UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________________________ to
_________________________.
Commission file number 0-23454
Total Containment, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2394872
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
422 Business Center, A130 North Dr., Oaks, PA 19456
(Address of principal executive offices) (Zip Code)
(610) 666-7777
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 4,641,600 shares of Common Stock, par value $0.01 per
share were outstanding at April 30, 1998.
<PAGE>
Total Containment, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
December 31, 1997 and March 31, 1998 3
Condensed Consolidated Statement of Operations and
Comprehensive Income (Loss) - Three months
ended March 31, 1997 and 1998 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial
Statements - March 31, 1998 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
Item 1. Financial Statements
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, March 31,
1997 1998
(Unaudited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 612 $ 456
Accounts receivable, net 7,887 8,944
Inventories - Note 2 7,306 8,603
Deferred income taxes 3,114 3,240
Other assets 2,277 2,180
Total current assets 21,196 23,423
Molds and tooling costs, net 987 835
Property and equipment, net 3,870 3,993
Patents, patent rights and
licenses, net 4,293 4,213
Goodwill, net 5,379 5,340
Deferred income taxes 4,322 3,976
Total Assets $40,047 $41,780
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit borrowings $ 3,197 $ 2,492
Current portion of long-term debt 744 681
Accounts payable, trade and
accrued expenses 6,019 4,955
Other payable 4,020 4,020
Warranty reserve 6,088 6,229
Total current liabilities 20,068 18,377
Long-term debt 2,305 2,166
Warranty reserve 11,234 10,334
Total liabilities 33,607 30,877
Shareholders' Equity:
Preferred stock - $10,000 stated
value; authorized 400 shares;
400 shares issued and
outstanding - 4,000
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 (7,139) (6,676)
Equity adjustment from foreign
currency translation (196) (196)
Total shareholders' equity 6,440 10,903
Total Liabilities & Shareholders'
Equity $40,047 $41,780
======= =======
See notes to condensed consolidated financial statements.
<PAGE>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended
March 31,
1997 1998
(In thousands,
except per share data)
Net sales 8,259 10,221
Cost of sales (excluding warranty
provision) 5,406 6,041
2,853 4,180
Warranty Provision 219 302
Gross profit 2,634 3,878
Selling, general and administrative 3,088 2,856
Amortization of patents, licenses
and goodwill 136 119
Income (loss) from operations (590) 903
Interest expense 147 149
Income (loss) before income taxes (737) 754
Income tax expense (benefit) (295) 277
Net income (loss) (442) 477
Preferred stock dividends - 14
Net Income (loss) applicable to
common Shareholders (442) 463
======= =======
Earnings (loss) per common share -
basic and diluted (0.10) 0.10
======= =======
Weighted average shares and share
used in computation of net
income (loss) per share 4,642 4,642
======= =======
Net income (loss) ($442) $477
Other comprehensive income (loss)
Foreign currency translation
adjustments ($130) $0
Other comprehensive income (loss)
before taxes ($130) $0
Income tax (expense) benefit on other
comprehensive income (loss) $51 $0
Other comprehensive income (loss) ($79) $0
Total Comprehensive income (loss) ($521) $477
======= =======
See notes to condensed consolidated financial statements.
<PAGE>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
Three months ended
March 31,
1997 1998
(In thousands)
Cash flows from operating activities:
Net income (loss) (442) 477
Adjustment to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 275 473
Change in current assets and
liabilities (102) (3,089)
Change in warranty accrual (608) (785)
Net cash used for operating
activities $ (877) $(2,924)
Cash flows from investing activities:
Purchase of property and equipment (440) (325)
Net cash used for investing
activities (440) (325)
Cash flows from financing activities:
Proceeds from the sale of preferred
stock - 4,000
Net borrowings on long-term debt 410 (202)
Net borrowings under line of credit 372 (705)
Net cash provided by financing
activities 782 3,093
Net decrease in cash $ (535) $ (156)
======= =======
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of
Total Containment, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have
been included. The results of operations of the Company for the
three months ended March 31, 1998, are not necessarily
indicative of the results that may be expected for any other
interim period or for a full year. For further information,
refer to the Consolidated Financial Statements and notes thereto
included in the Registrant Company's Annual Report and Form 10-K
for the year ended December 31, 1997.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. Realization of deferred tax assets associated
with state net operating loss (NOL) carryforwards is dependent
upon generating sufficient taxable income prior to their
expiration. The Company believes that there is a risk that
certain of these NOL carryforwards may expire unused and,
accordingly, has established a valuation allowance (approximately
$275,000 as of December 31, 1997) against them. Although
realization is not assured for the deferred tax assets, the
Company believes it is more likely than not they will be realized
through future taxable earnings.
New Accounting Pronouncements. On January 1, 1998, the
Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change
in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Prior period amounts have been restated to conform to
the provisions of SFAS No. 130. The adoption of SFAS 130 had no
impact on the Company's financial position or results of
operations.
On January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 requires that public business
enterprises report certain information about operating segments
in a complete set of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires the reporting of certain
information about their products and services, the geographic
area in which they operate, and their major customers. The
adoption of SFAS No. 131 had no impact on the Company's financial
position or results of operation.
The AICPA's Accounting Standards Executive Committee has
issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP segments an
internal use software project into stages and the accounting is
based on the stage in which a cost is incurred. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 for
costs incurred in those fiscal years for all projects, including
projects in progress when the SOP is adopted. The adoption of
SOP 98-1 is not expected to have a material impact on the
Company's financial position or results of operations.
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, March 31,
1997 1998
(In thousands)
Raw Materials $ 516 $ 1,550
Finished Goods 6,790 7,053
$ 7,306 $ 8,603
Note 3 - Line of Credit
In April, 1998, the Company increased its overall working
capital line of credit with CoreStates Bank, N.A. to $10.0
million. This facility provides for financing of working capital
needs and equipment purchases and is secured by the Company's
receivables, inventory and other assets. The interest rate for
this facility is the prime rate plus one-quarter (1/4) percent
and expires December 31, 1999.
Note 4 - Sale of Preferred Stock
On March 17, 1998, the Company's principal shareholder
purchased from the Company 400 shares of authorized perpetual
Class A Floating Rate Preferred Stock of the Company at $10,000,
cash, per share (the "Preferred Stock") or $4 million in the
aggregate. The perpetual Preferred Stock is entitled to receive,
as and if declared by the Company's Board, dividends at a
floating rate equal to the rate payable by the Company on its
line of credit with its commercial bank. Dividends are paid
quarterly in arrears, and if not declared or paid would cumulate
at the line of credit rate, plus 50 basis points. The preferred
stock: (i) does not possess voting rights, (ii) is not
convertible into common stock, and (iii) is not redeemable at the
option of the holder. The Preferred Stock is redeemable at the
option of the Company, but only (i) if and to the extent the
Company's net tangible assets at the end of any fiscal quarter
and after such dividend exceeds $4.5 million, or (ii) if at least
a majority of the independent and disinterested members of the
audit committee of the Company's Board of Directors approve such
redemption. The preceding provision relating to redemption
constitutes a covenant between the Company, the Company's
principal shareholder and its remaining shareholders and may not
be changed without the approval of at least a majority of the
independent and disinterested members of the audit committee of
the Company's Board of Directors.
Note 5 - Warranty Reserves
The Company's Tank Jacket and Pipe Jacket product lines
carry a warranty of one year for workmanship and materials. The
Enviroflex product line carries a ten year warranty for
workmanship and materials. The Tank Jacket product line also
carries a thirty year warranty for corrosion from certain
specified materials. The Company's warranties are limited to
replacement of defective material; they do not cover by their
terms costs associated with leaks or spillage of tank or pipe
contents. Management has accrued a reserve for anticipated
warranty and other products liability claims and associated legal
fees based upon its industry knowledge and actual claims
experience.
As a result of a review of piping problems initiated in
1996, the Company, during the third quarter of 1997, increased
its warranty reserve by approximately $18.6 million primarily to
cover the Company's estimate of the cost, anticipated to be
incurred over a two to three year period, of inspecting and
replacing pipe 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 at some 3,000 sites. The deterioration
results from a microbiological fungus, which, under certain
conditions, affects the outer layers or the system's primary
(inner) retractable pipe. The Company has instituted litigation
against the supplier of the pipe to recover the cost the Company
has and will sustain to replace such pipe, as well as other
damages.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is a Pennsylvania corporation organized in 1986.
The Company is a leading manufacturer and distributor of
underground systems and products for the conveyance and
containment of petroleum and alcohol based motor vehicle fuels
from underground storage tanks to aboveground fuel dispensers.
The principal end users of the Company's products are service
stations, convenience stores and other retail sellers of
gasoline, gasohol and other motor vehicle fuels, government
bodies, utilities and other fleet vehicle operators.
In addition to historical information, this Form 10-Q
contains forward-looking information. The forward-looking
information contained herein is subject to certain risk and
uncertainties that could cause actual results to differ
materially from those projected. For example, risk and
uncertainties can arise with changes in: general economic
conditions, including their impact on capital expenditures;
business conditions in the manufacturing and distribution
industry; the regulatory environment; rapidly changing technology
and industry standards; competitive factors, including increased
competition with both national and international companies, new
services and products offered by competitors; and price
pressures. Readers are cautioned not to place undue reliance on
the forward-looking information included within, which reflects
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update this
forward-looking information to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - First Quarter of 1998 compared to First
Quarter of 1997
Net Sales
The Company's net sales for the quarter ended March 31,
1998, were $10.2 million compared to $8.3 for the corresponding
quarter in 1997, an increase of 22.9%. The increase was
primarily attributable to increased sales from our field
operations at our American Containment, Inc. subsidiary, as well
as continued strong sales of our flexible underground piping
systems.
Gross Profit
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 manufacturing and warehousing
operations, depreciation of molds, tools and equipment, and
warranty expense. The Company's gross profit for the quarter
ended March 31, 1998, was $3.9 million compared to $2.6 million
for the corresponding quarter in 1997. The increase resulted
primarily from reduced costs of producing our main piping
products due to the integration of our pipe manufacturing plant
in October, 1997, coupled with lower costs in certain other
products due to our cost reduction program initiated in the
second half of 1997. Additionally, the Company also experienced
an increase in gross margin due to a decrease in the costs of
producing other products at its Bakersfield, California
operations.
The Company's gross profit percentage increased to 37.9% for
the quarter ended March 31, 1998, compared to 31.9% for the
corresponding quarter in 1997. The increase was primarily
attributable to the reduced costs of our main piping products as
well as lower costs in certain other products.
Operating Expense
Selling, general and administrative expenses consist
primarily of salaries and related benefits, payroll taxes,
commissions, royalties, legal expenses and other general,
administrative and overhead costs. Selling, general and
administrative expenses for the quarter ended March 31, 1998 were
$2.9 million compared to $3.1 million for the corresponding
quarter in 1997. The decrease for the quarter resulted mainly
from a reduction in litigation expense related to the retractable
pipe supplier litigation.
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.
Interest Expense
Interest expense for the quarter ended March 31, 1998, was
$149,000 compared to $147,000 for the corresponding quarter in
1997. Interest expense is incurred on term loans that were used
for purchasing equipment and under the Company's working capital
line of credit.
Income Taxes
Income taxes (benefit) for the quarter ended March 31,
1998, were $277,000 compared to ($295,000) for the corresponding
quarter in 1997. The Company incurred a net loss in the 1997
period compared to net income in the 1998 period.
Net Income (Loss)
The Company's net income for the quarter ended March 31,
1998, was $477,000 compared to a net loss of $442,000 for the
corresponding quarter in 1997. The increase of $919,000 was a
result of increased sales, an increase in gross margin percentage
and a reduction in selling, general and administrative costs.
Preferred Stock Dividends
The preferred stock dividend, approved by the Company's
Board of Directors, relates to the Company's sale, on March 17,
1998, of 400 shares of authorized perpetual Class A Floating Rate
Preferred Stock (the "Preferred Stock") to the Company's
principal shareholder at $10,000, cash, per share or $4.0 million
in the aggregate. See "Part II., Item 5. Other Information."
Seasonality and Economic Conditions
The Company's sales are affected by the timing of planned
construction of new service stations and the retrofitting of
existing service stations by the end users, both of which are
influenced by inclement weather and general economic conditions.
During the quarter ended March 31, 1998, the Company's net sales
and operating results were adversely affected due to the
inclement weather experienced by the Northwest and West Coast
portions of North America.
Financial Condition
On March 17, 1998, the Company sold 400 shares of the
Preferred Stock to the Company's principal shareholder at
$10,000, cash, per share or $4.0 million in the aggregate. For
more information, see "Part II., Item 5. Other Information."
The Company's inventory of $8.6 million for the quarter
ended March 31, 1998, as compared to $7.3 million for the period
ended December 31, 1997, is attributable to normal inventory
increase due to seasonality.
Liquidity and Capital Resources
The Company had working capital of $5.1 million and $1.1
million at March 31, 1998 and December 31, 1997, respectively.
The increase in working capital was due mainly to the proceeds
from the sale of the Preferred Stock for $4.0 million.
The Company satisfies its working capital needs primarily
through funds generated by operations and by borrowings under a
new $10.0 million secured credit facility with a commercial bank.
The Company believes that its presently available funds,
existing credit facility and the cash flow expected to be
generated from operations, will be adequate to satisfy its
anticipated working capital requirements for the foreseeable
future.
<PAGE>
Item 1. Legal Proceedings
A description of the Company's other pending legal
proceedings has been previously reported in the Company's Annual
Report and Form 10-K for the fiscal year ended December 31, 1997.
Item 5. Other Information
Sale of Preferred Stock
On March 17, 1998, the Company's principal shareholder
purchased from the Company 400 shares of authorized perpetual
Class A Floating Rate Preferred Stock of the Company at $10,000,
cash, per share (the "Preferred Stock") or $4 million in the
aggregate. The perpetual Preferred Stock is entitled to receive,
as and if declared by the Company's Board, dividends at a
floating rate equal to the rate payable by the Company on its
line of credit with its commercial bank. Dividends are paid
quarterly in arrears, and if not declared or paid would cumulate
at the line of credit rate, plus 50 basis points. The preferred
stock: (i) does not possess voting rights, (ii) is not
convertible into common stock, and (iii) is not redeemable at the
option of the holder. The Preferred Stock is redeemable at the
option of the Company, but only (i) if and to the extent the
Company's net tangible assets at the end of any fiscal quarter
and after such dividend exceeds $4.5 million, or (ii) if at least
a majority of the independent and disinterested members of the
audit committee of the Company's Board of Directors approve such
redemption. At March 31, 1998, net tangible assets of the
Company were $1.4 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: Computation of Earnings Per
Share (unaudited)
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 17, 1998, the Company filed a Current Report on
Form 8-K, dated March 13, 1998, reporting information under Item
5 related to the Company's issuance of $4 million of Preferred
Stock. No financial statements were included with this filing.
<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 May 11, 1998 By/s/ Pierre Desjardins
Pierre Desjardins
President and Chief Executive
Officer
Date May 11, 1998 By /s/ Keith R. Ruck
Keith R. Ruck
Vice President Finance & Chief
Financial Officer
<PAGE>
Exhibit Index
Exhibit No. Description
11 Statement re: computation of Earnings Per
Share(unaudited)
27 Financial Data Schedule
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
Three months ended
March 31,
1997 1998
(In thousands, except share data)
Basic:
Average shares outstanding 4,642 4,642
Net income (loss) $ (442) $ 463
Net income (loss) per share
amount $ (0.10) $ 0.10
Assuming dilution
Average shares outstanding 4,642 4,642
Effect of dilutive options -- 24
Totals 4,642 4,666
Net income (loss) $ (442) $ 463
Net income (loss) per share
amount $ (0.10) 0.10
The effect of dilutive options is not shown for the three
month period ended March 31, 1997 since their effect would be
anti-dilutive.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 456
<SECURITIES> 0
<RECEIVABLES> 9,144
<ALLOWANCES> 200
<INVENTORY> 8,603
<CURRENT-ASSETS> 23,423
<PP&E> 9,769
<DEPRECIATION> 4,941
<TOTAL-ASSETS> 41,780
<CURRENT-LIABILITIES> 18,377
<BONDS> 0
0
4,000
<COMMON> 46
<OTHER-SE> 6,857
<TOTAL-LIABILITY-AND-EQUITY> 41,780
<SALES> 10,221
<TOTAL-REVENUES> 10,221
<CGS> 6,343
<TOTAL-COSTS> 9,199
<OTHER-EXPENSES> 119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> 754
<INCOME-TAX> 277
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 463
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
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