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 March 31, 2000
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: 4,672,600 shares of Common
Stock, par value $0.01 per share were outstanding at April 28, 2000.
1
Total Containment, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
December 31, 1999 and March 31, 2000 3
Condensed Consolidated Statement of Operations - Three months
ended March 31, 1999 and 2000 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements -March 31, 2000 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures
2
Part I. Financial Information
Item 1. Financial Statements
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 731 $ 558
Accounts receivable, net 4,158 4,376
Inventories 5,438 5,602
Deferred income taxes 1,535 1,537
Other assets 625 628
--------- ---------
Total current assets 12,487 12,701
Molds and tooling, net 330 259
Property and equipment, net 5,576 5,246
Patents, patent rights and licenses, net 250 236
Goodwill, net 5,560 5,513
Deferred income taxes 6,589 6,587
--------- ---------
Total Assets $ 30,792 $ 30,542
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 875 $ 834
Accounts payable, trade and accrued expenses 3,589 3,428
Accrued preferred stock dividend 306 --
Other payable 4,020 4,020
Warranty reserve 975 556
--------- ---------
Total current liabilities 9,765 8,838
Long-term debt 3,227 3,001
Line of credit borrowings 3,189 5,000
Other Long Term Liabilities -- 517
Warranty reserve 2,368 2,610
--------- ---------
Total liabilities 18,549 19,966
--------- ---------
Shareholders' Equity:
Preferred stock - Series A, $10,000 stated value; authorized
400 shares; 400 shares issued and outstanding 4,000 4,000
Preferred stock - Series B, $10,000 stated value; authorized
400 shares; 400 shares issued and outstanding 4,000 4,000
Common stock - $0.01 par value;
authorized 20,000,000 shares;
4,652,600 and 4,672,600 shares issued and outstanding 47 47
Capital in excess of par value 13,809 13,809
Retained earnings (accumulated deficit) (9,292) (11,068)
Equity adjustment from foreign
currency translation (321) (212)
--------- ---------
Total shareholders' equity 12,243 10,576
--------- ---------
Total Liabilities & Shareholders' Equity $ 30,792 $ 30,542
========= =========
See notes to condensed consolidated financial statements.
3
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended
March 31,
1999 2000
---- ----
(In thousands, except per share data)
Net sales $ 7,770 $ 3,980
Cost of sales (excluding warranty provision) 5,929 3,309
-------- --------
1,841 671
Warranty Provision 228 117
-------- --------
Gross profit 1,613 554
Selling, general and administrative 2,973 1,869
Amortization of patents, licenses and goodwill 61 62
-------- --------
Income (loss) from operations (1,421) (1,377)
Interest expense 131 189
-------- --------
Income (loss) before income taxes (1,552) (1,566)
Income tax expense (benefit) (587) --
-------- --------
Net income (loss) (965) (1,566)
Preferred stock dividends 76 210
-------- --------
Net Income (loss) applicable to common
shareholders $(1,041) $(1,776)
======== ========
Earnings (loss) per common share - basic $ (0.22) $ (0.38)
======== ========
Weighted average shares used in computation
of net income (loss) per share - basic 4,657 4,668
======== ========
See notes to condensed consolidated financial statements.
4
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
1999 2000
---- ----
(In thousands)
Cash flows from operating activities:
Net income (loss) (965) (1,566)
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 395 611
Change in assets and liabilities (289) (436)
Change in operating warranty reserve (1,279) (177)
-------- --------
Net cash used in operating activities $(2,138) $(1,568)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (538) (149)
-------- --------
Net cash used in investing activities (538) (149)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of common stock 52 --
Repayments on long-term debt (145) (267)
Net borrowings under bank line of credit and short term demand note 2,657 1,811
-------- --------
Net cash provided by financing activities 2,564 1,544
-------- --------
Net increase (decrease) in cash and cash equivalents $ (112) $ (173)
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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
months ended March 31, 2000 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 and 10-KA for
the year ended December 31, 1999.
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.
Significant estimates made by management that are reasonably subject to change
include the warranty reserve, inventory reserves, allowance for doubtful
accounts and deferred tax assets. Realization of deferred tax assets,
associated, in part, with both federal and state net operating loss (NOL)
carryforwards, is dependent upon generating sufficient taxable income prior to
their expiration. The Company has incurred net operating losses during 1999 and
year-to-date 2000, and has elected to record an increase in the deferred tax
assets through December 31,1999. Although realization is not assured for the
deferred tax assets, the Company believes it is more likely than not, that 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 presentations 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.
The Company's total Comprehensive Income (Loss) applicable to common
shareholders for the quarters ended March 31, 1999 and 2000 was $(965,000) and
$(1,666,579), respectively.
6
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, March 31,
1999 2000
-------- ---------
(In thousands)
Raw Materials $ 526 $ 615
Finished Goods 4,912 4,987
------ ------
$5,438 $5,602
====== ======
Note 3 - Line of Credit
In December 1999, the Company entered into a short term, $5 million line of
credit facility with a new bank. The line of credit is to be used for operating
working capital purposes and expires on June 30, 2001. Proceeds from this
facility were used to repay the old facility of approximately $3 million. This
facility charges interest at a rate of LIBOR plus 1.50% (7.63% as of March 31,
2000) and is guaranteed by Canam Steel Corporation, a subsidiary of The Canam
Manac Group, Inc. Canam Steel Corporation is currently the holder of all the
Preferred Stock of the Company. Canam Steel Corporation charges a fee for this
guarantee at the rate of .50% of the outstanding balance. The line of credit
required the Company to maintain $5.0 million in tangible net worth as defined
in the agreement.
In April 2000, this line of credit was extended to $7 million of availability
and the bank lowered their loan requirement to $4.0 million in tangible net
worth as defined by the agreement.
Note 4 - Long Term Debt
In September 1999, the Company refinanced its long term debt of approximately
$1.9 million with a new five-year, $4 million facility with Finloc Inc., an
affiliate of The Canam Manac Group. Finloc Inc. is currently the holder of
approximately 57% of the Company's common stock. The facility charges interest
at the rate of LIBOR plus 4.00% which as of March 31, 2000, was approximately
10.13%. The loan is in the form of a six month promissory note which requires
payment of the entire principal and related interest at its term. Finloc has
provided written notice of its intent to renew this note every six months for a
five year period with a reduction of principal of approximately $400,000 from
the principal of the previous note. Proceeds from this facility were used to
repay approximately $1.9 million of the existing long term debt, reduce the
short term line of credit by $1 million and approximately $1.1 million were used
to pay vendors who supplied various components in connection with the Company's
installation of its Corrugator.
Note 5 - Sale of Preferred Stock
In March 1998, the Company's principal shareholder purchased from the
Company 400 shares of authorized Series A Floating Rate Preferred Stock of the
Company at $10,000 cash per share or $4 million in the aggregate. In December
1999, the Company's principal shareholder purchased an additional 400 shares of
Series B Floating Rate Preferred Stock of the Company at $10,000 cash per share,
or $4 million in the aggregate (the Series A and Series B Floating Rate
Preferred Stock are hereafter collectively referred to as the "Preferred
Stock"). The Series A 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. Series B
Preferred Stock is entitled to
7
dividends at a floating rate equal to the rate payable by the Company on
its line of credit with its commercial bank plus .8%. Dividends are paid
quarterly in arrears, and if not declared or paid would cumulate at the above
mentioned rates, plus 50 basis points. The Board of Directors of the Company
passed a resolution in May 2000 to delay payment of all accrued preferred stock
dividends until at least June 2001. The Company has therefore reclassed the
preferred stock dividend payable to Other Long Term Liabilities as of March 31,
2001. The principal shareholder has been notified of the delay in payment and
has waived nonpayment penalty on the dividends. 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 6 - Warranty Reserves
The Company's Tank Jacket(R) product line carries a warranty of one year for
workmanship and materials. The Enviroflex(R) 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 product 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 sustained 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
then 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. The Company has been able to significantly reduce
the cost of performing the pipe replacement program by managing more efficiently
the use of outside contractors as well as controlling the costs incurred by the
Company's service crews.
Due to the decrease in the results of its operations during 1999 and
year to date 2000, the Company has significantly slowed its pipe replacement
program starting in May 1999. The Company expects that it will continue to
replace the deteriorating pipe as results of operations allow it to provide
funds for such activities. Through March 31, 2000, the Company estimates that it
has replaced at least 70 to 75% of all of the potential problem sites. Due to
the current unavailability of excess funds, the Company cannot predict at this
time when the pipe replacement program will be completed.
8
As a result of a review performed during the fourth quarter of 1999 of the
progress regarding the Company's replacement of the deteriorating pipe and the
effects of the Company's decision, during the second quarter of 1999, to only
replace pipe at locations where the pipe is significantly deteriorated, as well
as the costs expected to be incurred to complete this process, the Company
recorded, during the fourth quarter of 1999, a charge to the warranty reserve of
approximately $800,000.
Note 7 - Income Taxes
The Company recorded deferred tax assets, related to Net Operating Loss
carryforward ("NOL"), on its books as of December 31, 1999 totaling
approximately $8.1 million. During the three months ended March 31, 2000, the
Company incurred a pre tax loss but elected not to record a related income tax
benefit nor increase the deferred tax assets on its books. Realization of NOL
carryforwards is dependent upon generating sufficient taxable income prior to
their expiration. The Company currently believes that it is more likely than not
that this asset will be realized in future years as a result of taxable income
to be generated but will continue to monitor the valuation of this asset on an
ongoing basis.
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.
Except for historical information, this report may be deemed to contain
"forward-looking" statements. The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.
These forward-looking statements included statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including but not
limited to, (i) projections of revenues, costs of raw materials, income or loss,
earnings or loss per share, capital structure and other financial items, (ii)
statements of plans of and objectives of the Company or its management or board
of directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulating
authorities, (iii) statements of future economic performance, (iv) statements of
assumptions, such as the prevailing weather conditions in the Company's market
areas, and other statements about the Company or its business, and (v)
statements preceded by, followed by or that include the words "may," "could,"
"should," "pro forma," "looking forward," "would," "believe," "expect,"
"anticipate," "estimate," "intend," "plan," or similar expressions. These
forward-looking statements involve risks and uncertainties, which are subject to
change based on various important factors (some of which, in whole or in part,
are beyond the Company's control). The following factors, among others, could
cause the Company's financial performance to differ materially from the goals,
plans, objectives, intentions and expectations expressed in such forward-looking
statement: (1) the strength of the United States and global economies in general
and the strength of the regional and local economies in which the Company
conducts operations; (2) the effects of, and changes in, U.S. and foreign
governmental trade, monetary and fiscal policies and laws; (3) the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by the Company; (4) the willingness of
customers to substitute competitors' products and services and vise versa; (5)
the impact on operations of regulations; (6) the level of export sales impacted
by export controls, changes in legal and regulatory requirements, policy changes
affecting the markets, changes in tax laws and tariffs, exchange rate
fluctuations, political and economic instability, and accounts receivable
collection; (7) changes in capital expenditures by major oil companies resulting
from proposed and completed mergers and consolidations of the oil companies; (8)
technological changes; (9) regulatory or judicial proceedings; (10) the failure
to generate sufficient pre tax income to utilize the deferred tax assets
currently recorded by the Company; and (11) the success of the Company at
managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
10
RESULTS OF OPERATIONS -First Quarter of 2000 compared to First Quarter of 1999
Net Sales
The Company's net sales for the quarter ended March 31, 2000 were $ 4.0
million compared to $7.8 million for the corresponding quarter in 1999, a
decrease of 48.8%. The decrease was attributable to a decrease in revenues from
our product sales, primarily attributable to a general slowdown in new
construction and renovation of petroleum service stations despite the large
number of service stations still not in compliance with the federally mandated
regulations. The recently announced merger plans of several large oil companies
has resulted in a decrease in their capital expenditure plans (with some large
oil companies, a temporary suspension) which has also had a negative impact on
the Company's revenues. The decrease was also caused in part by the
Environmental Protection Agency's extension of the deadline for conformity to
new tank regulations.
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 quarter ended March 31, 2000, was $ 554,000
compared to $ 1.6 million for the corresponding quarter in 1999. The decrease
resulted primarily from a decrease in product sales volume. Comparing margins
before the effect of the warranty provision, the Company experienced a decrease
in gross profit margin primarily from the decreased sales and unabsorbed
manufacturing and warehousing costs.
The Company's gross profit percentage after the effect of the warranty
provision decreased to 13.9% for the quarter ended March 31, 2000 compared to a
gross profit percentage of 20.8% for the corresponding quarter in 1999. The
Company's gross profit percentage before the effect of the warranty provision
decreased to 16.9% compared to 23.7% for the corresponding quarter in 1999. The
decrease in the gross profit margin is due to unabsorbed manufacturing costs
attributable to lower than expected manufacturing activity, and warehousing and
higher freight costs.
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 March 31, 2000 were $ 1.9 million
compared to $3.0 million for the corresponding quarter in 1999. The decrease for
the quarter resulted mainly from a decrease in personnel headcount and activity
levels due to cost reductions initiated by the Company during the second quarter
of 1999. The effects of these reductions on operating expenses are expected to
be more evident during 2000.
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. Amortization expense for the quarters ended March 31, 1999 and 2000 was
$61,000 and $62,000, respectively.
11
Interest Expense
Interest expense for the quarter ended March 31, 2000 was $189,000 compared
to $131,000 for the corresponding quarter in 1999. 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 for the quarter is due to higher
combined balances of the short term line of credit and the long term equipment
loans during the 2000 period and higher interest rates experienced during the
2000 period.
Income Taxes
The Company elected not to record an income tax benefit for the quarter
ended March 31, 2000. The Company recorded an income tax benefit of $587,000 for
the corresponding quarter in 1999. The Company recorded income taxes utilizing
an effective tax rate of approximately 38% during the 1999 period. In not
recognizing this benefit in the 2000 period, the Company did not increase its
deferred tax asset on its balance sheet. The Company currently believes that it
is more likely than not that this asset will be realized in future years as a
result of taxable income to be generated by its operations, but will continue to
monitor the valuation of this asset on a quarterly basis.
Net Income (Loss)
The Company's net loss for the quarter ended March 31, 2000 was $ 1.6
million compared to net loss of $1.0 million for the corresponding quarter in
1999. The loss for the quarter resulted from decreased sales and a decrease in
gross margin percentage. The Company has reduced its spending and staffing
levels and will continue to monitor the industry and its short term capital
expenditure plans. The increased loss for the quarter ended March 31, 2000
resulted from the Company's election not to record an income tax benefit for the
period.
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 at $10,000 cash per
share, or $4.0 million in the aggregate and the sale, during December 1999, of
400 shares of authorized perpetual Class B Floating Rate Preferred Stock at
$10,000 cash per share, or $4.0 million in the aggregate (in total, the
"Preferred Stock"). For the three months ended March 31, 2000 the Company has
accrued, but not paid this dividend. The Board of Directors of the Company
passed a resolution in May 2000 to delay payment of all accrued preferred stock
dividends until at least June 2001. The Company has therefore reclassed the
preferred stock dividend payable to Other Long Term Liabilities as of March 31,
2001. The principal shareholder has been notified of the delay in payment and
has waived nonpayment penalty on the dividends.
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 March 31, 2000, the Company
experienced adverse sales and operating results due to inclement weather. The
Company's sales have been adversely affected to a slight extent due to the
recent Asian economic crisis and political changes in certain Latin American
countries.
The recently announced merger plans of several large oil companies have
created short term uncertainty regarding their retail operation capital
expenditure plans. During fiscal 1999 and the quarter ended March 31, 2000, the
Company experienced adverse sales and operating results due to a reduction
12
in capital expenditures by the large oil companies related to their retail
operations. The Company believes that once these mergers near completion, the
major oil Companies will reinitiate their related capital expenditures. The
Company believes that a fair number of sites have not yet been upgraded to the
Federally mandated compliance regulations but cannot currently predict when this
compliance will be performed.
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 and sold, during December 1999, 400 shares of authorized
perpetual Class B Floating Rate Preferred Stock at $10,000 cash per share, or
$4.0 million in the aggregate.
The increase in the Company's inventory to $ 5.6 million as of March 31,
2000, as compared to $5.4 million as of December 31, 1999, is attributable to
seasonal shifts in stocking levels of certain inventory items. The Company
continues to aggressively manage the overall levels of inventory it is carrying
during the depressed market conditions.
Liquidity and Capital Resources
The Company had working capital of $ 2.7 million and $3.9 million at
December 31, 1999 and March 31, 2000, respectively. During the first quarter of
2000, the Company utilized its line of credit to fund its pre-tax loss. During
the third quarter of 1999, the Company was able to obtain a new $4 million long
term loan facility (see Note 4 - Long Term Debt) and a new $5 million short term
working capital loan which was subsequently increased to $7 million in April
2000 (see Note 3 - Line of Credit) that it used to complete its purchase of the
additional manufacturing equipment and to fund its operating needs. The holder
of the currently outstanding Preferred Stock has waived both payment of
dividends and non payment penalties related to the delayed payment of dividends
for the forseeable future.
The Company satisfies its working capital needs primarily through funds
generated by operations and by borrowings under its existing $7.0 million
secured credit facility with a commercial bank and through the loans obtained in
September 1999. The Company believes that its presently available funds and
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. See Notes 3, 4 and 5 of Notes to
Condensed Consolidated Financial Statements.
Update on Year 2000 Issues
As of the filing date of this Quarterly Report on Form 10-Q, no significant
problems have been encountered as a result of computer problems related to
operating in calendar year 2000. All known remediation projects and all critical
projects throughout Total Containment have been completed. Contingency plans
were developed for any process determined to be mission critical to the Company.
All manufacturing, shipping and administrative functions have operated normally
since January 1, 2000 and no significant problems have been experienced with
suppliers or customers.
The Company has incurred 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 cost approximately $350,000, of which approximately $300,000 was
incurred as part of the acquisition, during 1998, of the Company's new
information system.
13
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.
14
Part II. Other Information
Item 1. Legal Proceedings
The trial date of the legal action that is pending against Dayco Products,
Inc., in the United States District Court for the Eastern District of
Pennsylvania, which was reported in the Company's Annual Report and Form 10-K
for the fiscal year ended December 31, 1999, has been rescheduled from April 3,
2000 to October 11, 2000. Dayco Products, Inc. initiated a separate legal action
against the Company in February 1999 in the United States District Court for the
Western District of Missouri, alleging that the Company is infringing certain
patents held by Dayco relating to hose couplings and is seeking, among other
things, a determination of infringement, damages and injunctive relief. This
case is scheduled for trial August 14, 2000. The Company believes that it has
meritorious defenses to this action.
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, 1999.
Item 5. Other Information
None
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 on form 8-K
A report on Form 8-K dated March 29, 2000 was filed with the
Securities and Exchange Commission. The report announced that the
listing of the Company's common stock was transferred from the NASDAQ
National Market to the NASDAQ Small Cap Market effective March 31,
2000.
15
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: May 10, 2000 By /s/ Pierre Desjardins
-------------------------------------------------
Pierre Desjardins
Chief Executive Officer
Date: May 10, 2000 By /s/ Keith R. Ruck
-------------------------------------------------
Keith R. Ruck
Vice President Finance & Chief Financial Officer
16
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
17
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
Three months ended Six months ended
March 31 March 31
1999 2000
------------------ ----------------
(In thousands, except share data)
Basic:
Average shares outstanding 4,657 4,668
========= =========
Net income applicable to common
shareholders $ (1,041) $ (1,776)
========= =========
Net income per share amount $ (0.22) $ (0.38)
========= =========
The computation or earnings (loss) per share is not shown for the three month
period ended March 31, 1999 and March 31, 2000 since the effect of
options would be anti-dilutive.
18