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, 1997
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: 4,641,600 shares of Common Stock, par value
$0.01 per share were outstanding at October 31, 1997.
<PAGE>
Total Containment, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Income -
Three months and nine months ended
September 30, 1997 and 1996 4
Condensed Consolidated Statement of Cash
Flows - Nine months ended September 30, 1997
and 1996 5
Notes to Condensed Consolidated Financial
Statements - September 30, 1997 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
Sep. 30, Dec. 31,
1997 1996
(In thousands) (In thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 452 $ 616
Accounts receivable, net 8,583 7,453
Inventories - Note 2 8,962 7,248
Other assets 5,934 3,677
Total current assets 23,931 18,994
Molds and tooling costs, net 1,127 1,362
Property and equipment, net 3,473 2,511
Patents, patent rights and
licenses, net 4,375 5,155
Goodwill, net 5,420 5,545
Other assets 5,328 1,398
Total Assets $43,654 $34,965
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit borrowings $ 4,235 $ 3,677
Current portion of long-term debt 869 770
Accounts payable and accrued
expenses 11,002 5,125
Warranty reserve 7,250 1,161
Total current liabilities 23,356 10,733
Long-term debt 2,594 1,894
Warranty reserve 11,896 3,322
Total liabilities 37,846 15,949
Shareholders' Equity:
Common stock - $0.01 par value;
authorized 20,000,000 shares;
4,641,600 shares issued and
outstanding 46 46
Capital in excess of par value 13,729 13,729
Retained earnings (deficit) (7,968) 5,217
Equity adjustment from foreign
currency translation 1 24
Total shareholders' equity 5,808 19,016
Total Liabilities & Shareholders'
Equity $43,654 $34,965
See notes to condensed consolidated financial statements.
<PAGE>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine
months ended
September 30,
September 30 ,
1997 1996 1997
1996
(In thousands, except
share data)
<S> <C> <C> <C>
<C>
Net sales $ 13,136 $ 11,635 $
33,475 $ 28,545
Cost of sales (Including
warranty expense of $17.6
million and $350,000 for the
three months ended
September 30, 1997 and 1996,
and $18.2 million and $1.3
million for the nine months
ended September 30, 1997
and 1996) 27,228 7,464
40,370 18,141
Gross profit (14,092) 4,171
(6,895) 10,404
Selling, general and
administrative 3,224 2,984
9,651 7,786
Amortization of patents,
licenses and goodwill 128 134
400 386
Other expense 2,565 -
2,565 -
Income (loss) from operations (20,009) 1,053
(19,511) 2,232
Interest expense 158 109
466 234
Income (loss) before income
taxes (20,167) 944
(19,977) 1,998
Income tax expense (6,857) 351
(6,792) 770
Net income (loss) (13,310) 593
(13,185) 1,228
Net income (loss) per share $ (2.87) $ 0.13 $
(2.84) $ 0.26
Weighted average shares and
share equivalents used in
computation of net income
per share 4,641,600 4,641,600
4,641,600 4,641,600
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
Nine months ended
September 30,
1997 1996
(In thousands)
Cash flows from operating activities:
Net cash provided by (used for)
operating activities $ 483 $ (658)
Cash flows from investing activities:
Purchase of property and equipment (1,630) (1,597)
Other (68) -
Net cash used for investing activities (1,698) (1,597)
Cash flows from financing activities:
Net borrowings on long-term debt 493 486
Net borrowings under line of credit 558 1,816
Net cash provided by financing activities 1,051 2,302
Net increase (decrease) in cash $ (164) $ 47
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 including adjustments for warranty and
other charges as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations")
considered necessary for a fair presentation have been included.
The results of operations of the Company for the three month and
nine month periods ended, September 30, 1997, are not necessarily
indicative of the results that may be expected for any other
interim period or for a full year. For further information,
refer to the Consolidated Financial Statements and notes thereto
included in the Registrant Company's Annual Report and Form 10-K
for the year ended December 31, 1996.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. Realization of deferred tax assets associated
with the net operating loss (NOL) carryforwards is dependent upon
generating sufficient taxable income prior to their expiration.
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. See "Note 3 - Deferred
Tax Asset."
Note 2 - Inventories
The components of inventory consist of the following:
Sept. 30, Dec. 31,
1997 1996
(In thousands)
Raw materials $ 604 $ 503
Finished goods 8,358 6,745
$ 8,962 $ 7,248
Note 3 - Deferred Tax Asset
The net loss resulting from the $20.6 million charge to income
creates a tax loss carry forward benefit of approximately
$7 million. This future tax benefit is reflected under "other
assets" (both current and long-lived) on the Company's balance
sheet at September 30, 1997 due to a determination by both the
Company's Board and management that it is more likely than not
that such tax benefit will be realized. Price Waterhouse LLP,
the Company's independent accountants, at present, do not concur
with the determination of the amount of the asset. Price
Waterhouse's preliminary view is that a valuation allowance
against the deferred tax asset is necessary. To the extent this
issue is not resolved in favor of the Company, the Company's net
loss for the three months and nine months ended September 30,
1997 will increase by the amount of the reduction in the income
tax benefit. The Company intends to resolve this difference as
soon as possible before disclosure of year-end results.
<PAGE>
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.
Adjustment to Warranty Reserve
The Company's net loss for the quarter and nine months ended
September 30, 1997, was principally due to a $20.6 million charge
to earnings primarily to increase the Company's warranty reserve.
This increase is intended to cover the future cost of inspecting
and replacing pipe with 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. As previously reported, the deterioration
results from a microbiological fungus which, under certain
conditions, affects the outer layer of the system's primary
(inner) retractable pipe. The Company purchased the retractable
pipe on a sole source basis from Dayco-Products, Inc. ("Dayco"),
a subsidiary of Mark IV Industries, which designed and
manufactured the pipe. The outer cover of the retractable pipe
was reengineered in 1994 to eliminate this problem. This fungus
does not affect the system's (outer) secondary containment pipe
or the other portions of the Enviroflex systems.
During the third quarter, the Company completed its review
of the pipe problem which was initiated in 1996 by surveying most
of the sites. The Company concluded in its review that the
problem had accelerated in some areas and that the majority of
the pipe would have to be replaced over a period of time. Also,
the Company concluded from its negotiations with Dayco that
substantial financial assistance would not be forthcoming from
Dayco in connection with the repair and replacement of the
deteriorating pipe and, as a result, the Company initiated legal
proceedings against Dayco. See "Item 1. Legal Proceedings." As
part of its review, the Company identified the number of sites
likely to be affected and the cost to replace pipe at these
sites. To date, the Company has completed replacement of the
pipe at approximately 1,000 sites and estimates that there are
approximately 3,000 additional sites where pipe susceptible to
deterioration was installed. The Company estimates that it will
complete replacement at approximately half the remaining sites in
the next 12 months and the balance of the sites in the following
18 months.
Approximately $18.0 million of the $20.6 million charge
primarily represents management's present assessment, based on
its best judgment, of the cost of inspecting and replacing pipe
at the remaining 3,000 sites over a two to three year period,
assuming no financial assistance from Dayco. Although Dayco had
previously agreed to credit certain overcharges and had made an
accommodation to provide replacement pipe through the end of
1997, Dayco has not contributed significantly to any other costs
for replacement of pipe to date and has not committed to cover
any future expense. The Company has commenced litigation against
Dayco in an effort to require Dayco to assume responsibility for
its pipe, and the parties are presently in the process of
exploring whether some form of settlement-is feasible. The
Company cannot predict with reasonable certainty whether a
resolution will result from these negotiations or whether the
Company will prevail in connection with such litigation. See
"Item 1. Legal Proceedings." In an effort to eliminate its
reliance on Dayco and to provide superior quality and
reliability, the Company has commenced manufacturing of a new
primary pipe at its Oaks, Pennsylvania facility. Through the
third quarter of 1997, the Company has incurred approximately $7
million of external expenses to replace pipe, as well as internal
expense. Based upon increased efficiencies, the Company
anticipates reductions in the cost per site for replacement of
the pipe. The remainder of the charge is due to a write down in
inventory, costs incurred in connection with licensing patented
technology, and the write off of a patent.
RESULTS OF OPERATIONS
Net Sales
The Company's net sales for the quarter and nine months
ended September 30, 1997, were $13.1 million and $33.5 million,
respectively, as compared to $11.6 million and $28.5 million for
the corresponding periods in 1996. Net sales increased 12.9%
during the quarter and 17.3% for the first nine months of 1997 as
compared to the same periods in the previous fiscal year. The
increases for both the quarter and nine months were primarily
attributable to strong sales of underground flexible piping
systems in the United States due to the Company's redirected
sales effort, as well as the continued expansion of American
Containment, Inc.
Gross Profit
The primary component of the Company's cost of sales is the
product manufacturing costs paid to various third party
manufacturers. Other components are the variable and fixed costs
of operating the Company's warehouses, depreciation of molds,
tools, and equipment, and warranty expense. The Company's gross
profit (loss) for the quarter and nine months ended September 30,
1997 was ($14.1) million and ($6.9) million, respectively. Gross
profit decreased 437.9% during the quarter and 166.3% for the
first nine months of 1997 as compared to the same period in the
previous fiscal year. The decrease resulted primarily from an
$18 million charge to earnings mainly to increase the Company's
warranty reserve to cover the future cost of inspecting and
replacing pipe with deteriorating cover material on the
retractable pipe portion of the Company's double-wall,
underground fuel dispensing and containment systems. See
"Item 5. Other Information" for a discussion regarding the
adjustment to the warranty reserve.
The Company's gross profit before the charge to increase the
Company's warranty reserve for the quarter and nine months ended
September 30, 1997 was $3.9 million and $11.1 million,
respectively, as compared to $4.2 million and $10.4 million for
the corresponding periods in 1996. The decrease in the quarter
was due to increases in labor and overhead at American
Containment caused by the expansion of its manufacturing and
service business. The increase in gross profit before the charge
for the nine months ended September 30, 1997 resulted primarily
from increased sales.
The Company's gross profit (loss) percentage was (107.3%)
for the quarter and (20.6%) for the nine months ended
September 30, 1997, compared to 35.8% and 36.4% for the same
periods in the previous fiscal periods, as a result of the
aforementioned charge. The Company's gross profit percentage
before the charge to increase the Company's warranty reserve was
29.7% for the quarter and 33.2% for the nine months ended
September 30, 1997.
The Company's gross profit percentage decreased in the
quarter ended September 30, 1997, prior to the charge, due to a
decrease in the gross profit percentage of American Containment,
based on increases in labor and overhead caused by expansion of
its manufacturing and service business, as well as additional
freight costs associated with the Company's warehouses.
Operating Expense
Selling, general and administrative expenses consist
primarily of salaries and related employee benefits, payroll
taxes, commissions, royalties, legal expenses, and other general,
administrative, and overhead costs. Selling, general and
administrative expenses for the quarter and nine months ended
September 30, 1997, were $3.2 million and $9.7 million,
respectively, as compared to $3.0 million and $7.8 million for
the corresponding periods in 1996. Selling, general and
administrative expenses increased 8.0% during the quarter and
increased 24.0% for the nine months of 1997 as compared to the
same periods in the previous fiscal year. The increase in the
quarter resulted primarily from additional selling expenses
related to increased sales. The increase for the nine months was
due mainly to additional administrative costs associated with the
acquisition of American Containment, acquired in July, 1996, as
well as increased litigation expenses.
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 straightline
basis over the estimated lives of the patents (which range from
13 to 18 years) at the acquisition date or subsequent issuance
date.
Other Expense
The Other expense of $2.6 million incurred in the quarter
ended September 30, 1997 was associated with the licensing of
certain patented technology as well as the write off of a patent
of a product line that has been discontinued.
Interest Expense
Interest expense for the quarter and nine months ended
September 30, 1997, were $158,000 and $466,000, respectively, as
compared to $109,000 and $234,000 for the corresponding periods
in 1996. The increases for the quarter and nine months were due
to increased borrowings, sufficient to commence manufacturing of
primary pipe at the Oaks, Pennsylvania facility, on term loans
for purchases of equipment and an increase in borrowings under
the Company's line of credit.
Income Taxes
Income taxes (benefit) for the quarter and nine months ended
September 30, 1997 were ($6.9) million and ($6.8) million,
respectively, as compared to $351,000 and $770,000 for the
corresponding periods in 1996. The decreases were due to the
reductions in the Company's income before income taxes. The
income tax benefit derived from the net loss has been established
as a deferred tax asset in the amount of $6.8 million. This tax
benefit is included on the Condensed Consolidated Balance Sheet
as Other Assets and is segmented into current and long term,
based upon projections as to the tax period in which the Company
will receive these benefits.
The net loss resulting from the $20.6 million charge to
income creates a tax loss carry forward benefit of approximately
$7 million. This future tax benefit is reflected under "other
assets" (both current and long-lived) on the Company's balance
sheet at September 30, 1997 due to a determination by both the
Company's Board and management that it is more likely than not
that such tax benefit will be realized. Price Waterhouse LLP,
the Company's independent accountants, at present, do not concur
with the determination of the amount of the asset. Price
Waterhouse's preliminary view is that a valuation allowance
against the deferred tax asset is necessary. To the extent this
issue is not resolved in favor of the Company, the Company's net
loss for the three months and nine months ended September 30,
1997 will increase by the amount of the reduction in the income
tax benefit. The Company intends to resolve this difference as
soon as possible before disclosure of year-end results.
Net Income (Loss)
The Company's net income (loss) for the quarter and nine
months ended September 30, 1997, were ($13.3) million and ($13.2)
million, respectively, as compared to $593,000 and $1.2 million
for the corresponding periods in 1996. Net income decreased
2,344.5% during the quarter and 1,173.7% for the first nine
months of 1997 as compared to the same periods in the previous
fiscal year. The decrease in net income for the quarter and nine
months were due primarily to an $20.6 million charge to earnings
to increase the Company's warranty reserve, a write down in
inventory, as well as charges associated with licensing of
certain patented technology and the write-off of a patent. See
"Item 5. Other Information" for more information regarding the
adjustment to the warranty reserve. The decrease in net income,
prior to these charges, for the quarter and nine months was due
to a reduction in gross profit percentage primarily from the
increase in labor and overhead with American Containment as well
as an increase in administrative costs from the acquisition of
American Containment, and legal and interest expense. For
information regarding the possible adjustment of net loss, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Income Taxes."
FINANCIAL CONDITION
The Company's accounts payable and accrued expenses of
$11.0 million for the quarter ended September 30, 1997, as
compared to $5.1 million for the period ended December 31, 1996,
reflect the seasonality of the business and includes a $4.0
million payable to Dayco Products, Inc., which is disputed by the
Company. See "Item 1. Legal Proceedings". The allocation of the
warranty reserve between $7.3 million undercurrent liabilities
and $11.9 million under future liabilities reflects the Company's
present expectation that defective pipe at approximately 1,500
sites will be replaced in the next 12 months and the remaining
1,500 in the following 18 months. See "Item 1. Legal
Proceedings" and "Item 5. Other Information".
The Company's inventory of $9.0 million for the quarter
ended September 30, 1997, as compared to $7.2 million for the
period ended December 31, 1996, is attributable to normal
inventory increase due to seasonality and the Company's expanded
warehousing facilities. Property and equipment of $3.5 million
for the quarter ended September 30, 1997 compared to $2.5 million
for the period ended December 31, 1996 is attributable primarily
to the Company's new manufacturing facilities in Oaks,
Pennsylvania. See "INTRODUCTION", this Management Discussion and
Analysis. For information regarding the possible adjustment of
other assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Income Taxes."
Liquidity and Capital Resources
The Company had working capital of $575,000 and $8.3 million
at September 30, 1997 and December 31, 1996, respectively. The
decrease in working capital was due mainly to a $20.6 million
charge, of which $7.3 million is included in current liabilities,
related primarily to the Enviroflex@ pipe. See "Item 5. Other
Information" for more information regarding the adjustment to the
warranty reserve. For information regarding the possible
adjustment of other assets (including the current portion of
other assets and thus working capital), see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Income Taxes."
The Company satisfies its working capital needs primarily
through funds generated by operations and by borrowings under its
$6.0 million credit facility with a commercial bank.
The Company presently has a preliminary commitment from its
existing lender to increase the Company's line of credit. Based
on this, the Company believes that its presently available funds,
existing credit facility and the cash flow expected to be
generated from operations will be adequate to satisfy its
anticipated working capital requirements for the foreseeable
future.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company has initiated a legal action against Dayco in
the United States District Court for the Eastern District of
Pennsylvania seeking, among other things, a judicial
determination that Dayco breached the provisions of two Supply
Agreements, entered into in 1990 and 1993 for the sale of primary
pipe. The Complaint alleges that Dayco supplied pipe that was
defective because it was susceptible to microbial fungus. (See
"Item 5. Other Information".)
In its suit, the Company requests that the Court award
damages in an amount to be determined at trial and for further
appropriate relief. Dayco has not yet filed a response to the
Complaint and it is as yet too early to predict the results of
the litigation. The parties are presently in the process of
exploring whether some form of settlement is feasible. The
Company cannot predict, with reasonable certainty (i) whether a
settlement will result from these negotiations and if so the form
or value of such settlement, or (ii) whether the Company will
prevail in connection with such litigation.
A legal action was filed in the Fifth Circuit Court of the
State of Hawaii on September 16, 1997 by JJR Inc., James Jasper
Enterprises, Inc., and others with interests in a retail shopping
center on the Island of Kauai, Hawaii, against Company, Dayco,
and Senter Petroleum, Inc. for damages allegedly resulting from
the failure of Company's Enviroflex(D piping system on or about
August 12, 1996 at The Little Gas Shack ("the Shack"), a retail
gasoline service facility supplied by Senter adjacent to the
shopping center. The Complaint alleges that more than 1800
gallons of gasoline were released onto the property occupied by
the Shack and the adjacent businesses and into a nearby stream
and the harbor where the shopping center was located. Although
the amount sought by the plaintiffs is not specified in the
Complaint, the attorney retained by the Company's insurance
carrier has ascertained that plaintiffs are seeking approximately
$23 million in damages. The Company has and maintains insurance
that may potentially respond to this claim, however, the amount
claimed exceeds the liability limits. Under the Dayco Supply
Agreement, Dayco is required to indemnify and hold the Company
harmless from all claims and suits by third parties based upon
the manufacture of Enviroflex primary pipe or the performance by
Dayco of its obligations under the Agreement. Dayco has not, as
yet, agreed to honor this obligation. The Company has commenced
litigation to enforce its rights against Dayco. Based upon the
Company's investigation to date, the Company believes that the
Enviroflex@ secondary containment system functioned properly to
contain the overflow and was not responsible for the release, and
that any loss was caused by the failure of equipment manufactured
and supplied by third parties. The Company believes that
plaintiff's claims are grossly excessive and intends to
vigorously defend its position.
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, 1996
and in the Company's quarterly report on Form 10-Q, as amended,
for the quarter ended June 30, 1997.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Adjustment to Warranty Reserve
The Company's net loss for the quarter and nine months ended
September 30, 1997, was principally due to a $20.6 million charge
to earnings primarily to increase the Company's warranty
reserve. This increase is intended to cover the future cost of
inspecting and replacing pipe with deteriorating cover material
on the retractable pipe portion of the Company's double-wall,
underground fuel dispensing and containment systems installed
between 1990 and 1994. As previously reported, the deterioration
results from a microbiological fungus which, under certain
conditions, affects the outer layer of the system's primary
(inner) retractable pipe. The outer cover of the retractable
pipe has been reengineered in 1994 to eliminate this problem.
This fungus does not affect the (inner) secondary containment
pipe or other portions of the Enviroflex@ systems. The Company
purchased the retractable pipe on a sole source basis from Dayco,
a subsidiary of Mark IV Industries, which designed and
manufactured the pipe.
During the third quarter, the Company completed its review
of the pipe problem which was initiated in 1996 by surveying most
of the sites. The Company concluded in its review that the
problem had accelerated in some areas and that the majority of
the pipe would have to be replaced over a period of time. Also,
the Company concluded from its negotiations with Dayco that
substantial financial assistance would not be forthcoming from
Dayco in connection with the repair and replacement of the
deteriorating pipe and, as a result, the Company initiated legal
proceedings against Dayco. See "Item 1. Legal Proceedings." As
part of its review, the Company identified the number of sites
likely to be affected and the cost to replace pipe at these
sites. To date, the Company has completed replacement of the
pipe at approximately 1,000 sites and estimates that there are
approximately 3,000 additional sites where the pipe susceptible
to deterioration was installed. The Company estimates that it
will complete replacement at approximately half the remaining
sites in the next 12 months and the balance of the sites in the
following 18 months..
Approximately $18 million of the $20.6 million charge
primarily represents management's present assessment, based on
its best judgment, of the cost of inspecting and replacing pipe
at the remaining 3,000 sites over a two to three year period,
assuming no financial assistance from Dayco. Although Dayco had
previously agreed to credit certain overcharges and had made an
accommodation to provide replacement pipe through the end of
1997, Dayco has not contributed significantly to any other costs
for replacement of pipe to date and has not committed to cover
any future expense. The Company has commenced litigation against
Dayco in an effort to require Dayco to assume responsibility for
its pipe, and the parties are presently in the process of
exploring whether some form of settlement is feasible. See
"Item 1. Legal Proceedings." Through the third quarter of 1997,
the Company has incurred approximately $7 million of external
expenses to replace the pipe, as well as internal expenses.
Based upon increased efficiencies, the Company anticipates
reductions in the cost per site replacement of the pipe at the
remaining sites.
The net loss resulting from the $20.6 million charge to
income creates a tax loss carry forward benefit of approximately
$7 million. This future tax benefit is reflected under "other
assets" (both current and long-lived) on the Company's balance
sheet at September 30, 1997 due to a determination by both the
Company's Board and management that it is more likely than not
that such tax benefit will be realized. Price Waterhouse LLP,
the Company's independent accountants, at present, do not concur
with the determination of the amount of the asset. Price
Waterhouse's preliminary view is that a valuation allowance
against the deferred tax asset is necessary. To the extent this
issue is not resolved in favor of the Company, the Company's net
loss for the three months and nine months ended September 30,
1997 will increase by the amount of the reduction in the income
tax benefit. The Company intends to resolve this difference as
soon as possible before disclosure of year-end results.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit
3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
3.2 By-laws 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
None
<PAGE>
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 19, 1997 By /s/ Pierre Desjardins
Pierre Desjardins
President and Chief Executive
Officer
Date: November 19, 1997 By /s/ Jeffrey A. Boehmer
Jeffrey A. Boehmer
Principal Financial Officer
<PAGE>
Exhibit Index
Exhibit No. Description
3.1 Certificate of Incorporation of the Company
(Incorporated herein by reference to
Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30,
1997).
3.2 By laws 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
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Nine months ended
September 30,
1997 1996
(In thousands)
Primary:
Average shares outstanding 4,642 4,642
Options were anti-dilutive - -
Totals 4,642 4,642
Net Income $(13,185) $ 635
Per share amount $ (2.84) $ 0.14
Fully diluted:
Average shares outstanding 4,642 4,642
Options were anti-dilutive - -
Totals 4,642 4,642
Net Income $(13,185) $ 635
Per share amount $ (2.84) $ 0.14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 452
<SECURITIES> 0
<RECEIVABLES> 8,633
<ALLOWANCES> (50)
<INVENTORY> 8,962
<CURRENT-ASSETS> 23,931
<PP&E> 8,887
<DEPRECIATION> (4,287)
<TOTAL-ASSETS> 43,654
<CURRENT-LIABILITIES> 23,356
<BONDS> 0
0
0
<COMMON> 4,642
<OTHER-SE> 46
<TOTAL-LIABILITY-AND-EQUITY> 43,654
<SALES> 33,475
<TOTAL-REVENUES> 33,475
<CGS> 40,370
<TOTAL-COSTS> 9,651
<OTHER-EXPENSES> 2,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> (19,977)
<INCOME-TAX> (6,792)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,185)
<EPS-PRIMARY> (2.84)
<EPS-DILUTED> (2.84)
</TABLE>
