ITEM 1. BUSINESS.
Introduction
Gundle/SLT Environmental, Inc. (the "Company") is the world leader in providing geosynthetic lining solutions, products and services to satisfy customers' needs for protecting the environment.
The Company is a Delaware corporation formed in 1986. The Company's principal executive offices are located at 19103 Gundle Road, Houston, Texas 77073. The Company's telephone number is (281) 443-8564.
Recent Developments
On January 23, 1997, the Company purchased 2,071,656 shares of its common stock at a purchase price of $7.00 per share, or a total of $14,502,000. The transaction was funded with the Company's available cash balances. The shares purchased represented approximately 12% of the Company's outstanding common stock as of December 31, 1996.
General
The Company manufactures, sells and installs synthetic lining systems and products on a worldwide basis principally for the prevention of groundwater contamination from municipal and industrial sources, and for the containment of water and industrial liquids and solids. The Company markets its lining systems primarily to waste management, industrial and mining companies, municipalities and other governmental agencies that own or operate waste, material processing, water treatment or containment facilities, as well as to engineering firms and construction contractors that serve these industries. During the three year period ended December 31, 1996, the Company sold nearly 2 billion square feet of polyethylene membrane to customers in the United States and more than 70 other countries.
The Company's four primary manufacturing facilities located in the Unites States, Germany and the United Kingdom, generate revenue from the direct sale of its products to customers, as well as from the installation of liner systems which incorporate the liners and other products manufactured by or distributed through the Company. On July 27, 1995, the Company merged with SLT Environmental, Inc. (SLT) thereby obtaining additional manufacturing facilities in Houston, Texas, and Rechlin, Germany. Other products include drainage nets, geotextiles, composites, geosynthetic clay products, vertical barrier walls, geogrids, and specialty concrete attachment products.
The Company sells and installs its products through its worldwide distribution system consisting of its own sales and installation personnel, as well as a worldwide dealer and distributor network.
Synthetic lining systems installed by the Company or its independent installers are designed by its customers or third party engineering firms to meet their particular containment requirements, ranging from a single lining to more complex systems consisting of several liners interlayered with drainage materials, geotextiles and geogrids. The principal components of the Company's lining systems are geomembranes manufactured through production processes developed by the Company, primarily utilizing polyethylene resins and certain chemical additives comprising a proprietary formula designed to withstand weathering and ultraviolet degradation for extended periods of time in an exposed environment. The Company's sheets are generally welded together on the customer's job site using a hot wedge or extrusion welding methods. The welded seams on lining systems installed by the Company are tested as part of its quality assurance program.
The Company believes that its manufacturing capabilities, quality control procedures, welding processes and use of high quality resins enable it to produce and install lining systems of the highest quality. The Company provides its customers with a single source for the manufacture, installation and testing of complete lining systems.
Economies of scale in purchasing raw materials, and the efficiencies of its manufacturing process enable the Company to undertake construction projects requiring the installation of lining systems on a price competitive basis.
Synthetic Liner Industry
The Company manufactures flexible geomembrane liners ("FMLs") that compete directly in some cases with coated textiles and soils, as well as FMLs made from other resins. The principal types of FMLs presently available are: high density polyethylene ("HDPE") and other variations of polyethylene, such as very flexible polyethylene ("VFPE"), polyvinyl chloride ("PVC"), ethylene propylene diene terpolymer ("EPDM"), scrim-reinforced chlorosulphonated polyethylene ("Hypalon"), and polypropylene or combinations or variations of these synthetics. Polyethylene membranes have several physical advantages over PVC and other FMLs that include chemical resistance characteristics (e.g., their resistance to various acids, alkalis, aromatic solvents and oils), as well as certain strength characteristics (e.g., their relative impermeability, puncture resistance and tendency to stretch rather than tear in response to certain types of pressure). HDPE sheeting represents a major portion of the synthetic liner market, particularly for municipal solid waste and other environmentally critical applications. The Company believes the market for synthetic liners in general and polyethylene liners in particular continues to expand as engineers throughout the world become more familiar with the quality, utility and breadth of product options involving liners manufactured from HDPE, VFPE and combinations thereof.
The Company believes that significant factors in the growth of the world market for FMLs include: laws and regulatory requirements relating to the storage of hazardous and nonhazardous substances (see "Regulatory Background"); increasing public concern for the environment and for protecting ground water; cost benefits of synthetic liners when compared to more traditional containments such as soil, concrete and steel; the inert, sanitary characteristic of polyethylene liners that makes them usable for potable water containment or conveyance and aquaculture ponds; and the increasing use of polyethylene liners in leach pads associated with large scale mining operations.
Regulatory Background -- United States
In the past two decades, substantial regulations have been enacted relating to the management, treatment, storage and disposal of waste materials. The Company believes that these regulations have enhanced the market for the Company's lining systems and helped establish the quality, utility and breadth of product options of HDPE and VFPE lining systems in general.
The principal U.S. federal statute that has influenced the market for the Company's products is the Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA provides a comprehensive scheme for the regulation of waste facilities and the storage, treatment and disposal of wastes. The Environmental Protection Agency (the "EPA"), which is charged with implementing, administering and enforcing RCRA, has adopted regulations under RCRA governing the management and disposal of wastes, including standards for storage areas, incinerators and landfills.
RCRA legislation is divided into a number of subtitles, including "Subtitle C -- Hazardous Waste Management" and "Subtitle D -- State or Regional Solid Waste Plans." Regarding synthetic liners, Subtitle D impacts the disposal of all municipal solid waste ("MSW") at roughly 2,700 MSW active landfill sites in the country by providing minimum national standards for the protection of human health and the environment. Regulations adopted under Subtitle D govern the methods by which MSW landfills are sited, designed, built, operated and closed, and impose strict compliance standards with regard to groundwater protection.
Subtitle D regulations are generally enforced at the state level as a majority of states have created their own regulations which meet or exceed the federal guidelines. EPA approved state programs can permit facilities using alternatives to the federally specified criteria, but alternative liner designs must be proven to be as effective as the minimum design standard. The Subtitle D regulations specify use of a composite liner system consisting of highly impermeable clay plus a geomembrane. The geomembrane must be at least 30 mils (one mil equals 1/1000 of an inch) thick. HDPE liners have been installed in landfills in every state.
The Company believes that a broad range of factors favor use of HDPE geomembranes in landfills, including material properties, extensive experience and history.
The Hazardous and Solid Waste Amendments of 1984 (the "1984 Amendments") require that all new hazardous waste landfills use approved lining systems composed of two or more liners with leachate collection and drainage systems above and between each liner (a "Double Liner System"). The 1984 Amendments also require the use of a Double Liner System for all surface impoundments or ponds used in the containment of certain hazardous liquids. The welds joining individual sections of synthetic lining systems must also be tested in compliance with EPA procedures. The Company believes that, of the lining systems for hazardous waste landfill sites that have received EPA approval under RCRA since 1984, HDPE lining systems have been the most widely used.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (commonly known as "CERCLA" or the "Superfund" legislation), was enacted in response to the dangers of uncontrolled hazardous waste sites. The Superfund legislation authorizes the EPA to compel owners and operators to clean up hazardous waste sites and, if they fail to do so, authorizes the EPA to perform the cleanup work, using funds appropriated for that purpose by Congress, and thereafter to pursue owners or operators for reimbursement.
In 1994, the EPA published its presumptive remedy for use at MSW landfills for preventing ground water and soil contamination, which accounted for 230 identified Superfund sites. The presumptive remedy includes use of a liner cap over the area and containment of subterranean hazardous waste plumes. The Company believes its products directly address this application.
EPA published regulations and some state regulations also require that gypsum waste, a by-product of phosphate mining, be stored in lined facilities. In addition, all states have enacted statutes and issued regulations regulating the handling and storage of hazardous substances, specifically petroleum products and other chemicals contained in tanks or lagoons. The Company's products directly address these applications.
Regulatory Background -- Foreign
Similar laws and regulatory requirements exist in other countries throughout the world, particularly in the European Community, Japan, and Central and South America as projects that involve intensive water use or which can have impacts on groundwater quality are developed. These activities include agricultural irrigation, livestock feedlots, dairy facilities, aquaculture facilities, and industrial and public stormwater runoff containment areas, canals, mining and tunnels.
Products and Services
The Company produces a variety of FML products that are used in lining systems. The Company's principal product is a smooth finished HDPE sheet. The sale and installation of HDPE smooth sheeting accounted for approximately 65%, 55% and 52% of the Company's sales in 1996, 1995 and 1994, respectively. The Company manufactures HDPE sheet in thicknesses from 20 to 240 mil in varying seamless widths up to 34.5 feet. Sheet width and consequently the number of seams required for installation is critical. Seaming represents the major technical difficulty for liner installation. A greater number of seams requires more technical labor and more testing. The Company also manufactures and sells textured HDPE sheet for use on sloping terrain, or where a high friction interface is required.
The Company manufactures sheeting using low density resins. The Company markets these products as a very flexible polyethylene ("VFPE") membrane with chemical compatibility and temperature tolerance characteristics superior to PVC and other FML products. Applications include landfill caps, mining heap leach pads, and floating covers.
The Company utilizes its co-extrusion capability to produce sheets with layers consisting of different materials. When co-extruded, these layers become molecularly integrated such that they cannot delaminate. The Company has been awarded a patent for its white-surfaced sheet. By reflecting radiant heat, the white surfaced sheet reduces the expansion/contraction (wrinkling/bridging) of the liner during installation and
protects subgrade soils from desiccation. Under identical exposure conditions, white-surfaced sheets have recorded temperatures as much as 50% lower than standard black geomembranes. In addition, white-surfaced sheets greatly improve installation damage detection and quality by revealing scoring and abrasion as black marks exposed against the white surface. The Company also manufactures this product with a textured surface.
A patent has been awarded for the Company's electrically conductive sheet product which incorporates a proprietary conductive layer and allows for 100% electric spark testing of the installed liner. Unlike traditional electric leak detection surveys, the Company's conductive sheet spark testing does not require flooding of the containment system with water, which can be expensive and time consuming.
The Company manufactures a high density polyethylene drainage net, consisting of two sets of HDPE strands intertwined to form a net along which fluid may be conveyed for drainage. The Company bonds geotextiles to one or both sides of the drainage net which allows one-step installation of drainage media for primary leachate collection where soil is placed directly on top of the drainage layer.
The Company, under non-exclusive agreements, markets and installs other third party products such as high-flow net, geogrids, piping and geotextiles.
The Company operates four primary geomembrane manufacturing facilities: two in Houston, Texas, one in Rechlin, Germany, and one in Soham, England. The Company utilizes two different extrusion manufacturing technologies for its primary sheeting products: flat cast and round die film. The Company operates a total of twelve continuous flow extrusion lines, 10 for sheeting products and two for its drainage net products. Raw materials are delivered by railcar or truck, and pneumatically transported into storage silos or directly to a production line where it is extruded into sheet or net. Material handling equipment moves the rolls of finished product to a storage yard prior to inspection and final shipment to the customer. The Company's production facilities normally operate on a 24 hour per day basis, seven days a week, throughout the year.
The Company's joint venture in Egypt utilizes a flat cast continuous flow extrusion line for producing sheet. It manufacturers smooth FML products in thicknesses from 20 mil to 120 mil.
The Company often provides its customers with completely installed and tested lining systems. The Company employs trained technicians and supervisors who travel to customer jobsites and install the lining materials. It also offers installation services on a worldwide basis through a network of trained distributors and subcontractors. In many applications, the Company furnishes a technical supervisor to monitor and provide quality assurance technical advice during the installation process. The sheets are joined in the field using hot wedge or extrusion welders. The hot wedge welder operates by propelling itself along the sheets that are to be joined and draws a hot metal wedge between them. The heated sheets are then fed between pressure rollers, creating a dual track seam. The extrusion welder operates by extruding heated resin through the dual head of the welder, and integrating such material with the resin of the sheets that are to be joined. Both the hot wedge and the extrusion weld result in a homogeneous bond between the sheets, thereby offering the same chemical resistance as the sheet. Because of the homogeneous bond created with the sheet, the Company believes its welding methods are superior to other methods such as gluing.
The Company also manufactures and sells a geosynthetic clay liner (GCL), that combines the Company's various sheet products with highly expansive sodium bentonite clay. The benefit of the clay layer is that its high swelling capacity seals small punctures accidently made in an overlaying FML. In addition, the Company manufactures its Studliner product at its Rechlin, Germany, facility, which is used in tunnels and foundations for concrete protection.
In addition, the Company conducts its own laboratory and onsite testing of its installations. The laboratory tests monitor the quality of incoming raw materials and perform all routine tests on the finished product required by the customer's specification. The Company tests the strength and adequacy of the welds on the liners it installs by some combination of the following methods: cutting samples from the liners and destructively testing the weld seam; pressure testing an air channel created in the length of the weld during hot wedge welding; performing vacuum testing for the airtightness of the extrusion weld seam, and electric spark
testing of its conductive sheet product. The Company considers the testing of its products and the maintenance of high quality standards essential to the successful operation of its business.
The Company's research and development efforts focus on the development of new products, new quality control procedures, and new or more efficient manufacturing and installation techniques. Concepts are generated by the Company's internal research efforts, as well as through contacts with potential customers and professionals in the field. The Company's research and development and quality control expenditures during 1996, 1995 and 1994 were $1,675,000, $1,705,000 and $2,191,000, respectively.
Raw Materials
The principal raw materials used by the Company are various high grade polyethylene resins. The Company conducts initial screening tests of the resins upon delivery as part of its quality control program. Each of the Company's manufacturing units purchase polyethylene resins from two primary suppliers. The Company uses different types of polyethylene resins utilizing proprietary formulations of stabilizers and antioxidants to manufacture various products.
Polyethylene resins are occasionally in short supply and are subject to substantial price fluctuation in response to market demand. The Company has not encountered any significant difficulty to date in obtaining raw materials in sufficient quantities to support its worldwide operations at current or expected near-term future levels. But, any significant interruption in raw material supplies or abrupt increases in raw material prices could have an adverse effect upon the Company's operations. The Company has ongoing programs of working with its suppliers to insure quality, supply and new product development.
Applications
The following table sets forth the principal applications of the Company's lining systems, and the dollar amounts (in thousands) and percentages of net sales for each application for the past three years. See Note 21 to Consolidated Financial Statements for geographic financial information.
SALES BY MARKET APPLICATION
Solid Waste Containment. Solid waste containment applications for synthetic liners include the lining of new landfill sites, or new cells within existing landfill sites, to be used for the disposal or storage of non-hazardous waste.
Synthetic liners are used to cover or "cap" unlined landfill sites to prevent rainwater from creating excessive leachate that may seep into the underlying groundwater, and to cap lined landfill cells to meet federal and state guidelines. Synthetic liner covers also are used in the systems to collect methane gas that is naturally produced as waste decays for use as fuel or to meet regulatory requirements.
Mining. Synthetic liners are employed for various purposes in the mining industry. Liners are used for the containment of chemicals used in the mining of gold, silver, copper and phosphate. These minerals are dissolved or "leached" from the ore by chemical solutions that are circulated through ore-bearing crushed rock deposited on top of a liner pad. The synthetic liner acts as a collection and drainage system for the mineral-bearing solution. Demand for synthetic liners for the mining industry is a direct result of the introduction of leaching processes in
gold, silver and copper mines. Leaching is a lower cost recovery technique, as compared with traditional, capital-intensive mining techniques for the separation of minerals from ore, and also permits the extraction of minerals from low-grade ore that previously were not processed. Synthetic liners are also used in various mining applications to contain the spent ore, or tailings, and for containment of the various chemical solutions after the leaching process. Gypsum, a byproduct of the phosphate mining industry, is regulated to require containment systems, as it becomes acidic during the mining process. The Company believes the gypsum market represents an important segment of the overall mining application market.
Hazardous Waste Containment. Synthetic liners are used for containment of both solid and liquid hazardous waste. The Hazardous and Solid Waste Amendments of 1984 mandate the use of synthetic lining systems at all new hazardous waste landfill sites and at all new ponds containing certain hazardous liquids.
Liquid Containment. Applications such as aquaculture ponds, wastewater ponds for municipal sewage treatment, industrial process liquid containment, stormwater runoff containment, potable water reservoirs, irrigation canals, erosion control along banks, and decorative ponds often require the use of liners to contain liquids or protect concrete.
Other Applications. Synthetic liners are used in various other industrial and non-industrial applications, including tank lining, secondary containment, tunnel waterproofing and prefabricated products. Synthetic liners also are used as floating covers on liquid or semi-solid surfaces to protect the covered elements from water and other elements in the environment, control odor, promote anaerobic digestion of organic wastes and capture the resultant methane gas produced. The Company is continually evaluating other industries in which its lining systems might have commercially viable applications.
Marketing and Sales
The Company conducts a worldwide direct sales effort focused on engineers, general contractors, facility owners and government officials who are responsible for designing projects and awarding construction contracts involving the installation of synthetic lining systems. It has sales personnel located in the United States, France, Germany, the United Kingdom, Spain, the Netherlands, Indonesia, Singapore and Australia. The Company also sells material to a select group of domestic installation companies and through a network of independent commercial agents and distributors throughout the world.
The Company advertises in specialized trade publications and by direct mail to its customers and potential customers, and participates in trade conventions and conducts industry seminars domestically and abroad. The Company also gives presentations to government administrators regarding the available technology for the containment of waste materials and the advantages offered by the Company's products.
In the United States, the Company sells liners generally through construction contracts awarded on the basis of a competitive bidding process or directly to independent installers. When the Company makes sales pursuant to construction contracts, the customer's bid proposal specifies the design and performance criteria for the lining system to be constructed. If the Company is awarded the contract, the remainder of the contractual terms are negotiated with the customer, or with the customer's general contractor. The contract price covers the cost of manufacturing the lining material, other third party products and the labor and other costs involved in installation, welding and testing. The Company also may indemnify the site owner or general contractor for certain damages resulting from the negligence of the Company's employees. The Company often is required to post bid and performance bonds covering the full amount of an installation contract. In most contracts, the Company provides the customer with specified limited warranties as to material quality and workmanship. These limited warranties may last for up to 20 years, but are generally limited to repair or replacement by the Company of the defective liner or installation up to the dollar amount of the contract involved, and are prorated over the life of the warranty.
The Company's foreign manufacturing subsidiaries generally sell liners to independent installers on the basis of a competitive bidding process. In some foreign contracts, the Company provides the customer with specified limited warranties as to material quality. Some of the Company's foreign subsidiaries also sell through construction contracts.
In 1996, 1995 and 1994, respectfully, 54%, 51% and 61% of the Company's net sales were to customers in the United States.
During 1996, 1995 and 1994, no single customer accounted for 10% or more of the Company's net sales. The Company believes that the loss of any one customer would not have a material adverse effect on the Company's financial position or results of operations.
Product Liability and Insurance
Although the Company is not exposed to the type of potential liability that might arise from being in the business of handling, transporting or storing hazardous wastes or materials, the Company could be susceptible to liability for environmental damage or personal injury resulting from defects in the Company's products or negligence by Company employees in the installation of its lining systems. Such liability could be substantial because of the potential that hazardous or other waste materials might leak out of their containment system into the environment. The Company maintains liability insurance, which includes pollution coverage in amounts which it believes to be prudent. However, there is no assurance that this coverage will remain available to the Company. The Company has experienced no material losses from defects in products and installations. However, the Company's claims experience to date may not be a meaningful measure of its potential exposure for product liability.
Backlog
The backlog of unfilled orders at December 31, 1996, was $57.2 million compared with $51.7 million at December 31, 1995. It is anticipated that, subject to weather and other construction-related delays, the majority of the value of construction contracts and customer purchase orders included in backlog at December 31, 1996, will be completed or filled prior to December 31, 1997. Contracts and commitments for products and services are occasionally varied, modified or canceled by mutual consent.
Seasonality and Other Business Conditions
The Company's operations are subject to seasonal fluctuation, with the greatest volume of product deliveries and installations typically occurring during the summer and fall. In addition, scheduled deliveries are often subject to delay at the customers' request to correspond with customers' annual budgetary and permitting cycles. With the Company's manufacturing facilities in the United States, Germany, England and Egypt, the Company is attempting to mitigate the seasonal fluctuation on its delivery and installation schedules. See Supplementary Data.
Competition
The Company believes that there are approximately 30 companies engaged in the production of various synthetic liners worldwide. At least twelve of these companies compete directly with the Company throughout the world. The principal competitive factors within the synthetic liner market are performance of the lining system, installation capability and price. The Company believes that it has been able to maintain its position within the synthetic lining market because of the performance advantages of the Company's lining systems over other types of liners available, the convenience to the customer of having the Company take sole responsibility for the manufacture, installation and testing of its lining systems and by being price competitive. Although the Company is a leading supplier of synthetic lining systems, certain of the Company's existing competitors are subsidiaries of larger companies that have greater financial resources than the Company. Furthermore, the possibility exists that companies with more significant resources than the Company could enter the synthetic lining market.
Employees
As of December 31, 1996, the Company had 843 employees, of whom 607 were employed in the United States and 236 in foreign locations. During peak construction periods in the summer and fall months, the Company's workforce increases. During the winter months, the Company's workforce is maintained at levels
somewhat below the peak staffing levels experienced during the summer and fall months. Some of the Company's full-time employees in foreign locations are unionized; however, the Company has never experienced a strike or walkout. The Company believes its employee relations are satisfactory.
Patents and Proprietary Information
The Company has been awarded patents for the "GSE White(TM)," "GSE Conductive(TM)" and "GSE CurtainWall(R)" products as well as the "FrictionFlex(R)" texturing process. The Company has other patents and pending applications. The Company's manufacturing, welding and testing processes also involve proprietary information and know-how. See "Products and Services." The Company has registered its new trademark and logo ("GSE") with the U.S. Office of Patent and Trademark and is in the process of registering this new trademark in select foreign countries.
ITEM 2.
ITEM 2. PROPERTIES.
United States
The Company's corporate headquarters and one of its manufacturing facilities are situated on a 21.5-acre tract of Company-owned land located in an industrial park in north Houston. This location has 31,400 square feet of office space in two buildings, housing executive, administrative, marketing and accounting personnel. The manufacturing plant is a 67,000 square foot building that contains seven continuous flow liner extrusion lines. This manufacturing facility also houses one continuous flow drainage net extruder. In addition, fabrication services and equipment are housed in a 12,000 square foot facility located on the premises.
A second manufacturing facility in Houston occupies 16.9 acres with 3,300 square feet of office space and 83,000 square feet of manufacturing facilities. This location operates a continuous flow geomembrane extrusion line on this site, as well as geonet, geocomposite and texturing lines.
The Company also has a manufacturing facility located in Spearfish, South Dakota, that manufactures the Company's GCL. This 16,000 square foot facility contains one production line.
Germany
The administrative offices of GSE Lining Technology GmbH, the Company's German subsidiary, are located in Hamburg, Germany. The manufacturing facility, located in Rechlin, Germany, on 8.2 acres, supplies polyethylene sheet to customers in Europe. The Company operates a continuous flow geomembrane extrusion line and two texturing lines on this site.
United Kingdom
The administrative offices of SGS Geosystems Limited (SGS) and GSE Lining Technology Ltd., two of the Company's United Kingdom subsidiaries, are located on a .75 acre leased site in Soham, England. This location has 2,433 square feet of office space and 10,652 square feet of manufacturing facilities. SGS operates a continuous flow geomembrane extrusion line on this site.
Egypt
The Company owns a 50% interest in two joint ventures, Hyma/GSE Manufacturing Co. (Hyma/GSE) and Hyma/GSE Lining Technology Co., a manufacturing company and a trading company, respectively. The administrative offices for these ventures are in a small leased facility in Cairo. Hyma/GSE's manufacturing facilities are located on a 1.1 acre leased site located outside of Cairo. Located on this site are two buildings totaling 34,262 square feet that house the manufacturing equipment. A single continuous flow geomembrane extrusion line is operated on this site.
Other
The Company also maintains installation and sales offices in leased premises located in the United Kingdom, Singapore, Indonesia, and Australia.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
For information concerning various legal proceedings involving the Company, see Note 16 to the Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company trades on the New York Stock Exchange (NYSE) under the symbol GSE. The following table shows the range of high and low sale prices for the common stock on the American Stock Exchange through December 18, 1996, and on the NYSE thereafter for the periods indicated.
The approximate number of record holders of the Company's common stock at March 3, 1997, was 420. Management estimates that the aggregate number of beneficial holders exceeds 4,000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
RESULTS OF OPERATIONS
General
On July 27, 1995, the Company merged (the Merger) with SLT Environmental, Inc. (SLT). SLT manufactured and installed synthetic lining systems and operated manufacturing facilities in Rechlin, Germany and Houston, Texas. The stockholder of SLT received 7,000,000 shares of the Company's common stock for all issued and outstanding shares of SLT common stock. The Merger was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of SLT for all periods presented prior to 1996.
Year Ended December 31, 1996, Versus Year Ended December 31, 1995
The Company's net sales decreased $38,691,000 or 16% in 1996 compared with 1995. This decrease was driven by lower prices as unit sales volume was the same year to year. Sales price follows raw material cost, which was down considerably during the first half of 1996. Geographically, unit sales volumes were up slightly in North America and up over 7% in Europe. These increases were offset by lower unit sales in Latin and South America and the Middle East/Africa.
Gross profit increased $2,181,000 or 5% despite the lower sales level. The improvement in gross profit was generated by the Company's North American and European operations. The increase in gross profit on lower sales volume was generated from a reduction in the Company's overall cost structure enhanced by the Merger in 1995. This margin improvement on lower sales increased gross profit margins from 19% in 1995 to 24% in 1996.
Selling, general and administrative expenses declined $1,565,000 or 6% in 1996 compared with 1995. Expenses in the United States declined nearly $2,500,000 but this decrease was offset by increased expenses in Europe. The increase in expenses in Europe was due to the acquisition of SGS Geosystems Limited in 1996. Excluding this acquisition, expenses outside the U.S. were comparable with the prior year.
Interest expense declined $1,141,000 or 19% from 1995 to 1996. This reduction was the result of a lower level of average debt outstanding during 1996 combined with lower interest rates due to the debt restructuring in conjunction with the Merger.
Interest income increased to $1,585,000 in 1996 from $606,000 in 1995. This increase was the result of significantly higher levels of short term investments in 1996.
Foreign exchange gains of $683,000 were recorded in 1996 compared with a foreign exchange loss of $120,000 in 1995. The majority of the gain was recorded in the Company's German operations and was driven by gains on receivables that were denominated in currencies other than the Deutsche Mark.
Other income declined from $447,000 in 1995 to $65,000 in 1996. In 1995, approximately $500,000 of other income was recorded in connection with the receipt of development grant for the Company's investment in its German manufacturing facility.
The Company's provision for income taxes was $8,434,000 in 1996 compared with $935,000 in 1995. The tax provision in both years was provided at the statutory rates adjusted for permanent differences. The 1995 provision, on a pretax loss of $1,296,000 was due to the nondeductibility of certain expenses, particularly merger and meals and entertainment expenses and goodwill amortization.
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
The Company's net sales increased $24,735,000 or 11% in 1995 compared with 1994. This increase in sales was generated by increased prices, as unit sales volume fell slightly less than 6% from year to year. Overall pricing for the Company's products and services increased approximately 18% and was principally the result of the pass through of increased raw material costs in 1995. Sales and unit sales volume increased
significantly in Europe and Latin and South America. These increases were partially offset by decreases in North America, the Far East/Pacific Rim and Middle East/Africa.
Gross profit for the year increased $1,118,000 or 2% from 1994 to 1995. This increase is the result of increased sales for the year. The increase in gross profit was generated primarily from the Company's European operations. As a percentage of sales, gross profit decreased from 21% to 19%. The gross profit percentage from U.S. operations was down slightly from year to year, but fell nearly 3% in Europe as a result of the Company aggressively pricing its products and services to increase its market share.
Selling, general and administrative expenses were reduced $3,121,000 to $27,785,000 during 1995. Expense in the U.S. were down $3,536,000, as a result of efficiencies gained from the Merger. Internationally, SG&A expenses were up slightly.
As a result of the Merger and the planned disposal of SLT's old office and manufacturing facility, the Company recorded nonrecurring charges of $15,270,000. Of this amount, $10,070,000 related to a plan to reduce the overall cost structure of the Company's products and manufacturing operations. To accomplish the reduction in cost, the Company is standardizing its products, as well as streamlining its manufacturing processes. An analysis was completed during the year and the Company concluded that certain products, processes and manufacturing assets must be upgraded or eliminated. The resulting charge of $10,070,000 represented the Company's best estimate of the cost to standardize products and streamline the manufacturing process, including the writedown of certain assets. The Company discontinued operating its compounding facility and upgraded its geonet production lines. The capital cost associated with upgrading its geonet production capability was estimated to be $1,500,000. In addition, costs of $400,000 related to the consolidation of SLT's manufacturing facilities and closing its Conroe facility were recorded. Costs related to the merger with SLT were $4,800,000. These expenses represent the cost of combining the two companies, including severance expense, standardization of employee benefit plans, professional fees, office and equipment relocation and other related costs incurred in connection with the merger.
Interest expense of $5,956,000 represents an increase of $763,000 from the prior year due to an increase in the average level of debt outstanding during the year.
Other income declined from $679,000 in 1994 to $447,000 in 1995 due to gains recorded in 1994 on the sale of fully depreciated assets from the Company's abandoned manufacturing facility in Germany. In 1995, other income includes the receipt of a development grant of approximately $500,000 in connection with the Company's investment in its German manufacturing facility.
The Company's provision for income taxes decreased to $935,000 in 1995 from $3,230,000 in 1994. The tax provision in both years was provided at the statutory rate adjusted for permanent differences. In 1995, the Company recorded a tax provision of $935,000 on a pretax loss of $1,296,000 due to the nondeductibility of certain expenses, particularly merger, meals and entertainment expenses and goodwill amortization. The 1994 tax provision was reduced by $1,574,000 due to the utilization of a previously unrecognized net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $86,585,000 of which $43,122,000 was cash and cash equivalents. The Company's cash, inventory and receivable balances fluctuate from quarter to quarter due to the seasonality of sales. The Company's capital structure consisted of $49,740,000 in debt and $109,513,000 in stockholders' equity at December 31, 1996.
On January 23, 1997, the Company purchased 2,071,656 shares of its common stock at a price of $7 per share, or a total cost of $14,502,000. The transaction was funded with the Company's available cash.
The Company has a $35,000,000 multi-currency revolving credit facility (the "Revolver") with NationsBank of Texas as agent bank. The Revolver as amended, matures on September 30, 1998, bears interest at the Company's option, at the bank's prime rate or LIBOR plus an applicable margin based on the ratio of funded debt to total capitalization. An annual commitment fee of up to 3/8% is payable on any unused
portion of the facility. Under the terms of the revolving line of credit agreement, the Company is required to maintain certain financial ratios and a specific level of consolidated tangible net worth. At December 31, 1996, and March 3, 1997, there was no balance outstanding on the Revolver. However, letters of credit issued under this facility totaled $1,569,000 thereby reducing the balance available to $33,431,000 (see Note 8 of the Notes to Consolidated Financial Statements). The letters of credit issued under this facility secure performance of installation projects and self-insurance programs.
On June 15, 1997, the Company is required to make a $5,000,000 principal payment on its 11.17% Notes. The Company believes that its cash balance, cash generated by operations and the balance available under the Revolver are adequate to meet these and any other foreseeable cash requirements during 1997.
The Company's operations are subject to seasonal fluctuation with the greatest volume of product deliveries and installations typically occurring in the summer and fall months. In particular, the Company's operating results are most impacted in the first quarter as both product deliveries and installations are at their lowest levels due to the inclement weather experienced in the Northern Hemisphere.
In connection with sales and installation projects outside of the United States, principally Europe and Australia, the Company may enter into sales or installation contracts that are denominated in currencies different than the subsidiary's functional currency. The Company recognizes that its international operations are subject to the risk of foreign currency fluctuations not present in domestic operations. Currency losses to date have not been material to the Company's operations as a whole.
Pricing for the Company's products and services are principally driven by worldwide manufacturing capacity in the industry and raw material costs. The Company's primary raw material occasionally is in short supply and is subject to substantial price fluctuation in response to market demand. Any increase in worldwide manufacturing capacity, interruption in raw material supply or abrupt raw material price increase could have an adverse effect upon the Company's operations. Inflation has not had a significant impact on the Company's operations.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Gundle/SLT Environmental, Inc.
We have audited the accompanying consolidated balance sheets of Gundle/SLT Environmental, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 Gundle/SLT Environmental, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas January 31, 1997
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated financial statements.
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION --
Organization --
Gundle/SLT Environmental, Inc. (the "Company"), a Delaware corporation, was incorporated in August 1986, and through its wholly owned subsidiaries is primarily engaged in the manufacture, sale and installation of polyethylene lining systems.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Consolidation --
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Investments in partially owned entities in which ownership ranges from 20 to 50 percent are accounted for using the equity method. All material intercompany balances and transactions have been eliminated.
Cash Equivalents --
The Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents.
Inventory --
Inventory is stated at the lower of cost or market. Cost, which includes material, labor and overhead, is determined by the weighted average cost method, which approximates the first in first out cost method.
Property, plant and equipment --
Costs of additions and major improvements are capitalized, whereas maintenance and repairs which do not improve or extend the life of the asset are charged to expense as incurred. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Interest costs incurred in construction of assets are capitalized and depreciated over the useful life of the asset. Depreciation is computed using the straight-line method, based on the estimated useful lives of the assets. Total repairs and maintenance expense during 1996, 1995 and 1994 was $2,404,000, $2,650,000 and $2,632,000, respectively.
Excess of purchase price over fair value of net assets acquired --
The excess of the aggregate price paid by the Company in the acquisition of businesses, accounted for as a purchase, over the fair market value of the net assets acquired is amortized on a straight-line basis over periods not exceeding 40 years. The carrying value of the excess of purchase price over fair value of net assets acquired is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that the carrying value will not be recoverable, as determined based on the undiscounted cash flows of the entity required over the remaining amortization period, it is reduced by the estimated shortfall of cash flows. As of December 31, 1996 and 1995, accumulated amortization was $9,984,000 and $8,895,000, respectively.
Accounting for long-lived assets --
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996. The effect of adoption was not material.
Revenue and cost recognition --
The Company recognizes revenue upon shipment of product to the customer except when work is being performed under an installation contract. Revenues from installation contracts are recognized on the percentage-of-completion method measured by the percentage of costs incurred to total estimated costs for each contract.
Cost of sales includes all direct material and labor costs, and indirect costs such as indirect labor, depreciation, insurance, supplies, tools and repairs.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Deferred costs --
Debt issuance costs are capitalized and amortized using the effective interest rate method over the period the related debt is anticipated to be outstanding.
Warranty Costs --
The Company's products are sold and installed with specified limited warranties as to material quality and workmanship and may extend up to 20 years. Provision for warranty costs are made based on the Company's claims experience. The reserve for these costs is included in the self-insurance reserve (see Note 7).
Income taxes --
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial statements and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Foreign currency translation --
Results of operations for foreign subsidiaries with functional currencies other than the U.S. dollar are translated using average exchange rates during the year. Assets and liabilities of these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date and the resulting translation adjustments are recognized as a separate component of stockholders' equity. Gains and losses arising from foreign currency transactions are recognized in income as incurred.
In connection with contracts performed outside of the United States, the Company routinely bids fixed-price contracts which are denominated in currencies different than the functional currency of the applicable subsidiary performing the work. The Company recognizes that such bidding practices, in the context of international operations, are subject to the risk of foreign currency fluctuations not present in domestic operations. Losses related to these contracts are included in cost of sales and have not been significant.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign exchange contracts --
The Company enters into forward contracts and cross currency swaps in its management of foreign currency exposures. As a matter of policy, the Company does not speculate in financial markets and therefore, does not hold these contracts for trading purposes. The Company utilizes what it considers straightforward instruments to accomplish its objectives.
The Company is using a cross currency principal and interest rate swap to effectively convert a portion of its U.S. dollar denominated debt into Deutsche Marks. The objective of this hedging strategy is the management of the foreign currency exchange risk associated with its net investment in Germany and is based on the projected foreign currency cash flows from Germany over the next nine years. The Company's investment in Germany and the foreign currency portion of its swap are adjusted each period to reflect current foreign exchange rates with the gains and losses recorded in the equity section of the balance sheet. The differential paid or received on the interest rate component is recognized as an adjustment to interest expense.
Earnings per common share --
Earnings per common share is based on the weighted average number of common shares and common share equivalents outstanding. Common share equivalents (outstanding options to purchase shares of common stock) are computed using the treasury stock method and were excluded from the earnings per share calculations as dilution was less than 3%.
Stock options --
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options. See Note 10 for disclosures required by Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Supplier/sources of supply --
The Company currently purchases its raw material (polyethylene resins) from at least two suppliers at each location. Polyethylene resins are occasionally in short supply and are subject to substantial price fluctuation in response to market demand. The Company has not encountered any significant difficulty to date in obtaining raw materials in sufficient quantities to support its operations at current or expected near-term future levels. However, any disruption in raw material supply or abrupt increases in raw material prices could have an adverse effect upon the Company's operations.
Reclassifications --
The accompanying consolidated financial statements for 1994 and 1995 contain certain reclassifications to conform with the presentation used in 1996.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) TRADE RECEIVABLES --
Trade receivables consisted of the following at December 31:
(4) ACCOUNTING FOR INSTALLATION CONTRACTS --
The following summarizes installation contracts in progress at December 31:
(5) INVENTORY --
Inventory consisted of the following at December 31:
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment consisted of the following at December 31:
(7) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
Accounts payable and accrued liabilities consisted of the following at December 31:
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT --
Long-term debt consisted of the following at December 31:
The Company entered into a $35,000,000 multi-currency revolving credit facility (the "Revolver") with NationsBank of Texas as agent, on July 27, 1995. The Revolver as amended, matures on September 30, 1998, bears interest at the Company's option, at the bank's prime rate or the reserve adjusted LIBOR plus an applicable margin based on the ratio of funded debt to total capitalization. An annual commitment fee of up to 3/8% is payable on any unused portion of the facility. Under the terms of the revolving line of credit agreement, the Company is required to maintain certain financial ratios and a specific level of consolidated tangible net worth. As of December 31, 1996, there was no balance outstanding under the Revolver. However, letters of credit issued under this facility totaled $1,569,000 reducing the balance available to $33,431,000. The letters of credit primarily secure performance of installation contracts and self-insurance programs.
On July 27, 1995, the Company entered into note agreements (the "7.34% Notes") with two lenders, in the aggregate amount of $25,000,000 which mature on August 1, 2005. The 7.34% Notes, which are unsecured, require semiannual interest payments at a rate of 7.34% beginning February 1, 1996, and annual principal payments of $5,000,000 beginning August 1, 2001. The terms of the 7.34% Notes place various restrictions on the Company's ability to pay dividends or make certain other payments, incur additional debt, consolidate or merge into another corporation or sell assets unless certain other criteria are met. The 7.34% Notes also require the Company to maintain certain financial ratios and a specified level of consolidated net worth. The proceeds from the 7.34% Notes were used to retire outstanding indebtedness of SLT.
The 11.17% Notes, which are unsecured, require quarterly interest payments at a rate of 11.17%, which began September 15, 1990, and annual principal payments of $5,000,000 began June 15, 1996. The terms of the 11.17% Notes are consistent with the terms of the 7.34% Notes.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 8% Promissory Note, which is unsecured, requires annual principal and interest payments of $206,000 ending December 31, 2004.
Summarized below are the maturities of long-term debt of the Company during the next five years and thereafter (in thousands).
(9) FINANCIAL INSTRUMENTS --
Fair value of financial instruments --
The Company's financial instruments consist primarily of cash and cash equivalent, trade receivables, trade payables, debt instruments and a cross currency swap (see "Derivative financial instrument" below). The book values of cash and cash equivalents, trade receivables and trade payables and floating-rate debt instruments are considered to be representative of their respective fair values. The Company had $49,740,000 and $55,573,000 of fixed-rate debt instruments at December 31, 1996 and 1995, with fair values of approximately $48,800,000 and $54,200,000, respectively. The fair value of long-term debt was estimated based on quoted market prices for these or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The difference between the fair value and the carrying value represents the theoretical net premium the Company would have to pay to retire all debt at such date.
Derivative financial instrument --
Effective October 18, 1996, the Company swapped $10,000,000 in long-term debt with an annual interest rate of 7.34% for 15,380,000 Deutsche Mark (DM) denominated long-term debt with an annual interest rate of 6.32%, effectively hedging a portion of its German net investment. The DM swap agreement requires the Company to re-exchange 3,076,000 DM for $2,000,000 each August 1 for the five-year period beginning August 1, 2001. The DM swap will be marked to market as the U.S. Dollar/DM exchange rate changes. These adjustments are included as a component of cumulative translation adjustment in stockholders' equity. Interest payments and receipts are semi-annual on February 1 and August 1. The DM interest payments are also subject to exchange rate fluctuations. The gains and losses resulting from these fluctuations are recognized in interest expense during the current period.
(10) STOCKHOLDERS' EQUITY --
On June 1, 1992, the Company's board of directors adopted a stock repurchase plan under which the Company was authorized to repurchase up to 500,000 shares of its outstanding common stock in open market transactions depending on market conditions. As of December 31, 1996 and 1995, stockholders' equity included 500,000 treasury shares repurchased under the plan at an aggregate cost of $4,267,000.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's board of directors adopted a qualified employee stock purchase plan on October 16, 1991, effective January 1, 1992. The plan authorizes the issuance of up to 100,000 shares of common stock for purchase by participating employees at a 15% discount from the market price. As of December 31, 1996 and 1995, 24,539 and 20,217 shares, respectively, had been issued under this plan.
In 1986, the Company's board of directors adopted an employee stock option plan (the "1986 Employee Plan"). This Plan, as amended, permitted up to 850,000 stock options to be granted. The plan permitted the grant of both "incentive" and "non-qualified" stock options to employees of the Company. Each option is exercisable for a period of up to ten years after it is granted. Unless the terms of the option specify otherwise, options may be exercised in respect of 33 1/3%, 66 2/3% and 100% of the shares covered, upon the third, fourth and fifth anniversaries of the date of grant. The option price cannot be less than the fair market value of the shares on the date the option is granted. Any options that were available for grant under this plan as of December 1995, are now a part of the 1995 Incentive Stock Plan.
During 1988, the Company's board of directors adopted a stock option plan (the "1988 Director Plan"), which permits the grant of up to 75,000 "non-qualified" stock options to non-employee directors. The terms of this plan are substantially the same as those of the 1986 Employee Plan. This Plan was terminated in December 1995 and subsequently replaced by the 1996 Non-Qualified Stock Option Plan for Non-Employee Directors.
In 1995, the Company's board of directors adopted the 1995 Incentive Stock Plan (the "1995 Employee Plan"). The 1995 Employee Plan as subsequently amended and restated, permits the grant of up to 1,750,000 stock options less any options exercised or outstanding under the 1986 Employee Plan. The 1995 Employee Plan provides for the grant of (i) non-qualified stock options, (ii) incentive stock options, (iii) shares of restricted stock, (iv) shares of phantom stock, and (v) stock bonuses (collectively, "Incentive Awards"). In addition, the 1995 Employee Plan permits the grant of cash bonuses payable when a participant is required to recognize income for federal income tax purposes in connection with the vesting of shares of restricted stock or the grant of a stock bonus. Key employees, including officers (whether or not they are directors), of the Company and its subsidiaries are eligible to participate in the 1995 Employee Plan. Each non-qualified stock option issued under the 1995 Employee Plan is granted for a period up to seven years after it is granted and may be exercised in respect of 50% and 100% of the shares covered upon the first and second anniversaries of the date of grant. The option price cannot be less than the fair market value of the shares on the date the option is granted.
During 1996, the board of directors granted 156,800 shares of restricted stock to senior management under the 1995 Employee Plan. One-third of the shares are subject to annual vesting provided specific financial performance measurements are met by the Company. This plan also provides for cash bonuses to be paid to grantees to cover federal income taxes and requires that the grantee be employed at the end of the three year vesting period in order to receive the shares.
During 1996, the Company's board of directors adopted the 1996 Non-Qualified Stock Option Plan for Non-Employee Directors (the "1996 Director Plan"). The 1996 Director Plan authorizes an aggregate of 100,000 shares to be issued pursuant to non-qualified stock options to non-employee directors. The 1996 Director Plan provides for the automatic annual grant to each non-employee director of a five year option to purchase 2,000 shares of common stock at an exercise price equal to the market price on the date of grant. The options will be granted immediately following each annual meeting of stockholders, with each option to vest and become exercisable in its entirety one year from the date of grant. This Plan replaces the 1988 Director Plan.
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The stock option activity under each plan is set forth below:
In 1993, pursuant to an employment agreement with an officer, the Company's board of directors granted the officer a non-qualified stock option to purchase 100,000 shares of the Company's common stock. The option price is equal to the fair market value of the shares on the date of the grant. This option is exercisable through April 1997. At December 31, 1996, 100,000 shares were exercisable under this agreement.
The Company applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its 1996 Director Plan and unrestricted stock options from the 1995 Employee Plan. The compensation expense that has been charged against income for its performance based restricted stock grant pursuant to the provisions of the 1995 Employee Plan were $516,000 and $0 for 1996 and 1995, respectively.
Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation. Statement 123 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 1995 and 1996, respectively: risk-free interest rates of 6.5%, a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 44%; and a weighted-average expected life of the option of 5 to 10 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 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
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
The estimated fair value of stock options issued in 1996 and 1995 was $545,000 and $1,008,000, respectively.
(11) INCOME TAXES --
Domestic and foreign income (losses) before income taxes were as follows:
The provision (benefit) for income taxes consisted of the following:
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the provision for income taxes and income taxes computed by applying the statutory rate is as follows:
The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities were as follows at December 31:
In 1995 the U.S. current tax provision for income taxes was net of approximately $601,000, of tax benefit due to the utilization of net operating loss carryforwards. In Germany the 1996 and 1995 current tax provisions for income taxes were net of approximately $607,000 and $324,000, respectively, of tax benefit due to utilization of net operating loss carryforwards.
At December 31, 1996, the Company has $248,000 of net operating loss carryforward for German tax purposes, which does not expire. In the opinion of management, no valuation allowance on the deferred tax asset is necessary at December 31, 1996.
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $1,256,000 at December 31, 1996. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and 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 both U.S. income taxes (subject to an
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.
(12) EMPLOYEE BENEFIT PLANS --
The Company has a defined contribution employee benefit plan under which substantially all U.S. employees are eligible to participate. The Company contributed $380,000, $264,000 and $315,000 to the plan during the years ended December 31, 1996, 1995 and 1994, respectively. Under the terms of the plan, contributions to the plan may be discontinued at any time.
(13) PENSION PLAN --
The Company's German subsidiary has an unfunded pension plan providing benefits to three present employees and three former employees. The plan provides fixed minimum pension payments at retirement age. There are no assets held in outside funds.
The Company has adopted FAS 87, "Employers' Accounting for Pensions"; however, to the extent pension costs under German law exceed amounts computed under FAS 87, those additional amounts are recorded by the Company. Pension expense for the years ended December 31, 1996, 1995, and 1994 was $160,000, $94,000, and $70,000, respectively. The actuarial present value of accumulated benefits was $1,315,000 at December 31, 1996 and $1,291,000 at December 31, 1995. The projected benefit obligation for service rendered to date, net of unrecognized prior service cost, was $1,308,000 and $1,281,000 as of December 31, 1996 and 1995, respectively.
The computation assumed a discount rate on benefit obligations of 7%, annual salary increase of 2% and annual benefit increase of 3%.
(14) SALES TO SIGNIFICANT CUSTOMERS --
During 1996, 1995 and 1994, no single customer accounted for 10% or greater of total net sales.
(15) RESEARCH AND DEVELOPMENT COSTS --
Research and development costs are charged to expense as incurred. The amounts of research and development and quality control expenditures during the years ended December 31, 1996, 1995 and 1994 were $1,675,000, $1,705,000, and $2,191,000, respectively.
(16) COMMITMENTS AND CONTINGENCIES --
Product warranties and insurance coverage --
The Company's products are sold and installed with specified limited warranties as to material quality and workmanship. These limited warranties may last for up to 20 years, but are generally limited to repair or replacement by the Company of the defective liner or the dollar amount of the contract involved, amortized over a period of years. The Company may also indemnify the site owner or general contractor for other damages resulting from negligence of the Company's employees. The Company is occasionally required to post bid and performance bonds covering the full amount of an installation contract.
Although the Company is not exposed to the type of potential liability that might arise from being in the business of handling, transporting or storing hazardous waste or materials, the Company could be susceptible to liability for environmental damage or personal injury resulting from defects in the Company's products or negligence by Company employees in the installation of its lining systems. Such liability could be substantial because of the potential that hazardous or other waste materials might leak out of their containment system
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into the environment. The Company maintains liability insurance, which includes pollution coverage in the U.S. and Germany, in amounts which it believes to be prudent. However, there is no assurance that this coverage will remain available to the Company. While the Company's claims experience to date may not be a meaningful measure of its potential exposure for product liability, the Company has experienced no material losses from defects in products and installations.
Litigation and claims --
The Company is involved in litigation arising in the ordinary course of business, which in the opinion of management, will not have a material adverse effect on the Company's financial position or results of operations.
Operating Leases --
The Company leases certain equipment through operating lease arrangements of varying terms. Annual rental expense under the terms of non-cancellable operating leases is less than 1% of consolidated revenues.
(17) ACQUISITION OF SGS GEOSYSTEMS, LTD. --
On April 30, 1996, the Company acquired SGS Geosystems, Ltd. (SGS), a UK geomembrane manufacturer, for $4,774,000 net cash plus the assumption of certain obligations of SGS in the amount of $600,000. The acquisition was accounted for as a purchase and, accordingly, the results of operations of SGS have been included in the consolidated results of operations of the Company from the date of acquisition. The excess of purchase price over fair value of net assets acquired associated with this transaction was $2,796,000. Pro forma financial information for SGS has not been presented as it is not material to the overall consolidated operating results of the Company.
(18) INVESTMENT IN JOINT VENTURE --
On November 9, 1996, the Company completed the formation of two joint ventures with Hyma Plastic Hyma Foam Co., an Egyptian supplier of plastic liner, bags and foam products. The administrative offices of the ventures are located in Cairo, Egypt. The manufacturing facilities are located outside of Cairo, Egypt and will manufacture and sell synthetic lining systems in Egypt.
The Company made an initial contribution of $1,696,000 to the ventures and has a commitment to invest an additional $1,659,000 over the next ten years. The Company has a 50% ownership interest in both ventures and accounts for its investments using the equity method of accounting.
(19) MERGER WITH SLT ENVIRONMENTAL, INC. --
On July 27, 1995, the Company merged with SLT Environmental, Inc. (SLT). The stockholder of SLT received 7,000,000 shares of the Company's common stock for all issued and outstanding shares of SLT common stock. The merger was accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of SLT for all periods presented.
Combined and separate results of Gundle and SLT during the period preceding the merger were as follows (unaudited and in thousands):
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the merger and the planned disposal of SLT's old office and manufacturing facility, the Company recorded nonrecurring charges of $15,270,000. Of this amount, $10,070,000 related to a plan to reduce the overall cost structure of the Company's products and manufacturing operations. To accomplish the reduction in cost, the Company is standardizing its products, as well as streamlining its manufacturing processes. An analysis was completed during the year and the Company concluded that certain products, processes and manufacturing assets must be upgraded or eliminated. The resulting charge of $10,070,000 represents the Company's best estimate of the net cost to standardize products and streamline the manufacturing process, including the writedown of certain assets. The Company has discontinued operating its compounding facility and is upgrading its geonet production lines. The capital cost associated with upgrading its geonet production capability is estimated to be $1,500,000. In addition, costs of $400,000 related to the consolidation of SLT's manufacturing facilities and closing its Conroe facility were recorded. Costs related to the merger with SLT were $4,800,000. These expenses represent the cost of combining the two companies, including severance expense, standardization of employee benefit plans, professional fees, office and equipment relocation and other related costs incurred in connection with the merger.
(20) SUBSEQUENT EVENTS --
On January 23, 1997, the Company purchased 2,071,656 shares of its common at a price of $7 per share, for a total cost of $14,502,000. The transaction was funded with the Company's available cash.
(21) GEOGRAPHIC INFORMATION --
Summary geographic financial information is as follows:
GUNDLE/SLT ENVIRONMENTAL, INC. SUPPLEMENTARY DATA
Consolidated quarterly financial data (Unaudited) --
Unaudited quarterly information for fiscal 1996 and 1995 is as follows (in thousands, except per share amounts):
The above data should be read in conjunction with the consolidated financial statements and notes thereto.
SCHEDULE II
GUNDLE/SLT ENVIRONMENTAL, INC.
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
Part III (Items 10 through 13) is omitted since the Company expects to file with the Securities and Exchange Commission within 120 days following December 31, 1996, definitive proxy materials pursuant to Regulation 14A under the Securities Exchange Act of 1934 involving the annual election of directors and certain other matters. If for any reason such a statement is not so filed, this Report will be appropriately amended.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial statements (see financial statements at pages 13-31)
(a)(2) Supplementary data (see page 32)
(a)(3) Financial schedule (see page 33) Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above are omitted since the information required to be submitted has been included in the financial statements or the notes thereto, or the schedules are not required.
(a)(3) Exhibits:
(b) Reports on Form 8-K.
(c) Exhibits (see Item (a)(3), above).
(d) Additional financial statements (see Items (a)(1) and (a)(2) above).
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE DAY 5TH OF MARCH, 1997.
GUNDLE/SLT ENVIRONMENTAL, INC.
By ----------------------------------- William P. Reid, President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED ON THE 5TH DAY OF MARCH, 1997.
INDEX TO EXHIBITS
(b) Reports on Form 8-K.
(c) Exhibits (see Item (a)(3), above).
(d) Additional financial statements (see Items (a)(1) and (a)(2) above).