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, 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 November 13, 2000.
1
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 September 30, 2000 3
Condensed Consolidated Statement of Operations - Three and nine months
ended September 30, 1999 and 2000 4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements -September 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 5. Other Information 16
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, September 30,
1999 2000
------------ ------------
(Unaudited)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 731 $ 604
Accounts receivable, net 4,158 3,784
Inventories 5,438 4,439
Deferred income taxes 1,535 1,535
Other current assets 625 468
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Total current assets 12,487 10,830
Molds and tooling, net 330 139
Property and equipment, net 5,576 4,502
Patents, patent rights and licenses, net 250 206
Goodwill, net 5,560 5,420
Deferred income taxes 6,589 6,589
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Total Assets $ 30,792 $ 27,686
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 875 $ 825
Accounts payable, trade and accrued expenses 3,589 3,078
Accrued preferred stock dividend 306 -
Other payable 4,020 4,020
Warranty reserve 975 556
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Total current liabilities 9,765 8,479
Long-term debt 3,227 2,721
Line of credit borrowings 3,189 6,045
Preferred stock dividends payable - 978
Warranty reserve 2,368 1,788
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Total liabilities 18,549 20,011
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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
Preferred stock - Series C, $50,000 stated value; authorized
40 shares; 40 shares issued and outstanding 2,000
Common stock - $0.01 par value;
authorized 20,000,000 shares;
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) (15,614)
Equity adjustment from foreign
currency translation (321) (567)
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Total shareholders' equity 12,243 7,675
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Total Liabilities and Shareholders' Equity $ 30,792 $ 27,686
======== ========
See notes to condensed consolidated financial statements.
3
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 2000 1999 2000
------- ------- -------- --------
(In thousands, except per share data)
Net sales $ 5,742 $ 4,475 $ 20,648 $ 12,856
Cost of sales (excluding warranty provision) 4,610 3,896 16,554 11,433
------- ------- -------- --------
1,132 579 4,094 1,423
Warranty Provision 164 120 600 374
------- ------- -------- --------
Gross profit 968 459 3,494 1,049
Selling, general and administrative 3,244 1,887 9,137 5,887
Amortization of patents, licenses and goodwill 61 62 184 185
------- ------- -------- --------
Loss from operations (2,337) (1,490) (5,827) (5,023)
Interest expense 157 216 459 627
------- ------- -------- --------
Loss before income taxes (2,494) (1,706) (6,286) (5,650)
Income tax expense (benefit) (951) - (2,389) -
------- ------- -------- --------
Net loss (1,543) (1,706) (3,897) (5,650)
Preferred stock dividends 76 252 230 672
------- ------- -------- --------
Net loss applicable to common
shareholders $(1,619) $(1,958) $ (4,127) $ (6,322)
======= ======= ======== ========
Loss per common share - basic $ (0.35) $ (0.42) $ (0.88) $ (1.35)
======= ======= ======== ========
Weighted average shares used in computation
of net loss per share - basic 4,673 4,673 4,666 4,673
======= ======= ======== ========
See notes to condensed consolidated financial statements.
4
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
1999 2000
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(In thousands)
Cash flows from operating activities:
Net loss (3,897) (5,650)
Adjustment to reconcile net income loss to
net cash provided by operating activities:
Depreciation and amortization 1,221 1,613
Change in assets and liabilities 4,240 773
Change in operating warranty reserve (2,573) (999)
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Net cash used in operating activities $ (1,009) $ (4,263)
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Cash flows from investing activities:
Purchase of property and equipment (1,898) (164)
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Net cash used in investing activities (1,898) (164)
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Cash flows from financing activities:
Proceeds from the sale of preferred stock 2,000
Proceeds from the sale of common stock 52 -
Repayments on long-term debt (384) (556)
Net borrowings under bank line of credit and short term demand note 3,368 2,856
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Net cash provided by financing activities 3,036 4,300
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Net increase (decrease) in cash and cash equivalents $ 129 $ (127)
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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
nine months ended September 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 Form10-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 September 30, 1999 and 2000 was $1,555,363 and $1,862,345,
respectively, and for the nine months ended September 30, 1999 and 2000 was
$3,916,262 and $5,897,261, respectively.
6
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, Sept. 30,
1999 2000
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(In thousands)
Raw Materials $ 526 $ 368
Finished Goods 4,912 4,071
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$5,438 $4,439
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Note 3 - Line of Credit
In December 1999, the Company entered into a $5.0 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 $3.0 million.
This facility charges interest at a rate of LIBOR plus 1.50% (8.12% as of
September 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 issued and outstanding 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 $7.0 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.
In August 2000, the bank reduced the requirement that the Company maintain net
worth as defined in the agreement 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 issued and
outstanding common stock. The facility charges interest at the rate of LIBOR
plus 4.00% which as of September 30, 2000 was approximately 10.62%. 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, Canam Steel Corporation 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,
Canam Steel Corporation purchased 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. In August 2000, Canam Steel Corporation purchased 40 shares of Series
C Floating Rate Preferred Stock at $50,000 cash per share, or $2.0 million in
the aggregate (the Series A, B and C 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 is entitled to dividends
at a floating rate equal to the prime rate plus 0.8 %. The Series C Preferred
Stock is entitled to dividends at a floating rate equal to the prime rate plus
3.5% but with a minimum rate of at least 12.0%. 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 November 2000 to defer payment of all accrued preferred stock
dividends until a date after December 31, 2001. The Company has therefore
reclassified the $978,299 preferred stock dividend payable as of September 30,
2000 to other long-term liabilities. The shareholder has been notified of the
delay in payment and has waived both payment of dividends and nonpayment
penalties related to the deferred payment of dividends until after December 31,
2001. 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 redemption exceeds $4.5 million (Series A and B
only), 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 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.
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.
8
Note 6 - Warranty Reserves Con't
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 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 September 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 nine months ended September 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 of approximately $2.4
million, 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-Third Quarter of 2000 compared to Third Quarter of 1999
Net Sales
The Company's net sales for the quarter ended September 30, 2000 were
$4.5 million compared to $5.7 million for the corresponding quarter in 1999, a
decrease of 22.1%. 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
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 September 30, 2000 was
$459,000 compared to $ 968,000 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 10.3% for the quarter ended September 30, 2000, compared
to a gross profit percentage of 16.9% for the corresponding quarter in 1999. The
Company's gross profit percentage before the effect of the warranty provision
decreased to 12.9%, compared to 19.7% for the corresponding quarter in 1999. The
decrease in the gross profit margin percentage is due primarily to 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 September 30, 2000 were $1.9
million, compared to $3.2 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 September 30, 1999
and 2000 was $61,000 and $62,000, respectively.
11
Interest Expense
Interest expense for the quarter ended September 30, 2000 was $216,000
compared to $157,000 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 a valuation reserve equal to the computed deferred
tax benefit of approximately $648,000 for the quarter ended September 30, 2000.
The Company recorded an income tax benefit of $951,000 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 Loss
The Company's net loss for the quarter ended September 30, 2000 was
$1.7 million compared to a net loss of $1.5 million for the corresponding
quarter in 1999. The increase of $0.2 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 its costs and 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, during March 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, 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, and the sale, during August
2000, of 40 shares of authorized perpetual Class C Floating Rate Preferred Stock
at $50,000 cash per share, or $2.0 million in the aggregate. For the three
months ended September 30, 2000 the Company has accrued, but not paid this
dividend. The Board of Directors of the Company passed a resolution in November
2000 to defer payment of all accrued dividends on the Preferred Stock until
after December 31, 2001. The Company has therefore reclassified the dividend
payable on the Preferred Stock to other long-term liabilities as of September
30, 2000. The shareholder has been notified of the delay in payment and has
waived the nonpayment penalty on the dividends.
12
RESULTS OF OPERATIONS - Nine Months Ended September 30, 2000 vs.
Nine Months Ended September 30, 1999
Net Sales
The Company's net sales for the nine months ended September 30, 2000
were $12.9 million compared to $20.6 million for the corresponding nine months
in 1999, a decrease of 37.7%. 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
The Company's gross profit after the warranty provision for the nine
months ended September 30, 2000, was $1.0 million, compared to $3.5 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 to 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 8.2% for the nine months ended September 30, 2000,
compared to a gross profit percentage of 16.9% for the corresponding nine months
in 1999. The Company's gross profit percentage before the effect of the warranty
provision decreased to 11.1%, compared to 19.8% for the corresponding nine
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 nine months ended
September 30, 2000 were $5.9 million, compared to $9.1 million for the
corresponding nine months in 1999. The decrease for the nine months ended
September 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.
13
Amortization of Intangibles
Amortization expense for the nine months ended September 30, 1999 and
2000 was $184,000 and $185,000, respectively.
Interest Expense
Interest expense for the nine months ended September 30, 2000 was
$627,000, compared to $459,000 for the corresponding nine months in 1999. The
increase for the nine 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 of approximately $2.1 million for the nine months ended September
30, 2000. The Company recorded an income tax benefit of $2.4 million for the
corresponding nine 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 Loss
The Company's net loss for the nine months ended September 30, 2000 was
$5.7 million, compared to net loss of $3.9 million for the corresponding nine
months in 1999. The increase of $1.8 million in net loss for the nine months
ended September 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 its costs and 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 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 September 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.
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.
14
Financial Condition
In March 1998, the Company sold 400 shares of Class A Preferred Stock
to Canam Steel Corporation 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 Canam Steel Corporation at $10,000 cash per share, or $4.0 million in
the aggregate. In August 2000, the Company sold 40 shares of Class C Preferred
Stock to Canam Steel Corporation at $50,000 cash per share, or $2.0 million in
the aggregate.
The Company's inventory was $ 4.4 million as of September 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 $2.4 million at
December 31, 1999 and September 30, 2000, respectively. During the first nine
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
$4.0 million long-term loan facility (see Note 4 - Long-Term Debt) and a new
$5.0 million working capital loan which was subsequently increased to $7.0
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.
For the nine months ended September 30, 2000 the Company has accrued,
but not paid the preferred stock dividends. The Board of Directors of the
Company passed a resolution in November 2000 to defer payment of all accrued
dividends on the Preferred Stock until after December 31, 2001. The Company has
therefore reclassified the dividend payable on the Preferred Stock to other
long-term liabilities as of September 30, 2000. 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 December 31,
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. In August 2000, the Board approved the sale of 40 shares of
Series C Floating Rate Preferred Stock for $2.0 million cash in the aggregate to
Canam Steel Corporation. In August 2000, the Board also approved the issuance of
an additional 40 shares of preferred stock for $2.0 million cash in the
aggregate. The Company expects to complete the sale of the additional 40 shares
in December 2000. 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 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.
15
Part II. Other Information
Item 1. Legal Proceedings
The Company's legal action against Dayco Products, Inc., which was
reported in the Company's Annual Report and Form 10-K/A for the fiscal year
ended December 31, 1999, proceeded to trial on October 11, 2000 in the United
States District Court for the Eastern District of Pennsylvania. The trial is
still in process as of the date of this report. 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. 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 have
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 November
2000 to defer payment of all accrued dividends on the Preferred Stock until
after December 31, 2001. The total preferred dividend arrearage at September 30,
2000 and as of the date of this filing is $978,299. 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
December 31, 2001.
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 worth 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.
16
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: November 14, 2000 By /s/ Pierre Desjardins
-------------------------------------
Pierre Desjardins
Chief Executive Officer
Date: November 14, 2000 By /s/ Thomas P. Kennedy
--------------------------------------
Thomas P. Kennedy
Chief Financial Officer
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).
27 Financial Data Schedule
19