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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 1-9307
--------------------- ------
GUNDLE/SLT ENVIRONMENTAL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 22-2731074
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
19103 Gundle Road Houston, Texas 77073
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (281) 443-8564
----------------
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 is
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at July 24, 2002
- ---------------------------- --------------------------------
Common stock, par value $.01 11,213,694
GUNDLE/SLT ENVIRONMENTAL, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of
June 30, 2002 (Unaudited) and
December 31, 2001 3
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002
and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Submission of Matters to a vote of Security Holders 17
PART II - OTHER INFORMATION 17
2
GUNDLE/SLT ENVIRONMENTAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30 DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 10,452 $ 16,163
ACCOUNTS RECEIVABLE, NET 71,936 45,418
CONTRACTS IN PROGRESS 5,714 1,977
INVENTORY 28,124 17,151
DEFERRED INCOME TAXES 11,020 3,479
PREPAID EXPENSES AND OTHER 4,072 1,609
---------- ---------
TOTAL CURRENT ASSETS 131,318 85,797
PROPERTY, PLANT AND EQUIPMENT, NET 33,892 33,355
EXCESS OF PURCHASE PRICE OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET 22,389 22,205
DEFERRED INCOME TAXES 5,908 -
OTHER ASSETS 7,033 3,727
---------- ---------
$ 200,540 $ 145,084
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 49,377 $ 26,351
ADVANCE BILLINGS ON CONTRACTS
IN PROGRESS 2,741 1,139
SHORT-TERM DEBT - 5,154
CURRENT PORTION OF LONG-TERM DEBT 4,540 5,268
INCOME TAXES PAYABLE - 391
---------- ---------
TOTAL CURRENT LIABILITIES 56,658 38,303
LONG-TERM DEBT 19,381 15,379
DEFERRED INCOME TAXES 1,296 1,145
OTHER LIABILITIES 994 350
MINORITY INTEREST 2,044 -
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 PAR VALUE, 1,000,000 SHARES
AUTHORIZED, NO SHARES ISSUED OR
OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE, 30,000,000
SHARES AUTHORIZED, 18,279,956 AND 18,109,923 SHARES
ISSUED 185 181
ADDITIONAL PAID-IN CAPITAL 70,090 69,380
RETAINED EARNINGS 87,646 60,293
ACCUMULATED OTHER COMPREHENSIVE INCOME 32,192 (2,769)
---------- ---------
157,345 127,085
TREASURY STOCK AT COST, 7,066,262 and 7,066,262 SHARES (37,178) (37,178)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 120,167 89,907
---------- ---------
$ 200,540 $ 145,084
========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GUNDLE/SLT ENVIRONMENTAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
SALES AND OPERATING REVENUE $ 81,932 $ 47,019 $120,662 $ 70,563
COST OF PRODUCTS & SERVICES 62,448 39,147 95,057 60,623
-------- -------- -------- --------
GROSS PROFIT 19,484 7,872 25,605 9,940
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,834 5,989 15,193 12,262
AMORTIZATION OF GOODWILL -- 329 -- 661
NONRECURRING CHARGES-SERROT ACQUISITION 1,096 -- 2,006 --
-------- -------- -------- --------
OPERATING INCOME (LOSS) 10,554 1,554 8,406 (2,983)
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE 610 426 1,155 785
INTEREST INCOME 32,705 32,660 32,634 32,501
OTHER (INCOME) EXPENSE, NET 438 32,546 564 32,608
MINORITY INTEREST 291 -- 286 --
-------- -------- -------- --------
INCOME(LOSS) BEFORE INCOME TAXES 9,278 1,458 6,535 (3,341)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) 3,896 612 2,745 31365
-------- -------- -------- --------
NET INCOME (LOSS) BEFORE EXTRORDINARY ITEMS 5,382 846 3,790 -1938
EXTRAORDINARY GAIN - SERROT ACQUISITION 32,440 -- 24,299 --
EXTRAORDINARY LOSS - EXTINQUISHMENT OF DEBT 0 -- 32,027 --
-------- -------- -------- --------
NET INCOME(LOSS) $ 5,054 $ 846 $ 27,348 $ (1,938)
======== ======== ======== ========
BASIC EARNINGS(LOSS) PER SHARE
NET INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS 0.48 0.08 0.34 (0.18)
EXTRAORDINARY ITEMS (0.03) -- 2.12 --
-------- -------- -------- --------
NET INCOME(LOSS) PER SHARE $ 0.45 $ 0.08 $ 2.46 $ (0.18)
======== ======== ======== ========
DILUTED EARNINGS(LOSS) PER SHARE
NET INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS 0.46 0.08 0.33 (0.18)
EXTRAORDINARY ITEMS (0.03) -- 2.05 --
-------- -------- -------- --------
NET INCOME(LOSS) PER SHARE $ 0.43 $ 0.08 $ 2.38 $ (0.18)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 11,157 11,044 11,108 11,047
======== ======== ======== ========
DILUTED 11,639 11,044 11,505 11,047
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GUNDLE/SLT ENVIROMENTAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ 27,348 $ 30,830
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION 3,779 3,957
AMORTIZATION 355 671
DEFERRED INCOME TAXES 3,280 266
MINORITY INTEREST 286 --
GAIN ON SALE OF ASSETS 32,753 32,736
GAIN ON PURCHASE OF SERROT (24,299) --
GAIN ON SALE OF JOINT VENTURE INTEREST 32,717 --
DEFERRED GAIN ON HEDGE 32,478 --
INCREASE (DECREASE) IN CASH DUE TO
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (430) 9,917
CONTRACTS IN PROGRESS 30,456 27,635
INVENTORY 28,948 27,028
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 5,030 707
ADVANCE BILLINGS ON CONTRACTS IN PROGRESS 828 31,875
INCOME TAXES PAYABLE -- 30,983
OTHER (3,738) (786)
--------- ---------
NET CASH PROVIDED BY(USED IN)OPERATING ACTIVITIES 5,951 (789)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT 28,522 24,313
PROCEEDS FROM SALE OF EQUIPMENT 264 258
PAYMENTS FOR THE ACQUISITION OF A BUSINESS, NET OF
CASH ACQUIRED 29,020 --
SALE OF JOINT VENTURE INTEREST, NET OF CASH SOLD 31811 --
OTHER 146 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,541) (8,197)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Expenses Payments
REVOLVER 27,768 5,000
PAYMENT OF FINANCING FEES 30,731 --
PROCEEDS FROM NEW DEBT 25,338 --
REPURCHASE OF COMMON STOCK -- 32,694
PROCEEDS FROM THE EXERCISE OF STOCK OPTIONS AND
1st Qtr 757046 1196750
PURCHASES UNDER THE EMPLOYEE STOCK PURCHASE PLAN 711 17
2nd Qtr 757046 279,250
RETIREMENT OF LONG-TERM DEBT (22,046) --
NET CHANGE IN SHORT-TERM DEBT -- 504
--------- ---------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES (3,034) 5,447
--------- ---------
4th Qtr 594,150 279,250
EFFECT OF EXCHANGE RATE CHANGES ON CASH 32,681 32,192
--------- ---------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (5,711) (4,115)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 16,163 11,270
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 10,452 $ 7,155
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
GUNDLE/SLT ENVIRONMENTAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation -
General -
The accompanying unaudited, condensed consolidated financial statements
have been prepared by the Registrant ("Gundle/SLT Environmental, Inc." or the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for the
fair presentation of such financial statements for the periods indicated.
Certain information relating to the Company's organization and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States has been
condensed or omitted in this Form 10-Q pursuant to Rule 10-01 of Regulation S-X
for interim financial statements required to be filed with the Securities and
Exchange Commission. However, the Company believes that the disclosures herein
are adequate to make the information presented not misleading. The results for
the three and six months ended June 30, 2002, are not necessarily indicative of
future operating results. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The accounting policies followed by the Company in preparing interim
condensed consolidated financial statements are similar to those described in
the "Notes to Consolidated Financial Statements" in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
The Company occasionally enters into forward contracts and cross currency
swaps in its management of foreign currency exposures. As a matter of policy,
the Company does not speculate in financial markets and therefore, does not hold
these contracts for trading purposes. The Company utilizes what it considers
straightforward instruments to accomplish its objectives.
The foreign currency forward contracts are used to hedge specific
transactions. Gains and losses on these contracts are recognized in the same
period as the gains and losses on the underlying position.
Organization -
Gundle/SLT Environmental, Inc., a Delaware corporation, through GSE Lining
Technology, Inc. and the Company's other operating subsidiaries, is primarily
engaged in the manufacture, sale and installation of geosynthetic lining
systems.
6
(2) Inventory -
Inventory is stated at the lower of cost or market. Cost, which includes
material, labor and overhead, is determined by the weighted average cost method,
which approximates the first in, first out cost method. Inventory consisted of
the following (000's):
June 30, December 31,
2002 2001
------------ --------------
Raw materials and supplies $ 9,327 $ 4,625
Finished goods 18,797 12,526
------- -------
$28,124 $17,151
======= =======
(3) Income Taxes -
The Company's provision for income taxes is recorded at the statutory rates
adjusted for the effect of any permanent differences. The Company has a tax
holiday in Thailand through 2003 and a 50% reduced tax rate for 2004 through
2008.
(4) Equity -
On September 18, 1998, the Company's board of directors adopted a stock
repurchase plan under which the Company was authorized to repurchase up to
1,000,000 shares of its outstanding common stock in open market transactions
depending on market conditions. This amount was increased to 3,000,000 as of
December 31, 2000. As of June 30, 2002, stockholders' equity included 1,380,357
shares repurchased under this program. All of these transactions were funded
with the Company's available cash. At June 30, 2002, the Company had 11,213,694
shares outstanding.
(5) Comprehensive Income -
During the second quarter of 2002 and 2001, other comprehensive income
(losses), representing foreign currency translation adjustments, amounted to
$2,751,000 and $(487,000), respectively. For the six months ended June 30, 2002
and 2001, other comprehensive income (losses), amounted to $2,193,000 and
$(2,318,000) respectively.
7
(6) Goodwill amortization -
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets", effective for years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the statements.
The Company adopted SFAS No. 142 as of January 1, 2002. If GSE had not amortized
goodwill in the first six months of 2001 the following pro forma results would
have occurred:
Three months ended Six months ended
------------------ ----------------
June 30, 2001 June 30, 2001
-------------- --------------
Net Income(Loss) $1,035 ($1,554)
Basic Income(Loss) Per Share $ .09 ($ .14)
Diluted Income(Loss) Per Share $ .09 ($ .14)
During the second quarter 2002, the Company performed the initial testing
of impairment of goodwill on its reporting unit. The test was applied utilizing
the fair value of the reporting unit as of January 1, 2002 as determined based
on the reporting units discounted cash flow. There was no goodwill impairment in
the Company's one reporting unit
(7) Business Combination
On February 4, 2002, the Company completed the purchase of all the
outstanding stock of Serrot International, Inc. (SII) from Waste Management
Holdings, Inc. (WMI). The acquisition cost was $17.9 million, including after
tax purchase, financing and transition costs of $6.0 million. The Company
recorded the transaction using the purchase method of accounting resulting in
the recognition of $24.3 million of negative goodwill representing the excess
fair value of the assets acquired over the purchase price after its allocation
to SII's long-lived assets net of their associated tax benefits. The negative
goodwill was recognized as an extraordinary gain for the six months ended June
30, 2002. The purchase price was adjusted during the second quarter for
measurement of working capital as of the closing date.
In conjunction with the purchase, the Company established a pre-tax
liability of $6 million for estimated severance and other costs associated with
the involuntary termination of SII employees and the closing of a SII plant.
Through June 30, 2002, approximately $4.6 million of these costs have been paid.
The Company anticipates approximately $5.2 million of these costs will be paid
by the end of 2002.
8
Unaudited pro forma combined operating results of the Company and SII
assuming the merger was completed as of January 1, 2002 and 2001, respectively,
are summarized as follows:
Six months ended June 30,
------------------------
2002 2001
---- ----
Sales & Operating Revenue $129,345 $142,496
Net Income(Loss) $ 2,960 ($ 1,801)
Basic Income(Loss) Per Share $ .27 ($ .15)
Diluted Income(Loss) Per Share $ .26 ($ .16)
The pro forma information includes adjustments for changes to interest
costs related to new financing obtained in conjunction with the acquisition, and
decreased depreciation expense of acquired property and equipment as a result of
the allocation of negative goodwill to long-lived assets. The pro forma
information excludes an extraordinary gain of $24.3 million resulting from
excess negative goodwill. The pro forma information is not necessarily
indicative of the results of operations had the transaction been effected on the
assumed date or the results of operations for any future periods.
(8) New Accounting Prouncements -
In April 2002, Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in APB 30 will now be used to classify those gains and
losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS
No. 4 has been rescinded. SFAS No. 44 was issued to establish accounting
requirements for the effect of transition to the provisions of the Motor Carrier
Act of 1980. Because the transition has been completed, SFAS No. 44 is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effect similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Certain
provisions of this statement related to SFAS No. 13 are effective for
transactions occurring after May 15, 2002, all other provisions of this
statement will be effective for financial statements issued on or after May 15,
2002. The Company adopted this statement in the second quarter of 2002. The
adoption of this statement did not have a significant impact on the consolidated
financial statements of the Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Quarter:
For the three months ended June 30, 2002, sales and operating revenue
was $81,932,000 compared with $47,019,000 for the same period last year. U.S.
sales and operating revenue was $49,858,000, 94% higher than for the same period
last year. U.S. units shipped were up 77% and those installed were up 175%.
Foreign sales and operating revenue was $32,074,000, 51% higher than last year.
Foreign units shipped were up 43%. Foreign currency translation increased 2002
foreign sales and operating revenue by $395,000. The primary reason for the
increased sales and operating revenue and units shipped and installed was the
completion, on February 4, 2002, of the acquisition of Serrot International,
Inc.(SII).
Gross profit for the quarter was $19,484,000, or 148% higher than the prior
year at $7,871,000. Gross Profit was increased by the additional units
manufactured, shipped and installed. Gross profit margin, as a percentage of
sales and operating revenue, increased to 23.8% from 16.7% last year. Margin as
a percentage of sales and operating revenue improved primarily due to increases
in the utilization of GSE's manufacturing and installation assets and increased
spread between lower resin costs purchased earlier in the year and selling price
of selling prices.
Selling, general and administrative (SG&A) expenses were $7,834,000
compared with $5,989,000 in the second quarter of 2001, a 31% increase. Most of
this increase was associated with the acquistion of SII. SG&A, as a percent of
sales, was 9.6% compared to 12.7% last year.
Interest expense was $184,000 higher than last year primarily due to an
increase in the interest rate resulting from the refinancing of our long term
debt to accomplish the acquisition of SII.
Other (income)/expense, net was $660,000 higher than last year primarily
due to an increase in amortization of debt issuance costs related to GSE's new
debt, reduced gains in foreign exchange and a reduction in the Company's
Egyptian joint venture income.
The quarterly provision for income taxes was $3,896,000 compared with
$612,000 in the same period last year. The tax provision for both periods was
recorded at the statutory rates adjusted for certain permanent differences on a
year-to-date basis.
10
Year-to-date:
For the six months ended June 30, 2002, sales and operating revenue was
$120,662,000 compared with $70,563,000 for the same period last year. U.S. sales
and operating revenue was $69,120,000, 105% higher than for the same period last
year. Units shipped were up 90% and those installed were up 175%. Foreign sales
and operating revenue was $51,542,000, 40% higher than last year. Foreign units
shipped were up 37% and those installed were up 137%. Foreign currency
translation increased 2002 foreign sales and operating revenue by $729,000. The
primary reason for the increased sales and operating revenue and units shipped
and installed was the completion, on February 4, 2002, of the acquisition of
SII.
Gross profit for the six months was $25,605,000, or 158% higher than the
prior year at $9,940,000. Gross Profit was increased by the additional units
manufactured, shipped and installed in the U.S. primarily resulting from the
acquisition of SII. Gross profit margin, as a percentage of sales and operating
revenue, increased to 21.2% from 14.1% last year. Margin as a percentage of
sales and operating revenue improved primarily due to increases in the
utilization of GSE's manufacturing and installation assets and increased spread
between lower resin costs purchased earlier and selling price of finished
products.
SG&A expenses were $15,193,000 compared with $12,262,000 in the first six
months of 2001, a 24% increase. Most of this increase was associated with the
acquisition of SII. SG&A, as a percentage of sales, was 12.6% compared to 17.4%
last year.
Interest expense was $370,000 higher than last year primarily due to an
increase in the interest rate resulting from the refinancing of our long term
debt to accomplish the acquisition of SII.
Other (income)/expense, net, was $724,000 higher than last year primarily
due to an increase in amortization of debt issuance costs related to GSE's new
debt and a reduction in the Company's Egyptian joint venture income.
The year to date provision for income taxes was $2,745,000 compared with a
benefit of $1,403,000 in the same period last year. The tax provision for both
periods was recorded at the statutory rates adjusted for certain permanent
differences on a year-to-date basis.
11
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
The Company's primary sources of liquidity in the first six months of 2002
were internally generated cash from operations, its credit line and a
refinancing of its long term notes. Primary uses of cash were capital
expenditures and the acquisition of SII. Cash provided by operations in the
first six months was $5,951,000. Capital expenditures totaled $4,246,000.
Payments for the acquisition of SII, net of cash acquired, was $3,748,000, As of
June 30, 2002, the Company had working capital $74,660,000 of which $10,452,000
was cash and cash equivalent investments. The Company's capital structure
consisted of $23,921,000 in debt and $120,167,000 in stockholders' equity at
June 30, 2002.
At June 30, 2002, the Company had credit facilities with two German banks
in the amount of EUR 5,100,000. These revolving credit facilities are secured by
property and plant in Germany. These facilities mature in September, 2002, and
bear interest at various market rates. These credit facilities are used
primarily to guarantee the performance of European installation contracts and
temporary working capital requirements. At June 30, 2002, the Company had EUR
3,324,000 available under these credit facilities with EUR 1,776,000 of bank
guarantees outstanding and no current borrowings. These facilities are in the
process of being renewed, secured only by a corporate guarantee.
In January 2002, the Company arranged an additional EUR 2,550,000 credit
line with a third German bank to increase the amount available to guarantee the
performance of German installation contracts and temporary working capital
requirements. This facility bears interest at market rates and is supported by a
corporate guarantee. At June 30, 2002, the Company had EUR 1,533,000 available
under these credit facilities with EUR 1,017,000 of bank guarantees outstanding.
On February 4, 2002, the Company entered into a note agreement with a
lender in the amount of $25,000,000. This 3-year term facility is secured by the
Company's Houston, TX and Kingstree, SC, real properties and all of the
Company's equipment at these locations. The promissory note requires monthly
payments of approximately $520,000 including interest at the rate of 9.22% and
matures on February 5, 2005 with a balloon payment equal to the unpaid principal
balance plus accrued and unpaid interest. The terms of the note place various
restrictions on the Company's ability to pay dividends or make certain other
payments, incur additional debt, consolidate or merge into another corporation
or sell assets and make capital expenditures. The note also requires the Company
to maintain certain financial ratios and specified levels of consolidated net
worth.
12
On February 4, 2002, the Company entered into a 3-year credit agreement
with Bank of America, N.A., as agent, to borrow up to $55,000,000 on a revolving
basis. The amount of borrowings allowed under the credit agreement is determined
by the amount of eligible receivable and inventory amounts that make up the
borrowing base. Loans made pursuant to the credit agreement bear interest, at
the Company's option, at the bank's prime rate or the reserve adjusted LIBOR
plus an applicable margin based on the ratio, from time-to-time, of the
Company's EBITDA (as defined in the credit agreement) to certain "fixed
charges", including principal paid on funded debts, cash interest expense,
dividends, stock repurchases and certain other distributions made, cash amount
of taxes paid and net capital expenditures made from time-to-time. The
applicable margin for prime rate loans may vary between 0% and .25% per annum,
and the applicable margin for LIBOR based loans may vary between 2% and 2.75%
per annum. Fees will be payable from time-to-time with respect to letters of
credit issued pursuant to the credit agreement at a rate equal to the margin
payable with respect to LIBOR based revolving loans. An annual commitment fee of
3/8% is payable on any unused portion of the facility. The terms of the credit
agreement place various restrictions on the Company's ability to pay dividends
or make certain other payments, incur additional debt, consolidate or merge into
another corporation or sell assets and to make capital expenditures. The credit
agreement also requires the Company to maintain certain financial ratios and
specified levels of consolidated net worth. As of June 30, 2002, the Company had
no borrowings outstanding under this facility. On June 30, 2002, the Company's
available borrowing base under the line of credit was approximately $48,000,000
of which the Company could have borrowed approximately $26,000,000.
Using proceeds from the aforementioned note and credit agreements, the
Company paid in full $20,000,000 of 7.34% long term debt and $15,165,400 for the
purchase of all of the outstanding stock of SII. Based on Serrot's final closing
balance sheet, GSE received a purchase price adjustment of $3,534,000 from Waste
Management Holdings, Inc. on June 13, 2002. The Company also paid approximately
$4,000,000 of closing costs related to the acquisition. To complete the
acquisition the Company used $8,700,000 of its cash and borrowed $5,500,000
under its line of credit, which was subsequently repaid.
The Company estimates it will cost $9,000,000 for severance, and relocating
personnel, inventory and equipment during fiscal year 2002 related to the
acquisition, of which approximately $6,564,000 occurred in the first six months.
The acquisition added approximately $24,300,000 in equity to the balance sheet.
Management believes significant savings will result from plant consolidations,
sales and marketing consolidations, and administrative cost savings on a
combined basis.
13
The Company expects to rely upon internally generated cash flow and its
line of credit to maintain liquidity in the foreseeable future, as cash flow
from operations for the year is expected to be positive and adequate to fulfill
cash requirements in 2002 and 2003. The Company will use its line of credit for
seasonal working capital requirements and to maintain liquidity for short term
imbalances. The Company's operating results and liquidity are normally reduced
in the first six months as both product deliveries and installations are at
their lowest levels due to the inclement weather experienced in the Northern
Hemisphere.
Our long term obligations consist primarily of the $23,921,000 of long term
notes and are payable over the next three years.
Other
The Company's operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring in
the summer and fall months. In particular, the Company's operating results are
most impacted in the first quarter as both product deliveries and installations
are at their lowest levels due to the inclement weather experienced in the
Northern Hemisphere.
The Company's foreign subsidiaries routinely accept contracts in currencies
different than their functional currency. The Company recognizes that such
practices are subject to the risk of foreign currency fluctuations not present
in U.S. operations. Foreign exchange gains and losses to date have not been
material to the Company's operations as a whole.
Pricing for the Company's products and services is primarily driven by
worldwide manufacturing capacity in the industry, and by raw material costs. The
Company's primary raw material, polyethylene, is occasionally in short supply
and subject to substantial price fluctuation in response to market demand. Any
increase in the industry's worldwide manufacturing capacity, interruption in raw
material supply or electricity supply, or abrupt raw material price increases
could have an adverse effect upon the Company's operations and financial
performance. Inflation has not had a significant impact on the Company's
operations.
The Company's third quarter sales and operating revenue is expected to be
approximately $100,000,000 compared to $57,000,000 last year producing gross
profit of approximately $21,000,000 compared to $11,000,000 last year.
14
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates estimates,
including those related to bad debts, materials and supplies obsolescence,
investments, intangible assets and goodwill income taxes, financing operations,
workers' insurance, pensions and other post-retirement and employment benefits
and contingent liabilities. Estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from the estimates estimate used in
preparing the consolidated financial statements contained herein.
The Company believes the following are its most critical accounting
policies. These policies require significant judgmental estimates used in the
preparation of its consolidated financial statements, based on historical
experience and assumptions related to certain factors including competitive
market factors, worldwide manufacturing capacity in the industry, general
economic conditions around the world and governmental regulation and
supervision.
Allowance for doubtful accounts - The Company closely monitors its
customers' accounts on a regular basis, including an analysis of past due
accounts. The Company provides for potential doubtful accounts as a percentage
of sales and operating revenues based on historical experience and past due
accounts.
Warranty Reserve - The Company's products carry specified limited
warranties as to quality and workmanship. The Company establishes a reserve for
potential warranty claims based on history of claims experience.
Revenue recognition and job loss accrual - Revenues from installation
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated cost for each contract. The
Company's installation projects are reviewed for profitability on a monthly
basis. When it has been determined that a project will generate a loss for the
Company, the Company estimates that loss and books a reserve for the total
expected loss on the job.
15
Goodwill impairment - The Company reviews the carrying value of goodwill
when facts and circumstances suggest an other than temporary decline in the
recorded value. Effective January 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangibles. As a result of the statement the Company will no
longer amortize goodwill but will perform an initial test of impairment and then
assess goodwill for impairment at least annually thereafter.
* * *
Forward-looking information:
This Form 10-Q contains certain forward-looking statements as such is
defined in the Private Securities Litigation Reform Act of 1995, and information
relating to the Company and its subsidiaries that are based on beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words,
"anticipate", "believe", "estimate", "expect", "intend" and words of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive market factors, world-wide
manufacturing capacity in the industry, general economic conditions around the
world, raw material pricing and supply, governmental regulation and supervision,
seasonality, distribution networks, and other factors described herein. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
16
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 2002, an annual meeting of our stockholders was held. The
holders of 9,915,013 shares of common stock were present in person or
represented by proxy at the meeting. At the meeting, the stockholders took the
following actions:
(a) Election of Directors
The stockholders elected the following persons to serve as directors of
the Company until the next annual meeting of stockholders, or until
their successors are duly elected and qualified:
---------------------- ------------------- ------------------ ----------------------
Shares Present Shares
---------------------- ------------------- ------------------ ----------------------
Nominee Shares For Withheld Not Voting
---------------------- ------------------- ------------------ ----------------------
Samir T. Badawi 9,898,113 16,900 1,138,681
---------------------- ------------------- ------------------ ----------------------
James R. Burke 9,898,664 16,349 1,138,681
---------------------- ------------------- ------------------ ----------------------
Bruce Cummings 9,893,564 21,449 1,138,681
---------------------- ------------------- ------------------ ----------------------
James R. Gibbs 9,895,564 19,449 1,138,681
---------------------- ------------------- ------------------ ----------------------
T. William Porter 9,901,464 13,549 1,138,681
---------------------- ------------------- ------------------ ----------------------
Edward T. Sheehan 9,898,464 16,549 1,138,681
---------------------- ------------------- ------------------ ----------------------
PART II - OTHER INFORMATION
GSE filed two reports on Form 8-K during the six months ended June 30,
2002. One report on Form 8-K, dated January 23, 2002, reported that GSE had
entered into an agreement to acquire the stock of Serrot International, Inc. The
other report on Form 8-K, dated February 14, 2002, reported the completion of
the Serrot acquisition, the related financial statements of the business
acquired and the pro forma financial information of GSE reflecting the Serrot
acquisition.
17
SIGNATURE
Pursuant to the requirements 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.
GUNDLE/SLT ENVIRONMENTAL, INC.
DATE July 25, 2002 BY /S/ Roger J. Klatt
------------------- ----------------------------
ROGER J. KLATT,
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
18