give an indication of the caliber of
organizations that purchase NDE's services.
o Oil companies: Amoco Oil Company, B.P. Oil, Chevron U.S.A. Products
Company, Exxon U.S.A., Mobil Oil Corporation, Shell Oil Company
o Convenience stores: Cumberland Farms, Dairy Mart, Diamond Shamrock,
Southland Corporation
o Fleet owners: Hertz Corporation, Ryder Truck Rental
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NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Mobil Oil Corporation accounted for approximately 20% and 13% of the
Company's 1996 and 1995 revenues, respectively. No other single customer
contributed more than 10% of the Company's 1996 revenues.
Other matters
Suppliers
The Company does not depend upon any single supplier for spare parts for
any of its technologies. Substantially all repair, diagnostic, and maintenance
functions are performed at the Company's headquarters.
Patents
The Company owns or has obtained license for various rights in the form of
patents, trademarks, copyrights, and/or registered names. NDE's policy is to
vigorously defend these rights, and the Company is currently working with
counsel to address infringements. There can be no assurance that the rights, or
the Company's efforts to enforce them, will provide the Company with a
competitive advantage. The Company believes that the duration of its patents
generally exceeds the life cycles of the technologies disclosed and claimed
therein. Although the patents it holds may be of value, the Company believes
that its success will depend primarily on its engineering marketing, and service
skills.
Research and Development
The Company has incurred no significant expenses for research and
development since its inception. Most technology used by the Company has been
obtained through acquisition.
Insurance
The Company's testing activities, consistent with the industry, present
risks of substantial liability. Spills of petroleum products and hazardous
substances, or the creation or exacerbation of a contamination problem through
errors or omissions in tank testing, could result in substantial liability under
federal and state anti-pollution statutes and regulations or from tort claims by
those suffering personal injury or property damage as a result of such
contamination. In addition, many of the Company's tank testing services involve
USTs containing volatile substances such as gasoline. The Company or its former
licensees could be held liable for damage to persons or property caused by any
resulting fire or explosion. In addition, most of the Company's services are
provided by technicians driving Company vehicles with attendant risks associated
with operating motor vehicles.
The Company maintains professional and pollution liability insurance of up
to $2 million per occurrence, general, product and personal injury coverage of
up to $1 million per occurrence, and fire liability coverage to $500,000. In
addition, umbrella coverage for all sources of liability in the amount of $10
million is maintained. Deductibles are in the amount of $200,000 per occurrence,
$400,000 in the aggregate, for professional and pollution liability coverages.
The umbrella policy carries a $10,000 deductible. All other coverages carry a
$5,000 deductible per occurrence. The Company believes that the policies in
force are expected to be sufficient to cover all current and expected claims.
The Company has not been denied any coverages sought. However, there can be no
assurance that all possible types of liabilities that may be incurred by the
Company are covered by its insurance or that the dollar amount of such
liabilities will not exceed the Company's policy limits. The occurrence of any
significant uninsured loss or liability would have a mateial adverse effect on
the Company's business, financial condition, and results of operations.
Personnel
As of December 31, 1996, the Company employed 324 full-time and no
part-time personnel. None of the Company's personnel are represented by a labor
union. The Company believes that its relationship with its employees is
satisfactory.
- 11 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property. All operations are conducted in leased
premises. In December 1993, the Company leased 2,000 square feet, in Austin,
Texas for its headquarters. This lease was amended in May 1994 to add 6,000
square feet of space. In May of 1996, the Company moved from the previous Austin
location to its current address which has 11,500 square feet of leased space.
The Company also leases regional offices and storage facilities. The lease for
USTMAN's facility in Denver, Colorado was assumed in the Acquisition. The
Tanknology Canada lease, also assumed in the Acquisition, was one of the assets
disposed of subsequent to the 1996 year end (see Item 1. Description of Business
- - Mergers and Acquisitions).
ITEM 3. LEGAL PROCEEDINGS
In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against NDE
Environmental Corporation in the United States Federal District Court, Western
District of Louisiana. The lawsuit is for a declaratory judgment that certain
patents owned by NDE are invalid, unenforceable, and/or that certain U.S. Test
tank testing systems do not infringe such patents. The relief U.S. Test is
seeking includes a final determination on the above issues, a preliminary
injunction regarding actions taken by NDE, and attorneys' fees and costs. In May
1995, NDE filed a counterclaim alleging that (1) the NDE patents are valid and
enforceable, (2) the U.S. Test tank testing systems are infringing upon such
patents, and (3) NDE is owed damages for such infringement. The amount of
damages owed by U.S. Test, if any, has not been specifically alleged. The
patents at issue were transferred from Gilbarco, Inc. in the 1994 acquisition by
NDE of Gilbarco's Environmental Services Division. The parties entered into a
joint scheduling order providing for a trial which is currently expected to
occur during the third quarter of 1997. There have been no dispositive rulings
to date. The Company does not believe that the outcome of such litigation will
have a material adverse effect on the Company's results of operations or
financial condition.
The Company also is subject to various claims and litigation in the normal
course of business. The Company believes that the ultimate resolution of such
matters will not have a material adverse effect on the Company's results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 12 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On July 20, 1995, the Company was delisted from the NASDAQ Stock Market for
failure to meet listing requirements. These requirements included maintaining a
minimum bid price, minimum capital surplus and minimum market value of public
float. On December 22, 1995, the Company voluntarily delisted from the Boston
Stock Exchange for similar reasons. The Company's common stock continues to be
traded on the OTC Bulletin Board under the symbol NDEC.
The following table sets forth high and low bid prices of the shares of
Common Stock of the Company for each quarterly fiscal period within the last two
fiscal years. Quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions and may not represent actual transactions.
High Low
1995
First Quarter $9/16 $5/16
Second Quarter $5/8 $1/4
Third Quarter $1/4 $1/8
Fourth Quarter $3/16 $1/20
1996
First Quarter $1/8 $1/20
Second Quarter $5/16 $1/8
Third Quarter $5/16 $1/16
Fourth Quarter $9/16 $3/32
As of April 2, 1997, there were approximately 170 holders of record of the
Company's Common Stock including those shares held in "street name." The Company
did not declare or pay Common Stock dividends during 1995 or 1996. The Company
currently intends any future earnings to finance the development and expansion
of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward looking Statements
All forward-looking statements contained in this Annual Report on Form
10-KSB and in the Management's Discussion and Analysis of Financial Condition
and Results of Operations is based on the Company's current knowledge of factors
affecting its business. The Company's actual results may differ materially if
these assumptions prove invalid.
Significant risk factors include, but are not limited to,:
o increasing price competition in the Company's marketplace
o changes in government regulations that decrease the requirements for the
Company's testing services or adversely affect pricing
o lack of achievement of the cost reductions and operational efficiencies
anticipated as a result of the Acquisition
o an excess of product liability losses over the Company's expectations
o the loss of a significant customer or group of customers
o a failure in the computer or communication systems used to manage the
Company's geographically dispersed operations
o risks associated with technological obsolescence
- 13 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Revenues
Revenues for 1996 were $15,939,126, an increase of $4,591,535 or 40%,
compared to $11,347,591 for 1995. NDE's increased revenue was due to the
Acquisition completed on October 25, 1996 and revenues for the year include the
results of the UST Group from that date.
Historically, the Company's revenues in the second half of the year are
higher than in the first half. The 1996 results of operations included only two
months of the Tanknology UST Group's results. Due to seasonality, those two
months of combined operations accounted for substantially all of the 40%
increase in revenues. In general, the price of UST tightness testing, which is
the Company's main revenue source, continued to decline in 1996; however, this
decline has been mitigated to some extent by increased revenues from CMS and
international licensing revenues.
Cost of Testing
Cost of testing services for 1996 was $11,085,062 (70% of revenue), an
increase of $4,022,606 or 57%, compared to $7,062,456 (62% of revenue) for 1995.
The gross margin was $4,854,064 (30% of revenue) for 1996, compared to
$4,285,135 (38% of revenue) for 1995. The increased costs are due primarily to
an increase in the number of tests due to the Acquisition. In addition, fuel
prices increased in 1996 over 1995, and vehicle maintenance costs increased due
to the aging of the Company's fleet.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) for 1996 were
$6,581,337 (41% of revenue), an increase of $152,904 or 2%, compared to
$6,428,433 (57% of revenue) for 1995. The increase in SG&A was primarily due to
an increase in the staffing levels required as a result of the Acquisition
offset by reductions in these expenses due to tight cost controls on these
expenses prior to the Acquisition. Through the first nine months of 1996, SG&A
expenses were essentially unchanged from the same period in 1995. The
elimination of most of the duplicate expenses for these expense categories
subsequent to the Acquisition reduced the percentage increase from 1995;
however, severance costs for terminated NDE employees and the costs of
maintaining additional administrative staff after the Acquisition through the
end of the year unfavorably impacted these costs.
Impairment of Long-lived Assets
In the third quarter of 1996, the Company recorded an impairment of
long-lived assets of $833,321 relating to the write-down of vehicles and test
equipment purchased from the Gilbarco Environmental Services Division ("Gilbarco
ESD"). This write-down was based on a periodic review to determine whether there
had been any permanent decline in values of the Company's assets.
Interest Expense
Interest expense for 1996 was $1,062,409, or 7% of revenue, an increase of
$156,865, or 17%, compared to $905,544 or 8% of revenue, in 1995. The increase
in interest expense is due to the increased debt incurred for the Acquisition,
non-cash interest expense related to accretion of subordinated debt of $67,641,
and amortization of the deferred financing costs incurred on the
Acquisition-related debt of $36,989. These amounts were partially offset by
generally lower interest rates on the new debt compared to the Company's prior
financing arrangements.
Extraordinary Gain
In September 1996, the Company recorded an extraordinary gain on the early
retirement of debt of $1,813,149. The retired debt related to a $2,450,000
six-year note which was collateralized by assets acquired in the April 1994
transaction with Gilbarco ESD. At settlement (September 30,1996), the note's
carrying value of $2,113,149 including accrued interest was retired in
consideration of cash payments by the Company totaling $546,000.
- 14 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Net Loss
The Company recorded a net loss for 1996 of $1,638,998 (10% of revenue) as
compared to a net loss of $2,892,639 for 1995 (25% of revenue). Excluding
unusual items (impairment of long-lived assets and extraordinary gain) the 1996
loss was $2,618,826 (16% of revenue).
Liquidity and Capital Resources
The Company's operational strategy has been to establish and maintain a
national presence. A substantial portion of the Company's growth has come
through acquisitions, beginning with the Pan American Environmental Services,
Inc. acquisition in 1990 and the Kaneb Metering Corporation transaction in 1991
and continuing with the domestic ProEco transaction in January 1993, the ProEco
international transaction in December 1993, and the Gilbarco ESD transaction in
1994.
On October 25, 1996 (the "Closing Date"), the Company acquired all of the
capital stock of three underground storage tank services subsidiaries (the "UST
Group") from TEI, Inc. (formerly Tanknology Environmental Incorporated). The
subsidiaries acquired were Tanknology Corporation International ("TCI"), USTMAN
Industries, Inc. ("USTMAN"), and Tanknology Canada (1988), Inc. ("Tanknology
Canada"). Immediately following the Acquisition, the Company merged its wholly
owned subsidiary NDE Testing and Equipment, Inc. into TCI and changed the name
of the merged entity to Tanknology/NDE Corporation.
The UST Group was purchased for an aggregate purchase price of $12 million
which was paid to TEI at closing of the transaction. This purchase price is
subject to upward adjustment for certain taxes that may be owed to TEI relating
to operations of the UST Group from August 31, 1996 to October 25, 1996 (the
Interim Period") and interest on the $12 million purchase price for the Interim
Period at 8% per annum. The purchase price adjustment will be reduced by any
claims the Company may have as a result of its internal post-closing audit of
the acquired assets.
In connection with the Acquisition, the Company obtained a total of $19
million of financing (the "Financing') under two separate loan agreements. The
Financing consisted of senior secured bank debt consisting of a three-year, $5
million revolving line of credit and a five-year, $6 million term loan and a
five-year, $8 million subordinated note. Substantially all of the Company's
assets were pledged as security under the loan agreements. Concurrent with the
Acquisition and the Financing, a major stockholder of the Company provided a $1
million standby commitment in the event of a payment default by the Company
under the loan agreements, and, in conjunction with an affiliated debt holder,
converted $1,035,882 of existing debt ($1 million of principal, plus accrued
interest) into 8 million shares of common stock. The proceeds from the Financing
were used to purchase the UST Group, to pay off outstanding balances under an
existing term loan and an existing factoring agreement in the aggregate amount
of $2,526,970, for funding of Acquisition related fees and expenses, and for
general working capital. At December 31, 1996, the Company had $1,113,616
available for additional borrowing under the revolving credit facility.
Senior Secured Bank Debt
The funds available for borrowing under the revolving line of credit are
based on a formula as applied to the eligible accounts receivable of the
Company. In conjunction with the February 1997 sale of certain Canadian
operations (see below), the amount available to the Company under the revolving
credit was reduced by $500,000 as a condition to obtaining the banks agreement
to sell the operating assets of Tanknology Canada. At the closing of the
Acquisition, $2 million was drawn under the revolving credit line and remained
outstanding at December 31, 1996. The $6 million term loan carries a rate of
prime plus 1.5%. Principal payments of $100,000 per month on the term loan are
due beginning in January 1997. Interest is payable monthly under both loan
agreements. Under both the revolving credit line and the term loan, the Company
is subject to certain restrictions and covenants.
Senior Subordinated Note
The 13%, $8 million senior subordinated note (the "Note") matures December
31, 2001. Principal payments of $500,000 per quarter begin on March 31, 1998,
and interest is payable quarterly beginning December 31, 1996. In consideration
for the Note, the debt holder also received warrants with a put option (see
"Warrants" below) to purchase shares
- 15 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
of the Company's common stock. The appraised fair market value of the
warrants at issuance was determined to be $1.6 million and was recorded as a
discount to, and separately from, the Subordinated Note. At December 31, 1996,
the Note had a carrying value, net of unamortized discount, of $6,467,641. Under
the terms of the Note agreement, the Company is subject to certain restrictions
and covenants.
Warrants
As noted above, the Company issued to its Note holder warrants to purchase
13,022,920 shares of common stock. The warrants are exercisable at $0.325 per
share and can be exercised at any time from October 24, 1996 through December
31, 2005. Both the number of shares and the exercise price may be subject to
adjustment based upon certain factors. The initial, and maximum, exercise price
of $0.325 is subject to downward adjustment based on the Company's financial
performance during the 12 month period immediately prior to the exercise of the
warrants. The downward adjustment is limited to $0.20 per share for a minimum
exercise price of $0.125. These warrants are also subject to a put option (the
"Put") whereby, under certain circumstances, the holder can require the Company
to repurchase the warrants (including any common shares owned as a result of a
previous warrant exercise). Unless, and until, a "Qualifying Public Offering"
has occurred (defined as a sale to the public of at least $20 million of Company
stock), the put is exercisable after December 31, 2001, or after certain other
events such as a change in control, certain mergers, or uncured defaults under
the Note agreement. If the Note holder were to exercise the put, the cost to the
Company would be calculated based upon a formula and/or an independent
appraisal.
Based upon an independent appraisal of the warrants and attached put
option, a valuation of $1,600,000 was assigned to these instruments. The Company
is unable to determine if the holder will ever exercise the put and accordingly
what the purchase price would be at that time. However, beginning in 1997, the
Company will record an estimate of the possible valuation as of December 31,
2001 (the earliest date at which the put is exercisable, absent other events)
based upon projections of future results of operations and record an expense to
accrete the carrying value of the warrants with put option to such estimated
redemption value.
Gilbarco Financing
Two notes were issued by the Company in connection with the Gilbarco ESD
acquisition. Both were payable to Gilbarco. The first note, in the principal
amount of $400,000, became due on March 31, 1995 and was paid in full by the
Company. The second note was in the principal amount of $2,450,000. In March
1996, the Company obtained from Gilbarco a prepayment incentive in exchange for
an immediate payment of $256,000. In September 1996, the Company settled the
remaining note balance for $300,000. The debt had a carrying value at the
prepayment date of $2,113,149, including accrued interest. The settlement
resulted in an extraordinary gain of $1,813,149.
In November 1995, in consideration for the assignment of certain Gilbarco
patents, the Company entered into a note to pay Gilbarco an additional $300,000.
The $300,000 note was outstanding at December 31, 1996, bears interest at a
variable rate (currently, approximately 6%), and is due in October 2000.
The aggregate annual maturities of long-term debt and financing agreements
at December 31, 1996 are as follows:
1997 $ 1,963,564
1998 3,477,713
1999 5,344,963
2000 3,635,661
2001 3,266,033
17,687,934
Less: Discount related to subordinated notes (1,532,359)
-----------------
$ 16,155,575
=================
- 16 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
In January 1995, the Company raised $500,000 from a significant shareholder
("Proactive") in exchange for its promissory notes (the "1995 Bridge Note").
These notes were to mature on April 30, 1995. In January 1995, this note was
extended to May 31, 1995. In June 1995, the Company completed a restructuring of
the 1995 Bridge Note and Proactive's portion of the Subordinated Debt (the "June
Refinancing"). The shareholders agreed to exchange (I) the 1995 Bridge Note of
$500,000 plus accrued interest of $25,644, (ii) Proactive's portion of the
Subordinated Debt, which was $273,038, plus accrued interest of $4,728, and
(iii) cash of $500,000 for 261 newly issued shares of the Company's Series DDD
Preferred Stock. The Series DDD Preferred Stock was never issued. In March 1996,
instead of receiving the Series DDD Preferred Stock, the shareholders agreed to
convert the June Refinancing directly into a total of 5,482,254 shares of Common
Stock.
At December 31, 1996, the Company had positive working capital of $101,162
compared with a working capital deficit of $1,818,766 at December 31, 1995. The
decrease in the deficit is due to the previously discussed Financing. Cash used
in operating activities during 1995 was $1,181,393 and cash provided by
operating activities in 1996 was $868,023.
Prior to the Acquisition, the Company incurred operating losses and
negative cash flows from operations and relied primarily on it's principal
shareholders for financing. To a lesser extent, the Company had relied on bank
financing, lease financing, vendor financing, and seller financing with respect
to acquisitions. The Company has historically utilized cash proceeds from the
issuance of debt and equity securities to satisfy its cash requirements from
operations. The Company believes that the Financing, completed in conjunction
with the purchase of the UST group as described above, the proceeds from the
disposition of the business and operations of Tanknology Canada, discussed
below, and cash flows generated from operations will provide it with sufficient
borrowing capacity and funds to meet the Company's normal capital expenditure
requirements, operational needs, and debt service requirements for the next 12
months. This is a forward-looking statement, and the Company's actual cash flows
from operations and capital requirements may differ from management's current
expectation due to risk factors that may affect the Company's ability to fund
capital expenditure requirements, operations, and debt service.
In February 1997, the Company sold the business and operations of
Tanknology Canada which it acquired as part of the Acquisition. As part of the
transaction, the Company sold certain patent, software, and trademark rights as
well as the fixed assets associated with the operation of the Canadian business
and entered into a series of royalty generating license agreements. Payments of
$1,200,000 were paid at closing. $1,150,000 of the proceeds were allocated to
the sale of the patent, software and trademark rights and $50,000 was allocated
to the sale of the fixed assets. The net proceeds from these sales will reduce
the basis of the acquired assets and will have no impact to the Company's
results of operations in 1997. These funds will be used for general working
capital purposes.
ITEM 7. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of NDE Environmental
Corporation and Subsidiaries are attached hereto.
Page
----
Report of Independent Auditors.........................................F-2
Consolidated Balance Sheets - December 31, 1996 and 1995...............F-3
Consolidated Statements of Operations - Years Ended
December 31, 1996 and 1995........................................F-4
Consolidated Statements of Stockholders' Deficit -
Years Ended December 31, 1996 and 1995............................F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996 and 1995........................................F-7
Notes to Consolidated Financial Statements.............................F-8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 17 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth certain information regarding the Company's
executive officers and directors.
Officer and/or Director Positions Age
- ----------------------- -------------------------------------------------- ---
Jay Allen Chaffee Chairman of the Board, Director, Officer 45
A. Daniel Sharplin President, Chief Executive Officer, Director 35
David G. Osowski Vice President, Secretary, Chief Financial Officer 44
H. Baxter Nairon President, Tanknology/NDE subsidiary 37
Charles G. McGettigan Director 52
Michael S. Taylor Director 55
Myron A. Wick, III Director 54
Mark B. Bober Director 36
Jay Allen Chaffee was elected to the Company's Board of Directors in April
1991 and has been the Chairman since November 1994. He served as the Company's
President, Chief Executive Officer and Chief Financial Officer from May 1991
until June 1995. Mr. Chaffee has served as President and a director of Bunker
Hill Associates, Inc. ("Bunker Hill") since 1985, and he continues to serve in
these capacities.
A. Daniel Sharplin joined the Company's Board of Directors in June of 1995
and has been the Company's President and Chief Executive Officer since June
1995. He became the Company's Vice President, Western Region, in December 1991,
was appointed the Company's Chief Operating Officer and Secretary in July 1992
and in November 1994 was appointed President. Prior to joining the Company, Mr.
Sharplin functioned as an environmental service industry consultant from April
1991 to December 1991. Mr. Sharplin received a M.B.A. from the University of
Texas in 1987.
H. Baxter Nairon was named President, Field Services in April 1996, and is
the President of the Tanknology/NDE subsidiary. Prior to joining NDE, from 1989
to 1996, Mr. Nairon was employed by Booz- Allen & Hamilton, a global management
consulting firm, where he achieved the position of Principal, specializing in
engagements for large oil companies. He has received a Professional Engineering
registration, and is 37 years old. He holds a Bachelor of Science degree in
Mechanical Engineering from the University of Tennessee at Knoxville, and a
M.B.A. from the University of Texas.
David G. Osowski was named Vice President, Secretary and Chief Financial
Officer in December 1996. Prior to joining NDE, from May 1991 until July 1996,
Mr. Osowski served as Senior Vice President, Controller and Treasurer for
Summagraphics Corporation. Mr. Osowski received a Bachelor of Science degree
from the University of Bridgeport.
Charles G. McGettigan was a founding partner and is currently a general
partner of Proactive Investment Managers, L.P., which is the general partner of
Proactive Partners, L.P. Mr. McGettigan was a co-founder of McGettigan, Wick &
Co., Inc., an investment banking firm, in 1988. From 1984 to 1988, he was a
Principal, Corporate Finance, of Hambrecht & Quist, Incorporated. Prior to that,
Mr. McGettigan was a Senior Vice President of Dillon, Read & Co. Inc. He
currently serves on the Boards of Directors of Modtech, Inc.; Onsite Energy,
Inc.; PMR Corporation; and Sonex Research, Inc. Mr. McGettigan is a graduate of
Georgetown University, and he received his MBA in Finance from the Wharton
School at the University of Pennsylvania.
- 18 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Michael S. Taylor has been a director of the Company since July 1992. He
has been Associate Director of Investment Banking of Josephthal since June 1989.
From early 1980 until joining Josephthal, he was President of Mostel & Taylor
Securities, Inc., an NASD-member investment banking and brokerage firm. He has
been involved in the securities industry since 1966, when he joined Lehman
Brothers as an analyst. He became a director of Simtek Corporation this year. He
attended Amherst College and Columbia University. In 1991, the Securities and
Exchange Commission entered an administrative order finding that, in 1988 and
1989, Mr. Taylor aided Mostel & Taylor Securities, Inc. in connection with
certain violations of the net capital requirements for securities broker-dealers
imposed by the Securities Exchange Act of 1934, and suspended him from
associating with a broker dealer in any capacity for 90 days and in a
proprietary or supervisory capacity for two years, at which time he may apply to
remove the suspension. Mr. Taylor consented to the order without admitting or
denying its findings.
Myron A. Wick, III has been a director of the Company since November 1991.
Since November 1988, he has been Managing Director of McGettigan, Wick & Co.,
Inc., an investment banking firm in San Francisco which he co-founded. Since May
1991, Mr. Wick has been a general partner of Proactive Investment Managers,
L.P., which is the general partner of Proactive, a merchant banking fund
investing in and providing financial services to small public companies. From
September 1985 to May 1988, Mr. Wick was Chief Operating Officer of California
Biotechnology, Inc., a publicly traded biotechnology firm. Mr. Wick is a
director of Phoenix Network, Inc.; Sonex Research,; Inc. and Stat-Tech
International Corporation. Mr. Wick received a B.A. from Yale University in 1965
and an M.B.A. from Harvard University in 1968.
Mark B. Bober has been a director of the Company since December 1996. He is
a partner in Bober, Markey & Company, Certified Public Accountants, a position
he has held since August 1992. From 1983 until 1992 he held positions of
progressive responsibility with Price Waterhouse, Cleveland. Mr. Bober holds a
Bachelor of Science degree from Miami University and is a Certified Public
Accountant, State of Ohio.
Section 16(a) Beneficial Ownership Reporting Compliance
The Securities Exchange Act of 1934 requires the Company's directors and
officers and persons who own more than 10% of the Common Stock to file with the
Securities and Exchange Commission (the "SEC"), initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. The Company believes that, during the 1996 fiscal year, the filings
required of its officers, directors or greater than 10% beneficial owners have
not been timely filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the most highly compensated executive officers of the Company (the
"Named Executive Officers"), for all services rendered in all capacities to the
Company and its subsidiaries during 1994, 1995 and 1996. No other person who was
an executive officer of the Company at the end of 1996 was awarded, earned or
received annual salary and bonus in excess of $100,000.
- 19 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------------- -------------
Awards
-------------
Name and Shares
Principal Position Underlying All Other
Year Salary Bonus Options Compensation
- ------------------------ ------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Jay Allen Chaffee 1996 $ 90,000(1) $ 150,000(1)
Chairman of the Board 1995 $ 113,671 $ 19,969(1) 440,000(1)
of Directors 1994 $ 114,000
A. Daniel Sharplin 1996 $ 154,526(2) $ 75,000(2) $ 4,526(7)
President and Chief 1995 $ 136,779 $ 39,969(2) 640,000(5)
Executive Officer 1994 $ 117,885
A. Baxter Nairon 1996 $ 95,537 $ 45,000(3) 384,000(6)
President, Tanknology/ n/a
NDE and Field Services n/a
Division
<FN>
(1) In 1993, the Company awarded a bonus of $19,969 to Mr. Chaffee; this
amount was paid in installments in 1995 with the last installment being paid in
January 1996. In July 1995 the Company amended the Senior Executive Compensation
Plan, and revised the annual sum paid to Bunker Hill for Mr. Chaffee's
management services as an Officer of the Company to $90,000 from $125,000 (see
Item 12.). In 1996 the Compensation Committee awarded Mr. Chaffee a bonus for
1996 of $150,000 which has not yet been paid.
(2) In 1993, the Company accrued a $19,969 bonus for Mr. Sharplin; this
amount was paid in 1995. Also in 1995, the Compensation Committee awarded him a
$20,000 bonus which was paid in 1997. Mr. Sharplin's 1996 bonus award of $75,000
has not yet been paid.
(3) Mr. Nairon joined the Company in 1996 and received a $10,000 bonus as
an inducement to join the Company. He was also granted a salary advance of
$10,000 as of his hire date. In 1996 the Compensation Committee awarded Mr.
Nairon a 1996 bonus of $35,000 which was paid in 1997. Mr. Nairon repaid the
salary advance out of proceeds from the bonus payment.
(4) On June 22, 1995 Mr. Chaffee was awarded an option to purchase 440,000
shares of Common stock at $0.125 per share which will expire in June 2005. The
option vests one-third each year from date of grant starting June 22, 1995. The
option was granted in 1995, subject to approval by shareholders of an increase
in the number of shares available for grant to management under options.
Shareholders approved an increase in the number of shares available for grant in
1996 to 2,500,000. In addition, in 1996 certain previously granted options were
repriced (see "Report on Repricing of Options", below).
(5) On June 22, 1995 Mr. Sharplin was awarded an option to purchase 640,000
shares of Common stock at $0.125 per share which will expire in June 2005. The
option vests one-third each year from date of grant starting June 22, 1995. The
option was granted in 1995, subject to approval by shareholders of an increase
in the number of shares available for grant to management under options.
Shareholders approved an increase in the number of shares available for grant in
1996 to 2,500,000. In addition, in 1996 certain previously granted options were
repriced (see "Report on Repricing of Options", below).
(6) In March 1996, the Board granted an option to purchase 384,000 share of
Common stock to Mr. Nairon at $0.1875, the market price of NDE common stock on
Mr. Nairon's hire date. The option vests ratably one- third each year starting
at his date of hire. The option was granted in 1995, subject to approval by
- 20 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
shareholders of an increase in the number of shares available for grant to
management under options. Shareholders approved an increase in the number of
shares available for grant in 1996 to 2,500,000.
(7) Consists of matching funds for the Company 401k Plan relating to
Company contributions for 1992, 1993 and 1994 which were made in 1996.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth options granted to the Named Executive
Officers during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Number of
Shares
Underlying Percent of Options Exercise
Options Granted to Employees in Price per
Granted Fiscal Year Share Expiration Date
<S> <C> <C> <C> <C>
------------- --------------------------- ------------- --------------------
Name
- ------------------------
Jay Allen Chaffee - - - -
A. Daniel Sharplin - - - -
H. Baxter Nairon 384,000 33% $0.1875 (1) April 2006 (1)
<FN>
- --------------
(1) See Note (6) to the immediately preceding table.
</FN>
</TABLE>
Fiscal Year End Options Values
The following table sets forth the option holdings and the value of
unexercised options held by each Named Executive Officer as of December 31,
1996. None of the Named Executive Officers exercised options during 1996.
<TABLE>
<CAPTION>
Numbers of Shares Underlying Value of Unexercised
Unexercised Options in-the-Money Options
at December 31, 1996 at December 31, 1996
------------------------------------ --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------
<S> <C> <C> <C> <C>
Jay Allen Chaffee 196,666 293,334 $55,312 $82,500(1)
A. Daniel Sharplin 263,334 426,666 $74,063 $120,000(1)
H. Baxter Nairon 0 384,000 $0 $84,000(2)
<FN>
(1) Represents (i) the difference ($0.28125) between the exercise price of
the options ($0.125) and the per share fair market value on December 31, 1996
($0.40625) times (ii) the number of shares subject to the options.
(2) None of Mr. Nairon's options vest until April 15, 1997, one year after
his date of hire. Represents (i) the difference ($0.21875) between the exercise
price of the options ($0.1875) and the per share fair market value on December
31, 1996 ($0.40625) times (ii) the number of shares subject to the options.
</FN>
</TABLE>
Employment Agreements
Four executives of the Company (Messrs. Chaffee, Sharplin, Nairon, Osowski)
are subject to a change of control protection provision, which was instituted by
the Board in order to maintain a high-caliber officer group. The provision is
effective for the period July 1, 1993 through June 30, 1997, and provides, in
case of a change of control, (1) the immediate vesting of all options allocated
to each officer in the 1989 stock option plan, and (2) a payment in cash of two
times the annual base salary of any designated officer who is not offered a
position comparable in pay and authority with the surviving entity (NDE or
acquirer), or (3) a payment in cash equal to the annual base salary if the
- 21 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
designated officer is offered a position comparable in pay and authority with
the surviving entity. Change in control is defined as (1) an acquisition by a
party owning less than 25% of NDE as of July 1, 1993, giving effect to all
convertible securities (warrants and options are not convertible securities), of
greater than 30% of the common shares; or (2) a change in one year of over 50%
of the members of the Board of Directors other than in the normal course of
business or pursuant to the rights under preferred share certificates.
Report on Repricing of Options
In 1996 the Compensation Committee of the Board of Directors determined
that in connection with the granting of executive options in 1995, that it would
be in the best interests of shareholders and the Company to reprice certain
management options that had been granted in 1993 to a current market price
rather than issue additional new options. The Committee believed that at the
existing exercise prices, the options were not providing the proper performance
incentive to management. Accordingly, the Committee repriced 50,000 options that
had been previously granted to each Messrs. Chaffee and Sharplin as well as
20,000 for Mr. Eric Hopkins the former Vice President and Chief Financial
Officer of the Company to $0.125, the then market price of the Common Stock. All
of the aforementioned options previously had exercise prices of $3.75. All of
these options remain fully vested following the repricing.
Compensation of Directors
The Company has agreed to pay or reimburse the travel expenses of its
directors resulting from attendance at Board meetings. No other cash
compensation was paid to, or on behalf of, board members, in consideration of
their services provided as directors in 1996. However, certain directors were
provided compensation for other services provided to the Company (see Item 12 of
this Annual Report on Form 10- KSB/A). Beginning in 1997, the Board of Directors
agreed to pay Mr. Bober a per meeting fee of $2,250 and to reimburse his travel
expenses.
In 1992, the Company granted to each of its then outside directors (
including Michael Taylor and Myron A. Wick), options to purchase 4,000 shares of
Common Stock. These options were granted at exercise prices equal to the market
prices on the grant dates ($7.50 for options granted to Mr. Wick, $12.50 for the
options granted to Mr. Taylor. In March 1996, the Company canceled the prior
options issued to Messrs. Taylor and Wick and granted 40,000 options with an
exercise price of $0.125 to each non-management director (Messrs. Taylor, Wick,
and McGettigan). In December 1996, the Board granted Mr. Bober 40,000 options to
purchase Common Stock at an exercise price of $0.40625.
There was no other director compensation paid during 1996 or 1995 to the
non-management directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of the Company's capital stock, as of April 2, 1997, by: (a) each
stockholder known by the Company to be the beneficial owner of more than 5% of a
class of voting stock, (b) each director, (c) each of the Named Executive
Officers of the Company named in the Summary Compensation Table below, and (d)
all executive officers and directors as a group.
- 22 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
Beneficial Ownership of Common Stock (1)
<TABLE>
<CAPTION>
Number of Percentage of
Beneficial Owner Shares Class
- ----------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Proactive Partners, L.P.(2) (3) (4) (5) 14,349,233 47.80
50 Osgood Place, Penthouse
San Francisco, CA 94153
Lagunitas Partners, L.P.(2) (3) (4) (5) 14,319,556 47.71
50 Osgood Place, Penthouse
San Francisco, CA 94153
Banc One Capital Partners 13,022,920 43.39
150 East Gay Street
Columbus, OH 43215
Myron A. Wick, III (4) (5) 10,614,595 35.36
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94133
Charles C. McGettigan (4) (5) 10,614,595 35.36
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94133
A. Daniel Sharplin (6) 1,016,959 3.39
Jay Allen Chaffee (7) 410,483 1.37
H. Baxter Nairon (8) 128,000 *
Mark B. Bober (9) -- *
Michael S. Taylor (10) 17,333 *
All executive officers and directors as a group (8 15,922,008 53.04
persons)
(*) Less than 1% of the outstanding Common Stock
<FN>
(1) For the purposes of the above table and the following notes, the shares
of Common Stock shown as "beneficially owned" include all shares of Common Stock
that the "beneficial owner" has the right to acquire within 60 days upon the
conversions of other securities, upon the exercise of warrants, or otherwise. In
calculating the total number of shares of Common Stock deemed to be outstanding
for the purposes of reflecting the beneficial owner's percentage of the class,
the shares that other owners did not then own but had the right to acquire
within 60 days or more are not included.
(2) Includes 10,267,378 outstanding shares of Common Stock. Also includes
(i) 175,000, 105,874 and 50,000 shares reserved for issuance upon the exercise
of warrants at prices of $0.375, $0.15, and $0.125 respectively; (ii) 3,721,304
shares beneficially owned by Lagunitas and referred to in note (3) below; (iii)
the 13,333 shares beneficially owned by Mr. Wick and referred to in note (4)
below, (iv) the 13,333 shares beneficially owned by Mr. McGettigan and referred
to in note (5) below, (v) and 3,010 shares issuable upon the exercise of
warrants at a price of $0.15 issued to McGettigan, Wick & Co., Inc. (for the
benefit of Proactive Investment Managers, L.P.). Mr. Wick is a general partner
of McGettigan, Wick & Co., Inc. and of Proactive's general partner, Proactive
Investment Managers, L.P. See also note (7) below.
- 23 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
(3) Includes 3,694,390 outstanding shares of Common Stock. Also includes
(i) 26,914 shares of Common Stock issuable upon the exercise of warrants at a
price of $0.15 per share and (ii) 10,598,252 shares beneficially owned by
Proactive and referred to in note (2) above.
Two of the general partners of Lagunitas Partners, L.P. ("Lagunitas"), Jon
D. Gruber and J. Patterson McBaine, are also general partners of the general
partner of Proactive. Accordingly, Mr. Gruber and Mr. McBaine could be regarded
as sharing the power to vote and dispose of all the securities referred to in
this note (3) and in note (2) above, as well as the other securities referred to
in the table as beneficially owned by Proactive or Lagunitas.
(4) Includes (i) 13,333 shares of Common Stock issuable upon the exercise
of stock options granted to Mr. Wick under the Company's 1989 Stock Option Plan
and (ii) the shares beneficially owned by Proactive and referred to in note (2)
above (10,598,252). Mr. Wick is a general partner of the general partner of
Proactive. Also includes 3,010 shares beneficially owned by McGettigan, Wick &
Co. (Mr. Wick is a general partner of McGettigan, Wick & Co.) but does not
include an additional 26,667 shares subject to options that are not yet
exercisable. Also does not include 184,410 shares owned by the NDE Environmental
Corporation 401K plan of which Mr. Wick is a Trustee.
(5) Includes (i) 13,333 shares of Common Stock issuable upon the exercise
of stock options granted to Mr. McGettigan under the Company's 1989 Stock Option
Plan and (ii) the shares beneficially owned by Proactive and referred to in note
(2) above (10,598,252). Mr. McGettigan is a general partner of the general
partner of Proactive. Also includes (c) 3,010 shares beneficially owned by
McGettigan, Wick & Co. (Mr. McGettigan is a general partner of McGettigan, Wick
& Co.) but does not include an additional 26,667 shares subject to options that
are not yet exercisable.
(6) Includes 513,932 outstanding shares of Common Stock. Also includes
26,360 shares reserved for issuance upon the exercise of warrants at prices of
$7.50. Also includes 476,667 shares reserved for issuance to Mr. Sharplin under
the Company's 1989 Stock Option Plan but does not include an additional 213,333
shares subject to options that are not yet exercisable. Also does not include
184,410 shares owned by the NDE Environmental Corporation 401K plan of which Mr.
Sharplin is a Trustee.
(7) Includes 67,150 outstanding shares of Common Stock. These shares are
held in the name of Bunker Hill, an affiliate of Mr. Chaffee. Also includes
343,333 shares subject to exercisable options granted to Bunker Hill under the
Company's 1989 Stock Option Plan but does not include 146,667 shares subject to
options that are not yet exercisable. Also does not include 184,410 shares owned
by the NDE Environmental Corporation 401K plan of which Mr. Chaffee is a
Trustee.
(8) Consists of 128,000 shares issuable upon the exercise of options
granted to Mr. Nairon under the Company's 1989 Stock Option Plan but does not
include 256,000 shares subject to options that are not yet unexercisable.
(9) Does not include 40,000 shares subject to options granted to Mr. Bober
under the Company's 1989 Stock Option Plan that are not yet unexercisable.
(10) Includes 13,333 shares issuable upon the exercise of options granted
to Mr. Taylor under the Company's 1989 Stock Option Plan but does not include
26,667 shares subject to options that are not yet unexercisable. Also includes
4,000 shares outstanding held by Mr. Taylor's wife. Mr. Taylor disclaims
beneficial ownership of his wife's shares.
</FN>
</TABLE>
- 24 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last fiscal year, the following transactions in excess of
$60,000 were entered into with related parties: Bank One Capital Partners, a
lender to and warrant holder of the Company, purchased $8,000,000 in senior
subordinated debt, earned $170,000 in fees related to the debt purchase, and
were reimbursed $21,930 for due diligence and travel costs. Proactive Investment
Managers, L.P., a major shareholder of the Company, converted $825,000 of debt
and $28,103 of accrued interest into 6,600,000 shares common stock. Lagunitas
Partners, L.P., a major shareholder of the Company, converted $175,000 of debt
and $7,779 of accrued interest into 1,400,000 shares common stock. Jay Allen
Chaffee, Chariman of the Board of Directors, is the president of Bunker Hill
Associates. During 1996, the Company paid $318,775 to Bunker Hill for services
and expenses as described below.
In connection with the Acquisition, the Company placed $8 million of senior
subordinated debt with a 5-year maturity and interest at 13% per annum with Banc
One Capital Partners L.P. ("BOCP"). BOCP also purchased from the Company
13,022,920 warrants each to purchase one share of the Company's common stock at
an initial exercise price of $0.325 per warrant subject to downward adjustment
(but not less than $0.125 per warrant) based on the company's financial
performance during the 12 month period prior to the exercise of the warrants. In
connection with the Acquisition and related financings, Proactive Partners, L.P.
of San Francisco, California, provided a $1 million standby commitment in the
event of a payment default by the Company under both the BOCP subordinated debt
and, together with its affiliate Lagunitas L.P., agreed to convert $1 million of
prior indebtedness, and $35,882 of associated accrued interest, into 8,000,000
shares of the Company's common stock.
In 1991, the Company entered into a service contract with Bunker Hill
Associates, Inc. ("Bunker Hill") to retain the services of Mr. Chaffee. Mr.
Chaffee is a principal of Bunker Hill, a management consulting firm based in
Houston, Texas. Pursuant to the contract, Mr. Chaffee has agreed to serve the
Company in various capacities as an officer and director. Effective July 1995,
the Company agreed to pay for such services at the rate of $7,500 per month with
additional stock and cash bonus consideration. The contract can be terminated by
either party with one month's notice. In 1996, Bunker Hill, on behalf of Mr.
Chaffee, received $90,000 in consideration of Mr. Chaffee's management services
as an officer of the Company. In addition, $78,775 was remitted to Bunker Hill
Associates for secretarial support and reimbursement of travel and out-of-pocket
expenses related to Mr. Chaffee's services.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated
herein by reference:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) 1996 Financial Statements, Contents...................................F-1
Report of Independent Auditors........................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995..........F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995............................................F-4
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1996 and 1995............................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995............................................F-7
Notes to Consolidated Financial Statements............................F-8
</TABLE>
- 25 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
(2) Index to Financial Statement Schedules:
All information required in Financial Statement
Schedules for which provision is made in the applicable
accounting regulations of the Commission (i) are included in
the notes to the financial statements included in this
report or (ii) are not required under the related
instruction or are inapplicable and, therefore, have been
omitted.
(3) Exhibits:
No. Exhibit
------- -------------------------------------------------
3.01 Amended and Restated Certificate of Incorporation
of the Registrant, as amended May 22, 1996
3.02 Bylaws of the Registrant, as adopted
November 29, 1988 and amended July 10,
1990. (Incorporated by reference from
Exhibit 3.06 of Form 10-KSB for the fiscal
year ended December 31, 1991.)
10.01 Stock Purchase Agreement, dated as of December
11, 1993, among the Registrant, Jim R. Clare and
Donald Valverde. (Incorporated by reference
from Exhibit 10.76 of Form 10-KSB for the fiscal
year ended December 31, 1993.)
10.02 Secured Promissory Note, dated April 11, 1994,
issued by the Registrant to Gilbarco Inc. in the
principal amount of $2,450,000 (Incorporated by
reference from Exhibit 10.83 of Form 10-KSB for
the fiscal year ended December 31, 1993.)
10.03 Security Agreement, dated as of April 11,
1994, between the Registrant and Gilbarco
Inc. securing payment of the Secured
Promissory Note (Exhibit 10.02).
(Incorporated by reference from Exhibit
10.84 of Form 10-KSB for the fiscal year
ended December 31, 1993.)
10.04 Patent License Agreement, dated as of April
11, 1994, between the Registrant and
Gilbarco Inc. (Incorporated by reference
from Exhibit 10.86 of Form 10-KSB for the
fiscal year ended December 31, 1993.)
10.05 Third Amendment to NDE Environmental
Corporation's Secured Notes, Dated as of
March 31, 1995, between the Registrant and
Proactive Partners; Spears, Benzak,
Salomon, & Farrell; Dan Purjes; Peter
Sheib; Lawrence Rice; and Joan Taylor.
(Incorporated by reference from Exhibit
10.88 of Form 10-KSB for the fiscal year
ended December 31, 1994.)
10.06 Second Amendment to NDE Environmental
Corporation's Subordinated Note, dated as of
March 31, 1995, between the Registrant and
Spears, Benzak, Salomon, and Farrell.
(Incorporated by reference from Exhibit 10.89 of
Form 10-KSB for the fiscal year ended December
31, 1994.)
10.07 First Amendment to NDE Environmental
Corporation's Subordinated Secured Promissory
Note, dated as of February 28, 1995, between the
Registrant and Gilbarco, Inc. (Incorporated by
reference from Exhibit 10.90 of Form 10-KSB for
the fiscal year ended December 31, 1994.)
10.08 Promissory note, dated as of January 17, 1995,
between the Registrant and Proactive Partners,
L.P. (Incorporated by reference from Exhibit
10.94 of Form 10-KSB for the fiscal year ended
December 31, 1994.)
- 26 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
No. Exhibit
------- -------------------------------------------------
10.09 First Amendment of The Promissory Note dated
January 17, 1995, Amendment dated April 30, 1995,
between the registrant and Partners L. P.
(Incorporated by reference from Exhibit 10.96 of
Form 10-QSB for the quarterly period ended March
31, 1995.)
10.10 First Amendment of the Financing Agreement
between the registrant and Silicon Valley
Financial Services, dated June 20, 1995.
(Incorporated by reference from Exhibit 10.97 of
Form 10-QSB for the quarterly period ended June
30, 1995.)
10.11 Notice of Conversion regarding Series AAA
Preferred Stock between the registrant and
Proactive Partners, L.P.; Lagunitas
Partners L.P.; and A. Daniel Sharplin,
dated as of April 17, 1995. (Incorporated
by reference from Exhibit 10.98 of Form 10-
QSB for the quarterly period ended June 30,
1995.)
10.12 Notice of Conversion regarding Series BBB
Preferred Stock between the registrant and
Proactive Partners, L.P.; Lagunitas
Partners, L.P.; and A. Daniel Sharplin,
dated as of April 17, 1995. (Incorporated
by reference from Exhibit 10.99 of Form 10-
QSB for quarterly period ended June 30,
1995.)
10.13 Notice of Conversion regarding Series CCC
Preferred Stock between the registrant and
Proactive Partners, L.P.; Lagunitas Partners,
L.P.; and A. Daniel Sharplin, dated as of April
17, 1995. (Incorporated by reference from Exhibit
10.100 of Form 10- QSB for the quarterly period
ended June 30, 1995.)
10.14 Promissory Note, dated as of November 6, 1995,
between the Registrant and Gilbarco, Inc.
(Incorporated by reference from Exhibit 10.102 of
Form 10-KSB for the fiscal year ended December
31, 1995.)
10.15 Promissory Note, dated as of , February 13, 1996,
between the Registrant and Proactive Partners,
L. P. (Incorporated by reference from Exhibit
10.103 of Form 10-KSB for the fiscal year ended
December 31, 1995.)
10.16 Promissory Note, dated as of , February 13, 1996,
between the Registrant and Lagunitas Partners,
L. P. (Incorporated by reference from Exhibit
10.104 of Form 10-KSB for the fiscal year ended
December 31, 1995.)
10.17 Second Amendment to NDE Environmental
Corporation's Secured Promissory Note, dated as
of March 22, 1996, between Registrant and
Gilbarco, Inc. (Incorporated by reference from
Exhibit 10.105 of Form 10-KSB for the fiscal year
ended December 31, 1995.)
10.18 Settlement Agreement dated as of November 30,
1995 between the Registrant and Protank, Inc.
(Incorporated by reference from Exhibit 10.106 of
Form 10-KSB for the fiscal year ended December
31, 1995.)
10.19 1996 Funding Agreement, dated as of, March 27,
1996, between the Registrant, Proactive Partners
and Lagunitas Partners, L. P. (Incorporated by
reference from Exhibit 10.107 of Form 10-KSB for
the fiscal year ended December 31, 1995.)
10.20 1996 Additional Funding Agreement, dated as
of March 15, 1996, between the Registrant
and Proactive Partners, L.P. (Incorporated
by reference from Exhibit 10.108 of Form
10-QSB for the quarterly period ended June
30, 1996.)
- 27 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
No. Exhibit
------- -------------------------------------------------
10.21 1996 Second Additional Funding Agreement,
dated as of June 13, 1996, between the
Registrant and Proactive Partners, L.P.
(Incorporated by reference from Exhibit
10.109 of Form 10-QSB for the quarterly
period ended June 30, 1996.)
10.22 Revised Agreement to NDE Environmental
Corporation's Secured Promissory Note,
between the Registrant and Gilbarco, Inc.,
dated as of September 15, 1996.
(Incorporated by reference from Exhibit
10.1 of Form 10-QSB for the quarterly
period ended September 30, 1996.)
10.23 Stock Purchase Agreement between NDE
Environmental Corporation and Tanknology
Environmental, Inc. Dated as of October 7, 1996.
(Incorporated by reference from Exhibit 2.1 of
Form 8-K dated October 25, 1996.)
10.24 First Amendment to Stock Purchase Agreement
between NDE Environmental Corporation and
Tanknology Environmental, Inc. dated as of
October 25, 1996. (Incorporated by reference from
Exhibit 2.2 of Form 8-K dated October 25, 1996.)
10.25 Loan Agreement, dated October 25, 1996,
between NDE Environmental Corporation,
Tanknology/NDE Corporation, USTMAN
Industries, Inc., ProEco, Inc., Tanknology
Canada (1988) Inc., and Bank One Texas,
N.A. (Incorporated by reference from
Exhibit 10.1 of Form 8-K dated October 25,
1996.)
10.26 Revolving Note dated October 25, 1996,
issued pursuant to the Loan Agreement.
(Incorporated by reference from Exhibit
10.1a of Form 8-K dated October 25, 1996.)
10.27 Term Note dated October 25, 1996 issued
pursuant to the Loan Agreement.
(Incorporated by reference from Exhibit
10.1b of Form 8-K dated October 25, 1996.)
10.28 Note and Warrant Purchase Agreement, dated
as of October 25, 1996, between NDE
Environmental Corporation, Tanknology/NDE
Corporation, USTMAN Industries, Inc.,
ProEco, Inc., and Tanknology Canada (1988)
Inc. and Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit
10.2 of Form 8-K dated October 25, 1996.)
10.29 Senior Subordinated Note due December 31, 2001,
dated October 25, 1996 issued pursuant to the
Note and Warrant Agreement. (Incorporated by
reference from Exhibit 10.2a of Form 8-K dated
October 25, 1996.)
10.30 Warrant Certificate dated October 25, 1996 issued
pursuant to the Note and Warrant Purchase
Agreement. (Incorporated by reference from
Exhibit 10.2b of Form 8-K dated October 25, 1996)
10.31 Security Agreement, dated as of October 25,
1996, among NDE Environmental Corporation,
Tanknology/NDE Corporation, USTMAN
Industries, Inc., ProEco, Inc., and
Tanknology Canada (1988), Inc., and Banc
One Capital Partners, L.P. (Incorporated by
reference from Exhibit 10.3 of Form 8-K
dated October 25, 1996.)
10.32 Security Agreement - Pledge of Subsidiary
Stock, dated as of October 25, 1996,
between NDE Environmental Corporation and
Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit
10.4 of Form 8-K dated October 25, 1996.)
- 28 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
No. Exhibit
------- -------------------------------------------------
10.33 Put Option Agreement, dated as of October
25, 1996, between NDE Environmental
Corporation and Banc One Capital Partners
L.P. (Incorporated by reference from
Exhibit 10.5 of Form 8-K dated October 25,
1996.)
10.34 Registration Rights Agreement, dated as of
October 25, 1996, between NDE Environmental
Corporation and Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit 10.6 of
Form 8-K dated October 25, 1996.)
10.35 Preemptive Rights Agreement, dated as of October
25, 1996, between NDE Environmental Corporation
and Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit 10.7 of
Form 8-K dated October 25, 1996.)
10.36 Co-Sale Agreement, dated as of October 25, 1996,
among NDE Environmental Corporation, Proactive
Partners, L.P., Lagunitas L.P., Jay Allen
Chaffee, A. Daniel Sharplin, and Banc One Capital
Partners, L.P. (Incorporated by reference from
Exhibit 10.8 of Form 8-K dated October 25, 1996.)
10.37 Standby Commitment, made as of October 25, 1996,
among Proactive Partners L.P., NDE Environmental
Corporation, Banc Capital Partners, L.P., and
Bank One Texas, N.A. (Incorporated by reference
from Exhibit 10.9 of Form 8-K dated October 25,
1996.)
10.38 Shareholder Agreement, dated as of October 25,
1996, among Proactive Partners, L.P., Lagunitas
L.P., Jay Allen Chaffee, A. Daniel Sharplin, and
Banc One Capital Partners, L.P. (Incorporated by
reference from Exhibit 10.10 of Form 8-K dated
October 25, 1996.)
10.39 Pledge and Security Agreement, dated October 25,
1996, between NDE Environmental Corporation and
Bank One Texas N.A. (Incorporated by reference
from Exhibit 10.11 of Form 8-K dated October 25,
1996.)
10.40 Pledge and Security Agreement, dated
October 25, 1996, between Tanknology/NDE
Corporation and Bank One Texas N.A.
(Incorporated by reference from Exhibit
10.12 of Form 8-K dated October 25, 1996.)
10.41 Pledge and Security Agreement, dated October 25,
1996, between ProEco, Inc. and Bank One Texas,
N.A. (Incorporated by reference from Exhibit
10.13 of Form 8-K dated October 25, 1996.)
10.42 Pledge and Security Agreement, dated October 25,
1996, between USTMAN Industries, Inc., and Bank
One Texas, N.A. (Incorporated by reference from
Exhibit 10.14 of Form 8-K dated October 25, 1996)
10.43 Amendment No. 1 to Loan Agreement (Exhibit 10.25)
dated April 10, 1997, among NDE Environmental
Corporation Tanknology/NDE Corporation, USTMAN
Industries, Inc., ProEco, Inc. Tanknology Canada
(1988), Inc. and Bank One, Texas, N.A.
10.44 Amendment No. 1 to Note and Warrant Purchase
Agreement ( Exhibit 10.28) dated April 10, 1997,
among NDE Corporation, Tanknology/NDE
Corporation, USTMAN Industries, Inc., ProEco,
Inc. Tanknology Canada (1988), Inc. and Bank One
Capital Partners, L.P.
- 29 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
No. Exhibit
------- -------------------------------------------------
21.01 Subsidiaries of the Registrant
27.01 Selected Financial Data
(b) There was one Report on 8-K filed during the quarter
ended December 31, 1996, as follows:
<TABLE>
<CAPTION>
Filed Dated
-------------------- ------------------
<S> <C> <C> <C>
November 12, 1996 October 25, 1996 Item 2, Acquisition or Disposition of Assets:
Acquisition of the Tanknology UST Group from
Tanknology Environmental, Inc.
</TABLE>
- 30 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No. 1)
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Amendment to the Annual Report filed on Form 10-KSB/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
NDE ENVIRONMENTAL CORPORATION
Date: April 30, 1997 By: /s/ A. DANIEL SHARPLIN
------------------ -----------------------------------------------
A. Daniel Sharplin
President, Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
- 31 -
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No.1)
Exhibits
Index to Exhibits
3.01 Amended and Restated Certificate of Incorporation of the Registrant,
as amended May 22, 1996
10.43 Amendment No.1 to Loan Agreement (Exhibit 10.25) dated April 10, 1997,
among NDE Environmental Corporation Tanknology/NDE Corporation, USTMAN
Industries, Inc., ProEco, Inc. Tanknology Canada (1988), Inc. and Bank
One, Texas, N.A.
10.44 Amendment No. 1 to Note and Warrant Purchase Agreement (Exhibit 10.28)
dated April 10, 1997, among NDE Corporation, Tanknology/NDE Corpora-
tion, USTMAN Industries, Inc., ProEco, Inc. Tanknology Canada (1988),
Inc. and Bank One Capital Partners, L.P.
21.01 Subsidiaries of the Registrant
27.01 Selected Financial Data
32
<PAGE>
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No.1)
Exhibits
Exhibit 3.01
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NDE ENVIRONMENTAL CORPORATION
(A DELAWARE CORPORATION)
(Originally incorporated on November 23, 1988)
ARTICLE 1
The name of the Corporation is NDE Environmental Corporation.
ARTICLE 2
The address of the registered office of the Corporation in the State
of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover,
County of Kent. The name of its registered agent at that address is The
Prentice-Hall Corporation System, Inc.
ARTICLE 3
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation law of Delaware.
ARTICLE 4
The total number of shares of stock of all classes which the
corporation has authority to issue is 50,010,000 shares, consisting of
50,000,000 shares of Common Stock with a par value of $0.0001 per share,
and 10,000 shares of Preferred Stock with a par value of $0.0001 per share.
The Preferred Stock authorized by this Certificate of Incorporation may be
issued from time to time in one or more series. The Board of Directors is
hereby authorized to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption, including
sinking fund provisions, the redemption price or prices, the liquidation
preferences and the other preferences, powers, rights, qualifications,
limitations and restrictions of any wholly unissued class or series of
Preferred Stock and the number of shares constituting any such series and
the designation thereof.
The Board of Directors is further authorized to increase or decrease
the number of shares of any series of Preferred Stock, the number of which
was fixed by it, subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding, subject to the
limitations and restrictions stated in the resolution of the Board of
Directors originally fixing the number of shares of such series. In case
the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to
the adoption of the resolution originally fixing the number of shares of
such series.
ARTICLE 5
The stockholders of the Corporation holding a majority of the
Corporation's outstanding voting stock shall have the power to adopt, amend
or repeal the Bylaws. The Board of Directors of the Corporation shall also
have the power to adopt, amend or repeal Bylaws of the Corporation, except
as such power may be expressly limited by Bylaws adopted by the
stockholders.
ARTICLE 6
Election of Directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. If, as of the record date of any
meeting of the stockholders or the date of any action by written consent,
the aggregate number of directors which the holders of the Preferred Stock,
either voting together as a class or as separate series, as the case may
be, are entitled to elect (the "Preferred Number") shall be less than the
authorized number of directors, then the holders of the Common Stock,
voting together as a single class, shall be entitled to elect a number of
directors equal to the difference between the authorized number of
directors and the Preferred Number.
ARTICLE 7
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (I) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.
Any repeal or modification of the foregoing provisions of this Article
7 shall be prospective only, and shall not adversely affect any limitation
on the personal liability of a director of the Corporation existing at the
time of such repeal or modification.
ARTICLE 8
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this Article 8.
A.(1 )Except as otherwise expressly provided in Section B of this
Article 8:
(i)any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (a) any Interested Shareholder (as
hereinafter defined) or (b) any other corporation (whether or not itself an
Interested Shareholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined) of ten percent (10%) or more of the
total value of the assets of the Corporation and its consolidated
subsidiaries as reflected in the most recent balance sheet of the
Corporation; or
(iii) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Shareholder or any
Affiliate of any Interested Shareholder in exchange for cash, securities or
other property (or a combination thereof having an aggregate Fair Market
Value of $10,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Shareholder or any Affiliate of any Interested Shareholder; or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving any
Interested Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class
of equity or convertible securities of the Corporation or any Subsidiary
which is directly or indirectly owned by any Interested Shareholder or any
Affiliate of any Interested Shareholder; shall require the affirmative vote
of the holders of at least 66 2/3 percent of the voting power of all the
then-outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors (hereinafter in this Article 8
referred to as the "Voting Stock.), voting together as a single class (it
being understood that, for purposes of this Article 8, each share of the
Voting Stock shall have the number of votes granted to it pursuant to the
Certificate of Incorporation, including any designation of the rights,
powers and preferences of any class or series of Preferred Stock (a
"Preferred Stock Designation.)). Such affirmative vote shall be requried
notwithstanding any other previsions [sic] of this agreement with any
national securities exchange which might otherwise permit a lesser vote or
not vote, but such affirmative vote shall be required in addition to any
affirmative vote of the holders of any particular class or series of the
Voting Stock required by law or the Certificate of Incorporation or any
Preferred Stock Designation.
(2) The term "Business Combination" as used in this Article 8 shall
mean any transaction which is referred to in any one or more of
subparagraphs (I) through (v) of paragraph (1 ) of this Section A.
B. The provisions of Section A of this Article 8 shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by law,
any other provision of this Certificate of Incorporation, any Preferred
Stock Designation or any agreement with any national securities exchange,
if, in the case of a Business Combination that does not involve any cash or
other consideration being received by the stockholders of the Corporation,
solely in their respective capacities as stockholders of the Corporation,
the condition specified in the following paragraph (1) is met, or, in the
case of any other Business Combination, the conditions specified in either
of the following paragraphs (1 ) and (2) are met:
(1) The Business Combination shall have been approved by a majority of
the Continuing Directors (as hereinafter defines), even if the Continuing
Directors do not constitute a quorum of the entire Board of Directors, it
being understood that this condition shall not be capable of satisfaction
unless there is at least one Continuing Director.
(2) All the following conditions shall have been met:
(i) The consideration to be received by holders of shares of a
particular class of outstanding Voting Stock shall be in cash or in the
same form as the Interested Shareholder has paid for shares of such class
of Voting Stock within the two-year period ending on and including the date
on which the Interested Shareholder became an Interested Shareholder (the
Determination Date"). If, within such two-year period, the Interested
Shareholder has paid for shares of any class of Voting Stock with varying
forms of consideration, the form of consideration to be received per share
by holders of shares of such class of Voting Stock shall be either cash or
the form used to acquire the largest number of shares of such class of
Voting Stock acquired by the Interested Shareholder within such two-year
period.
(ii) The aggregate amount of (x) the cash and (y) the Fair Market
Value, as of the date (the "Consummation Date") of the consummation of the
Business Combination shall be at least equal to the higher of the following
(it being intended that the requirements of this paragraph 2 (ii) shall be
required to be met with respect to all shares of Common Stock outstanding
whether or not the Interested Shareholder has previously acquired any
shares of Common Stock)
(a) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of Common Stock acquired by it
within the two-year period immediately prior to the date of the first
public announcement of the proposal of the Business Combination (the
"Announcement Date") or in the transaction in which it became an Interested
Shareholder, whichever is higher, plus interest compounded annually from
the Determination Date through the Consummation Date at the prime rate of
interest of The Bank of America N.T. & S.A. (or such other major bank
headquartered in the State of California as may be selected by the
Continuing Directors) from time to time in effect in the City of San
Francisco, less the aggregate amount of any cash dividends paid, and the
Fair Market Value of any dividends paid in other than cash, on each share
of Common Stock from the Determination. Date through the Consummation Date
in an amount up to but not exceeding the amount of interest so payable per
share of Common Stock; or
(b) the Fair Market Value per share of Common Stock on the
Announcement Date.
(iii) The aggregate amount of (x) the cash and (y) the Fair Market
Value, as of the Consummation Date, of the consideration other than cash to
be received per share by holders of shares of any class, other than Common
Stock, of outstanding Voting Stock shall be at least equal to the highest
of the following (it being intended that the requirements of this paragraph
(2) (iii) shall be required to be met with respect to every such class of
outstanding Voting Stock, whether or not the Interested Shareholder has
previously acquired any shares of a particular class of Voting Stock):
(a) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of such class of Voting Stock
acquired by it within the two-year period immediately prior to the
Announcement Date or in the transaction in which it became an Interested
Shareholder, whichever is higher, plus interest compounded annually from
the Determination Date through the Consummation Date at the prime rate of
interest of The Bank of America N.T. & S.A (or such other major bank
headquartered in the City of San Francisco as may be selected by the
Continuing Directors) from time to time in effect in the City of San
Francisco, less the aggregate amount of any cash dividends paid, and the
Fair Market Value of any dividends paid in other than cash, on each share
of such class of Voting Stock from the Determination Date through the
Consummation Date in an amount up to but not exceeding the amount of
interest so payable per share of such class of Voting Stock; or
(b) the Fair Market Value per share of such class of Voting Stock on
the Announcement Date; or
(c) the highest preferential amount per share to which the holders of
shares of such class of Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation.
(iv) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination: (a)
except as approved by a majority of the Continuing Directors, there shall
have been no failure to declare and pay at the regular date therefor any
full quarterly dividends (whether or not cumulative) on any outstanding
Preferred Stock; (b) there shall have been (I) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary to reflect
any subdivision of the Common Stock), except as approved by a majority of
the Continuing Directors, and (II) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to increase such annual
rate is approved by a majority of the Continuing Directors; and (c) such
Interested Shareholder shall have not become the beneficial owner of any
additional shares of Voting Stock except as part of the transaction which
results in such Interested Shareholder becoming and Interested Shareholder.
(v) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately, solely in such
interested Shareholder's capacity as a stockholder of the Corporation), of
any loans, advances, guarantees, pledges, or other financial assistance or
any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise.
(vi) A proxy or information statement describing the proposed Business
Combination complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) and setting forth, as
an exhibit thereto, the opinion of an investment banking firm selected by a
majority of the Continuing Directors, or, if there are no Continuing
Directors, an opinion of the investment banking firm most recently retained
by the Corporation before the Interested Shareholder became an Interested
Shareholder, or any successor in interest to such investment banker, that
the proposed Business Combination is fair from a financial point of view to
the stockholders of the Corporation other than the Interested Shareholder,
shall be mailed to all stockholders of the Corporation at least 30 days
prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purposes of this Article 8:
(1 ) A "person" shall mean any individual, firm, corporation or other
entity.
(2) "Interested Shareholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) it is the beneficial owner, directly or indirectly, of fifteen
percent (15%) or more of the voting power of the outstanding Voting Stock;
or
(ii) is an Affiliate of the Corporation and at any time within the
three-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of fifteen percent (15%) or more
of the voting power of the then- outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the three-year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
(3) A person shall be a "Beneficial owner' of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates of Associates has (a)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Voting Stock.
(4) For the purposes of determining whether a person is an Interested
Shareholder pursuant to paragraph (2) of this section C, the number of
shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of paragraph (3) of this section C but shall not
include any other shares of Voting Stock which may be issuable pursuant to
any agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on July 1, 1987
(the term "registrant" in said Rule 12b-2 meaning in this case the
Corporation).
(6) "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in paragraph (2) of this section C, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the
Corporation.
(7) "Continuing Director" means any member of the Board of Directors
of the Corporation (the "Board") who is unaffiliated with the Interested
Shareholder and was a member of the Boards prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor
of a Continuing Director who is unaffiliated with the Interested
Shareholder and is recommended to succeed a Continuing Director by a
majority of Continuing Directors then on the Board.
(8) "Fair Market Value" means: (I) in the case of stack, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-
day period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in
use, or if no such quotations are available, the highest closing sale price
during the 30-day period immediately preceding the date in question of a
share of such stock on any foreign exchange(s) upon which such stock is
listed, or, if such stock is not so listed, the fair market value on the
date in question of a share of such stock as determined by the Board in
good faith; and (ii) in case of property other than cash or stock, the fair
market value of such property on the date in question as determined by the
Board in good faith.
(9) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in paragraphs (2) (ii) and (2) (iii) of Section B of this Article 8 shall
include the shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
D. A majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the
time any such determination as is hereinafter in this Section D specified
is to be made by the Board) shall have the power and duty to determine, on
the basis of information known to them after reasonable inquiry, all facts
necessary to determine compliance with this Article 8, including, without
limitation, (1 ) whether a person is an Interested Shareholder, (2) the
number of shares of Voting Stock beneficially owned by any person, (3)
whether a person is an Affiliate or Associate of another, (4) whether the
applicable conditions set forth in paragraph (2) of section B have been met
with respect to any Business Combination, (5) whether the assets which are
the subject of any Business Combination referred to in paragraph (1) (ii)
of section A have an aggregate Fair Market Value of 10% of the assets of
the Corporation and its consolidated subsidiaries as reflected in the most
recent balance sheet of the Corporation, and (6) whether the consideration
to be received for the insurance or transfer of securities by the
Corporation or any Subsidiary in any Business Combination referred to in
paragraph (1 ) (iii) of section A has an aggregate Fair Market Value of
$10,000,000 or more.
E. Nothing contained in this Article 8 shall be construed to relieve
any Interested Shareholder from any fiduciary obligation imposed by law.
F. The fact that any Business Combination complies with the provisions
of Paragraph 2 of Section B of this Article 8 shall not be construed to
impose any fiduciary duty, obligation or responsibility on the Board of
Directors, or any member thereof, to approve such Business Combination or
recommend its adoption or approval to the shareholders of the Corporation,
nor shall such compliance limit, prohibit or otherwise restrict in any
manner the Board of Directors, or any member thereof, with respect to
evaluations of, or actions and responses taken with respect to, such
Business Combination.
G. Notwithstanding any other provision of the Certificate of
Incorporation or any provision of law that might otherwise permit a lesser
vote or not vote, but in addition to any vote of the holders of any class
or series of the stock of this Corporation required by law or by the
Certificate of Incorporation, the affirmative vote of the holders of at
least 66-213 percent of the voting power of all of the then outstanding
shares of Voting Stock, voting together as a single class shall be required
to amend or repeal Article 8.
ARTICLE 9
The Corporation elects not to be governed by Section 203 of the
Delaware General Corporation Law.
* * * * * * * *
NDE Environmental Corporation, a Delaware corporation, hereby
certifies that the foregoing Amended and Restated Certificate of
Incorporation, which restates, integrates and further amends the provisions
of the Certificate of Incorporation of this corporation as heretofore
amended or supplemented, has been duly adopted by the corporation's Board
of Directors and stockholders in accordance with Sections 242 and 245 of
the Delaware General Corporation Law.
IN WITNESS WHEREOF, said corporation has caused this Restated
Certificate of Incorporation to be signed by its duly authorized officers
this 22 day of May, 1966.
NDE ENVIRONMENTAL CORPORATION
By: /s/ A. DANIEL SHARPLIN
-------------------------------
A. Daniel Sharplin, President
ATTEST:
/s/ ERIC J.(RICK) HOPKINS
- -----------------------------------
Eric J. (Rick) Hopkins, Secretary
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No.1)
Exhibits
Exhibit 10.43 Amendment No. 1 to Loan Agreement (Exhibit 10.25) dated April
10, 1997, among NDE Environmental Corporation Tanknology/NDE
Corporation, USTMAN Industries, Inc., ProEco, Inc. Tanknology
Canada (1988), Inc. and Bank One, Texas, N.A.
AMENDMENT NO. 1
TO
LOAN AGREEMENT
DATED OCTOBER 25, 1996
BY AND BETWEEN NDE ENVIRONMENTAL CORPORATION,
TANKNOLOGY/NDE CORPORATION, USTMAN INDUSTRIES, INC.,
PROECO, INC. AND TANKNOLOGY CANADA (1988) INC.
AND
BANK ONE, TEXAS, N.A.
This Amendment No. 1 to Loan Agreement dated as of the 25th day of October,
1996, (this "First Amendment") by and among NDE ENVIRONMENTAL CORPORATION, a
Delaware corporation, TANKNOLOGY/NDE CORPORATION, a Delaware corporation, USTMAN
INDUSTRIES, INC., a Delaware corporation, PROECO, INC., a Delaware corporation,
and TANKNOLOGY CANADA (1988) INC., a Canadian federal corporation (collectively,
"Borrower") and BANK ONE, TEXAS, N.A., a national banking association (the
"Bank") is entered into this 10th day of April, 1997.
WITNESSETH:
Borrower has requested that Bank amend the Loan Agreement in several
respects and waive Borrower's non-compliance with certain covenants therein, and
Bank is willing to do so in accordance with, and subject to, the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
I. Amendment to Loan Agreement.
Article I of the Loan Agreement is hereby amended by replacing the
following defined term:
"Adjusted Liabilities" means Total liabilities less the sum of Subordinated
Indebtedness and cash on hand.
Section 5.19 of the Loan Agreement is hereby amended by replacing it in its
entirety with the following:
5.19 Adjusted Liabilities to Adjusted Net worth. Maintain a ratio of
Adjusted Liabilities to Adjusted Net worth of not more than 2.25 to 1.0 through
September 30, 1997; thereafter 1.75 to 1.0 through September 30, 1998,
thereafter 1.25 to 1.0 through September 30, 1999; and thereafter 1.0 to 1.0.
Section 5.20 of the Loan Agreement is hereby amended by replacing it in its
entirety with the following:
5.20 Net Worth Requirement. Maintain a total Consolidated Net worth of not
less than 90% of Consolidated Net worth at December 31, 1996, plus: (a) 70% of
Borrower's Net Income (if positive) subsequent to Closing, calculated
cumulatively as of the end of each calender year of Borrower beginning with the
year ending December 31, 1997, and (b) 100% of any equity issued.
II. Certain Waivers. Bank hereby waives non-compliance by the Borrower with
the covenants set forth (i) in Section 5.19 of the Loan Agreement, to the extent
that Borrower was not in compliance with such covenants prior to the execution
of the First Amendment, and (ii) in Section 5,20 of the Loan Agreement as of the
period ended December 31, 1996.
III. Reaffirmation of Representations and Warranties. To induce the Bank to
enter into this First Amendment, the Borrower hereby reaffirms, as of the date
hereof, its representations and warranties contained in Article IV of the Loan
Agreement and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this First Amendment and the
performance by the borrower of its obligations under this First Amendment
are within the Borrower's power, have been duly authorized by all necessary
corporate action, have received all necessary governmental approval (if any
shall be required), and do not and will not contravene or conflict with any
provision of law or of the charter or by-laws of the Borrower or of any
agreement binding upon the Borrower.
B. The Loan Agreement as amended by this First Amendment represents
the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms subject as
to enforcement only to bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally
C. No Event of Default or Unmatured Event of Default has occurred and
is continuing as of the date hereof.
IV. Defined Terms. Except as amended hereby, terms used herein that are
defined in the Loan Agreement shall have the same meanings herein.
V. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to
be an amendment to the Loan Agreement, and the Loan Agreement, as further
amended hereby, is hereby ratified, approved and confirmed in each and every
respect. Al references to the Loan Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the Loan
Agreement as amended hereby.
VI Entire Agreement. The Loan Agreement, as hereby further amended,
embodies the entire agreement between the Borrower and the Bank and supersedes
all prior proposals, agreements and understandings relating to the subject
matter hereof. The Borrower certifies that it is relying on no representation,
warranty, covenant or agreement except for those set forth in the Loan Agreement
as hereby further amended hereby and the other documents previously executed or
executed of even date herewith.
VII. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. This First Amendment has been entered into in Harris
County, Texas, and it shall be performable for all purposes in Harris County,
Texas. Courts within the State of Texas shall have jurisdiction over any and all
disputes between the Borrower and the Bank, whether in law or equity, including,
but not limited to, any and all disputes arising out of or relating to the First
Amendment or any other Security Instrument; and venue in any such dispute
whether in federal or state court shall be laid in Harris County, Texas.
VIII. Severability. Whenever possible each provision of this First
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this First Amendment shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this First Amendment.
IX. Execution in Counterparts. This First Amendment may be executed in any
number of counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same agreement.
X. Section Captions. Section captions used in this First Amendment are for
convenience of reference only, and shall not affect the construction of this
First Amendment.
XI. Successors and Assigns. This First Amendment shall be binding upon the
Borrower and the Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Bank, and the respective successors
and assigns of the Bank.
XII. Non-Application of Chapter 15 of the Texas Credit Codes. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statues,
Article 5069-15) are specifically declared by the parties hereto not to be
applicable to the Loan Agreement as hereby further amended hereby or any of the
other Security Instruments or to the transactions contemplated hereby.
XIII. Notice. THIS FIRST AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND
THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PROPER, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed as of the day and year first above written.
BORROWER:
NDE ENVIRONMENTAL CORPORATION
By: /s/ JAY ALLEN CHAFFEE
--------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY/NDE CORPORATION
By: /s/ JAY ALLEN CHAFFEE
--------------------------------
Jay Allen Chaffee
Chairman of the Board
USTMAN INDUSTRIES, INC.
By: /s/ JAY ALLEN CHAFFEE
--------------------------------
Jay Allen Chaffee
Chairman of the Board
PROECO, INC.
By: /s/ JAY ALLEN CHAFFEE
--------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY CANADA (1988) INC.
By: /s/ JAY ALLEN CHAFFEE
--------------------------------
Jay Allen Chaffee
President
BANK:
BANK ONE, TEXAS, N.A.
By: /s/ CHARLES KINGSWELL-SMITH
--------------------------------
Charles Kingswell-Smith
Vice President
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No.1)
Exhibits
Exhibit 10.44 Amendment No. 1 to Note and Warrant Purchase Agreement
(Exhibit 10.28) dated April 10, 1997, among NDE Corporation,
Tanknology/NDE Corporation, USTMAN Industries, Inc., ProEco,
Inc. Tanknology Canada (1988), Inc. and Bank One Capital
Partners, L.P.
NDE Environmental Corporation
NOTE AND WARRANT PURCHASE AGREEMENT
Amendment No. 1
April 10, 1997
This is AMENDMENT NO. 1 dated as of April 10, 1997 ("Amendment") to the
NOTE AND WARRANT PURCHASE AGREEMENT dated as of October 25, 1996 ("Agreement")
by and among NDE Environmental Corporation ("NDE"), a Delaware corporation,
Tanknology/NDE Corporation ("TCI"), a Delaware corporation, USTMAN Industries,
Inc. ("USTMAN"), a Delaware corporation, Proeco, Inc. ("Proeco"), a Delaware
corporation and Tanknology of Canada (1988), Inc. ("Canada"), a Canadian Federal
corporation, as sellers and Banc One Capital Partners, L.P. ("Purchaser"), an
Ohio limited partnership, as purchaser.
NDE, Testing & Equipment, TCI, USTMAN, Proeco and Canada are referred to
collectively as the "Sellers" and individually as a "Seller". The Sellers and
the Purchaser are referred to individually as a "Party" and collectively as the
"Parties."
STATEMENT OF AGREEMENT
As provided for in Section 12(b) of the Agreement, the Agreement is
hereby amended as follows.
Section 1. Total Liabilities to Net Worth.
Section 10(a) of the Agreement is hereby amended in its entirety to
read as follows:
(a) Total Liabilities to Net Worth Ratio. Maintain a ratio of (i)
Total Liabilities less the sum of (A) Subordinated Debt, plus (B) Cash and
Cash Equivalents to (ii) Net Worth Plus Subordinated Debt (tested quarterly
beginning with the period ended December 31, 1996) of not greater than the
ratio set forth opposite the applicable period below:
Period Ending Ratio Closing Date through December 31, 1997
2.50:1.0 Thereafter through December 31, 1998 2.00:1.0 Thereafter
through December 31, 1999 1.75:1.0 Thereafter through December 31,
2000 1.50:1.0 Thereafter through December 31, 2000 1.25:1.0
"Cash and Cash Equivalents" shall mean, for the purposes of this
Section 10(a), all cash and cash equivalents as determined by GAAP other
than any cash or cash equivalents which have deposit restrictions.
Section 2 Net Worth.
Section 10(b) of the Agreement is hereby amended in its entirety
to read as follows:
(b) Net Worth. maintain a total Company Net Worth of not less than 90%
of Company Net Worth at December 31, 1996, plus (i) 60% of the Company's
Net income (if positive) subsequent to the Closing Date, calculated
cumulatively as of the end of each Quarter beginning with the Quarter
ending December 31, 1997, and (ii) 100% of any equity issued (tested
annually beginning with the period ended December 31, 1999).
Section 3 Effective Date.
This Amendment shall be deemed to have become effective as of December
31, 1996.
Section 4 Counterparts.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original and all of which shall constitute one in
the same agreement.
The Parties have caused this Amendment to be executed and delivered as
of the date first written above.
Sellers: Purchaser:
NDE ENVIRONMENTAL CORPORATION BANC ONE CAPITAL PARTNERS, L.P.
By: BOCP Corporation, General Partner
By: /s/ JAY ALLEN CHAFFEE By: /s/ JAMES H. WOLFE
--------------------------- ---------------------------------
Jay Allen Chaffee Its: Managing Director
Chairman of the Board ---------------------------------
TANKNOLOGY/NDE CORPORATION TANKNLOOGY OF CANADA (1988), INC.
By: /s/ JAY ALLEN CHAFFEE By: /s/ JAY ALLEN CHAFFEE
--------------------------- ---------------------------------
Its: Chairman of the Board Its: President
--------------------------- ---------------------------------
PROECO, INC.
By: /s/ JAY ALLEN CHAFFEE
---------------------------
Its: Chairman of the Board
---------------------------
NDE ENVIRONMENTAL CORPORATION
1996 ANNUAL REPORT ON FORM 10-KSB/A (Amendment No.1)
Exhibits
Exhibit 21.01
SUBSIDIARIES OF REGISTRANT
Tanknology/NDE Corporation, a Delaware corporation, incorporated on
December 27, 1991, is a wholly owned subsidiary of NDE Environmental Corporation
and does business under the name Tanknology/NDE Corporation.
NDE Environmental Canada Corporation, incorporated on May 21, 1993 under
the Business Corporations Act of Alberta, is a wholly owned subsidiary of NDE
Environmental Corporation and does business under the name NDE Environmental
Canada Corporation.
ProEco, Inc., a Delaware corporation, incorporated as Tank Testing
International, Inc. on March 19, 1990, changed its name to ProEco, Inc. on July
26, 1991, and is a wholly owned subsidiary of NDE Environmental Corporation and
does business under the name ProEco, Inc.
EcoAm, Inc., a Florida corporation, incorporated on July 15, 1991, is a
wholly owned subsidiary of NDE Environmental Corporation and does business under
the name EcoAm, Inc.
ProEco, Ltd., a United Kingdom corporation, incorporated in October 16,
1992, as EcoAm, Ltd., is a wholly owned subsidiary of NDE Environmental
Corporation and does business under the name ProEco, Ltd.
Tanknology Canada (1988) Inc., incorporated in Ontario, Canada, is a wholly
owned subsidiary of NDE Environmental Corporation and does business under the
name Tanknology Canada (1988) Inc.
USTMAN Industries, Inc., a Delaware corporation, incorporated on May 29,
1992, is a wholly owned subsidiary of NDE Environmental Corporation and does
business under the name USTMAN Industries, Inc.
NDE Environmental Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
Contents
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets ..............................................F-3
Consolidated Statements of Operations.......................................F-4
Consolidated Statements of Stockholders' Deficit............................F-5
Consolidated Statements of Cash Flows.......................................F-7
Notes to Consolidated Financial Statements..................................F-8
F-1
<PAGE>
NDE Environmental Corporation and Subsidiaries
Report of Independent Auditors
Stockholders and Board of Directors
NDE Environmental Corporation
We have audited the accompanying consolidated balance sheets of NDE
Environmental Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NDE
Environmental Corporation and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
March 27, 1997, except for
the second paragraph of Note 4
as to which the date is April 14, 1997
F-2
<PAGE>
NDE Environmental Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash ...................................................... $ 2,412,233 $ 327,035
Trade accounts receivable, less allowance for doubtful
accounts of $837,480 in 1996 and $289,512 in 1995..... 5,735,550 2,162,593
Inventories ............................................... 367,362 175,173
Prepaid expenses and other current assets ................. 1,578,097 245,645
------------ ------------
10,093,242 2,910,446
Equipment and improvements, net (Note 3) ........................... 5,736,391 4,027,037
Goodwill, net of accumulated amortization of $55,122 (Note 2) ...... 4,922,617 -
Patents, licenses and other intangible assets, net of accumulated
amortization of $773,140 n 1996 and $578,247 in 1995 ...... 3,374,962 1,292,360
Deferred financing costs ........................................... 922,424 -
------------ ------------
Total assets ....................................................... $ 25,049,636 $ 8,229,843
============ ============
Liabilities and stockholders' deficit Current liabilities:
Accounts payable .......................................... $ 1,673,470 $ 751,944
Accrued liabilities ....................................... 4,885,260 1,322,457
Accrued payroll and payroll taxes ......................... 1,469,786 636,369
Current portion of long-term debt (Note 4) ................ 1,963,564 2,018,442
------------ ------------
9,992,080 4,729,212
Long-term debt (Note 4) ............................................ 14,192,011 3,739,653
Warrants with put option (Note 5) .................................. 1,600,000 -
Stockholders' deficit:
Series AAA Convertible Preferred Stock, $.0001 par value; authorized 400
shares; issued and outstanding 1 share; stated at
liquidation value of $5,000 per share .................... 5,000 5,000
Common Stock, $.0001 par value; authorized 50,000,000 shares; issued
and outstanding 15,978,610 shares in 1996 and 2,274,420
shares in 1995 ........................................... 1,598 227
Common Stock Subscribed, 5,482,254 shares in 1995 (Note 5) ......... - 1,303,410
Additional paid-in capital ......................................... 27,578,446 25,134,457
Accumulated deficit ................................................ (28,302,374) (26,663,376)
Cumulative foreign currency translation adjustment ................. (17,125) (18,740)
------------ ------------
(734,455) (239,022)
------------ ------------
Total liabilities and stockholders' deficit ........................ $ 25,049,636 $ 8,229,843
============ ============
</TABLE>
See accompanying notes
F-3
<PAGE>
NDE Environmental Corporation and Subsidiaries
Consolidated Statements of Operations
Year ended December 31,
1996 1995
------------ ------------
Revenues ..................................... $ 15,939,126 $ 11,347,591
Costs and expenses:
Cost of testing services ............ 11,085,062 7,062,456
Selling, general and administrative . 6,581,337 6,428,433
Total costs and expenses ..................... 17,666,399 13,490,889
Impairment of long-lived assets (Note 3) ..... (833,321) -
------------ ------------
Operating loss ............................... (2,560,594) (2,143,298)
Other income (expense):
Interest expense .................... (1,062,409) (905,544)
Other income, net ................... 214,641 156,203
------------ ------------
Net loss before provision for income taxes and
extraordinary gain .................. (3,408, 362) (2,892,639)
Provision for income taxes (Note 8) .......... (43,785) --
Extraordinary gain (Note 4) .................. 1,813,149 --
------------ ------------
Net loss ..................................... $ (1,638,998) $ (2,892,639)
============ ============
Net loss per common share:
Before extraordinary gain ........... $ (0.45) $ (1.45)
Extraordinary gain .................. 0.24 --
------------ ------------
Net loss per common share .................... $ (0.21) $ (1.45)
============ ============
Weighted average number of common shares
outstanding ......................... 7,725,377 1,991,820
============ ============
See accompanying notes
F-4
<PAGE>
NDE Environmental Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock Foreign
----------------------- ---------------------------------------- Additional Currency Total
Shares Shares Shares Paid-in Accumulated Translation Shockholder
Outstanding Amount Outstanding Amount Subscribed Amount Capital Deficit Adjustment Deficit
- ----------------- ----------- ----------- ----------- ------ ---------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 570.5 $3,237,500 1,462,420 $ 146 - $ - $21,902,038 ($23,770,737) ($18,740) $1,350,207
- ----------------- ----------- ----------- ----------- ------ ---------- ---------- ----------- ------------- ----------- -----------
Conversion of
Series AAA
Convertible
Preferred Stock
to Common Stock (256.5) (1,282,500) 511,000 51 - - 1,282,449 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of
Series BBB
Convertible
Preferred Stock
to Common Stock (253) (1,650,000) 253,000 25 - - 1,649,975 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of
Series CCC
Convertible
Preferred Stock
to Common Stock (60) (300,000) 48,000 5 - - 299,995 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Subscription of
Common Stock
(Note 5) - - - 5,482,254 1,303,410 - - - 1,303,410
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - - - (2,892,639) - (2,892,639)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 1 $5,000 2,274,420 $ 227 5,482,254 $1,303,410 $25,134,457 ($26,663,376) ($18,740) ($239,022)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
NDE Environmental Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit (continued)
<TABLE>
<CAPTION>
Cumulative
Preferred Stock Common Stock Foreign
----------------------- ---------------------------------------- Additional Currency Total
Shares Shares Shares Paid-in Accumulated Translation Shockholder
Outstanding Amount Outstanding Amount Subscribed Amount Capital Deficit Adjustment Deficit
- --------------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec-
ember 31, 1995 1 $ 5,000 2,274,420 $ 227 5,482,254 $1,303,410 $25,134,457 ($26,663,376) ($18,740) ($239,022)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common Stock to
settle
licensing
dispute - - 20,000 2 - - 3,748 - - 3,750
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common Stock
Subscribed - - 5,482,254 548 (5,482,254) (1,303,410) 1,302,862 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange of
Secured
Promissory
Notes for
Common Stock - - 8,000,000 800 - - 1,035,082 - - 1,035,882
- ------------------------------------------------------------------------------------------------------------------------------------
Company
contribution
to 401(k)
Plan - - 201,936 21 - - 102,297 - - 102,318
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
foreign
currency
translation - - - - - - - - 1,615 1,615
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - - - - (1,638,998) - (1,638,998)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Dec-
ember 31, 1996 1 $ 5,000 15,978,610 $1,598 - - $27,578,446 ($28,302,374) ($17,125) ($734,455)
====================================================================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
NDE Environmental Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net loss ............................................................ $ (1,638,998) $ (2,892,639)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary gain ................................................ (1,813,149) -
Impairment of long-lived assets ................................... 833,321 -
Depreciation and amortization ..................................... 2,029,865 1,594,257
Amortization of discounts and financing costs ..................... 309,954 159,534
Gain on sale of equipment ......................................... (214,641) (187,708)
Changes in operating assets and liabilities, net of assets and liabilities
acquired:
(Increase) decrease in trade accounts receivable .................. 1,192,044 (702,942)
Increase in inventories ........................................... (45,689) (47,141)
(Increase) decrease in prepaid expenses and other current assets .. (480,452) 144,836
Increase in accounts payable ...................................... 147,526 42,385
Increase (decrease) in accrued liabilities ........................ (285,175) 593,145
Increase in accrued payroll and payroll taxes ..................... 833,417 114,880
------------ ------------
Net cash provided by (used in) operating activities ........... 868,023 (1,181,393)
Cash flows from investing activities:
Business acquisitions, net of cash acquired of $700,000 ........... (11,299,757) -
Capital expenditures .............................................. (1,120,752) (464,608)
Proceeds from sale of equipment ................................... 234,450 242,294
Other ............................................................. 10,737 -
------------ ------------
Net cash used in investing activities ......................... (12,175,322) (222,314)
Net cash from financing activities:
Proceeds from issuance of long-term debt and warrants with put option 16,529,903 2,006,886
Deferred financing costs ............................................ (959,413) -
Payments on long-term debt .......................................... (3,177,993) (1,020,635)
Proceeds from issuance of debt (Note 5) ............................. 1,000,000 -
Proceeds from common stock subscriptions ............................ - 500,000
------------ ------------
Net cash provided by financing activities ......................... 13,392,497 1,486,251
Net increase in cash .............................................. 2,085,198 82,544
Cash at beginning of year ........................................... 327,035 244,491
------------ ------------
Cash at end of year ................................................. $ 2,412,233 $ 327,035
============ ============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest ............................................................ $ 487,334 $ 631,231
============ ============
Income taxes ........................................................ $ - $ -
============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Description and History of Business
NDE Environmental Corporation and subsidiaries (the Company) provides
regulatory compliance and related services, primarily tightness testing for
underground storage tanks (USTs) and associated pipelines. Operations are
conducted in the United States, Puerto Rico, and the District of Columbia.
Although work is occasionally performed outside of the U.S., the Company
generally operates through foreign licensees. The Company has grown
significantly through acquisitions, financed primarily by debt.
Basis of Presentation
The consolidated financial statements include the accounts and operations
of NDE Environmental Corporation and its wholly-owned subsidiaries:
Tanknology/NDE Corporation, USTMAN Industries, Inc., Tanknology Canada (1988)
Inc., NDE Environmental Canada Corporation, ProEco, Inc., ProEco, Ltd., and
EcoAm, Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the consolidated financial
statements for years prior to December 31, 1996 have been reclassified to
conform to the current year presentation.
Revenue Recognition
Tank testing, line testing and consulting service revenues are recognized
when services are performed. Revenues for contracts extending more than 30 days
are recognized on a percentage of completion basis. Equipment sales are
recognized upon delivery to the customer.
Concentrations of Credit Risk
The Company's customers are principally the retail fuel operations of major
oil companies, independently owned gasoline retailers, convenience store
operators, large vehicle fleet owners and governmental entities. Accounts
receivable potentially expose the Company to concentrations of credit risk.
Generally, accounts receivable are due within 30 days and are not
collateralized. Credit losses historically have not been significant. One
customer accounts for approximately 20% of the Company's revenues. A payment
default by this customer could have a material impact on the Company's results
of operations.
Inventories
Inventories consist principally of parts sold by the Company in connection
with the performance of testing services and are valued at lower of cost
(first-in, first-out) or market.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
estimated useful lives, or the term of the related leases, whichever is shorter,
using the straight-line method.
The estimated useful lives used in computing depreciation and amortization
are as follows:
Tank testing equipment 8 years
Furniture and fixtures 5 years
Vehicles 3 - 5 years
Other equipment 3 - 6 years
F-8
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following estimated useful lives:
Goodwill 15 years
Patents 5 - 12 years
Licenses 15 years
Other intangible assets 3 - 5 years
The carrying values of intangible assets are reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates the
intangible assets will not be recoverable as determined based on the
undiscounted cash flows related to the intangible asset over the remaining
amortization period, the Company's carrying value of the intangible assets is
reduced by the estimated shortfall of cash flows. Such review did not result in
any writedown of intangible assets in 1996 or 1995.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, ("APB 25") "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, compensation expense is recognized only when the exercise price of the
Company's stock options is less than the market price of the underlying stock on
the date of grant.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between balances recognized for financial reporting purposes and income tax
purposes, and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Management establishes a
valuation allowance for deferred tax assets where realization is not likely.
Loss Per Share Data
Loss per share is computed by dividing net loss for the year by the
weighted average number of common shares outstanding during each year. The
effect of the convertible preferred stock, options and warrants are not
considered as the effect would be antidilutive. The computation of fully diluted
loss per share was antidilutive and, therefore, not presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Business Acquisitions
Tanknology UST Group (the "Acquisition")
On October 25, 1996, the Company acquired all of the common stock of the
Tanknology UST Group of Tanknology Environmental, Inc. ("TEI"). The Tanknology
UST Group consisted of three subsidiaries of TEI: Tanknology Corporation
International ("TCI"), Tanknology Canada (1988) Inc., and USTMAN Industries,
Inc. ("USTMAN"). The Acquisition was accomplished by means of the Company's
purchase of all of the issued and outstanding capital stock of the subsidiaries.
The Acquisition has been accounted for as a purchase and thus results of
operations of the UST Group from the date of the acquisition are included in the
Company's statement of operations. The purchase price is subject to adjustment
based upon final closing adjustments, which are expected to occur in 1997.
F-9
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
In addition to the purchase price paid to TEI, the Company incurred
approximately $714,000 in fees and expenses related to consummating and
effecting the Acquisition. The Company also accrued approximately $857,000 for
costs related to the planned relocation of and reduction in the former UST
Group's Field Services management and administrative groups. Included in this
accrual are costs for severance, employment contract obligations, personnel and
facility relocation costs, excess lease expenses and other acquisition-related
costs. The Company anticipates that the consolidation of operations acquired
will be completed by June 30, 1997. The Company also recorded approximately
$758,000 for certain additional liabilities relating to potential purchase price
adjustments and liabilities recognized subsequent to the acquisition, which,
depending upon the outcome of the final purchase price discussions with TEI, may
or may not be realized.
The purchase price was recorded as follows:
Working capital, other than cash .......... $ 3,255,000
Property and equipment .................... 2,950,000
Intangibles, other than goodwill .......... 2,428,000
Other assets .............................. 18,000
Goodwill .................................. 4,978,000
Accrued fees and acquisition liabilities.. (2,329,000)
------------
Purchase price, net of cash acquired ... $ 11,300,000
============
The following summarized unaudited pro forma results of operations for the
years ended December 31, 1996 and 1995 assume the Acquisition occurred as of the
beginning of each respective year. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the results
of operations that actually would have resulted had the acquisition occurred at
the beginning of the periods presented, or that may result in the future.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Revenues ............................................ $ 35,115,022 $ 35,954,911
Net loss before extraordinary gain .................. $ (4,418,450) $ (1,381,800)
Net loss ............................................ $ (2,605,301) $ (1,381,800)
Net loss before extraordinary gain per common share.. $ (0.31) $ (0.14)
Net loss per common share ........................... $ (0.18) $ (0.14)
</TABLE>
Sale of Acquired Canadian Operations
On February 20, 1997 the Company sold certain patents, software and
trademark rights as well as fixed assets associated with the operation of
Tanknology Canada (1988), Inc. for $1.2 million to the Company's eastern Canada
licensee. The Company also canceled certain existing license agreements and
entered into new agreements, which will generate a future revenue stream.
F-10
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
3. Equipment and Improvements
Equipment and improvements consist of the following:
At December 31,
1996 1995
------------ -------------
Equipment ........................................ $ 12,474,380 $ 9,448,292
Furniture and fixtures ........................... 334,261 278,954
Vehicles ......................................... 277,812 244,413
Equipment replacement parts ...................... 161,500 --
Leasehold improvements ........................... 99,672 60,148
13,347,625 10,031,807
Less accumulated depreciation and amortization ... (7,611,234) (6,004,770)
$ 5,736,391 $ 4,027,037
============ ============
In 1996, due to the acquisition of more efficient and effective tank
testing systems, management began discontinuing the use of the tank testing
technology acquired from Gilbarco ESD, and future undiscounted cash flows
related to using this technology were expected to be significantly less than
anticipated. Accordingly, in the third quarter of 1996 management recognized a
loss on the impairment of these assets by reducing the book value of this
equipment by approximately $833,000.
4. Long-Term Debt
Long-term debt and financing agreements consist of the following:
At December 31,
1996 1995
------------ ------------
Revolving line of credit ....................... $ 2,000,000 $ --
Term loan ...................................... 6,000,000 750,000
------------ ------------
Senior secured bank debt .................... 8,000,000 750,000
Senior subordinated note ....................... 8,000,000 --
Less: Discount ................................. (1,532,359) --
------------ ------------
Senior subordinated note .................... 6,467,641 --
Factoring agreement ............................ -- 1,477,207
Debt related to Gilbarco acquisition and patents 300,000 2,396,703
Other collateralized notes ..................... 902,312 616,820
Other non-collateralized notes ................. 485,622 517,365
------------ ------------
Other long-term debt ........................ 1,687,934 5,008,095
Total long-term debt ........................ 16,155,575 5,758,095
Less: Current portion .......................... (1,963,564) (2,018,442)
------------ ------------
$ 14,192,011 $ 3,739,653
============ ============
In October 1996, in connection with the Acquisition, the Company obtained a
total of $19 million in two separate financing agreements ("the Financing
Agreements"), consisting of senior secured bank debt and a senior subordinated
note (the "Note"). The senior secured bank debt consists of a revolving line of
credit for up to $5 million and a term loan of $6 million. The amount of the
Note is $8 million, before discount. Virtually all of the Company's assets are
pledged as security for the agreements. The Financing Agreements also impose
restrictions on the Company's ability to incur additional indebtedness, sell
assets, pay dividends, make additional business acquisitions, repurchase shares
of common stock, make capital expenditures and make certain management changes.
At December 31, 1996, the Company was in compliance with the financial debt
F-11
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
covenants related to the Financing Agreements as amended in April 1997. Related
to the Financing Agreements, a major stockholder of the Company provided a $1
million standby commitment in the event of a payment default by the Company,
and, in conjunction with an affiliated debt holder, converted $1,035,882 of
existing debt (principal and accrued interest) into 8,000,000 shares of common
stock. The outstanding balances under an existing term loan and a factoring
agreement were paid off using $2,526,970 of the proceeds of the two Financing
Agreements.
Senior Secured Bank Debt
The senior secured bank debt consists of a three-year revolving credit line
of up to $5 million, and a $6 million 5-year term note, maturing December 31,
2001. The funds available under the revolving line of credit are based on a
formula as applied to the eligible accounts receivable of the Company. The
amount available to the Company has been reduced by $500,000, as compared to the
initial agreement, as a bank condition to release the assets of Tanknology
Canada (1988) from its collateral (see Note 2). At closing of the Acquisition,
$2 million was funded under the credit line, and remained outstanding at
December 31, 1996. Outstanding balances under the credit line bear interest at a
rate of prime plus 0.75% (9% at December 31, 1996). The commitment fee related
to the unused portion of the $5 million line is 0.5%. The $6 million term loan
bears interest at of prime plus 1.5% (9.75% at December 31, 1996). Principal
payments of $100,000 per month are due beginning January 1997. At December 31,
1996, the Company had $1,113,616 available for additional borrowing under the
revolving credit facility.
Senior Subordinated Note
The $8 million senior subordinated note has a 5 year term, maturing
December 31, 2001 and bears interest at 13%. The debt holder received put
warrants to purchase 13,022,920 shares of the Company's common stock at an
initial, maximum exercise price of $0.325 per share, subject to downward
adjustment based on the Company's financial performance during the 12 month
period prior to the exercise of the warrants. The downward adjustment is limited
to $0.20 per share, for a minimum exercise price of $0.125. The proceeds from
the issuance of the senior subordinated note and the warrants were allocated to
the senior subordinated note and the warrants based upon fair value. The
independently appraised fair market value of the put warrants at issuance was
$1.6 million resulting in a $1.6 million discount on the debt (See Note 5). The
discount is being amortized over the life of the subordinated note using the
effective interest method. Principal payments of $500,000 per quarter are due
beginning on March 1, 1998.
Gilbarco Environmental Services Division ("Gilbarco ESD")
The April 1994 Gilbarco ESD acquisition was financed in part by a
$2,450,000 six-year note bearing interest at prime minus 1%, collateralized by
the assets acquired. In March 1996, the Company obtained from Gilbarco a
prepayment incentive in exchange for an immediate payment of $256,000. In
September 1996, the Company settled the $2,450,000 note for $300,000. The debt
had a carrying value including accrued interest at the settlement date of
$2,113,149. The settlement resulted in an extraordinary gain of $1,813,149. A
separate note for $300,000, payable to Gilbarco, related to patent rights
purchased in November 1995, was outstanding at December 31, 1996. The remaining
note bears interest at a variable rate of approximately 6% and is due October
2000.
Other Collateralized Notes
Other collateralized notes include financing arrangements collateralized
solely by the assets purchased, or by the Company's common stock, and includes a
6% one-year insurance note with a balance outstanding at December 31, 1996 of
$403,710, payable in monthly installments. Maturities range from 1 to 5 years.
Interest rates range from 6% to 31% per year, with a weighted average interest
rate of 8%.
Other Non-Collateralized Notes
Other non-collateralized notes consist of subordinated notes and a note to
a vendor. Interest on the subordinated notes is payable quarterly at 8%;
principal is payable annually in equal amounts over five years. The Company
recognizes interest expense on the vendor note at an imputed rate of 10%.
F-12
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Payments on the vendor note are due monthly in 1997 and 1998.
The aggregate annual maturities of long-term debt and financing agreements
at December 31, 1996 are as follows:
1997 1,963,564
1998 3,477,713
1999 5,344,963
2000 3,635,661
2001 3,266,033
17,687,934
Less: Discount (1,532,359)
-------------
16,155,575
=============
5. Stockholders' Equity
AAA Preferred Stock
The Company's Series AAA Preferred Stock may be converted into Common Stock
at any time at the initial conversion price of $2.50 per share (subject to
adjustment pursuant to anti dilution provisions). In May 1995, 256.5 shares of
the Series AAA Preferred Stock with a liquidation value of $1,282,500 were
converted into an aggregate of 511,000 shares of Common Stock at a conversion
price per share of $2.50. One share with a liquidation value of $5,000 was
outstanding at December 31, 1996 and 1995.
BBB Preferred Stock
In May 1995, 203 shares of the Series BBB Preferred Stock with a
liquidation value of $1,400,000 were converted into an aggregate of 203,000
shares of Common Stock at a conversion price per share of $6.90. In addition, in
May 1995, 50 shares of the Series BBB Preferred Stock with a liquidation value
of $250,000 were converted into an aggregate of 50,000 shares of Common Stock at
a conversion price per share of $5.00. No shares were outstanding at December
31, 1995 or 1996.
CCC Preferred Stock
In May 1994, the Company raised $300,000 through the issuance of 60 shares
of Series CCC Preferred Stock and five- year warrants to purchase 24,000 shares
of Common Stock at an exercise price of $7.50 per share. In May 1995, all shares
of the Series CCC Preferred Stock were converted into an aggregate of 48,000
shares of Common Stock at a conversion price per share of $6.25. No shares were
outstanding at December 31, 1995 or 1996.
DDD Preferred Stock
In January 1995, the Company obtained $500,000 from its major shareholders
in exchange for a promissory note ("Bridge Note"). The note bore interest at
prime plus 4% and became due, after extension, on May 31, 1995. In June 1995,
the Company completed a restructuring of the Bridge Note. The shareholders
agreed to exchange the Bridge Note of $500,000 plus accrued interest of $25,644,
their promissory note for $273,038 plus accrued interest of $4,728, and cash of
$500,000 for 261 shares of the Company's Series DDD Preferred Stock. This Series
DDD Preferred Stock was never issued. In March 1996, pursuant to the 1995
Recapitalization Agreement Amendment between the Company and the shareholders,
5,482,254 shares of Common Stock were issued in lieu of the Series DDD
Convertible Preferred Stock. This transaction was recorded in the accompanying
financial statements as Common Stock Subscribed in 1995 and as common stock
issued in 1996.
F-13
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Secured Promissory Notes
In 1996, the Company entered into a series of Secured Promissory Notes (the
"1996 Notes") with its largest stockholders in the aggregate amount of
$1,000,000. Concurrent with the Acquisition, the 1996 Notes, plus $35,882 of
accrued interest thereon were converted into 8,000,000 shares of common stock.
Common Stock
In 1996 the Company increased the authorized number of common shares from
10,000,000 to 50,000,000.
Warrants
As of December 31, 1996, the Company had the following warrants outstanding:
Number of Shares Issuable Exercise Price Expiration
------------------------- -------------- --------------
175,000 $.380 January 1998
50,000 $.150 January 1998
5,000 $7.500 September 1998
73,798 $.150 April 1999
38,035 $7.500 April 1999
50,000 $.125 April 1999
12,000 $.150 May 1999
12,000 $7.500 May 1999
58,334 $11.400 December 1999
31,667 $21.000 December 1999
32,219 $25.800 December 1999
13,022,920 $.325 December 2005
-------------------------
13,560,973
=========================
In 1996, the expiration dates on warrants to purchase 122,220 number of
shares of common stock that were originally scheduled to expire in 1996 were
extended to 1999 in connection with the aforementioned debt restructurings with
the Company's largest stockholders.
Warrants with Put Options
In connection with the Acquisition, on October 25, 1996, the Company issued
to its senior subordinated note (the "Note") holder, warrants to purchase
13,022,920 shares of common stock. The warrants are exercisable at $.325 per
share of common stock and can be exercised at any time from October 25, 1996
through December 31, 2005. Both the number of warrants and the exercise price
may be subject to adjustment based upon certain factors. These warrants are also
subject to a put option (the "Put") whereby, under certain circumstances, the
holder can require the Company to repurchase the warrants (including any common
shares owned as a result of a previous warrant exercise). Unless and until a
"Qualifying Public Offering" has occurred (defined as a sale to the public of at
least $20,000,000 of Company stock), the Put is exercisable after December 31,
2001, or after certain other events such as a change in control, certain mergers
or uncured defaults under the Note agreement. If the Note holder were to
exercise the Put, the cost to the Company would be calculated based upon a
formula stated in the put agreement and/or an independent appraisal.
Based upon an independent appraisal of the warrants and attached Put
option, $1,600,000 was allocated to these instruments. The Company is unable to
determine if the holder will ever exercise the Put, and accordingly what the
purchase price would be at that time. However, beginning in 1997, the Company
will estimate the possible valuation as of December 31, 2001 (the earliest date
at which the Put is exercisable, absent other events) based upon projections of
future results of operations and record an expense to accrete the carrying value
of the warrants with put option to such estimated redemption value.
F-14
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Stock Options
The Company has elected to account for its employee stock options under APB
25. As a result, pro forma information regarding net loss and loss per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.0%
and 5.8%; no dividend yield; volatility factors of the expected market price of
the Company's common stock of 1.2; and a weighted-average expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1996 1995
------------- --------------
Pro forma net loss:
Before extraordinary gain .......... $ (3,602,859) $ (2,897,223)
Extraordinary gain ................. 1,813,149 --
Net loss ........................... $ (1,789,710) $ (2,897,223)
============= =============
Pro forma loss per share:
Before extraordinary gain .......... $ (0.47) $ (1.45)
Extraordinary gain ............... 0.24 --
Net loss ......................... $ (0.23) $ (1.45)
============= =============
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year...... 304,850 $ 2.79 154,850 $ 5.31
Granted ........................... 2,753,000 0.18 150,000 0.19
Exercised ......................... - - - -
Canceled .......................... (323,294) 2.58 - -
------------- ---------------- ------------ ----------------
Outstanding-end of year............ 2,734,556 $ 0.18 304,850 $ 2.79
============= ================ ============ ================
Exercisable at end of year......... 609,667 $ 0.13 113,183 $ 5.93
============= ================ ============ ================
Granted ........................... 2,753,000 0.18 150,000 0.19
Weighted-average fair value of
options granted during the year.... $ 0.14 $ 0.15
=================== ===================
</TABLE>
F-15
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.05 to $0.44. The weighted-average remaining contractual life of those options
is 8.9 years.
The following table summarizes outstanding options at December 31, 1996 by
price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ----------------------------------------------------------------- ----------------------------
Weighted Weighted-Average
Number of Range of Average Remaining Number of Weighted Average
Options Exercise Price Exercise Price Contractual Life Options Exercise Price
- ------------ -------------- -------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
45,000 $0.050 $0.050 9 years - -
1,480,556 0.125 0.125 8.4 years 559,667 $ 0.125
55,000 0.094 0.094 9.8 years - -
635,000 0.15-0.188 0.178 9.3 years 50,000 0.188
180,000 0.250 0.250 9.4 years - -
339,000 0.41-0.440 0.410 10 years - -
- ------------ -------------- -------------- ---------------- --------- ----------------
2,734,556 $0.05 - $0.440 $0.180 8.9 years 609,667 $ 0.130
============ ============== ============== ================ ========= ================
</TABLE>
As of December 31, 1996, 150,556 of the options granted in 1996 under the
1989 Stock Option Plan (as amended) were granted subject to Shareholder approval
of an increase in the number of shares available to grant under the Executive
Management/Director plan from the current 2,500,000 to 3,500,000.
Stock Option Plan
The purpose of the NDE Environmental Corporation 1989 Stock Option Plan
(the "Plan) is to establish a compensatory plan to attract, retain and provide
equity incentives to selected employees, consultants and directors, and to
promote the financial success of the Company. In 1996 the Plan was amended to
increase the number of shares issuable under the Plan from 248,250 to 2,500,000.
Options granted may be either "incentive stock options" within the meaning of
Section 422 (a) of the Internal Revenue Code, or non-qualified options.
The Plan is administered by the Board of Directors or a Committee (the
"Committee") appointed by the Board of Directors. The exercise price of options
(as determined by the Committee) may not be less than 85% of the fair market
value of the Common Stock on the date the option is granted. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the Common Stock on the date of grant (or, in the case of holders of
10% or more of the outstanding Common Stock, 110% of the fair market value on
such date). Options may not be exercisable after ten years from the date of
grant (five years from the date of grant in the case of options issued to
holders of 10% or more of the outstanding Common Stock).
Executive Compensation Plan
Under the Plan, the Company adopted a senior executive compensation plan.
In 1996 the number of shares reserved under this plan was increased to 2,200,000
from 180,000.
Effective June 1995, the Company adopted the 1995 Incentive Plan for
Non-management Employees (the "Non- management Plan"). The Non-management Plan
is administered by a Committee appointed by the Board of Directors. The Company
has reserved an aggregate of 250,000 shares for issuance pursuant to the
Non-management Plan.
F-16
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
In 1996 the Company canceled all options that had been previously issued to
outside directors and issued 40,000 new options priced at $0.125 (market value
at date of grant) to each of the four current outside directors
Common Shares Reserved for Issuance
Common shares reserved for issuance under convertible securities, options,
warrants and other arrangements are detailed in the following table:
Common Shares
Reserved for Issuance
---------------------
Warrants 13,560,973
Stock Options 2,900,556
Convertible Preferred Stock (Series AAA) 2,000
Shares issuable upon conversion of promissory notes 24,725
Common shares reserved for issuance 16,488,254
=====================
6. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash
The carrying amount reported in the consolidated balance sheets
approximates the fair market value.
Long-term Debt
The carrying amount of the Company's senior secured bank debt approximates
its fair value because this debt bears interest at variable rates. The carrying
amount of the Company's other long-term debt approximates their fair value.
Warrants with Put Option
The carrying amount of the warrants with put option approximates its fair
market value as determined by independent appraisal.
7. Related Party Transactions
The Company has a service contract with Bunker Hill Associates, Inc.
("Bunker Hill") to retain the services of Mr. Chaffee. Mr. Chaffee is Chairman
of the Board of the Company. The contract is on a month-to-month basis and
cancelable by either party without cause. The compensation amount is subject to
approval by the Company's compensation committee. In 1996 and 1995, Bunker Hill
earned or incurred reimbursable expenses of $318,775 and $179,640, respectively,
associated with both the aforementioned services contract and certain
Acquisition-related fees.
During 1996, the Company also paid $335,563 to its two largest
stockholders, primarily for financing fees related to the Acquisition.
F-17
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996 and 1995 are as follows:
1996 1995
------------ -----------
Deferred tax assets:
Net operating loss carry forwards ......... $ 9,333,000 $ 8,636,000
Allowance for doubtful accounts ........... 143,000 98,000
Nondeductible accruals .................... 290,000 145,000
------------ -----------
Total deferred tax assets ..................... 9,766,000 8,879,000
Less valuation allowance ...................... (9,072,000) (8,377,000)
------------ -----------
Net deferred tax asset ........................ 694,000 502,000
Deferred tax liability:
Book over tax basis of depreciable assets.. 694,000 502,000
------------ -----------
Deferred taxes, net ........................... $ - $ -
============ ===========
Due to changes in ownership of the Company's stock in 1995 as defined under
federal income tax law, the Company's future utilization of net operating loss
carry forwards incurred prior to such changes is subject to a substantial annual
and cumulative limitation. As of December 31, 1996, the Company has net
operating loss carryforwards of approximately $25,226,000. The valuation
allowance for deferred tax assets increased principally as a result of
operations.
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 35% to income before income taxes as a result of the following:
1996 1995
--------- ---------
Income taxes at the statutory rate ............. $(592,000) $(984,000)
Change in valuation allowance .................. 694,000 977,000
All other, net ................................. (102,000) 7,000
Tax on Income of Controlled Foreign Corporations 44,000 --
--------- ---------
Income taxes ................................... $ 44,000 $ --
========= =========
9. Leases
The Company's office space and certain equipment and vehicles are leased
under noncancelable operating lease agreements which expire on various dates
through 2002. Under the terms of most of the leases, the Company is required to
pay all taxes, insurance and maintenance. Future minimum payments under
noncancelable operating leases at December 31, 1996 were as follows:
1997 $ 356,851
1998 348,586
1999 188,780
2000 32,242
2001 9,614
Rent expense under operating leases totaled $216,910 in 1996 and $159,283
in 1995. As of December 31, 1996, approximately $92,000 of aggregate future
minimum rentals are due to the Company under noncancelable subleases.
F-18
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
10. Significant Customer
Sales to one customer comprised 20% of total revenue in 1996 and 13% in
1995. Management expects the significance of this customer to grow, both in
aggregate revenues and as a proportion of total revenues. Loss of this customer
would significantly and adversely impact the Company's results of operations.
11. Commitments and Contingencies
Potential Liability and Insurance
The Company's and its licensees' tank testing activities, consistent with
the industry, present risks of substantial liability. Spills of petroleum
products and hazardous substances, or the creation or exacerbation of a
contamination problem through errors or omissions in tank testing, could result
in liability under federal and state anti-pollution statutes and regulations or
from tort claims by those suffering personal injury or property damage as a
result of such contamination. In addition, many of the Company's tank testing
services involve volatile substances such as gasoline. The Company or its
licensees could be held liable for damage to persons or property caused by any
resulting fire or explosion.
The Company carries professional and pollution liability insurance of up to
$2,000,000 per occurrence; general, product and personal injury coverage of up
to $1,000,000 per occurrence; and fire liability coverage to $500,000. In
addition, umbrella coverage for all sources of liability in the amount of
$10,000,000 is maintained. Deductibles are in the amount of $200,000 per
occurrence, $400,000 in the aggregate, on the professional and pollution
liability coverages. Other coverages carry a $5,000 deductible per occurrence,
except for the umbrella policy, which carries a $10,000 deductible. The policies
in force, in the opinion of management, are expected to be sufficient to cover
all current and expected claims - the Company has not been denied any coverages
sought. However, there can be no assurance that all possible types of
liabilities that may be incurred by the Company are covered by its insurance or
that the dollar amount of such liabilities will not exceed the Company's policy
limits.
Litigation
The Company is the defendant in litigation involving a major competitor
claiming patent infringements. The Company owns rights under two patents
acquired from Gilbarco in the Gilbarco acquisition of 1994. Subsequent to the
acquisition, the Company embarked upon a licensing program for the existing
users of this patent technology, as the existing users were then infringing on
the patent rights owned by the Company. Some or all of the said suspected
infringers were customers of the plaintiff. Thus, the plaintiff filed a
preemptive suit against the Company. The Company responded by filing patent
infringement counter-claims against the plaintiff. In April of 1996 the Company
filed a Motion to Certify Class Action and Designate Class Representatives in an
attempt to join the "users class" as a party defendant. This motion, if granted,
could make the plaintiff's customers subject to any royalties the Company might
be granted if successful in this suit. This motion is currently scheduled for
hearing in late April 1997. Although significant discovery has been completed,
additional discovery remains and may have to be repeated because of the joinder
of additional parties. This case has been scheduled for a jury trial in July
1997, however, there is no assurance that the trial will not be postponed again.
Management believes that the Company cannot be held liable to the plaintiff for
monetary damages and, accordingly, no litigation liability estimates have been
accrued.
In connection with the purchase of the UST group of companies in October
1996, the Company accepted the legal liability for certain potential claims and
existing law suits and claims against the acquired companies. These suits range
from former employee-related claims to environmental remediation claims incurred
in the course of UST's business activities. In connection with claims related to
product liability, the Company assumed a liability of $658,450 (the "Assumed
Liability") as part of the acquisition. To the extent that certain of these
claims are settled for an amount exceeding the Assumed Liability, the Company
has been indemnified by the former owner of the UST group for any claims made by
the Company under the provisions of the acquisition agreement within three years
from the closing date of the acquisition in an amount up to $1,250,000 over the
Assumed Liability, net of any insurance proceeds or additional insurance
premiums that might become due as a result of such claims. It is possible that
estimates relating to the $658,450 of claims and litigation contingencies could
change. In connection with other claims, as defined in the Acquisition
Agreement, the Company is indemnified for claims asserted against the former UST
Group owner within two years from the closing date of the acquisition in an
F-19
<PAGE>
NDE Environmental Corporation and Subsidiaries
Notes to Consolidated Financial Statements
amount up to $1,000,000 in excess of any liabilities transferred to the Company,
net of any insurance proceeds or additional insurance premiums that become due
as a result of such claims. The Company believes that the liability assumed and
recorded in its accounts and the indemnification from the former owner of the
UST Group are sufficient and that the indemnification is enforceable and
collectible such that the resolution of these matters will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
The Company is also subject to various claims and litigation in the normal
course of business not directly related to the Acquisition. However, in the
opinion of management, the ultimate resolution of such matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
12. Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering all full-time
employees. Employees are eligible to participate in the plan after six months of
service. At December 31, 1996, approximately 275 employees are eligible to
participate in the plan. The Company matches annually at its discretion, with
equivalent value of Company stock (using the market value as of December 31),
50% of a participant's voluntary contributions, up to 3% of a participant's
compensation, and 100% for contributions between 3% to 6% of a participant's
compensation. The Company's expense for the plan totaled $102,318 in 1996 (none
in 1995). In 1996 the Company contributed 201,936 shares of common stock to the
plan for 1992, 1993 and 1994 contributions.
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from NDE
Environmental Coropration's financial statements as of and for the year ended
December 31, 1996.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,412,233
<SECURITIES> 0
<RECEIVABLES> 6,573,030
<ALLOWANCES> 837,480
<INVENTORY> 367,362
<CURRENT-ASSETS> 10,093,242
<PP&E> 13,347,625
<DEPRECIATION> 7,611,234
<TOTAL-ASSETS> 25,049,636
<CURRENT-LIABILITIES> 9,992,080
<BONDS> 14,192,011
0
5,000
<COMMON> 1,598
<OTHER-SE> (741,053)
<TOTAL-LIABILITY-AND-EQUITY> 25,049,636
<SALES> 15,939,126
<TOTAL-REVENUES> 15,939,126
<CGS> 0
<TOTAL-COSTS> 11,085,062
<OTHER-EXPENSES> 7,143,723
<LOSS-PROVISION> 270,935
<INTEREST-EXPENSE> 1,062,409
<INCOME-PRETAX> (3,408,362)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,408,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,813,149
<CHANGES> 0
<NET-INCOME> (1,638,998)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
