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, 1998
[ ] 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
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended December 31, 1998 were
$66,845,455.
The aggregate market value of voting stock held by non-affiliates of the Issuer
as of March 22, 1999 was approximately $1,521,709.
As of March 26, 1999, there were 16,745,040 outstanding shares of common stock,
$0.0001 par value, of the Issuer.
DOCUMENTS OMITTED
None.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Table of Contents
Page
PART I
Item 1. Description of Business.............................................3
Item 2. Description of Property............................................13
Item 3. Legal Proceedings..................................................13
Item 4. Submission of Matters to a Vote of Security Holders................14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........14
Item 6. Management's Discussion and Analysis or Plan of Operation..........15
Item 7. Financial Statements ..............................................22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................23
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with Section 16(a) of the Exchange Act.....24
Item 10. Executive Compensation.............................................25
Item 11. Security Ownership of Certain Beneficial Owners and Management.....29
Item 12. Certain Relationships and Related Transactions.....................32
Item 13. Exhibits and Reports on Form 8-K...................................33
SIGNATURES....................................................................40
- 2 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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, 1998, 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. ("Tanknology Construction"),
Outbound Services, Inc. ("OSI") 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. Additionally, through OSI, the Company provides maintenance
management services for retail quick service restaurants as well as UST owners
and operators. 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") regulations and
other regulations affecting the Company or its customers, the outcome of
litigation, the loss of a significant customer or group of customers,
disruptions in 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 as a result of these
acquisitions. The Company expects that it will continue to make strategic
acquisitions in the future.
Outbound Services, Inc. Acquisition
On August 7, 1998, the Company acquired all of the operating assets and
assumed the liabilities of OSI. The acquisition was accomplished by means of the
Company's purchase of all of the issued and outstanding stock of OSI.
OSI engages in the business of providing site service management to
primarily retail fuel and food service providers. It provides numerous service
capabilities to owners and operators of these sites such as seven-day,
twenty-four hour call center availability, contractor management and dispatch,
equipment warranty tracking and other services. The Company believes that the
acquisition of OSI allows it to expand the range of services that it offers to
its existing customer base, which owns and/or operates USTs, and also to begin
penetrating the quick service restaurant market with its current services such
as construction management and equipment installation and repair.
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 "TEI Acquisition"). The UST Group's
operations were principally conducted through three subsidiaries of TEI:
Tanknology Corporation International ("TCI"), Tanknology Canada, and USTMAN
- 3 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Industries, Inc. ("USTMAN"). The TEI Acquisition was accomplished by means of
the Company's purchase of all of the issued and outstanding capital stock of
these subsidiaries.
Prior to the TEI Acquisition, 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 TEI 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 the TEI
Acquisition, the Company believes that the resulting entity is the largest and
only nationwide provider of UST services.
USTMAN Disposition
USTMAN provided statistical inventory reconciliation ("SIR") services. SIR
meets the post-1998 EPA precision requirement for leak detection. SIR may also
identify other conditions of concern to UST operators such as pilferage or flaws
in record keeping. On May 22, 1997, The company sold USTMAN 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.
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 TEI
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 offers comprehensive services to its customer base of retail
and non-retail fuel distributors who own or operate USTs. The Company has two
main operating lines that reflect its primary lines of business: Field Services
and Management Services. Management Services is comprised of four divisions:
Compliance Management Services, Construction Services, Maintenance Services and
International.
The Company expects that over the next several years that it will see a
significant decline in its precision tank testing services and compliance
related installation services as new government regulations and enforcement
thereof take effect. Accordingly, the Company plans to broaden its historical
service offerings to replace these revenues. In 1997, the Company entered into
the Construction Services field and also expanded its installation of automatic
tank gauges ("ATG"). In 1998, the Company entered the Service Management
business through the acquisition of OSI and entered the ATG monitoring ("Site
Sentry") business. The Company expects that it may introduce new services
related to its current business and may expand certain existing service
offerings.
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 to comply with regulations, certify the system as tight after
work has been performed on the system, investigate inventory discrepancies,
satisfy environmental liability concerns and investigate for evidence of
pollution or fire hazard.
- 4 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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 regarding USTs on December 22,
1998, annual precision tightness testing will no longer be accepted as a primary
means of meeting leak detection requirements. Revenues from this service
declined both in annual revenues and as a percentage of revenues in 1998 as
compared to 1997. The Company expects revenues from precision testing to
continue to decline. 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 the functionality of
Stage II vapor recovery equipment and to verify that this equipment does not
leak. Stage II equipment collects vapor emissions displaced from a vehicle's gas
tank during refueling 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. Field Services 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, began phasing-in in 1998. Forty percent
of all new cars for the model year 1999 must be equipped with OBVR systems. By
2000, all cars must have OBVR systems, 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, management does not expect the aggregate market for Stage II testing
to change significantly within the next five years. In 1998, revenues from State
II Testing increased from 1997 but declined as a percentage of revenue from 1997
due to the significant increase in other service areas.
Field Services also installs ATGs. In 1998, Field Services derived
approximately 30% of its revenues from the installation, inspection, maintenance
and parts sales associated with ATGs, up from approximately 17% in 1997. An ATG
consists of a probe permanently installed in the tank and wired to a monitor to
provide information on product level and temperature. These systems
automatically calculate the changes in product volume that can indicate a
leaking tank. ATGs meet regulatory requirements as 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" services).
However, UST owners may continue to use precision tightness testing at five year
intervals for ten years after the upgrades in most states. See "Government
Regulations." It is currently anticipated that ATG related revenues will decline
in 1999 as the Company completes an upgrade program for one customer that
accounted for approximately 60% of the ATG related revenue in 1998 and as the
demand for ATG services wanes due to the passing of the December 22, 1998
upgrade deadline.
Field Services also equips, designs, installs and maintains cathodic
protection systems which can include 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
- 5 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
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. In 1998, cathodic protection related revenues
increased to approximately 24% of Field Services revenues from approximately 12%
of Field Service revenues in 1997.
In addition to testing and upgrading UST systems, Field Services also provides
overfill protection, UST cleaning and value added site services, including
surveying 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 secondary containment,
interstitial monitoring or groundwater or vapor monitoring.
In 1998, Field Services revenues were approximately $53.9 million ($32.7
million in 1997), or 78% (85% in 1997), of the Company's consolidated revenues.
Management Services
Management Services are operations that focus on providing information,
data accumulation, administrative, licensing, technical, outsourcing and
regulatory related services. Development of Management Services has been an
integral part of the Company's strategy to diversify its service base and to
develop strong relationships with its customer base. The Company has developed
these services both through internal development and through the acquisition of
OSI.
In 1998 Management Services had revenues of approximately $13.4 million or
19% of the Company's consolidated revenues compared to approximately $4.3
million or 11% of 1997 consolidated revenues.
Compliance Management Services ("CMS")
In 1995, the Company established its Compliance Management Services
division to enable tank owners and operators to outsource the regulatory
compliance function. Compliance Management Services provides turn-key
administrative, managerial, technical, data processing and regulatory liaison
services. Compliance Management Services helps UST owners and operators
coordinate regulated activities and manage their relationship with regulators.
On behalf of its customers, Compliance Management Services can:
o administer UST systems in compliance with regulations;
o acquire and maintain operating and regulatory permits;
o respond to, report and manage environmental incidents;
o comply with Superfund Amendments Reauthorization Act ("SARA III")
community right-to-know requirements;
o resolve environmental notices of violation or noncompliance;
o track hazardous waste transportation via manifest and report in
accordance with state requirements;
o prepare and file state specific Certificates of Financial
Responsibility;
o manage the liabilities associated with the operation of USTs and
the storage of hazardous material;
o coordinate construction, maintenance, testing and contractor
oversight; and
o coordinate the provision of services from the customer's other
UST vendors.
Currently, the Compliance Management Services division manages the
environmental compliance for approximately 18,000 tanks in the United States.
Construction Services
In 1997, the Company established Tanknology Construction which provides
construction management services. Tanknology Construction provides turn-key
construction program management to customers that cannot, or do not want to,
- 6 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
manage large-scale, complex tank upgrade projects, removals, replacements and
other petroleum related construction. Tanknology Construction 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, Tanknology
Construction 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. Tanknology
Construction 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 UST installations;
o Canopy installations and modifications;
o Parts and equipment supply;
o Other petroleum related construction; and
o Coordination with services offered by other TNDE divisions.
International
Through ProEco, TNDE licenses technology to service providers in Australia,
Brazil, Canada, Chile, Columbia, 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 reviews certain test data, issues test reports,
provides technical support and receives license or processing fees on each test
using the Company's technology.
Service Management (OSI)
In 1998, the Company entered the service management business based upon
increased interest of existing and potential customers to out-source facilities
and equipment repair and maintenance management activities. OSI added extensive
expertise in managing maintenance activities at small pad retail sites,
comprehensive information systems, extensive service history databases, an
experienced call center operation and an established network of qualified
vendors. This business provides comprehensive site maintenance capabilities to
multi-site, retail location owners and operators, primarily in the retail fuel
and food provider market. OSI provides these services to more than 5,000 sites.
Initially, the Company purchased the assets and hired the employees of a
small provider of these services located in Ohio in May 1998. In August the
Company purchased all of the outstanding stock of OSI which is located in
Southern California. The Company operated both locations during 1998 but closed
the Ohio operation in early 1999 and consolidated its operation with the
operations of OSI. OSI provides the following services (among numerous others)
to its customers:
o Seven-day, twenty-four hour call center service;
o Services for food service equipment, car wash equipment, fuel
storage and dispensing systems, HVAC and refrigeration systems,
building, lighting and electrical systems and point-of-sale and
retail automation systems and equipment;
o Extensive site, equipment and vendor data warehousing;
o Equipment/repair warranty tracking;
o Subcontractor/vendor dispatching and tracking;
o Invoice auditing;
o Vendor and contractor management;
o Customized performance analysis and reporting; and
o Coordination with services offered by other TNDE divisions.
- 7 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Site Sentry
Site Sentry is an twenty-four hour monitoring, management and reporting
service that assists customers with maintaining compliance with EPA leak
detection regulations for monthly monitoring. With Site Sentry, ATGs are
remotely monitored seven days a week, twenty-four hours a day through telephone
data lines or a satellite connection by a central polling computer. Required
monthly reports are generated and distributed to each location. TNDE analysts
evaluate, process and maintain all records which are made easily accessible to
the customer via the Internet. If the ATG indicates an compliance or maintenance
issue, the problem is immediately processed by the OSI call center to determine
if on-site service is required or the problem can be addressed remotely,
avoiding an unnecessary service call.
Site Sentry complements other TNDE services, such as compliance management and
maintenance management, and furthers the Company's position as a full-service
provider of integrated solutions for UST management.
Government Regulations
EPA's regulatory structure is the primary driver for the Company's
services. State and local agencies have the main regulatory enforcement
responsibilities in this structure. Additionally, many of these agencies add
requirements that are more strict than those of EPA.
The EPA's regulations date back to 1984 when Congress, in response to
concerns about groundwater contamination, included UST amendments in the 1984
Resource Conservation and Recovery Act ("RCRA"). The RCRA amendments led to the
federal UST regulations found in 40 CFR 280. These regulations require that new
USTs (those installed after December 22, 1988) meet certain performance
standards and that older tanks be upgraded to meet comparable standards by
December 22, 1998 or face closure. The regulations also require UST
owners/operators to provide release detection for tanks and piping, follow
standards of maintenance and record keeping and maintain financial
responsibility.
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. If owners and operators of existing USTs do not
implement these upgrades, they must close those existing USTs. 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, government regulations have required leak detection
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.
- 8 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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% and a
probability of false alarm of no more than 5%. Tightness testing methods must be
able to detect a 0.1 gallon-per-hour leak with at least a 95% probability of
detection and no more than a 5% probability of false alarm.
Leak detection is required for all new USTs after installation or upgraded
USTs within ten years of upgrade. Such methods include: Statistical Inventory
Reconciliation (" SIR"), ATG, secondary containment with interstitial
monitoring, vapor or groundwater monitoring or other methods approved by a state
regulatory authority that are at least as precise as the EPA requirements.
ATGs provide an alternative to SIR, as a replacement to manual inventory
control procedures, to meet leak detection requirements in combination with tank
tightness testing or SIR. Secondary containment consists of using a barrier, an
outer wall, a vault or a liner around the UST or piping. Leaked product from the
inner tank or piping is directed toward an interstitial monitor located between
the inner tank or piping and the outer barrier.
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 is 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 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.
Maintenance, Record Keeping and Financial Responsibility
Owners/operators are required to perform scheduled maintenance and testing,
report suspected releases, follow proper closure and corrective action
procedures and keep applicable documents available for inspection.
Owners/operators must also demonstrate financial responsibility. They must be
- 9 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
able to pay the costs of cleaning up leaks and compensating third-parties for
bodily injury and property damage caused by leaking USTs.
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
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 created 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
continue 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.
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's 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,
Michigan 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 services 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's headquarters.
OSI markets to Field Services, CMS and Construction Services customers as
well as through direct sales efforts. OSI performs services throughout the
United States and maintains administrative offices in Laguna Hills, California
and Orange, Connecticut.
Information Systems and Products
TOPS (Tanknology Order Processing System), CMSS (Compliance Management
Services System), Site Sentry, WRAP (Web Report Access Program) and Tracker are
the trade names for a group of proprietary information systems that facilitate
the environmental compliance of UST installations and site management. Other
systems that are used to support UST installations include the Company's
internet access system and hazardous material tracking system. TNDE's systems
- 10 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
were developed in response to the growing informational needs of UST owners and
operators in their efforts to manage complex regulatory, risk avoidance and
operational requirements. While TOPS, CMSS, Site Sentry, WRAP and Tracker 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.
CMSS 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.
Site Sentry is a system developed to seamlessly collect remotely polled ATG
data including compliance and operational data. Site Sentry collects data from
ATGs produced by multiple manufacturers and displays the information in a common
format. The information is accessible by customers and business partners (such
as fuel haulers) via secure connections to the Internet. This allows customers
and business partners to focus on the data instead of the mechanism of
collecting the data. Data that are accessible via Site Sentry includes inventory
levels and alarm status.
WRAP is TNDE's system which was developed in response to customer requests
for accessing field reports via the Internet. WRAP allows customers to connect
securely via the Internet and review completed field reports. Customers may
access the system twenty-four hours a day to view field reports and invoices.
This system provides faster access to data and easily organizes the reports for
quick access by customers.
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 with
the exception of Tracker which is maintained at OSI's offices in California.
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 e-mailed or hard copies can be
printed and mailed to the customer and/or regulatory agency.
These systems add value for UST owners and operators 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.
- 11 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Competition
In 1996, the Company acquired the Tanknology UST Group, 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
1998, 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.
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. Various companies compete on a national or
regional basis with Site Sentry.
Construction Services competes with local construction companies, larger
national construction companies and internal construction groups within major
customers.
OSI competes with local and national maintenance providers as well as
internal maintenance groups within major customers.
Customers
The Company provides on-site and "back office" services to oil companies,
independently owned gasoline retailers, convenience store operators, fleet
owners, government facilities, other operators of USTs and to restaurants and
fast food companies. 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 The
Company's services.
o Oil companies: BP-Amoco, Chevron Products Company, Exxon U.S.A.,
Mobil Oil Corporation, Shell Oil Products Company and Star
Enterprises;
o Gasoline distributors/retailers: B&D Petroleum, Savings Oil, USA
Petroleum;
o Convenience stores: Cumberland Farms, Dairy Mart, Diamond
Shamrock, Southland Corporation E-Z Serve Convenience Stores,
Tosco Corporation;
o Fleet Owners: Hertz Corporation, Ryder Transportation Services,
Budget Rent A Car, and
o Government facilities: City of Philadelphia, Fort Bragg, Army and
Air Force Exchange Service.
Additionally, OSI performs services for petroleum companies (such as Conoco) as
well as companies in the quick serve restaurant market (Pizza Hut, Taco Bell,
Einstein's Bagels).
Mobil Oil Corporation accounted for approximately 23%, 21% and 20% of the
Company's 1998, 1997 and 1996 consolidated 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
- 12 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
the Company's efforts to enforce them, will provide the Company with a
competitive advantage. The Company believes that the duration of its patents
generally exceeds the life cycles of the technologies disclosed and claimed
therein. Although the patents it holds may be of value, the Company believes
that its success will depend primarily on its engineering, marketing and service
skills.
Research and Development
The Company has incurred no significant expenses for research and
development since its inception. Most technology used by the Company has been
obtained through acquisition.
Insurance
The Company's testing activities, consistent with the industry, present
risks of substantial liability. Spills of petroleum products and hazardous
substances, or the creation or exacerbation of a contamination problem through
errors or omissions in tank testing, could result in substantial liability under
federal and state anti-pollution statutes and regulations or from tort claims by
those suffering personal injury or property damage as a result of such
contamination. In addition, many of the Company's tank testing services involve
USTs containing volatile substances such as gasoline. The Company or its
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 of $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
carries similar coverages for its International division. 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, 1998, the Company employed 460 full-time and 25
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 25,500 square
feet of leased office space in Austin, Texas of which the Company is currently
subleasing approximately 4,000 square feet. 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 States District Court for the Western District of
Louisiana. The lawsuit is for a declaratory judgment that certain patents owned
by the Company were invalid and unenforceable and/or that certain U.S. Test tank
testing systems did not infringe such patents. The relief U.S. Test sought
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 Company patents
were valid and enforceable, (2) the U.S. Test tank testing systems infringed
such patents and (3) the Company was owed damages for such infringement. The
- 13 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
patents at issue were transferred from Gilbarco, Inc. as a result of the
Company's 1994 acquisition of Gilbarco ESD. In 1998, the District Count entered
a decision basically granting U.S. Tests relief, denying the Company's counter
claim, and awarding no damages to either party.
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.
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
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
1998
First Quarter $1 7/8 $1/8
Second Quarter $1 1/8 $3/4
Third Quarter $7/8 $5/8
Fourth Quarter $1 1/32 $21/32
As of April 15, 1998, there were approximately 167 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 1997 or 1998. 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 TEI 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,
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
- 14 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
discount to, and separately from, the 1996 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 to DH
Holdings Corp. ("DH"), a subsidiary of Danaher Corporation. 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 at the redemption price
per share on the $6,500,000 senior subordinated note (the "1997 Note") payable
to DH is paid in full. 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) 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 with DH 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.
In August 1998, in connection with, and as part of consideration paid to
the former shareholders of OSI for purchase of their shares in OSI, the Company
issued 250,000 shares of its common stock.
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 RESULTS OF OPERATIONS
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 are 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 service areas with new and profitable revenue streams.
- 15 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Revenues
Revenues for 1998 were $66,845,455, an increase of $28,162,309, or 73%,
compared to $38,683,146 for 1997. The increase in revenues in 1998 was due to
several factors:
1) Increased revenues of $6,522,239 from the Construction Services
division which only operated for a partial year in 1997.
2) Increased revenues of $860,095 generated by OSI which was
purchased in August 1998.
3) Increased revenues of $5,659,555 from an upgrade program for a
major customer.
4) Increased cathodic protection related revenues of $9,288,420
driven by the December 1998 regulatory deadline.
5) Increased revenues from other ATG upgrade work caused by the
December 1998 regulatory deadline.
Revenues in 1998 were favorably impacted by the increased demand generated
as a result of the December 1998, regulatory deadline. The Company also believes
that the revenue increases were driven by the increase in the number of services
offered, increased marketing and sales efforts and growing awareness within the
Company's customer base of the depth and breath of the Company's service
offerings. Revenue increases were experienced in all geographic areas in the
United States and in all services areas except for tank testing and tank
cleaning. The upgrade program for the major customer noted above was
substantially completed in 1998, and there is no similar program in place for
1999. The Company expects that tank testing revenues will continue to decline in
1999 as more and more UST are fitted with ATGs, other remote monitoring systems
or are cathodically protected. The Company expects that due to the passing of
the December 1998 regulatory deadlines, the level of business activity in 1999
will not be as favorable to the Company as in 1998. 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
testing and upgrade driven services. In general, the prices for the Company's
services were stable in 1998 with some price increases implemented in service
areas where the demand for services exceeded capacity as a result of the
December 1998 regulatory deadlines.
Cost of Services
Cost of services for 1998 was $48,285,993 (72% of revenue), an increase of
$19,039,872, or 65%, compared to $29,246,121 (76% of revenue) for 1997. Gross
margin was $18,559,462 (28% of revenue) in 1998 compared to $9,437,025 (24% of
revenue) in 1997. The increase in gross margin percentage is due primarily to
increased vehicle and technician utilization as a result of the increase in
revenues and to lower depreciation charges.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") for 1998 were
$12,276,887 (18% of revenue), an increase of $4,423,885, or 56%, compared to
$7,853,002 (20% of revenue) for 1997. The increase in SG&A spending was
primarily due to the establishment and staffing of the Company's national sales
force, increased marketing costs, increased costs incurred to upgrade computer
systems and IT staffing due to increased business levels and new service
offerings, increased incentive compensation costs due to the increased level of
Company profitability and, to a lesser extent, increases in the administrative
staffing levels required as a result of increase in business activity. As a
percentage of sales, SG&A expenses declined from 20% in 1997 to 18% in 1998 as a
result of the increase in revenues.
Earnings Before Interest, Taxes, Depreciation and Amortization and Extraordinary
Gains (EBITDA)
EBITDA for 1998 was $9,581,334, an increase of $4,086,196, or 74%, compared
to EBITDA of $5,495,138 for 1997. The increase in EBITDA is due to increased
revenues and growth in more recent service offerings such as Construction
Services. EBITDA represents net income before depreciation, amortization,
interest expense and income taxes. 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. It is commonly used to analyze and compare
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
- 16 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
or net income as an indicator of operating performance or cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles. Also, EBITDA, as computed by the Company, is not
necessarily comparable to similarly titled amounts of other companies.
Interest Expense
Interest expense for 1998 was $1,757,559, (3% of revenue), a decrease of
$1,447,916, or 45%, compared to $3,205,475 (8% of revenue) for 1997. The
decrease in interest expense is primarily due to the 1997 Refinancing (described
below). The 1997 Refinancing lowered the amount of subordinated debt outstanding
from $8 million to $6.5 million, and lowered the interest rate on this debt from
13% to 10%, which both contributed to approximately $385,000 of the decrease.
The 1997 Refinancing also eliminated the accretion of the Warrants of $734,250
incurred in 1997 and reduced the accretion of the subordinated debt by $357,103.
These items accounted for $1,476,353 of the decrease over 1997. Interest costs
were further reduced by generally lower interest rates on the Company's
revolving credit facility and term loan where rates are tied to the prime rate.
However, these reduced costs were more than offset by the increased debt levels
incurred in 1998 compared to 1997.
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 TEI 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.
Provision for Income Taxes
The Company's effective income tax rate in 1998 was approximately 17%. Due
to the availability of net operating loss carryforwards, the Company has in
years prior to 1998 paid minimum taxes. In 1998, as a result of the Company's
profitable operations the Company fully utilized its unrestricted federal income
tax loss carryforwards as well as its applicable 1998 restricted loss
carryforwards. For state and local income tax purposes the Company has
substantially utilized its tax loss carryforwards in a number of states.
Accordingly, in 1998, the Company provided for a federal tax provision of
$601,000 and a state tax provision of $205,000. Subsequent to 1998, the Company
will be subject to recording and paying taxes on income at the full statutory
rates which are estimated at approximately 39%.
The Company has approximately $22 million of remaining net operating loss
carryforwards which, as a result of a change in ownership of the Company's stock
in 1995 pursuant to Internal Revenue Code Section 382, are restricted to
utilization at the rate of approximately $100,000 per year through 2011, when
they expire.
Net Income/Loss
In 1998, the Company had net income of $3,903,797 (6% of revenue) compared
to a net loss of $1,353,635 for 1997 (4% of revenue).
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 TEI Acquisition in October 1996.
- 17 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
The UST Group was purchased for an aggregate purchase price of $12 million,
subject to adjustment. In December 1998, the Company and TEI reached a
settlement of the final purchase price claims that resulted in a payment to the
Company of $230,000 and the reduction of certain indemnification limitations by
the Company provided for in the Stock Purchase Agreement on behalf of TEI from
the previous limit of $1,250,000 to $600,000.
Sale of Canadian Operations
In February 1997, the Company sold the business and operations of
Tanknology Canada which it acquired as part of the TEI 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
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 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 its borrowing base, which reduced the Company's borrowing capacity
under the Company's revolving credit facility with its bank. The "block" was
subsequently removed as part of the 1997 Refinancing.
Sale of USTMAN
On May 22, 1997 the Company sold USTMAN, which was acquired as part of the
TEI 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 June 1, 1998 (the "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 $650,000 for one-half of the
working capital adjustment plus 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 $4,795,000 of goodwill.
Accordingly, the Company did not realize any gain or loss on this transaction in
its 1997 results of operations.
Purchase of OSI
On August 7, 1998, the Company purchased all of the issued and outstanding
common stock of OSI. The terms of this transaction called for a cash payment of
$765,000, the issuance of a 10% subordinated note of $750,000 payable in equal
installments over 24 months, the issuance of 250,000 shares of the Company's
common stock which were valued at $195,313, and the issuance of a warrant to
purchase 500,000 shares of the Company's common stock at an initial exercise
price of $2.00 per share, subject to downward adjustment (but not lower than
$1.00) based upon the future performance of OSI. The warrant was valued at
$30,000. This purchase price is subject to downward adjustment for certain items
once the total of such adjustment items exceeds $50,000. Any reduction in the
purchase price will be effected through a reduction of the remaining principal
balance of the subordinated note.
Financing
In 1996, in connection with the TEI Acquisition, the Company obtained a
total of $19 million of financing (the "TEI Acquisition Financing") under two
separate loan agreements. The TEI 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 TEI Acquisition and
the TEI 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 TEI
Acquisition Financing were used (i) to purchase the UST Group, (ii) to pay off
- 18 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
outstanding balances under a then existing term loan and an existing factoring
agreement in the aggregate amount of $2,526,970, (iii) to pay the TEI
Acquisition's fees and expenses and (iv) as 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 TEI 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 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.
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.
As part of this termination agreement, the Company 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 or (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 $20,000,000 as of January 1, 1999, and through
March 31, 1999, the PCA expiration date. Such payment 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, 1998, there has been no
occurrence of a Triggering Event, and the Company is not aware of any potential
Triggering Events.
The funds for the 1997 Refinancing were provided by the issuance of
$1,500,000 of Series A Redeemable Convertible Preferred Stock, 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. 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 at the redemption price per share to DH
is paid in full. 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
beginning March 31, 2000. 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
through December 31, 2002.
- 19 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
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 Canadian operations, the amount
available to the Company under the credit line was reduced by $500,000 as a
condition to obtaining the bank's agreement to consent to the sale of the
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. In
1998, the Company renegotiated certain terms of the Revolving Line to increase
the maximum borrowings from $5 million to $9 million and to extend the
expiration date of the facility by one year to December 31, 2000.
At December 31, 1998, the Company had $6,650,000 of borrowings outstanding
under the Revolving Line and also had $735,000 in letters of credit outstanding.
As of December 31, 1998, there was an additional $1,615,000 available for
borrowing under the Revolving Line.
The $6 million term loan carries an interest rate of the bank's prime rate
plus 1%. Principal payments of $100,000 are paid monthly. During 1998, the
Company renegotiated certain terms of the term loan to reduce the interest rate
by 0.5% and to suspend the principal amortization for a six-month period from
July 1, 1998 through December 1, 1998. Principal payments were resumed as of
January 1, 1999. At December 31, 1998, $4,200,000 remained outstanding under the
term loan. Interest is payable monthly under both the Revolving Line and the
term loan. Under both the Revolving Line and the term loan, the Company is
subject to certain restrictions and covenants. At December 31, 1998, the Company
was in compliance with all restrictions and covenants related to the revolving
credit line and term loan.
Gilbarco Note
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, 1998, bears interest at a
variable rate and is due in October 2000. In the first quarter of 1999, the
Company entered into an agreement to reassign the patents back to Gilbarco in
exchange for the note and the accrued interest thereon. The Company expects to
record a small gain from the sale of these patents in 1999.
The aggregate annual maturities of long-term debt and financing agreements
at December 31, 1998 are as follows:
1999 $ 2,023,727
2000 10,954,384
2001 3,586,520
2002 2,930,290
2003 148,359
19,643,280
Less: Discount related to subordinated notes (210,321)
-----------------
$ 19,432,959
=================
At December 31, 1998, the Company had positive working capital of
$7,029,962 compared with working capital of $743,612 at December 31, 1997. The
increase in working capital is primarily a result of the reclassification of the
$6,650,000 outstanding under the Revolving Line to long-term debt, since the
Company does not expect to repay this debt in 1999.
Cash flows provided by operating activities in 1998 were $2,239,557 versus
cash flows used in operating activities in 1997 of $2,225,165. The most
significant factors contributing to the positive cash flow from operating
activities in 1998 were net income of $3,903,797, depreciation and amortization
of $3,579,089 and increases in accounts payable and accrued payroll and payroll
taxes of $4,356,314. These positive cash flows were significantly reduced by an
$8,339,130 increase in accounts receivable and a $1,036,729 decrease in accrued
- 20 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
liabilities. The increase in accounts receivable was caused by an increase in
revenues in the fourth quarter of 1998 as compared to the fourth quarter of 1997
of approximately $9 million.
Capital expenditures in 1998 were $5,787,757 compared to $2,841,530 in
1997. The increase in capital expenditures in 1998 was primarily due to the
purchase of replacement and new service vehicles, increased expenditures for
computer hardware and software and purchases of approximately $2,500,000 of
automated tank gauges for a specific customer contract. The Company expects that
capital expenditures in 1999 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 TEI 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 current credit facilities 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 1999. 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
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
time- sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
Tanknology has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, and
telephone/PBX systems, scanning equipment and other miscellaneous systems, as
well as systems that are not commonly thought of as IT systems, such as alarm
systems, fax machines or other miscellaneous systems. Both IT and non-IT systems
may contain imbedded technology, which complicates the Company's Year 2000
identification, assessment, remediation and testing efforts. Based upon its
identification and assessment efforts to date, the Company believes that certain
of the computer equipment and software it currently uses will require
replacement or modification. In addition, in the ordinary course of replacing
computer equipment and software, the Company attempts to obtain replacements
that it believes are Year 2000 compliant. Utilizing both internal and external
resources to identify and assess needed Year 2000 remediation, the Company
currently anticipates that its Year 2000 identification, assessment,
remediation, and testing efforts, which began in February 1998, will be
completed by June 30, 1999, and that such efforts will be completed prior to any
currently anticipated impact on its computer equipment and software. The Company
estimates that as of December 31, 1998, it had completed approximately 30% of
the initiatives that it believes will be necessary to fully address potential
Year 2000 issues relating to its computer equipment and software. The projects
comprising the remaining 70% of the initiatives are in process and expected to
be completed on or about June 30, 1999.
The company is currently evaluating field service equipment, test equipment
and gauges at remote sites for Year 2000 compliance. The company's Year 2000
identification, assessment, remediation, and testing efforts will include the
current and future evaluation of all products, equipment and gauges used in the
field.
The Company's primary systems are at less risk of date related problems
due, primarily, to the fact that the average age of the systems is less than 5
years and were developed to operate beyond the year 2000.
- 21 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
PERCENT
YEAR 2000 INITIATIVE TIME FRAME COMPLETE
---------------------------------- ---------------- -------------
Initial IT systems identification
and assessment 2/98-12/98 100%
Remediation and testing
regarding central system issues 8/98-5/99 85%
Remediation and testing
regarding departmental system
issues 10/98-4/99 90%
Remediation and testing
regarding tank Testing and
truck equipment system issues 11/98-6/99 45%
Remediation and testing
regarding telephone/PBX 11/98-12/98 100%
Electronic data interchange
trading partner conversions 10/98-4/99 70%
Identification, assessment,
remediation, and testing
regarding desktop and
individual system issues 10/98-4/99 90%
Identification and assessment
regarding non-IT system issues 8/98-4/99 80%
Remediation and testing 10/98-6/99 40%
regarding non-IT system issues
The Company has also mailed letters to its significant vendors and service
providers and has verbally communicated with strategic customers to determine
the extent to which interfaces with such entities are vulnerable to Year 2000
issues and whether the products and services purchased from or by such entities
are Year 2000 compliant.
The Company believes that the cost of its Year 2000 identification,
assessment, remediation and testing efforts, as well as currently anticipated
costs to be incurred by the Company with respect to Year 2000 issues of third
parties, will not exceed $150,000, which expenditures will be funded from
operating cash flows. All of the $150,000 relates to analysis, repair or
replacement of existing software, upgrades to existing software, or evaluation
of information received from significant vendors, service providers or
customers. The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
The Company has not begun a comprehensive analysis of the operational
problems that would be reasonably likely to result from the failure by the
Company and certain third parties to complete efforts to achieve Year 2000
compliance on a timely basis. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and such scenario
has not yet been clearly identified. The Company currently plans to complete
such analysis and contingency planning by June 30, 1999.
- 22 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
The Company will engage an independent expert to evaluate its Year 2000
identification, assessment, remediation, and testing efforts.
ITEM 7. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and its
subsidiaries are attached hereto.
Page
----
Report of Independent Auditors.....................................F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997......................................................F-3
Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997..............................F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998 and 1997................F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997 .............................F-7
Notes to Consolidated Financial Statements ........................F-8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 23 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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>
Officer and/or Director Positions Age
<S> <C> <C>
- ----------------------- --------------------------------------------------- ---
Jay Allen Chaffee Chairman of the Board, Director, Officer 47
A. Daniel Sharplin President, Chief Executive Officer, Director 36
David G. Osowski Vice President, Secretary, Chief Financial Officer 46
H. Baxter Nairon Vice President of Strategy and Business
Development 39
Charles G. McGettigan Director 54
Michael S. Taylor Director 57
Myron A. Wick, III Director 55
Daniel J. Kubala Vice President of Marketing 35
Allen Porter Vice President of Sales 41
Lawrence K. Landers Director 49
</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 a director and the Company's President, and
Chief Executive Officer since June 1995. He became the Company's Vice President,
Western Region, in December 1991, was appointed the Company's Chief Operating
Officer and Secretary in July 1992 and was appointed President in December 1994.
Prior to joining the Company, Mr. Sharplin was 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, age 39, was named Vice President of Strategy and Business
Development of the Company in December 1997. Prior to that time, 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, age 46, 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. ("McGettigan
Wick"), 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 time, Mr. McGettigan was a Senior Vice President of
Dillon, Read & Co. Inc. He currently serves on the boards of directors of
Cuisine Solutions, Inc., Modtech, Inc, Onsite Energy, Inc., PMR Corporation,
- 24 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Sonex Research, Inc., and Wray-Tech Instruments, Inc. Mr. McGettigan is a
graduate of Georgetown University, and also received a Masters of Business
Administration in Finance from the Wharton School at the University of
Pennsylvania.
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 at Josephthal Lyons & Ross, Inc.
("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 a Managing Director of McGettigan Wick. Since
May 1991, Mr. Wick has been a general partner of PIM, which is the general
partner of Proactive. 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 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.
Daniel J. Kubala, age 35, joined the Company as Vice President of Marketing
in August 1996. Before joining the company, from 1993 to 1996, Mr. Kubala served
as Technology Marketing Manager for the IC2 Institute, assisting start-up firms
in licensing and marketing NASA and CIA technologies for private sector use.
Prior to that, Mr. Kubala was Product Manager for Quaker Oats Company's Gatorade
sports drink, where he was responsible for pricing strategy, forecasting, new
flavors, and packaging. Mr. Kubala holds a Bachelor of Arts in Mathematics from
the University of Dallas and a Masters of Business Administration from the
University of Texas.
Allen Porter, age 41, was named Vice President of Sales in August, 1998.
From May, 1998 to August 1998, Mr. Porter was employed by the Company as Vice
President, Total Compliance. Prior to joining the Company, from May 1985 to May
1998, Mr. Porter served in various management positions including Director of
Sales and Vice President of Marketing and, most recently, as the Vice President,
Encompass Division at Arizona Instrument, Inc. Mr. Porter received a Bachelor of
Science from Marquette University.
Mr. Landers has been a director since June 1998. Since September 1998, he
has been Vice President of Marketing for Veeder-Root Company ("Veeder-Root"), a
subsidiary of Danaher Corporation ("Danaher"), and from December 1996 to
September 1998 served as the General Manager of Simplicity Data Services for
Veeder-Root. Prior to that time, Mr. Landers was employed with United Parcel
Service as the Vice President, Marketing of UPS Worldwide Logistics , a
subsidiary of UPS from June 1995 to December 1996, and as International
Marketing Manager for UPS from March 1994 to June 1995. Mr. Landers received a
Bachelor of Science from the University of Alabama in 1973 and a Masters in
Business Administration from Duke University in 1984.
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
- 25 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Company and its subsidiaries during 1995, 1996 and 1997.
<TABLE>
<CAPTION>
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 1998 $ 115,500 (1) $ 200,000 (1) -- --
Chairman of the Board 1997 $ 90,000 (1) $ 200,000 (1) 800,016 (2) --
of Directors 1996 $ 90,000 (1) $ 150,000 (1) -- --
A. Daniel Sharplin 1998 $ 225,000 (3) $ 370,000 (3) -- $ 500 (5)
President and Chief 1997 $ 150,000 (3) $ 100,000 (3) 1,200,024 (4) --
Executive Officer 1996 $ 154,526 (3) $ 75,000 (3) -- $ 4,526 (6)
H. Baxter Nairon 1998 $ 138,000 $ 93,762 (7) -- $ 500 (5)
Vice President of 1997 $ 138,000 $ 58,000 (7) -- --
Strategy and Business 1996 $ 95,537 $ 45,000 (7) 384,000 (8) --
Development
David G. Osowski 1998 $ 135,000 $ 93,762 (9) -- $ 500 (5)
Vice President, 1997 $ 135,000 $ 47,625 (9) 250,000 (10) --
Secretary and Chief 1996 N/A N/A N/A --
Financial Officer
Daniel J. Kubala 1998 $ 90,000 $ 93,762 (11) -- $ 500 (5)
Vice President of 1997 $ 80,000 $ 38,500 (11) -- --
Marketing 1996 $ 27,692 $ 10,111 (11) 201,000 (12) --
Allen Porter 1998 $ 57,692 $ 50,881 (13) 100,000 (14) $ 500 (5)
Vice President of Sales 1997 N/A N/A N/A
1996 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 1998.
(1) In July 1997, the Company entered into an Executive Consulting
Agreement with Bunker Hill, of which Mr. Chaffee is a principal. See
"Certain Transactions." In 1993, the Company awarded a bonus of
$19,969 to Mr. Chaffee, which 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, which was
paid in 1998. In 1998, the Compensation Committee awarded Mr. Chaffee
a bonus for 1998 of $200,000, which will be paid in 1999.
(2) In 1996, certain previously granted options were repriced. See "Fiscal
Year End Options Values." On July 1, 1997, pursuant to the Executive
Consulting Agreement, Mr. Chaffee was awarded cash stock appreciation
rights ("SARs") for an aggregate of 800,016 shares of Common Stock at
$0.2813 per share. On July 2, 1997, the Company 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.
- 26 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
(3) 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's 1996 bonus award of $75,000 was paid in 1997. Mr.
Sharplin's 1997 bonus award of $100,000 was paid in 1998. In 1998 the
Compensation Committee awarded Mr Sharplin a bonus for 1998 of
$370,000, which was paid in 1999.
(4) In 1996, certain previously granted options were repriced. See "Fiscal
Year End Options Values." On July 1, 1997, pursuant to the Employment
Agreement, Mr. Sharplin was awarded 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.
(5) Consists of the Company's 1998 contribution to the 401K plan.
(6) Consists of matching funds for the Company 401(k) plan relating to
Company contributions for 1992, 1993 and 1994 which were made in 1996.
(7) In 1996, the Compensation Committee awarded Mr. Nairon a bonus for
1996 of $35,000, which was paid in 1997. Mr. Nairon was also paid a
$10,000 bonus as an inducement to join the Company in 1996. In 1997,
the Compensation Committee awarded Mr. Nairon a bonus for 1997of
$58,000, of which $16,000 was paid in 1997 and $42,000 was paid in
1998. In 1998, the Compensation Committee awarded Mr. Nairon a bonus
for 1998 of $93,762, which was paid in 1999.
(8) In March 1996, Mr. Nairon was granted an option to purchase 384,000
shares of Common Stock 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.
(9) In 1997, the Compensation Committee awarded Mr. Osowski a bonus for
1997 of $47,625, of which $28,125 was paid in 1997 and $19,500 was
paid in 1998. In 1998, the Compensation Committee awarded Mr. Osowski
a bonus for 1998 of $93,762, which was paid in 1999.
(10) In December 1996, Mr. Osowski was granted an option to purchase
250,000 shares of Common Stock at $0.40625, 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.
(11) In 1996, the Compensation Committee awarded Mr. Kubala a bonus for
1996 of $10,111 which was paid in 1997. In 1997, the Compensation
Committee awarded Mr. Kubala a bonus for 1997 of $38,500, of which
$8,500 was paid in 1997 and $30,000 was paid in 1998. In 1998, the
Compensation Committee awarded Mr. Kubala a bonus for 1998 of $93,762,
which was paid in 1999.
(12) In August 1996, Mr. Kubala was granted an option to purchase 201,000
shares of Common Stock at $0.15625, the market price of the Company's
Common Stock on Mr. Kubala's employment acceptance date. The option
vests ratably one-third each year starting on August 1, 1996.
(13) Mr. Porter joined the Company in May 1998. In 1998, the Compensation
Committee awarded Mr. Porter a bonus for 1998 of $46,881 which was
paid in 1999. Mr. Porter also was paid a $4,000 bonus in 1998 for
completing certain goals as outlined in his initial employment offer.
(14) In April 1998, Mr. Porter was granted an option to purchase 100,000
shares of Common Stock at $0.78125, the market price of the Company's
Common Stock on Mr. Porter's employment acceptance date. The option
vests ratably one-third each year starting on April 15, 1998.
- 27 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Option Grants in Last Fiscal Year
The following table sets forth options granted to the Named Executive
Officers during the year ending December 31, 1998.
<TABLE>
<CAPTION>
Number of Percnet of Potential Realizable
Shares Total Options Value at Assumed
Underlying Granted to Exercise Annual Rates of Stock
Options Employees in Price Per Price Appreciation for
Name Granted Fiscal Year Share Expiration Date Option Term
<S> <C> <C> <C> <C> <C> <C>
- ------------------ ---------- ------------- --------- --------------- ----------------------
5% 10%
Jay Allen Chaffee -- -- -- -- -- --
A. Daniel Sharplin -- -- -- -- -- --
H. Baxter Nairon -- -- -- -- -- --
David G. Osowski -- -- -- -- -- --
Daniel Kubala -- -- -- -- -- --
Allen Porter 100,000 13.4% $.78125 April 15, 2008 $ 49,132 $ 124,511
</TABLE>
Fiscal Year End Options Values
The following table sets forth the option holdings and the value of
unexercised options held by each Named Executive Officer as of December 31,
1997. None of the Named Executive Officers exercised options during 1998.
Numbers of Shares Underlying Value of Unexercised
Unexercised Options in-the-Money-Options
at December 31, 1998 at December 31, 1998
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- ------------- ----------- -------------
Jay Allen Chaffee 342,864 457,152 $ 203,576 $ 271,434 (1)
440,000 -- $ 330,000 -- (2)
50,000 -- $ 37,500 -- (2)
A. Daniel Sharplin 514,296 685,728 $ 305,363 $ 407,151 (1)
640,000 -- $ 480,000 -- (2)
50,000 -- $ 37,500 -- (2)
H. Baxter Nairon 256,000 128,000 $ 176,000 $ 88,000 (3)
David G. Osowski 166,667 83,333 $ 78,125 $ 39,063 (4)
Daniel J. Kubala 134,000 67,000 $ 96,313 $ 48,156 (5)
Allen Porter -- 100,000 $ -- $ 9,375 (6)
(1) Represents (i) the difference ($0.59375) 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, 1998 ($0.875) times (ii) the
number of shares subject to the options.
(2) Represents (i) the difference ($.75) 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, 1998 ($0.875) times (ii) the number of
shares subject to the options.
- 28 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
(3) Represents (i) the difference ($0.6875) 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, 1998 ($0.875) times (ii) the
number of shares subject to the options.
(4) Represents (i) the difference ($.46875) between the exercise price of
the options ($0.40625) and the per share fair market value of the
Company's Common Stock on December 31, 1998 ($0.875) times (ii) the
number of shares subject to the options.
(5) Represents (i) the difference ($.71875) between the exercise price of
the options ($0.15625) and the per share fair market value of the
Company's Common Stock on December 31, 1998 ($0.875) times (ii) the
number of shares subject to the options.
(6) Represents (i) the difference ($.09375) between the exercise price of
the options ($0.78125) and the per share fair market value of the
Company's Common Stock on December 31, 1998 ($0.875) times (ii) the
number of shares subject to the options.
There was no other director compensation paid during 1998 or 1997 to the
non-management directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of the Company's capital stock as of 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)
Amount and nature of
Beneficial Owner Beneficial Ownership Percentage
- ------------------------------------ -------------------- ----------
Proactive Partners, L.P. 13,869,828 (2) 54.71%
50 Osgood Place, Penthouse
San Francisco, CA 94153
Lagunitas Partners, L.P. 13,761,818 (3) 54.29%
50 Osgood Place, Penthouse
San Francisco, CA 94153
Danaher Corporation 4,500,000 (4) 17.75%
1250 24th Street, N.W.
Washington, DC 20037
Myron A. Wick, III 10,083,523 (5) 39.78%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94153
Charles C. McGettigan 10,108,523 (6) 39.88%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA 94153
A. Daniel Sharplin 1,744,588 (7) 6.88%
Jay Allen Chaffee 900,014 (8) 3.55%
H. Baxter Nairon 384,000 (9) 1.51%
- 29 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Amount and nature of
Beneficial Owner Beneficial Ownership Percentage
- ------------------------------------ -------------------- ----------
Lawrence K. Landers -- --
Michael S. Taylor 57,333 (10) *
David G. Osowski 166,667 (11) *
Daniel J. Kubala 134,000 (12) *
Allen Porter 33,333 (13) *
All executive officers and directors 17,289,763 (14) 68.20%
- ---------------------------
* 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 options or
otherwise. In calculating the total number of shares of Common Stock deemed to
be outstanding for the purpose of reflecting each 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 10,065,513 outstanding shares of Common Stock, including 25,000
shares owned directly by Mr. McGettigan. Also includes (i) 3,721,305 shares
beneficially owned by Lagunitas Partners, L.P. and referenced in note (3) below;
(iii) 40,000 shares beneficially owned by Mr. McGettigan and referenced in note
(6) below; (iv) 40,000 shares beneficially owned by Mr. Wick and referenced in
note (5) below; and (v) 3,010 shares 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 issuable upon the exercise of warrants at a price of $0.15 per
share and (ii) 10,040,513 shares beneficially owned by Proactive and referenced
in note (2) above.
(4) Consists of currently exercisable warrants to purchase 4,500,000 shares of
Common Stock at $.375 per share owned by DH Holdings Corp.
(5) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of
stock options granted to Mr. Wick under the Company's 1989 Long-Term Incentive
Plan (the "Incentive Plan"); (ii) 10,040,513 shares beneficially owned by
Proactive and referenced in note (2) above (Mr. Wick is a general partner of PIM
which is the general partners of Proactive); and (iii) 3,010 shares beneficially
owned by McGettigan, Wick & Co. (Mr. Wick is a general partner of McGettigan,
Wick & Co.). Does not include 184,410 shares owned by the Company's 401(K) plan
of which Mr. Wick is a trustee.
(6) Includes 25,000 outstanding shares of common stock. Also includes (i) 40,000
shares of Common Stock issuable upon the exercise of stock options granted to
Mr. McGettigan under the Incentive Plan; (ii) 10,040,513 shares beneficially
owned by Proactive and referenced in note (2) above (Mr. McGettigan is a general
partner of PIM, which is the general partner of Proactive); and (iii) 3,010
shares beneficially owned by McGettigan, Wick & Co. (Mr. McGettigan is a general
partner of McGettigan, Wick & Co.).
(7) Includes 513,932 outstanding shares of Common Stock. Also includes (i)
26,360 shares reserved for issuance upon the exercise of warrants at prices of
$7.50 and (ii) 1,744,588 shares reserved for issuance to Mr. Sharplin under the
Incentive Plan. Does not include (i) 685,728 shares subject to options that are
not yet exercisable or (ii) 176,659 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, which is an affiliate of Mr. Chaffee. Also includes
900,014 shares subject to exercisable options granted to Bunker Hill under the
- 30 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Incentive Plan. Does not include (i) 457,152 shares subject to options that
are not yet exercisable or (ii) 176,659 shares owned by the Company's
401(K) plan of which Mr. Chaffee is a trustee.
(9) Consists of 384,000 shares issuable upon the exercise of options granted to
Mr. Nairon under the Incentive Plan.
(10) Includes (i) 57,333 shares issuable upon the exercise of options granted to
Mr. Taylor under the Incentive Plan and (ii) 4,000 shares outstanding held by
Mr. Taylor's wife. Mr. Taylor disclaims beneficial ownership of his wife's
shares. Does not include 66,667 shares subject to options that are not yet
exercisable.
(11) Consists of 166,667 shares issuable upon the exercise of options granted to
Mr. Osowski under the Incentive Plan but does not include 83,333 shares subject
to options that are not yet exercisable.
(12) Consists of 134,000 shares issuable upon the exercise of options granted to
Mr. Kubala under the Incentive Plan but does not include 67,000 shares subject
to options that are not yet exercisable.
(13) Consists of 33,333 shares issuable upon the exercise of options granted to
Mr. Porter under the Incentive Plan but does not include 66,667 shares subject
to options that are not yet exercisable.
(14) In calculating the total number of shares of Common Stock owned by all
executive officers and directors, shares that the owners do not own but could be
acquired within 60 days or more are not included.
- 31 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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 1998, the Company paid
$374,601 to Bunker Hill for the services of Jay Allen Chaffee and related
expenses as described below. Mr. Chaffee is the Chairman of the Board and
President of 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 agreement 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
agreement supercedes the 1991 service contract between the Company and Bunker
Hill. In 1998, Bunker Hill, on behalf of Mr. Chaffee, received $90,000 in
consideration for Mr. Chaffee's management services as an officer of the Company
plus a bonus of $200,000 earned but not paid in fiscal year 1998. In July 1998
the Company also retained Bunker Hill, on behalf of Mr. Chaffee to provide
management and support services in connection with the Company's environmental
risk management function for a monthly fee of $4,250. Accordingly, Bunker Hill,
on behalf of Mr. Chaffee was paid a total of $25,500 for these services in 1998.
In addition, $59,101 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 (the
"Employment Agreement") with A. Daniel Sharplin, its President, Chief Executive
Officer and a director, pursuant to which Mr. Sharplin will continue to serve
the Company as President, Chief Executive Officer and director. Pursuant to the
Employment Agreement, the Company paid Mr. Sharplin a base salary at the rate of
$225,000 in 1998,. Pursuant to the Employment Agreement, the Company will pay
Mr. Sharplin 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. On February 23, 1999, the Compensation
Committee of the Board of Directors voted to increase Mr. Sharplin's annual
salary to $290,000 effective January 1, 1999. 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.
- 32 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
Refinancing
In December 1997, the Company entered into several agreements with two
subsidiaries of Danaher Corporation, which encompassed both a commercial
agreement with Veeder-Root Company and an $8 million investment by DH Holdings,
Inc. Veeder-Root is a manufacturer of environmental monitoring equipment and a
provider of supporting services. 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 with DH Holdings Corp.,
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 Preferred Stock that 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 DH
Holdings Corp. 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 ("BOCP") and
repurchased all of the Company's 13,022,920 outstanding warrants which were held
by BOCP. Mr. Landers is a Vice-President of Veeder- Root and a director of the
Company.
Subsequent to December 31, 1998, on February 8, 1999, the Company invoked
the Dispute Resolution provision of the Distribution, Services and Marketing
Agreement (DSM Agreement). In response to the Company's notice, Veeder- Root's
counsel advised the Company's counsel that Veeder-Root also invoked the Dispute
Resolution provisions of the DSM Agreement. At this time, the parties have
elected to continue informal negotiations rather than initiating a formal
arbitration process. We believe that the result of these negotiations and or a
formal arbitration proceeding with Veeder-Root will not have a significant
adverse effect on the balances of the Note Payable, Preferred Stock and Warrants
and the related Accounts Receivable from Veeder-Root at December 31, 1998.
Additionally, we believe any potential claims DH Holdings, Inc. may have
regarding the Purchase Agreement will not have a significant adverse effect on
the balance sheet at December 31,1998, or results of operations for the year
ended December 31, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated herein by
reference:
(1) 1998 Financial Statements, Table of Contents.................F-1
Report of Independent Auditors...............................F-2
Consolidated Balance Sheets as of December 31, 1998
and 1997.................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997...............................F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998 and 1997.........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997...............................F-7
Notes to Consolidated Financial Statements...................F-8
- 33 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
(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.)
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.)
- 34 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------------
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.)
- 35 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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.)
10.25 Loan Agreement, dated October 25, 1996, between NDE
Environmental Corporation, Tanknology/NDE Corporation,
USTMAN Industries, Inc., ProEco, Inc., Tanknology Canada
(1988) Inc., and Bank One Texas, N.A. (Incorporated by
reference from Exhibit 10.1 of Form 8-K dated October 25,
1996.)
10.26 Revolving Note dated October 25, 1996, issued pursuant to
the Loan Agreement. (Incorporated by reference from Exhibit
10.1a of Form 8-K dated October 25, 1996.)
10.27 Term Note dated October 25, 1996 issued pursuant to the Loan
Agreement. (Incorporated by reference from Exhibit 10.1b of
Form 8-K dated October 25, 1996.)
10.28 Note and Warrant Purchase Agreement, dated as of October 25,
1996, between NDE Environmental Corporation, Tanknology/NDE
Corporation, USTMAN Industries, Inc., ProEco, Inc., and
Tanknology Canada (1988) Inc. and Banc One Capital Partners,
L.P. (Incorporated by reference from Exhibit 10.2 of Form
8-K dated October 25, 1996.)
10.29 Senior Subordinated Note due December 31, 2001, dated
October 25, 1996 issued pursuant to the Note and Warrant
Agreement. (Incorporated by reference from Exhibit 10.2a of
Form 8-K dated October 25, 1996.)
10.30 Warrant Certificate dated October 25, 1996 issued pursuant
to the Note and Warrant Purchase Agreement. (Incorporated by
reference from Exhibit 10.2b of Form 8-K dated October 25,
1996.)
- 36 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------------
10.31 Security Agreement, dated as of October 25, 1996, among NDE
Environmental Corporation, Tanknology/NDE Corporation,
USTMAN Industries, Inc., ProEco, Inc., and Tanknology Canada
(1988), Inc., and Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit 10.3 of Form 8-K
dated October 25, 1996.)
10.32 Security Agreement - Pledge of Subsidiary Stock, dated as of
October 25, 1996, between NDE Environmental Corporation and
Banc One Capital Partners, L.P. (Incorporated by reference
from Exhibit 10.4 of Form 8-K dated October 25, 1996.)
10.33 Put Option Agreement, dated as of October 25, 1996, between
NDE Environmental Corporation and Banc One Capital Partners
L.P. (Incorporated by reference from Exhibit 10.5 of Form
8-K dated October 25, 1996.)
10.34 Registration Rights Agreement, dated as of October 25, 1996,
between NDE Environmental Corporation and Banc One Capital
Partners, L.P. (Incorporated by reference from Exhibit 10.6
of Form 8-K dated October 25, 1996.)
10.35 Preemptive Rights Agreement, dated as of October 25, 1996,
between NDE Environmental Corporation and Banc One Capital
Partners, L.P. (Incorporated by reference from Exhibit 10.7
of Form 8-K dated October 25, 1996.)
10.36 Co-Sale Agreement, dated as of October 25, 1996, among NDE
Environmental Corporation, Proactive Partners, L.P.,
Lagunitas L.P., Jay Allen Chaffee, A. Daniel Sharplin, and
Banc One Capital Partners, L.P. (Incorporated by reference
from Exhibit 10.8 of Form 8-K dated October 25, 1996.)
10.37 Standby Commitment, made as of October 25, 1996, among
Proactive Partners L.P., NDE Environmental Corporation, Banc
Capital Partners, L.P., and Bank One Texas, N.A.
(Incorporated by reference from Exhibit 10.9 of Form 8-K
dated October 25, 1996.)
10.38 Shareholder Agreement, dated as of October 25, 1996, among
Proactive Partners, L.P., Lagunitas L.P., Jay Allen Chaffee,
A. Daniel Sharplin, and Banc One Capital Partners, L.P.
(Incorporated by reference from Exhibit 10.10 of Form 8-K
dated October 25, 1996.)
10.39 Pledge and Security Agreement, dated October 25, 1996,
between NDE Environmental Corporation and Bank One Texas
N.A. (Incorporated by reference from Exhibit 10.11 of Form
8-K dated October 25, 1996.)
10.40 Pledge and Security Agreement, dated October 25, 1996,
between Tanknology/NDE Corporation and Bank One Texas N.A.
(Incorporated by reference from Exhibit 10.12 of Form 8-K
dated October 25, 1996.)
10.41 Pledge and Security Agreement, dated October 25, 1996,
between ProEco, Inc. and Bank One Texas, N.A. (Incorporated
by reference from Exhibit 10.13 of Form 8-K dated October
25, 1996.)
10.42 Pledge and Security Agreement, dated October 25, 1996,
between USTMAN Industries, Inc., and Bank One Texas, N.A.
(Incorporated by reference from Exhibit 10.14 of Form 8- K
dated October 25, 1996.)
- 37 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------------
10.43 Amendment No. 1 to Loan Agreement (Exhibit 10.25) dated
April 10, 1997, among NDE Environmental Corporation
Tanknology/NDE Corporation, USTMAN Industries, Inc., ProEco,
Inc. Tanknology Canada (1988), Inc. and Bank One, Texas,
N.A.
10.44 Amendment No. 1 to Note and Warrant Purchase Agreement (
Exhibit 10.28) dated April 10, 1997, among NDE Corporation,
Tanknology/NDE Corporation, USTMAN Industries, Inc., ProEco,
Inc. Tanknology Canada (1988), Inc. and Bank One Capital
Partners, L.P.
10.45 Note, Preferred 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, Preferred 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
Preferred 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, Preferred
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,
Preferred 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, Preferred Stock and Warrant Purchase
Agreement (Exhibit 10.45)
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, Preferred 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, Preferred Stock and
Warrant Purchase Agreement (Exhibit 10.45)
- 38 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------------
10.54 Amendment No. 1 to the Note, Preferred 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 10.58)
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 10.59) 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.
10.64 Amendment No. 4 dated as of June 26, 1998, to Loan Agreement
by and between the Registrant, Tanknology-NDE Construction
Services, Inc., ProEco, Inc., 2368692 Canada, Inc. and Bank
One, Texas, N.A. dated as of October 25, 1996
10.65 Amendment No. 1 [sic] dated as of July 10, 1998, to the
Note, Preferred Stock and Warrant Purchase Agreement among
the Registrant, ProEco, Inc., Tanknology/NDE Corporation,
2368692 Canada, Inc., Tanknology-NDE Construction Services,
Inc. and DH Holdings Corp. dated as of December 23, 1997
10.66 Amendment No. 5 dated as of November 5, 1998, to the Loan
Agreement by and between the Registrant, Tanknology-NDE
Construction Services, Inc., ProEco, Inc., 2368692 Canada,
Inc. and Bank One, Texas, N.A. dated as of October 25, 1996
- 39 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 ANNUAL REPORT ON FORM 10-KSB
No. Exhibit
------ -------------------------------------------------------------
10.67 Third Amendment dated as of December 7, 1998, to the Stock
Purchase Agreement dated as of October 27, 1996 by and
between the Registrant and Tanknology Environmental, Inc.
10.68 Amendment No. 2 to the Employment Agreement effective July
2, 1997 by and between the Registrant and A. Daniel Sharplin
21.01 Subsidiaries of the Registrant
23.2 Consent of Ernst & Young, LLP
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
- 40 -
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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.
Outbound Services, Inc., a California corporation, incorporated on March
22, 1993, is a wholly owned subsidiary of Tanknology-NDE International, Inc. and
does business under the name of Outbound Services, Inc.
<PAGE>
TANKNOLOGY-NDE INTERNATIONAL, INC.
1998 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 29, 1999 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 29 , 1999
-------------------------------------------- ----------
Jay Allen Chaffee
Chairman of the Board of Directors
/s/ DAVID G. OSOWSKI Dated: March 29 , 1999
-------------------------------------------- ----------
David G. Osowski
Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL and ACCOUNTING OFFICER)
/s/ CHARLES C. McGETTIGAN Dated: March 29 , 1999
-------------------------------------------- ----------
Charles C. McGettigan
Director
/s/ MICHAEL S. TAYLOR Dated: March 29 , 1999
-------------------------------------------- ----------
Michael S. Taylor
Director
/s/ MYRON A. WICK, III Dated: March 29 , 1999
-------------------------------------------- ----------
Myron A. Wick, III
Director
/s/ LAWRENCE K. LANDERS Dated: March 30 , 1999
-------------------------------------------- ----------
Lawrence K. Landers
Director
<PAGE>
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
Contents
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity (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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (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, 1998 and 1997, 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 19, 1999
F-2
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash .............................................................. $ 416,189 $ 193,627
Trade accounts receivable, less allowance for doubtful
accounts of $1,798,044 in 1998 and $1,066,331 in 1997 ....... 18,071,273 9,856,826
Inventories ....................................................... 1,218,271 482,107
Prepaid expenses and other current assets ......................... 521,909 1,149,950
------------ ------------
20,227,642 11,682,510
Restricted cash ........................................................ 3,000,000 3,000,000
Equipment and improvements, net ........................................ 8,109,097 4,812,500
Goodwill, net of accumulated amortization of $125,442 in 1998 .......... 2,401,115 --
Patents, licenses and other intangible assets, net of accumulated
amortization of $1,527,761 in 1998 and $1,169,104 in 1997 ......... 1,070,446 1,604,194
Deferred financing costs, net .......................................... 674,531 649,614
------------ ------------
Total assets ........................................................... $ 35,482,831 $ 21,748,818
============ ============
Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity ( Deficit)
Current liabilities:
Accounts payable .................................................. $ 4,874,180 $ 2,675,345
Accrued liabilities ............................................... 1,649,020 2,249,208
Accrued payroll and payroll taxes ................................. 4,363,312 1,959,273
Current portion of long-term debt and capital lease obligations ... 2,314,991 4,055,072
------------ ------------
13,201,503 10,938,898
Long-term debt and capital lease obligations ........................... 18,271,743 10,589,252
Deferred license revenue ............................................... 207,135 525,000
Redeemable Convertible Preferred Stock, at redemption value ............ 1,500,000 1,500,000
Stockholders' equity ( deficit):
Series AAA Convertible Preferred Stock, $.0001 par value; authorized 400 shares;
issued and outstanding no shares in 1998 and 1 share in
1997; stated at liquidation value of $5,000 per share ............. -- 5,000
Common Stock, $.0001 par value; authorized 50,000,000 shares; issued
and outstanding 16,735,040 and 15,978,610 at December 31, 1998
and 1997, respectively ............................................ 1,674 1,598
Warrants ............................................................... 321,000 291,000
Additional paid-in capital ............................................. 27,733,366 27,578,446
Accumulated deficit .................................................... (25,755,500) (29,659,297)
Cumulative foreign currency translation adjustment ..................... 1,910 (21,079)
------------ ------------
2,302,450 (1,804,332)
------------ ------------
Total Liabilities, Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) .................................... $ 35,482,831 $ 21,748,818
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31,
1998 1997
------------ ------------
Revenues ..........................................$ 66,845,455 $ 38,683,146
Cost of services .................................. 48,285,993 29,246,121
------------ ------------
Gross margin ...................... 18,559,462 9,437,025
Selling, general and administrative ............... 12,276,887 7,853,002
------------ ------------
Operating income .................................. 6,282,575 1,584,023
Other income (expense):
Interest expense ............................. (1,757,559) (3,205,475)
Interest income ..................... 124,304 97,800
Other income (expense), net .................. 64,210 (11,420)
------------ ------------
Income (loss) before provision for income taxes and
extraordinary gain ................................ 4,713,530 (1,535,072)
Provision for income taxes ........................ (809,733) (39,060)
Extraordinary gain ................................ -- 220,497
------------ ------------
Net income (loss) ................................$ 3,903,797 $ (1,353,635)
Less: Preferred stock dividends ................ (150,000) (3,288)
------------ ------------
Net loss available to common stock ................$ 3,753,797 $ (1,356,923)
============ ============
Basic income (loss) per share:
Before extraordinary gain ....................$ 0.23 $ (0.10)
Extraordinary gain ........................... - 0.01
------------ ------------
Basic income (loss) per share ....................$ 0.23 $ (0.09)
============ ============
Diluted income (loss) per share:
Before extraordinary gain ....................$ 0.16 $ (0.10)
Extraordinary gain ........................... - 0.01
------------ ------------
Diluted income (loss) per share ...................$ 0.16 $ (0.09)
============ ============
See accompanying notes.
F-4
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series AAA
Convertible Preferred
Stock Common Stock Warrants
- ------------------- -------------------- ------------------ ------------------ Additional Other Stockholders'
Shares Shares Shares Paid-in Accumulated Comprehensive Equity
Outstanding Amount Outstanding Amount Issuable Amount Capital Deficit Income (Deficit)
- -------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 1 $ 5,000 15,978,610 $1,598 - - $27,578,446 $(28,302,374) $ (17,125) (734,455)
Issuance of Warrants - - - - 4,850,000 $291,000 - - - $ 291,000
Dividend on
Redeemable Preferred
Stock - - - - (3,288) - (3,288)
Foreign currency
translation - - - - - - (3,954) (3,954)
Net loss - - - - - (1,353,635) - (1,353,635)
Comprehensive (loss) (1,357,589)
Balance at
December 31, 1997 1 $ 5,000 15,978,610 $1,598 4,850,000 $291,000 $27,578,446 $(29,659,297) $ (21,079) $ (1,804,332)
- -------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
</TABLE>
F-5
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
Series AAA
Convertible Preferred
Stock Common Stock Warrants
- ------------------- -------------------- ------------------ ------------------ Additional Other Stockholders'
Shares Shares Shares Paid-in Accumulated Comprehensive Equity
Outstanding Amount Outstanding Amount Issuable Amount Capital Deficit Income (Deficit)
- -------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1997 1 $ 5,000 15,978,610 $1,598 4,850,000 $291,000 $27,578,446 $(29,659,297) $ (21,079) $ (1,804,332)
- -------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
Issuance of Warrants 500,000 30,000 30,000
- -------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
Dividend on
Redeemable Preferred
Stock (150,000) (150,000)
Exercise of stock
options 175,556 18 21,924 21,942
Exercise of warrants 330,874 33 87,708 87,741
Issuance of common
stock in connection
with the
acquisition of OSI 250,000 25 195,288 195,313
Repurchase of Series
AAA Convertible
Preferred Stock (1) (5,000) (5,000)
Foreign currency
translation
adjustments 22,989 22,989
Net income 3,903,797 3,903,797
Total Comprehensive
income 3,926,786
Balance at December
31, 1998 - $ - 16,735,040 $1,674 5,350,000 $321,000 $27,733,366 $(25,755,500) $ 1,910 $ 2,302,450
====================================================================================================================================
</TABLE>
F-6
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................... $ 3,903,797 $(1,353,635)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain ..................................................... -- (220,497)
Write down of assets ................................................... -- 16,396
Depreciation ........................................................... 2,871,948 3,376,237
Amortization ........................................................... 426,811 534,878
Amortization of discounts and financing costs .......................... 280,330 1,366,713
Deferred license revenue earned ........................................ (161,371) (91,667)
Gain on sale of equipment .............................................. -- (22,758)
Other .................................................................. 22,989 (3,954)
Changes in operating assets and liabilities net of acquisitions and
dispositions:
Trade accounts receivable .................................................. (8,339,130) (4,121,276)
Inventories ................................................................ (736,164) (114,745)
Prepaid expenses and other current assets .................................. 650,762 (140,130)
Accounts payable ........................................................... 2,039,297 1,001,875
Accrued liabilities ........................................................ (1,036,729) (2,942,089)
Accrued payroll and payroll taxes .......................................... 2,317,017 489,487
----------- -----------
Net cash provided by (used in) operating activities .................... 2,239,557 (2,225,165)
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 ...................................................... (765,000) -
Capital expenditures ....................................................... (5,787,757) (2,841,530)
Proceeds from sale of equipment ............................................ - 80,258
Other ...................................................................... (29,909) (4,095)
----------- -----------
Net cash provided by (used in) investing activities .................... (6,582,666) 2,082,133
Net cash from financing activities:
Proceeds from issuance of long-term debt and warrants ...................... 2,335,280 6,500,000
Proceeds from issuance of common stock ..................................... 109,683 -
Preferred stock dividends .................................................. (150,000) -
Proceeds from issuance of redeemable convertible preferred stock ........... - 1,500,000
Deferred financing costs ................................................... (245,570) (299,363)
Payments on long-term debt ................................................. (5,378,722) (6,966,968)
Repurchase of series AAA convertible preferred stock ....................... (5,000) -
Proceeds from issuance of debt ............................................. 7,900,000 5,690,757
Repayment of long-term debt and warrants with put option ................... - (8,500,000)
----------- -----------
Net cash provided by (used in) financing activities .................... 4,565,671 (2,075,574)
Net change in cash .................................................... 222,562 (2,218,606)
Cash at beginning of year .................................................. 193,627 2,412,233
----------- -----------
Cash at end of year ........................................................ $ 416,189 $ 193,627
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the year
for:
Interest ...................................................... $ 1,312,861 $ 1,840,031
=========== ===========
Taxes ......................................................... $ 287,513 -
=========== ===========
Capital lease financing ................................................ $ 960,666 $ 170,704
=========== ===========
Items related to business acquisition:
Note payable issued in business acquisition ............................ $ 750,000 -
Common stock issued in business acquisition ............................ 195,313 -
Warrants issued in business acquisition ................................ 30,000 -
Liabilities incurred in business acquisition .......................... 239,601 -
<FN>
See accompanying notes
</FN>
</TABLE>
F-7
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
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 the Field Services and Management business segments.
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. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the consolidated financial statements for
years prior to December 31, 1998 have been reclassified to conform to the
current year presentation.
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.
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 management 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 accounted for approximately 23% and 21 %of the Company's revenues in
1998 and 1997 respectively. 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.
F-8
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
The estimated useful lives used in computing depreciation and amortization are
as follows:
Tank testing equipment 8 years
Furniture and fixtures 5 years
Vehicles 2 - 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.
Fair Values of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable reported in the consolidated balance sheets approximates the
fair market value. The carrying amount of the Company's long- term debt
approximates their fair value since most of this debt bears interest at variable
rates.
Advertising Costs
The Company accounts for advertising costs in accordance with AICPA
Statement of Position No. 93-7, Reporting on Advertising Costs. The Company
expenses advertising costs as incurred. Advertising expense was approximately
$333,000 and $238,000 in 1998 and 1997, respectively.
Income/(loss) per common share
Basic income/(loss) per share is computed by dividing net income/(loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period. The computation of diluted income/(loss) per
share is similar to basic income/(loss) per share, except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued. The
effect of the potentially dilutive common shares were not included in the
computation of diluted loss per share for the year ended December 31, 1997
because to do so would have been antidilutive.
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.
Comprehensive Income
Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. Tanknology's other
comprehensive income is primarily comprised of foreign currency translation
adjustments. The tax benefit or expense, as well as any reclassifications
related to the components of other comprehensive income were not significant.
F-9
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Segment Data
During 1998, the Company adopted Statement of Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131.
Disclosures about Segments of an Enterprise and Related Information. FAS 131
supersedes FAS 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal reporting that is used by management
for making operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosure about products
and services, geographic areas and major customers. The adoption of FAS 131 did
not affect results of operations or the financial position of Tanknology- NDE
but did affect the disclosure of segment information.
Year 2000 Compliance
The "Year 2000" issue results from an industry-wide practice of
representing years with only two digits instead of four. Beginning in the year
2000, date code fields will need to accept four digit entries to distinguish
twenty- first century dates from twentieth century dates (2000 or 1900). As a
result, in less than one year, computer systems and/or software used by many
companies may need to be upgraded to comply with such Year 2000 requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. FAS 133 is effective for transactions
entered into after January 1, 2000. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. Because of the company's minimal
use of derivatives, adoption of this statement will have not have a significant
impact on the Company's results of operations.
In February 1998, the FASB issued Statement 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The Statement supersedes the
disclosure requirements in Statements No. 87 Employers' Accounting for Pensions,
No. 88, Accounting for Settlements and Curtailments of Defined Benefits Pension
Plans and for Termination Benefits, and No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions. Statement 132 will have no affect
on the Company's results of operations, financial position or disclosures in the
future.
2. Business Acquisitions/Dispositions
Purchase of Outbound Services, Inc. (OSI)
On August 7, 1998, the Company purchased all of the outstanding stock of
OSI. OSI engages in the business of providing site service management to
primarily retail fuel and food service providers. It provides numerous service
capabilities to owners and operators of these sites such as seven-day,
twenty-four hour call center availability, contractor management and dispatch,
equipment warranty tracking and other services. The terms of the purchase called
for a cash payment of $765,000, a $750,000, 10% subordinated note payable
monthly in twenty four equal installments, the issuance of 250,000 shares of
common stock which were valued at $195,313, the issuance of warrants (valued at
$30,000) to purchase 500,000 shares common stock with an initial exercise price
of $2.00 (subject to downward adjustment based on the future performance of OSI)
and the assumption of certain debt and liabilities of the Company. The
acquisition was accounted for as a purchase and accordingly, the results of
operations of OSI from the date of the acquisition are included in the Company's
statement of operations. The purchase price is subject to adjustment if certain
assumed liabilities exceed the amounts specified in the purchase agreement
through a reduction in the principal amount of the subordinated note.
In addition to the purchase price paid to shareholders of OSI, the Company
incurred approximately $239,601 in fees and costs related to consummating and
F-10
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
effecting the acquisition.
The purchase price was recorded as follows:
Working capital, other than cash $ (288,251)
Property and equipment 75,071
Goodwill 2,469,269
Long-term liabilities (276,175)
-----------------
Purchase price, net of cash acquired $ 1,979,914
=================
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.
In December, 1998 the Company settled all of the remaining purchase price
adjustments with TEI resulting in a payment to the Company of $230,000 and the
reduction of certain indemnification limitations provided for in the Stock
Purchase Agreement on behalf of TEI from the previous limit of $1,250,000 to
$600,000 (see Note 12).
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
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.
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.
As a condition of approval of the USTMAN sale transaction by the Company's
senior bank, $3,000,000 of the cash proceeds has 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.
F-11
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
3. Equipment and Improvements
Equipment and improvements consist of the following:
At December 31,
1998 1997
------------ ------------
Equipment ...................................... $ 17,823,586 $ 13,805,523
Furniture and fixtures ......................... 191,679 154,046
Vehicles ....................................... 3,319,341 1,677,664
Equipment replacement parts .................... 161,500 161,500
Leasehold improvements ......................... 83,654 66,353
21,579,760 15,865,086
Less accumulated depreciation and amortization . (13,470,663) (11,052,586)
$ 8,109,097 $ 4,812,500
============ ============
The company leases vehicles and miscellaneous equipment under capital
leases. The gross amount of assets recorded under capital leases at December 31,
1998 and 1997 was $3,342,096 and $1,716,036, respectively. The related
accumulated amortization was $838,328 and $445,765 at December 31, 1998 and
1997, respectively.
4. Long-Term Debt
Long-term debt and financing agreements consist of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------------ ------------
<S> <C> <C>
Revolving line of credit ......................... $ 6,650,000 $ 1,792,667
Term loan ........................................ 4,200,000 4,800,000
------------ ------------
Senior secured bank debt ................ 10,850,000 6,592,667
Senior subordinated note ......................... 6,500,000 6,500,000
Less: Discount ................................... (210,322) (270,000)
------------ ------------
Senior subordinated note ................ 6,289,678 6,230,000
Capital lease obligations ........................ 966,413 222,167
Other collateralized notes
845,646 613,119
Other non-collateralized notes ................... 1,634,997 986,371
------------ ------------
Other long-term debt .................... 2,480,643 1,599,490
------------ ------------
Total long-term debt and capital lease obligations 20,586,734 14,644,324
Less: Current portion ............................ (2,314,991) (4,055,072)
------------ ------------
$ 18,271,743 $ 10,589,252
============ ============
</TABLE>
F-12
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Senior Secured Bank Debt
In 1998 the Company amended its Senior credit facilities to increase the
revolving credit line from $5,000,000 to $9,000,000 and to extend the term of
this facility by one year to December 2000 and to suspend amortization of the
5-year term note which matures at December 31, 2001 for six months. 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% (8.50% at December 31, 1998). The commitment fee related to the
unused portion of the $5 million line is 0.5%. The term loan bears interest at
prime plus 1.0% (8.75% at December 31, 1998) with monthly principal payments of
$100,000.
At December 31, 1998, the Company had $6,650,000 of borrowings outstanding
under the revolving credit line and also had $735,000 in letters of credit
outstanding. At December 31, 1998, there was approximately $1,615,000 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, prohibits payment of
dividends, make additional business acquisitions, repurchase shares of common
stock, make capital expenditures and make certain management changes. At
December 31, 1998, the Company was in compliance with the financial debt
covenants related to the Financing Agreements as amended in December 1998.
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, 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 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 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
F-13
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
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, 1998, 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 and interest payments begin March 31, 2000.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, 1998,
the note had a carrying value, net of unamortized discount, of $6,289,678. Under
the terms of the Note agreement, the Company is subject to certain restrictions
and covenants.
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.
Other Collateralized Notes
Other collateralized notes include financing arrangements collateralized by
the Company's common stock and a note collateralized by certain purchased
assets. Original maturities on the notes are 7 years with an interest rate of
7.5% per year.
Other Non-Collateralized Notes
Other non-collateralized notes consist of subordinated notes, a note for
purchased patent rights, a note for gauge financing and includes an 8.00% and
8.53% insurance note, payable in twelve monthly installments. The 10%
subordinated note related to the OSI purchase (see note 2) is payable in twenty
four equal installments. Interest on the other subordinated notes is payable
quarterly at 10%; principal is payable annually in equal amounts over five
years. The gauge financing note is payable in monthly installments and matures
in five years with an interest rate of prime plus 1% (8.75% at December 31,
1998). 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.
F-14
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
The aggregate annual maturities of long-term debt and financing agreements
at December 31, 1998 are as follows:
1999 $ 2,023,727
2000 10,954,847
2001 3,586,520
2002 2,930,290
2003 148,359
Thereafter 186,899
19,830,642
Less: Discount (210,321)
--------------------
$ 19,620,321
====================
5. Leases
The Company leases certain facilities, vehicles and equipment used in its
operations which are leased under noncancellable capital and operating lease
agreements which expire on various dates through 2002. Under the terms of most
of the leases, the Company is required to pay all taxes, insurance and
maintenance. Future minimum annual lease payments under these lease agreements
at December 31, 1998 were as follows:
Capital Operating
Leases Leases
------------------ -------------
1999 ......................................... $ 370,646 $ 593,047
2000 ......................................... 347,733 460,090
2001 ......................................... 321,099 191,081
2002 ......................................... 104,660 2,457
2003 ......................................... -- 204
1,144,138
----------
Less amounts related to interest ............. (177,725)
----------
Present value of capital lease obligations ... 966,413
Less current portion ......................... (281,264)
----------
Long-term capital lease obligations .......... $ 685,149
==========
Rent expense under operating leases totaled $628,045 in 1998 and $420,426
in 1997. As of December 31, 1998, approximately $13,338 of aggregate future
minimum rentals are due to the Company under noncancellable subleases.
6. 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-15
<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.
7. 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. During 1998,
the Company repurchased the one share which was outstanding at December 31,
1997.
Warrants
As of December 31, 1998, the Company had the following warrants
outstanding:
Number of Shares Issuable Exercise Price Expiration
25,924 $.150 April 1999
3,675 $.750 April 1999
34,360 $7.500 April 1999
4,000 $.150 May 1999
12,000 $7.500 May 1999
58,334 $11.400 December 1999
31,667 $21.000 December 1999
500,000 $2.000 December 2008
32,219 $25.800 December 1999
4,850,000 $.375 December 2002
- --------------------------
5,552,179
==========================
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.
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 1998 and 1997, respectively: risk-free interest rates of 6.00%
and 6.15%; no dividend yield; volatility factors of the expected market price of
the Company's common stock of .86 and 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-16
<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:
1998 1997
- ---------------------------------- ------------ -------------
Pro forma net income/(loss):
Before extraordinary gain $ 3,673,752 $ (1,829,913)
Extraordinary gain - 220,497
------------ -------------
Net income/(loss) $ 3,673,752 $ (1,609,416)
============ =============
Pro forma income/(loss) per share:
Basic:
Before extraordinary gain $ 0.22 $ (0.11)
Extraordinary gain - 0.01
------------ -------------
Net income/(loss) $ (0.10)
============ =============
Fully diluted:
Before extraordinary gain $ (0.15) $ (0.11)
Extraordinary gain - 0.01
------------ -------------
Net income/(loss) $ (0.15) $ (0.10)
============ =============
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
---------------------------- ----------------------------
1998 1997
---------------------------- ----------------------------
Weighted
Weighted Average Average Exercise
Options Exercise Price Options Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 5,131,929 $ 0.23 2,734,556 $ 0.18
Granted 748,650 0.63 2,528,040 0.30
Exercised (175,556) 0.13 - -
Canceled (78,333) 0.43 (130,667) 0.29
--------- ---------------- --------- ----------------
Outstanding-end of year 5,626,690 $ 0.29 5,131,929 $ 0.23
========= ================ ========= ================
Exercisable at end of year 3,063,160 $ 0.21 1,709,609 $ 0.17
========= ================ ========= ================
Weighted-average fair value of
options granted during the year $ 0.63 $ 0.23
========= =========
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$0.05 to $1.125. The weighted- average remaining contractual life of those
options is 7.4 years.
F-17
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
The following table summarizes outstanding options at December 31, 1998 by
price range:
Outstanding Exercisable
- --------------------------------------------- --------------------------
Weighted Weighted-Average Weighted
Number of Average Remaining Number of Average
Options Exercise Price Contractual Life Options Exercise Price
- --------- -------------- ---------------- --------- --------------
45,000 $ 0.05000 7 years 30,000 $ 0.05000
55,000 $ 0.09375 7.8 years 36,667 $ 0.09375
1,327,400 $ 0.12500 6.5 years 1,265,000 $ 0.12500
201,000 $ 0.15625 7.6 years 134,000 $ 0.15625
492,000 $ 0.18750 7.6 years 292,000 $ 0.18750
155,000 $ 0.25000 7.9 years 101,667 $ 0.25000
2,000,040 $ 0.28125 7 years 857,160 $ 0.28125
65,000 $ 0.31250 8.5 years 21,667 $ 0.31250
310,000 $ 0.40625 8 years 195,000 $ 0.40625
310,000 $ 0.43750 8.5 years 130,000 $ 0.43750
325,000 $ 0.50000 9.1 years - $ 0.50000
90,000 $ 0.62500 9.6 years - $ 0.62500
100,000 $ 0.78125 9.3 years - $ 0.78125
40,000 $ 0.81250 9.9 years - $ 0.81250
100,000 $ 1.00000 9.6 years - $ 1.00000
11,250 $ 1.12500 9.3 years - $ 1.12500
- --------- -------------- ---------------- --------- --------------
5,626,690 $ 0.28830 7.4 years 3,063,161 $ 0.21200
========= ============== ================ ========= ==============
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 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 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
carrying 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
F-18
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
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 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.
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 at December 31, 1998, under convertible
securities, options, warrants and other arrangements are detailed in the
following table:
Common Shares
Reserved for Issuance
---------------------
Warrants .................................................. 5,552,179
Stock Options ............................................. 6,250,000
Series A Redeemable Convertible Preferred Stock ........... 3,000,000
Shares issuable upon conversion of promissory notes ....... 14,835
Common shares reserved for issuance ..................... 14,817,014
=====================
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 1998 and 1997, Bunker Hill earned or incurred
reimbursable expenses totaling $374,601 and $380,785, respectively, associated
with both the aforementioned services contract and certain acquisition-related
fees. In July 1998 the Company also retained Bunker Hill, on behalf of Mr.
Chaffee to provide management and support services in connection with the
Company's environmental risk management function for a monthly fee of $4,250.
Accordingly, Bunker Hill, on behalf of Mr. Chaffee was paid a total of $25,500
for these services in 1998.
In December 1997, the Company entered into a series of agreements a 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
F-19
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
$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. Landers
is a Vice President of Veeder-Root and a director of the Company.
9. Income Taxes
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
1998 1997
-------------- ---------------
Current:
Federal $ 601,000 $ -
State 205,000 25,000
Foreign 4,000 14,000
-------------- ---------------
Total Current 810,000 39,000
Deferred:
Federal - -
State - -
Foreign - -
-------------- ---------------
Total Deferred - -
-------------- ---------------
$ 810,000 $ 39,000
============== ===============
The foreign taxes include withholdings on royalties from foreign countries.
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, 1998 and 1997
are as follows:
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 431,000 $ 989,000
Allowance for doubtful accounts 592,000 412,000
Nondeductible accruals 395,000 698,000
----------- -----------
Total deferred tax assets 1,418,000 2,099,000
Valuation allowance (645,000) (1,536,000)
Net deferred tax assets 773,000 563,000
Deferred tax liabilities:
Book over tax basis of depreciable
assets (773,000) (563,000)
Deferred taxes, net $ 0 $ 0
=========== ===========
The valuation allowance for deferred tax assets decreased by $891,000
during 1998 as a result of the combined effect of current year utilization of
net operating losses and current year activity which decreased the net amount of
deferred tax assets. At December 31, 1998, for income tax purposes, the Company
had net operating loss carryforwards of $21,990,000. 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.
Undistributed earnings of the Company's foreign subsidiaries were
immaterial as of December 31, 1998. Those earnings are considered permanently
reinvested, and accordingly, no provision for U.S. federal and/or state income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends or otherwise, the Company would be subject to U.S. federal income
tax (subject to an adjustment for foreign tax credits), state income tax, as
F-20
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
applicable, and additional foreign taxes, as applicable. Determination of the
amount of unrecognized U.S. federal income tax on those permanently reinvested
foreign earnings is not practicable because the amount is subject to the outcome
of future events.
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:
1998 1997
------------- -------------
Income taxes (benefit) at the statutory rate ..... $ 1,649,000 $ (460,000)
Change in valuation allowance .................... (891,000) 156,000
Tax benefit for Alternative Minimum Tax Credit ... (40,000) -
Nondeductible interest ........................... - 230,000
State taxes, net of Federal benefit .............. 133,000 25,000
Other, net ....................................... (41,000) 84,000
Tax rate differential - foreign jurisdictions .... - 4,000
----------- -----------
Income taxes ..................................... $ 810,000 $ 39,000
=========== ===========
10. Significant Customer
Sales to one customer comprised 23% of total revenue in 1998 and 21% in
1997. Loss of this customer would significantly and adversely impact the
Company's results of operations.
11. Commitments and Contingencies
Potential Liability and Insurance
The Company's and its licensees' tank testing activities, consistent with
the industry, present risks of substantial liability. Spills of petroleum
products and hazardous substances, or the creation or exacerbation of a
contamination problem through errors or omissions in tank testing, could result
in liability under federal and state anti-pollution statutes and regulations or
from tort claims by those suffering personal injury or property damage as a
result of such contamination. In addition, many of the Company's tank testing
services involve volatile substances such as gasoline. The Company or its
licensees could be held liable for damage to persons or property caused by any
resulting fire or explosion.
The Company carries professional and pollution liability insurance of up to
$2 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 deductibles of $1,000 to $5,000 per
occurrence. Additionally the Company carries general, auto and employers
liability insurance for its international operations. The Company believes that
the policies in force are expected to be sufficient to cover all current and
expected claims. The Company has not been denied any coverages sought. However,
there can be no assurance that all possible types of liabilities that may be
incurred by the Company are covered by its insurance or that the dollar amount
of such liabilities will not exceed the Company's policy limits. The occurrence
of any significant uninsured loss or liability would have a material adverse
effect on the Company's business, financial condition and results of operations.
F-21
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Litigation
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. As part of the
resolution of the remaining purchase price adjustments with TEI (see Note 2),
the Company agreed to reduce this indemnification limit to $600,000 for the
remaining period of the indemnification period. 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 was 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. This indemnification expired in 1998. The Company believes that
the liability assumed and recorded in its accounts and the indemnification from
the former owner of the UST Group are sufficient and that the indemnification is
enforceable and collectible such that the resolution of these matters will not
have a material adverse effect on the consolidated financial position or results
of operations of the Company.
The Company is also subject to various claims and litigation in the normal
course of business not directly related to the Acquisition. However, in the
opinion of management, the ultimate resolution of such matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
12. Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering all employees.
Employees are eligible to participate in the plan after thirty days of service.
At December 31, 1998, approximately 460 employees are eligible to participate in
the plan. The Company matches annually at its discretion. In 1998 the Company
amended the plan allowing for the Company to make a flat $500 per eligible
employee for 1998. In early 1999 the Company contributed $191,500 to the 401(k)
plan for its 1998 matching contribution. There was no Company contribution in
1997.
F-22
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
13. Income (loss) per share calculations
The following table sets forth the calculation of basic and diluted income
(loss) per share:
For the Year Ended
---------------------------
December 31,
---------------------------
1998 1997
----------- -----------
Numerator:
Net income (loss) ....................... $ 3,903,797 $(1,353,635)
Preferred stock dividends ............... (150,000) (3,288)
----------- -----------
Numerator for basic income (loss) per
share -income available to common
shareholders ............................ 3,753,797 (1,356,923)
Effect of dilutive securities - preferred
stock dividends ........................ 150,000 3,288
----------- -----------
Numerator for diluted income (loss)
per share .............................. $ 3,903,797 $(1,353,635)
=========== ===========
Denominator:
Denominator for basic income (loss)
per share - weighted-average shares 16,329,073 15,978,610
Effect of dilutive securities:
Stock options 3,835,323 --
Warrants 3,077,462 --
Convertible preferred stock 1,367,464 --
----------- -----------
Dilutive potential common shares 8,280,249 --
Denominator for diluted earnings (loss)
per share - adjusted weighted - average
shares and assumed conversions 24,609,322 15,978,610
=========== ===========
Basic income (loss) per share $ 0.23 $ 0.09
=========== ===========
Diluted income (loss) per share $ 0.16 $ (0.09)
=========== ===========
14. Segment Information
The Company manages its business segments primarily along two lines of
business, Field Services and Management Services. Field Services is comprised of
all services that are typically performed out of the Company's regional offices
by field technicians operating from the Company's fleet of rolling stock.
Management Services is comprised of Compliance Management Services,
International, Remote Monitoring, Maintenance Management and Construction
F-23
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Services. These services are primarily "back office" functions whereby the
Company manages customers' information, oversees compliance or construction
projects or performs technology licensing. These services are primarily
performed out of the Company's corporate office in Texas (Compliance Management,
Remote Monitoring, International) or offices in California (Maintenance
Management) and Georgia (Construction Management).
The accounting policies of the two segments are the same as those described
in the "Summary of Significant Accounting Policies" in Note 1. The Company
evaluates the performance of its segments based on segment profit. Segment
profit is defined as segment revenues less those direct costs associated with
the operations and does not include depreciation, amortization, interest
expense, income taxes or certain corporate expenses that are managed outside the
reportable segment such as the costs of the finance, marketing, information
technology, legal, executive management and national sales groups. The Company
does not allocate and manage its assets by segment. Accordingly, the Company
considers all assets to be Corporate assets and as such no allocation of assets
has been made.
Summary information by segment as of and for the years ended December 31,
1998 and 1997 is as follows:
1998 1997
-------------- --------------
Field Services:
Segment revenues .................... $53,922,391 $32,690,564
Segment profit ...................... 15,928,853 8,133,692
Management Services:
Segment revenues .................... 13,434,438 6,164,820
Segment profit ...................... $ 1,451,348 $ 893,666
Segment revenues in 1997 include $117,169 and $1,884,361, respectively, for
Canada and USTMAN, both of which were sold in 1997. Segment profits in 1997
include $34,259 and $618,602, respectively, for Canada and USTMAN.
A reconciliation of the Company's segment revenues and segment profit to
the corresponding consolidated amounts as of and for the years ended December
31, 1998 and 1997 is as follows:
1998 1997
------------ ------------
Segment revenues: ...................... $ 67,356,829 $ 38,855,384
Field Services revenues from
Management Services .................... (511,374) (172,238)
Consolidated revenues .................. $ 66,845,455 $ 38,683,146
1998 1997
------------ ------------
Segment net profit: .................... $ 17,380,201 $ 9,027,358
Corporate expenses ..................... (7,798,867) (3,532,220)
Depreciation and amortization .......... (3,298,759) (3,911,115)
Interest income ........................ 124,304 97,800
Interest expense ....................... (1,757,559) (3,205,475)
Other income/expense ................... 64,210 (11,420)
Income taxes ........................... (809,733) (39,060)
Extraordinary gain ..................... -- 220,497
Net Income ............................. $ 3,903,797 $ (1,353,635)
15. Subsequent events
F-24
<PAGE>
Tanknology-NDE International, Inc. and Subsidiaries
Veeder-Root and DH Holdings, Inc.
Subsequent to December 31, 1998, on February 8, 1999, the Company invoked
the Dispute Resolution provision to the Distribution, Services and Marketing
Agreement (DSM Agreement). In response to the Company's notice, Veeder-Root's
counsel advised the Company's counsel that Veeder-Root also invoked the Dispute
Resolution provisions of the DSM Agreement. At this time, the parties have
elected to continue informal negotiations rather than initiating a formal
arbitration process. The Company believes that the result of these negotiations
and or a formal arbitration proceeding with Veeder-Root will not have a
significant adverse affect on the balances of the Note Payable, Preferred Stock
and Warrants and the related Accounts Receivable from Veeder-Root at December
31, 1998.
Additionally, the Company believes any potential claims DH Holdings, Inc.
may have regarding the Purchase Agreement will not have a significant adverse
effect on the balance sheet at December 31,1998, or results of operations for
the year ended December 31, 1998.
F-25
Exhibit 10.64
AMENDMENT NO. 4 TO LOAN AGREEMENT
DATED OCTOBER 25, 1996
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.
This Amendment No. 4 ("Fourth Amendment") to the Loan Agreement dated as of
the 25th day of October, 1996, as amended (the "Loan Agreement"), by and among
TANKNOLOGY-NDE INTERNATIONAL, INC. (formerly known as NDE ENVIRONMENTAL
CORPORATION) ("NDE"), a Delaware corporation, TANKNOLOGY/NDE CORPORATION, a
Delaware corporation, PROECO, INC., a Delaware corporation, 2368692 CANADA, INC.
(formerly known as TANKNOLOGY CANADA (1988) INC.), a Canadian federal
corporation, and TANKNOLOGY-NDE CONSTRUCTION SERVICES, INC., a Delaware
corporation (collectively, "Borrower") and BANK ONE, TEXAS, N.A., a national
banking association (the "Bank") is entered into this 26th day of June 1998.
W I T N E S S E T H:
WHEREAS, Borrower and Bank entered into the Loan Agreement on October 25,
1996, as amended by the First Amendment dated April 10, 1997, the Second
Amendment dated May 20, 1997, and the Third Amendment dated December 23, 1997;
WHEREAS, Borrower desires to increase the Revolving Commitment under the
Loan Agreement;
WHEREAS, Borrower desires to increase the advance rate on the Revolving
Commitment under the Loan Agreement;
WHEREAS, Borrower desires to include Borrower's Inventory in the Borrowing
Base calculation;
WHEREAS, Borrower desires to extend the Revolving Commitment Termination
Date of the Revolving Note;
WHEREAS, Bank is willing to agree to the foregoing in accordance with, and
subject to, the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
-1-
<PAGE>
I. Amendments to Loan Agreement.
Any and all references to "NDE ENVIRONMENTAL CORPORATION" as an existing
Borrower is hereby replaced with "TANKNOLOGY-NDE INTERNATIONAL, INC." and any
and all references to "TANKNOLOGY CANADA (1988) INC." as an existing Borrower is
hereby replaced with "2368692 CANADA, INC."
Article I, DEFINITIONS, is amended by revising the following defined terms
(or their designated subparts) in their entirety to read as follows:
"Accounts," "Chattel Paper," "Contracts," "Documents," "Equipment,"
"Fixtures," "General Intangibles," "Goods," "Instruments," and
"Inventory", except as may be expressly provided otherwise in the Loan
Agreement, shall have the same respective meanings as are given to
those terms in the Uniform Commercial Code as presently adopted and in
effect in the State of Texas.
"Borrowing Base" means, at any time, the lesser of: (a) $9,000,000.00;
or (b) the amount accurately computed on the Borrowing Base
Certificate most recently delivered to, and accepted by, the Bank in
accordance with Section 2.06 and other relevant provisions of this
Agreement, and equal to eighty percent (80%) of Eligible Accounts of
the Borrower, plus the lesser of (i) fifty percent (50%) of the
then-current market value of Borrower's Inventory, or (ii)
$500,000.00.
"Eligible Account" . . . (N) No more than 25% of account debtor's
aggregate account total fails to satisfy clause (H) of this
definition;
"Maximum Commitment Amount" means $9,000,000.00 as of the date of the
Fourth Amendment.
"Permitted Liens" . . . (I) Purchase money security interests granted
to secure not more than eighty percent (80%) of the purchase price of
assets, except as permitted by Sections 6.14 and 6.15, the purchase of
which does not violate this Agreement or any instrument required
hereunder;
"Revolving Commitment Termination Date" means December 31, 2000.
"Revolving Note" means that certain promissory note in the original
face amount of $9,000,000.00 dated of even date with the Fourth
Amendment made by the Borrower payable to the order of the Bank in the
form attached as Exhibit "A" to the Fourth Amendment, together with
all deferrals, renewals, extensions, amendments, modifications or
rearrangements thereof, which promissory note shall evidence certain
advances to the Borrower by the Bank pursuant to Section 2.01 of the
Loan Agreement.
"Term Note Rate" means a per annum interest rate equal to the BANK ONE
Base Rate in effect from time to time plus one percent (1.0%).
-2-
<PAGE>
Article I, DEFINITIONS, is further amended by adding the following
definition:
"Fourth Amendment" means Amendment No. 4 to this Loan Agreement,
executed by Borrower and Bank on June 26, 1998.
Article II, THE LOAN, of the Loan Agreement is hereby amended by revising
the following section in its entirety to read as follows:
2.05 Payments of Term Loan Principal. For the period beginning on July 1,
1998 until December 1, 1998 principal payments of the Loan evidenced by the
Term Note shall not be due, except as provided in Section 2.08. The
principal of the Loan evidenced by the Term Note will be repaid in
thirty-six (36) equal consecutive monthly installments in the amount of
$100,000.00 each, beginning on January 1, 1999, and continuing on the first
day of each calendar month thereafter until the Term Loan Maturity Date,
when the entire unpaid principal amount then outstanding of the Term Note
shall be due and payable.
Section 5.21 of the Loan Agreement, as amended by the Third Amendment, is
hereby amended by revising that section in its entirety to read as follows:
5.21 Debt Service Coverage Ratio. Maintain a Debt Service Coverage Ratio of
not less than 1.20 to 1.0: (a) for the six (6) months ending June 30, 1998,
it shall be calculated on a six- month basis; (b) for the nine (9) months
ending September 30, 1998, it shall be calculated on a nine-month basis;
and (c) for the twelve (12) months ending December 31, 1998 and thereafter,
it shall be calculated on a rolling four-quarter basis.
Section 5.22 General and Administrative Expenses is hereby amended by
replacing the reference therein to "30%" with "25%" and is further amended by
replacing the reference therein to "December 31, 1997" with "June 30, 1998".
Section 6.01 Other Indebtedness, as amended by the Third Amendment, is
hereby further amended by replacing the reference in Subsection (I) to
"$750,000.00" with "$1,000,000.00".
Section 6.11 Restricted Payments, as amended by the Third Amendment, is
hereby amended by moving the word "or" from immediately preceding Subsection (D)
of that section to immediately preceding the period at the end of that section
and is further amended by adding the following subsection thereto:
"(E) use cash consideration for the purpose of any stock or asset
acquisition of or from any Person in an amount that exceeds in the
aggregate $2,000,000.00"
Section 6.14 Capital Expenditures Limitation, as amended by the Third
Amendment, is hereby further amended by replacing the clause therein which reads
"$2,500,000.00 in the 1998 fiscal year" with "$3,000,000.00 in the 1998 fiscal
year" and by replacing the clause therein which reads "not more than
$750,000.00" with "not more than $1,000,000.00".
-3-
<PAGE>
"Exhibit A-1," the form of Revolving Note attached to the Loan Agreement,
as amended by the Third Amendment and therein referred to as "Exhibit A", is
hereby replaced with Exhibit "A" attached to the Fourth Amendment.
"Exhibit B," the form of Compliance Certificate attached to the Loan
Agreement, as amended by the Third Amendment, is hereby replaced with Exhibit
"B" attached to the Fourth Amendment.
"Exhibit C," the form of Borrowing Base Certificate attached to the Loan
Agreement, as amended by the Third Amendment, is hereby replaced with Exhibit
"C" attached to the Fourth Amendment.
"Exhibit D-1" the form of Opinion of Counsel for Borrower attached to the
Loan Agreement, as amended by the Third Amendment and therein referred to as
"Exhibit G-1", is hereby replaced with Exhibit "D" attached to the Fourth
Amendment.
"Schedule 1.01(a), Collateral" attached to the Loan Agreement, as amended
by the Second and Third Amendments, is hereby replaced with Schedule 1.01(a),
Collateral attached to this Fourth Amendment.
"Schedule 3.10, Collateral Documents" attached to the Loan Agreement is
hereby replaced with Schedule 3.10, Collateral Documents attached to this Fourth
Amendment.
II. Conditions to the Effectiveness of the Fourth Amendment. As a condition
to the effectiveness of the Fourth Amendment by Bank, Borrower has satisfied the
following conditions:
A. Receipt of Amended and Restated Revolving Note, Fourth Amendment
and Certificate of Compliance. The Bank shall have received the Amended and
Restated Revolving Note (the form of which is attached hereto as Exhibit
"A"), multiple counterparts of this Fourth Amendment, as requested by the
Bank and the Compliance Certificate duly executed by an authorized officer
for each Borrower (the form of which is attached hereto as Exhibit "B");
B. Receipt of Certified Copy of Corporate Proceedings and Certificate
of Incumbency. The Bank shall have received from each Borrower copies of
all resolutions of its board of directors with respect to the transactions
set forth in this Fourth Amendment and the execution of this Fourth
Amendment and the Amended and Restated Revolving Note, such copy or copies
to be certified by the Secretary or an Assistant Secretary as being true
and correct and in full force and effect as of the date hereof. In
addition, the Bank shall have received from each Borrower a certificate of
incumbency signed by the Secretary or an Assistant Secretary setting forth
(a) the names of the officers executing this Fourth Amendment and the
Amended and Restated Revolving Note, (b) the office(s) to which such
Persons have been elected and in which they presently serve and (c) an
original specimen signature of each such person.
C. Receipt of the Certified Copy of Corporate Proceedings and
Certificate of Incumbency. Bank shall have received from DH Holdings Corp.
("DHH"), copies of all resolutions of their boards of directors with
-4-
<PAGE>
respect to the transactions contemplated by the this Fourth Amendment and
the First Amendment to the Intercreditor and Subordination Agreement, such
copy or copies to be certified by the Secretary or an Assistant Secretary
as being true and correct and in full force and effect as of the date
hereof. In addition, the Bank shall have received from DHH a certificate of
incumbency signed by the Secretary or an Assistant Secretary setting forth
(a) the names of the officers executing First Amendment to the
Intercreditor and Subordination Agreement, (b) the office(s) to which such
Persons have been elected and in which they presently serve and (c) an
original specimen signature of each such person.
D. Receipt of the First Amendment to Intercreditor and Subordination
Agreement. Borrower, DHH and Bank shall have entered into a First Amendment
to Intercreditor and Subordination Agreement in the form attached as
Exhibit "E".
E. Receipt of the Second Amended and Restated Standby Commitment.
Bank, Borrower and Proactive Partners, L.P. ("Proactive") shall have
entered into a Second Amended and Restated Standby Commitment in the form
attached as Exhibit "F".
F. Facility Fee. As partial consideration for its agreement to the
terms of the Fourth Amendment, Bank shall have received $40,000 prior to or
contemporaneous with the execution of the Fourth Amendment.
G. Borrower's Opinion of Counsel. Bank shall have received from
counsel for Borrower written opinions in the form set forth on Exhibit "D"
attached to the Fourth Amendment.
H. Satisfaction of Conditions to Fourth Amendment. Upon the
satisfaction of the conditions to the effectiveness of this Fourth
Amendment, as set forth in this Article II hereof, Borrower shall execute
and deliver to Bank a Certificate of Compliance, and if Bank has been
reasonably satisfied that such conditions have been fulfilled, Bank shall
contemporaneously provide a letter to Borrower and DHH stating "Bank One,
Texas, N.A. is satisfied that the conditions set forth in Article II of the
Fourth Amendment to that certain Loan Agreement dated October 25, 1996,
among the Bank and Tanknology-NDE International, Inc. et al. have been
fulfilled," whereupon this Fourth Amendment shall become effective.
III. Reaffirmation of Representations and Warranties. To induce Bank to
enter into this Fourth Amendment, Borrower hereby reaffirms, as of the date
hereof, its representations and warranties contained in Article IV of the Loan
Agreement and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this Fourth Amendment and the
performance by Borrower of its obligations under this Fourth Amendment are
within the Borrower's corporate power, have received all necessary
governmental approval (if any shall be required), and do not and will not
contravene or conflict with any provision of law or of any agreement
binding upon the Borrower.
-5-
<PAGE>
B. The Loan Agreement as amended by this Fourth Amendment represents
the legal, valid and binding obligations of Borrower, enforceable against
Borrower in accordance with its terms subject as to enforcement only to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general
principles of equity.
C. No Event of Default or Unmatured Event of Default has occurred and
is continuing as of the date hereof.
IV. Defined Terms. Except as amended hereby, terms used herein that are
defined in the Loan Agreement shall have the same meanings herein.
V. Reaffirmation of Loan Agreement. This Fourth Amendment shall be deemed
to be an amendment to the Loan Agreement, and the Loan Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Loan Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the Loan
Agreement as amended hereby.
VI. Entire Agreement. The Loan Agreement, as hereby amended, embodies the
entire agreement between Borrower and Bank, and supersedes all prior proposals,
agreements and understandings relating to the subject matter hereof. Borrower
certifies that it is relying on no representation, warranty, covenant or
agreement except for those set forth in the Loan Agreement as hereby amended and
the other documents previously executed or executed of even date herewith.
VII. Governing Law. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. This Fourth Amendment has been entered
into in Harris County, Texas, and it shall be performable for all purposes in
Harris County, Texas. Courts within the State of Texas shall have jurisdiction
over any and all disputes between Borrower and Bank, whether in law or equity,
including, but not limited to, any and all disputes arising out of or relating
to this Fourth Amendment or any other Loan Document; and venue in any such
dispute whether in federal or state court shall be laid in Harris County, Texas.
VIII. Severability. Whenever possible each provision of this Fourth
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Fourth Amendment shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Fourth Amendment.
IX. Execution in Counterparts. This Fourth Amendment may be executed in any
number of counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same agreement.
X. Section Captions. Section captions used in this Fourth Amendment are for
convenience of reference only, and shall not affect the construction of this
Fourth Amendment.
-6-
<PAGE>
XI. Successors and Assigns. This Fourth Amendment shall be binding upon the
Borrower and Bank and their respective successors and assigns, and shall inure
to the benefit of the Borrower and Bank, and the respective successors and
assigns of Bank.
XII. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of
Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article
5069-15) are specifically declared by the parties hereto not to be applicable to
the Loan Agreement as hereby amended or any of the other Loan Documents or to
the transactions contemplated hereby.
XIII. Notice. THIS FOURTH AMENDMENT TOGETHER WITH THE LOAN AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed as of the day and year first above written.
BORROWER:
TANKNOLOGY-NDE INTERNATIONAL, INC.
(formerly known as NDE ENVIRONMENTAL
CORPORATION)
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY/NDE CORPORATION
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY-NDE CONSTRUCTION
SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
PROECO, INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
2368692 CANADA, INC.(formerly known as
TANKNOLOGY CANADA (1988) INC.)
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
President
-8-
<PAGE>
BANK:
BANK ONE, TEXAS, N.A.
By: //s// Charles Kingswell-Smith
-------------------------------
Charles Kingswell-Smith
Senior Vice President
-9-
<PAGE>
SCHEDULE 1.01(a)
COLLATERAL
Tanknology-NDE International, Inc.
(a) Pledged Stock of Tanknology/NDE Corporation, a Delaware
corporation, Tanknology-NDE Construction Services, Inc., a
Delaware corporation, ProEco, Inc., a Delaware corporation,
and 2368692 Canada, Inc., a Canadian federal corporation
(b) Bank Accounts and Pledged Certificates of Deposit
(c) Inventory
Tanknology/NDE Corporation
(a) Bank Accounts
(b) Accounts Receivable
(c) Vehicles
(d) Diagnostic Equipment (including equipment on Vehicles)
(e) Inventory
(f) Furniture and Office Equipment
(g) Patents
(h) Trademarks
(i) Proprietary Software
(j) Licensing Agreements
ProEco, Inc.
(a) Accounts Receivable
(b) Bank Accounts
(c) Furniture and Office Equipment
(d) Licensing Agreements
(e) Inventory
Tanknology-NDE Construction Services, Inc.
(a) Accounts Receivable
(b) Bank Accounts
(c) Patents
(d) Furniture and Office Equipment
(e) Licensing Agreements
(f) Inventory
1.01(a)-1
<PAGE>
SCHEDULE 3.10
COLLATERAL DOCUMENTS
1. Stock Powers executed by Tanknology-NDE International, Inc.
a. Tanknology/NDE Corporation dated October 25, 1996
b. ProEco, Inc. dated October 25, 1996
c. 2368692 Canada, Inc. dated October 25, 1996
d. Tanknology-NDE Construction Services, Inc. dated December
23, 1997
2. Security Agreements
a. Tanknology-NDE International, Inc. and Bank One, Texas dated
October 25, 1996
b. Tanknology/NDE Corporation and Bank One, Texas dated October
25, 1996
c. ProEco, Inc. and Bank One, Texas dated October 25, 1996
d. Tanknology-NDE Construction Services, Inc. dated December
23, 1997
3. Financing Statements
Tanknology-NDE International, Inc.
CALIFORNIA: Secretary of State
DELAWARE: Secretary of State
TEXAS: Secretary of State & Travis County
ProEco, Inc.
DELAWARE: Secretary of State
TEXAS: Secretary of State & Travis County
Tanknology/NDE Corporation
CALIFORNIA: Secretary of State
DELAWARE: Secretary of State
GEORGIA: Gwinnett County
ILLINOIS: Secretary of State
MASSACHUSETTS: Secretary of Commonwealth & Agawam Township
MISSOURI: Secretary of State
NEW JERSEY: Secretary of State
OHIO: Secretary of State & Fairfield/Franklin Counties
TEXAS: Secretary of State & Travis County
Tanknology-NDE Construction Services, Inc.
DELAWARE: Secretary of State
TEXAS: Secretary of State
4. Certificate of Title Liens
Tanknology/NDE Corporation
3.10-1
<PAGE>
5. Assignments of Patents
ProEco, Inc.
Tanknology/NDE Corporation
6. Assignments of Trademarks
Tanknology/NDE Corporation
3.10-2
<PAGE>
EXHIBIT "A"
AMENDED AND RESTATED REVOLVING NOTE
$9,000,000.00 June 26, 1998
FOR VALUE RECEIVED, TANKNOLOGY-NDE INTERNATIONAL, INC., a Delaware
corporation, TANKNOLOGY/NDE CORPORATION, a Delaware corporation, PROECO, INC., a
Delaware corporation, TANKNOLOGY-NDE CONSTRUCTION SERVICES, INC., a Delaware
corporation, and 2368692 CANADA, INC., a Canadian federal corporation, all of
the foregoing having an address at 8900 Shoal Creek, Bldg. 200, Austin, Texas
78757, (collectively, "Borrower") unconditionally promise to pay to the order of
BANK ONE, TEXAS, NATIONAL ASSOCIATION, (herein called "Bank"), at its offices at
910 Travis, Houston, Texas 77002, the principal sum of NINE MILLION DOLLARS
($9,000,000.00) or, if less, the aggregate unpaid principal amount of all
Revolving Loans (as defined in the Loan Agreement) made by the Bank to the
Borrower pursuant to the Loan Agreement, as shown in the records of the Bank,
outstanding on such date.
The undersigned also promise to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement; provided,
however, that in no event shall such interest exceed the Maximum Rate (as
hereinafter defined).
"Maximum Rate" means the Maximum Rate of non-usurious interest permitted
from day to day by Applicable Law.
"Applicable Law" means that law in effect from time to time and applicable
to this Note which lawfully permits the charging and collection of the highest
permissible lawful, non-usurious rate of interest on this Note, including laws
of the State of Texas and laws of the United States of America. It is intended
that Article 1.04, Title 79, Revised Civil Statutes of Texas, 1927, as amended
(Article 5069-1.04, as amended, Vernon's Texas Civil Statutes) shall be included
in the laws of the State of Texas in determining Applicable Law; and for the
purpose of applying said Article 1.04 to this Note, the interest ceiling
applicable to this Note under said Article 1.04 shall be the indicated weekly
rate ceiling from time to time in effect. The Borrower and the Bank hereby agree
that Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of Texas, 1925,
as amended, shall not apply to this Note or the loan transaction evidenced by,
and referenced in, the Loan Agreement (hereinafter defined) in any manner,
including without limitation, to any account or arrangement evidenced or created
by, or provided for in, this Note.
In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum amount
of interest which, under Applicable Law, could be lawfully charged on this Note.
------------
Initial for
Identification
A-1
<PAGE>
The Bank and the Borrower specifically intend and agree to limit contractually
the interest payable on this Note to not more than an amount determined at the
Maximum Rate. Therefore, none of the terms of this Note or any other instruments
pertaining to or securing this Note shall ever be construed to create a contract
to pay interest at a rate in excess of the Maximum Rate, and neither the
Borrower nor any other party liable herefor shall ever be liable for interest in
excess of that determined at the Maximum Rate, and the provisions of this
paragraph shall control over all provisions of this Note or of any other
instruments pertaining to or securing this Note. If any amount of interest taken
or received by the Bank shall be in excess of the maximum amount of interest
which, under Applicable Law, could lawfully have been collected on this Note,
then the excess shall be deemed to have been the result of a mathematical error
by the parties hereto and shall be refunded promptly to the Borrower. All
amounts paid or agreed to be paid in connection with the indebtedness evidenced
by this Note which would under Applicable Law be deemed "interest" shall, to the
extent permitted by Applicable Law, be amortized, prorated, allocated and spread
throughout the full term of this Note.
This Note is the Revolving Note referred to in and is entitled to the
benefits of a certain Loan Agreement, dated as of October 25, 1996, as amended
by that First Amendment dated April 10, 1997, that Second Amendment dated May
20, 1997, that Third Amendment dated December 23, 1997 and that Fourth Amendment
dated of even date herewith (as the same may be further amended, modified,
supplemented, extended, rearranged and/or restated from time to time, the "Loan
Agreement"), entered into by and among Tanknology-NDE International, Inc.,
(f/k/a NDE Environmental Corporation) et al., as Borrower, and Bank One, Texas,
National Association and secured by the Collateral Documents (as such term is
defined in the Loan Agreement). Reference is hereby made to the Loan Agreement
for a statement of the prepayment rights and penalties and obligations of the
Borrower, a description of the properties and assets mortgaged, encumbered and
assigned, the nature and extent of the security and the rights of the parties to
the Collateral Documents in respect of such security, and for a statement of the
terms and conditions under which the due date of this Note may be accelerated.
Upon the occurrence of any Event of Default as specified in the Loan Agreement,
the principal balance hereof and the interest accrued hereon may be declared to
be forthwith due and payable in accordance with the Loan Agreement, and any
indebtedness of the holder hereof to the Borrower may be appropriated and
applied hereon.
In addition to and not in limitation of the foregoing, the undersigned
further agrees, subject only to any limitation imposed by applicable law, to pay
all reasonable expenses, including reasonable attorneys' fees and legal
expenses, incurred by the holder of this Note in endeavoring to collect any
amounts payable hereunder which are not paid when due, whether by acceleration
or otherwise.
All parties hereto, whether as makers, endorsees, or otherwise, severally
waive presentment for payment, demand, protest, notice of intent to accelerate,
notice of acceleration and notice of dishonor.
This Note is issued in substitution for, and in replacement, modification,
rearrangement, renewal and extension of, but not in extinguishment of, the
outstanding principal indebtedness evidenced by that certain note of
------------
Initial for
Identification
A-2
<PAGE>
Tanknology-NDE International, Inc. (f/k/a NDE Environmental Corporation),
Tanknology/NDE Corporation, ProEco, Inc., 2368692 Canada, Inc. (f/k/a/
Tanknology Canada (1988) Inc.) and Tanknology-NDE Construction Services, Inc.,
dated December 23, 1997, payable to the order of Bank One, Texas, N.A. in the
original principal sum of $5,000,000.00, (the "Prior Note"); it being
acknowledged and agreed by Borrower that the indebtedness evidenced by this Note
constitutes an extension and renewal of the outstanding principal indebtedness
evidenced by the Prior Note, and that all security interests and other liens
which secure the repayment of the Prior Note shall continue to secure the
indebtedness evidenced by this Note.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE
OF TEXAS AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
EXECUTED this 26th day of June, 1998.
TANKNOLOGY-NDE INTERNATIONAL,
INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY/NDE CORPORATION
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY-NDE CONSTRUCTION
SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
PROECO, INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
Chairman of the Board
2368692 CANADA, INC.
By: //s// JAY ALLEN CHAFFEE
-------------------------------
Jay Allen Chaffee
President
A-3
<PAGE>
EXHIBIT "B"
Compliance Certificate
I, the ____________________________ of TANKNOLOGY-NDE INTERNATIONAL, INC.
(the "Company"), pursuant to Section 5.05 of the Loan Agreement dated as of
October 25, 1996, as amended by the First Amendment dated April 10, 1997, the
Second Amendment dated May 20, 1997, the Third Amendment dated December 23,
1997, and the Fourth Amendment dated June 26, 1998, by and among BANK ONE,
TEXAS, N.A. ("Bank") and the Company et al. (the "Agreement") do hereby certify,
as of the date hereof, that to my knowledge:
1. No Event of Default (as defined in the Agreement) has
occurred and is continuing, and no Unmatured Event of
Default (as defined in the Agreement) has occurred and is
continuing except for the following events (include actions
taken to cure such situations):
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
-----------------------------;
2. No material adverse change has occurred in the condition,
financial or otherwise, of the Company since
----------------;
3. Except as otherwise stated in the Schedule, if any, attached
hereto, each of the representations and warranties of the
Company contained in Article IV of the Agreement is true and
correct in all respects; and
B-1
<PAGE>
4. The Company's financial condition for the month ending
__________ is as follows:
<TABLE>
<CAPTION>
Financial Covenant Time Period Required Ratio Actual Ratio
<S> <C> <C> <C>
================================= ============== ============================================================= ==============
(a) Net Worth Term of Loan Not less than the Consolidated Net Worth as of 12/31/97,
with allowable cumulative interim losses during fiscal year
1998 of not more than $1,000,000.00 (tested as of the end of
each calendar quarter), and as of 12/31/98, and thereafter,
maintain at least the Consolidated Net Worth in effect
12/31/97 plus 70% of Borrower's Net Income (if positive)
after 12/31/98.
(b) Capital Expenditures Term of Loan Not more than $3,000,000 for fiscal 1998 and $2,000,000 for
each year thereafter.
(c) Debt Service Coverage Ratio Term of Loan Not less than 1.2 to 1.0
(d) Adjusted Liabilities to Term of Loan 12/23/97 - 6/30/98 not more than 2.25 to 1.0; 7/1/98 -
Adjusted Net Worth 9/30/98 not more than 2.00 to 1.0; 10/1/98 - 6/30/99 not
more than 1.75 to 1.0; 7/1/99 - 12/31/99 not more than 1.25
to 1.0; and after 12/31/99 not more than 1.0 to 1.0.
================================= ============== ============================================================= ==============
</TABLE>
This certificate is executed this ___ day of ___________ 199__.
TANKNOLOGY-NDE INTERNATIONAL, INC.
-----------------------------------
By: ______________________________
Its: ______________________________
B-2
<PAGE>
EXHIBIT "C"
BORROWING BASE CERTIFICATE
I, the ___________________________ of TANKNOLOGY-NDE INTERNATIONAL, INC.
(the "Company"), pursuant to Section 2.06 of the Loan Agreement dated as of
October 25, 1996, as amended by the First Amendment dated April 10, 1997, the
Second Amendment dated May 20, 1997, the Third Amendment dated December 23,
1997, and the Fourth Amendment dated as of June 26, 1998, by and among BANK ONE,
TEXAS, N.A. ("Bank") and the Company et al. (the "Agreement") do hereby certify,
as of the date hereof, that to my knowledge:
1. The Borrowing Base calculated pursuant to the Agreement effective as of
____________, 199__, is $___________.
2. The Borrowing Base stated in paragraph 1 hereof is the lesser of (a)
$9,000,000.00, or (b) eighty percent (80%) of Eligible Accounts of the Borrower,
plus the lesser of (i) fifty percent (50%) of the then-current market value of
Borrower's Inventory, or (ii) $500,000.00.
3. The Eligible Accounts of the Borrower total $_________, which is
comprised of the following components:
a. Total of Accounts meeting the following criteria: $___________
(1) The Account arose from a bona fide outright sale of Goods by
the Borrower or from bona fide services performed by the Borrower, and
such Goods have been shipped to the appropriate account debtors or
their designees (or the sale has otherwise been consummated), or the
services have been performed for the appropriate account debtors;
(2) The Account is based upon an enforceable order or contract,
written or oral, for Goods shipped or held or for services performed,
and the same were shipped, held, or performed in accordance with such
order or contract;
(3) The title of the Borrower to the Account and, except as to
the account debtor, to any Goods is absolute and is not subject to any
prior assignment, claim, lien, or security interest, except Permitted
Liens;
(4) The amount shown on the books of the Borrower and on any
invoice or statement delivered to the Bank is owing to the Borrower;
and
(5) The account debtor has not returned or refused to retain, or
otherwise notified the Borrower of any dispute concerning, or claimed
nonconformity of, any of the Goods or services from the sale of which
the Account arose;
C-1
<PAGE>
b. Minus the sum of:
(1) $____________ for any claim of reduction, counterclaim,
set-off, recoupment, or any claim for credits, allowances, or
adjustments by the account debtor of any of the foregoing Accounts,
because of returned, inferior, or damaged Goods or unsatisfactory
services, or for any other reason;
(2) $____________ for any partial payment that has been made on
any of the foregoing Accounts by anyone;
(3) $____________ for any part of any of the foregoing Accounts
that is due and payable more than thirty (30) days from the date of
the invoice therefor;
(4) $____________ for any part of any of the foregoing Accounts
is more than ninety (90) days past due or is outstanding more than one
hundred twenty (120) days from the date of the invoice therefore;
(5) $____________ for any of the foregoing Accounts that arise
out of a contract with, or order from, an account debtor that, by its
terms, forbids or makes void or unenforceable the assignment by the
Borrower to the Bank of the Account arising with respect thereto;
(6) $____________ for the amount or value of any note, trade
acceptance, draft, or other Instrument with respect to, or in payment
of, any of the foregoing Accounts, or any Chattel Paper with respect
to the Goods giving rise to any such Account, unless, if any such
Instrument or Chattel Paper has been received, the Borrower has
notified the Bank and, at the Banks's request, has endorsed or
assigned and delivered the same to the Bank;
(7) $____________ for any Account payable by an account debtor as
to which the Borrower has received any notice of the death of the
account debtor or a partner thereof; or of the dissolution,
termination of existence, insolvency, business failure, appointment of
a receiver for any part of the property of, assignment for the benefit
of creditors by, or the filing of a petition in bankruptcy or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against, the account debtor;
(8) $____________ for any Account payable by an account debtor
that is a Subsidiary or other Affiliate of the Company;
(9) $____________ for any Account payable by an account debtor
whose principal place of business is outside of the United States of
America, its territories and possessions;
(10) $____________ for the aggregate amount of all Accounts owed
by any account debtor as to which more than 25% of such account
debtor's aggregate
C-2
<PAGE>
Account total is more than ninety (90) days past due or is
outstanding more than one hundred twenty (120) days from the
date of the invoice therefore;
(11) $____________ for any Account insofar as such
Account constitutes more than twenty-five percent (25%) of the
aggregate total of Eligible Accounts in (a) hereinabove; and
(12) $____________ for any Account that Bank has
given notice to Company that the Bank has deemed such Account
ineligible (i) because of a reasonable uncertainty about the
creditworthiness of the account debtor; or (ii) because the
Bank otherwise reasonably considers the collateral value
thereof to the Bank to be impaired or its ability to realize
such value to be insecure.
4. Borrower's Inventory totals $______________.
5. The worksheet used to calculate the Borrowing Base is attached as
Exhibit "A".
Capitalized terms used herein shall have the meanings assigned in the
Agreement unless otherwise defined herein.
This certificate is executed this ___ day of ____________ 199__.
TANKNOLOGY-NDE INTERNATIONAL, INC.
By: _____________________________
Its: _____________________________
C-3
<PAGE>
Exhibit "A"
to Borrowing Base Certificate
Worksheet
C-4
<PAGE>
EXHIBIT "D"
Form of Opinion of Counsel for Borrower
Baker & Botts, L.L.P.
(1) The Borrower and the Subsidiaries are corporations duly organized,
existing, and in good standing under the Laws of their respective states of
incorporation [naming such states] and are qualified to transact business and
are in good standing in those states where the nature of business or property
owned by them requires qualification, as set forth in Schedule 4.01, attached
hereto and made a part hereof, and, to the knowledge of such counsel, are not
required to be qualified as a foreign corporation in any other jurisdiction;
(2) The Borrower has the power to execute and deliver this Fourth
Amendment, to borrow money hereunder, to grant the Collateral required
hereunder, to execute and deliver the Amended and Restated Revolving Note, and
Collateral Documents, and to perform its obligations hereunder and thereunder;
(3) All corporate actions by the Borrower and all consents and approvals of
any Persons necessary to the validity of this Fourth Amendment, the Amended and
Restated Revolving Note, the Collateral Documents, and each other document to be
delivered hereunder have been duly taken or obtained, and this Fourth Amendment,
Amended and Restated Revolving Note, and the Collateral Documents, and such
other documents do not conflict with any provision of the charter or by-laws of
the Borrower, or of any applicable Laws, or any other agreement binding the
Borrower or its property of which, after reasonable inquiry, such counsel has
knowledge; and
(4) This Fourth Amendment, the Amended and Restated Revolving Note, and
Collateral Documents to be delivered hereunder have been duly executed by, and
each is a valid and binding obligation of, the Borrower; each of the foregoing
documents is in all respects sufficient to achieve its purported function and is
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
creditors' rights generally or by general equitable principles.
D-1
<PAGE>
EXHIBIT "E"
First Amendment to Intercreditor and Subordination Agreement
E-1
<PAGE>
EXHIBIT "F"
Second Amended and Restated Standby Commitment
F-1
Exhibit 10.65
AMENDMENT NO. 1 TO NOTE, PREFERRED STOCK
AND WARRANT PURCHASE AGREEMENT
Dated as of December 23, 1997
by and among
TANKNOLOGY-NDE INTERNATIONAL, INC.,
TANKNOLOGY/NDE CORPORATION, 2368692 CANADA, INC., and
TANKNOLOGY-NDE CONSTRUCTION SERVICES, INC., as Sellers
and
DH HOLDINGS CORP., as Purchaser
This Amendment No. 1 (this "First Amendment") to Note, Preferred Stock and
Warrant Purchase Agreement dated as of December 23, 1997 ("Note Purchase
Agreement") by and among Tanknology-NDE International, Inc., Tanknology/NDE
Corporation, 2368692 Canada, Inc., Tanknology-NDE Construction Services, Inc.
(collectively, the "Sellers") and DH Holdings Corp. ("Purchaser") is entered
into as of the 10th day of July, 1998.
W I T N E S S E T H:
Sellers and Purchaser desire to amend the Note Purchase Agreement in
accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises herein contained, and each
intending to be legally bound hereby, the parties hereto agree as follows:
1. Subsection (f)(iii) of Section 10 of the Note Purchase Agreement is
hereby deleted.
2. The word "and" is hereby added at the end of subsection (f)(i) of
Section 10 and "; and" appearing at the end of subsection (f)(ii) of
Section 10 is hereby deleted and a period is substituted therefor.
3. This First Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware.
4. Except as amended hereby, all terms and provisions of the Note
Purchase Agreement shall remain in full force and effect.
-1-
<PAGE>
5. This First Amendment may be executed in multiple counterparts, each
of which shall be deemed to be an original and all of which shall
constitute one and the same agreement.
The Parties have caused this First Amendment to be executed and delivered
effective as of the date first above written.
Sellers:
TANKNOLOGY-NDE INTERNATIONAL, INC.
By: //s// JAY ALLEN CHAFFEE
----------------------------
Name: Jay Allen Chaffee
Its: Chairman
PROECO, INC.
By: //s// JAY ALLEN CHAFFEE
----------------------------
Name: Jay Allen Chaffee
Its: Chairman
TANKNOLOGY/NDE CORPORATION
By: //s// JAY ALLEN CHAFFEE
----------------------------
Name: Jay Allen Chaffee
Its: Chairman
2368692 CANADA, INC.
By: //s// JAY ALLEN CHAFFEE
----------------------------
Name: Jay Allen Chaffee
Its: President
-2-
<PAGE>
TANKNOLOGY-NDE CONSTRUCTION
SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
----------------------------
Name: Jay Allen Chaffee
Its: Chairman
Purchaser:
DH HOLDINGS CORP.
By: //s// DANIEL COMAS
----------------------------
Name: Daniel Comas
Its: Vice President
-3-
Exhibit 10.66
AMENDMENT NO. 5 TO LOAN AGREEMENT
DATED OCTOBER 25, 1996
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.
This Amendment No. 5 ("Fifth Amendment") to the Loan Agreement, by and
among TANKNOLOGY-NDE INTERNATIONAL, INC. (formerly known as NDE ENVIRONMENTAL
CORPORATION) ("NDE"), a Delaware corporation, TANKNOLOGY/NDE CORPORATION, a
Delaware corporation, PROECO, INC., a Delaware corporation, 2368692 CANADA, INC.
(formerly known as TANKNOLOGY CANADA (1988) INC.), a Canadian federal
corporation, TANKNOLOGY-NDE CONSTRUCTION SERVICES, INC., a Delaware corporation,
and OUTBOUND SERVICES, INC., a California corporation (collectively, "Borrower")
and BANK ONE, TEXAS, N.A., a national banking association (the "Bank") is
entered into this 5th day of November 1998.
W I T N E S S E T H:
WHEREAS, Borrower and Bank entered into the Loan Agreement on October 25,
1996, as amended by the First Amendment dated April 10, 1997, the Second
Amendment dated May 20, 1997, the Third Amendment dated December 23, 1997 and
the Fourth Amendment dated June 26, 1998 (the "Loan Agreement");
WHEREAS, NDE has purchased all the outstanding common stock of Outbound
Services, Inc. ("OSI") pursuant to that certain Stock Purchase Agreement dated
August 7, 1998, by and among NDE, OSI and the stockholders of OSI identified in
the signature page of the Stock Purchase Agreement (the "OSI Stock Purchase
Agreement") (the selling stockholders of OSI hereinafter referred to as the
"Sellers");
WHEREAS, for consideration under the OSI Stock Purchase Agreement, NDE:
(i) executed that certain promissory note dated August 7, 1997 in the face
amount of $750,000 made payable to the order of Sellers (the "OSI
Unsecured Note");
(ii) granted Sellers certain non-transferable rights to purchase up to an
aggregate of 500,000 fully paid and nonassessable shares of NDE's
common stock as more fully described in that certain Warrant Agreement
dated August 7, 1998, by and among NDE and Sellers (the "OSI Warrant
Agreement");
-1-
<PAGE>
(iii) paid Sellers $700,000.00 in cash;
(iv) transferred stock certificates to Sellers for 250,000 shares of NDE
common stock;
(v) agreed to either guarantee or advance funds to OSI for OSI to pay
certain indebtedness of OSI in an amount not to exceed $335,000.00;
and
(vi) agreed to invest at least $500,000.00 in additional working capital in
OSI.
WHEREAS, OSI engages in the Maintenance Service Business--a type of
business unrelated to Borrower's business prior to the closing of the OSI Stock
Purchase Agreement;
WHEREAS, Borrower desires that OSI become a co-Borrower under the Revolving
Note;
WHEREAS, Borrower desires to include OSI's accounts receivable and
inventory in the Borrowing Base calculation;
WHEREAS, Borrower has requested that Bank waive Borrower's non-compliance
with certain covenants, insofar as such non-compliance is the result of NDE's
(i) acquisition of all the outstanding stock of OSI, (ii) indebtedness to the
Sellers evidenced by the OSI Unsecured Note, (iii) payment to Sellers of
$700,000.00 in cash, (iv) granting of stock warrants under the OSI Warrant
Agreement, (v) transfer of stock certificates to Sellers for 250,000 shares of
NDE common stock, (vi) agreement to either guarantee or advance funds to OSI for
the payment of certain indebtedness, (vii) agreement to invest at least
$500,000.00 in additional working capital in OSI, and (viii) Borrower's
engagement in the Maintenance Service Business, all in accordance with the terms
and provisions hereof;
WHEREAS, Bank is willing to agree to the foregoing in accordance with, and
subject to, the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the promises herein contained, and each
intending to be legally bound hereby, the parties agree as follows:
I. Amendments to Loan Agreement.
General. By its execution of the Fifth Amendment, OSI's signature block is
hereby deemed added to the other signature blocks at the end of the Loan
Agreement, and, unless specified otherwise, is hereafter a co-Borrower under the
Loan Agreement, as hereby amended, and does hereby assume, ratify, accept and
confirm all such obligations as co-Borrower under the Loan Documents.
-2-
<PAGE>
Article I, DEFINITIONS, is amended by adding the following definitions:
"Borrower" shall have the meaning ascribed to it in the introductory
paragraph of the Fifth Amendment.
"Fifth Amendment" means Amendment No. 5 to this Loan Agreement, executed by
Borrower and Bank on November 5, 1998.
"Maintenance Service Business" shall mean activities related to providing
facility and equipment maintenance service management including maintenance
call receiving, maintenance contractor management, maintenance cost and
service performance analysis for third parties.
"OSI" shall mean Outbound Services, Inc., a California corporation.
"OSI Stock Purchase Agreement" means that certain Stock Purchase Agreement
dated August 7, 1998, by and among NDE, OSI and the selling stockholders
("Sellers") of OSI identified in the signature page of the Stock Purchase
Agreement.
"OSI Unsecured Note" shall mean that certain promissory note dated August
7, 1998 executed by NDE in the face amount of $750,000 made payable to the
order of Sellers.
"OSI Warrant Agreement" means that certain Warrant Agreement dated August
7, 1998, by and among NDE and Sellers wherein NDE granted Sellers certain
non-transferable rights to purchase up to an aggregate of 500,000 fully
paid and nonassessable shares of NDE's common stock as more fully described
therein.
"Revolving Note" means that certain promissory note in the original face
amount of $9,000,000.00 dated of even date with the Fifth Amendment made by
the Borrower payable to the order of the Bank in the form attached as
Exhibit "A-1" to the Fifth Amendment, together with all deferrals,
renewals, extensions, amendments, modifications or rearrangements thereof,
which promissory note shall evidence certain advances to the Borrower by
the Bank pursuant to Section 2.01 of the Loan Agreement.
"Sellers" means those selling stockholders of OSI stock pursuant to the OSI
Stock Purchase Agreement.
Article II, THE LOAN, is modified by adding the following new sections:
2.18 Obligations of OSI. Notwithstanding anything contained herein to
the contrary, while OSI is deemed a co-Borrower for all other purposes
(except as otherwise noted herein), OSI is not a Borrower with respect
to the Term Note.
-3-
<PAGE>
Article IV, REPRESENTATIONS AND WARRANTIES, is modified by adding the
following new section:
4.19 Representations and Warranties of OSI. With respect to any
representations and warranties made by OSI with respect to the Notes,
such representations and warranties shall be applicable only to the
Revolving Note.
Article V, AFFIRMATIVE COVENANTS, of the Loan Agreement is hereby amended
by revising the following Section in its entirety to read as follows:
5.19 Adjusted Liabilities to Adjusted Net Worth. Maintain a ratio of
Adjusted Liabilities to Adjusted Net Worth of not more than 2.25 to
1.0 through March 31, 1999; thereafter 2.00 to 1.0 through June 30,
1999; thereafter 1.75 to 1.0 through March 31, 2000; thereafter 1.25
to 1.0 through September 30, 2000; and thereafter 1.0 to 1.0.
Article V, AFFIRMATIVE COVENANTS, is modified by adding the following new
section:
5.35 Affirmative Covenants of OSI. With respect to any affirmative
covenants made by OSI with respect to the Notes, such affirmative
covenants shall be applicable only to the Revolving Note.
Article VI, NEGATIVE COVENANTS, is modified by adding the following new
section:
6.17 Negative Covenants of OSI. With respect to the any negative
covenants made by OSI with respect to the Notes, such negative
covenants shall be applicable only to the Revolving Note.
Section 6.01 Other Indebtedness, as amended by the Third Amendment, is
hereby further amended by moving the word "and" immediately preceding subsection
(J) to the end of such subsection and is further amended by adding the following
subsection thereto:
"(K) indebtedness as evidenced by the OSI Unsecured Note."
Section 6.14 Capital Expenditures Limitation, as amended by the Third and
Fourth Amendments, is hereby further amended by replacing the clause therein
which reads "$3,000,000.00 in the 1998 fiscal year" with "$6,800,000.00 in the
1998 fiscal year".
"Exhibit A-1," the form of Revolving Note attached to the Loan Agreement,
as replaced pursuant to the Third Amendment and the Fourth Amendment is hereby
replaced with Exhibit "A- 1" attached to this Fifth Amendment.
-4-
<PAGE>
"Exhibit B," the form of Compliance Certificate attached to the Loan
Agreement, as amended by the Third and Fourth Amendments, is hereby replaced
with Exhibit "B" attached to this Fifth Amendment.
"Schedule 1.01(a), Collateral" attached to the Loan Agreement, as amended
by the Second, Third and Fourth Amendments, is hereby amended by adding the
following information to the end of the section entitled "Tanknology-NDE
International, Inc.", subpart "(a)":
", Outbound Services, Inc., a California corporation",
and is further amended by adding the following information at the end of that
schedule:
"Outbound Services, Inc.
(a) Accounts Receivables
(b) Inventory"
"Schedule 3.10, Collateral Documents" attached to the Loan Agreement, as
amended by the Fourth Amendment, is hereby amended by adding the following
information to each identified subpart:
1. Stock Powers executed by Tanknology-NDE International, Inc.:
"e. Outbound Services, Inc.;
2. Security Agreements:
"e. Outbound Services, Inc. dated November 5, 1998"
3. Financing Statements:
"Outbound Services, Inc.
TEXAS: Secretary of State"
"Schedule 4.01, Jurisdiction Information, etc." attached to the Loan
Agreement is hereby amended by adding the following information to the end of
that schedule:
"Outbound Services, Inc.
State of Incorporation: California"
"Schedule 4.09, Existing Indebtedness" attached to the Loan Agreement is
hereby amended by adding the following information to the end of that schedule:
$750,000 promissory note dated August 7, 1998 executed by NDE and made
payable to the order of Sellers, as defined in the Loan Agreement, as
amended.
-5-
<PAGE>
II. Certain Waivers. Bank hereby waives non-compliance by the Borrower with
the covenants set forth in Sections 6.01, 6.04, 6.07, 6.08 and 6.11 of the Loan
Agreement, but only to the extent that such non-compliance was the result of the
Borrower's acquisition of all the outstanding stock of OSI pursuant to the terms
under the OSI Stock Purchase Agreement. Notwithstanding anything that may be
contained herein to the contrary, no waiver or any other provision contained
herein shall serve to subordinate any of Borrower's Obligations to Bank to any
of Borrower's Obligations to any third party, including, but not limited to, any
of NDE's obligations to the Sellers.
III. Certain Consents. Bank hereby consents to (i) the acquisition by NDE
of, and the additional capital investment by NDE of up to $500,000 in, OSI as a
wholly owned subsidiary of NDE, and (ii) the issuance of 500,000 shares of NDE
stock warrants pursuant to the OSI Stock Purchase Agreement.
IV. Conditions to the Effectiveness of the Fifth Amendment. As a condition
to the effectiveness of the Fifth Amendment by Bank, Borrower has satisfied the
following conditions:
A. Receipt of Amended and Restated Revolving Note, Fifth Amendment and
Certificate of Compliance. The Bank shall have received the Amended and
Restated Revolving Note (the form which is attached hereto as Exhibit
"A-1"), multiple counterparts of this Fifth Amendment as requested by the
Bank and the Compliance Certificate duly executed by an authorized officer
for each Borrower (the form of which is attached hereto as Exhibit "B");
B. Collateral Documents. As security for the payment of the Revolving
Note and the performance of the obligations of OSI under the Loan
Agreement, Bank shall have received the duly executed and acknowledged
Collateral Documents described on Schedule 1 attached hereto.
C. Receipt of Certified Copy of Corporate Proceedings and Certificate
of Incumbency. The Bank shall have received from each Borrower copies of
all resolutions of its board of directors with respect to the transactions
set forth in this Fifth Amendment and the execution of this Fifth
Amendment, such copy or copies to be certified by the Secretary or an
Assistant Secretary as being true and correct and in full force and effect
as of the date hereof. In addition, the Bank shall have received from each
Borrower a certificate of incumbency signed by the Secretary or an
Assistant Secretary setting forth (a) the names of the officers executing
this Fifth Amendment, (b) the office(s) to which such Persons have been
elected and in which they presently serve and (c) an original specimen
signature of each such person.
D. Borrower's Opinion of Counsel. Bank shall have received from
counsel for Borrower a written opinion in form satisfactory to Bank
covering the matters set forth on Exhibit "D" attached to the Fifth
Amendment.
-6-
<PAGE>
E. Delivery of OSI's Stock Certificate. Bank shall have received the
stock certificate of Outbound Services, Inc. pursuant to the Third
Amendment to Pledge and Security Agreement by and between Borrower and Bank
dated of even date herewith as part of the security for Borrower's
obligations under the Loan Agreement.
F. Satisfaction of Conditions to Fifth Amendment. Upon the
satisfaction of the conditions to the effectiveness of this Fifth
Amendment, as set forth in this Article IV hereof, Borrower shall execute
and deliver to Bank a Certificate of Compliance, and if Bank has been
reasonably satisfied that such conditions have been fulfilled, Bank shall
contemporaneously provide a letter to Borrower stating "Bank One, Texas,
N.A. is satisfied that the conditions set forth in Article IV of the Fifth
Amendment to that certain Loan Agreement dated October 25, 1996, among the
Bank and Tanknology-NDE International, Inc. et al. have been fulfilled,"
whereupon this Fifth Amendment shall become effective.
V. Reaffirmation of Representations and Warranties. To induce Bank to enter
into this Fifth Amendment, Borrower hereby reaffirms, as of the date hereof, its
representations and warranties contained in Article IV of the Loan Agreement, as
amended, and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this Fifth Amendment and the
performance by Borrower of its obligations under this Fifth Amendment are
within the Borrower's corporate power, have received all necessary
governmental approval (if any shall be required), and do not and will not
contravene or conflict with any provision of law or of any agreement
binding upon the Borrower.
B. The Loan Agreement as amended by this Fifth Amendment represents
the legal, valid and binding obligations of Borrower, enforceable against
Borrower in accordance with its terms subject as to enforcement only to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general
principles of equity.
C. No Event of Default or Unmatured Event of Default has occurred and
is continuing as of the date hereof.
VI. Defined Terms. Except as amended hereby, terms used herein that are
defined in the Loan Agreement shall have the same meanings herein.
VII. Reaffirmation of Loan Agreement. This Fifth Amendment shall be deemed
to be an amendment to the Loan Agreement, and the Loan Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Loan Agreement herein and in any other document,
instrument, agreement or writing shall hereafter be deemed to refer to the Loan
Agreement as amended hereby.
-7-
<PAGE>
VIII. Entire Agreement. The Loan Agreement, as hereby amended, embodies the
entire agreement between Borrower and Bank, and supersedes all prior proposals,
agreements and understandings relating to the subject matter hereof. Borrower
certifies that it is relying on no representation, warranty, covenant or
agreement except for those set forth in the Loan Agreement as hereby amended and
the other documents previously executed or executed of even date herewith.
IX. Governing Law. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. This Fifth Amendment has been entered into in Harris
County, Texas, and it shall be performable for all purposes in Harris County,
Texas. Courts within the State of Texas shall have jurisdiction over any and all
disputes between Borrower and Bank, whether in law or equity, including, but not
limited to, any and all disputes arising out of or relating to this Fifth
Amendment or any other Loan Document; and venue in any such dispute whether in
federal or state court shall be laid in Harris County, Texas.
X. Severability. Whenever possible each provision of this Fifth Amendment
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Fifth Amendment shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Fifth Amendment.
XI. Execution in Counterparts. This Fifth Amendment may be executed in any
number of counterparts and by the different parties on separate counterparts,
and each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same agreement.
XII. Section Captions. Section captions used in this Fifth Amendment are
for convenience of reference only, and shall not affect the construction of this
Fifth Amendment.
XIII. Successors and Assigns. This Fifth Amendment shall be binding upon
the Borrower and Bank and their respective successors and assigns, and shall
inure to the benefit of the Borrower and Bank, and the respective successors and
assigns of Bank.
XIV. Non-Application of Chapter 346 of Texas Finance Code. The provisions
of Chapter 346 of the Texas Finance Code are specifically declared by the
parties hereto not to be applicable to the Loan Agreement as hereby amended or
any of the other Loan Documents or to the transactions contemplated hereby.
XV. Notice. THIS FIFTH AMENDMENT TOGETHER WITH THE LOAN AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. `
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
be duly executed as of the day and year first above written.
BORROWER:
TANKNOLOGY-NDE INTERNATIONAL, INC.
(formerly known as NDE ENVIRONMENTAL
CORPORATION)
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY/NDE CORPORATION
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
TANKNOLOGY-NDE CONSTRUCTION
SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
PROECO, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
2368692 CANADA, INC. (formerly known as
TANKNOLOGY CANADA (1988) INC.)
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
President
OUTBOUND SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
-9-
<PAGE>
BANK:
BANK ONE, TEXAS, N.A.
By: //s// JO LINDA PAPADAKIS
------------------------------------
Jo Linda Papadakis
Vice President
-10-
<PAGE>
Schedule 1
1. Stock Power executed by Tanknology-NDE International, Inc. with respect to
its shares of Outbound Services, Inc., a wholly owned subsidiary.
2. Third Amendment to Stock Pledge and Security Agreement between
Tanknology-NDE International, Inc. and Bank One, Texas.
3. Security Agreement between Outbound Services, Inc. and Bank One, Texas.
4. Financing Statement
Outbound Services, Inc.
TEXAS: Secretary of State
-1-
<PAGE>
EXHIBIT "A-1"
AMENDED AND RESTATED REVOLVING NOTE
$9,000,000.00 November 5, 1998
FOR VALUE RECEIVED, TANKNOLOGY-NDE INTERNATIONAL, INC. (formerly known as
NDE ENVIRONMENTAL CORPORATION) ("NDE"), a Delaware corporation, TANKNOLOGY/NDE
CORPORATION, a Delaware corporation, PROECO, INC., a Delaware corporation,
2368692 CANADA, INC. (formerly known as TANKNOLOGY CANADA (1988) INC.), a
Canadian federal corporation, TANKNOLOGY-NDE CONSTRUCTION SERVICES, INC., a
Delaware corporation, and OUTBOUND SERVICES, INC., a California corporation, all
of the foregoing having an address at 8900 Shoal Creek, Bldg. 200, Austin, Texas
78757 (collectively, "Borrower") unconditionally promise to pay to the order of
BANK ONE, TEXAS, NATIONAL ASSOCIATION, (herein called "Bank"), at its offices at
910 Travis, Houston, Texas 77001, the principal sum of NINE MILLION DOLLARS
($9,000,000.00) or, if less, the aggregate unpaid principal amount of all
Revolving Loans (as defined in the Loan Agreement) made by the Bank to the
Borrower pursuant to the Loan Agreement, as shown in the records of the Bank,
outstanding on such date.
The undersigned also promise to pay interest on the unpaid principal amount
hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement; provided,
however, that in no event shall such interest exceed the Maximum Rate (as
hereinafter defined).
"Maximum Rate" means the Maximum Rate of non-usurious interest permitted
from day to day by Applicable Law.
"Applicable Law" means that law in effect from time to time and applicable
to this Revolving Note which lawfully permits the charging and collection of the
highest permissible lawful, non-usurious rate of interest on this Revolving
Note. To the extent federal law permits Bank to contract for, charge or receive
a greater amount of interest, Bank will rely on federal law instead of the Texas
Finance Code, as supplemented by Texas Credit Title, for the purpose of
determining the Maximum Rate. Additionally, to the maximum extent permitted by
applicable law now or hereafter in effect, Bank may, at its option and from time
to time, implement any other method of computing the Maximum Rate under the
Texas Finance Code, as supplemented by Texas Credit Title, or under other
applicable law, by giving notice, if required, to Borrower as provided by
applicable law now or hereafter in effect. Notwithstanding anything to the
contrary contained herein or in any of the other Loan Documents, it is not the
intention of Bank to accelerate the maturity of any interest that has not
------------
Initial for
Identification
A-1
<PAGE>
accrued at the time of such acceleration or to collect unearned interest at the
time of such acceleration.
In no event shall Chapter 346 of the Texas Finance Code (which regulates
certain revolving loan accounts and revolving tri-party accounts) apply to this
Note. To the extent that Chapter 303 of the Texas Finance Code is applicable to
this Note, the "weekly ceiling" specified in such Chapter 303 is the applicable
ceiling; provided that, if any applicable law permits greater interest, the law
permitting the greatest interest shall apply.
In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum amount
of interest which, under Applicable Law, could be lawfully charged on this Note.
The Bank and the Borrower specifically intend and agree to limit contractually
the interest payable on this Note to not more than an amount determined at the
Maximum Rate. Therefore, none of the terms of this Note or any other instruments
pertaining to or securing this Note shall ever be construed to create a contract
to pay interest at a rate in excess of the Maximum Rate, and neither the
Borrower nor any other party liable herefor shall ever be liable for interest in
excess of that determined at the Maximum Rate, and the provisions of this
paragraph shall control over all provisions of this Note or of any other
instruments pertaining to or securing this Note. If any amount of interest taken
or received by the Bank shall be in excess of the maximum amount of interest
which, under Applicable Law, could lawfully have been collected on this Note,
then the excess shall be deemed to have been the result of a mathematical error
by the parties hereto and shall be refunded promptly to the Borrower. All
amounts paid or agreed to be paid in connection with the indebtedness evidenced
by this Note which would under Applicable Law be deemed "interest" shall, to the
extent permitted by Applicable Law, be amortized, prorated, allocated and spread
throughout the full term of this Note.
This Note is the Revolving Note referred to in and is entitled to the
benefits of a certain Loan Agreement, dated as of October 25, 1996, as amended
by that First Amendment dated April 10, 1997, that Second Amendment dated May
20, 1997, that Third Amendment dated December 23, 1997, the Fourth Amendment
dated June 26, 1998 and the Fifth Amendment dated of even date herewith (as the
same may be further amended, modified, supplemented, extended, rearranged and/or
restated from time to time, the "Loan Agreement"), entered into by and among
Tanknology-NDE International, Inc., (f/k/a NDE Environmental Corporation) et
al., as Borrower, and Bank One, Texas, National Association and secured by the
Collateral Documents (as such term is defined in the Loan Agreement). Reference
is hereby made to the Loan Agreement for a statement of the prepayment rights
and penalties and obligations of the Borrower, a description of the properties
and assets mortgaged, encumbered and assigned, the nature and extent of the
security and the rights of the parties to the Collateral Documents in respect of
such security, and for a statement of the terms and conditions under which the
due date of this Note may be accelerated. Upon the occurrence of any Event of
Default as specified in the Loan Agreement, the principal balance hereof and the
------------
Initial for
Identification
A-2
<PAGE>
interest accrued hereon may be declared to be forthwith due and payable in
accordance with the Loan Agreement, and any indebtedness of the holder hereof to
the Borrower may be appropriated and applied hereon.
In addition to and not in limitation of the foregoing, the undersigned
further agrees, subject only to any limitation imposed by applicable law, to pay
all reasonable expenses, including reasonable attorneys' fees and legal
expenses, incurred by the holder of this Note in endeavoring to collect any
amounts payable hereunder which are not paid when due, whether by acceleration
or otherwise.
All parties hereto, whether as makers, endorsees, or otherwise, severally
waive presentment for payment, demand, protest, notice of intent to accelerate,
notice of acceleration and notice of dishonor.
This Note is issued in substitution for, and in replacement, modification,
rearrangement, renewal and extension of, but not in extinguishment of, the
outstanding principal indebtedness evidenced by that certain note of
Tanknology-NDE International, Inc. (f/k/a NDE Environmental Corporation),
Tanknology/NDE Corporation, ProEco, Inc., 2368692 Canada, Inc. (f/k/a/
Tanknology Canada (1988) Inc.) and Tanknology-NDE Construction Services, Inc.,
dated June 26, 1998, payable to the order of Bank One, Texas, N.A. in the
original principal sum of $9,000,000.00, (the "Prior Note"); it being
acknowledged and agreed by Borrower that the indebtedness evidenced by this Note
constitutes an extension and renewal of the outstanding principal indebtedness
evidenced by the Prior Note, and that all security interests and other liens
which secure the repayment of the Prior Note shall continue to secure the
indebtedness evidenced by this Note.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE
OF TEXAS AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
EXECUTED this 5th day of November, 1998.
MAKER:
TANKNOLOGY-NDE INTERNATIONAL, INC.
(formerly known as NDE ENVIRONMENTAL
CORPORATION)
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
A-3
<PAGE>
TANKNOLOGY/NDE CORPORATION
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
PROECO, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
2368692 CANADA, INC. (formerly known as
TANKNOLOGY CANADA (1988) INC.)
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
President
TANKNOLOGY-NDE CONSTRUCTION
SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
OUTBOUND SERVICES, INC.
By: //s// JAY ALLEN CHAFFEE
------------------------------------
Jay Allen Chaffee
Chairman of the Board
A-4
<PAGE>
EXHIBIT "B"
Compliance Certificate
I, ______________________, the ___________________________ of
TANKNOLOGY-NDE INTERNATIONAL, INC. (the "Company"), pursuant to Section 5.05 of
the Loan Agreement dated as of October 25, 1996, as amended by the First
Amendment dated April 10, 1997, the Second Amendment dated May 20, 1997, the
Third Amendment dated December 23, 1997, the Fourth Amendment dated June 26,
1998, and the Fifth Amendment dated November 5, 1998 by and among BANK ONE,
TEXAS, N.A. ("Bank") and the Company et al. (the "Agreement") do hereby certify,
as of the date hereof, that to my knowledge:
1. No Event of Default (as defined in the Agreement) has occurred and is
continuing, and no Unmatured Event of Default (as defined in the
Agreement) has occurred and is continuing except for the following
events (include actions taken to cure such situations):
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
--------------------------;
2. No material adverse change has occurred in the condition, financial or
otherwise, of the Company since ________________;
3. Except as otherwise stated in the Schedule, if any, attached hereto,
each of the representations and warranties of the Company contained in
Article IV of the Agreement is true and correct in all respects; and
B-1
<PAGE>
4. The Company's financial condition for the month ending __________ is
as follows:
<TABLE>
<CAPTION>
Financial Covenant Time Period Required Ratio Actual Ratio
<S> <C> <C> <C>
================================= ============== ============================================================= ==============
(a) Net Worth Term of Loan Not less than the Consolidated Net Worth as of 12/31/97,
with allowable cumulative interim losses during fiscal year
1998 of not more than $1,000,000.00 (tested as of the end of
each calendar quarter), and as of 12/31/98, and thereafter,
maintain at least the Consolidated Net Worth in effect
12/31/97 plus 70% of Borrower's Net Income (if positive)
after 12/31/98.
(b) Capital Expenditures Term of Loan Not more than $6,800,000 for fiscal 1998 and $2,000,000 for
each year thereafter.
(c) Debt Service Coverage Ratio Term of Loan Not less than 1.2 to 1.0
(d) Adjusted Liabilities to Term of Loan 9/30/98 - 3/31/99 not more than 2.25 to 1.0; 4/1/99
Adjusted Net Worth 6/30/99 not more than 2.00 to 1.0; 7/1/99 - 3/31/2000 not
more than 1.75 to 1.0; 4/1/2000 - 9/30/2000 not more
than 1.25 to 1.0; and after 9/30/2000 not more than 1.0
to 1.0.
================================= ============== ============================================================= ==============
</TABLE>
This certificate is executed this ___ day of ___________ 199__.
TANKNOLOGY-NDE INTERNATIONAL, INC.
------------------------------------
By: ________________________________
Its: _______________________________
B-2
<PAGE>
EXHIBIT "C"
There is no Exhibit C attached to this Fifth Amendment.
C-1
<PAGE>
EXHIBIT "D"
Form of Opinion of Counsel for Borrower
Baker & Botts, L.L.P.
(1) OSI is a corporation duly organized, existing, and in good standing
under the Laws of its state of incorporation [naming such states] and is
qualified to transact business and is in good standing in those states where the
nature of business or property owned by it requires qualification, as set forth
in Schedule 4.01 of the Loan Agreement, as amended, attached to this Fifth
Amendment and made a part hereof, and, to the knowledge of such counsel, is not
required to be qualified as a foreign corporation in any other jurisdiction;
(2) OSI has the power to execute and deliver the Fifth Amendment, to borrow
money thereunder, to grant the Collateral required thereunder, to execute and
deliver the Collateral Documents, and to perform its obligations thereunder;
(3) All corporate actions by OSI and all consents and approvals of any
Persons necessary to the validity of the Fifth Amendment and each other document
to be delivered hereunder have been duly taken or obtained, and the Fifth
Amendment and the Collateral Documents, and such other documents do not conflict
with any provision of the charter or by-laws of OSI, or of any applicable Laws,
or any other agreement binding OSI or its property of which, after reasonable
inquiry, such counsel has knowledge; and
(4) The Fifth Amendment and Collateral Documents to be delivered hereunder
have been duly executed by, and each is a valid and binding obligation of OSI;
each of the foregoing documents is in all respects sufficient to achieve its
purported function and is enforceable in accordance with its terms, except as
limited by bankruptcy, insolvency, reorganization, moratorium, or other similar
laws affecting creditors' rights generally or by general equitable principles.
D-1
Exhibit 10.67
THIRD AMENDMENT TO
STOCK PURCHASE AGREEMENT
This Agreement is the Third Amendment to the Stock Purchase Agreement,
dated October 7, 1996, (the "Stock Purchase Agreement") by and between
Tanknology-NDE International, Inc. (formerly known as NDE Environmental
Corporation and hereinafter referred to as "Buyer" ), a Delaware corporation,
and TEI, Inc. (formerly known as Tanknology Environmental, Inc. and hereinafter
referred to as "Seller" ), a Texas corporation, (jointly referred to as the
"Parties");
WHEREAS, pursuant to the Stock Purchase Agreement, the Seller sold all the
capital stock of (i) Tanknology Corporation International, including its
cathodic protection division d/b/a Tanknology Cathodic Protection, a Delaware
corporation, (ii) USTMAN Industries, Inc., a Delaware corporation, and (iii)
Tanknology Canada (1988), Inc. a Canadian corporation (the "Transferred
Companies"); and
WHEREAS, the Stock Purchase Agreement was closed on or about October 26,
1996 (the"Closing"); and
WHEREAS, the Parties have negotiated certain matters arising under the
Stock Purchase Agreement;
NOW, THEREFORE, in consideration of the promises and of the respective
agreements with conditions herein, the Parties hereto hereby agree as follows
1. Release by Buyer. Buyer hereby unconditionally and irrevocably releases,
acquits and forever discharges, to the fullest extent permitted by law, the
Seller from (i) all of Buyer's claims against Seller arising under the Stock
Purchase Agreement Section 7.1(a) - (d) including, but not limited to, (a) the
Seth Hunt Royalty Agreement and related management contract, (b) the PM Services
Agreement, (c) the MCI telephone services contact, and (d) the Mason termination
case, (ii) all of Buyer's claims against Seller arising under the Stock Purchase
Agreement Section 2.3 including, but not limited to, (a) accounts receivable
adjustments, (b) unaccrued management bonus (c) uncollected prepaid insurance,
(d) the Royal Bank of Canada cash deposit, (e) various non-transferred deposits,
(f) certain miscellaneous pre-closing unpaid taxes, and (g) the credit
adjustment for Petroleum Products Equipment, and (iii) certain Buyer's claims
against Seller which arose after Closing for post-closing health insurance
payments in the amount of $25,517.14.
2. Release by Seller. Seller hereby unconditionally and irrevocably
releases, acquits and forever discharges, to the fullest extent permitted by
law, the Buyer from (i) all of Seller's claims against Buyer arising under Stock
Purchase Agreement Section 2.3 including, but not limited to, (a) interest
pursuant to Section 2.3(b), and (b) excess cash in any of the Transferred
Companies, (ii) all of Seller's claims against Buyer arising under Stock
Purchase Agreement Section 2.4 including, but not limited to, excess cash in any
of the Transferred Companies, (iii) all of Seller's claims against Buyer
pursuant to Stock Purchase Agreement Section 6.15(e) for payment of reimbursable
<PAGE>
taxes, (iv) all of Seller's claims against Buyer arising under Stock Purchase
Agreement Section 6.15(a) or otherwise for non-federal tax refund claims for
pre-closing periods collected by Buyer subsequent to the Closing, and (v)
certain Seller's claims against Buyer for matters arising after the Closing
relating to the Mitchell Hutchins replacement check for $3,158.00.
3. Hold Harmless, Buyer agrees to defend, indemnify and hold harmless
Seller from and against, any and all claims, actions, causes of action,
arbitrations, proceedings, losses, damages, liabilities, judgments and expenses
(including, without limitation, reasonable attorneys' fees) incurred by Seller
arising out of claims made by Seth Hunt against Seller for post-closing matters
relating to USTMAN Industries.
4. Cash Payment. Seller shall pay Buyer $230,000 by check within two days
of the execution date of this agreement.
5. Indemnification Limitation. The indemnification limitation provided by
Seller to Buyer pursuant to Stock Purchase Agreement Section 7.2(b) shall be
lowered from $1,250,000.00 to $600,000.00.
6. No Other Amendment. Only the matters specifically referenced shall be
amended; otherwise, the original Stock Purchase Agreement and the prior
amendments shall remain in full force and effect.
EXECUTED as of this _____ day of December, 1998.
TANKNOLOGY-NDE INTERNATIONAL, INC.
By: //s// JAY ALLEN CHAFFEE
----------------------------
Jay Allen Chaffee
Chairman of the Board
TEI, INC.
By: //s// DONALD R. CAMPBELL
----------------------------
Donald R. Campbell
President
Exhibit 10.68
AMENDMENT NO. 2 TO
THE EMPLOYMENT AGREEMENT
This Amendment No. 2 to the Employment Agreement ("Amendment No. 2"),
effective as of January 1, 1999, is entered into by and between Tanknology-NDE
International, Inc., a Delaware corporate (the "Company") and A. Daniel Sharplin
(the "Executive"). Capitalized terms used herein but not defined herein shall
have the meaning assigned to them in the Employment Agreement (the "Employment
Agreement"), dated as of July 1, 1997, by and between the Company and the
Executive.
Pursuant to Section 3(a) of the Employment Agreement, the Base Salary of
the Executive is increased by the sum of $40,000 per annum from $250,000, as
provided in the original Employment Agreement, to $290,000 effective January 1,
1999.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Amendment No. 2 effective as of January 1, 1999.
TANKNOLOGY-NDE INTERNATIONAL, INC.
BY:
Jay Allen Chaffee
Chairman of the Board
EXECUTIVE
BY:
A. Daniel Sharplin
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statement on
Form S-8 pertaining to the 1989 Long-Term Incentive Plan and the 1995 Incentive
Plan for Non-Management Employees of Tanknology-NDE International, Inc., of our
report dated March 19, 1999, with respect to the consolidated financial
statements of Tanknology-NDE International, Inc. included in its Form 10-K for
the year ended December 31, 1998, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Austin, Texas
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Tanknology-NDE International, Inc. financial statements as of and for the year
ended December 31, 1998.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 416,189
<SECURITIES> 0
<RECEIVABLES> 19,869,317
<ALLOWANCES> 1,798,044
<INVENTORY> 1,218,271
<CURRENT-ASSETS> 20,227,642
<PP&E> 21,579,760
<DEPRECIATION> 13,470,663
<TOTAL-ASSETS> 35,482,831
<CURRENT-LIABILITIES> 13,201,503
<BONDS> 18,271,743
1,500,000
0
<COMMON> 1,674
<OTHER-SE> 2,300,776
<TOTAL-LIABILITY-AND-EQUITY> 35,482,831
<SALES> 66,845,455
<TOTAL-REVENUES> 66,845,455
<CGS> 48,285,993
<TOTAL-COSTS> 60,562,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,757,559
<INCOME-PRETAX> 4,713,530
<INCOME-TAX> 809,733
<INCOME-CONTINUING> 3,903,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,903,797
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.16
</TABLE>
