-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LrK9+Q+4VOAQGKhhNRp/at+BMFbTh5xTpVXoDTqOfhoZiZ/hWAHwq/mLKGP7YBQV UqoFRPuJ4FERUsfFzLHsTQ== 0000890566-97-000684.txt : 19970401 0000890566-97-000684.hdr.sgml : 19970401 ACCESSION NUMBER: 0000890566-97-000684 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANKNOLOGY ENVIRONMENTAL INC /TX/ CENTRAL INDEX KEY: 0000867888 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 760284783 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18899 FILM NUMBER: 97571791 BUSINESS ADDRESS: STREET 1: 5225 HOLLISTER CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7136908265 MAIL ADDRESS: STREET 1: 5225 HOLLISTER CITY: HOUSTON STATE: TX ZIP: 77040 10-K 1 Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (mark one) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file No. 0-18899 TANKNOLOGY ENVIRONMENTAL, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0284783 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10235 W. LITTLE YORK, SUITE 405 HOUSTON, TEXAS 77040 (Address of principal executive office) Registrant's telephone number, including area code (281) 892-7160 5225 HOLLISTER STREET, HOUSTON, TEXAS 77040 (713) 690-8265 (Former address and telephone number of principal executive office) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 7, 1997, the registrant had 14,244,012 outstanding shares of Common Stock, par value $0.01 per share, and at such date, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was $13.3 million. For purposes of this computation, all officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Notice of Annual Meeting of Shareholders and definitive Proxy Statement pertaining to the 1996 Annual Meeting of Shareholders (the "Proxy Statement") and filed pursuant to Regulation 14A is incorporated herein by Reference into Part III of this report. TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES INDEX PAGE PART I. Item 1. Business.................................................. 3 Item 2. Properties................................................ 6 Item 3. Legal Proceedings......................................... 6 Item 4. Submission of Matters to a Vote of Security Holders....... 6 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 7 Item 6. Selected Financial Data................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 9 Item 8. Financial Statements and Supplementary Data............... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 30 PART III. Item 10. Directors and Executive Officers of the Registrant........ 31 Item 11. Executive Compensation.................................... 31 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 31 Item 13. Certain Relationships and Related Transactions............ 31 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 32 2 PART I. ITEM 1. BUSINESS GENERAL The Company is a holding company that conducts its business through various wholly owned subsidiaries. The Company was incorporated in the State of Texas in June 1989, for the purpose of acquiring all of the outstanding stock of Tanknology Corporation International ("Tanknology") in a reorganization in connection with a private offering of securities by the Company. During 1995 and 1996, the Company has sold or scheduled to sell all of its operations except for Energy Recovery Resources, Inc. ("ERRI"). ERRI performs wastewater treatment, waste oil recycling, and the recovery and handling of other non-hazardous fluid wastes for owners and operators of underground storage tanks ("USTs"), aboveground storage tanks ("ASTs"), and other commercial and industrial waste generators. In January 1994, the Company acquired from Jack Holder Enterprises, Inc. those assets and liabilities that comprise ERRI. Those operations the Company has sold or scheduled to sell include: (i) Tanknology, a provider of leak detection services for USTs and ASTs using the VacuTect(R) process, a patented nonvolumetric method owned by Tanknology (Tanknology was incorporated in 1988 and sold in October 1996); (ii) Tanknology Canada (1988), Inc., ("Tanknology Canada"), a provider of leak detection services in Canada (Tanknology Canada was incorporated in 1988 and sold in October 1996); (iii) USTMAN Industries, Inc. ("USTMAN"), a provider of statistical inventory reconciliation ("SIR") leak detection services to owners and operators of USTs (USTMAN was purchased in 1992 and sold in October 1996); (iv) Mankoff Equipment, Inc. ("Mankoff"), a provider of remediation services, tank upgrades, and other environmental products and services to owners and operators of USTs and ASTs (Mankoff was acquired in 1993 and sold in December 1995); (v) Engineered Systems, Inc. ("ESI"), a designer and manufacturer of automated systems and products for petroleum-oriented companies for use in bulk liquid loading terminals, fuel management, pipeline supervision, environmental data gathering, and access control. ESI was purchased in 1993, and in December 1995 the Company announced its intention to dispose of ESI; however, as of December 1996, ESI has not been sold. Tanknology, including its cathodic protection division d/b/a/ Tanknology Cathodic Protection, USTMAN, and Tanknology Canada are known collectively as the Tank Testing Group. The principal executive offices of the Company are located at 10235 W. Little York, Suite 405, Houston, Texas 77040, and its telephone number is (281) 892-7160. GOVERNMENT REGULATIONS The Clean Water Act of 1972, The Safe Drinking Water Act of 1974, RCRA, and The Comprehensive Environmental Response Compensation and Liability Act of 1980 are federal regulations that govern the treatment of water and wastewater. In addition, local and state governmental agencies have established stringent standards limiting the type and quantity of chemicals and wastewater that can be discharged into the local sewer systems and waterways by individuals and commercial entities. These regulations prohibit the discharge of any pollutant into the public waterway that will interfere with the operation or performance of the public treatment facility. In many instances, wastewater may be pretreated to remove the pollutant. After the pollutant is removed, the wastewater may be discharged into the public waterway. Used oil is defined as any oil refined from crude oil or synthetic oil and, as a result of use, storage, or handling, has become unsuitable for its original purpose due to the presence of impurities or loss of original properties, but which may be suitable for further use and is economically recyclable. RCRA, as well as many state and local regulations, prohibits anyone from collecting, transporting, storing, recycling, using or disposing of used oil in any manner that endangers public health or welfare. Processors and transporters of used oil must obtain operating permits issued by local governmental authorities, and are required to comply with certain regulations related to the processing facility, waste oil storage, and documentation and reporting of activities. Wastewater processing and waste oil recycling are performed through the Company's ERRI subsidiary. 3 Business Strategy The Company's business strategy includes capitalizing on the opportunities for growth in its service area. The Company has constructed a new processing facility and expanded its wastewater and waste oil treatment business in the Charlotte, North Carolina area. The new facility has increased the capacity of wastewater and waste oil that can be treated and is capable of processing certain products that could not be handled at the Company's former location from which ERRI relocated during 1996. In addition to its investment in ERRI, the Company has cash and liquid investments of $29,848,000 at December 31, 1996. The Company and its Board of Directors are evaluating alternatives for use of these excess funds. OPERATIONS WASTEWATER TREATMENT AND WASTE OIL RECYCLING The Company, through its ERRI subsidiary, provides wastewater treatment, waste oil recycling, and the recovery and handling of other non-hazardous fluid wastes. Its customers include owners and operators of USTs and ASTs and other storage facilities, as well as commercial and industrial businesses that need to dispose of oil, chemicals, and wastewater generated by or used in their operations. Treated water is processed to meet local quality standards before being discharged into the sanitary sewer. Waste oil is recycled into high quality, low sulfur, high energy substitutes for Number 2 through Number 4 fuel oil. The recycled oil is then sold to asphalt plants, fuel blending companies, and various other industrial accounts, such as concrete and textile plants. Any unusable, non-recoverable oils are transported to an incineration plant. FUEL SYSTEM PRODUCTS The Company, through its ESI subsidiary, produces a variety of customized computer systems, both hardware and software, for use in controlling, monitoring, and gathering data associated with the movement of liquids, primarily petroleum and petrochemicals. The Company elected to discontinue operations at its ESI subsidiary effective as of December 31, 1995 and put the assets of the business up for sale. As of December 31, 1996 ESI has not been sold. PERSONNEL As of December 31, 1996, the Company employed 57 people, including those employed at ESI. None of the Company's employees are represented by a labor union. The Company considers relations with its employees to be satisfactory. MARKETING The Company's products and services are marketed primarily to wastewater and waste oil generators and fuel product distributors. The Company's marketing efforts include trade publication advertising, presentation of products and services at trade shows, and personal sales calls. The Company's sales force consists of sales managers and independent sales agents who are paid commissions. In addition to the Company's headquarters in Houston, Texas, at December 31, 1996, the Company's ERRI subsidiary operates in its own treatment plant in Charlotte, North Carolina, while ESI operates in its facility in Tempe, Arizona. The Company performs service work for customers pursuant to a standard written service order, specified contract, or under longer-term negotiated agreements. During 1996 and 1995, the Company provided wastewater treatment and waste oil recycling services to approximately 700 customers. During each of the years ended December 31, 1996 and 1995, Holston Companies accounted for approximately 12% of the Company's total revenues from continuing operations. 4 RESEARCH AND DEVELOPMENT The Company is not currently involved in any resarch and development projects. FOREIGN OPERATIONS The Company generated no revenues from foreign sources from continuing operations during 1996, 1995, and 1994. COMPETITION The Company's ERRI subsidiary operates predominantly within a 150-mile radius of Charlotte, North Carolina and competes with several regional and national wastewater treatment and waste oil recycling firms. Competition is based on price, service, reliability, reputation, and plant capabilities. Many of these competitors are substantially larger and have significantly greater capital and other resources than the Company. INSURANCE The Company's business, which involves working with volatile and hazardous substances, exposes it to substantial risks for which the Company could be held liable for damage to persons or property caused by any release, spill, fire, or explosion that occurs as a result of the conduct of its business. Such liability could be on the basis of negligence, strict liability, contract, or otherwise. The Company has obtained pollution and professional liability insurance in addition to its general liability, automobile liability, and workers compensation insurance. This insurance is subject to coverage limits. Therefore, there can be no assurance that liabilities that may be incurred by the Company will be covered by its insurance policies or, if covered, that the dollar amount of such liabilities will not exceed the Company's coverage limits. Even a partially uninsured claim, if successful and of significant magnitude, could have a material adverse effect on the Company's financial condition. TRADEMARKS AND PATENTS The Company has registered the following marks with the U.S. Patent and Trademark Office (those marks designated with an asterisk were registered for an initial term of 20 years, all others were registered for an initial term of ten years, and all may be renewed for ten-year terms). All of these marks are expected to be sold in connection with the planned sale of ESI. ESI-FUEL* ESI-TRAC* ESI ENGINEERED SYSTEMS INC. & Design* ESI-TALK* ESI IMAGE The Company has U.S. patents on the following inventions, listed by title and expiration date: Communications System with Repeater Stations October 28, 1997 Power Failure Detection and Restarting System November 22, 1997 Sequential Card Reader System June 16, 1998 Remote Verification Lockout System October 20, 1998 Card Reader Security System October 20, 1998 Electronic Control System June 15, 1999 Universal Document Control System December 7, 1999 End of Transaction Control System February 25, 2003 Data Scrambling System and Method May 27, 2003 5 ITEM 2. PROPERTIES The Company's principal offices are located in an office building at 10235 W. Little York, Suite 405, Houston, Texas, which the Company rents. Most administrative functions are conducted from such facility. ERRI's office and processing plant is located on a six-acre site in the Charlotte, North Carolina area. ESI's principal offices are located in a 32,000 square foot facility at 2001 West Campus Drive, Tempe, Arizona, which the Company owns. The Company believes that its existing facilities and equipment are well maintained, are in good operating condition and are suitable and adequate for their intended purposes. ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation and routine claims from time to time. Certain of the Company's litigation and claims are covered by insurance with a maximum deductible of $50,000. In addition, the Company is contingently liable for up to $1.25 million for liabilities relating to services performed by the Tank Testing Group prior to October 25, 1996. The Company has recorded a liability for the $1.25 million contingency as of December 31, 1996. In Management's opinion, the litigation and claims in which the Company is currently involved are not material to the Company's consolidated financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders during the fourth quarter ended December 31, 1996. 6 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the Symbol: "TANK." The Common Stock began trading on June 19, 1991. Prior to that time, there was no established public trading market for the Common Stock. The following table sets forth the quarterly high and low sale prices of the Common Stock, as reported on the NASDAQ National Market for the calendar quarters indicated: Calendar Period High Low -------------------- ------------- ----------- 1996: First Quarter 3-1/4 1-5/8 Second Quarter 3-1/32 2-1/8 Third Quarter 2-7/16 1-13/16 Fourth Quarter 2-1/2 1-13/16 1995: First Quarter 2-7/8 1-13/16 Second Quarter 2-1/2 1-13/16 Third Quarter 2-1/2 1-9/16 Fourth Quarter 2-3/8 1-1/2 As of March 7, 1997, there were 324 record holders of the Common Stock. To date, the Company has not paid cash dividends on its Common Stock. It is the policy of the Company to continue retaining earnings for use in the Company's operations and to fund the Company's future activities. On March 26, 1992, the Board of Directors approved the repurchase by the Company of up to 500,000 shares of its Common Stock in private or public transactions. On January 19, 1993 and July 19, 1994, the Board increased the authorization by another 500,000 and 1,000,000 shares, respectively. As of March 7, 1997 the Company had purchased 955,225 shares pursuant to such program; however, no shares were repurchased during 1995 and 1996. 7 ITEM 6. SELECTED FINANCIAL DATA During 1995 and 1996, the Company has sold or scheduled to sell all of its operations except for ERRI. The Company acquired ERRI during 1994. The statement of operations data for all years shown, except 1996, have been reclassified to reflect results from continuing operations. See Notes 1 and 3 to the Consolidated Financial Statements. The following data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report.
Year Ended December 31, ------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Statement of Operations Data: Revenues ............................. $ 2,199,154 $ 2,374,637 $ 2,477,349 $ -- $ -- Cost of services ..................... 1,554,132 1,316,499 1,337,769 -- -- ------------ ------------ ------------ ------------ ------------ Gross profit ......................... 645,022 1,058,138 1,139,580 -- -- Selling, general and administrative expenses (1) ......................... 2,428,537 2,197,363 1,921,482 1,335,170 1,341,464 ------------ ------------ ------------ ------------ ------------ Loss from operations ................. (1,783,515) (1,139,225) (781,902) (1,335,170) (1,341,464) Other income (expense), net .......... 910,142 749,013 251,413 324,156 726,552 ------------ ------------ ------------ ------------ ------------ Loss from continuing operations ........................... before income taxes ................................ (873,373) (390,212) (530,489) (1,011,014) (614,912) Benefit for income taxes ............. (339,476) (150,687) (199,592) (384,185) (233,666) ------------ ------------ ------------ ------------ ------------ Loss from continuing operations ........................... (533,897) (239,525) (330,897) (626,829) (381,246) Income (loss) from discontinued operations ................... 1,288,997 (8,349,580) 1,873,875 5,544,274 4,051,606 ------------ ------------ ------------ ------------ ------------ Net income (loss) .................... $ 755,100 $ (8,589,105) $ 1,542,978 $ 4,917,445 $ 3,670,360 ============ ============ ============ ============ ============ Earnings (loss) per share: From continuing operations ...................... $ (0.04) $ (0.01) $ (0.02) $ (0.04) $ (0.03) From discontinued operations ....................... 0.09 (0.59) 0.13 0.37 0.27 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) per share ............................ $ 0.05 $ (0.60) $ 0.11 $ 0.33 $ 0.24 ============ ============ ============ ============ ============ Weighted average common shares outstanding .......................... 14,237,012 14,230,012 14,511,248 14,931,258 15,127,969 ============ ============ ============ ============ ============
(1) A substantial portion of selling, general and administrative expenses are considered to be general corporate expenses, which management did not allocate to discontinued operations. However, subsequent to December 31, 1996, these expenses have been substantially reduced.
AS OF DECEMBER 31, ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Balance Sheet Data: Cash and cash equivalents ............ $11,421,710 $14,967,107 $ 6,249,636 $ 6,344,025 $ 6,566,970 Short-term investments ............... 18,425,979 3,694,873 7,483,075 9,841,270 9,917,721 Working capital ...................... 29,001,908 24,896,104 26,300,941 29,146,392 27,447,259 Total assets ......................... 43,033,894 42,276,610 52,917,420 55,358,301 48,790,644 Long-term debt, excluding current maturities ................... -- -- -- -- -- Total shareholders' equity............ 40,432,973 39,665,133 48,238,488 48,841,217 43,993,381
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto and "Selected Financial Data" included elsewhere in this Report. GENERAL The following table sets forth, for the periods indicated, the percentage relationship that certain items in the Company's Statement of Operations bear to revenues: Year ended December 31, --------------------------- 1995 1994 1996 (Restated)(Restated) ----- ----- ----- Revenues ......................................... 100.0% 100.0% 100.0% Cost of services ................................. 70.7 55.4 54.0 ----- ----- ----- Gross profit ..................................... 29.3 44.6 46.0 Selling, general and administrative expenses ..... 110.4 92.6 77.6 ----- ----- ----- Loss from operations ............................. (81.1) (48.0) (31.6) Other income (expense), net ...................... 41.4 31.6 10.2 ----- ----- ----- Loss from continuing operations before income taxes ...................... (39.7) (16.4) (21.4) Income tax benefit ............................... (15.4) (6.3) (8.1) ----- ----- ----- Loss from continuing operations .................. (24.3) (10.1) (13.3) Income (loss) from discontinued operations and gain (loss) on sale of discontinued operations ... 58.6 (351.6) 75.6 ----- ----- ----- Net income (loss) ................................ 34.3% (361.7)% 62.3% ===== ===== ===== RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues from wastewater treatment and waste oil recycling services at the Company's Energy Recovery Resources, Inc. ("ERRI") division declined by 7.4% from $2,375,000 during the year ended December 31, 1995 to $2,199,000 during the year ended December 31, 1996. Such revenue decrease was primarily due to operational delays caused by the relocation of ERRI's processing equipment to the newly constructed treatment facility in the Charlotte, North Carolina area. The transfer of the processing equipment took place in stages over the course of the year, but was essentially completed by year-end 1996. Gross profit declined by $413,000 to $645,000 during 1996 from $1,058,000 during 1995. When measured as a percentage of sales, the gross margin declined to 29.3% during 1996 from 44.6% during the previous year. The Company incurred certain one-time personnel and transportation costs associated with ERRI's move to its new location. Other redundant costs related to the operation of two processing plants were also incurred during 1996. Additionally, during the first half of 1996, processing operations in the new facility were not as efficient as that of the old facility due to the new equipment and processing techniques employed and the learning curve involved with its operation. Management believes that as of year-end 1996, the operating efficiency in the new facility has improved relative to the first half of the year. Selling, general and administrative expenses increased $231,000 to $2,428,000 in 1996 from $2,197,000 during 1995, mainly due to the addition of management and supervisory personnel needed to start-up and operate the new more complex processing facility. Other income and expense, consisting mainly of interest earned on the Company's investments, and gains and losses on the disposition of fixed assets, grew from $749,000 during 1995 to $910,000 during 1996, principally due to an increase in the amount invested as a result of the Company's sale of certain subsidiaries during the fourth quarter of 1996. 9 A substantial portion of selling, general and administrative expense represents general corporate overhead, which management did not allocate to discontinued operations. Subsequent to the sale of its Tank Testing Group, management has substantially reduced corporate personnel and costs to a level more commensurate with ongoing current operations. As a result of the above factors, during the year ended December 31, 1996, the Company lost $534,000 from continuing operations compared to a loss of $239,000 during the year ended December 31, 1995. During 1996, the Company sold its subsidiaries that provided leak detection and cathodic protection services for USTs ("the Tank Testing Group") to an independent third party. The Company recorded a gain on the sale of the Tank Testing Group of $1,277,000, net of a provision for income taxes of $788,000. The Company also accrued an additional $1.25 million for contingent liabilities pursuant to the sale agreement. The Tank Testing Group earned $672,000 from operations during 1996, versus $1,055,000 during 1995, principally as a result of higher revenues during 1995. During 1995, the Company sold its Mankoff subsidiary to a private investor for cash and notes totaling $2.3 million. The sale resulted in a loss from discontinued operations of $3,610,000. In addition, Mankoff incurred operating losses of $364,000 during 1995. During 1995, the Board of Directors authorized the Company to dispose of its ESI subsidiary. In conjunction with the planned disposition, the Company recorded a loss from discontinued operations of its ESI operation of $3,715,000 during 1995, net of an income tax benefit of $1,914,000. The Company originally expected to complete the sale of ESI prior to December 31, 1996. Based on discussions with several potential purchasers, the Company anticipates the sale of ESI during the second quarter of 1997. As a result of the longer than anticipated period of disposal, the Company recorded an additional reserve of $660,000 during the fourth quarter of 1996, net of an income tax benefit of $340,000. ESI incurred operating losses of $2,163,000 during 1996, which were anticipated in the loss from discontinued operations recorded by the Company. For the year ended December 31, 1996, the Company earned $755,000 including $1,289,000 from discontinued operations, principally resulting from the gain on sale of the Tank Testing Group, compared to a net loss of $8,589,000 that included losses related to discontinued operations of $8,350,000, principally related to ESI and Mankoff, during the year ended December 31, 1995. During the first quarter of 1997, the Company sold its headquarters building in Houston and received cash consideration of approximately $900,000. Pursuant to the sale, the Company recorded a loss of approximately $150,000 for which the Company had recorded a provision during the fourth quarter of 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues from wastewater treatment and waste oil recycling services declined by 4.1% from $2,477,000 during the year ended December 31, 1994 to $2,375,000 during the year ended December 31, 1995, principally due to a lower volume of water processed in 1995 versus 1994. As a result of the relatively fixed cost nature of operations, gross profit dropped by $82,000 to $1,058,000 during 1995 from $1,140,000 during 1994. When measured as a percentage of revenues, the gross margin declined to 44.6% during 1995 from 46% during 1994. Selling, general and administrative expenses increased $276,000 to $2,197,000 during 1995 from $1,921,000 during 1994, primarily due to a rise in legal costs associated with various claims and litigation in which the Company was involved. Other income and expense, consisting mainly of interest earned on the Company's investments, and gains and losses on the disposition of fixed assets, grew from $251,000 during 1994 to $749,000 during 1995, chiefly due to an increase in the amount invested. During the year ended December 31, 1995, the Company lost $239,000 from continuing operations compared to a loss of $331,000 for the year ended December 31, 1994. For the year ended December 31, 1995, the Company had a net loss of $8,589,000 that included losses related to discontinued operations of $8,350,000, compared to net income of $1,543,000, including income from discontinued operations of $1,874,000 during the year ended December 31, 1994. 10 SEASONALITY The Company experiences no noticeable seasonal variations in its continuing business. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had cash, cash equivalents, and short-term investments of $29,848,000 and had no significant cash commitments of such funds in excess of requirements to operate the Company's continuing operations. These funds are being invested pending any decision by the Company's Board of Directors regarding the Company's future direction. For the year ended December 31, 1996, net cash flow from operations totaled $1,711,000 versus $5,651,000 during 1995. Current year cash flow from operations is the result of income of $755,000, reduced by non-cash revenue and expenses of $1,330,000, and increased for working capital changes totalling $2,286,000. Cash flow from operating activities from the continuing business was $387,000 for the year ended December 31, 1996. Non-cash revenue and expenses for 1996 includes a $1 million provision for disposition of ESI, offset by ESI's current year operating loss of $2,163,000, and by the Company's gain on the sale of the Tank Testing Group of $2,065,000. Depreciation and amortization totaled $2,598,000 during 1996. Working capital changes include a collection of income taxes receivable of $2,107,000 related to the sale of its Mankoff subsidiary during 1995. Capital expenditures for 1996 were $1,987,000, mainly for the construction of a new facility that expanded the Company's wastewater treatment capacity at its ERRI subsidiary. During 1996, the Company received cash of $12 million from the sale of those subsidiaries that made up the Tank Testing Group. Capital expenditures for 1997 are expected to be less that $500,000, primarily for the purchase and construction of machinery at ERRI. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company is evaluating strategic and financial alternatives for maximizing shareholder value. This may include, but is not limited to, an acquisition or merger with another company that may or may not be in a business complementary to that of the Company, a "going private" transaction in which current Directors and/or management would acquire the outstanding publicly-held shares of the Company, or some combination of the above alternatives. The Company has not necessarily determined to pursue any of the above alternatives at this time, nor are the Company's alternatives limited to the above items. FOWARD-LOOKING STATEMENT The statements contained in this Annual Report on Form 10-K ("Annual Report") that are not historical facts, including, but not limited to, statements found in Item 1. Business and this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in the Annual Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: general economic conditions, competition, government regulation and possible future litigation, as well as the risks and uncertainties discussed in this Annual Report, including without limitation, the portions referenced above, and the uncertainties set forth from time to time in the Company's other public reports and filings and public statements. ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, entitled "EARNINGS PER SHARE" ("SFAS No. 128"), in February 1997. The Company is required to adopt the provisions of SFAS No. 128 for its year ended December 31, 1997. Initial adoption of this standard is not expected to have a material impact on the Company's financial statements. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE AUDITED FINANCIAL STATEMENTS Report of Independent Accountants......................................... 13 Consolidated Balance Sheet as of December 31, 1996 and 1995.............. 14 Consolidated Statement of Operations for the three years in the period ended December 31, 1996........ 15 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 1996........ 16 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1996........ 17 Notes to Consolidated Financial Statements............................... 18 12 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Tanknology Environmental, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheet of Tanknology Environmental, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tanknology Environmental, Inc. and Subsidiaries as of 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. COOPERS & LYBRAND L.L.P. Houston, Texas March 24, 1997 13 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31, December 31, 1996 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents ........................ $ 11,421,710 $ 14,967,107 Short-term investments ........................... 18,425,979 3,694,873 Accounts receivable, net ......................... 420,556 5,023,019 Note receivable .................................. 91,349 -- Inventories, net ................................. 60,317 350,275 Deferred tax asset ............................... 447,202 576,002 Income tax receivable ............................ -- 2,106,678 Other current assets ............................. 735,716 789,627 ------------ ------------ Total current assets ............................. 31,602,829 27,507,581 PROPERTY AND EQUIPMENT, NET ........................ 5,547,864 9,049,510 INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION ....................................... 2,494,873 3,765,400 DEFERRED TAX ASSET ................................. 1,450,248 872,610 NET ASSETS OF DISCONTINUED OPERATIONS AND OTHER ASSETS ....................................... 1,938,080 1,081,509 ------------ ------------ Total assets ..................................... $ 43,033,894 $ 42,276,610 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable .................................... $ -- $ 28,939 Accounts payable ................................. 333,676 1,009,814 Accrued liabilities .............................. 2,267,245 1,572,724 ------------ ------------ Total current liabilities ................ 2,600,921 2,611,477 ------------ ------------ COMMITMENTS AND CONTINGENCIES (See Note 9) SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value; 10,000,000 shares authorized; no shares issued and outstanding ..... -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 15,192,237 and 15,185,237 shares issued at December 31, 1996 and 1995, respectively 151,922 151,852 Additional paid-in capital ....................... 33,109,657 33,096,987 Retained earnings ................................ 11,359,065 10,603,965 Treasury stock at cost, 955,225 shares, at December 31, 1996 and 1995 ....................... (4,187,671) (4,187,671) ------------ ------------ Total shareholders' equity ....................... 40,432,973 39,665,133 ------------ ------------ Total liabilities and shareholders' equity ....... $ 43,033,894 $ 42,276,610 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 14 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1996 1995* 1994* ------------ ------------ ------------ REVENUES ......................................................... $ 2,199,154 $ 2,374,637 $ 2,477,349 COST OF SERVICES ................................................. 1,554,132 1,316,499 1,337,769 ------------ ------------ ------------ Gross profit ..................................................... 645,022 1,058,138 1,139,580 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .......................................... 2,428,537 2,197,363 1,921,482 ------------ ------------ ------------ Loss from operations ............................................. (1,783,515) (1,139,225) (781,902) ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income .................................................. 1,056,874 745,568 406,444 Interest expense ................................................. (4,715) (33) (2,217) Other income (expense), net ...................................... (142,017) 3,478 (152,814) ------------ ------------ ------------ Total other income (expense), net ................................ 910,142 749,013 251,413 ------------ ------------ ------------ Loss before income taxes ......................................... (873,373) (390,212) (530,489) INCOME TAX BENEFIT ............................................... (339,476) (150,687) (199,592) ------------ ------------ ------------ Loss from continuing operations .................................. (533,897) (239,525) (330,897) Net income (loss) from discontinued operations, .................. net of tax ........................................ 12,098 (4,739,338) 1,873,875 Gain (loss) on sale of discontinued operations, .................. -- net of tax ....................................................... 1,276,899 (3,610,242) ------------ ------------ ------------ Net income (loss) ................................................ $ 755,100 $ (8,589,105) $ 1,542,978 ============ ============ ============ EARNINGS (LOSS) PER SHARE: From continuing operations ....................................... $ (0.04) $ (0.01) $ (0.02) From discontinued operations ..................................... 0.09 (0.59) 0.13 ------------ ------------ ------------ Net earnings (loss) per share .................................... $ 0.05 $ (0.60) $ 0.11 ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ...................................................... 14,237,012 14,230,012 14,511,248 ============ ============ ============
- ---------- * Reclassified The accompanying notes are an integral part of the consolidated financial statements. 15 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31,1996
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL ---------------------- ----------------------- PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- -------- -------- ----------- ----------- ------------ ------------ Balance, December 31, 1993 ........ 15,161,238 $151,612 (419,700) $(1,962,848) $33,002,361 $ 17,650,092 $ 48,841,217 Issuance of common stock to nonemployee directors ............. 7,000 70 -- -- 42,800 -- 42,870 Exercise of common stock options ........................... 9,999 100 -- -- 36,146 -- 36,246 Purchase of treasury stock ............................. -- -- (535,525) (2,224,823) -- -- (2,224,823) Net income ........................ -- -- -- -- -- 1,542,978 1,542,978 ---------- -------- -------- ----------- ----------- ------------ ------------ Balance, December 31, 1994 ........ 15,178,237 151,782 (955,225) (4,187,671) 33,081,307 19,193,070 48,238,488 Issuance of common stock to nonemployee directors ............. 7,000 70 -- -- 15,680 -- 15,750 Net loss .......................... -- -- -- -- -- (8,589,105) (8,589,105) ---------- -------- -------- ----------- ----------- ------------ ------------ Balance, December 31, 1995 ........ 15,185,237 151,852 (955,225) $(4,187,671) 33,096,987 10,603,965 39,665,133 Issuance of common stock to nonemployee directors .......... 7,000 70 -- -- 12,670 -- 12,740 Net income ........................ -- -- -- -- -- 755,100 755,100 ---------- -------- -------- ----------- ----------- ------------ ------------ Balance, December 31,1996 ......... 15,192,237 $151,922 (955,225) (4,187,671) $33,109,657 $ 11,359,065 $ 40,432,973 ========== ======== ======== =========== =========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 16 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................................... $ 755,100 $ (8,589,105) $ 1,542,978 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for disposition of discontinued operations ................ 1,000,000 7,521,209 -- (Gain) loss on sale of discontinued operations ...................... (2,065,228) 3,610,242 -- ESI operating loss charged to reserve for discontinued operations .................................................. (2,163,317) -- -- Depreciation and amortization ....................................... 2,598,411 3,758,893 3,718,853 Net amortization of premiums and discounts on short term investments ...................................... (234,897) (216,110) 129,733 Loss on disposal of assets .......................................... -- 7,221 105,559 Deferred income taxes ....................................... (232,838) (2,388,559) 56,475 Deferred income ............................................. (16,430) (20,160) (20,160) Changes in assets and liabilities, including discontinued operations: Decrease (increase) in accounts and note receivable, net .................................... (136,149) 2,028,855 1,847,116 Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts ....................................... (230,304) (672,616) 439,850 Decrease (increase) in inventories, net ............................. 595,206 1,004,140 (228,276) Decrease (increase) in income tax receivable ........................ 2,106,678 (2,106,678) -- (Increase) decrease in other current assets ................. (834,414) 604,231 525,724 Increase (decrease) in accounts payable and accrued liabilities ................................................. 568,853 1,109,363 (1,837,355) ------------ ------------ ------------ Total adjustments ................................................... 955,571 14,240,031 4,737,519 ------------ ------------ ------------ Net cash provided by operating activities ........................... 1,710,671 5,650,926 6,280,497 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................................ (1,987,458) (2,472,825) (2,224,437) Acquisition of business, net of cash acquired ....................... -- -- (3,490,000) Proceeds from the sale of discontinued operations ................... 12,000,000 1,500,000 -- Proceeds from the sale of assets .................................... -- 322,149 -- Purchases of short-term investments ................................. (20,193,368) (11,703,150) (10,598,782) Proceeds from maturities of short-term investments .................. 5,697,159 15,707,462 12,827,244 Increase in intangible assets ....................................... (44,763) (139,006) (534,863) ------------ ------------ ------------ Net cash (used in) provided by investing activities ................. (4,528,430) 3,214,630 (4,020,838) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable ................................. (28,939) (148,085) (165,472) Purchase of treasury stock .......................................... -- -- (2,224,823) Proceeds from exercise of stock options ............................. -- -- 36,247 ------------ ------------ ------------ Net cash used in financing activities ............................... (28,939) (148,085) (2,354,048) ------------ ------------ ------------ CASH OF BUSINESSES SOLD ............................................. (698,699) -- -- ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ................ (3,545,397) 8,717,471 (94,389) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...................... 14,967,107 6,249,636 6,344,025 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR ............................ $ 11,421,710 $ 14,967,107 $ 6,249,636 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 17 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of Tanknology Environmental, Inc. and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Prior year amounts in the consolidated statement of operations and related notes thereto have been reclassified to reflect the Company's discontinued operations consisting of Mankoff, Inc. ("Mankoff"), Engineered Systems, Inc. ("ESI"), Tanknology Corporation International ("TCI"), Tanknology Canada (1988), Inc., ("TCS"), and USTMAN Industries, Inc. ("USTMAN"), as discussed in Note 3. All amounts related to the statement of operations are from continuing operations unless otherwise indicated. The Company is a holding company whose only current continuing business is wastewater processing and waste oil recycling in the Central Eastern United States. The Company's discontinued subsidiary, ESI, develops and manufactures automated fuel systems and related products principally for large international oil companies. REVENUE RECOGNITION The Company generates revenues primarily through the treatment of wastewater and the sale of recycled waste oil. Revenues are recognized at the time the services are rendered. CASH EQUIVALENTS The Company considers all highly liquid investment instruments with original maturities of three months or less when purchased to be cash equivalents. SHORT-TERM INVESTMENTS Short-term investments are those with maturities greater than three months when purchased and prior to 1994, are recorded at amortized cost, which approximates market. Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments in Debt and Equity Securities," which addresses the accounting for investments in debt and equity securities held by the Company. The Company has classified all short-term investments as available-for-sale. When purchased, securities are recorded at cost and adjusted for unrealized holding gains and losses due to market fluctuations. Gains and losses are recorded upon the sales of short-term investments based upon the specific identification method. Adoption of this standard did not materially affect the Company's financial position or results of operations. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Reserves are established against inventories for excess, slow moving and obsolete items and for items where net realizable value is less than cost. At December 31, 1996 and 1995, the inventory reserve balances were $0 and $510,480, respectively. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is computed using the straight-line method. Buildings are depreciated over 20 to 40 years and other property and equipment are depreciated over five to ten years. Depreciation expense was $295,343, $208,853, and $48,097 for the years ended December 31, 1996, 1995, and 1994, respectively. When assets are 18 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. INCOME TAXES The Company utilizes the liability method for deferred income taxes. The liability approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events recognized in the Company's financial statements or tax returns. All expected future events other than changes in the law or tax rates, are considered in estimating future tax consequences. The provision for income taxes includes federal, state, and local income taxes currently payable and those deferred because of temporary differences between the financial statements and tax bases of assets and liabilities. EARNINGS PER COMMON SHARE Primary earnings per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of stock options or warrants reflected under the treasury stock method. Fully diluted earnings per share are not presented because such amounts would be the same as amounts computed for primary earnings per share. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and trade receivables. The Company maintains cash balances with several banks. Cash and cash equivalents includes investments in commercial paper and U.S. Government Securities that mature in no more than 90 days from the date of purchase. Short-term investments include U.S. Government Securities, municipal bonds, mutual funds, and mortgage backed securities. Such investments are recorded at cost and adjusted for fluctuations in market values. At December 31, 1996, approximately $20,326,000, $4,469,000, $2,354,000, and $2,189,000, respectively, were held in trust by four separate investment managers. At December 31, 1995, approximately $8,423,000, $4,193,000, $2,230,000, and $2,076,000, respectively, were held in trust by four separate investment managers. The Company grants credit to its customers who consist primarily of commercial and industrial wastewater and waste oil generators and major oil companies. The Company performs ongoing credit evaluations of its customers' financial conditions and, generally, requires no collateral from its customers. The provision for doubtful accounts for the years ended December 31, 1996, 1995, and 1994, was $30,996, $65,768, and $7,134, respectively. The allowance for doubtful accounts at December 31, 1996 and 1995 was $44,427 and $394,286, respectively. MANAGEMENT'S ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of consolidated assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, entitled "EARNINGS PER SHARE" ("SFAS No. 128"), in 1997. The Company is required to adopt the provisions of SFAS No. 128 for its year ended December 31, 1997. Initial adoption of this standard is not expected to have a material impact on the Company's financial statements. 19 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS On January 31, 1994, the Company, through its wholly owned subsidiary, Energy Recovery Resources, Inc. ("ERRI"), acquired certain assets of Jack Holder Enterprises, Inc. The purchase price consisted of a cash payment of $3,500,000. ERRI performs wastewater treatment, waste oil recycling, and the recovery and handling of other non-hazardous fluid wastes for owners and operators of underground storage tanks ("USTs"), aboveground storage tanks ("ASTs") and other commercial and industrial waste generators. The acquisition was accounted for using the purchase method; accordingly, the assets and liabilities of ERRI were recorded at their estimated fair values at the date of acquisition and earnings are included in the Company's operations from the date of purchase. 3. DISCONTINUED OPERATIONS During 1995, the Board of Directors of the Company elected to discontinue operations at its Mankoff and ESI subsidiaries and put the assets of the businesses up for sale. Mankoff's operations were discontinued as of June 30, 1995. Mankoff's revenues were $6,353,000 and $6,574,000 for the years ended December 31, 1995 and 1994, respectively. Mankoff was sold on December 21, 1995, for $1,500,000 in cash and two 24 month non-interest bearing notes receivable totalling $805,000. The purchaser has also assumed the performance of all contract obligations of Mankoff. A provision for loss on disposition of Mankoff of $3,610,000 net of an income tax benefit of $1,892,000 was recorded in 1995 as a result of the sale. ESI's operations were discontinued as of December 31, 1995; however, as of December 31, 1996, ESI has not been sold or closed. ESI's revenues were $3,322,000, $3,718,000, and $5,047,000 for the years ended December 31, 1996, 1995, and 1994, respectively. During 1995, a provision for estimated loss on disposition of ESI of $3,715,000, including write-off of goodwill and estimated losses through the then expected date of sale, was recorded net of an income tax benefit of $1,914,000. During 1996, an additional provision for estimated loss on disposition of ESI of $660,000 has been recorded, net of an income tax benefit of $340,000. The amounts the Company will ultimately realize could differ materially from the amounts assumed in arriving at the estimated loss from discontinued operations. The remaining net assets of ESI principally consist of accounts receivable, contracts in progress, inventories, and property, plant and equipment offset by accrued liabilities, including estimated losses through the revised expected date of sale. The Company will fulfill all contract obligations of ESI and liquidate its assets unless a buyer of the business assumes performance of its contracts in the near future. On October 25, 1996, the Company disposed of certain assets and liabilities, which consisted of the stock of its wholly owned subsidiaries, Tanknology Corporation International, including its cathodic protection division d/b/a Tanknology Cathodic Protection, USTMAN Industries, Inc., and Tanknology Canada (1988), Inc., collectively known as the "Tank Testing Group" to NDE Environmental Corporation ("NDE"), a Delaware corporation, an unrelated third party. The dispostion of the Tank Testing Group was made pursuant to a Stock Purchase Agreement (the "Agreement") between the Company and NDE dated October 7, 1996. The terms of the Agreement were determined by arm's-length negotiation between the Company and NDE. The Company disposed of the Tank Testing Group in consideration of the receipt of $12 million in cash. The Agreement calls for adjustments to the purchase price of up to $1 million for any working capital deficiencies and of up to $1.25 million for liabilities relating to services performed by the Tank Testing Group prior to October 25, 1996. Management does not believe any material working capital deficiencies exist; however, a liability totaling $1.25 million has been accrued for potential liabilities. Revenues for the Tank Testing Group were $18,926,000, $24,607,000, and $30,014,000 for the years ended December 31, 1996, 1995, and 1994, respectively. 20 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of discontinued operations for the three years in the period ended December 31, 1996 are as follows: ----------------------------------------- 1996 1995 1994 ----------- ------------ ----------- Revenues ........................... $18,925,828 $ 34,678,328 $41,634,955 ----------- ------------ ----------- Net income (loss) from discontinued operations, net of tax ......................... 12,098 (4,739,338) 1,873,875 Gain (loss) on sale of discontinued operations, net of tax ......................... 1,276,899 (3,610,242) -- ----------- ------------ ----------- Income (loss) from discontinued operations, net of tax ............. $ 1,288,997 $ (8,349,580) $ 1,873,875 =========== ============ =========== Net assets of discontinued operations at December 31, 1996 and 1995 consist of the following: ---------------------------- 1996 1995 ----------- ----------- Working capital ................................ $ 2,516,611 $ 2,575,473 Long term assets ............................... 3,826,152 3,796,841 Accrued losses and reserve for disposition ..... (4,404,683) (5,628,860) ----------- ----------- Net assets ..................................... $ 1,938,080 $743,454 * =========== =========== During 1996, ESI incurred losses of $2,163,317, which were charged to the reserve for disposition. During the fourth quarter, the Company recorded an additional charge of $660,000, net of a tax provision of $340,000 for further losses through the revised expected date of disposition. * As of December 31, 1995, the caption "Net assets of discontinued operations and other assets" in the Company's Consolidated Balance Sheet includes $338,055 of other assets in addition to $743,454 of net assets of discontinued operations. 21 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts at December 31, 1996 and 1995 is presented below: December 31, ------------------------------ 1996 1995 ----------- ------------ Other current assets: Estimated state income tax payments ........ $ -- $ 46,519 Interest receivable ........................ 31,016 53,800 Prepaid insurance .......................... 127,497 563,641 Employee travel advances ................... 3,030 85,267 Deposits ................................... -- 20,219 Other ...................................... 574,173 20,181 ----------- ------------ Total other current assets ......... $ 735,716 $ 789,627 =========== ============ Inventories: Raw materials and purchased parts .......... $ -- $ -- Work-in-process ............................ -- -- Finished goods ............................. 60,317 350,275 ----------- ------------ Total inventory .................... $ 60,317 $ 350,275 =========== ============ Property and equipment: Testing units .............................. $ -- $ 9,478,608 Buildings and improvements ................. 3,196,998(1) 1,042,749 Furniture, fixtures and equipment .......... 2,794,047(1) 5,327,911 Land ....................................... 559,520(1) 370,260 Plant construction in progress ............. 5,344 2,417,793 Testing equipment parts .................... -- 601,986 ----------- ------------ Total property and equipment ....... 6,555,909 19,239,307 Accumulated depreciation ................... (1,008,045)(1) (10,189,797) ----------- ------------ Net property and equipment ......... $ 5,547,864 $ 9,049,510 =========== ============ Accrued liabilities: Compensation ............................... $ 322,771 $ 630,265 State, federal and foreign income taxes .... 634,590 -- Warranty and claims reserves ............... 1,250,000 630,000 Other taxes ................................ 57,460 86,019 Other ...................................... 2,424 226,440 ----------- ------------ Total accrued liabilities .......... $ 2,267,245 $ 1,572,724 =========== ============ (1) Includes $1,044,978, $54,817, $370,260, and $421,603, respectively, related to the Company's former headquarters and Tank Testing Group facility that was sold in March 1997. A loss of $150,000 was recorded as of December 31, 1996. 22 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. SHORT-TERM INVESTMENTS The Company's investments in cash equivalents and short-term investments consist of debt securities that are classified as available-for-sale and are recorded at cost and adjusted for unrealized holding gains and losses due to market value fluctuations. A summary of the estimated fair values of investments at December 31, 1996 and 1995 follows: 1996 1995 ------------ ------------ U.S. Treasury obligations .................. $ -- $ 10,339,741 Money market mutual funds .................. 2,188,667 2,075,903 U.S. Government agency obligations ......... 20,939,007 1,045,475 Corporate bonds ............................ 4,469,000 2,477,192 Commercial paper ........................... 1,740,988 984,264 Less: Cash equivalents .................... (10,911,683) (13,227,702) ------------ ------------ Total short-term investments ............... $ 18,425,979 $ 3,694,873 ============ ============ 6. INTANGIBLE ASSETS At December 31, 1996 and 1995, intangible assets net of amortization consisted of the following: 1996 1995 ---------- ---------- Excess of costs over net assets acquired ......... $2,494,873 $2,847,359 Patents .......................................... -- 868,553 Other ............................................ -- 49,488 ---------- ---------- Total intangible assets, net ..................... $2,494,873 $3,765,400 ========== ========== Excess of costs over net assets acquired resulted from the acquisition of ERRI and is being amortized over fifteen years. Patents are amortized over the life of the patents, generally thirteen years. Other intangible assets are amortized over five to seven year periods. Amortization expense related to intangibles was $206,394, $206,394, and $188,325 for the years ended December 31, 1996, 1995, and 1994, respectively. Accumulated amortization related to intangible assets was $601,041 and $1,476,476 at December 31, 1996 and 1995, respectively. 23 7. NOTES PAYABLE At December 31, 1995, the Company had outstanding notes payable of $28,939 issued for the financing of insurance premiums. The notes matured in February 1996. The Company had no outstanding notes payable at December 31, 1996. At December 31, 1995, the Company had a $10 million unsecured revolving line of credit facility with a bank. The Company was required to maintain certain financial covenants regarding net worth and debt to cash flow and was in compliance for the year ended December 31, 1995. No borrowings were outstanding under such bank credit facility at December 31, 1995. The amounts available under the credit facility were reduced by amounts outstanding under letters of credit issued on behalf of the Company by the same bank. At December 31, 1995, the Company had a $106,000 balance outstanding under the letter of credit agreement. This credit facility matured in July 1996 and was not renewed. 8. INCOME TAXES The components of the income tax provision for the years ended December 31, 1996, 1995, and 1994 were as follows: Year Ended December 31, ---------------------------------------------- 1996 1995* 1994* ----------- ----------- ----------- Continuing operations: Federal-current ........ $ (126,397) $ (111,585) $ (202,559) Federal-deferred ....... (148,640) (11,786) 30,617 State-current .......... (37,009) (23,992) (36,285) State-deferred ......... (27,430) (3,324) 8,635 ----------- ----------- ----------- Total continuing ....... (339,476) (150,687) (199,592) Discontinued operations ..... 1,036,640 (3,915,175) 1,272,218 ----------- ----------- ----------- Total .................. $ 697,164 $(4,065,892) $ 1,072,626 =========== =========== =========== - ---------- *Reclassified 24 The difference between the effective tax rate reflected in the income tax provision for continuing operations and the statutory federal rate is analyzed as follows: Year Ended December 31, -------------------------------------- 1996 1995* 1994* --------- --------- --------- Amount computed using the statutory rate $(296,946) $(132,672) $(180,366) State taxes, net of federal benefit .... (42,530) (18,015) (19,226) --------- --------- --------- Total .................................. $(339,476) $(150,687) $(199,592) ========= ========= ========= The effective tax rates for the three years ended December 31, 1996, 1995, and 1994 were 38.9%, 38.6%, and 37.6%, respectively. The effective tax rate for discontinued operations was approximately 44% and 32% in 1996 and 1995, respectively. The 1996 rate resulted from foreign and state income taxes and non-deductible expenses. The 1995 rate reflects permanent bases differences on assets sold. The components of the deferred tax assets and liabilities are as follows:
Year Ended December 31, -------------------------- Current deferred tax assets (liabilities): 1996 1995 ----------- ----------- Difference in recognition of accrued expenses .. $ 87,121 $ 340,204 Difference in recognition of allowance for doubtful accounts .............................. 257,543 170,387 Difference in bases of inventory ............... 34,537 35,791 Difference in recognition of deduction for warranty expense ............................... 22,100 22,100 Difference in recognition of loss on building .. 51,000 -- Difference in recognition of other expenses .... (5,099) 7,520 ----------- ----------- Total current deferred .......... 447,202 576,002 ----------- ----------- Noncurrent deferred tax assets (liabilities): Difference in recognition of loss on disposition of ESI ......................................... 1,628,584 1,913,860 Difference in bases of property and equipment acquired ....................................... (312,634) (312,634) Difference in accumulated depreciation ......... (373,344) (809,496) Difference in recognition of accumulated amortization ................................... (4,989) 80,880 Difference in deducting construction period interest ....................................... 41,523 -- Difference in recognition of accrued expenses .. 425,750 -- Difference in other expenses ................... 45,358 -- ----------- ----------- Total noncurrent deferred ....... 1,450,248 872,610 ----------- ----------- Net deferred income taxes $ 1,897,450 $ 1,448,612 =========== ===========
25 9. COMMITMENTS AND CONTINGENCIES Total rental expense for operating leases none of which extend beyond December 31, 1996, for the years ended December 31, 1996, 1995, and 1994 was $67,116, $48,196, and $44,852, respectively. The Company is involved in litigation and routine claims from time to time. Certain of the Company's litigation and claims are covered by insurance with a maximum deductible of $50,000. In addition, the Company is contingently liable for up to $1.25 million for liabilities relating to services performed by the Tank Testing Group prior to October 25, 1996. The Company has recorded a liability for the $1.25 million contingency as of December 31, 1996. In Management's opinion, the litigation and claims in which the Company is currently involved are not material to the Company's consolidated financial position, results of operations or liquidity. 10. TREASURY STOCK During the year ended December 31, 1994, the Company purchased 535,525 shares of its Common Stock at an aggregate cost of $2,224,823. 11. STOCK OPTIONS The Board of Directors has reserved 1,000,000 authorized shares of its Common Stock for the purpose of issuing nonincentive stock options, incentive stock options, and restricted stock awards to key employees under its 1989 Stock Option Plan. The exercise price for a nonincentive stock option shall not be less than 85% of the fair market value of the Common Stock on the date of grant. The exercise price for each incentive stock option granted may not be less than the fair market value of the Company stock on the date of grant. For those incentive stock optionees owning more than 10% of the Company's Common Stock on the date the options are granted, the option price per share for an incentive stock option shall not be less than 110% of the fair market value on the date of the grant. The purchase price for restricted stock may be equal to or less than par value and may be zero. Effective December 20, 1994, the Board of Directors of the Company approved the cancellation of 258,333 employee stock options with exercise prices ranging from $3.00 to $7.50, and the subsequent issuance of 630,000 stock options with an exercise price of $2.50 to certain employees and nonemployee directors. Effective January 26, 1995, the Board of Directors of the Company approved the cancellation of 129,167 employee stock options, with exercise prices ranging from $4.50 to $7.50, and the subsequent issuance of 160,000 stock options, with an exercise price of $2.41 to certain employees. The options under the plan vest on graded schedule depending on the Company's stock price. Fifteen percent of all options are vested immediately as of the date of grant and an additional 15% will vest on the third anniversary of the date of grant. An additional 70% will vest within 3 years if the Company's stock price equals or exceeds certain criteria. Otherwise, these optins will vest on the tenth anniversary of the date of grant. A total of 800,000 shares of Common Stock were reserved for issuance under the 1991 Nonemployee Director Stock Option Plan, which authorized the granting of nonincentive stock options to purchase Common Stock and restricted stock awards subject to certain restrictions to nonemployee directors. Under the original plan, each eligible nonemployee director received (i) a Director Option to Purchase 6,000 shares of common stock on January 1 of each year, beginning January 1, 1993, and (ii) 1,000 shares of restricted stock (collectively, an "Award"). Each director option will expire five (5) years after the date of grant. The purchase price for each share of restricted stock shall be zero. Effective with the January 1, 1995 issue date, the 1991 Nonemployee Director Stock Option Plan was amended to eliminate the annual issuance of the Director Option to Purchase 6,000 shares of Common Stock to nonemployee directors. The Company had 697,295, 549,529, and 247,430 shares of Common Stock available for grant under existing stock option plans at December 31, 1996, 1995, and 1994, respectively. 26 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following table sets forth pertinent information regarding stock option transactions for each of the three years in the period ended December 31, 1996: Weighted Average Number Exercise of Shares Price ---------- ----- Outstanding at January 1, 1994 ................. 960,263 $4.62 Granted ........................................ 832,000 $3.30 Exercised ...................................... (9,999) $3.63 Cancelled ...................................... (361,299) $4.67 ---------- Outstanding at December 31, 1994 ............... 1,420,965 $3.75 Granted ........................................ 160,000 $2.41 Cancelled ...................................... (462,099) $3.88 ---------- Outstanding at December 31, 1995 ............... 1,118,866 $3.47 Granted ........................................ 0 Cancelled ...................................... (147,766) $5.29 ---------- Outstanding at December 31, 1996 ............... 971,100 $3.19 ========== The weighted average fair value of options granted during 1995 was $1.47. There were no options granted during 1996. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0.00%; risk-free interest rate of 7.82%; the expected life of options is 8.2 years; and volatility of 40.6% for the grants. The following table summarizes information related to stock options outstanding and exercisable at December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Number Wgtd. Avg. Wgtd. Avg. Number Wgtd. Avg. Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/96 Contr.Life Price at 12/31/96 Price $2.41 to $5.00 847,000 7.83 $2.62 310,000 $2.87 $5.01 to $9.125 124,100 5.88 $7.08 111,933 $7.19 - ---------------- ------------ ----------- ------------- ------------- -------------- $2.41 to $9.125 971,100 7.58 $3.19 421,933 $4.02
During 1996 the Company adopted the disclosure provision of Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based Compensation." The Company continues to account for its stock-based compensation plans using the accounting prescribed by APB Opinion 25. 27 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Had the compensation cost for the Company's stock-base compensation plan been determined in accordance with the accounting requirements of SFAS 123, the Company's net income and net income per common share for 1996 would approximate the pro forma amounts below: Year Ended December 31, 1996 1995 ------------- ------------- Loss from continuing operations - as reported ............................. $ (533,897) $ (239,525) Loss from continuing operations - proforma ................................ $ (540,197) $ (285,525) Continuing operations - (loss) per share as reported ............................. $ ( 0.04) $ (0.01) Continuing operations - (loss) per share proforma ................................ $ (0.04) $ (0.02) 12. PREFERRED STOCK The Company is authorized to issue 10,000,000 shares of Preferred Stock, par value $.10 per share. Such shares of Preferred Stock may be issued from time to time by the Board of Directors, without action by the shareholders, in one or more series with such designations, preferences and special rights and qualifications, limitations and restrictions as may be designated by the Board of Directors prior to the issuance of such series. 13. RELATED PARTIES Effective December 31, 1991, the Company entered into a consulting agreement with a director and former president and chief operating officer pursuant to which he agreed to provide consulting services to the Company for five years. The Company is obligated to pay $200,000 per year in equal bi-weekly installments for his consulting services. Such consulting agreement expired on December 31, 1996. The Company issued Common Stock in lieu of cash to nonemployee directors totaling $12,740, $15,750, and $42,870, during 1996, 1995, and 1994, respectively. 14. RETIREMENT PLANS The Company maintains defined contribution plans that allow all employees after attaining six months of service with the Company and employees covered by a collective bargaining plan to contribute through payroll deductions for investment in various funds established by the plan. Company contributions are discretionary and, in 1996, 1995, and 1994, no contributions were made to the plan. 15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense was approximately $5,000, $12,000, and $37,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The Company paid approximately $286,000, and $1,354,000 in cash for income taxes during the years ended December 31, 1995 and 1994, respectively, and received approximately $1,588,000 in cash for income taxes during the year ended December 31, 1996. The Company issued notes payable for insurance premiums of approximately $145,000 and $162,000 for the years ended December 31, 1995 and 1994, respectively. 28 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Components of cash used for acquisitions as reflected in the Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994 are summarized as follows: Year Ended December 31, ---------------------------- 1996 1995 1994 ----- ----- ----------- Fair value of current assets, net of cash acquired .......................... $-- $-- $ 420,319 Fair value of noncurrent assets, excluding intangibles ......................... -- -- 118,144 Intangible assets ............................... -- -- 3,050,690 Liabilities assumed ............................. -- -- (99,153) ----- ----- ----------- Cash paid at closing, net of cash acquired ...... $-- $-- $ 3,490,000 ===== ===== =========== 29 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. UNAUDITED QUARTERLY FINANCIAL DATA
Three Months Ended ------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 1996* 1996* 1996* 1996 ------------ ------------ ------------ ------------ Revenues ........................................... $ 517,000 $ 588,000 $ 513,000 $ 581,000 Cost of services ................................... 318,000 360,000 390,000 486,000 ------------ ------------ ------------ ------------ Gross profit ....................................... 199,000 228,000 123,000 95,000 General and administrative expenses ................ 577,000 612,000 612,000 627,000 ------------ ------------ ------------ ------------ Loss from operations ............................... (378,000) (384,000) (489,000) (532,000) Other income (expense), net ........................ 256,000 234,000 225,000 196,000 ------------ ------------ ------------ ------------ Loss from continuing operations before income taxes ................................ (122,000) (150,000) (264,000) (336,000) Benefit for income taxes ........................... (47,000) (58,000) (103,000) (130,000) ------------ ------------ ------------ ------------ Loss from continuing operations ............ (75,000) (92,000) (161,000) (206,000) Income (loss) from discontinued operations ......................................... (268,000) 314,000 566,000 677,000 ------------ ------------ ------------ ------------ Net income (loss) .................................. $ (343,000) $ 222,000 $ 405,000 $ 471,000 ============ ============ ============ ============ Loss per share from continuing operations........... $ (0.00) $ (0.01) $ (0.01) $ (0.02) Earnings (loss) per share from discontinued operations ............................ (0.02) 0.02 0.04 0.05 ------------ ------------ ------------ ------------ Net earnings (loss) per share ...................... $ (0.02) $ 0.01 $ 0.03 $ 0.03 ============ ============ ============ ============ Weighted average common shares outstanding ........................................ 14,237,000 14,285,000 14,237,000 14,237,000 ============ ============ ============ ============
Three Months Ended ------------------------------------------------------------------------ March 31, June 30, Sept. 30, Dec. 31, 1995* 1995* 1995* 1995* ------------ ------------ ------------ ------------ Revenues ........................................... $ 626,000 $ 575,000 $ 610,000 $ 564,000 Cost of services ................................... 389,000 333,000 353,000 241,000 ------------ ------------ ------------ ------------ Gross profit ....................................... 237,000 242,000 257,000 323,000 General and administrative expenses ................ 532,000 645,000 464,000 556,000 ------------ ------------ ------------ ------------ Loss from operations ............................... (295,000) (403,000) (207,000) (233,000) Other income (expense), net ........................ 176,000 157,000 198,000 217,000 ------------ ------------ ------------ ------------ Loss from continuing operations before income taxes ................................ (119,000) (246,000) (9,000) (16,000) Benefit for income taxes ........................... (46,000) (95,000) (3,000) (6,000) ------------ ------------ ------------ ------------ Loss from continuing operations ............ (73,000) (151,000) (6,000) (10,000) Income (loss) from discontinued operations ......................................... (113,000) (5,040,000) 371,000 (3,568,000) ------------ ------------ ------------ ------------ Net income (loss) .................................. $ (186,000) $ (5,191,000) $ 365,000 $ (3,578,000) ============ ============ ============ ============ Loss per share from continuing operations........... $ (0.00) $ (0.01) $ (0.00) $ 0.00 Earnings (loss) per share from discontinued operations ............................ (0.01) (0.35) 0.03 (0.26) ------------ ------------ ------------ ------------ Net earnings (loss) per share ...................... $ (0.01) $ (0.36) $ 0.03 $ (0.26) ============ ============ ============ ============ Weighted average common shares outstanding ........................................ 14,230,000 14,230,000 14,230,000 14,230,000 ============ ============ ============ ============
- ------------- *Reclassified 30 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9. 31 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this Item 10 is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this Item 11 is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item 12 is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item 13 is incorporated herein by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. 32 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements of the Company and Report of Independent Accountants are included under Part II Item 8 of this Form 10-K. PAGE Report of Independent Accountants.................................. 13 Consolidated Balance Sheet as of December 31, 1996 and 1995........ 14 Consolidated Statement of Operations for the three years in the period ended December 31, 1996....... 15 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 1996....... 16 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1996....... 17 Notes to Consolidated Financial Statements......................... 18 2. Financial Statement Schedules The following financial statement schedules should be read in conjunction with the consolidated financial statements and notes thereto. Report of Independent Accountants........................... S-1 Schedule II-- Valuation and qualifying accounts........... S-2 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements. 3. Exhibits The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits contained elsewhere herein. (b) Reports on Form 8-K A Form 8-K current report was filed during the quarterly period ended December 31, 1996. The report was filed October 25, 1996 and described the Registrant's sale of the stock of its wholly owned subsidiaries, Tanknology Corporation International including its cathodic protection division d/b/a Tanknology Cathodic Protection, USTMAN Industries, Inc., and Tanknology Canada (1988), Inc. to NDE Environmental Corporation. 33 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 March 24, 1997. TANKNOLOGY ENVIRONMENTAL, INC. By: /S/ DONALD R. CAMPBELL Donald R. Campbell, President, Chief Executive Officer, Chief Operating Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 34 Signature Title Date /S/ R. L. WALTRIP Chairman of the Board March 24, 1997 R. L. Waltrip /S/ DONALD R. CAMPBELL President, Chief Executive Officer, March 24, 1997 Donald R. Campbell Chief Operating Officer and Director (Principal Executive Officer) /S/ RICK BERRY Executive Vice President, Chief March 24, 1997 Rick Berry Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer) /S/ STEVEN R. FREDRICH Director March 24, 1997 Steven R. Fredrich /S/ T. G. BOGLE Director March 24, 1997 T. G. Bogle /S/ SAMUEL W. RIZZO Director March 24, 1997 Samuel W. Rizzo /S/ T. CRAIG BENSON Director March 24, 1997 T. Craig Benson /S/ TONY COELHO Director March 24, 1997 Tony Coelho /S/ JAMES H. GREER Director March 24, 1997 James H. Greer /S/ W. BLAIR WALTRIP Director March 24, 1997 W. Blair Waltrip 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Tanknology Environmental, Inc. and Subsidiaries: Our report on the consolidated financial statements of Tanknology Environmental, Inc. and Subsidiaries is included on page 13 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a) on page 32 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Houston, Texas March 24, 1997 S-1 SCHEDULE II TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
==================================================================================================================================== COL. A COL. B COL. C(1) COL. C(2) COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------------ Charged to Balance at other Balance beginning accounts-- Deductions- at end of Description of period Additions describe describe period - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 Allowance for doubtful accounts and notes ........................ $1,199,286 $ 30,996 $ (380,855)(A) $ -- $ 849,427 ========== ========== =========== ========= ========== Reserve for slow moving and obsolete inventory ....................... $ 510,480 $ -- $ (510,480)(A) $ -- $ -- ========== ========== =========== ========= ========== DECEMBER 31, 1995 Allowance for doubtful accounts and notes ........................ $ 876,737 $1,092,869 $ (540,623(A) $(229,697(C) $1,199,286 ========== ========== =========== ========= ========== Reserve for slow moving and obsolete inventory ........................ $ 90,000 $ 420,480 $ -- $ -- $ 510,480 ========== ========== =========== ========= ========== DECEMBER 31, 1994 Allowance for doubtful accounts and notes ................................ $ 711,643 $ 275,118 $ 61,497(B) $(171,521(C) $ 876,737 ========== ========== =========== ========= ========== Reserve for slow moving and obsolete inventory ....................... $ 90,000 $ -- $ -- $ -- $ 90,000 ========== ========== =========== ========= ==========
(A) Allowances related to assets of discontinued operations have been reclassified to net assets of discontinued operations. (B) Acquired allowance for the accounts receivable of Mankoff as of the purchase date. (C) Represents the reversal of the allowance on receivables that were determined to be uncollectible and were written off. S-2 INDEX TO EXHIBITS Exhibit Number Exhibit -------------- ----------------------------------------------------------- * 3.1 -- Articles of Incorporation of the Company (Exhibit 3.1). * 3.2 -- Amendment to Articles of Incorporation of the Company (Exhibit 3.2). * 3.3 -- Amended and Restated Bylaws of the Company (Exhibit 3.3). * 10.1 -- Asset Purchase, Non-Compete and Confidentiality Agreement between Tanknology, 381651 Alberta Ltd., T.E. (Ed) Adams and J. Gordon Adams dated July 15, 1988 (Exhibit 10.1). * 10.2 -- Assignment of Canadian Patent No. 1,185,693 from Thomas E. Adams to Tanknology dated July 18, 1988 (Exhibit 10.2). * 10.3 -- Assignment of U.S. Letters Patent No. 4,462,249 from T. Edwin Adams to Tanknology dated July 18, 1988 (Exhibit 10.3). * 10.4 -- Trademark, Service Mark and Tradename Assignment from Tanknology Canada Ltd. to Tanknology dated July 18, 1988 (Exhibit 10.4). ++ 10.5 -- Credit Agreement, dated July 15, 1994, by the Company as borrower, to Texas Commerce Bank National Association (Exhibit 10.5). ++++ 10.6 -- First Amendment to Credit Agreement, dated July 14, 1995, by the Company as borrower, to Texas Commerce Bank National Association (Exhibit 10.6). +**** 10.7 -- 1989 Stock Option Plan for the Company, as amended (Exhibit 10.6). +* 10.8 -- Form of Incentive Stock Option Agreement for use in connection with the 1989 Stock Option Plan of the Company (Exhibit 10.9). +* 10.9 -- Form of Nonincentive Stock Option Agreement for use in connection with the 1989 Stock Option Plan of the Company (Exhibit 10.10). +* 10.10 -- Nondisclosure Agreement to be used in conjunction with certain options granted under the 1989 Stock Option Plan of the Company (Exhibit 10.11). ** 10.11 -- License Agreement between Tanknology and GEC Avery Limited, dated December 30, 1991 (Exhibit 10.16). ** 10.12 -- License Agreement between Tanknology and Fulton Hogan Canterbury, Limited, dated October 31, 1991 (Exhibit 10.17). +** 10.13 -- Consulting Agreement, dated December 10, 1991, between the Company and T.G. Bogle (Exhibit 10.18). *** 10.14 -- Stock Purchase Agreement between Tanknology Environmental, Inc. and Square D Company dated July 16, 1992 (Exhibit 10.2). - ------------ * Incorporated by reference to the exhibit shown in parenthesis filed in the Company's Registration Statement on Form S-1, File No. 33-36822. ** Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1991 Form 10-K, File No. 0-18899. *** Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated July 16, 1992, File No. 0-18899. **** Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1992 Form 10-K, File No. 0-18899. ***** Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated October 1, 1993, File No. 0-18899. + Compensation plan, benefit plan or employment contract or arrangement. ++++++++++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1994 Form 10-K, File No. 0-18899. ++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1995 Form 10-K, File No. 0-18899. ++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1995 Form 10-K, File No. 0-18899. ++++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated October 25, 1996, File No. 0-18899. 36 Exhibit Number Exhibit -------------- ----------------------------------------------------------- **** 10.15 -- Asset Purchase Agreement between Tanknology Environmental, Inc. and USTMAN Industries, Inc. (Exhibit 10.14). +**** 10.16 -- 1991 Nonemployee Director Stock Option Plan (Exhibit 10.15). ***** 10.17 -- Asset Purchase Agreement between Tanknology Environmental, Inc. and Mankoff Equipment, Inc. (Exhibit 2). +***** 10.18 -- Noncompete Agreement between Tanknology Environmental, Inc. and Curt J. Mankoff (Exhibit 10). ++++++++++++10.19 Asset Purchase Agreement between Tanknology Environmental, Inc. and Jack Holder Enterprises, Inc. dated January 31, 1994 (Exhibit 10.18). ++++ 10.20 -- Agreement to sell assets, dated December 22, 1995, between Mankoff, Inc. and Donald Kooperman (Exhibit 10.20). ++++ 10.21 -- Installment note between Mankoff, Inc. and Continental Environmental, Inc., dated December 20, 1995 (Exhibit 10.21). ++++ 10.22 -- License Agreement between Tanknology Worldwide and Fulton Hogan Limited, dated April 1, 1995 (Exhibit 10.22). ++++++ 10.23 -- Stock Purchase Agreement between Tanknology Environmental, Inc. and NDE Environmental Corporation dated October 7, 1996 (Exhibit 2). 11.1 -- Statement re computation of per share earnings. * 16.1 -- Letter re change in certifying accountant (Exhibit 16.1). 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Accountants. 27.1 -- Financial Data Schedule. - --------------- * Incorporated by reference to the exhibit shown in parenthesis filed in the Company's Registration Statement on Form S-1, File No. 33-36822. ** Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1991 Form 10-K, File No. 0-18899. *** Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated July 16, 1992, File No. 0-18899. **** Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1992 Form 10-K, File No. 0-18899. ***** Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated October 1, 1993, File No. 0-18899. + Compensation plan, benefit plan or employment contract or arrangement. ++++++++++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1994 Form 10-K, File No. 0-18899. ++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1995 Form 10-K, File No. 0-18899. ++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Company's 1995 Form 10-K, File No. 0-18899. ++++++ Incorporated by reference to the exhibit shown in parenthesis filed in the Form 8-K dated October 25, 1996, File No. 0-18899. EX-11.1 2 EXHIBIT 11.1 TANKNOLOGY ENVIRONMENTAL, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Year Ended December 31, ------------------------------------------------------ 1996 1995 1994 ----------- ------------ ------------ Computation of earnings (loss) per common share: Net income (loss) applicable to common stock .................... $ 755,100 $ (8,589,105) $ 1,542,978 =========== ============ ============ Computation of primary earnings (loss) per share: Weighted average number of common shares outstanding ..................................................... 14,237,012 14,230,012 14,420,269 Common shares issuable under stock option plan ............................................................ -- -- 400,825 Less shares assumed repurchased with proceeds ........................................................ -- -- (309,846) ----------- ------------ ------------ Weighted average common and equivalent shares outstanding ........................................... 14,237,012 14,230,012 14,511,248 =========== ============ ============ Earnings (loss) per common share ................................ $ 0.05 $ (0.60) $ 0.11 =========== ============ ============ Computation of earnings (loss) per common share assuming full dilution: Weighted average number of common shares outstanding ..................................................... 14,237,012 14,230,012 14,420,269 Common shares issuable under stock option plan ............................................................ -- -- 400,825 Less shares assumed repurchased with proceeds ........................................................ -- -- (309,846) ----------- ------------ ------------ Weighted average common and equivalent shares outstanding .............................................. 14,237,012 14,230,012 14,511,248 =========== ============ ============ Earnings (loss) per common share assuming full dilution ................................................... $ 0.05 $ (0.60) $ 0.11 =========== ============ ============
EX-21.1 3 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
State or Country of Name Incorporation Trade Name - -------------------------------------------- -------------- --------------------------------- 1. Tanknology Environmental Services, Inc. Delaware TES, Inc. 2. Tanknology/Engineered Systems, Inc. Delaware Engineered Systems, Inc. 3. Tanknology Worldwide, Inc. Delaware Tanknology Worldwide, Inc. 4. Mankoff, Inc. Delaware Tanknology of Illinois, Inc. 5. Energy Recovery Resources, Inc. Delaware James Waste Oil Service
EX-23.1 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Tanknology Environmental, Inc. on Form S-8 (Registration Statement No. 33-65778) of our report dated March 24, 1997 on our audit of the consolidated financial statements and financial statement schedule of Tanknology Environmental, Inc. as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Houston, Texas March 24, 1997 EX-27.1 5
5 YEAR DEC-31-1996 DEC-31-1996 11,421,710 18,425,979 556,332 44,427 60,317 31,602,829 6,555,909 1,008,045 43,033,894 2,600,921 0 0 0 151,922 0 43,033,894 0 2,199,154 1,554,132 3,982,669 142,017 0 (1,052,159) (873,373) (339,476) (533,897) 1,288,997 0 0 755,100 0.05 0.05
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