U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB
(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, 1997
[ ] 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
Tanknology-NDE International, Inc.
(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
Checkwhether 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, 1997 were
$38,683,146.
The aggregate market value of voting stock held by non-affiliates of the Issuer
as of March 25, 1998 was approximately $1,956,493.
As of March 30, 1998, there were 16,145,166 outstanding shares of Common Stock,
$0.0001 par value, of the Issuer.
DOCUMENTS OMITTED
Exhibit Numbers 10.45 through 10.65
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
Table of Contents
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Page
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PART I
Item 1. Description of Business......................................................3
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...................14
Item 7. Financial Statements .......................................................21
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................21
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance
with Section 16(a) of the Exchange Act...............................22
Item 10. Executive Compensation......................................................23
Item 11. Security Ownership of Certain Beneficial Owners and Management..............27
Item 12. Certain Relationships and Related Transactions..............................28
Item 13. Exhibits and Reports on Form 8-K............................................30
SIGNATURES......................................................................................35
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Tanknology-NDE International, Inc (the "Company" or "TNDE") was
incorporated in Delaware in 1988. The Company is a holding company that conducts
business through its wholly-owned subsidiaries. At December 31, 1997, the
Company's subsidiaries included Tanknology/NDE Corporation, 2368692 Canada, Inc.
(formerly known as Tanknology Canada (1988) Inc.) ("Tanknology Canada"), NDE
Environmental Canada Corporation ("NDE Canada"), ProEco, Inc. ("ProEco"), EcoAm,
Inc., Tanknology-NDE Construction Services, Inc. and ProEco, Ltd. The Company
provides environmental compliance services, equipment installation, construction
project management 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, disruptions or the
failure of the Company's information management system, or technological
obsolescence.
Mergers and Acquisitions
The Company's business has historically grown through a series of
acquisitions beginning in March 1990. The Company has acquired testing
technology, licenses, testing vehicles and other assets. The Company expects
that it will continue to make strategic acquisitions in the future.
Tanknology UST Acquisition
On October 25, 1996, the Company acquired substantially all of the
operating assets and liabilities of the Tanknology UST Group ("UST Group") of
Tanknology Environmental, Inc. ("TEI"), (the "Acquisition"). The Tanknology UST
Group's operations were principally conducted through three subsidiaries of TEI:
Tanknology Corporation International ("TCI"), Tanknology Canada, 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 these
subsidiaries.
TCI was engaged in substantially the same business and 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 TNDE. Immediately following the Acquisition, the Company
merged its primary operating subsidiary, NDE Testing & Equipment, Inc., into
TCI, and changed its name to Tanknology/NDE Corporation. The combined entity
comprises the largest component of the Company's domestic operations, field
services. As a result of this transaction, the Company believes that the
resulting entity is the largest and only nationwide provider of UST services.
Management believes that the combination has resulted in a significant increase
in market share and the elimination of duplicate administrative costs.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
USTMAN Disposition
USTMAN provided statistical inventory reconciliation ("SIR") services. SIR
meets the post-1998 Environmental Protection Agency ("EPA") precision
requirement for leak detection. SIR may also identify other conditions of
concern to tank operators such as pilferage or flaws in record keeping. On May
22, 1997, USTMAN was sold to Watson General Corporation (since renamed USTMAN
Technologies, Inc.). The Company did not realize any gain or loss on this sale
as the net proceeds from the sale approximated the carrying value of the
tangible and intangible assets of USTMAN.
Gilbarco Acquisition
On April 11, 1994, the Company acquired the principal assets of the
Environmental Services Division of Gilbarco, Inc. ("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
the early retirement and settlement of debt incurred in conjunction with the
Gilbarco ESD acquisition and recorded a $833,321 write down of the acquired
vehicles and test equipment due to permanent impairment of their value.
Canada Disposition
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, TNDE 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, the Company sold
substantially all of the operating assets of Tanknology Canada to the Company's
eastern Canada licensee. The Company did not realize any gain or loss on this
sale as the net proceeds from the sale approximated the carrying value of the
tangible and intangible assets of Tanknology Canada.
Lines of Business
The Company expects that over the next two years that it will see a
significant decline in its precision tank testing services as government
regulations and enforcement thereof take effect. Accordingly, the Company plans
to broaden beyond its historical service offerings to replace these revenues. In
1997, the Company entered into the construction services field (see description
below) and also expanded its participation in the installation of Automatic Tank
Gauges ("ATG"). The Company expects that it may introduce new services related
to its current business and may expand certain existing service offerings.
The Company offers comprehensive services to its customer base of retail
and non-retail fuel distributors who own or operate USTs. The Company has four
operating divisions that reflect its primary lines of business: Field Services,
Compliance Management Services (CMS), Construction Services, and International.
Field Services
Historically, the principal business of the Company's Field Services
division ("Field Services") has been 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 for a variety of reasons, including:
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; and
o to investigate the site for evidence of pollution or a fire
hazard.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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; and
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.
Due to the final phase-in of EPA regulations on December 22, 1998, annual
precision tightness testing will no longer be accepted as a primary means of
meeting leak detection requirements. As a result, the Company expects revenues
from precision testing to decline substantially after 1998. Precision tests will
still be required in certain situations (such as prior to property transfers, to
confirm an inconclusive SIR result or to confirm a leak indicated by an ATG but
at greatly reduced frequency.
Field Services provides "Stage II Testing" to verify functionality of Stage
II Vapor Recovery equipment and to verify that it does not leak. During
refueling, Stage II equipment collects vapor emissions displaced from the
vehicle gas tank receiving the fuel and incinerates or returns the vapor to the
UST. EPA limitations on fuel vapor emissions are designed to help reduce ozone
layer depletion and are enforced in metropolitan areas that do not attain
emissions targets set forth in the Clean Air Act. TNDE 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.
On July 16, 1997, the EPA issued its new air quality standards for
particulate matter and ozone. Implementation of these more stringent standards,
which are currently under Congressional review, may increase the number of
metropolitan areas subject to Stage II Vapor Recovery requirements. The EPA's
On-board Vapor Recovery ("OBVR") requirements, which call for automakers to
install in-car vapor recovery canisters, start to phase-in in 1998. Forty
percent of all new cars for the model year 1999 must be equipped with OBVR. By
2000, all cars must have OBVR, and, by 2001, light duty and heavy duty trucks
will be included. Although full implementation of the requirements will, over
time, replace most Stage II systems and greatly reduce the Company's Stage II
testing services, management does not expect the aggregate market for Stage II
testing to change significantly within the next five years.
Field Services also offers installation of ATG. In 1997 the Company derived
more than 10% of its revenues from the installation, inspection, maintenance and
parts sales associated with ATG. No significant revenues were derived from ATG
in 1996. ATG 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. ATG meet regulatory requirements as an accepted means of monthly
monitoring. After December 22, 1998, UST owners must generally use a form of
monthly monitoring for leak detection requirements (such as the installation of
an ATG or the use of Statistical Inventory Reconciliation (SIR). However, tanks
owners may continue to use precision tightness testing at 5 year intervals for
ten years after the upgrades in most states. See "Government Regulations." It is
currently anticipated that the rate of UST closure and upgrade trends will
increase as the 1998 deadline approaches.
Field Services also offers the equipment, design, installation, and
maintenance of cathodic protection systems including video internal tank
inspection ("Petroscope"). 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, non-corrodible material. Cathodic protection is one
of two viable corrosion protection alternatives for owners or operators of steel
USTs who wish to upgrade rather than close or replace their USTs. 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. Cathodic protection systems are typically
installed by drilling holes at various points around the UST and related piping,
inserting anodes within the holes, wiring the anodes together and connecting the
system to the facility's electrical system. Cathodic protection systems require
periodic tests and inspections which are services the Company performs for its
customers. For the same reasons that annual tightness testing is expected to
decline, the Company expects strong demand for cathodic protection services
through a period shortly after December 22, 1998. The degree to which the
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
Company will experience a significant increase in cathodic protection revenues
or profits is not clear. However, in 1997, the Company experienced revenue
growth in this area and cathodic protection services accounted for approximately
12% of Field Services revenues.
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. The
Field Services division may, as a customer service, subcontract the upgrading of
USTs with spill protection but typically does not provide other UST services
such as secondary containment, interstitial monitoring or groundwater or vapor
monitoring.
In 1997, Field Services revenues were approximately $32.7 million, or 85%,
of the Company's consolidated revenues.
Compliance Management Services
In 1995, the Company established its CMS division 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 related to UST upgrades;
o coordinate construction, maintenance, testing and contractor
oversight; and
o coordinate the provision of services from the customer's other
UST vendors.
Currently, the CMS division manages the environmental compliance for
approximately 11,000 tanks in the United States.
Construction Services
In 1997, the Company established Tanknology-NDE Construction Services, Inc.
("CS") which provides construction management services. CS provides turn-key
construction program management to customers that cannot, or do not want to,
manage large-scale, complex tank upgrade projects, removals, replacements and
other petroleum related construction. CS program managers have many years of
petroleum construction and project management experience, as well as several
excellent customer relations that complement the Company's list of major
customers. Additionally, as the project manager, CS can usually influence which
sub-contractors will perform the construction or related work. This allows an
opportunity for other TNDE services, with customer approval, to be specified for
work. CS provides the following services (among numerous others) to its
customers:
o Single point program management;
o Site surveys;
o Project design and permitting;
o UST upgrades;
o UST tank and line removals;
o Above ground and underground tank installations;
o Canopy installations and modifications;
o Supply of parts and equipment;
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
o Other petroleum related construction; and
o Coordination with services offered by other TNDE divisions.
International
Through ProEco, its wholly owned subsidiary, TNDE licenses technology to
service providers in Australia, Brazil, Canada, Chile, Ireland, Italy, South
Korea, Mexico, Malaysia, New Zealand, Puerto Rico, Portugal and the United
Kingdom. Service providers receive a license for specific countries or
geographic areas and purchase or lease equipment from the Company. TNDE
typically reviews the test data, issues the test report, provides technical
support and receives license or processing fees on each test.
Government Regulations
The primary driver for the Company's services are various environmental
regulations issued by the EPA and enforced by state environmental departments.
In addition, regulatory interpretations and additional requirements are
determined by local and county officials, which vary significantly from area to
area.
In response to concerns about ground water contamination, Congress included
UST amendments in the 1984 Resource Conservation and Recovery Act ("RCRA"). The
RCRA amendments led 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 non-corrodible material (such as
fiberglass), or both. Existing steel piping must have cathodic protection. Tanks
or piping made of non-corrodible 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.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
There are two categories of leak detection:"monthly monitoring" and
"tightness testing". 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.
Leak detection is required for all "new" USTs after installation or
"upgraded" USTs within 10 years of upgrade. Such methods include: SIR, ATG,
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.
ATG 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.
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; and
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.
Some state and local jurisdictions have adopted regulations regarding
testing of UST 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 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
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
which a lack of compliance would have a material adverse impact on the operating
results of the Company.
Distribution
Geographical
As part of the Company's business strategy, the Company has expanded its
service offerings, both through acquisitions and internal expansion. The Company
plans to take advantage of its broad product line by cross marketing these
services to its customers who do not use all of the offered services and by
bundling separate services into a combined service offering. In 1998, the
Company plans to create a national sales organization to focus on selling the
entire line of service offerings to all geographic areas. This group will
supplement the Company's existing regional sales force. In addition, the Company
plans to develop relationships with other service providers, equipment
manufacturers and distributors and others in order to more effectively market
its services to a broader base of customers. In late 1997, the Company entered
into two separate agreements that it believes are significant first steps to
accomplishing its goals of more effectively marketing its service offerings and
extending its customer base:
1) Ryder Total Compliance Contract. In an agreement with Ryder
System Inc., the Company bundled its CMS, ATG installation, the
purchase of the gauge and related equipment, system maintenance
and remote monitoring of the gauge in a single turnkey service
called Total Compliance (tm). In 1997, this new service offering
covered approximately 325 USTs, and, in January 1998, the program
was expanded to cover approximately 1,350 USTs for Ryder.
2) Strategic Alliance with Veeder Root. In December 1997, the
Company entered into a strategic business alliance with
Veeder-Root Company ("Veeder-Root"), a subsidiary of Danaher
Corporation ("Danaher"), which included an $8 million investment
in the Company by Danaher. Veeder-Root is the industry's leading
manufacturer of ATG and line leak detection equipment. Through
its Simplicity Petroleum Data Services unit, Veeder-Root provides
a turnkey package of ATG and line leak equipment, twenty-four
hour remote monitoring, compliance reports, dispatching and field
management services. The Company believes that this alliance will
allow for joint marketing of the two companies' complementary
service offerings to provide customers more value as well as to
provide the Company with an expanded distribution capability by
using Veeder-Root's established direct sales force and
distribution network.
Field Services distributes its services throughout the United States
utilizing approximately 175 vehicles. Sales and operations are managed through
12 regional offices as well as the Company headquarters. 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, such as
hospitals and hotels.
CMS markets to Field Services and Construction Services customers and trade
show attendees and recipients of industry trade publications. CMS services are
marketed by CMS division personnel based at the Company's headquarters, the
corporate sales and marketing departments and the 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,
Connecticut and Virginia.
Construction Services markets to Field Services and CMS customers as well
as through direct sales and attendance at trade shows. Construction Services
performs throughout the United States and maintains an administrative office in
Atlanta, Georgia.
International operations are marketed through attendance at trade shows,
direct sales and advertising in trade publications. International operations are
managed from the Company headquarters.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
Information Systems and Products
TOPS (formerly known as, NDEOE) and CMS (formerly known as, USTLine) are
the trade names for a group of proprietary information systems that facilitate
the environmental compliance of UST installations. TOPS and CMS 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 TOPS and CMS 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; and
o USTs distant from managerial oversight.
TOPS 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 TOPS
while on-site. The TOPS database provides comprehensive information about the
customers' UST systems which is useful for their operational and regulatory
compliance functions and which can be sorted and analyzed electronically.
CMS is a comprehensive management information system that tracks UST site
data, test/upgrade histories, contractor visits and regulatory inquiries to help
ensure full compliance information is available when needed.
TNDE'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
TNDE's technician while visiting the site, while regulatory information would be
maintained on an associated database by TNDE regulatory affairs personnel and
tied to a particular site location via zip codes.
Master databases are centrally managed at TNDE's Austin headquarters.
Customized reports are generated which meet the needs of each particular client
or regulator. The TNDE 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.
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 TNDE through integrated e-mail;
o increased efficiency in planning, budgeting and scheduling due to
the integrated data-base management tools; and
o enhanced regional emergency response (e.g., earthquake), the TOPS
system can sort the data by proximity to a particular landmark
and other site characteristics.
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, which have historically declined, were relatively stable in
1997, although some price degradation occurred in certain geographic markets.
Competitors may refine existing technologies or develop new systems that render
the Company's technology obsolete or less competitive.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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 may be very price
sensitive. Owners or operators who operate nationwide have the ability to exact
price concessions from installation providers.
The Company does not believe that the CMS division currently has
significant direct competition.
Construction Services competes with local construction companies, larger
national construction companies and internal construction groups within major
customers.
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 TNDE'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; and
o Fleet owners: Hertz Corporation, Ryder Truck Rental.
Mobil Oil Corporation accounted for approximately 21%, 20% and 13% of the
Company's 1997, 1996 and 1995 revenues, respectively. No other single customer
contributed more than 10% of the Company's revenues during these three years.
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 licenses for various rights in the form of
patents, trademarks, copyrights and/or registered names. TNDE'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
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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 the attendant risks
associated with operating motor vehicles.
The Company maintains professional and pollution liability insurance of $2
million per occurrence with a $2 million aggregate limit; general, product and
personal injury coverage of $1 million per occurrence, with a $2 million
aggregate limit; and fire, legal liability coverage to $500,000. In addition,
the Company maintains umbrella coverage for all sources of liability other than
professional and pollution liability in the amount of $10 million. Deductibles
are in the amount of $100,000 per occurrence for professional and pollution
liability claims. The umbrella policy carries a $10,000 self-insured retention.
All other coverages carry a $5,000 deductible per occurrence. The Company
believes that the policies in force will 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 material adverse
effect on the Company's business, financial condition and results of operations.
Personnel
As of December 31, 1997, the Company employed 313 full-time and 10
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property. All operations are conducted from leased
premises. The Company's headquarters is located in approximately 17,000 square
feet of leased office space in Austin, Texas. The Company also leases regional
offices and storage facilities.
ITEM 3. LEGAL PROCEEDINGS
In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against the
Company in the United Statesl District Court for the Western District of
Louisiana. The lawsuit is for a declaratory judgment that certain patents owned
by TNDE are invalid and 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 TNDE and attorneys' fees and costs. In May 1995, TNDE filed a
counterclaim alleging that (1) the TNDE patents are valid and enforceable, (2)
the U.S. Test tank testing systems infringe such patents and (3) TNDE 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 TNDE of Gilbarco ESD. After numerous
delays, an evidentiary hearing occurred in early 1998, and the parties are in
the process of preparing post hearing submissions. 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.
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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 certain 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 "TNDE".
The following table sets forth high and low bid prices of the shares of
Common Stock of the Company as reported in the OTC Bulletin Board, Daily Trade
and Quote Summary Report 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
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
1997
First Quarter $9/16 $13/32
Second Quarter $7/16 $3/16
Third Quarter $11/32 $3/16
Fourth Quarter $1/2 $1/8
As of July 11, 1997, there were approximately 174 holders of record of the
Company's Common Stock including those shares held in "street name". The Company
did not declare or pay any dividends during 1996 or 1997. The Company currently
intends to retain any future earnings to finance the development and expansion
of its business.
Sales of Unregistered Securities
In October 1996, as part of the consideration given to Banc One Capital
Partners, L.P. ("BOCP") for a $8 million senior subordinated note (the "1996
Note") issued in connection with the Acquisition, BOCP received warrants to
purchase 13,022,920 shares of the Company's common stock (the "Warrants"). The
Warrants were exercisable at $0.325 per share and were exercisable at any time
from October 24, 1996 through December 31, 2005. Both the number of shares and
the exercise price were subject to adjustment based upon certain factors. The
Warrants were also subject to a put option whereby, under certain circumstances,
the BOCP could require the Company to repurchase the Warrants (including any
common shares owned as a result of a previous Warrant exercise). The appraised
fair market value of the Warrants at issuance was $1.6 million and was recorded
as a discount to, and separately from, the subordinated note. These securities
were repurchased in December 1997. See "Management's Discussion and Analysis or
Plan of Operation."
In December 1997 the Company sold 150 shares of Series A Redeemable
Preferred Stock with a liquidation preference of $10,000 per share were issued
to DH Holdings Corp. ("DH"), a subsidiary of Danaher. The shares are redeemable
at the option of the Company at any time after the later of June 30, 2001 or the
date upon which all principal and interest on the $6,500,000 senior subordinated
note (the "1997 Note") payable to DH is paid in full at the redemption price per
share. Any shares which are outstanding at December 31, 2004 will be redeemed by
the Company. Each share is convertible at the option of DH at any time after
December 31, 1997 into 20,000 shares of the Company's common stock (subject to
certain adjustments as defined in the agreement). DH is entitled to a annual
dividend of $1,000 per share, payable semi-annually in arrears on June 30 and
December 31 of each year. Additionally, in December 1997, the Company issued to
DH the 1997 Note. In consideration for the 1997 Note, DH also received a warrant
to purchase 4,500,000(subject to adjustment as defined in the warrant agreement)
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
shares of the common stock of the Company at an exercise price of $.375 per
share. The warrant is exercisable in a single exercise at any time. The warrant
expires on December 31, 2002.
In consideration of Bank One Texas, N.A.'s consent to enter into the
refinancing transaction in December 1997, the bank was paid a $50,000 fee and
received a warrant to purchase 350,000 shares of the Company's common stock at
an exercise price of $.375 per share. The terms of this warrant are the same as
that issued to DH.
The Company acted in reliance with Rule 506 under the Securities Act and
Section 4(6) of the Securities Act in not filing a registration statement with
these transactions.
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 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 product liability losses in excess of insured limits and third
party indemnifications;
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; and
o failure of the Company to replace anticipated revenue declines in
its core tank testing business with new and profitable revenue
streams.
Revenues
Revenues for 1997 were $38,683,146, an increase of $22,744,020 or 143%,
compared to $15,939,126 for 1996. The increase in revenues in 1997 was due to
several factors:
1) The start up of the Construction Services division which began
producing revenues in July 1997 and generated $2,857,564 of
revenues for the year.
2) Increased revenues of $1,049,869 generated by the USTMAN and
Canadian operations that were sold in 1997. These two operations
had combined revenues of $2,001,530 and $951,661 in 1997 and
1996, respectively.
3) Revenues from an ATG upgrade program for a major customer of
$4,238,349.
4) Inclusion of 12 months of revenues of the Field Services division
of the UST Group acquisition compared to only two months
inclusion in 1996.
The Company expects that in 1998 revenues for the Construction Services
division will increase substantially as it was in operation for only six months
in 1997, that the upgrade program revenues for the major customer noted above
will decline in 1998 as the program is completed and that tank tightness
revenues will decline as more and more UST are fitted with ATG, other remote
monitoring systems or are cathodically protected. The Company expects that due
to the impending December 1998 regulatory deadlines, the level of business
activity in 1998 will be favorable to the Company as UST owners/operators
endeavor to meet the regulatory guidelines and may require use of services such
as those offered by the Company. Additionally, the Company is constantly
reviewing additional acquisitions as well as new internally developed service
offerings to replace the anticipated decline in revenue streams from tank
tightness testing and ATG installations after the regulatory deadline passes and
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
UST owners become compliant with the regulations. In general, the price of UST
tightness testing, which is the Company's main revenue source, as well as other
services were stable in 1997.
Cost of Services
Cost of services for 1997 was $29,246,121 (76% of revenue), an increase of
$18,161,059 or 164%, compared to $11,085,062 (70% of revenue) for 1996. Gross
margin was $9,437,025 (24% of revenue) in 1997, compared to $4,854,064 (30% of
revenue) in 1996. The decline in gross margin percentage is due primarily to (i)
the inclusion of twelve months of operations of the Field Services unit of the
UST Group compared to two months inclusion of these operations in 1996, (ii) the
start up of the Construction Services division in 1997, which realizes lower
margins in general than other services since it primarily manages
sub-contractors and (iii) a planned increase in capacity in both trained
technicians and vehicles to prepare for increased demand in the fourth quarter
of 1997 and an anticipated increase in demand for the Company's services in 1998
due to the approaching regulatory deadlines in December 1998.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") for 1997 were
$7,853,002 (20% of revenue), an increase of $1,271,665 or 19%, compared to
$6,581,337 (41% of revenue) for 1996. The increase in SG&A was primarily due to
the start-up of the Construction Services division, increased costs incurred to
upgrade computer systems and administrative systems due to increased business
levels and, to a lesser extent, increases in the staffing levels required as a
result of the Acquisition. As a percentage of sales, SG&A expenses declined from
41% in 1996 to 20% in 1997. SG&A expenses in 1996 reflect only two months of
spending subsequent to the Acquisition. The increase in revenues and the
elimination of duplicate SG&A expenses subsequent to the Acquisition reduced
SG&A expenses as a percentage of revenues from 1996. These factors were
partially offset by increased spending in 1997 to upgrade systems and to
start-up the Construction Services division as noted above.
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 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.
Earnings Before Interest, Taxes, Depreciation and Amortization and Extraordinary
Gains (EBITDA)
EBITDA in 1997 was $5,495,138 which was an increase of $6,025,877 from
negative EBITDA of $530,739 in 1996. The increase in EBITDA is due to increased
revenues from the Acquisition and the absence of the $833,321 charge in 1996 for
impairment of long-lived assets and growth in other service offerings such as
Construction Services. The Company believes that EBITDA is an important measure
of the Company's financial performance as it is an indication of the funds
generated by operations available for debt service, capital expenditures and
payment of taxes.
Interest Expense
Interest expense for 1997 was $3,205,475, (8% of revenue), an increase of
$2,143,066 or 202%, compared to $1,062,409 (7% of revenue), in 1996. The
increase in interest expense is due to the increased debt incurred for the
Acquisition and due to the fact that the Acquisition debt was outstanding for
the full 1997 year versus only two months in 1996. Additionally, increased
non-cash interest expense related to accretion of the 1996 Note of $349,140,
estimated accretion of the Warrants of $734,250 (none in 1996) and increased
amortization of the deferred financing costs incurred on the Acquisition-related
debt of $177,424, accounted for $1,260,814 of the increase over 1996. These
increases were partially offset by generally lower interest rates on the new
debt compared to the Company's prior financing arrangements that were in effect
for the first ten months of 1996. The Company expects that interest expense will
decline in 1998 as a result of the refinancing in December 1997(see below) which
will lower the amount of subordinated debt outstanding from $8 million to $6.5
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
million, reduce the interest rate on subordinated debt from 13% to 10%,
eliminate the accretion of the Warrants of $734,250 incurred in 1997 and reduce
the amount of subordinated debt accretion by approximately $357,000.
Extraordinary Gain
In December 1997, the Company recorded an extraordinary gain on the early
retirement of the 1996 Note and associated Warrants that were issued in
connection with the Acquisition in 1996. The 1996 Note had a cost basis of
$6,884,422 at the time of retirement, net of unamortized discount, and the
Warrants had a carrying value of $2,334,250. These instruments were retired for
an aggregate cost of $8,500,000, plus $144,415 in related expenses. In
connection with this transaction, the Company wrote off the deferred financing
costs associated with the original issuance of the 1996 Note of $353,760. The
net gain on this transaction was $220,497.
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.
Net Loss
The Company recorded a net loss for 1997 of $1,353,635 (3% of revenue)
compared to a net loss of $1,638,998 for 1996 (10% of revenue). Although EBITDA
(as defined above) in 1997 increased by $6,025,877 over 1996, increased interest
expense of $2,143,066, increased depreciation and amortization of $1,881,250 and
the reduction of the extraordinary gains over 1996 of $1,592,652 largely offset
the improvement in EBITDA and contributed to the net loss in 1997.
If the debt refinancing that occurred in December 1997, had occurred on
January 1, 1997 (excluding the extraordinary gain on the transaction) the
Company would have a pro forma net loss of $90,580 for 1997.
Liquidity and Capital Resources
The Company's strategy has been to build a national UST service capability
and to expand its service offerings both through internal growth and through
acquisitions. 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, the Gilbarco ESD transaction in 1994
and the Acquisition in October 1996.
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. The subsidiaries acquired were TCI, USTMAN and 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. As of December 31, 1997, this purchase price adjustment was
still being negotiated between the Company and TEI. The Company believes that
this matter will be resolved in 1998 and that any settlement will not have a
material impact on its financial position or results of operations.
Sale of Canadian Operations
In February 1997, the Company sold the business and operations of
Tanknology Canada which it acquired as part of the Acquisition. In 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
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
and entered into a series of royalty generating license agreements. Payments
totaling $1,200,000 were made at closing of which $1,150,000 of the proceeds
were allocated to the sale of the patent, software and trademark rights and
$50,000 being allocated to the sale of the fixed assets. The net proceeds from
this sale approximated the carrying values of the assets sold, and, therefore,
no gain or loss was realized. As a condition of sale, the Company agreed to
"block" $500,000 from is borrowing base, which reduced the Company's borrowing
capacity under the Company's revolving credit facility with its bank. The
"block" was removed as part of the debt restructuring in December 1997 ("1997
Refinancing") described below.
Sale of USTMAN
On May 22, 1997 the Company sold USTMAN, which was acquired as part of the
Acquisition, to USTMAN Technologies, Inc. (formerly named Watson General
Corporation). The terms of this transaction called for a cash payment at closing
of $5,250,000, the execution of a $500,000 8.5% Note due on June 1, 1998 ("8.5%
Note"), the assumption of certain liabilities of the Company and an additional
payment based upon certain calculations of USTMAN's working capital as of the
closing date. In December 1997, as part of a settlement of the working capital
adjustment the Company received a payment of $150,000 for one half of the
working capital adjustment and early repayment of the 8.5% Note. The final
working capital payment of $150,000 was received in early 1998. As a condition
of the sale, the Company agreed to use $2,000,000 of the closing proceeds to
immediately repay all of the then outstanding borrowings under the revolving
credit facility and to place $3,000,000 in a restricted certificate of deposit
with the Company's senior bank. The net proceeds of the sale approximated the
carrying value of the assets sold, including a $4,795,000 reduction of goodwill.
Accordingly, the Company did not realize any gain or loss on this transaction in
its 1997 results of operations.
Financing
In 1996, in connection with the Acquisition, the Company obtained a total
of $19 million of financing (the "Acquisition Financing") under two separate
loan agreements. The Acquisition Financing consisted of senior secured bank debt
comprised of (i) a three-year, $5 million revolving line of credit ( the
"Revolving Line") and (ii) a five-year, $6 million term loan and (iii) the 1996
Note which was refinanced in December 1997 as described below under "1997
Refinancing." Substantially all of the Company's assets were pledged as security
under the loan agreements. Concurrent with the Acquisition and the Acquisition
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 Acquisition
Financing were used (i) to purchase the UST Group, (ii) to pay off outstanding
balances under a then existing term loan and an existing factoring agreement in
the aggregate amount of $2,526,970, (iii) for funding of Acquisition related
fees and expenses and for (iv) general working capital.
Senior Subordinated Note and Warrants with Put Option
As part of the consideration given to the holder of the 1996 Note issued in
connection with the Acquisition, the debt holder also received the Warrants. The
Warrants were exercisable at $0.325 per share and were exercisable at any time
from October 24, 1996 through December 31, 2005. Both the number of shares and
the exercise price were subject to adjustment based upon certain factors. The
Warrants were also subject to a put option (the "Put") whereby, under certain
circumstances, the holder could require the Company to repurchase the Warrants
(including any common shares owned as a result of a previous Warrant exercise).
The appraised fair market value of the Warrants at issuance was $1.6 million and
was recorded as a discount to, and separately from, the 1996 Note.
In 1997, the Company recorded interest expense of $734,250 to accrete the
value of the Warrants to their estimated value. With the retirement of this
instrument, there will be no similar charges in the future.
1997 Refinancing
In December 1997, the Company retired the 1996 Note, and the Warrants for
an aggregate price of $8,500,000, plus accrued, unpaid interest on the 1996 Note
through the closing date. As part of this termination agreement, the Company
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TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
also entered into a Post Closing Agreement (the "PCA") with the lender. The PCA
calls for payment to the lender upon the occurrence of certain "Triggering
Events" as defined in the PCA, which include, among other events, (i) the
dissolution or liquidation of the Company, (ii) the merger of the Company into
another entity in which (a) the Company is not the surviving entity or (b) the
current stockholders of the Company hold less than 50% of the combined voting
power of the surviving entity. Upon the occurrence of a Triggering Event, the
Company has agreed to pay to the lender 20% of the amount by which the Market
Determined Value (as defined in the PCA) at or as a result of the closing of a
Triggering Event exceeds the Target Amount. The Target Amount is $10,000,000 for
the period December 23, 1997 through March 31, 1998; $12,500,000 for the period
from April 1, 1998 through June 30, 1998; $15,000,000 for the period July 1,
1998 through September 30, 1998; $17,500,000 for the period October 1, 1998
through December 31, 1998; and $20,000,000 for the period January 1, 1999
through March 31, 1999. The PCA expires after March 31, 1999. Such payment is to
the lender will occur on the same date and will take the same form as the
payment other shareholders of the Company would receive. As of December 31,
1997, there has been no occurrence of a Triggering Event, and the Company is not
aware of any potential Triggering Events.
The funds for this transaction were provided by the issuance of $1,500,000
of Series A Redeemable, Convertible Preferred Stock and the issuance of the 1997
Note and $500,000 of the Company's cash. Additionally, the Company's bank credit
agreement was modified to allow for these transactions and to amend certain
other terms and conditions of the agreement.
Series A Redeemable, Convertible Preferred Stock
As part of the 1997 Refinancing, 150 shares of Series A Redeemable,
Convertible Preferred Stock with a liquidation preference of $10,000 per share
were issued to DH Holdings Corp. ("DH"), a subsidiary of Danaher. The shares are
redeemable at the option of the Company at any time after the later of June 30,
2001 or the date upon which all principal and interest on the $6,500,000 note
payable to DH is paid in full at the redemption price per share. Any shares
which are outstanding at December 31, 2004 will be redeemed by the Company. Each
share is convertible at the option of the holder at any time after December 31,
1997 into 20,000 shares of the Company's common stock (subject to certain
adjustments as defined in the agreement). The holders of shares of Series A
Redeemable, Convertible Preferred Stock are entitled to a annual dividend of
$1,000 per share, payable semi-annually in arrears on June 30 and December 31 of
each year.
1997 Note
As part of the 1997 Refinancing, the Company issued to DH the 1997 Note.
The interest rate on the 1997 Note is 10% and the maturity date is December 31,
2002. Principal payments under the 1997 Note are due quarterly in twelve equal
installments of $541,667 beginning on March 31, 2000. Interest payments are due
quarterly beginning March 31, 1998. The 1997 Note is collateralized by
substantially all of the assets of the Company. In consideration for the1997
Note, DH also received a warrant to purchase 4,500,000 (subject to adjustment as
defined in the warrant agreement) shares of the common stock of the Company at
an exercise price of $.375 per share. The warrant is exercisable in a single
exercise at any time. The warrant expires on December 31, 2002.
Senior Secured Bank Debt
The funds available for borrowing under the Revolving Line are based on a
formula as applied to the eligible accounts receivable of the Company. In
conjunction with the February 1997 sale of the Tanknology Canadian operations,
the amount available to the Company under the credit line was reduced by
$500,000 as a condition to obtaining the banks agreement to sell the Tanknology
Canadian operation. As a result of the 1997 Refinancing, the $500,000 reduction
to the credit line was eliminated and certain other terms and covenants of this
agreement were modified. In consideration of the bank's consent to enter into
the 1997 Refinancing the bank was paid a $50,000 fee and received a warrant to
purchase 350,000 shares of the Company's common stock at an exercise price of
$.375 per share. The terms of this warrant are the same as that issued to DH.
- 18 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
At December 31, 1997, the Company had $1,792,667 of borrowings outstanding
under the Revolving Line and also had $185,000 in letters of credit outstanding.
As of December 31, 1997, there was an additional $3,022,333 available for
borrowing under the Revolving Line.
The $6 million term loan carries an interest rate of the bank's prime rate
plus 1.5%. Principal payments of $100,000 are paid monthly. At December 31,
1997, $4,800,000 remained outstanding under the term loan. Interest is payable
monthly under both the Revolving Line and the term loan. Under both the
revolving credit line and the term loan and the Company is subject to certain
restrictions and covenants. At December 31, 1997, the Company was in compliance
with all restrictions and covenants related to the revolving credit line and
term loan.
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 of 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, 1997 are as follows:
1998 $ 4,055,072
1999 1,389,647
2000 3,844,577
2001 3,458,438
2002 2,166,590
14,914,324
Less: Discount related to subordinated notes (270,000)
-----------------
$ 14,644,324
=================
In January 1995, the Company raised $500,000 from a significant shareholder
("Proactive") in exchange for its promissory notes (the "1995 Bridge Notes").
The 1995 Bridge Notes were to mature on April 30, 1995. In January 1995, the
1995 Bridge notes were 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. Proactive 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,
in lieu of receiving the Series DDD Preferred Stock, Proactive received a total
of 5,482,254 shares of Common Stock.
At December 31, 1997, the Company had positive working capital of $743,612
compared with working capital of $182,885 at December 31, 1996. The increase in
working capital was generated by the sale of USTMAN and Canada for aggregate net
proceeds of approximately $7,100,000 and the sale of certain international
licensing agreements which generated cash proceeds of $800,000. The Company has
deferred the revenue generated from this sale and is recognizing the revenue on
a pro-rata basis over the term of the respective agreements.
Cash flows used in operating activities in 1997 was $2,225,165 versus cash
flows provided by operating activities in 1996 of $868,023. The most significant
factors contributing to the use of cash from operations in 1997 were a
$4,121,276 increase in accounts receivable and a $2,942,089 decrease in accrued
- 19 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
liabilities. The increase in accounts receivable was caused by an increase in
revenues in December 1997 as compared to December 1996 and delays in payment by
one large customer which was received in January 1998. The decrease in accrued
liabilities was primarily due to payments made for liabilities associated with
the Acquisition in 1996 including legal fees, accounting fees, severance, moving
costs and reclassifications made to certain acquired assets against accrued
liabilities that were recorded at the time of the Acquisition.
Capital expenditures in 1997 were $2,841,530 compared to $1,120,752 in
1996. The increase in capital expenditures in 1997 was primarily due to the
purchase of replacement and new service vehicles, increased expenditures for
computer hardware and software and the purchase of automated tank gauges for a
specific customer contract. The Company expects that capital expenditures in
1998 will be approximately $2,500,000, subject to the Company identifying
additional investment opportunities. This is a forward-looking statement, and
the Company's actual capital expenditures may differ from management's current
expectation due to risk factors that may affect the Company's ability to fund
capital expenditure requirements, changes in technology that may require
substantial capital investments, changes in government regulations or customer
other business opportunities that may arise.
Prior to the Acquisition, the Company incurred operating losses and
negative cash flows from operations and relied primarily on its 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 1997 Refinancing and cash flows
generated from operations will provide it with sufficient borrowing capacity and
funds to meet the Company's capital expenditure requirements, operational needs,
and debt service requirements for 1998. 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.
Impact of Year 2000
Some of the Company's older computer systems were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a dare using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities. The Company has made an initial assessment and
will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost is estimated at less than $250,000
as some of the Company's systems are already Year 2000 compliant. To date, the
Company has incurred some costs for this problem, however, these costs were
incurred as part of the normal systems assessment and software enhancements that
the Company has made over the past year and as such is not identifiable.
The project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and the actual
results could differ materially from those anticipated. Specific factors that
might cause material differences include, but are not limited to, the
availability of trained personnel in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
- 20 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
ITEM 7. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and its
subsidiaries are attached hereto.
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Report of Independent Auditors ......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........... F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1996 ...................................................... F-4
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1997 and 1996 ......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1996 ...................................................... F-7
Notes to Consolidated Financial Statements .............................. F-8
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 21 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Officer and/or Director Positions Age
- -------------------------- -------------------------------------------------- --
Jay Allen Chaffee Chairman of the Board, Director, Officer 46
A. Daniel Sharplin President, Chief Executive Officer, Director 35
David G. Osowski Vice President, Secretary, Chief Financial Officer 45
H. Baxter Nairon Vice President of Strategy and Business Development 38
Charles G. McGettigan Director 53
Michael S. Taylor Director 56
Myron A. Wick, III Director 54
Steven H. Sigmon Director 42
</TABLE>
Jay Allen Chaffee was elected to the Company's Board of Directors in April
1991 and has been the Chairman of the Board since December 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. Mr. Chaffee received a Bachelor of Arts
from Franklin & Marshall College in 1974 and a Juris Doctor from the University
of Tulsa, College of Law in 1978.
A. Daniel Sharplin has been the Company's President and Chief Executive
Officer and a Director 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 was appointed President in December 1994.
Prior to joining the Company, Mr. Sharplin functioned as an environmental
service industry consultant from April 1991 to December 1991. Mr. Sharplin
received a Masters of Business Administration from the University of Texas in
1987.
H. Baxter Nairon was named Vice President of Strategy and Business
Development of the Company in December 1997. Prior to that, he was President of
Field Services for the Company from April 1996 to December 1997. Before joining
the Company, 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 holds a Bachelor of Science in
Mechanical Engineering from the University of Tennessee at Knoxville and a
Masters of Business Administration from the University of Texas.
David G. Osowski was named Vice President, Secretary and Chief Financial
Officer in December 1996. Prior to joining the Company, 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 from the
University of Bridgeport.
Charles C. McGettigan has been a director since 1995. Since November 1988,
he has been a Managing Director of McGettigan, Wick & Co. Inc., an investment
banking firm in San Francisco. Since May 1991, Mr. McGettigan has been a general
partner of Proactive Investment Managers, L.P. ("PIM"), which is the general
partner of Proactive Partners, L.P. ("Proactive"), a merchant banking fund.
Prior to co-founding McGettigan, Wick & Co., Mr. McGettigan 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 Cuisine Solutions, Inc. digital dictation,
inc., I- FLOW Corporation, Modtech, Inc, Onsite Energy, Inc., PMR Corporation,
Phoenix Network, Inc., Sonex Research, Inc., and Wray-Tech Instruments, Inc. Mr.
McGettigan is a graduate of Georgetown University, and he received a Masters of
Business Administration in Finance from the Wharton School at the University of
Pennsylvania.
- 22 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
Michael S. Taylor has been a director of the Company since July 1992. He
has been Senior Vice-President- Corporate Finance of Gilford Securities
Incorporated since December 1996. From March 1996 to November 1996, he held a
similar position with Laidlaw Equities. From June 1989 to March 1996 he was an
Associate Director of Investment Banking of Josephthal. From early 1980 until
joining Josephthal, he was President of Mostel & Taylor Securities, Inc. He has
been involved in the securities industry since 1966 when he joined Lehman
Brothers Inc. as an analyst. He became a director of New Paradigm Software
Corporation in April 1996. He attended Amherst College and Columbia University.
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. Since May 1991, Mr. Wick has
been a general partner of PIM. 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 Children's Discovery Centers of
America, Inc., digital dictation, inc., Modtech, Inc., Sonex Research, Inc., and
Wray-Tech Instruments, Inc. Mr. Wick received a Bachelor of Arts from Yale
University in 1965 and a Masters of Business Administration from Harvard
University in 1968.
Steven H. Sigmon has been a director since February 1998. Since January
1997, he has been President of Veeder- Root, North America ("Veeder-Root") a
subsidiary of Danaher. Prior to that, Mr. Sigmon held positions with Veeder-Root
as Vice President of Marketing and Sales from June 1996 to December 1996, and as
Vice President of Marketing and International Sales from October 1995 to June
1996. Previously, he held positions with Emerson Electric Company as Vice
President of Marketing for the Emerson Power Transmission Bearing Division from
January 1992 to June 1995 and as President of the Camco Division from June 1995
to September 1995. Mr. Sigmon received a Bachelor of Science in Engineering
Technology from Clemson University in 1977.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and beneficial
owners of 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.
Officers, directors and 10% stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. The
Company believes that, during the 1997 fiscal year, the filings required of its
officers, directors or greater than 10% beneficial owners were timely filed,
except that the Form 5's filed by Mr. Sharplin and Mr. Chaffee were filed on an
untimely basis.
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 1995, 1996 and 1997. No other person who was
an executive officer of the Company at the end of 1997 was awarded, earned or
received annual salary and bonus in excess of $100,000.
- 23 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
------------
Awards
Annual Compensation ------------
------------------------------------ Shares
Name and Underlying All Other
Principal Position Year Salary Bonus Options Compensation
<S> <C> <C> <C> <C> <C>
- --------------------------- ---- ------------- ------------- ------------- ------------
Jay Allen Chaffee 1997 $ 90,000 (1) $ 200,000 (1) 800,016 (4) ---
Chairman of the Board 1996 $ 90,000 (1) $ 150,000 (1) --- ---
of Directors 1995 $ 113,671 $ 19,969 (1) 440,000 (4) ---
A. Daniel Sharplin 1997 $ 150,000 (2) $ 100,000 (2) 1,200,024 (5) ---
President and Chief 1996 $ 154,526 (2) $ 75,000 (2) --- $ 4,526 (7)
Executive Officer 1995 $ 136,779 $ 39,969 (2) 640,000 (5) ---
H. Baxter Nairon 1997 $ 138,000 $ 58,000 (3) --- ---
Vice President; President, 1996 $ 95,537 $ 45,000 384,000 (6) ---
Tanknology-NDE 1995 N/A N/A N/A ---
David G. Osowski 1997 $ 135,000 $ 47,625 (8) ---
Vice President, Secretary 1996 N/A N/A 250,000 (9) ---
and Chief Financial Officer 1995 N/A N/A N/A ---
</TABLE>
The Company has agreed to pay or reimburse the travel expenses of its
directors resulting from attendance at Board meetings. Except as hereinafter
provided, no other cash compensation was paid to, or on behalf of, Board
members, in consideration of their services provided as directors in 1997.
Certain directors were provided compensation for other services provided to the
Company as described above, and, beginning in 1997, the Board of Directors
agreed to pay Mr. Taylor a per meeting fee of $2,250. Mr. Taylor was paid a
total of $6,750 for 1997 meeting fees.
(1) In July 1997, the Company entered into an Executive Consulting Agreement
with Mr. Chaffee. See "Certain Transactions". In 1993, the Company awarded
Mr. Chaffee a bonus of $19,969; this amount was paid in installments in
1995 and 1996. In 1996, the Compensation Committee awarded Mr. Chaffee a
bonus for 1996 of $150,000 which was paid in 1997. In 1997, the
Compensation Committee awarded Mr. Chaffee a bonus for 1997 of $200,000, to
be paid in 1998.
(2) In July 1997, the Company entered into an Employment Agreement with Mr.
Sharplin. See "Certain Transactions". In 1995, the Compensation Committee
awarded Mr. Sharplin a $20,000 bonus which was paid in 1997. Mr. Sharplin
was also paid his 1993 bonus of $19,969 in 1995. Mr. Sharplin's 1996 bonus
award of $75,000 was paid in 1997. Mr. Sharplin's 1997 bonus award of
$100,000 was paid in 1998.
(3) In 1996, the Compensation Committee awarded Mr. Nairon a 1996 bonus of
$35,000 which was paid in 1997. Mr. Nairon was also awarded a $10,000 bonus
as an inducement to join the Company in 1996. In 1997, the Compensation
Committee awarded Mr. Nairon a 1997 bonus of $58,000, of which $16,000 was
paid in 1997 and $42,000 was paid in 1998.
(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 the date of grant commencing on
June 22, 1995. In 1996, certain previously granted options were repriced.
see "Fiscal Year End Options Values" below). On July 1, 1997, pursuant to
the Executive Consulting Agreement, Mr. Chaffee was awarded convertible
cash stock appreciation rights (the "SARs") for an aggregate of 800,016
shares of Common Stock at $0.2813 per share. On July 2, 1997, the Company
- 24 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
converted the SARs into a stock option for 800,016 shares of Common Stock
at $0.2813 per share which will expire on December 31, 2005.
(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. In 1996, certain previously granted options were repriced. See
"Report on Repricing of Options". On July 1, 1997, pursuant to the
Employment Agreement, Mr. Sharplin was awarded convertible cash stock
appreciation rights (the "SARs") for an aggregate of 1,200,024 shares of
Common Stock at $0.2813 per share. On July 2, 1997, the Company converted
the SARs into a stock option for 1,200,024 shares of Common Stock at
$0.2813 per share which will expire on December 31, 2005.
(6) In March 1996, Mr. Nairon was granted an option to purchase 384,000 shares
of Common Stock of the Company at $0.1875, the market price of the
Company's Common Stock on Mr. Nairon's hire date. The option vests ratably
one-third each year starting on April 15, 1996.
(7) Consists of matching funds for the Company 401(k) Plan relating to Company
contributions for 1992, 1993 and 1994 which were made in 1996.
(8) In 1997, the Compensation Committee awarded Mr. Osowski a 1997 bonus of
$47,625, of which $28,125 was paid in 1997 and $19,500 was paid in 1998.
(9) On December 19, 1996 , Mr. Osowski was granted options to purchase 250,000
shares of Common Stock of the Company at $0.4063, the market price of the
Company's Common Stock on Mr. Osowski's hire date. The option vests ratably
one-third each year starting on December 19, 1996.
Option Grants in Last Fiscal Year
The following table sets forth options granted to the Named Executive
Officers during the year ending December 31, 1997.
<TABLE>
<CAPTION>
Number of Percent of
Shares Total Options
Underlying Granted to Exercise
Options Employees in Price Per
Name Granted Fiscal Year Share Expiration Date
- ------------------ ------------- ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Jay Allen Chaffee 800,016 (1) 32% $ 0.2814 December 2005
A. Daniel Sharplin 1,200,024 (2) 48% $ 0.2814 December 2005
H. Baxter Nairon --- --- --- ---
David G. Osowski --- --- --- ---
</TABLE>
(1) Issued pursuant to an Executive Consulting Agreement. See Certain
Transactions above.
(2) Issued pursuant to an Employment Agreement. See Certain
Transactions above.
- 25 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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,
1997. None of the Named Executive Officers exercised options during 1997.
<TABLE>
<CAPTION>
Numbers of Shares Underlying Value of Unexercised
Unexercised-Options in-the-Money-Options
at December 31, 1997 at December 31, 1997
---------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jay Allen Chaffee 114,288 685,728 $ 3,572 $ 21,429 (1)
293,333 146,667 $ 55,000 $ 27,500 (2)
50,000 0 $ 9,375 $ 0 (2)
A. Daniel Sharplin 171,432 1,028,592 $ 5,357 $ 32,144 (1)
426,667 213,333 $ 80,000 $ 40,000 (2)
50,000 --- $ 9,375 $ 0 (2)
H. Baxter Nairon 128,000 256,000 $ 16,000 $ 32,000 (3)
David G. Osowski 83,333 166,667 $ 0 $ 0
</TABLE>
(1) Represents (i) the difference ($0.03125) between the exercise price of the
options ($0.28125) and the per share fair market value of the Company's
Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
subject to the options.
(2) Represents (i) the difference ($.1875) between the exercise price of the
options ($0.125) and the per share fair market value of the Company's
Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
subject to the options.
(3) Represents (i) the difference ($0.125) between the exercise price of the
options ($0.1875) and the per share fair market value of the Company's
Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
subject to the options.
In 1996, the Compensation Committee determined that in connection with the
granting of executive options in 1995, it would be in the best interests of
the 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 of Messrs. Chaffee and Sharplin as
well as 20,000 options that had been previously granted to Eric Hopkins,
the former Vice President and Chief Financial Officer of the Company, to
the then market price of the Common Stock which was $.125. All of the
aforementioned options previously had exercise prices of $3.75. All of
these options remain fully vested following the repricing.
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 1997 or 1996 to the
non-management directors.
- 26 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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 March 31, 1998 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 executive officers of
the Company and (d) all executive officers and directors as a group.
Beneficial Ownership of Common Stock(1)
Beneficial Owner Number of Shares Percentage
- ------------------------------------ ---------------- ----------
Proactive Partners, L.P.(2 14,375,901 54.76%
50 Osgood Place, Penthouse
San Francisco, CA 94153
Lagunitas Partners, L.P.(3) 14,319,558 54.55%
50 Osgood Place, Penthouse
San Francisco, CA 94153
Danaher Corporation(4) 7,500,000 28.57%
1250 24th Street, N.W.
Washington, DC 20037
Myron A. Wick, III(5) 10,627,930 40.48%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94133
Charles C. McGettigan(6) 10,627,930 40.48%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94133
A. Daniel Sharplin(7) 1,359,823 5.18%
Jay Allen Chaffee/Bunker Hill(8) 639,059 2.43%
H. Baxter Nairon(9) 256,000 *
Steven H. Sigmon 0 *
Michael S. Taylor(10) 30,667 *
David G. Osowski(11) 83,333 *
All executive officers and directors 16,811,783 64.04%
* Less than 1% of the outstanding Common Stock
(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 conversion 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 purpose 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 10,267,379 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)
3,721,305 shares beneficially owned by Lagunitas Partners, L.P. and
referenced to in note (3) below; (iii) 29,677 shares beneficially owned by
Mr. McGettigan and referenced to in note (5) below; and (v) 3,010 shares
- 27 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
issuable upon the exercise of warrants at a price of $0.15 per share issued
to McGettigan, Wick & Co., Inc. and to Proactive's general partner, PIM.
See also note (7) below.
(3) Includes 3,694,391 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) 10,598,253 shares beneficially owned by
Proactive Partners, L.P. and referenced to in note (2) above.
(4) Consists of warrants to purchase 4,500,000 shares of Common Stock at $.375
per share and 3,000,000 shares of Common Stock issuable upon conversion of
Preferred Stock at $.50 per share.
(5) Includes (i) 26,667 shares of Common Stock issuable upon the exercise of
stock options granted to Mr. Wick under the Company's 1989 Incentive Plan
and (ii) the shares beneficially owned by Proactive and referred to in note
(2) above (10,598,253). Mr. Wick is a general partner of PIM. 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 13,333 shares subject to options that are not yet exercisable.
Also does not include 184,410 shares owned by the Company's 401(K) plan of
which Mr. Wick is a trustee.
(6) Includes (i) 26,667 shares of Common Stock issuable upon the exercise of
stock options granted to Mr. McGettigan under the Company's 1989 Long-Term
Incentive Plan and (ii) the shares beneficially owned by Proactive and
referenced to in note (2) above (10,598,253). Mr. McGettigan is a general
partner of PIM. Also includes 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 13,333 shares subject to
options that are not yet exercisable.
(7) 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 819,531 shares reserved for issuance to Mr. Sharplin
under the Company's 1989 Long-Term Incentive Plan but does not include an
additional 1,070,493 shares subject to options that are not yet
exercisable. Also does not include 184,410 shares owned by the Company's
401(K) plan of which Mr. Sharplin is a trustee.
(8) 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
571,909 shares subject to exercisable options granted to Bunker Hill under
the Company's 1989 Long-Term Incentive Plan but does not include 718,107
shares subject to options that are not yet exercisable. Also does not
include 184,410 shares owned by the Company's 401(K) plan of which Mr.
Chaffee is a trustee.
(9) Consists of 256,000 shares issuable upon the exercise of options granted to
Mr. Nairon under the Company's 1989 Long-Term Incentive Plan but does not
include 128,000 shares subject to options that are not yet exercisable.
(10) Includes 26,667 shares issuable upon the exercise of options granted to Mr.
Taylor under the Company's 1989 Long-Term Incentive Plan but does not
include 13,333 shares subject to options that are not yet exercisable. Also
includes 4,000 shares outstanding held by Mr. Taylor's wife. Mr. Taylor
disclaims beneficial ownership of his wife's shares.
(11) Consists of 83,333 shares issuable upon the exercise of options granted to
Mr. Osowski under the Company's 1989 Long-Term Incentive Plan but does not
include 166,667 shares subject to options that are not yet exercisable.
- 28 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
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. During 1997, the Company paid
$290,000 to Bunker Hill for services of Jay Allen Chaffee and related expenses
as described below. Mr. Chaffee is the Chairman of the Board and president of
Bunker Hill Associates, Inc. ("Bunker Hill").
Employment Agreements
In 1991, the Company entered into a service contract with 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. In July 1997, the Company entered into an Executive Consulting
Agreement pursuant to which the Company agreed to pay a base retainer for such
services at the rate of $7,500 per month with additional stock and cash bonus
consideration. The term of the contract is three and one-half years, it may be
extended for one or more additional periods, and it can be terminated by Bunker
Hill on thirty days' prior written notice and by the Company at any time. The
contract supercedes the 1991 service contract between the Company and Bunker
Hill. In 1997, Bunker Hill, on behalf of Mr. Chaffee, received $90,000 in
consideration of Mr. Chaffee's management services as an officer of the Company
plus a bonus of $200,000 earned but not paid in fiscal year 1997. In addition,
$90,788 was remitted to Bunker Hill for secretarial support and reimbursement of
travel and out-of-pocket expenses related to Mr. Chaffee's services.
In July 1997, the Company entered into an employment agreement with A.
Daniel Sharplin, its President, Chief Executive Officer, pursuant to which Mr.
Sharplin will continue to serve the Company as President and Chief Executive
Officer and director. The Company paid Mr. Sharplin an annual base salary at the
rate of $150,000 through June 1997, at which time his salary was increased to
$200,000 pursuant to the Employment Agreement. Pursuant to the Employment
Agreement, the Company will pay him an annual base salary of $225,000 through
1998 and an annual base salary of $250,000 for all periods after December 31,
1998, except that the salary may be increased but not decreased at the
discretion of the Board of Directors. Mr. Sharplin will also receive additional
stock and cash bonus consideration. The term of the contract is three and
one-half years, and it may be extended for one or more additional periods.
The agreements described above between the Company and Messrs. Chaffee and
Sharplin (who for the purposes of this paragraph only will be referred to as the
"Employed Person") provide for change of control protection in case of a change
of control, (i) if the Employed Person is terminated, (A) the Employed Person
will be entitled to receive his base compensation for a period equal to the
remaining portion of the designated term of the relationship, (B) all of the
stock appreciation rights or stock options of the Employed Person granted
pursuant to the agreement which have accrued but not vested prior to the date on
which the change in control has occurred will automatically vest as of such date
and (C) all other rights and benefits the Employed Person may have under the
employee benefit, bonus and/or stock option plans and programs of the Company
will be determined in accordance with the terms and conditions of those plans
and programs, and (ii) if the Employed Person is not terminated, (A) the terms
and provisions of the agreements will remain in full force and effect, (B) at
the election of the Employed Person, the stock appreciation rights and stock
options of the Employed Person granted pursuant to the agreements which have
accrued but not vested prior to the date of such change in control shall either
(x)vest or (y) remain accrued but not vested and (C) regardless of the election
of the Employed Person pursuant to the immediately preceding clause, the stock
appreciation rights and stock options granted pursuant to the agreements shall
continue to accrue after the date of the change in control. A change in control
means a change in control of the Company which shall be deemed to have occurred
if (i) there is an event required to be reported with respect to the Company
under federal securities laws, (ii) any person shall have become the beneficial
owner, directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding voting
securities, (iii) the Company is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter or (iv) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors cease for any
reason to constitute at least a majority of the Board of Directors.
Strategic Alliance
In December 1997, the Company entered into a strategic alliance with
Veeder-Root, a subsidiary of Danaher, which encompassed both a commercial
agreement with Veeder-Root and an $8 million investment by Danaher. Veeder-Root
is a manufacturer of environmental monitoring equipment and a provider of
supporting services through its Simplicity offering. Under the terms of the
commercial agreement, the Company and Veeder-Root will work to integrate their
complementary service offerings. Under the terms of the investment agreement,
the Company issued (i) a $6.5 million Senior Subordinated Note with a 10% annual
interest rate and a 5-year term, (ii) $1.5 million of Redeemable, Convertible
Preferred Stock ("Preferred Stock") which is convertible into 3 million shares
of the Company's Common Stock and pays a 10% annual dividend with a 7-year term
and (iii) 4.5 million warrants to purchase the Company's Common Stock at $0.375
per share with a 5-year term. If Veeder-Root exercises its warrants and converts
the Preferred Stock, its ownership would be approximately 25% of the Company on
a fully-diluted basis. With the proceeds of this investment and approximately
- 29 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
$750,000 of cash, the Company repaid all of its obligations to Banc One Capital
Partners, L.P. ("BOCP") and repurchased BOCP's 13 million warrants. Mr. Sigmon
is President of Veeder-Root and a director of the Company.
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) 1997 Financial Statements, Table of Contents........................F-1
Report of Independent Auditors......................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........F-3
Consolidated Statements of Operationsfor the years ended
December 31, 1997 and 1996.....................................F-4
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 1997 and 1996.........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996.....................................F-7
Notes to Consolidated Financial Statements..........................F-8
</TABLE>
(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. (Incorporated
by reference from Exhibit 3.01 of Form 10-KSB/A for the
fiscal year ended December 31, 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.)
- 30 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------
10.05 Third Amendment to Tanknology-NDE International,
Inc.'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 Tanknology-NDE International,
Inc.'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 Tanknology-NDE International,
Inc.'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.)
10.09 First Amendment of the Promissory Note dated January
17, 1995, dated April 30, 1995, between the registrant
and Proactive 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 Tanknology-NDE International,
Inc.'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.)
- 31 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------
10.19 1996 Funding Agreement, dated as of, March 27, 1996,
between the Registrant, Proactive Partners, L.P. 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.)
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 Tanknology-NDE International,
Inc'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 Tanknology-NDE
International, Inc 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.)
10.45 Note, Preferrred Stock and Warrant Purchase Agreement,
signed as of December 23, 1997, by and between
Tanknology-NDE International, Inc., ProEco, Inc.,
Tanknology/NDE Corporation, 2368692 Canada, Inc.,
Tanknology-NDE Construction Services, Inc. and DH
Holdings Corp.
10.46 Senior Subordinated Note, dated December 23, 1997,
provided for in the Note, Preferrred Stock and Warrant
Purchase Agreement (Exhibit 10.45) by and between
Tanknology-NDE International, Inc. and DH Holdings
Corp..
10.47 Distribution, Services and Marketing Agreement, signed
as of December 23, 1997, by and between Tanknology-NDE
International and Veeder-Root Company
10.48 Certificate of Designation of Preferences and Rights of
Series A Redeemable Convertible Preferred Stock of
Tanknology-NDE International, Inc., meeting held
December 22, 1997, providing for the issuance of a
series of Perferred Stock designated as the Series A
Redeemable Convertible Preferred Stock
10.49 Preemptive Rights Agreement, signed as of December 23,
1997, by and between Tanknology-NDE International, Inc.
and DH Holdings Corp. entered into pursuant to the
Note, Preferrred Stock and Warrant Purchase Agreement
(Exhibit 10.45)
10.50 Registration Rights Agreement, signed as of December
23, 1997, by and between Tanknology-NDE International,
Inc. and DH Holdings Corp. entered into pursuant to the
Note, Preferrred Stock and Warrant Purchase Agreement
(Exhibit 10.45)
10.51 Co-Sale Agreement, signed as of December 23, 1997, by
and between Tanknology-NDE International, Inc.,
Proactive Partners, L.P., Lagunitas Partners, L.P., Jay
Allen Chaffee, A. Daniel Sharplin and DH Holdings Corp.
entered into pursuant to the Note, Preferrred Stock and
Warrant Purchase Agreement (Exhibit 10.45)
- 32 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------
10.52 Tanknology-NDE International, Inc. Security Agreement
- Personal Property, Signed as of December 23, 1997, by
and between Tanknology-NDE International, Inc., ProEco,
Inc., Tanknology/NDE Corporation, 2368692 Canada, Inc.,
Tanknology-NDE Construction Services, Inc. and DH
Holdings Corp. entered into pursuant to the Note,
Preferrred Stock and Warrant Purchase Agreement
(Exhibit 10.45)
10.53 Tanknology-NDE International, Inc. Security Agreement
- Pledge of Subsidiary Stock, Signed as of December 23,
1997, by and between Tanknology-NDE International, Inc.
and DH Holdings Corp. entered into pursuant to the
Note, Preferrred Stock and Warrant Purchase Agreement
(Exhibit 10.45)
10.54 Amendment No. 1 to the Note, Perferred Stock and
Warrant Purchase Agreement (Exhibit 10.45) by and
between Tanknology-NDE International, Inc.,ProEco,
Inc., Tanknology/NDE Corporation, 2368692 Canada, Inc.,
Tanknology-NDE Construction Services, Inc. and DH
Holdings Corp.
10.55 Amendment No.3 to Loan Agreement (Exhibit 10.25) by and
between Tanknology-NDE International, Inc.
Tanknology-NDE Corporation, Tanknology-NDE Construction
Services, inc., ProEco, Inc., and 2368692 Canada, Inc.
and Bank One, Texas, N.A.
10.56 Amended and Restated Standby Commitment, dated December
23, 1997, by and among Proactive Partners, L.P.,
Tanknology-NDE International, Inc., and Bank One,
Texas, N.A.
10.57 Termination Agreement, dated as of December 10, 1997,
by and between Tanknology-NDE International, Inc.,
Tanknology/NDE Corporation, ProEco, Inc. and 2368692
Canada Inc. and Banc One Capital Partners, LLC
10.58 Employment Agreement, effective as of July 1, 1997, by
and between Tanknology-NDE International, Inc. and A.
Daniel Sharplin
10.59 Executive Consulting Agreement, effective July 1,
1997, by and between Tanknology-NDE International, Inc.
and Bunker Hill Associates, Inc.
10.60 Amendment No. 1 to the Employment Agreement (Exhibit
10.60) effective July 2, 1997, by and between
Tanknology-NDE International, Inc. and A. Daniel
Sharplin
10.61 Amendment No. 1 to the Executive Consulting Agreement
(Exhibit 10.61) effective July 2, 1997, by and between
Tanknology-NDE International, Inc. and Bunker Hill
Associates, Inc.
10.62 Amendment to Stock Purchase Agreement dated May 22,
1997 (Incorporated by reference from Exhibit 2.1 of
Form 8-K dated October 25, 1996) dated as of October
30, 1997, by and between Watson General Corporation,
and Tanknology-NDE International, Inc.
10.63 Asset Purchase Agreement dated February 19, 1997 among
Precision Tank Testing Limited, Tanknology Canada
(1988) Inc., NDE Environmental Corporation,
Tanknology/NDE Corporation.
21.01 Subsidiaries of the Registrant
27.01 Selected Financial Data
(b) There were no Reports on Form 8-K filed during the quarter ended
December 31, 1997.
Filed Dated
---------------------- --------------------
N/A N/A
- 33 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
Exhibit 21.01
SUBSIDIARIES OF REGISTRANT
Tanknology/NDE Corporation, a Delaware corporation, incorporated on
December 27, 1991, is a wholly owned subsidiary of Tanknology-NDE International,
Inc. and does business under the name Tanknology/NDE Corporation.
NDE Environmental Canada Corporation was incorporated on May 21, 1993 under
the Business Corporations Act of Alberta, is a wholly owned subsidiary of
Tanknology-NDE International, Inc. 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, is a wholly owned subsidiary of Tanknology-NDE International, Inc. and
does business under the name ProEco, Inc.
EcoAm, Inc., a Florida corporation, incorporated on July 15, 1991, is a
wholly owned subsidiary of Tanknology-NDE International, Inc. 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 Tanknology-NDE
International, Inc. and does business under the name ProEco, Ltd.
2368692 Canada Inc., incorporated in Ontario, Canada is a wholly owned
subsidiary of Tanknology-NDE International, Inc. and does business under the
name Tanknology Canada (1988) Inc.
Tanknology-NDE Construction Services, Inc., a Delaware corporation,
incorporated on December 5, 1997, is a wholly owned subsidiary of Tanknology-NDE
International, Inc. and does business under the name Tanknology-NDE Construction
Services, Inc.
- 34 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-KSB
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Annual Report filed on Form 10-KSB to be signed on its behalf by
the undersigned, thereunto duly authorized.
Tanknology-NDE International, Inc
Date: March 31, 1998 By: /s/ A. DANIEL SHARPLIN
---------------------- -------------------------------------------
A. Daniel Sharplin
President, Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ JAY ALLEN CHAFFEE Dated: March 31 , 1998
-------------------------------------- -------------------
Jay Allen Chaffee
Chairman of the Board of Directors
/s/ DAVID G. OSOWSKI Dated: March 31 , 1998
-------------------------------------- -------------------
David G. Osowski
Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL and ACCOUNTING OFFICER)
/s/ CHARLES C. McGETTIGAN Dated: March 31 , 1998
-------------------------------------- -------------------
Charles C. McGettigan
Director
/s/ MICHAEL S. TAYLOR Dated: March 31 , 1998
-------------------------------------- -------------------
Michael S. Taylor
Director
/s/ MYRON A. WICK, III Dated: March 31 , 1998
-------------------------------------- -------------------
Myron A. Wick, III
Director
/s/ STEVEN H. SIGMON Dated: March 31 , 1998
-------------------------------------- -------------------
Steven H. Sigmon
Director
- 35 -
================================================================================
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
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>
Report of Independent Auditors
Stockholders and Board of Directors
Tanknology-NDE International, Inc.
We have audited the accompanying consolidated balance sheets of
Tanknology-NDE International, Inc. and subsidiaries as of December 31, 1997 and
1996, 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 Tanknology-NDE
International, Inc. and subsidiaries at December 31, 1997 and 1996, 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 13, 1998
F-2
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
------------ ------------
Assets
Current assets:
Cash ............................................................ $ 193,627 $ 2,412,233
Trade accounts receivable, less allowance for doubtful
accounts of $1,066,331 in 1997 and $837,480 in 1996 ....... 9,856,826 5,735,550
Inventories ..................................................... 482,107 367,362
Prepaid expenses and other current assets ....................... 1,149,950 1,659,820
------------ ------------
11,682,510 10,174,965
Restricted cash (Note 2) ................................................. 3,000,000 --
Equipment and improvements, net (Note 3) ................................. 4,812,500 5,736,391
Goodwill, net of accumulated amortization of $55,122 in 1996 (Note 2) .... -- 4,922,617
Patents, licenses and other intangible assets, net of accumulated
amortization of $1,169,104 in 1997 and $773,140 in 1996 ......... 1,604,194 3,293,239
Deferred financing costs, net ............................................ 649,614 922,424
------------ ------------
Total assets ............................................................. $ 21,748,818 $ 25,049,636
============ ============
Liabilities, redeemable convertible preferred stock and stockholders' deficit
Current liabilities:
Accounts payable ................................................ $ 2,675,345 $ 1,673,470
Accrued liabilities ............................................. 2,249,208 4,885,260
Accrued payroll and payroll taxes ............................... 1,959,273 1,469,786
Current portion of long-term debt (Note 4) ...................... 4,055,072 1,963,564
------------ ------------
10,938,898 9,992,080
Long-term debt, less current portion (Note 4) ........................... 10,589,252 14,192,011
Deferred license revenue ................................................. 525,000 --
Warrants with put option (Note 4) ........................................ -- 1,600,000
Redeemable Convertible Preferred Stock, at redemption value (Note 5) ..... 1,500,000 --
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 ........... 1,598 1,598
Warrants (Note 6) ......................................... 291,000 --
Additional paid-in capital ................................ 27,578,446 27,578,446
Accumulated deficit ....................................... (29,659,297) (28,302,374)
Cumulative foreign currency translation adjustment ........ (21,079) (17,125)
------------ ------------
(1,804,332) (734,455)
------------ ------------
Total liabilities, redeemable convertible preferred stock and
stockholders' deficit .................................................... $ 21,748,818 $ 25,049,636
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues ..................................... $ 38,683,146 $ 15,939,126
Cost of services ............................. 29,246,121 11,085,062
------------ ------------
Gross margin ................. 9,437,025 4,854,064
Selling, general and administrative .......... 7,853,002 6,581,337
Impairment of long-lived assets (Note 3) ..... -- 833,321
------------ ------------
Operating income (loss) ...................... 1,584,023 (2,560,594)
Other income (expense):
Interest expense .................... (3,205,475) (1,062,409)
Interest income ................ 97,800 --
Other income (expense), net ......... (11,420) 214,641
------------ ------------
Net loss before provision for income taxes and
extraordinary gain .................. (1,535,072) (3,408,362)
Provision for income taxes (Note 9) .......... (39,060) (43,785)
Extraordinary gain (Note 4) .................. 220,497 1,813,149
------------ ------------
Net loss ..................................... $ (1,353,635) $ (1,638,998)
Less:
Preferred stock dividends ..... 3,288 --
------------ ------------
Net loss available to common ................. $ (1,356,923) $ (1,638,998)
============ ============
Basic and diluted loss per share:
Before extraordinary gain ........... $ (0.10) $ (0.45)
Extraordinary gain .................. 0.01 0.24
------------ ------------
Basic and diluted loss per share ............. $ (0.09) $ (0.21)
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Series AAA
Convertible Preferred
Stock Common Stock Warrants
------------------ ------------------------------------------ ------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Subscribed Amount Issuable Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1995 1 $5,000 2,274,420 $ 227 5,482,254 $1,303,410 - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Common
Stock to settle
licensing dispute - - 20,000 2 - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Common
Stock Subscribed - - 5,482,254 548 (5,482,254) (1,303,410)
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Exchange of Secured
Promissory Notes
for Common Stock - - 8,000,000 800 - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Company contribution
to 401(k) Plan - - 201,936 21 - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Cumulative foreign
currency translation - - - - - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Net loss - - - - - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1996 1 $5,000 15,978,610 $1,598 0 0 0 0
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
</TABLE>
TABLE CONTINUED ...
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency
Paid-in Accumulated Translation Stockholders
Capital Deficit Adustment Deficit
<S> <C> <C> <C> <C>
- ------------------- ----------- ------------- ---------- -------------
Balance at
December 31, 1995 $25,134,457 $(26,663,376) $ (18,740) (239,022)
- ------------------- ----------- ------------- ---------- -------------
Issuance of Common
Stock to settle
licensing dispute 3,748 - - 3,750
- ------------------- ----------- ------------- ---------- -------------
Issuance of Common
Stock Subscribed 1,302,862 - - 0
- ------------------- ----------- ------------- ---------- -------------
Exchange of Secured
Promissory Notes
for Common Stock 1,035,082 - - 1,035,882
- ------------------- ----------- ------------- ---------- -------------
Company contributio
to 401(k) Plan 102,297 - - 102,318
- ------------------- ----------- ------------- ---------- -------------
Cumulative foreign
currency translatio - - 1,615 1,615
- ------------------- ----------- ------------- ---------- -------------
Net loss - (1,638,998) - (1,638,998)
- ------------------- ----------- ------------- ---------- -------------
Balance at
December 31, 1996 $27,578,446 $(28,302,374) $ (17,125) $ (734,455)
- ------------------- ----------- ------------- ---------- -------------
</TABLE>
F-5
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit (continued)
<TABLE>
<CAPTION>
Series AAA
Convertible Preferred
Stock Common Stock Warrants
------------------ ------------------------------------------ ------------------
Shares Shares Shares Shares
Outstanding Amount Outstanding Amount Subscribed Amount Issuable Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1996 1 $5,000 15,978,610 $1,598 - $ - - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Warrants 4,850,000 $291,000
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Dividend on
Redeemable Preferred
Stock
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Foreign currency
translation
adjustments
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Net loss - - - - - - -
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1997 1 $5,000 15,978,610 $1,598 - - 4,850,000 $291,000
- ------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
</TABLE>
TABLE CONTINUED...
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency Total
Paid-in Accumulated Translation Stockholders'
Capital Deficit Adjustment Deficit
<S> <C> <C> <C> <C>
- ------------------- ----------- ------------- ---------- -------------
Balance at
December 31, 1996 $27,578,446 $(28,302,374) $ (17,125) $ (734,455)
- ------------------- ----------- ------------- ---------- -------------
Issuance of Warrant 291,000
- ------------------- ----------- ------------- ---------- -------------
Dividend on
Redeemable Preferr
Stock (3,288) (3,288)
- ------------------- ----------- ------------- ---------- -------------
Foreign currency
translation
adjustments (3,954) (3,954)
- ------------------- ----------- ------------- ---------- -------------
Net loss - (1,353,635) - (1,353,635)
- ------------------- ----------- ------------- ---------- -------------
Balance at
December 31, 1997 $27,578,446 $(29,659,297) $ (21,079) $ (1,804,332)
- ------------------- ----------- ------------- ---------- -------------
</TABLE>
F-6
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................ $(1,353,635) $ (1,638,998)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary gain ......................................... (220,497) (1,813,149)
Write down of assets ....................................... 16,396 833,321
Depreciation ............................................... 3,376,237 1,740,254
Amortization ............................................... 534,878 289,611
Amortization of discounts and financing costs .............. 1,366,713 309,954
Deferred license revenue earned ............................ (91,667) --
Gain on sale of equipment .................................. (22,758) (214,641)
Other ...................................................... (3,954) --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable .................... (4,121,276) 1,192,044
Increase in inventories ............................................. (114,745) (45,689)
Decrease in prepaid expenses and other current assets ............... (140,130) (480,452)
Increase in accounts payable ........................................ 1,001,875 147,526
Decrease in accrued liabilities ..................................... (2,942,089) (285,175)
Increase in accrued payroll and payroll taxes ....................... 489,487 833,417
----------- -----------
Net cash provided by (used in) operating activities ........ (2,225,165) 868,023
Cash flows from investing activities:
Proceeds from the sale of USTMAN .................................... 5,900,000 --
Restricted cash received in the sale of USTMAN ...................... (3,000,000) --
Proceeds from the sale of licenses .................................. 1,947,500 --
Business acquisitions, net of cash acquired of $700,000 ............. -- (11,299,757)
Capital expenditures ................................................ (2,841,530) (1,120,752)
Proceeds from sale of equipment ..................................... 80,258 234,450
Other ............................................................... (4,095) 10,737
----------- -----------
Net cash provided by (used in) investing activities ........ 2,082,133 (12,175,322)
Net cash from financing activities:
Proceeds from issuance of long-term debt and warrants with put option -- 16,529,903
Proceeds from issuance of long-term debt and warrants ............... 6,500,000 --
Proceeds from issuance of redeemable convertible preferred stock .... 1,500,000 --
Deferred financing costs ............................................ (299,363) (959,413)
Payments on long-term debt .......................................... (6,966,968) (3,177,993)
Proceeds from issuance of debt (Note 4) ............................. 5,690,757 1,000,000
Repayment of long-term debt and warrants with put option ............ (8,500,000) --
----------- -----------
Net cash provided by (used in) financing activities ........ (2,075,574) 13,392,497
Net increase (decrease) in cash ............................ (2,218,606) 2,085,198
Cash at beginning of year ........................................... 2,412,233 327,035
=========== ===========
Cash at end of year ................................................. $ 193,627 $ 2,412,233
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the
year for:
Interest .......................................... $ 1,840,031 $ 487,334
=========== ===========
Income taxes ...................................... $ - $ -
=========== ===========
Capital lease financing .................................... $ 170,704 $ 60,153
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Description and History of Business
Tanknology-NDE International, Inc. and subsidiaries (the Company) provides
regulatory compliance and related services, primarily tightness testing for
underground storage tanks (USTs) and associated pipelines, which the Company
considers to encompass only one business segment. 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 Tanknology-NDE International, Inc. and its wholly-owned subsidiaries:
Tanknology/NDE Corporation, 2368692 Canada, 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, 1997 have been reclassified to conform to the current year
presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and all
investments with an initial maturity of three months or less.
Revenue Recognition
Tank testing, line testing and consulting service revenues are recognized
when services are performed. Revenues for construction contracts, generally on
short term projects, are recognized as the work is performed. 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 21% 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
Software 3 - 15 years
Other equipment 3 - 6 years
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.
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, primarily net operating losses,
that may not be realizable.
Basic and Diluted Loss Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. For the years ended December 31, 1997 and 1996, the effects of dilutive
potential common shares are not considered in calculating loss per common share
because their effects would be anti-dilutive to the net loss reported for these
years. All earnings per share for all periods have been presented to conform to
Statement 128 requirements.
Basic loss per share has been computed by dividing net loss (numerator) by
weighted average common shares outstanding (denominator) for all periods
presented. The numerator (net loss) for the year ended December 31, 1997 is
increased by preferred stock dividends of $3,288. There are no reconciling items
to net loss for the year ended December 31, 1996. Weighted average common shares
outstanding at December 31, 1997 and 1996 are 15,978,610 and 7,725,372,
respectively.
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.
Recently Issued Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. This statement is effective for
financial statements for periods ending after December 15, 1997, and will not
materially change the disclosures currently included in the Company's financial
statements.
F-8
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Adoption of
this statement will have no impact on the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for fiscal years beginning after December 15, 1997. Adoption of this
statement will have no impact on the Company's results of operations.
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"), 2368692 Canada, Inc. (formerly named Tanknology Canada
(1988) Inc.) ("Canada"), and USTMAN Industries, Inc. ("USTMAN"). The Acquisition
was 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 final closing adjustments, which
are expected to occur in 1998.
In addition to the purchase price paid to TEI, the Company incurred
approximately $714,000 in fees and costs 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 costs and other acquisition-related costs. The
Company also recorded approximately $758,000 for certain additional liabilities
relating to potential purchase price adjustments and liabilities recognized in
connection with the acquisition.
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
================
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
Canada, Inc. for $1.2 million. The Company also canceled certain existing
license agreements and entered into new agreements, which will generate a future
revenue stream. The net proceeds from this sale approximated the basis of the
assets sold and had no material impact to the Company's results of operations in
1997.
The Company recognized revenues and expenses related to Canadian operations
of approximately $111,000 and $84,000 in 1997 and $280,000 and $232,000 in 1996,
respectively.
F-9
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Sale of USTMAN Industries, Inc.
On May 22, 1997, the Company sold the stock of USTMAN, which was acquired
as part of the Acquisition. The terms of the sale called for a cash payment at
closing of $5,250,000, a $500,000, 8.5% note due on June 1, 1998, the assumption
of certain liabilities of the Company and an additional payment based upon
certain calculations of USTMAN's working capital as of the closing date. In
December 1997, as part of a settlement of the working capital adjustment the
Company received early repayment of the $500,000 note and a payment of $150,000
for one half of the working capital adjustment. The final adjustment of $150,000
was received in early 1998. The net proceeds of the sale approximated the
carrying value of the assets sold. Accordingly, the sale had no material impact
on the Company's results of operations for 1997.
The Company recognized revenues and expenses related to the USTMAN
operations of approximately $692,000 and $622,000 in 1997 and $1,184,000 and
$1,552,000 in 1996, respectively.
As a condition of approval of the USTMAN sale transaction by the Company's
senior bank, $3,000,000 of the cash proceeds have been placed in a restricted
account with the Company's senior bank and will be held as collateral against
outstanding Company loans. The remaining $2,250,000 cash proceeds from the sale
were used to pay down amounts due under the revolving credit line.
3. Equipment and Improvements
Equipment and improvements consist of the following:
At December 31,
1997 1996
------------ ------------
Equipment .................................... $ 13,805,523 $ 12,474,380
Furniture and fixtures ....................... 154,046 334,261
Vehicles ..................................... 1,677,664 277,812
Equipment replacement parts .................. 161,500 161,500
Leasehold improvements ....................... 66,353 99,672
15,865,086 13,347,625
Less accumulated depreciation and amortization (11,052,586) (7,611,234)
$ 4,812,500 $ 5,736,391
============ ============
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.
F-10
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
4. Long-Term Debt
Long-term debt and financing agreements consist of the following:
At December 31,
1997 1996
------------ ------------
Revolving line of credit
$ 1,792,667 $ 2,000,000
Term loan ................................ 4,800,000 6,000,000
------------ ------------
Senior secured bank debt ........ 6,592,667 8,000,000
Senior subordinated note ................. 6,500,000 8,000,000
Less: Discount ........................... (270,000) (1,532,359)
------------ ------------
Senior subordinated note ........ 6,230,000 6,467,641
Other collateralized notes ............... 835,286 902,312
Other non-collateralized notes ........... 986,371 785,622
------------ ------------
Other long-term debt ............ 1,821,657 1,687,934
------------ ------------
Total long-term debt ............ 14,644,324 16,155,575
Less: Current portion .................... (4,055,072) (1,963,564)
------------ ------------
$ 10,589,252 $ 14,192,011
============ ============
1996 Acquisition Financing
In October 1996, 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 an $8 million subordinated note which was refinanced in December 1997
as described below under "1997 Refinancing".
In 1996,as part of the acquisition financing, the Company obtained a $8
million senior subordinated note with a 5 year term, maturing December 31, 2001
with interest at 13%. The debt holder received warrants to purchase 13,022,920
shares of the Company's common stock at an initial an exercise price of $0.325
per share which could be exercised at any time from October 24, 1996 through
December 31, 2005. Both the number of shares and the exercise price were subject
to adjustment based upon certain factors. These warrants were also subject to a
put option (the "Put") whereby, under certain circumstances, the holder could
require the Company to repurchase the warrants (including any common shares
owned as a result of a previous warrant exercise). The appraised market value of
the put warrants at issuance was determined to be $1.6 million and was recorded
as a discount to, and separately from, the Subordinated Note.In 1997, the
Company recorded interest expense of $734,250 in its results of operations to
accrete the value of the warrants to their estimated value.
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, together 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 $8 million senior subordinated note and warrants for 13,022,920 shares
were retired in 1997 - see 1997 Refinancing below.
1997 Refinancing
In December 1997, the Company retired the then-existing Senior Subordinated
Note and the Warrants with Put Option for an aggregate of $8.5 million, plus
accrued interest on the Senior Subordinated Note through the closing date. As
part of this termination agreement, the Company also entered into a Post Closing
Agreement (the "PCA") with the lender. The PCA calls for an additional
contingent payment to the lender upon the occurrence of certain "Triggering
Events" as defined in the PCA, which include, among other events, the
dissolution or liquidation of the Company or the
F-11
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
merger of the Company into another entity wherein i) the Company is not the
surviving entity or ii) the current stockholders of the Company hold less than
50% of the combined voting power of the surviving entity. Upon the occurrence of
a Triggering Event, the Company has agreed to pay to the lender 20% of the
amount by which the Market Determined Value (as defined in the PCA) at or as a
result of the closing of a Triggering Event exceeds the Target Amount. The
Target Amount increases from $10 million as of the date of the 1997 Refinancing
through March 31, 1998 to $12.5 million for the period April 1, 1998 to June 30,
1998, to $15 million for the period July 1, 1998 to September 30, 1998 to $17.5
million for the period October 1, 1998 to December 31, 1998 and to $20 million
for the period January 1, 1999 to March 31, 1999. The PCA expires after March
31, 1999. Such payment to the lender is required on the same date and in the
same form as payments to shareholders of the Company. As of December 31, 1997,
there has been no occurrence of a Triggering Event, and the Company is not aware
of any potential Triggering Events.
The funds for this transaction were provided by the issuance of $1.5
million of Redeemable Convertible Preferred Stock (Note 5), the issuance of a
$6.5 million Senior Subordinated Note and $500,000 of the Company's cash.
Additionally, the Company's Senior Secured Bank Debt was modified to allow for
these transactions and to amend certain other terms and conditions of the
agreement.
1997 Senior Subordinated Note
In 1997, the Company obtained a $6.5 million senior subordinated note with
interest at 10% and maturing December 31, 2002. Required principal payments of
$541,667 per quarter begin March 31, 2000 and interest is payable quarterly in
arrears beginning March 31, 1998.This note, along with the Senior Secured Bank
Debt, is collateralized by substantially all of the assets of the Company. In
consideration for the note, the holder also received a warrant to purchase
4,500,000 shares of the Company's common stock at an initial exercise price of
$0.375 per share (subject to adjustment pursuant to anti-dilution provisions)
and is exercisable in a single exercise at any time. The warrant expires on
December 31, 2002. The appraised fair market value of the warrants at issuance
was determined to be $270,000 and was recorded as a discount to, and separately
from the note. The discount is being amortized over the life of the note using
the effective interest method. At December 31, 1997, the note had a carrying
value, net of unamortized discount, of $6,230,000. Under the terms of the Note
agreement, the Company is subject to certain restrictions and covenants.
Senior Secured Bank Debt
The Senior Secured Bank Debt at December 31, 1997, consists of a three-year
revolving credit line of up to $5 million, and a 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. In May 1997, as a condition to release the assets of USTMAN from its
collateral (see Note 2), the bank obtained as additional collateral a $3 million
restricted certificate of deposit. Outstanding balances under the credit line
bear interest at a rate of prime plus 0.75% (9.25% and 9.0% at December 31, 1997
and 1996, respectively). The commitment fee related to the unused portion of the
$5 million line is 0.5%. The term loan bears interest at of prime plus 1.5%
(10.0% and 9.75% at December 31, 1997 and 1996, respectively) with monthly
principal payments of $100,000.
At December 31, 1997, the Company had $1,792,667 of borrowings outstanding
under the revolving credit line and also had $185,000 in letters of credit
outstanding. Additionally, at December 31, 1997, there was approximately
$3,000,000 available for borrowing under the revolving credit facility.
Substantially all of the Company's assets were 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, 1997,
the Company was in compliance with the financial debt covenants related to the
Financing Agreements as amended in December 1997.
F-12
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Gain on Extinguishment of Debt
In December 1997, the Company recorded an extraordinary gain on the early
retirement of the Senior Subordinated Note and associated Warrant with Put
Option that were issued in connection with the Acquisition in 1996. The Senior
Subordinated Note had a cost basis of $6,884,422 at the time of retirement, net
of unamortized discount, and the Warrant with Put Option had a carrying value of
$2,334,250. These instruments were retired for an aggregate cost of $8,500,000,
plus $144,415 in related expenses. In connection with the transaction, the
Company wrote off deferred financing costs associated with the original issue of
the Senior Subordinated Note of $353,760. The net gain on this transaction was
$220,497.
In September 1996, the Company prepaid a $2,450,000 note relating to a
previous 1994 acquisition. The debt had a carrying value including accrued
interest at the settlement date of $2,113,149. The prepayment of $300,000
resulted in an extraordinary gain of $1,813,149.
Other Collateralized Notes
Other collateralized notes include financing arrangements collateralized
solely by certain purchased assets, or by the Company's common stock, and
includes a 7.6% insurance note with a balance outstanding at December 31, 1997
of $613,119, payable in monthly installments. Maturities range from 1 to 5
years. Interest rates range from 7.6% to 25.5% per year, with a weighted average
interest rate of 8.7%.
Other Non-Collateralized Notes
Other non-collateralized notes consist of subordinated notes, a note for
purchased patent rights and a note to a vendor. Interest on the $645,335 of
subordinated notes is payable quarterly from 7.5% to 8%; principal is payable
annually in equal amounts over five years. A note for $300,000 relates to patent
rights purchased in November 1995 bears interest at a variable rate of
approximately 6% and is due October 2000. The vendor note of $41,036 bears no
interest. Payments on the vendor note are due monthly in 1998.
The aggregate annual maturities of long-term debt and financing agreements
at December 31, 1997 are as follows:
1998 4,055,072
1999 1,389,647
2000 3,844,577
2001 3,458,438
2002 2,166,590
14,914,324
Less: Discount (270,000)
--------------------
14,644,324
====================
5. Series A Redeemable Convertible Preferred Stock
In December 1997, as part of the 1997 Refinancing (Note 4), the Company
issued 150 shares of it's Series A Redeemable Convertible Preferred Stock
("Series A Preferred") with a liquidation value of $10,000 per share. The
Company has recorded the Series A Preferred at its redemption value of
$1,500,000. The holders of Series A Preferred are entitled to receive annual
dividends of $1,000 per share payable in arrears semi-annually beginning June
30,1998. The shares are redeemable at the option of the Company at any time
after June 30, 2001 or the date upon which all principal and interest on the
$6.5 million senior subordinated note is paid in full at the redemption price of
$10,000 per share. Any shares which are outstanding at December 31, 2004 must be
redeemed by the Company. Because these shares are mandatorily redeemable, they
are not included in stockholders' equity. These shares are convertible at the
option of the holder at any time after December 31, 1997 into shares of the
Company's common stock at an initial conversion price of $0.50 per share
(subject to anti- dilution and anti-inflation provisions). The Company has 150
shares of Series A Preferred authorized at December 31, 1997.
F-13
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
The holders of Series A Preferred will be entitled to 20,000 votes per
share of Series A Preferred, subject to anti-dilution provisions, on all matters
subject to a vote of stockholders of the Corporation (except as specified in the
Series A Preferred Certificate of Designation), such that holders of the Series
A Preferred shall have the same voting rights as they would have if the shares
of Series A Preferred held by them had been converted into common stock.
6. Stockholders' Equity
Series AAA Convertible Preferred Stock
The Company's Series AAA Convertible Preferred Stock ("Series AAA
Preferred") 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 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, 1997 and 1996.
Series 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 ("Series DDD
Preferred"). This Series DDD Preferred 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 Preferred. This transaction was recorded in the accompanying financial
statements as common stock issued in 1996.
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, bearing interest at 8%. 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.
F-14
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Warrants
As of December 31, 1997, 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
3,675 $.750 April 1999
34,360 $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
4,850,000 $.375 December 2002
- ---------------------------
5,388,053
===========================
In consideration of the bank's consent to enter into the 1997 Refinancing,
the bank was paid a $50,000 fee and received a warrant to purchase 350,000
shares of the Company's common stock at an exercise price of $.375 per share.
The warrant is exercisable in a single exercise at any time and expires December
31, 2002.
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.
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 1997 and 1996, respectively: risk-free interest rates of 6.15%
and 6.00%; 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.
F-15
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
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:
1997 1996
------------- -------------
Pro forma net loss:
Before extraordinar......... $ (1,829,913 $ (3,602,859)
Extraordinary gain ......... 220,497 1,813,149
Net loss ................... $ (1,609,416) $ (1,789,710)
============= =============
Pro forma loss per share:
Before extraordinary gain... $ (0.11) $ (0.47)
Extraordinary gain ......... 0.01 0.24
Net loss ................... $ (0.10) $ (0.23)
============= =============
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect has been fully reflected in only 1997.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
- ------------------------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 2,734,556 $ 0.18 304,850 $ 2.79
Granted 2,528,040 0.30 2,753,000 0.18
Exercised - - - -
Canceled (130,667) 0.29 (323,294) 2.58
- ------------------------------- ---------- ---------------- ---------- ----------------
Outstanding-end of year 5,131,929 $ 0.23 2,734,556 $ 0.18
========== ================ ========== ================
Exercisable at end of year 1,709,609 $ 0.17 609,667 $ 0.13
========== ================ ========== ================
Weighted-average fair value of
options granted during the year $ 0.23 $ 0.14
========== ==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.05 to $0.4375. The weighted-average remaining contractual life of those
options is 8.1 years.
F-16
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
The following table summarizes outstanding options at December 31, 1997 by
price range:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ----------------------------------------------- -------------------------------
Weighted Weighted-Average Weighted
Number of Average Remaining Number of Average
Options Exercise Price Contractual Life Options Exercise Price
- ------------- -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
45,000 $ 0.05000 8 years 15,000 $ 0.05000
55,000 $ 0.09375 8.8 years 18,333 $ 0.09375
1,493,889 $ 0.12500 7.4 years 1,053,889 $ 0.12500
201,000 $ 0.15625 8.6 years 67,000 $ 0.15625
492,000 $ 0.18750 8.6 years 128,000 $ 0.18750
155,000 $ 0.25000 8.9 years 50,000 $ 0.25000
2,000,040 $ 0.28125 8 years 285,720 $ 0.28125
65,000 $ 0.31250 9.5 years - -
310,000 $ 0.40625 9 years 91,667 $ 0.40625
315,000 $ 0.43750 9.3 years - -
- ------------- -------------- ---------------- --------------- --------------
5,131,929 $ 0.23444 8.1 years 1,709,609 $ 0.175
============= ============== ================ =============== ==============
</TABLE>
Stock Option Plan
In 1997, the 1989 Stock Option Plan was amended and renamed the
Tanknology-NDE International, Inc. 1989 Long-Term Incentive Plan("Plan"). The
purpose of the Plan as so amended and restated is to retain key executives and
other selected employees, reward them for making major contributions to the
success of the Company and provide them with a proprietary interest in the
growth and performance of the Company and its subsidiaries. In general, the Plan
as so amended permits the award of stock-based compensation in addition to
options, extends the term of the Plan, increases the number of shares of stock
with respect to which awards may be made under the Plan and accommodates changes
in response to the enactment of section 162(m) of the Internal Revenue Code of
1986 as amended (the "Code"), and the revisions to Rule 16b-3 promulgated by the
U.S. Securities and Exchange Commission. The Plan was amended to allow up to
6,000,000 shares to be awarded, an increase from the previously authorized
2,500,000 shares.
The Plan provides for the grant of any or all of the following types of
awards: stock options, stock appreciation rights, stock awards and cash awards.
Awards of different types may be made singly, in combination or in tandem. Stock
options may be incentive stock options ("ISOs") that comply with Section 422 of
the Code. No participant may be granted awards consisting of stock options or
stock appreciation rights exercisable for more than fifty percent of the shares
of Common Stock of the Company reserved for issuance under the Plan. Awards
issued under the Plan as it was constituted prior to this amendment and
restatement are not being canceled or reissued, but shall remain in effect in
accordance with their terms.
The Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee") . Subject to the terms of the plan, the Committee
will have authority (i) to select employees to receive awards, (ii) to determine
the timing, form, amount or value and term of awards, and the conditions and
limitations, if any, subject to which awards will be made and become payable and
(iii) to interpret the Plan and adopt rules, regulations and guidelines for
carryong out the Plan. The Committee may delegate certain of its duties under
the Plan to the Chairman of the Board, the President and other senior officers
of the Company. The Committee may not, however, delegate to any person the
authority to grant awards to, or take other action with respect to, participants
who are subject to Section 16 of the Securities Exchange Act of 1934, as amended
, or section 162(m) of the Code.
In 1996, the Committee determined that in connection with the granting of
executive options in 1995, it would be in the best interests of the 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 the
Chairman of the Board and the Chief Executive Officer
F-17
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
as well as 20,000 options that had been previously granted to an officer to the
then market price of the Common Stock which was $.125. All of the aforementioned
options previously had exercise prices of $3.75. All of these options remain
fully vested following the repricing.
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
of underlying stock at date of grant) to each of the four current outside
directors
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.
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 .......................................... 5,388,053
Stock Options ..................................... 6,250,000
Series A Redeemable Convertible Preferred Stock ... 3,000,000
Series AAA Convertible Preferred Stock ............ 2,000
Shares issuable upon conversion of promissory notes 24,725
Common shares reserved for issuance ............. 14,664,778
==========================
7. 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 long-term debt approximates their fair
value since most of this debt bears interest at variable rates.
Warrants with Put Option
The warrants with put option which were outstanding at December 31, 1996
were carried at their fair market value as determined by independent appraisal.
8. 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 expiries December 31, 2000 and it may
be extended for one or more additional periods and it can be terminated by
Bunker Hill on thirty days notice and by the Company at any time. The contract
calls for a base retainer of $7,500 per month with additional stock and cash
bonus consideration. In 1997 and 1996, Bunker Hill earned or incurred
reimbursable expenses totaling $380,785 and $318,775, respectively, associated
with both the aforementioned services contract and certain acquisition-related
fees.
In December 1997, the Company entered into a strategic alliance with
Veeder-Root, a subsidiary of Danaher, which encompassed both a commercial
agreement with Veeder-Root and an $8 million investment by Danaher. Veeder-Root
is a manufacturer of environmental monitoring equipment and a provider of
supporting services through its Simplicity offering. Under the terms of the
commercial agreement, the Company and Veeder-Root will work to integrate their
F-18
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
complementary service offerings. Under the terms of the investment agreement,
the Company issued (i) a $6.5 million Senior Subordinated Note with a 10% annual
interest rate and a 5-year term, (ii) $1.5 million of Redeemable, Convertible
Preferred Stock ("Preferred Stock") which is convertible into 3 million shares
of the Company's Common Stock and pays a 10% annual dividend with a 7-year term
and (iii) 4.5 million warrants to purchase the Company's Common Stock at $0.375
per share with a 5-year term. If Veeder-Root exercises its warrants and converts
the Preferred Stock, its ownership would be approximately 25% of the Company on
a fully-diluted basis. With the proceeds of this investment and approximately
$750,000 of cash, the Company repaid all of its obligations to Banc One Capital
Partners, L.P. ("BOCP") and repurchased BOCP's 13 million warrants. Mr. Sigmon
is President of Veeder-Root and a director of the Company.
During 1996, the Company also paid $335,563 to its two largest
stockholders, primarily for financing fees related to the Acquisition.
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ........................... $ 989,000 $ 1,640,000
Allowance for doubtful accounts ............................ 412,000 143,000
Nondeductible accruals ..................................... 698,000 290,000
----------- -----------
Total deferred tax assets .................................. 2,099,000 2,073,000
Valuation allowance ........................................ (1,536,000) (1,379,000)
----------- -----------
Net deferred tax assets .................................... 563,000 694,000
Deferred tax liabilities:
Book over tax basis of depreciable assets .................. 563,000 694,000
----------- -----------
Deferred taxes, net ............................................ $ 0 $ 0
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets increased by $156,000
during 1997 as a result of the combined effect of current year utilization of
net operating losses and current year activity which increased the net amount of
deferred tax assets. At December 31, 1997, for income tax purposes, the Company
had net operating loss carryforwards of $23,463,000. Due to a change in
ownership of the Company's stock pursuant to Internal Revenue Code Section 382,
the Company's future utilization of the net operating loss carryforwards
incurred prior to such change will be subject to a significant annual
limitation. Remaining losses will expire in tax years 2004-2011.
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:
1997 1996
--------- ---------
Income taxes at the statutory rate .......... $(460,000) $(592,000)
Change in valuation allowance ............... 156,000 694,000
Nondeductible interest ...................... 230,000 25,000
State taxes, net of Federal benefit ......... 25,000 0
Other, net .................................. 84,000 (93,000)
Tax rate differential - foreign jurisdictions 4,000 10,000
--------- ---------
Income taxes ................................ $ 39,000 $ 44,000
========= =========
F-19
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
1997 1996
------- -------
Current:
Federal ......................... $ 0 $ 0
State ........................... 25,000 0
Foreign ......................... 14,000 44,000
------- -------
Total Current ........................ 39,000 44,000
Deferred:
Federal ......................... 0 0
State ........................... 0 0
Foreign ......................... 0 0
------- -------
Total Deferred ....................... 0 0
------- -------
39,000 44,000
======= =======
10. Leases
The Company's office space and certain equipment and vehicles are leased
under noncancelable operating lease agreements which expire on various dates
through 2000. 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, 1997 were as follows:
1998 $ 361,695
1999 $ 279,163
2000 $ 105,723
Rent expense under operating leases totaled $420,426 in 1997 and $216,910
in 1996. As of December 31, 1997, approximately $57,000 of aggregate future
minimum rentals are due to the Company under noncancelable subleases.
11. Significant Customer
Sales to one customer comprised 21% of total revenue in 1997 and 20% in
1996. Loss of this customer would significantly and adversely impact the
Company's results of operations.
12. 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 million per occurrence with a $2 million aggregate limit; general, product
and personal injury coverage of up to $1 million per occurrence, with a $2
million aggregate limit; fire and, legal liability coverage to $500,000. In
addition, umbrella coverage for all sources of liability other than professional
and pollution liability coverage in the amount of $10 million is maintained.
Deductibles are in the amount of $100,000 per occurrence, for professional and
pollution liability claims. The umbrella policy carries a $10,000 self insured
retention. 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
F-20
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
limits. The occurrence of any significant uninsured loss or liability would have
a material adverse effect on the Company's business, financial condition, and
results of operations.
Litigation
In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against the
Company in the United States District Court for the Western District of
Louisiana. The lawsuit is for a declaratory judgment that certain patents owned
by The Company are invalid and 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 The Company and attorneys' fees and costs. In May
1995, The Company filed a counterclaim alleging that (1) the The Company patents
are valid and enforceable, (2) the U.S. Test tank testing systems infringe such
patents and (3) The Company 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
The Company of Gilbarco ESD. After numerous delays, an evidentiary hearing
occurred in early 1998, and the parties are in the process of preparing post
hearing submissions. 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.
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
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.
13. Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering all employees.
Employees are eligible to participate in the plan after thirty days of service.
At December 31, 1997, approximately 319 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) or cash, 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.
There was no Company contribution of either stock or cash in 1997. The Company's
contribution in 1996 for the plan totaled $102,318. The Company contributed
201,936 shares of common stock to the plan for 1992, 1993 and 1994 contributions
in 1996.
F-21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from NDE
Environmental Inc.'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-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 193,627
<SECURITIES> 0
<RECEIVABLES> 10,923,157
<ALLOWANCES> 1,066,331
<INVENTORY> 482,107
<CURRENT-ASSETS> 11,682,510
<PP&E> 15,865,086
<DEPRECIATION> 11,052,586
<TOTAL-ASSETS> 21,748,818
<CURRENT-LIABILITIES> 10,938,898
<BONDS> 10,589,252
1,500,000
5,000
<COMMON> 1,598
<OTHER-SE> (1,810,930)
<TOTAL-LIABILITY-AND-EQUITY> 21,748,818
<SALES> 38,683,146
<TOTAL-REVENUES> 38,683,146
<CGS> 29,246,121
<TOTAL-COSTS> 37,099,123
<OTHER-EXPENSES> 11,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,205,475
<INCOME-PRETAX> (1,314,575)
<INCOME-TAX> 39,060
<INCOME-CONTINUING> (1,353,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,353,635)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
