UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number 0-23454
Total Containment, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2394872
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
422 Business Center, A130 North Dr., Oaks, PA 19456
(Address of principal executive offices) (Zip Code)
(610) 666-7777
Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 4,649,600 shares of Common Stock, par value $0.01 per
share were outstanding at October 31, 1998.
PAGE 1
Total Containment, Inc.
Contents
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
December 31, 1997 and September 30, 1998 3
Condensed Consolidated Statement of Operations and
Comprehensive Income (Loss) B Three and Nine months
ended September 30, 1997 and 1998 4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial
Statements - September 30, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information 17
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, September 30,
1997 1998
(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 612 $ 454
Accounts receivable, net 7,887 13,716
Inventories - Note 2 7,306 8,115
Deferred income taxes 3,114 2,820
Other assets 2,277 2,922
Total current assets 21,196 28,027
Molds and tooling costs, net 987 673
Property and equipment, net 3,870 4,347
Patents, patent rights, trademarks and licenses, net 4,293 325
Goodwill, net 5,379 5,253
Deferred income taxes 4,322 3,582
Total Assets $40,047 $42,207
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit borrowings $ 3,197 $ 4,156
Current portion of long-term debt 744 591
Accounts payable, trade and accrued expenses 6,019 9,212
Other payable 4,020 4,020
Warranty reserve 6,088 6,698
Total current liabilities 20,068 24,677
Long-term debt 2,305 1,956
Warranty reserve 11,234 1,982
Total liabilities 33,607 28,615
Shareholders' Equity:
Preferred stock - $10,000 par value; authorized 400 shares;
400 shares issued and outstanding 0.00 4,000
Common stock - $0.01 par value;
authorized 20,000,000 shares;
issued and outstanding December 31, 1997,
4,641,600 shares; September 30, 1998, 4,649,600 shares 46 46
Capital in excess of par value 13,729 13,749
Retained earnings (7,139) (4,023)
Equity adjustment from foreign
currency translation (196) (180)
Total shareholders' equity 6,440 13,592
Total Liabilities & Shareholders' Equity $40,047 $42,207
======= =======
See notes to condensed consolidated financial statements.
PAGE 3
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
(In thousands, except per share data)
Net sales 13,136 14,984 33,475 39,464
Cost of sales (excluding warranty provision) 9,628 8,031 22,160 21,933
3,508 6,953 11,315 17,531
Warranty Provision 17,600 (2,894) 18,210 (2,164)
Gross profit (loss) (14,092) 9,847 (6,895) 19,695
Selling, general and administrative 3,224 3,397 9,651 9,796
Amortization of patents, licenses and goodwill 128 123 400 367
Other expense 2,565 3,727 2,565 3,727
Income (loss) from operations (20,009) 2,600 (19,511) 5,805
Interest expense 158 210 466 474
Income (loss) before income taxes (20,167) 2,390 (19,977) 5,331
Income tax expense (benefit) (6,857) 898 (6,792) 2,026
Net income (loss) (13,310) 1,492 (13,185) 3,305
Preferred stock dividends 0 87 0 189
Net Income (loss) applicable to common shareholders (13,310) 1,405 (13,185) 3,116
======== ======== ======= ========
Earnings per common share - basic (2.87) 0.30 (2.84) 0.67
======== ======== ======= ========
Weighted average number of shares outstanding - basic 4,642 4,650 4,642 4,645
======== ======== ======= ========
Earnings per common share - diluted 0.29 0.64
======== ========
Weighted average number of shares outstanding - diluted 4,920 4,850
======== ========
Net income (loss) ($13,310) $1,492 ($13,185) $3,305
Other comprehensive income (loss)
Foreign currency translation adjustments (41) 65 (23) 16
Other comprehensive income before taxes (41) 65 (23) 16
Income tax (expense) benefit on other comprehensive income 14 (24) 8 (6)
Other comprehensive income (loss) (27) 41 (15) 10
Comprehensive income ($13,337) $1,533 ($13,200) $3,315
======== ======== ======== =======
See notes to condensed consolidated financial statements.
PAGE 4
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
Nine months ended
September 30,
1997 1998
(In thousands)
Cash flows from operating activities:
Net income $(13,185) $ 3,305
Adjustment to reconcile net income to
net cash provided by operating activities:
Loss on write-off of patent 565 -
Loss on write-off of patent license - 3,727
Depreciation and amortization 1,312 1,489
Change in assets and liabilities (2,871) (3,228)
Change in warranty accrual 14,662 (8,642)
Net cash (used for) operating activities 483 (3,349)
Cash flows from investing activities:
Purchase of property and equipment (1,630) (1,286)
Other (68) -
Net cash (used for) investing activities (1,698) 1,286
Cash flows from financing activities:
Proceeds from the sale of preferred stock 0 4,000
Proceeds from the sale of common stock 0 20
Net (repayments) borrowings on long-term debt 493 (502)
Net borrowings under line of credit 558 959
Net cash provided by financing activities 1,051 4,477
Net (decrease) in cash and cash equivalents ($164) ($158)
======== ========
See notes to condensed consolidated financial statements.
PAGE 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of
Total Containment, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have
been included. The results of operations of the Company for the
three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for
any other interim period or for a full year. For further
information, refer to the Consolidated Financial Statements and
notes thereto included in the Registrant Company's Annual Report
and Form 10-K for the year ended December 31, 1997.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. Realization of deferred tax assets associated
with state net operating loss (NOL) carryforwards is dependent
upon generating sufficient taxable income prior to their
expiration. The Company believes that there is a risk that
certain of these NOL carryforwards may expire unused and,
accordingly, has established a valuation allowance (approximately
$275,000 as of December 31, 1997 and September 30, 1998) against
them. Although realization is not assured for the deferred tax
assets, the Company believes it is more likely than not they will
be realized through future taxable earnings.
New Accounting Pronouncements. On January 1, 1998, the
Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change
in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Prior period amounts have been restated to conform to
the provisions of SFAS No. 130. The adoption of SFAS 130 had no
impact on the Company's financial position or results of
operations.
<PAGE 6>
On January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 requires that public business
enterprises report certain information about operating segments
in a complete set of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires the reporting of certain
information about their products and services, the geographic
area in which they operate, and their major customers. The
adoption of SFAS No. 131 had no impact on the Company's financial
position or results of operation.
The AICPA's Accounting Standards Executive Committee has
issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP segments an
internal use software project into stages and the accounting is
based on the stage in which a cost is incurred. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 for
costs incurred in those fiscal years for all projects, including
projects in progress when the SOP is adopted. The adoption of
SOP 98-1 is not expected to have a material impact on the
Company's financial position or results of operations.
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, September 30,
1997 1998
(In thousands)
Raw Materials $ 516 $ 655
Finished Goods 6,790 7,460
$ 7,306 $ 8,115
Note 3 - Line of Credit
In April 1998, the Company increased its overall working
capital line of credit with its bank to $10.0 million. This
facility provides for financing of working capital needs and
equipment purchases and is secured by the Company's receivables,
inventory and other assets. The interest rate for this facility
was the prime rate plus one-quarter (1/4) percent and expires
December 31, 1999. As of June 30, 1998, the Company met certain
financial covenants contained in the line of credit agreement and
therefore received a reduction in the interest rate effective
September 1, 1998, down to the prime rate. This rate will remain
in effect until termination of the arrangement.
Note 4 - Sale of Preferred Stock
On March 17, 1998, the Company's principal shareholder
purchased from the Company 400 shares of authorized perpetual
Class A Floating Rate Preferred Stock of the Company at $10,000,
cash, per share (the "Preferred Stock") or $4 million in the
<PAGE 7> aggregate. The perpetual Preferred Stock is entitled to
receive, as and if declared by the Company's Board, dividends at
a floating rate equal to the rate payable by the Company on its
line of credit with its commercial bank. Dividends are paid
quarterly in arrears, and if not declared or paid would cumulate
at the line of credit rate, plus 50 basis points. The preferred
stock: (i) does not possess voting rights, (ii) is not
convertible into common stock, and (iii) is not redeemable at the
option of the holder. The Preferred Stock is redeemable at the
option of the Company, but only (i) if and to the extent the
Company's net tangible assets at the end of any fiscal quarter
and after such dividend exceeds $4.5 million, or (ii) if at least
a majority of the independent and disinterested members of the
audit committee of the Company's Board of Directors approve such
redemption. The preceding provision relating to redemption
constitutes a covenant between the Company, the Company's
principal shareholder and its remaining shareholders and may not
be changed without the approval of at least a majority of the
independent and disinterested members of the audit committee of
the Company's Board of Directors.
Note 5 - Warranty Reserves
The Company's Tank Jacket product line carries a warranty of
one year for workmanship and materials. The Enviroflex product
line carries a ten year warranty for workmanship and materials.
The Tank Jacket product line also carries a thirty year warranty
for corrosion from certain specified materials. The Company's
warranties are limited to replacement of defective material; they
do not cover by their terms costs associated with leaks or
spillage of tank or pipe contents. Management has accrued a
reserve for anticipated warranty and other products liability
claims and associated legal fees based upon its industry
knowledge and actual claims experience.
As a result of a review of piping problems initiated in
1996, the Company, during the third quarter of 1997, increased
its warranty reserve by approximately $18.6 million primarily to
cover the Company's estimate of the cost, anticipated to be
incurred over a two to three year period, of inspecting and
replacing pipe that had deteriorating cover material on the
retractable inner pipe portion of the Company's double-wall
underground fuel dispensing and containment systems installed
between 1990 and 1994 at approximately 3,000 remaining sites.
The deterioration results from a microbiological fungus, which,
under certain conditions, affects the outer layers of the
system's primary (inner) retractable pipe. The Company has
instituted litigation against the supplier of the pipe to recover
the cost the Company has and will sustain to replace such pipe,
as well as other damages.
As a result of a review performed during the third quarter
of 1998 of the progress made regarding this replacement pipe
program, as well as the costs now expected to be incurred to
complete this process, the Company recorded, during the third
<PAGE 8> quarter of 1998, a reduction of the warranty reserve of
approximately $3.3 million. Through the use of managing outside
contractors as well as controlling the costs incurred by the
Company's service crews, the Company has been able to
significantly reduce the cost of performing the pipe replacement
program.
Note 6 - Write Off of Patent License
In November 1994, the Company acquired a license for all
inventions covered by a third party's patents, patent
applications and continuations in exchange for a payment of $2.0
million in cash and $1.5 million of the Company's Common Stock.
The Company capitalized these costs as well as certain other
acquisition costs. The Company was expensing these costs over a
17 year amortization period.
Due to the results of the Environ case, the Company wrote
off as of September 30, 1998 to Other Expense the current
unamortized cost of this license, which was approximately $3.7
million. (See Part II. Other Information, Item 1. Legal
Proceedings)
PAGE 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is a Pennsylvania corporation organized in 1986.
The Company is a leading manufacturer and distributor of
underground systems and products for the conveyance and
containment of petroleum and alcohol based motor vehicle fuels
from underground storage tanks to aboveground fuel dispensers.
The principal end users of the Company's products are service
stations, convenience stores and other retail sellers of
gasoline, gasohol and other motor vehicle fuels, government
bodies, utilities and other fleet vehicle operators.
In addition to historical information, this Form 10-Q
contains forward-looking information. The forward-looking
information contained herein is subject to certain risk and
uncertainties that could cause actual results to differ
materially from those projected. For example, risk and
uncertainties can arise with changes in: general economic
conditions, including their impact on capital expenditures;
business conditions in the manufacturing and distribution
industry; the regulatory environment; rapidly changing technology
and industry standards; competitive factors, including increased
competition with both national and international companies, new
services and products offered by competitors; and price
pressures. Readers are cautioned not to place undue reliance on
the forward-looking information included within, which reflects
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update this
forward-looking information to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - Third Quarter of 1998 compared to Third
Quarter of 1997
Net Sales
The Company's net sales for the quarter ended September 30,
1998, were $15.0 million compared to $13.1 million for the
corresponding quarter in 1997, an increase of 14.1%. The
increase was primarily attributable to increased sales from our
field operations at our American Containment, Inc. subsidiary, as
well as continued strong sales of our flexible underground piping
systems.
Gross Profit (Loss)
The primary component of the Company's cost of sales is the
product manufacturing costs incurred by the Company as well as
costs paid to various third party manufacturers. Other
components are the variable and fixed costs of operating the
<PAGE 10> Company's manufacturing and warehousing operations,
depreciation of molds, tools and equipment, and warranty expense.
The Company's gross profit after the warranty provision for the
quarter ended September 30, 1998 was $9.8 million compared to a
$14.1 million loss for the corresponding quarter in 1997. During
the third quarter of 1997, the Company recorded warranty expense
of $18.6 million to primarily cover the cost of replacing
deteriorating pipe (see Note 5 of Notes to Condensed Consolidated
Financial Statements). Additionally, as a result of a review
performed during the third quarter of 1998 of the progress made
regarding this replacement pipe program , as well as the costs
now expected to be incurred to complete this process, the Company
recorded, during the third quarter of 1998, a reduction of the
warranty reserve of approximately $3.3 million. Through the use
of managing outside contractors as well as controlling the costs
incurred by the Company's service crews, the Company has been
able to significantly reduce the cost of performing the pipe
replacement program.
Comparing margins before the effect of the warranty
provision, the Company experienced an increase in gross profit
primarily from increased sales and reduced costs of producing our
main piping products due to the integration of our pipe
manufacturing plant in October 1997, coupled with lower costs in
certain other products due to our cost reduction program
initiated in the second half of 1997. Finally, the Company also
experienced an increase in gross margin due to a decrease in the
costs of producing other products at its Bakersfield, California
operations.
The Company's gross profit percentage after the effect of
the warranty provision increased to 65.7% for the quarter ended
September 30, 1998 compared to a gross loss of 107.3% for the
corresponding quarter in 1997. The gross margin for the 1997
period was adversely affected by the previously mentioned $18.6
million warranty charge. The gross margin for the 1998 period
experienced a benefit from the previously mentioned $3.3 million
reduction of the warranty reserve. The Company's gross profit
percentage before effect of the warranty provision increased to
46.4% compared to 26.7% for the corresponding quarter in 1997.
The increase was primarily attributable to the reduced costs of
our main piping products as well as lower costs in certain other
products.
Operating Expense
Selling, general and administrative expenses consist
primarily of salaries and related benefits, payroll taxes,
commissions, royalties, legal expenses and other general,
administrative and overhead costs. Selling, general and
administrative expenses for the quarter ended September 30, 1998
were $3.4 million compared to $3.2 million for the corresponding
quarter in 1997. The increase for the quarter resulted mainly
from an increase in bad debt expense and training costs related
to the implementation of our new information system. <PAGE 11>
Amortization of Intangibles
Amortization of intangibles consists of the amortization of
goodwill over a period of 40 years and the amortization of
various patents and licenses that are amortized on a straight-
line basis over the estimated lives of the patents (which range
from 13 to 17 years) at the acquisition date or subsequent
issuance date.
Other Expense
Other Expense of $3.7 million incurred in the quarter ended
September 30, 1998 was associated with the write off of a patent
license originally capitalized by the Company (see Note 6 of
Notes to Condensed Consolidated Financial Statements). The other
expense of $2.6 million incurred in the quarter ended
September 30, 1997 was associated with the licensing of certain
patented technology as well as the write off of a patent of a
product line that has been discontinued.
Interest Expense
Interest expense for the quarter ended September 30, 1998
was $210,000 compared to $158,000 for the corresponding quarter
in 1997. Interest expense is incurred on term loans that were
used for purchasing equipment and under the Company's working
capital line of credit. The increase is due to a higher balance
outstanding on the Company's line of credit during the 1998
period as compared to the 1997 period.
Income Taxes
Income taxes for the quarter ended September 30, 1998 were
$898,000 compared to a benefit of $6.9 million for the
corresponding quarter in 1997. The Company recorded income taxes
utilizing an effective tax rate of 38% during the 1998 period as
compared to an effective tax rate of 34% in the 1997 period.
Net Income (Loss)
The Company's net income for the quarter ended September 30,
1998 was $1.5 million compared to a loss of $13.3 for the
corresponding quarter in 1997. The increase of $14.8 million
was a result of the prior year results containing a $20.6 million
charge to earnings to increase the Company's warranty reserve, to
write down certain inventory, as well as record charges
associated with licensing of certain patented technology and the
write off of a patent. The 1998 results were adversely affected
by the $3.7 million write off of the patent license which was
substantially offset by the reversal of $3.3 million of the
warranty provision. The increase in net income for the quarter,
excluding the previously mentioned charges, resulted from
increased sales and an increase in gross margin percentage
partially offset by the increase in operating and income tax
expenses. <PAGE 12>
Preferred Stock Dividends
The preferred stock dividend, approved by the Company's
Board of Directors, relates to the Company's sale, on March 17,
1998, of 400 shares of authorized perpetual Class A Floating Rate
Preferred Stock (the "Preferred Stock") to the Company's
principal shareholder at $10,000, cash, per share, or $4.0
million in the aggregate.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 1998
compared to Nine Months Ended September 30, 1997
Net Sales
The Company's net sales for the nine months ended
September 30, 1998 were $39.5 million compared to $33.5 million
for the corresponding nine months ended September 30, 1997, an
increase of 17.9%. The increase was primarily attributable to
increased sales from our field operations at our American
Containment, Inc. subsidiary, as well as continued strong sales
of our flexible underground piping systems.
Gross Profit (Loss)
The primary component of the Company's cost of sales is the
product manufacturing costs incurred by the Company as well as
costs paid to various third party manufacturers. Other
components are the variable and fixed costs of operating the
Company's manufacturing and warehousing operations, depreciation
of molds, tools and equipment, and warranty expense. The
Company's gross profit after the warranty provision for the nine
months ended September 30, 1998 was $19.7 million compared to a
loss of $6.9 million for the nine months ended September 30,
1997. During the third quarter of 1997, the Company recorded
warranty expense of $18.6 million to primarily cover the cost of
replacing the deteriorating pipe.
As a result of a review performed during the third quarter
of 1998 of the progress made regarding this replacement pipe, as
well as the costs now expected to be incurred to complete this
process, the Company recorded, during the third quarter of 1998,
a reduction of the warranty reserve of approximately $3.3
million. Through the use of managing outside contractors as well
as controlling the costs incurred by the Company's service crews,
the Company has been able to significantly reduce the cost of
performing the pipe replacement program.
Comparing margins before the effect of the warranty
provision, the Company experienced an increase in gross margin
primarily from increased sales and reduced costs of producing our
main piping products due to the integration of our pipe
manufacturing plant in October 1997, coupled with lower costs in
certain other products due to our cost reduction program
initiated in the second half of 1997. Additionally, the Company
also experienced an increase in gross margin due to a decrease in
<PAGE 13> the costs of producing other products at its
Bakersfield, California operations.
The Company's gross profit percentage after effect of the
warranty provision increased to 49.9% for the nine months ended
September 30, 1998 compared to a gross loss of 20.6% for the
corresponding nine months ended September 30, 1997. The gross
margin for the 1997 period was adversely affected by the
previously mentioned $18.6 million warranty charge. The gross
margin for the 1998 period experienced a benefit from the
previously mentioned $3.3 million reduction of the warranty
reserve. The Company's gross profit percentage before effect of
the warranty provision increased to 44.4% compared to 33.8% for
the corresponding nine month period in 1997. This increase was
primarily attributable to the reduced costs of our main piping
products as well as lower costs in certain other products.
Operating Expense
Selling, general and administrative expenses consist
primarily of salaries and related benefits, payroll taxes,
commissions, royalties, legal expenses and other general,
administrative and overhead costs. Selling, general and
administrative expenses for the nine months ended September 30,
1998 were $9.8 million compared to $9.7 million for the
corresponding nine months ended September 30, 1997. The increase
for the period resulted mainly from an increase in bad debt
expense and training costs related to the implementation of our
new information system.
Amortization of Intangibles
Amortization of intangibles consists of the amortization of
goodwill over a period of 40 years and the amortization of
various patents and licenses that are amortized on a straight-
line basis over the estimated lives of the patents (which range
from 13 to 17 years) at the acquisition date or subsequent
issuance date.
Other Expense
Other Expense of $3.7 million for the nine months ended
September 30, 1998 was associated with the write off of a patent
license originally capitalized by the Company (See Note 6 of
Notes to Condensed Consolidated Financial Statements). The other
expense of $2.6 million incurred in the quarter ended
September 30, 1997 was associated with the licensing of certain
patented technology as well as the write off of a patent of a
product line that has been discontinued.
Interest Expense
Interest expense for the nine months ended September 30,
1998 was $474,000 compared to $466,000 for the corresponding nine
months ended September 30, 1997. Interest expense is incurred on
<PAGE 14> term loans that were used for purchasing equipment and
under the Company's working capital line of credit. The increase
is due to a higher balance outstanding on the Company's line of
credit during the 1998 period as compared to the 1997 period.
Income Taxes
Income taxes for the nine months ended September 30, 1998
were $2.0 million compared to a benefit of $6.8 million for the
corresponding nine months ended September 30, 1997. The Company
recorded income taxes utilizing an effective tax rate of 38%
during the 1998 period as compared to an effective tax rate of
34% in the 1997 period.
Net Income (Loss)
The Company's net income for the nine months ended
September 30 1998 was $3.3 million compared to a net loss of
$13.2 million for the corresponding nine months ended
September 30, 1997. The increase of $16.5 million was a result
of the prior year results containing a $20.6 million charge to
earnings to increase the Company's warranty reserve, to write
down certain inventory, as well as record charges associated with
licensing of certain patented technology and the write off of a
patent. The 1998 results were adversely affected by the $3.7
million write off of the patent license which was substantially
offset by the reversal of the $3.3 million of the warranty
provision. The increase in net income for the nine month period
ended September 30, 1998, excluding the above mentioned charges,
was due to increased sales and an increase in gross margin
percentage offset by an increase in income tax expense.
Seasonality and Economic Conditions
The Company's sales are affected by the timing of planned
construction of new service stations and the retrofitting of
existing service stations by the end users, both of which are
influenced by inclement weather and general economic conditions.
During the quarter ended September 30, 1998, the Company did not
experience any adverse sales or operating results due to
inclement weather.The Company's sales have been adversely
affected to a slight extent due to the Asian economic crisis.
Financial Condition
On March 17, 1998, the Company sold 400 shares of the
Preferred Stock to the Company's principal shareholder at
$10,000, cash, per share, or $4.0 million in the aggregate. For
more information, see "Part II., Item 5. Other Information."
The increase in the Company's inventory to $8.1 million as
of September 30, 1998, as compared to $7.3 million as of
December 31, 1997, is attributable to normal inventory increase
due to seasonality.
<PAGE 15>
Liquidity and Capital Resources
The Company had working capital of $5.7 million and $1.1
million at September 30, 1998 and December 31, 1997,
respectively. The increase in working capital was due mainly to
the proceeds from the sale of the Preferred Stock for $4.0
million.
The Company satisfies its working capital needs primarily
through funds generated by operations and by borrowings under a
new $10.0 million secured credit facility with a commercial bank.
The Company believes that its presently available funds,
existing credit facility and the cash flow expected to be
generated from operations, will be adequate to satisfy its
anticipated working capital requirements for the foreseeable
future.
Year 2000 Disclosure
Management initiated, early in 1998, an enterprise-wide
program to identify areas where Company owned or operated
computer hardware, software, electronically operated
manufacturing and support equipment, and any other application,
could be adversely impacted by the problems presented by the year
2000, and prepare these computer systems, applications, and other
equipment for continuing use through the year 2000. The Company
has incurred or expects to incur internal staff costs as well as
consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare the systems for the
year 2000. Testing and conversion of system applications is
expected to cost approximately $350,000, of which approximately
$300,000 has already been incurred as part of the acquisition of
the Company's new information system.
In the opinion of management, the Company believes that all
of its important business resources, either currently or in the
near future, are expected to allow the Company to continue
operating through the Year 2000 and that there will be no
disruption of any material business operation or capability.
PAGE 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two cases were pending in the Eastern District of
Pennsylvania, in which the Company, as exclusive licensee of
these certain patents, and the licensor of those patents sought
money damages and an injunction due to patent infringement by
Environ Products, Inc. ("Environ") and Environ sought a
declaration of invalidity of the patents, non-infringement, and
unenforceability. These cases were to be tried in the Fall of
1998. The court issued an Order September 29, 1998 which, among
other things, granted Environ's motions for summary judgment of
invalidity of the patents and non-infringement by Environ. This
constituted a final judgment of all issues which were material to
these cases, and the licensor has filed an appeal to the U.S.
Court of Appeals, Federal Circuit.
The Company had capitalized the costs associated with the
original acquisition of the license. Due to the results of the
case, the Company wrote off, as of September 30, 1998, the
current carrying value of this license, which was approximately
$3.7 million.
A description of the Company's other pending legal
proceedings has been previously reported in the Company's Annual
Report and Form 10-K for the fiscal year ended December 31, 1997.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report of Form 10-Q for
the quarter ended June 30, 1997).
3.2 Bylaws of the Company (Incorporated herein by
reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
11 Statement re: Computation of Earnings Per Share
(unaudited)
27 Financial Data Schedule
(b) Reports of Form 8-K
None.
PAGE 17
Signatures
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.
Total Containment, Inc.
Date November 12, 1998 By /s/ Pierre Desjardins
Pierre Desjardins
President and Chief Executive
Officer
Date November 12, 1998 By /s/ Keith R. Ruck
Keith R. Ruck
Vice President Finance & Chief
Financial Officer
PAGE 18
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report of Form 10-Q for
the quarter ended June 30, 1997).
3.2 Bylaws of the company (Incorporated herein by
reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
11 Statement re: computation of Earnings Per
Share(unaudited)
27 Financial Data Schedule <PAGE 19>