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 June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-23454
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Total Containment, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2394872
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
422 Business Center, A130 North Dr., Oaks, PA 19456
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(Address of principal executive offices) (Zip Code)
(610) 666-7777
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(Registrant's telephone number, including area code)
N/A
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(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
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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 July 31, 2000.
Total Containment, Inc.
Index
Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
December 31, 1999 and June 30, 2000 3
Condensed Consolidated Statement of Operations - Three and six months
ended June 30, 1999 and 2000 4
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements - June 30, 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 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
Part I. Financial Information
Item 1. Financial Statements
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, June 30,
1999 2000
------------ ---------
(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 731 $ 487
Accounts receivable, net 4,158 3,610
Inventories 5,438 5,297
Deferred income taxes 1,535 1,535
Other assets 625 639
-------- --------
Total current assets 12,487 11,568
Molds and tooling, net 330 189
Property and equipment, net 5,576 4,883
Patents, patent rights and licenses, net 250 221
Goodwill, net 5,560 5,467
Deferred income taxes 6,589 6,589
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Total Assets $ 30,792 $ 28,917
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 875 $ 846
Accounts payable, trade and accrued expenses 3,589 3,510
Accrued preferred stock dividend 306 -
Other payable 4,020 4,020
Warranty reserve 975 556
-------- --------
Total current liabilities 9,765 8,932
Long-term debt 3,227 2,968
Line of credit borrowings 3,189 6,339
Preferred stock dividends payable - 727
Warranty reserve 2,368 2,162
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Total liabilities 18,549 21,128
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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;
4,672,600 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) (13,656)
Equity adjustment from foreign
currency translation (321) (411)
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Total shareholders' equity 12,243 7,789
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Total Liabilities & Shareholders' Equity $ 30,792 $ 28,917
======== ========
See notes to condensed consolidated financial statements.
3
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
-------- ------- -------- -------
(In thousands, except per share data)
Net sales $ 7,136 $ 4,401 $ 14,906 $ 8,381
Cost of sales (excluding warranty provision) 6,015 4,228 11,944 7,537
-------- ------- -------- -------
1,121 173 2,962 844
Warranty Provision 208 137 436 254
-------- ------- -------- -------
Gross profit 913 36 2,526 590
Selling, general and administrative 2,920 2,131 5,893 4,000
Amortization of patents, licenses and goodwill 62 61 123 123
-------- ------- -------- -------
Loss from operations (2,069) (2,156) (3,490) (3,533)
Interest expense 171 222 302 411
-------- ------- -------- -------
Loss before income taxes (2,240) (2,378) (3,792) (3,944)
Income tax expense (benefit) (851) - (1,438) -
-------- ------- -------- -------
Net loss (1,389) (2,378) (2,354) (3,944)
Preferred stock dividends 78 210 154 420
-------- ------- -------- -------
Net loss applicable to common
shareholders $ (1,467) $ (2,588) $(2,508) $(4,364)
======== ======= ======== =======
Loss per common share - basic $ (0.31) $ (0.55) $ (0.54) $ (0.93)
======== ======= ======== =======
Weighted average shares used in computation
of net loss per share - basic 4,673 4,673 4,673 4,673
======== ======= ======== =======
See notes to condensed consolidated financial statements.
4
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
1999 2000
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(In thousands)
Cash flows from operating activities:
Net loss (2,354) (3,944)
Adjustment to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 897 1,124
Change in assets and liabilities 2,470 506
Change in operating warranty reserve (2,085) (624)
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Net cash used in operating activities $ (1,072) $ (2,938)
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Cash flows from investing activities:
Purchase of property and equipment (872) (168)
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Net cash used in investing activities (872) (168)
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Cash flows from financing activities:
Proceeds from the sale of common stock 52 -
Repayments on long-term debt (292) (288)
Net borrowings under bank line of credit and short term demand note 2,182 3,150
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Net cash provided by financing activities 1,942 2,862
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Net decrease in cash and cash equivalents $ (2) $ (244)
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and
six months ended June 30, 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 on Form 10-K/A 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 recorded 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 Loss applicable to common shareholders for the
quarters ended June 30, 1999 and 2000 was $1,360,000 and $2,577,000,
respectively, and for the six months ended June 30, 1999 and 2000 was $2,360,000
and $4,034,000 respectively.
6
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, June 30,
1999 2000
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(In thousands)
Raw Materials $ 526 $ 505
Finished Goods 4,912 4,792
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$5,438 $5,297
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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 had an original expiration of 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% (8.15%
as of June 30, 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 of the Preferred Stock of the Company. Canam Steel Corporation charges a
fee for this guarantee at the rate of .50% of the outstanding balance.
In April 2000, this line of credit was extended to $7 million of availability
and the bank reduced the requirement that the Company maintain tangible net
worth as defined by the agreement from $5.0 million to $4.0 million.
Due to the losses the Company has sustained in the first and second quarters of
2000, the Company was in technical default as of June 30, 2000 of certain
covenants of the line of credit regarding required tangible net assets as
defined in the agreement. In August 2000 the bank provided a waiver of this
default as of June 30, 2000 and has lowered the tangible net worth requirement
from $4.0 million to $2.0 million. Additionally, the bank agreed to extend the
terms of the line of credit until October 1, 2001.
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, $4.0 million facility with Finloc
Inc.("Finloc"), an affiliate of The Canam Manac Group Inc. 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 June 30,
2000, was approximately 10.65%. 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 $1.0 million and pay
approximately $1.1 million to vendors who supplied various components in
connection with the Company's installation of its Corrugator.
7
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 $4.0 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 $4.0 million in the aggregate (the Series A and 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. The Series B Preferred
Stock are entitled to 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 August 2000 to defer payment of all accrued
preferred stock dividends until a date after September 30, 2001. The Company has
therefore reclassified the preferred stock dividend payable ($727,000) as of
June 30, 2000 to other long-term liabilities. The principal shareholder has been
notified of the delay in payment and has waived the 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.
In August 2000, the Board approved the sale of 200 shares of Series C Floating
Rate Preferred Stock for $2.0 million cash in the aggregate to the majority
shareholder. It is expected that the Series C Preferred Stock will have terms
substantially similar to the Series A and B Preferred Stock, except that the
dividend rate payable by the Company will be prime plus 3.5% (minimum 12%).
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 30-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.
8
Note 6 - Warranty Reserves - Con't
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 then 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.
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.
Due to 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 June 30, 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.
Note 7 - Income Taxes
The Company recorded deferred tax assets, primarily related to Net Operating
Loss carryforwards ("NOLs"), on its books as of December 31, 1999 totaling
approximately $8.1 million. During the six months ended June 30, 2000, the
Company incurred a pre-tax loss but elected to record a valuation reserve equal
to the computed deferred tax benefit for the period, resulting in a zero percent
effective tax rate for interim financial purposes. 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 the net carrying amount of 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 customers; (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 -Second Quarter of 2000 compared to Second Quarter of 1999
- ---------------------
Net Sales
The Company's net sales for the quarter ended June 30, 2000 were $4.4
million compared to $7.1 million for the corresponding quarter in 1999, a
decrease of 38.3%. The decrease was attributable to a decrease in revenues from
our product sales, as well as a decrease from our field operations, 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 caused in part by the
Environmental Protection Agency's extension of the deadline for conformity to
new tank 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.
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 June 30, 2000 was $ 36,000,
compared to $ 913,000 for the corresponding quarter in 1999. The decrease
resulted primarily from a decrease in product sales volume, unabsorbed
manufacturing and warehousing costs attributable to lower than anticipated
manufacturing and sales, production scrap related to the start up of new
equipment, and higher freight costs. Comparing margins before the effect of the
warranty provision, the Company experienced a decrease in gross profit margin
primarily from the decreased sales, unabsorbed manufacturing and warehousing
costs, production scrap, and higher freight costs.
The Company's gross profit percentage after the effect of the warranty
provision decreased to 0.8% for the quarter ended June 30, 2000, compared to a
gross profit percentage of 12.8% for the corresponding quarter in 1999. The
Company's gross profit percentage before the effect of the warranty provision
decreased to 3.9%, compared to 15.7% for the corresponding quarter in 1999. The
decrease in the gross profit margin percentage is due primarily from the
decreased sales, unabsorbed manufacturing and warehousing costs, production
scrap, 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 June 30, 2000 were $ 2.1 million
compared to $2.9 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 ongoing cost reductions initiated by the Company beginning in the
second quarter of 1999.
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 June 30, 1999 and 2000 was
$62,000 and $61,000, respectively.
11
Interest Expense
Interest expense for the quarter ended June 30, 2000 was $222,000 compared
to $171,000 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 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 recorded to record a valuation reserve equal to the computed
deferred tax benefit for the quarter ended June 30, 2000. The Company recorded
an income tax benefit of $851,000 for the corresponding quarter in 1999. The
Company recorded income taxes utilizing an effective tax rate of approximately
38% during the 1999 period. In recording the valuation reserve in the 2000
period, the Company did not increase its net deferred tax asset on its balance
sheet. The Company currently believes that it is more likely than not that the
net carrying amount of 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 June 30, 2000 was $2.4 million
compared to a net loss of $1.4 million for the corresponding quarter in 1999.
The increase of $1.0 million in net loss for the quarter resulted from decreased
sales, unabsorbed manufacturing and warehousing costs, production scrap, and
higher freight costs, as well as the Company's decision to record a valuation
reserve equal to the deferred tax benefit for the period. The Company has
reduced its spending and staffing levels and will continue to monitor the
industry and its short-term capital expenditure plans.
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. For the three months ended June 30,
2000 the Company has accrued, but not paid this dividend. The Board of Directors
of the Company passed a resolution in August 2000 to defer payment of all
accrued dividends on the Preferred Stock until after September 30, 2001. The
Company has therefore reclassified the dividend payable on the Preferred Stock
to other long-term liabilities as of June 30, 2000. The principal shareholder
has been notified of the delay in payment and has waived the nonpayment penalty
on the dividends.
12
RESULTS OF OPERATIONS - Six Months Ended June 30, 2000 vs. Six Months Ended
- ---------------------
June 30, 1999
Net Sales
The Company's net sales for the six months ended June 30, 2000 were $8.4
million compared to $14.9 million for the corresponding six months in 1999, a
decrease of 43.8%. The decrease was attributable to a decrease in revenues from
our product sales, as well as a decrease from our field operations, 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, caused in part by the
Environmental Protection Agency's extension of the deadline for conformity to
new tank 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.
Gross Profit (Loss)
The Company's gross profit after the warranty provision for the six months
ended June 30, 2000, was $590,000, compared to $2.5 million for the
corresponding six months in 1999. The decrease resulted primarily from a
decrease in product sales volume, unabsorbed manufacturing and warehousing costs
attributable to lower than anticipated manufacturing and sales, production scrap
related to the start up of new equipment, and higher freight costs. Comparing
margins before the effect of the warranty provision, the Company experienced a
decrease in gross profit primarily from the decreased sales, unabsorbed
manufacturing and warehousing costs, production scrap and higher freight costs.
The Company's gross profit percentage after the effect of the warranty
provision decreased to 7.0% for the six months ended June 30, 2000, compared to
a gross profit percentage of 16.9% for the corresponding six months in 1999. The
Company's gross profit percentage before the effect of the warranty provision
decreased to 10.1%, compared to 19.9% for the corresponding six months in 1999.
The decrease in gross profit margin percentage is due primarily from the
decreased sales, unabsorbed manufacturing and warehouse costs, production scrap,
and higher freight costs.
Operating Expense
Selling, general and administrative expenses for the six months ended June
30, 2000 were $4.0 million, compared to $5.9 million for the corresponding six
months in 1999. The decrease for the six months ended June 30, 2000 resulted
mainly from a decrease in personnel headcount and activity levels due to ongoing
cost reductions initiated by the Company beginning in the second quarter of
1999.
Amortization of Intangibles
Amortization expense for the six months ended June 30, 1999 and 2000 was
$123,000.
13
Interest Expense
Interest expense for the six months ended June 30, 2000 was $411,000,
compared to $302,000 for the corresponding six months in 1999. The increase for
the six months 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 recorded a valuation reserve equal to the computed deferred tax
benefit for the six months ended June 30, 2000. The Company recorded an income
tax benefit of $1.4 million for the corresponding six months of 1999. The
Company recorded income taxes utilizing an effective tax rate of 38% during the
1999 period. In recording the valuation reserve 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 the net carrying amount
of 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 six months ended June 30, 2000 was $3.9
million, compared to net loss of $2.4 million for the corresponding six months
in 1999. The increase of $1.5 million in net loss for the six months ended June
30, 2000 resulted from decreased sales, unabsorbed manufacturing and warehouse
costs, production scrap, higher freight costs, as well as the Company's decision
to record a valuation reserve equal to the deferred tax benefit for the period.
The Company has reduced its spending and staffing levels and will continue to
monitor the industry and its short-term capital expenditure plans.
Preferred Stock Dividends
The preferred stock dividend, approved by the Company's Board of Directors,
relates to the Company's sale of the Preferred Stock.
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 six months ended June 30, 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 year-to-date through June 30,
2000, the Company experienced adverse sales and operating results due to a
reduction 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.
14
Financial Condition
In March 1998, the Company sold 400 shares of Class A Preferred Stock to
the Company's principal shareholder at $10,000 cash per share, or $4.0 million
in the aggregate; in December 1999, the Company sold 400 shares of Class B
Preferred Stock to the Company's principal shareholder at $10,000 cash per
share, or $4.0 million in the aggregate. In August 2000 the Company approved the
sale of 200 shares of Class C Preferred Stock to the Company's principal
shareholder at $10,000 cash per share, or $2.0 million in the aggregate.
The Company's inventory was $ 5.3 million as of June 30, 2000, compared to
$5.4 million as of December 31, 1999. Changes in inventory levels are
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 $2.6 million at
December 31, 1999 and June 30, 2000, respectively. During the first six months
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 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 deferred payment of dividends
until after September 30, 2001.
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, and the funds to be received under the previously mentioned
preferred stock issuance 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 during 1998 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.
15
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/A
for the fiscal year ended December 31, 1999, has been rescheduled from April 3,
2000 to October 11, 2000. This case has now been assigned to another judge.
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 was infringing certain patents held by Dayco
relating to hose couplings and was seeking, among other things, a determination
of infringement, damages and injunctive relief. This case was scheduled for
trial August 14, 2000. In July 2000 the Court granted the Company's Motion for
Summary Judgement on the basis that the Company was not infringing the Dayco
patents. Dayco has filed notice of appeal from this decision.
A description of the Company's other pending legal proceedings has been
previously reported in the Company's Annual Report and Form 10-K/A for the
fiscal year ended December 31, 1999.
Item 3. Defaults Upon Senior Securities
The Board of Directors of the Company passed a resolution in August, 2000
to defer payment of all accrued dividends on the Preferred Stock until after
September 30, 2001. The total preferred dividend arrearage at June 30, 2000 and
the date of this filing is $727,000. The holder of the outstanding Preferred
Stock has waived both the payment of dividends and non-payment penalties related
to the deferred payment of dividends until after September 30, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Shareholders (the "Meeting") of the Company was
held on May 2, 2000. Notice of the Meeting was mailed to shareholders on or
about March 30, 2000, together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The Meeting was held for the following purposes:
1. To elect three Class III directors to hold office until the 2003
Annual Meeting of Shareholders and until their successors shall have
been elected and qualified (Matter No. 1); and
2. To ratify the appointment by the Company's Board of Directors of Grant
Thornton LLP as the Company's independent auditors for the fiscal year
ending December 31, 2000 (Matter No. 2).
There was no solicitation in opposition to the nominees of the Board
of Directors for the election to the Board of Directors. All nominees
of the Board of Directors were elected. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker
nonvotes for each Matter were as follows:
Abstentions and
Nominee For Against Withheld Broker Non-votes
------- --------- ------- -------- ----------------
Matter No. 1 - -
Jean-Claude Arpin 4,326,420 - 1,200 -
Marc Guindon 4,326,420 - 1,200 -
John R. Wright, Jr. 4,326,420 - 1,200 -
Matter No. 2 4,327,470 150 - -
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Item 5. Other Information
Due to the losses the Company has sustained in the first and second
quarters of 2000, the Company was in technical default as of June 30, 2000 of
certain covenants of the line of credit regarding required tangible net assets
as defined in the agreement. In August 2000 the bank provided a waiver of this
default as of June 30, 2000 and has lowered the tangible net worth requirement
from $4.0 million to $2.0 million. Additionally, the bank agreed to extend the
terms of the line of credit until October 1, 2001. If the Company is required to
repay all or a significant amount of the outstanding balance of the line of
credit, and the Company is unable to find an alternate source of financing, the
Company's financial condition and results of operations could be adversely
materially affected.
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).
27 Financial Data Schedule
(b) Reports on form 8-K
None.
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: August____, 2000 By_________________________________
Pierre Desjardins
Chief Executive Officer
Date: August____, 2000 By_________________________________
Thomas P. Kennedy
Chief Financial Officer
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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).
27 Financial Data Schedule
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