ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Gundle/SLT Environmental, Inc. (the "Company" or "GSE") is the world leader in the manufacture and installation of geosynthetic lining products and services for environmental protection and other uses. It is a Delaware corporation headquartered in Houston, Texas.
The Company manufactures, sells, and installs flexible geomembrane liners, geonets, geosynthetic clay liners, concrete protection liners, and geocomposite products made from specially formulated polyethylene resins. Its fabrication department offers a variety of specialty products, such as manholes, sumps, pipe penetration boots, floats, floating covers, and vertical membrane barrier wall panels. All of these products are sold and installed on a worldwide basis, typically as part of geosynthetic containment systems. The Company's products and other related geosynthetic products are used in containment systems for the prevention of groundwater contamination, and for the confinement of water, industrial liquids and solids.
The Company's products are installed by independent third parties and by the Company's full-time field personnel, who are organized into close-knit construction crews. Crewmembers are extensively trained in hot wedge and extrusion welding techniques. Using the latest equipment, these crews install liners in the field to make one continuous, seamless containment system. The use of an extensive weld-seam quality assurance testing program, combined with our manufacturing quality control program and high quality resin, enables the Company to offer what it believes are the highest quality products and services.
ACQUISITION
The Company, in August 1999, expanded its sales operations into the Far East/Pacific Rim countries by forming and staffing a limited private liability company in Thailand. This new company has acquired the assets of a well- established geosynthetic manufacturing company in the Kingdom of Thailand. This 24 million pound manufacturing facility will allow the Company to focus on increasing sales in the Far East and the Peoples Republic of China.
COMPANY PRODUCTS
The Company's principal products-flexible liners-are manufactured from specially formulated polyethylene resins with chemical additives designed to resist weathering, ultraviolet degradation and chemical exposure for extended time in exposed applications. Either customers or third-party engineering firms design the containment and confinement systems into which the Company's products are installed. These systems may include other Company manufactured products consisting of drainage nets, geocomposites, geosynthetic clay liners, vertical barrier walls, specialty concrete protection liners, and other companies' products. Marketing efforts for its products are carried on through a worldwide distribution organization made up of internal sales, independent dealers, agents, and distributors.
The Company's primary product is a smooth-finish, high density polyethylene- HDPE-liner. The sale and installation of this product in 1999, 1998, and 1997 accounted for approximately 54%, 56%, and 60% of total sales. Its HDPE liner products come in thickness ranges from 20 to 240 mil (one mil equals 1/1000th of an inch), and seamless widths up to 34.5 feet. Liner width dictates how many seams are required during installation, and seaming represents the major technical difficulty for liner installers. The fewer the number of seams, the less labor involved, and the less testing required.
The Company manufactures very flexible polyethylene (VFPE) sheet products (GSE UltraFlex(R)) from low-density resin. VFPE products are finding greater use in landfill caps, mining heap leach pads, and floating covers where greater flexibility is desired. Both VFPE and HDPE products are available with texturing for use on sloping terrain, or where a high friction angle is required.
Demand is increasing for products made using the Company's co-extrusion manufacturing capability. This manufacturing process produces products with different layers made of various resin densities that become molecularly integrated such that they cannot delaminate or separate. One of the major products created using this process is GSE White(R), the Company's patented white-surface (reflective) product for use in landfills and waste containment applications. By reflecting radiant heat, the reflective surface reduces the expansion and contraction (wrinkling and bridging) of the liner during installation. Its reflective nature protects subgrade soils from drying out and cracking (desiccation). Under identical exposure conditions, white- surfaced liners recorded temperatures as much as 50% lower than standard black surface liner. The white-surface greatly improves detection of installation damage by revealing scoring and abrasions as black marks exposed against the white surface.
Using this same co-extrusion technology, the Company received a patent for GSE Conductive(R), its electrically conductive liner. This product incorporates a conductive layer that allows for spark testing of 100% of the surface once the liner is installed. The unique ability to electric spark test the entire surface eliminates the need for flooding the containment system with water for leak detection, which can be expensive and time consuming. This product is finding greater use in waste containment lagoons and landfill sump applications.
The Company offers different specifications of drainage net (GSE HyperNet(R)) consisting of two sets of HDPE strands intertwined to form a channel along which fluid is conveyed for drainage. This net can be bonded with geotextiles on one or both sides to form GSE FabriNet(R) and GSE FabriCap, the Company's geocomposite products. These products are used as drainage media for primary leachate collection where the soil is placed directly on top of the drainage layer. GSE FabriCap products are specifically designed for landfill capping project applications requiring a load bearing drainage net. The Company has just acquired a license to sell a drainage net and a geocomposite manufactured using three strands of HDPE. These new products will be offered as GSE Triplanar net and composite for use in landfill cell expansions where higher load bearing characteristics are required, and in landfill capping projects where higher flow rate characteristics are needed.
Another product manufactured and offered by the Company is its patented geosynthetic clay liner (Gundseal(R)) that combines HDPE liners with highly expansive sodium bentonite clay. The sodium bentonite clay is adhered directly to the liner, and has demonstrated its primary function of sealing small punctures accidentally made in the overlaying liner. When hydrated, the bentonite material is itself a highly impermeable liner taking the place of up to three feet of compacted clay ordinarily required as a subgrade layer.
GSE Studliner(R), is fabricated in the Company's facility located in Rechlin, Germany. This product is finding extensive use in tunnels, corrosive containment applications, and protecting concrete piping, pilings, and foundations. The Company fabricates products made from this material for many types of civil engineering applications.
The Company also offers a wide variety of specially fabricated products, such as manholes, sumps, pipe penetration boots, floating booms, and vertical membrane barrier wall panels. Its product lines include portable secondary containment pads, temporary or daily landfill covers, and self-installed pond and pit liners.
The Company offers third-party products under non-exclusive agreements, such as geogrids, HDPE piping, and geotextiles. Polypropylene products are manufactured and sold by the Company's subsidiary in the United Kingdom, in addition to products manufactured from polyethylene.
The Company considers quality control and testing as critical to the successful operation of its manufacturing and installation business. At its in-house laboratories, it conducts various quality control tests, as well as other sophisticated physical and chemical property tests. On-site testing of its manufactured products is conducted continuously during the manufacturing process. Our laboratories monitor the quality of incoming raw materials, and perform routine tests on all finished products. Certifications as to the quality and test results are routinely furnished to customers as part of the quality assurance program.
The Company believes that its products made from HDPE and VFPE resins offer several critically important physical advantages over other resin liner products. Those advantages include: chemical resistance to various acids, alkalis, aromatic solvents and oils; puncture resistance and tendency to stretch rather than tear under certain pressures; and relative impermeability. These characteristics are the reason that the Company's products represent a major portion of the geosynthetic liner market, particularly in solid waste applications.
SERVICES
The Company often provides its customers with installation services. Trained field personnel travel to the customers' job sites and install products. Company trained crews are available in the United States, the United Kingdom, central Europe and Australia. Inside the United States, a network of carefully selected independent dealers also provides installation services. Outside the United States, in addition to the Company's installation capabilities, a network of qualified distributors and subcontractors provide installation services. Upon request from a customer using third-party installers, the Company may furnish a technical supervisor to monitor installation activities and provide quality assurance.
Sheeting products are field-joined using hot wedge or extrusion welders. The computer controlled, self-propelled wedge welding equipment creates a dual track seam resulting in a homogeneous bond created between the sheets. The presence of an unwelded channel between the dual seams allows trained technicians to perform 100% non-destructive quality control testing of the welds. The extrusion welding equipment extrudes hot resin through the dual head of the welder resulting in an integration of the hot resin with the sheet liner. These two forms of seam formation are considered superior to other methods of bonding, including gluing. The strength and adequacy of seam welds are tested by some combination of the following test methods: (1) cutting samples from the liner and destructively testing the weld seams; (2) pressure testing the air channel created during the wedge welding process; (3) performing vacuum testing for air tightness of the extrusion welds; and (4) electric spark testing of the conductive liner.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts focus on new products, new quality control procedures, and more efficient manufacturing and installation techniques. Expenditures in 1999 were $1,616,000, compared to $1,845,000 in 1998 and $1,851,000 in 1997.
RAW MATERIALS
The Company's high-grade polyethylene resins are purchased from at least two primary suppliers at each manufacturing location. These resins arrive ready for screening tests already formulated with Company designated stabilizers and antioxidants. The Company consistently works with its suppliers to ensure supply, pricing stability, quality and new product development. Occasionally, resins are in short supply and subject to substantial price fluctuations. The Company has not encountered any significant difficulty to date in obtaining resins in sufficient quantities at all of its facilities to support its worldwide demands for its products. Any significant interruption in resin supplies or abrupt increase in prices could have a material adverse impact on the Company's operations.
APPLICATIONS
This table describes the principal applications of the Company's Products for the past three years based on the sales and operating revenues for each application.
SALES BY MARKET APPLICATION (in thousands)
Solid Waste Containment. This application includes liners for new landfills, and new cells within existing landfills designed for the disposal or storage of non-hazardous wastes. Included within this definition are products used to cover (cap) lined and unlined landfills. Capping is required to prevent rainwater from creating excessive leachate generation, which may then seep into groundwater in unlined landfills. A secondary benefit derived from capping is the collection of methane gas produced as waste decays.
Mining. The mining industry uses our products for the containment and confinement of chemicals used in mining gold, copper, and phosphate. These minerals are dissolved or "leached" from the ore by chemical solutions that are circulated through the ore-bearing crushed rock deposited on top of the liner pad. The pad serves as the collection and drainage system for the mineral-bearing solution. Leaching is a lower cost recovery technique permitting the extraction of minerals from low-grade ore that previously was not processed. The Company's products are also used to contain spent ore, tailings and chemical solutions after the leaching process. Gypsum, a by- product of the phosphate mining industry, is required to be stored on liners because of its acidic nature.
Hazardous Waste Containment. Synthetic liners are extensively used to contain both solid and liquid hazardous waste and substances with the use of liners in these applications mandated in the U.S. by the Hazardous and Solid Waste Amendments of 1984.
Liquid Containment. The Company's products are used in a wide range of liquid containment applications including aquaculture ponds, tank linings, irrigation canals, storm water runoff containment, organic waste from pig and cattle feedlot operations and potable water reservoirs.
Other Applications. The Company's products are used in various other applications involving secondary containment and liquid confinement. These applications are tunnel waterproofing, protection of concrete products from corrosive chemicals and odor control through the use of floating covers. A growing application is the use of its products to promote anaerobic digestion of organic wastes and the capture of the resulting methane gas.
MARKETING AND SALES
Marketing is a worldwide effort conducted by sales personnel located in the United States, France, Germany, the United Kingdom, Italy, the Netherlands, Thailand, Australia, Egypt, and the United Arab Emirates. The Company's multi- tiered sales efforts are focused on engineers, general contractors, facility owners, state and federal regulators and government officials who are responsible for product specifications and the design and awarding of contracts. A strong network of independent commercial agents, dealers and distributors throughout the world work closely with the Company's sales staff.
Advertisements of the Company's products appear regularly in specialized trade publications and on the Company's worldwide web site (www.gseworld.com). The Company participates in trade shows, conducts industry seminars and makes presentations to governmental administrators. Efforts are ongoing to inform engineers and regulators of the benefits to be derived from using our GSE White, GSE Conductive and GundSeal products.
The Company sells its products in a very competitive market place. Substantial quantities of its products are sold through the competitive bidding process, whether in the United States or in foreign countries. The Company bids either directly to the general contractor or owner, or through one of the Company's independent distributors or dealers. The customers' bid proposals establish the design and performance criteria for the products. The Company negotiates the remainder of the contract terms where possible. In most cases, the Company agrees to indemnify the site owner, general contractor and others for certain damages resulting from the negligence of the Company and its employees. The Company often is required to post bid and performance bonds or bank guarantees. In all cases, the Company provides its customers with limited material warranties on its products, and limited installation warranties for its workmanship. These limited warranties may last up to 20 years, but are generally limited to repair or replacement of defective liners or workmanship on a prorated basis up to the dollar amount of the original contract.
In some foreign contracts, the Company may be required to provide the customer with specified contractual limited warranties as to material quality. The Company's product warranty liability in many foreign countries is dictated by local laws in addition to the warranty specified in the contracts. Several of our foreign subsidiaries sell products and installation services under competitively bid construction contracts.
The enactment of numerous environmental laws with corresponding regulations has enhanced the market for the Company's products. In the United States, the Resource Conservation and Recovery Act of 1976, as amended (RCRA); Subtitle C- Hazardous Waste Management; and Subtitle D-State or Regional Solid Waste Plans provide the legal framework for the storage, treatment and disposal of hazardous and non-hazardous wastes. Of particular importance to the Company has been the impact of Subtitle D that regulates the disposal of municipal solid waste (MSW) at roughly 2,300 U.S. landfills. State regulations adopted under this title impose strict compliance standards with regard to groundwater protection, which is exactly what the Company's products are designed to provide.
Subtitle D regulations specify the use of a composite liner system consisting of highly impermeable clay and a geomembrane liner. The liner must be at least 30 mils thick. The United States Environmental Protection Agency (EPA) took another step in its efforts to protect groundwater when it published a presumptive remedy requiring the use of a "liner cap" in closed MSW landfills. This liner cap is designed to prevent groundwater contamination and assist in the containment of subterranean liquid waste plumes. The Company's products have been installed in both applications in landfills located throughout the United States.
In 1980 the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) became law. This law was in response to the dangers of abandoned or uncontrolled hazardous waste sites. Our products are used in the cleanup work undertaken by owners, operators and waste generators that have been compelled by the EPA or a state environmental protection agency to clean up these sites.
RCRA was amended in 1984 by the Hazardous and Solid Waste Amendments of 1984. These amendments require all new hazardous waste landfills to use geosynthetic lining systems composed of two or more liners with leachate collection and drainage systems above and between the liners. These same amendments require surface impoundments or ponds used in the containment of certain hazardous liquids to be double lined. The EPA also established procedures for testing weld seams joining sections of liners. The Company believes that since 1984, its products have been the most widely used in these applications.
Recently, EPA published regulations covering gypsum waste management generated as a by-product of phosphate mining. Gypsum waste must now be stored on synthetic lined containment systems. The EPA and the state agencies have also adopted regulations controlling the handling and storage of hazardous substances, specifically petroleum products and other chemicals contained in tanks and lagoons. The Company's products are designed and used to directly address these applications.
Similar environmental laws and regulations exist in other countries, particularly in the European Community, Japan and the Americas. As the world's populations increase and industrial development continues, the demand for enforcement of existing laws and the adoption of new laws to protect valuable natural resources will increase. The focus of current law is on those projects involving intensive water use and activities that have an impact on groundwater quality. These activities include agricultural irrigation, animal feedlots and compounds, aquaculture facilities, industrial storm water runoff containment areas, canals, mining leach pads and tunnels.
CUSTOMERS
The primary customers for the Company's products are domestic and international, municipal and private companies engaged in waste management, mining, water and wastewater treatment, aquaculture and other industrial activities, including the engineering and civil works construction companies serving these customers. Within the last three years, the Company has sold more than 2 billion square feet of products to customers in more than 70 countries. The Company is a full service organization that strives to provide its customers with a single source of geomembrane liners, related products and services for environmental protection and other uses.
During the years 1999, 1998, and 1997, no single customer accounted for more than 10% of the Company's net sales. In those same years, 54%, 52% and 52% of the Company's net sales were to customers in the United States. 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.
BACKLOG
As of December 31, 1999, the Company's backlog was $44.4 million compared to $60.6 million at December 31, 1998. The Company anticipates that the majority of the value of construction contracts and customer purchase orders included in backlog at December 31, 1999 will be completed or filled prior to the end of 2000, subject to weather and other construction related delays. Contracts and commitments for products and services are occasionally varied, modified, or cancelled by mutual consent.
SEASONALITY AND OTHER BUSINESS CONDITIONS
The greatest volume of product deliveries and installations typically occur during the summer and fall, which results in seasonal fluctuations of revenue. Often, scheduled deliveries are subject to delays at the customers' request
to correspond with customers' annual budgetary and permitting cycles. The Company uses its manufacturing capacity at its various locations in an attempt to mitigate the seasonal fluctuation on its manufacturing, delivery, and installation schedules. (See Supplementary Data.)
COMPETITION
The Company believes that there are approximately 30 companies engaged in the production of various synthetic geomembrane liners worldwide. These companies offer the wide range of products identified in the section on Company Products. The Company's competition is not limited to those companies that manufacture polyethylene liners, but encompasses companies offering PVC, Hypalon, and EPDM geomembranes. A least 12 of the companies manufacturing HDPE liners compete directly with the Company in the United States.
The principal resin types used in the products sold by the Company are high- density polyethylene and very flexible polyethylene. In addition to HDPE and VFPE products manufactured by its primary competitors, the Company's products compete directly with flexible membrane liners manufactured from other forms of resins. Other resins are: polyvinyl chloride (PVC), ethylene propylene diene terpolymer (EPDM), scrim-reinforced chlorosulphonated polyethylene (Hypalon), and polypropylene.
The Company encounters competition in its other product lines in the United States with three companies competing in the sale and installation of geosynthetic clay liners. In the geonet market, six companies offer products that directly compete with the Company's geonet product line.
Competition is based on the performance of the lining systems, installation capacity and pricing. As a full service company that manufactures, sells and installs a full range of geosynthetic products, the Company believes that it maintains its position within the market because of the quality and performance of its products and installation services. The combining of its financial strength with its full service program enables the Company to remain competitive. Pricing remains very competitive with over-capacity in the industry driving margins downward. Two of the larger competitors in the United States merged in late 1999, and the impact of that merger in the marketplace will be more fully understood in the year 2000. One new competitor commenced production of HDPE liner in Taiwan in 1999. The appearance of new competitors in a slow growth market demonstrates a lack of barriers to entry into this market.
EMPLOYEES
The Company had a total of 788 employees as of December 31, 1999, with 579 employed in the United States. During peak construction periods, the Company's workforce increases in all locations. In the off-season construction period, the Company maintains a nucleus of experienced employees somewhat below the peak season staffing levels. Some of the Company's full-time employees in foreign locations are unionized, but the Company has never experienced a strike or lockout. The Company believes its employee relations are satisfactory.
The Company is firmly committed to a policy of Equal Employment Opportunity and administers its personnel policies and conducts its employment practices in a manner which treats each employee and applicant for employment on the basis of merit, experience and other work-related criteria without regard to race, color, religion, sex, national origin, ancestry, age, disability or any other protected class under relevant state and federal laws.
PATENTS AND PROPRIETARY INFORMATION
The Company has received patents from the U.S. Patent and Trademark Office for its GSE White, GSE Conductive and GSE CurtainWall products, as well as its FrictionFlex texturing process. Certain of these patents are either registered or in the process of being registered in select foreign countries. It has registered its new trademark and logo ("GSE") with the same patent office and is in the process of registering this trademark in select foreign countries. The Company has other patents, license-to-use patents (such as GundSeal), and pending applications. Although in the aggregate GSE's patents are important in the operation of its businesses, the loss, by expiration or otherwise, of any one patent or group of patents would not materially effect its business.
ITEM 2.
ITEM 2. PROPERTIES.
The Company manufactures its products in six locations around the world. These operations use flat sheet extrusion and round die extrusion manufacturing technologies to produce products. There are eleven extrusion lines for producing liner products, and three for the production of drainage net products.
UNITED STATES
GSE Lining Technology, Inc. conducts U.S. operations at the Company's headquarters located on a 21.5-acre tract of Company-owned land in an industrial park in Houston, Texas. This location has 31,400 square feet of office space in two buildings, housing administrative, sales, and installation functions. Here the Company has two large manufacturing facilities servicing the U.S. and foreign markets. One manufacturing facility is a 67,000 square foot building of metal skin over steel frame construction that contains seven blown film round die extrusion lines, and one geocomposite line. Fabrication is housed in a 12,000 square foot facility.
The second manufacturing facility in Houston occupies 16.9 acres of Company- owned land with 3,300 square feet of office space, and two buildings with a total of 83,000 square feet for manufacturing operations. The manufacturing buildings house a flat cast sheet-extrusion line, as well as a geonet/geocomposite line and a texturing line. The flat sheet extruder is considered the most precise method in the industry for manufacturing certain mil thickness of sheeting.
The Company's patented GundSeal products are manufactured on one production line housed in a Company-owned 16,000 square foot building located in Spearfish, South Dakota. The plant is located near the sources for clay (bentonite).
GERMANY
GSE Lining Technology GmbH headquartered in Hamburg, Germany, manages the Company's European operations. Its manufacturing facility is located in Rechlin, Germany, on 8.2 acres owned by the Company. From this location, the Company supplies its customers with products manufactured on a flat cast extrusion line and two texturing lines. Operating at the same facility is a fabrication department involved in fabricating products from the Company's StudLiner sheeting. The Company's staff in Hamburg can help its customers in 21 languages.
UNITED KINGDOM
The Company's operations in the United Kingdom are carried out by its subsidiary, GSE Lining Technology Ltd., operating at a .75 acre leased facility in Soham, England, just north of London. This location has 2,500 square feet of office space and 10,652 square feet of manufacturing facilities. Its products are manufactured on a round die extrusion line located on this site. The Company's administrative, sales, and installation service personnel are housed at this location. This facility manufacturers both polyethylene and polypropylene geomembrane products.
EGYPT
The Company owns a 50% interest in two joint ventures, Hyma/GSE Manufacturing Co. and Hyma/GSE Lining Technology Co., a manufacturing company and a trading company. The manufacturing operations are located on a 1.1 acre leased site outside of Cairo. Located on this site are two buildings totaling 34,262 square feet that house a flat sheet extrusion line. The trading company operates out of a small leased facility in Nasr City, Cairo, and its staff sells products manufactured by the Hyma/GSE Manufacturing Co., the Company, and other subsidiaries of the Company.
OTHER
The Company's sales efforts in the United Arab Emirates, Oman, Bahrain, Qatar, Kuwait and Yemen are conducted by GSE Gulf FZE located in leased warehouse and sales facilities in the Jebel Ali Free Trade Zone in Dubai. This joint-venture company warehouses select quantities of products in the duty free trade zone.
The Company's sales and installation operations in Australia are carried out by GSE Lining Technology Pty Ltd. operating out of leased offices located in Moorebank, New South Wales. It offers the full range of Company geomembranes and related products, coupled with installation service for customers located throughout the South Pacific Rim.
Sales activities for the Company in Asia are conducted by GSE Lining Technology Company Ltd. located in leased office space in Bangkok, Thailand. All inquiries from customers, engineering firms and construction companies from Far East countries about the Company's products and services are directed through this office.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
For information about various legal proceedings involving the Company, see Note 17 of the Notes to 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 under the symbol GSE. The following table shows the quarterly range of high and low sale prices for the stock through December 31, 1999.
The approximate number of record holders of the Company's common stock at February 18, 2000, was 318. Management estimates that the aggregate number of beneficial holders exceeds 2,000.
The Company does not currently intend to declare or pay dividends on its Common Stock and expects to retain funds generated by operations for the development and growth of the Company's business. The Company's future dividend policy will be determined by the Company's Board of Directors on the basis of various factors, including among other things, the Company's financial condition, cash flows from operations, the level of its capital expenditures, its future business prospects, the requirements of Delaware law and any restrictions imposed by the Company's credit facilities.
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.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995, and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. When used in this report, the words, "anticipate", "believe", "estimate", "expect", "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitations, competitive market factors, worldwide manufacturing capacity in the industry, general economic conditions around the world, raw material pricing and supply, governmental regulation and supervision, seasonality, distribution networks, and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended.
RESULTS OF OPERATIONS
General
On January 23, 1997, the Company purchased 2,071,656 shares of its common stock at a price of $7.00 per share for a total cost of $14,502,000. On December 16, 1997, the Company purchased 2,200,000 shares of its common stock at a price of $5.40 per share for a total cost of $11,880,000. Both of these transactions were funded from the Company's available cash. The Company has repurchased 394,357 shares of its common stock in open market transactions since September 1998, under a 1,000,000 share repurchase program. At December 31, 1999, the Company had 12,768,630 shares outstanding.
Year Ended December 31, 1999, Versus Year Ended December 31, 1998
The Company's net sales and operating revenue of $178,569,000 decreased $986,000, or less than 1%, in 1999 from the $179,555,000 reported in 1998. The decrease was primarily the result of changes in the US dollar value of foreign entities functional currencies that caused 1999 sales to decrease 3% compared to 1998. Product prices were about the same in 1999 as 1998. 1999's net sales and operating revenue were enhanced by 48% of the revenue stream from products sold with added value installation services vs. 46% in 1998. Sales to the North American market were $96,551,000 in 1999 compared with $94,900,000 in 1998. North American unit sales and unit prices were up 1% from 1998. Sales to foreign markets were $82,018,000 in 1999 compared with $84,655,000 in 1998. Decreases in foreign exchange rates caused $2,100,000 of the drop. Sales, in units, in foreign markets were down 2% from 1998.
Gross profit was $35,921,000 in 1999 compared to $34,928,000 in 1998. This 3% increase of $993,000 was primarily caused by improved margins as units shipped were down 1%. Gross profit margin improved to 20% of sales in 1999 from 19% of sales in 1998. While 1999 selling prices of products were virtually the same as 1998's, lower resin cost and improved installation service margins caused improvements in the gross margin.
Selling, general and administrative expenses of $24,649,000 were $18,000 higher in 1999 than in 1998. 1998 expenses included approximately $1,000,000 severance paid to the former President and CEO. Excluding this one-time expense, selling, general and administrative expenses would have been up by $1,000,000. Expenses were down in the Company's foreign operating units by almost $300,000 caused primarily by the change in foreign exchange rates. The increase came from the U.S. operations and was primarily related to amortization of the cost of the Company's new ERP system.
Interest expense was $657,000 lower in 1999 than in 1998. This reduction was the result of a lower level of average debt outstanding. During 1999 the company repaid $5,000,000 of its 11.17% interest rate debt and reduced debt in Germany by $924,000.
Foreign exchange losses of $16,000 were recorded in 1999 compared with foreign exchange gains of $209,000 in 1998. Last year's gains were primarily the result of the improved value of the German Deutsche Mark. These gains and losses result from the Company's foreign operating units entering into sales and purchases in currencies other than their functional currency.
The Company recorded Other Income of $289,000 in 1999 compared with Other Income of $162,000 in 1998. In 1999 there was a decrease of approximately $211,000 in income from the Company's Egyptian joint ventures compared to 1998.
The Company's provision for income taxes was $3,554,000 in 1999 compared with $2,912,000 in 1998. The tax provision in both years was provided at statutory rates adjusted for permanent differences.
Year Ended December 31, 1998, Versus Year Ended December 31, 1997
The Company's net sales of $179,555,000 decreased $19,763,000, or 10%, in 1998 from the $199,318,000 reported in 1997. The decrease resulted from a 5% decrease in units sold and a 5% drop in product and services selling prices. The effect on net sales of changes in foreign exchange rates was less than 1%. Sales to the North American market were $94,900,000 in 1998 compared with $104,109,000 in 1997. North American unit sales were down 5% from 1997. Sales to foreign markets were $84,655,000 in 1998 compared with $95,209,000 in 1997. Decreases in foreign exchange rates caused $1,500,000 of the drop. Sales, in units, to foreign markets were down 5% from 1997.
Gross profit was $34,928,000 in 1998 compared to $36,101,000 in 1997. This 3% decrease of $1,173,000 was primarily caused by 5% lower volumes offset by improved margins. Gross profit margin improved to 19% of sales in 1998 from 18% of sales in 1997. While 1998 selling prices of products were lower than 1997's as a result of lower resin cost, cost reductions exceeded lower selling prices.
Selling, general and administrative expenses of $24,631,000 were $524,000 higher in 1998 than in 1997. 1998 expenses included approximately $1,000,000 severance paid to the former President and CEO, who left the Company in April. Excluding this one-time expense, selling, general and administrative expenses would have been down by $476,000. Expenses were down in the Company's foreign operating units by almost $300,000 with the remainder in the U.S. operations.
Interest expense was $572,000 lower in 1998 than in 1997. This reduction was the result of a lower level of average debt outstanding. During 1998 the company repaid $5,000,000 of its 11.17% interest rate debt.
Interest income of $1,058,000 in 1998 compared with $1,796,000 in 1997. This decrease was the result of lower levels of short-term investments in 1998. Short-term investments were reduced $11,880,000 in December 1997 to repurchase 2,200,000 of the Company's common shares.
Foreign exchange gains of $209,000 were recorded in 1998 compared with foreign exchange losses of $334,000 in 1997. This year's gains were primarily the result of the improved value of the German Deutsche Mark. These gains and losses result from the Company's foreign operating units entering into sales and purchases in currencies other than their functional currency.
The Company recorded Other Income of $162,000 in 1998 compared with Other Expense of $242,000 in 1997. In 1998 there was an improvement of approximately $450,000 in income recorded from the Company's Egyptian joint ventures compared to 1997.
The Company's provision for income taxes was $2,912,000 in 1998 compared with $3,296,000 in 1997. The tax provision in both years was provided at statutory rates adjusted for permanent differences.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had working capital of $60,715,000 of which $16,873,000 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 $31,360,000 in debt and $93,271,000 in stockholders' equity at December 31, 1999.
The Company has a $25,000,000 multi-currency revolving credit facility (the "Revolver") with Bank of America as agent bank. The Revolver, as amended, matures on September 30, 2002, and 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, 1999, and December 31, 1998, there was no balance outstanding on the Revolver. However, at December 31, 1999, letters of credit issued under this facility totaled $975,000 thereby reducing the balance available to $24,025,000 (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.
The Company has credit facilities with two German banks to support its European cash management and bank guarantee requirements in the amount of DM 12,000,000. These revolving credit facilities are secured by property and plant in Germany, which also secures an installment loan and matures in September, 2002, and bears interest at various market rates. These credit facilities are used primarily to guarantee the performance of European installation contracts. At December 31, 1999, the Company had DM 7,162,000 available under these credit facilities with DM 4,838,000 of bank guarantees outstanding.
The Company has invested approximately $6,000,000 for the purchase of equipment and working capital for its newly formed operations in Thailand. On June 15, 2000, the Company will 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 any foreseeable cash requirements during 2000.
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.
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.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its installation, remediation and testing of systems. As a result of those efforts the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The cost incurred by the Company in the assessment, replacement and installation of Year 2000 systems was approximately $5.0 million. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year to insure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 7 A.
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to interest rate market risk is limited to credit facilities that bear interest at the floating rates. As of December 31, 1999, there was no balances outstanding under the Revolvers. A change in interest rates would have no impact on the Company's earnings.
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. The Company's German operation will primarily take place within the European Union(EU). The exchange rates within the EU are fixed in relation to the Euro, the currency of the EU. The Euro structure will eliminate the currency fluctuations among members of the EU and should eliminate a great deal of the currency risks associated with sales by the Company's German operation.
The Company routinely enters into fixed price contracts with commencement of performance dates spread throughout the year. Due to the nature of the construction business into which our products are sold, the Company has limited contractual means of passing through resin price increases. The Company believes that it successfully manages this risk by:
a) setting expiration dates on bids,
b) negotiating delays in announced resin price increases,
c) carrying inventory to meet expected demand and
d) planning and staying informed on economic factors influencing resin prices.
The Company does not enter into purchase contracts for the future delivery of raw materials.
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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 28, 2000
GUNDLE/SLT ENVIRONMENTAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
ASSETS
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.
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 1999, 1998 and 1997 was $2,577,000, $2,676,000 and $2,411,000, 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, determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, it is reduced to the discounted cash flow value. As of December 31, 1999 and 1998, accumulated amortization was $13,878,000 and $12,613,000, respectively.
Revenue and cost recognition --
The Company recognizes revenue upon shipment of product to the customer except when work is being performed under an installation contract. Revenues from installation contracts are recognized on the 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.
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.
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selling, general and administrative costs are charged to expense as incurred.
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 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.
Foreign exchange contracts --
The Company occasionally 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 ten year life of the contract. 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.
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 11 for disclosures required by Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1997 and 1998 contain certain reclassifications to conform with the presentation used in 1999.
Accounting Changes --
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Financial Instruments and Hedging Activities. Statement 133 requires that all derivatives be recognized as assets and liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Statement 133 is effective for fiscal years beginning after June 15, 2000 and early adoption is permitted. Because of the Company's minimal use of derivatives, management does not anticipate the adoption of Statement 133 will have a significant effect on net income or the financial position of the Company.
(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:
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) INVENTORY --
Inventory consisted of the following at December 31:
(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:
(8) LONG-TERM DEBT --
Long-term debt consisted of the following at December 31:
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company entered into a $25,000,000 multi-currency revolving credit facility (the "Revolver") with Bank of America, N.A. (formerly NationsBank of Texas, N.A.) as agent, on July 27, 1995. The Revolver as amended, matures on September 30, 2002, and bears interest, at the Company's option, at the bank's prime rate or the reserve adjusted LIBOR plus an applicable margin based on the ratio of funded debt to total capitalization. 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, 1999, there was no balance outstanding under the Revolver. However, letters of credit issued under this facility totaled $975,000 reducing the balance available to $24,025,000. The letters of credit primarily secure performance of installation contracts and self-insurance programs.
The Company has credit facilities with two German banks to support its European cash management and bank guarantee requirements in the amount of DM 12,000,000. These revolving credit facilities are secured by property and plant in Germany which also secures an installment loan that matures in September, 2002, and bears interest at various market rates. These credit facilities are used primarily to guarantee the performance of European installation contracts. At December 31, 1999, the Company had DM 7,162,000 available under these credit facilities with DM 4,838,000 of bank guarantees outstanding.
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% that began 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 11.17% Notes, which are unsecured, require quarterly interest payments at a rate of 11.17% that began September 15, 1990, and annual principal payments of $5,000,000 that began June 15, 1996. The terms of the 11.17% Notes are consistent with the terms of the 7.34% Notes.
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 equivalents, 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 $31,360,000 and $37,414,000 of fixed-rate debt instruments at December 31, 1999 and 1998, with fair values of approximately $31,438,000 and $35,586,000, 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 discount or premium the Company would receive or have to pay to retire all debt at such date.
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 debt is marked to market as the U.S. Dollar/DM exchange rate changes. These adjustments are included as a component of comprehensive income 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. The swap agreement has been amended to anticpate its settlement in Euros.
(10) PER SHARE INFORMATION--
The following table sets forth the weighted average shares for the computation of basic and diluted earnings per share (in thousands):
(11)STOCKHOLDERS' EQUITY --
On September 18, 1998, the Company's board of directors adopted a stock repurchase plan under which the company was authorized to repurchase up to 1,000,000 shares of its outstanding common stock in open market transactions depending on market conditions. As of December 31, 1999, stockholders' equity included 394,357 shares repurchased under the plan at an aggregate cost of $1,522,975.
During 1997, the Company purchased 4,271,656 shares of its common stock at a cost of $26,382,000. The transaction was funded with the Company's available cash balances. The shares purchased represented approximately 26% of the Company's then outstanding stock.
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, 1999 and 1998, 39,186 and 35,311 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 director 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
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1999, 1998 and 1997, the board of directors granted 0, 0, and 138,840 shares, respectively 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 except under certain circumstances when the employee is terminated by the Company. Unvested shares issued to employees who terminate employment prior to the plans three year vesting period are transferred into treasury shares except under certain circumstances when the employee is terminated by the Company.
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, of non-qualified stock options to be issued 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.
The stock option activity under each plan is set forth below:
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Substantially all outstanding options were priced between $4.00 and $11.63 per share at December 31, 1999. The weighted average of the remaining contractual life for the outstanding options at December 31, 1999, was 5.4 years. The weighted average price of options outstanding during 1999, 1998 and 1997 was $4.84, $5.69 and $6.59, respectively.
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 was $24,000, $(34,000), and $164,000 for 1999, 1998, and 1997, 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 1999, 1998 and 1997, respectively: risk-free interest rates of 6.5%, 4.7% and 6.0%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 60%, 40% and 44% and a weighted-average expected life of the option of 5 to 7 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 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 1999 and 1998 was $258,000 and $639,000, respectively.
(12) INCOME TAXES --
Domestic and foreign income before income taxes were as follows:
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes consisted of the following:
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:
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $5,274,000 at December 31, 1999. 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
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an 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.
(13) 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 matches a portion of the employees' contributions. The Company contributed $472,000, $441,000 and $412,000 to the plan during the years ended December 31, 1999, 1998 and 1997, respectively. Under the terms of the plan, contributions to the plan may be discontinued at any time.
(14) PENSION PLAN --
The Company's German subsidiary has an unfunded pension plan providing benefits to 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, 1999, 1998, and 1997 was $84,000, $132,000 and $96,000 respectively. The actuarial present value of accumulated benefits was $1,302,000 and $1,453,000 as of December 31, 1999 and December 31, 1998, respectively. The projected benefit obligation for service rendered to date, net of unrecognized prior service cost, was $1,302,000 and $1,453,000 as of December 31, 1999 and 1998, respectively.
The computation assumed a discount rate on benefit obligations of 7%, annual salary increases of 2% and annual benefit increases of 2% for 1999 and 1998.
(15) CONCENTRATION OF CREDIT RISK --
Accounts receivable, as financial instruments, could potentially subject the Company to concentrations of credit risk. The Company continuously evaluates the creditworthiness of its customers and may require customers to provide letters of credit to guarantee payments. During 1999, 1998 and 1997, no single customer accounted for 10% or greater of total net sales.
(16) 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, 1999, 1998 and 1997 were $1,616,000, $1,845,000 and $1,851,000 respectively.
(17) 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, on a prorated basis. The Company may also indemnify the site owner or general contractor for other damages resulting from negligence of the Company's employees. The Company often is required to post bid and performance bonds or bank guarantees covering the full amount of an installation contract.
Although the Company is not exposed to the type of potential liability that might arise from being in the business of handling, transporting or storing hazardous waste or materials, the Company could be susceptible to liability for environmental damage or personal injury resulting from defects in the Company's products or negligence by Company employees in the installation of its lining systems. Such liability could be substantial because of the potential that hazardous or other waste materials might leak out of their containment system into the environment.
GUNDLE/SLT ENVIRONMENTAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company maintains liability insurance, which includes contractors pollution liability coverage in amounts which it believes to be prudent. However, there is no assurance that this coverage will remain available to the Company. While the Company's claims experience to date may not be a meaningful measure of its potential exposure for product liability, the Company has experienced no material losses from defects in products and installations.
Litigation and claims --
The Company is involved in litigation arising in the ordinary course of business, which in the opinion of management, will not have a material adverse effect on the Company's financial position or results of operations.
Operating Leases --
The Company leases certain equipment through operating lease arrangements of varying terms. Annual rental expense under the terms of non-cancelable operating leases is less than 1% of consolidated revenues.
(18) SEGMENT INFORMATION --
The Company operates exclusively in the geosynthetic liner market. Substantially all sales and operating revenues result from the sale and installation of the Company's manufactured products. These products are manufactured and sold in various locations throughout the world using similar raw materials (polyethylene resin), production processes (flat or round die extrusion) and distribution channels (product and installation sales made directly to customers or through representatives of the Company).
Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information allows the aggregation of an enterprise's segments if they are similar. The Company operates in different geographic areas, however, the Company has reviewed the aggregation criteria and determined that the Company operates as one segment based on the high degree of similarity of the following aspects of the Company's operations:
. nature of the products and services,
. raw materials and production processes used,
. customers and markets served,
. methods used to distribute products and services,
. effects of regulatory influences on the market, and the economic characteristics of the products and services in different geographical areas.
GUNDLE/SLT ENVIRONMENTAL, INC. SUPPLEMENTARY DATA
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) --
Unaudited quarterly information for fiscal 1999 and 1998 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, 1999, 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 12-27)
(a)(2) Supplementary data (see page 28)
(a)(3) Financial schedule (see page 29)
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 -- None.
(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 2nd day of March, 2000.
GUNDLE/SLT ENVIRONMENTAL, INC.
By /s/ Samir T. Badawi ___________________________________________ Samir T. Badawi, 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 2nd day of March, 2000.
INDEX TO EXHIBITS