<PAGE>
[LOGO]
To Our Stockholders:
In 1997, TCI implemented a plan to set the foundation for enhanced
profitability and competitiveness. The plan set as goals:
-- Regaining lost sales momentum and market share
-- Identifying and reducing costs while enhancing quality
-- Developing resources to grow its business while developing a
proactive plan to deal with its previously disclosed pipe
replacement program
-- Enhancing its expertise on the logistics/operations front.
ACHIEVEMENTS
After two years of sales decline, TCI regained its sales momentum and
increased its market share. The Company's net sales increased to $45.6 million
in 1997 from $37.7 million in 1996. The two major contributors to this sales
increase were our redirected sales efforts and a buoyant North American industry
climate.
We started in early 1997 to refocus our sales force on the end users
of our products while increasing the coverage of our distribution system. We
also increased our direct sales force and completed our warehouse expansion
program to allow more direct access to our products by our customers, as well as
to make us more competitive in freight costs.
As part of our overall cost reduction and enhanced quality programs,
we installed a pipe manufacturing line in Oaks, Pennsylvania. This line
obviates the need to purchase primary pipe at excessive prices from our prior
sole supplier and should, over time, result in significant cost savings.
Although we began manufacturing, with full Underwriters' Laboratories approval
in October, 1997, we will realize the cost efficiencies as we start selling our
manufactured products in early 1998. This new line should enable us not only to
achieve substantial savings, but also to control our quality and substantially
improve our product development capability. To this end, we have installed and
staffed a quality control laboratory in our facilities in Oaks. We also
targeted other major cost reduction opportunities from which we should benefit
during 1998.
1
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To increase our long term revenue base and to respond to customer
needs, we initiated a custom part service business at American Containment in
Bakersfield, California. This unit will focus solely on this business and
become the field technical arm of TCI, as well. This will be a natural
complement to our parts business and should enhance our field level expertise
and resources for our customers.
To focus even more on cost reduction and efficiency, we have separated
administration from operations and hired a dedicated, established senior
logistics and operations officer.
In 1997 we also established a proactive program to deal with the
deteriorating piping supplied to us by Dayco prior to 1994 and recorded an $18.6
million charge to income primarily to increase our warranty reserve to cover
expected future costs of replacing this pipe.
Finally, following the negotiations breakdown with Dayco on the pipe
warranty issue in early fall, we initiated litigation against Dayco to recover
the damages we sustained as a result of Dayco's deteriorating pipe.
THE RESULTS
While we continued to establish the foundation for future
profitability and push sales to record levels, increases in costs at our Oaks
facility in the first six months and efficiency issues related to our large
volume increases at our Bakersfield facility, taken together with the special
charge discussed above, reduced our profitability substantially, resulting in a
net loss of $12.4 million in 1997.
OUTLOOK
In 1997, TCI has laid the foundation for enhanced profitability with a
plan for increased sales, efficiencies and identifying cost reduction. This
foundation, coupled with an anticipated healthy industry, should result in a
much better year for TCI in 1998.
2
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BOARD OF DIRECTORS
Chuck Frey, a friend, mainstay in our industry, and long-time
director, will be retiring from our Board as of our annual meeting. We wish to
thank him for his dedicated efforts over the last seven years in shaping this
company and wish him well.
Very truly yours,
/s/ Pierre Desjardins
Pierre Desjardins
Chairman, President and Chief Executive
Officer
3
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated summary
financial data of the Company for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales...................................................... $31,500 $40,355 $39,069 $37,730 $ 45,649
Cost of sales (excluding warranty
expense)...................................................... 17,154 22,174 23,058 24,288 30,698
------- ------- ------- ------- --------
14,346 18,181 16,011 13,442 14,951
Warranty expense............................................... 473 605 8,073 747 18,596
------- ------- ------- ------- --------
Gross profit (loss)............................................ 13,873 17,576 7,938 12,695 (3,645)
Selling, general and administrative............................ 7,650 9,350 10,262 10,665 12,307
Amortization of patents, licenses and
goodwill(1)(2)................................................ 314 356 483 508 521
Loss on write-off of patent(2)................................. -- 1,847 -- -- 565
Other operating expense........................................ -- -- -- -- 1,800
------- ------- ------- ------- --------
Income (loss) from operations.................................. 5,909 6,023 (2,807) 1,522 (18,838)
Interest expense.............................................. 1,222 286 146 362 627
Other expense(3)............................................... -- -- 407 -- --
------- ------- ------- ------- --------
Income before income taxes..................................... 4,687 5,737 (3,360) 1,160 (19,465)
Income tax expense (benefit)................................... 2,036 2,391 (1,112) 762 (7,109)
------- ------- ------- ------- --------
Net income (loss)(8)........................................... $ 2,651 $ 3,346 $(2,248) $ 398 $(12,356)
======= ======= ======= ======= ========
Earnings (loss) per common share(4)
-basic........................................................ $.78 $(.48) $.09 $(2.66)
======= ======= ======= =======
Earnings (loss) per common share -
assuming dilution............................................. $.78 $(.48) $.08 $(2.66)
======= ======= ======= ========
December 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................... (993) $ 7,776 $ 8,224 $ 8,261 1,128
Goodwill, patents, patent rights and
licenses, net(1)(2)........................................... 7,863 10,449 10,317 10,700 9,672
Deferred Income Taxes.......................................... 234 771 3,228 1,701 7,420
Total Assets................................................... 19,132 26,901 30,702 34,965 40,047
Line of credit borrowings(5)(7)................................ 1,606 983 251 3,677 3,197
Debt(6)(8)..................................................... 5,800 -- 654 2,664 3,049
Subordinated debt to related party(6).......................... 2,000 -- -- -- --
Stockholders' equity(6)........................................ 4,573 20,804 18,616 19,016 6,440
</TABLE>
____________________
(1) In connection with the initial public offering by the Company of 1,346,600
shares of its common stock (the "Offering"), the Company acquired the Tank
Jacket patent from Groupe Treco Ltee ("Treco"), a majority stockholder of
the Company, in consideration for the issuance by the
4
<PAGE>
Company to Treco of 45,000 shares of the Company's common stock. The Tank
Jacket patent was valued at $427,500. See Note 11 of Notes to Consolidated
Financial Statements appearing elsewhere herein.
(2) On December 16, 1994, the Company and Mr. Keith Osborne entered into a
settlement agreement pursuant to which the parties settled an interference
proceeding (the "Interference Proceeding") commenced by Mr. Osborne against
the Company. In connection with the settlement of the Interference
Proceeding, the Company wrote-off the remaining unamortized portion of the
Company's patent pertaining to the retractability feature of Enviroflex and
capitalized amounts paid to acquire a license and related costs. See Note
2 of Notes to Consolidated Financial Statements appearing elsewhere herein.
See also "Item 3. Legal Proceedings."
(3) During 1995, the Company incurred non-recurring transaction expenses,
consisting primarily of legal fees and special committee and board fees of
$407,000, related to negotiations with a third party and certain members of
management with respect to their proposed acquisition of the Company. In
August 1995, the Company announced that the acquisition negotiations had
been terminated and charged all costs associated therewith to other
expense.
(4) Based on 4.3 million weighted average shares outstanding during 1994 and
4.6 million during 1995, 1996 and 1997.
(5) The proceeds from the Offering were used, in part, to repay, in full, the
bank debt and the subordinated debt to a related party and for the
temporary repayment of the Company's working capital line of credit.
(6) On March 4, 1994, the Company completed the Offering and received net
proceeds of approximately $11.0 million.
(7) Increases in the line of credit and debt in 1996 were due to increased
working capital requirements for, among other things, warranty charges
related to the Enviroflex pipe, as well as two term loans for expansion and
the acquisition of American Containment, Inc.
(8) The net loss resulting principally from the $20.4 million of warranty and
other expense in 1997 creates a deferred tax benefit of approximately $7.4
million. This future tax benefit is reflected under "Deferred Income
Taxes" (both current and long lived) on the Company's balance sheet which
will be deductible in future years.
(9) The other expense in 1997 of $1.8 million was associated with the legal
settlement regarding licensing of certain patented technology.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements of the Company, including the related notes
thereto, appearing elsewhere herein.
1997 Adjustment to Warranty Reserve
- -----------------------------------
In 1997 the Company sustained a significant net loss. This loss was
principally due to a $20.4 million charge to earnings in the third quarter
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 identified 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 Note 11 to
"Notes to Financial Statements." 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 over 1,000
sites and estimates that there are approximately 3,000 additional sites where
pipe susceptible to deterioration was installed.
Approximately $18.6 million of the $20.4 million charge primarily
represented management's assessment 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
6
<PAGE>
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. See "Note 11" to "Notes to Financial Statements." In an effort to
eliminate its reliance on Dayco, provide better quality and reliability and
reduce costs, the Company has commenced manufacturing of a new primary pipe at
its Oaks, Pennsylvania facility. The remainder of the charge is due to a write
down in inventory and costs incurred in connection with licensing patented
technology.
RESULTS OF OPERATIONS - 1995-1997
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- ------- --------
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales (excluding warranties).... 59.0 64.4 67.2
----- ----- ------
41.0 35.6 32.8
Warranty expense........................ 20.7 2.0 40.7
----- ----- ------
Gross profit............................ 20.3 33.6 (7.9)
Selling, general and administrative..... 26.3 28.3 27.0
Amortization of patents, licenses and
goodwill.............................. 1.2 1.3 1.1
Loss on write-off of patent............. -- -- 1.2
Other operating expense................. -- -- 3.9
----- ----- ------
Operating income (loss)................. (7.2) 4.0 (41.1)
Interest expense........................ 0.4 0.9 1.4
Other expense........................... 1.0 -- --
----- ----- ------
Income (loss) before income taxes....... (8.6) 3.1 (42.5)
Income tax expense (benefit)............ (2.8) 2.0 (15.6)
----- ----- ------
Net income (loss)....................... (5.8)% 1.1% (26.9)%
===== ===== ======
7
<PAGE>
Net Sales
The Company's net sales were $45.65 million in 1997, compared to
$37.73 million in 1996, and $39.07 million in 1995.
Net sales increased $7.92 million, or 21.0%, in 1997 as compared to
1996. The increase was primarily attributable to strong sales of underground
flexible piping systems in the United States due to the Company's redirected
sales effort, the buoyancy of the North American market, as well as an increase
in sales at American Containment, Inc.
Net sales decreased $1.34 million or 3.4% in 1996 as compared to 1995.
The decrease was primarily attributable to a decrease in sales of Enviroflex
piping systems in North America and the United Kingdom, increased competition
worldwide in the flexible pipe market, as well as an increase in discounting to
customers.
Gross Profit
Components of the Company's cost of sales include product
manufacturing costs including amounts paid to various third party manufacturers,
costs associated with operating the Company's warehouses, depreciation of molds,
tools and equipment, warranty expense and limited assembly costs. The Company's
gross loss was ($3.65) million in 1997, compared to gross profit of $12.69
million in 1996 and $7.94 million in 1994.
The Company's gross profit for the year ended 1997 decreased $16.34
million or 128.7%, compared to 1996. The decrease resulted primarily from an
$18.6 million charge to earnings to increase the Company's warranty reserve
referred to above.
Gross profit before the charge increased $1.51 million, or 11.2%,
compared to 1996. The increase in gross profit before the charge resulted
primarily from increased sales.
Gross profit increased $4.75 million or 59.8% in 1996 as compared to
1995. The increase resulted primarily from a decrease in warranty charge from
$8.10 million warranty in 1995 to $747,000 in 1996. This increase was partially
offset by an increase in discounting to customers, an increase in the cost of
certain purchased materials, and an increase in freight costs and manufacturing
overhead.
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 were $12.31 million in 1997, compared to
8
<PAGE>
$10.66 million in 1996. Selling, general, and administrative expenses in 1997
increased $1.64 million or 15.4%, compared to 1996. The increase was due to
administrative costs associated with the acquisition of American Containment,
Inc., acquired in July, 1996, as well as increased litigation expenses.
Selling, general and administrative expenses increased $403,000, or
3.9%, in 1996, as compared to 1995, which was primarily attributable to an
increase in selling and administrative expenses related to the acquisition of
American Containment, Inc. and additional corporate personnel.
The change in selling, general and administrative expenses as a
percentage of net sales to 27.0% in 1997, from 28.3% in 1996 and 26.3% in 1995,
resulted primarily from selling, general and administrative expenses being
spread over a larger volume of sales in 1997 and, in 1996, from increased
selling, general and administrative expenses as a result of the acquisition of
American Containment, Inc.
Research and development expenses are included in the general expense
category and were approximately $527,000, $786,000 and $760,000, in 1997, 1996
and 1995, respectively.
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 and licenses (which range from 13 to 17 years) at the acquisition date
or subsequent issuance date.
Interest Expense
Interest expense was $627,000, $362,000 and $146,000 in 1997, 1996 and
1995, respectively. The increase of $265,000 from 1996 to 1997 was due to
increased borrowings under the Company's line of credit sufficient to permit the
purchase and installation of a new manufacturing line for primary pipe at the
Company's Oaks, Pennsylvania facility, as well as from increased cash used for
warranty work.
The increase in interest expense of $216,000 in 1996 compared to 1995
was due to an increase in debt used to acquire American Containment, Inc. and an
increase in the Company's line of credit activity for, among others, warranty
charges related to the Enviroflex pipe.
Other
The Company incurred non-recurring transaction expenses, consisting
primarily of legal fees, special committee and board fees and related expenses
relating to offers made by Danaher
9
<PAGE>
Corporation, certain members of management and others to acquire the outstanding
common stock of the Company during 1995.
Income Taxes
Income tax expense (benefit) was ($7.11 million), $762,000 and ($1.11
million) in 1997, 1996 and 1995, respectively. The fluctuation in income tax
expense (benefit) during the three-year period was primarily due to changes in
the Company's income before income taxes. The Company recorded deferred income
tax assets of approximately $7.42 million and $1.70 million in 1997 and 1996,
respectively, resulting from future tax benefits related to future deductibility
of warranty expense referred to above. See Note 10 of Notes to Consolidated
Financial Statements appearing elsewhere herein for additional information
concerning variations in the customary relationship between income before income
tax expense (benefit) and income tax expense (benefit).
Net Income
The Company's net loss was ($12.36) million in 1997, as compared to
net income of $398,000 in 1996, and a net loss of ($2.25) million in 1995. The
decrease in net income in 1997 compared to 1996 was due primarily to a $20.4
million charge to earnings to increase the Company's warranty reserve, as well
as charges associated with licensing of certain patented technology.
The increase in net income in 1996, as compared to 1995, resulted from
an additional warranty charge of $7.50 million in 1995, and non-recurring
transaction expense. This was partially offset by a decrease in gross margin
due to, among other things, increased customer discounts and costs of certain
purchased materials.
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 end
users, both of which are influenced by inclement weather and general economic
conditions. Accordingly, the Company's net sales and operating results for the
quarter ended March 31 are generally adversely affected.
Inflation
Management does not believe that inflation has had a material impact
upon results of operations during the years ended December 31, 1997, 1996 or
1995.
10
<PAGE>
Recent Accounting Pronouncements.
On December 15, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS
128 eliminates the primary and fully diluted earnings per share and requires the
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings. Basic earnings
per share excludes the dilution and is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding during
the period. Dilutive earnings per share takes into account the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised and converted into common stock. Prior periods income
(loss) per share calculations have been restated to reflect the adoption of SFAS
No. 128.
In June 1997, the FASB issued 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. SFAS No. 130 is effective for all periods
beginning after December 15, 1997. Subsequent to the effective date, all prior-
period amounts are required to be restated to conform to the provisions of SFAS
No. 130. The adoption of SFAS 130 is not expected to have a material impact on
the Corporation's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. SFAS No. 131 is effective for all periods beginning after
December 15, 1997. The adoption of SFAS 131 is not expected to have any impact
on the Corporation's financial position or results of operations.
Year 2000 Disclosure
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare the
systems for the year 2000. Testing and conversion of system applications is
expected to cost approximately $250,000.
11
<PAGE>
Financial Condition; Liquidity and Capital Resources
The Company had working capital of $1.13 million at December 31, 1997,
compared to $8.26 million in 1996 and $8.22 million at December 31, 1995.
The Company satisfies its working capital needs primarily through
funds generated by operations and by borrowings under a $6 million unsecured
line of credit facility with a commercial bank. Amounts borrowed under this line
of credit bear interest at the bank's national commercial rate (8.5% at December
31, 1997). At December 31, 1997, the Company owed $3.20 million under the line
of credit. In addition, the Company has a $1.06 million secured credit facility
with the commercial bank for expansion purposes. At December 31, 1997, the
Company has borrowed $808,000 under this facility.
In 1996, the Company executed a term loan with a bank for $1.0 million
which was used for the acquisition of American Containment, Inc. The term loan
bears interest at the bank's national commercial rate plus .125% (8.625% at
December 31, 1997.) and is secured by the assets of American Containment, Inc.
At December 31, 1997, $733,000 was outstanding under the term loan. The loan
requires the payment of equal monthly installments of principal in the amount of
$16,667 plus interest on the unpaid principal balance.
In 1996, the Company signed a note payable to a third party of
$500,000. The note payable bears an interest rate of 8% compounded annually.
At December 31, 1997, a balance of $187,500 was outstanding under the note
payable. The note requires the payment of equal quarterly installments of
$62,500 plus interest on the unpaid principal balance.
In 1995, the Company executed a term loan with a bank for $1.60
million which is required to be used exclusively for the purchase of equipment.
The term loan bears interest at the bank's national commercial rate plus .125%
(8.625% at December 31, 1997) and is secured by all equipment financed
thereunder. At December 31, 1997 and 1996, $1.20 million and $1.29 million,
respectively, were outstanding under the term loan. The loan requires the
payment of equal monthly installments of principal in the amount of $26,667 plus
interest on the unpaid principal balance.
In February, 1998, the Bank committed, subject, among other things, to
negotiation of definitive loan documentation, to extend a new $10 million credit
facility to the Company. The loan would be secured by essentially all of the
Company's assets. Under the facility the Company would be entitled to borrow,
repay and reborrow an amount equal to the sum of 80% of "eligible receivables"
(to be defined in the definitive loan documents) and 25%-35% of the value of
"eligible inventory" (to be defined in the definitive loan documentation), not
to exceed $10 million.
12
<PAGE>
The loan would bear interest at the lender's prime rate plus 1/2%. The facility
would be subject to a number of covenants which have yet to be negotiated, plus
other usual terms and conditions.
The Company invested $2.20 million, $1.91 million and $2.12 million in
capital equipment and leasehold improvements in 1997, 1996 and 1995,
respectively. The purchase of product molds and tooling constituted $501,000,
$737,000 and $992,000 of these capital expenditures in 1997, 1996, and 1995,
respectively. Total capital expenditures during 1998 are expected to be
approximately $1.17 million. Also, the Company is evaluating an additional
expansion of its manufacturing line which would cost about $1.2 million. The
Company intends to use its cash flow from operations and, to the extent
necessary, its working capital line of credit and term loans to fund its 1998
capital expenditures.
Because the Company does not discharge a significant amount of
material into the environment, the Company does not anticipate that it will
incur any material costs or expenses in complying with federal, state and local
environmental laws or otherwise relating to the protection of the environment.
The Company does not anticipate that it will incur material costs and expenses
for research and development necessary to modify its existing product lines to
comply with changes in such laws and could, under certain circumstances, become
liable with respect to the discharge of materials into the environment that
results from a defect in a product.
The Company believes that its presently available funds, together with
cash flow expected to be generated from operations and amounts available under
its commitments from its commercial bank, will be adequate to satisfy its
anticipated working capital requirements for the foreseeable future.
On March 17, 1998, the Company's principal shareholder purchased from
the Company 400 shares of authorized perpetual preferred stock at $10,000, cash,
per share, or $4 million in the aggregate. (See note 14 to "Notes to Financial
Statements").
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders,
Total Containment, Inc.
We have audited the consolidated balance sheet of Total Containment, Inc. (a
Pennsylvania Corporation) and Subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1997. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. We also audited the adjustments to shares and earnings per share data
for 1996 and 1995 due to the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" as discussed in Note 8. In our opinion
such adjustments are appropriate and have been properly applied.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Total Containment, Inc. and Subsidiaries at December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 12, 1998 (except for Note 14 as to which the date is March 17, 1998)
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
and Board of Directors of
Total Containment, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Total Containment, Inc. and its subsidiaries at December 31, 1996, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management, our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes the examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Total Containment, Inc. for any period
subsequent to December 31, 1996.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 7, 1997
15
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 616,015 $ 612,119
Accounts receivable, net of allowance for
doubtful accounts of $50,000 and $200,000
for 1996 and 1997, respectively................... 7,452,901 7,887,074
Inventories......................................... 7,248,293 7,305,643
Deferred income taxes............................... 576,983 3,114,165
Prepaid royalties................................... 438,000 --
Other current assets................................ 2,662,049 2,276,818
----------- -----------
Total current assets ............................ 18,994,241 21,195,819
Molds and tooling costs, net........................ 1,362,112 986,612
Property and equipment, net......................... 2,511,301 3,870,524
Prepaid royalties................................... 207,747 --
Patents, patent rights and licenses, net............ 5,155,124 4,292,630
Goodwill, net....................................... 5,544,521 5,379,359
Deferred income taxes............................... 1,123,638 4,305,894
Other assets........................................ 66,585 15,956
----------- -----------
$34,965,269 $40,046,794
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings .......................... $ 3,677,000 $ 3,197,000
Current portion of long-term debt................... 770,012 743,512
Accounts payable, trade and accrued expenses ....... 5,125,582 6,019,265
Other payable....................................... -- 4,020,481
Warranty reserve - current.......................... 1,160,604 6,087,565
----------- -----------
Total current liabilities ....................... 10,733,198 20,067,823
Long-term debt........................................ 1,894,082 2,305,282
Non-current warranty.................................. 3,322,410 11,233,833
----------- -----------
Total liabilities ............................... 15,949,690 33,606,938
----------- -----------
Commitments and contingencies......................... -- --
Stockholders' equity:
Preferred stock - $.01 par value; authorized
1,000 shares; none issued and outstanding......... -- --
Common stock - $.01 par value; authorized
20,000,000 shares; 4,641,600 shares issued
and outstanding................................... 46,416 46,416
Capital in excess of par value ..................... 13,728,778 13,728,778
Retained earnings................................... 5,216,846 (7,139,358)
Equity adjustment from foreign currency
translation....................................... 23,539 (195,980)
----------- -----------
Total stockholders' equity ....................... 19,015,579 6,439,856
----------- -----------
$34,965,269 $40,046,794
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
16
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................. $39,068,990 $37,730,009 $ 45,648,699
Cost of sales (excluding warranty
expense).............................. 23,058,278 24,288,535 30,697,518
----------- ----------- ------------
16,010,712 13,441,474 14,951,181
Warranty expense....................... 8,073,005 746,792 18,596,329
----------- ----------- ------------
Gross profit (loss).................... 7,937,707 12,694,682 (3,645,148)
Selling, general and administrative.... 10,261,950 10,664,161 12,307,515
Amortization of patents, licenses and
goodwill.............................. 482,803 508,309 521,077
Loss on write-off of patent............ -- -- 564,684
Other operating expense................ -- -- 1,800,000
----------- ----------- ------------
Income (loss) from operations.......... (2,807,046) 1,522,212 (18,838,424)
Interest expense...................... (145,979) (362,437) (626,575)
Other expense......................... (407,133) -- --
----------- ----------- ------------
Income (loss) before income taxes...... (3,360,158) 1,159,775 (19,464,999)
Income tax expense (benefit)........... (1,112,121) 761,565 (7,108,795)
----------- ----------- ------------
Net income (loss)...................... $(2,248,037) $ 398,210 $(12,356,204)
=========== =========== ============
Per share data:
Earnings (loss) per common share -
basic................................ $(.48) $.09 $(2.66)
=========== =========== ============
Earnings (loss) per common share
assuming dilution.................... (.48) $.08 $(2.66)
=========== =========== ============
Weighted average shares used in com-
putation of earnings (loss) per
common share......................... 4,641,600 4,641,600 4,641,600
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
17
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
CAPITAL FROM FOREIGN
COMMON IN EXCESS RETAINED CURRENCY
STOCK OF PAR VALUE EARNINGS TRANSLATION TOTAL
---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
January 1, 1995..................... $46,416 $13,728,778 $ 7,066,673 $ (37,537) $20,804,330
Net loss............................ (2,248,037) (2,248,037)
Equity adjustment from foreign
currency translation............... 59,212 59,212
---------- ------------ ----------- ----------- -----------
December 31, 1995................... 46,416 13,728,778 4,818,636 21,675 18,615,505
Net Income.......................... 398,210 398,210
Equity adjustment from foreign
currency translation............... 1,864 1,864
---------- ------------ ----------- ----------- -----------
December 31, 1996................... 46,416 13,728,778 5,216,846 23,539 19,015,579
Net loss............................ (12,356,204) (12,356,204)
Equity adjustment from foreign
currency translation............... (219,519) (219,519)
---------- ------------ ----------- ----------- -----------
December 31, 1997................... $46,416 $13,728,778 $(7,139,358) $ (195,980) $ 6,439,856
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
18
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operation activities:
Net income (loss)...................... $(2,248,037) $ 398,210 $(12,356,204)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 1,472,333 1,566,294 1,744,418
Loss on write-off of patent........... -- -- 564,684
Change in assets and liabilities:
Accounts receivable.................. 1,042,693 (813,202) (561,500)
Inventories.......................... (1,123,495) (1,219,947) (158,721)
Other assets......................... (5,675) (1,494,063) 1,081,230
Deferred taxes....................... (2,495,144) 1,516,445 (5,719,438)
Accounts payable, trade and
accrued expenses.................... 27,243 2,043,716 987,414
Other payable........................ -- -- 4,020,481
Income taxes payable................. (442,296) -- --
Warranty reserve..................... 6,464,653 (3,788,542) 12,855,711
----------- ----------- ------------
Net cash provided by (used for)
operating activities............... 2,692,275 (1,791,089) 2,458,075
=========== =========== ============
Cash flows from investing activities:
Purchase of molds and tooling.......... (991,990) (736,761) (500,688)
Purchase of property and equipment..... (1,123,726) (1,176,778) (1,699,212)
Patent costs and license fees.......... (350,634) (484,039) (67,744)
Purchase of net assets of ACI.......... -- (1,000,000) --
----------- ----------- ------------
Net cash used for investing
activities......................... (2,466,350) (3,397,578) (2,267,644)
=========== =========== ============
Cash flows from financing activities:
Borrowings on long-term debt........... 654,214 2,219,050 1,154,712
Payments on long-term debt............. -- (209,170) (770,012)
Net borrowings (payments) under line
of credit............................. (733,873) 3,426,000 (480,000)
----------- ----------- ------------
Net cash provided by (used for)
financing activities................. (79,659) 5,435,880 (95,300)
----------- ----------- ------------
Effect of foreign currency exchange
rate................................... 9,246 1,864 (99,027)
----------- ----------- ------------
Net increase (decrease)................. 155,512 249,077 (3,896)
Cash and cash equivalents at beginning
of year................................ 181,006 336,518 616,015
----------- ----------- ------------
Cash and cash equivalents from ACI
acquisition............................ -- 30,420
Cash and cash equivalents at end of
year................................... $ 336,518 $ 616,015 $ 612,119
=========== =========== ============
Supplemental cash flow information:
Interest paid.......................... $ 147,888 $ 391,561 626,575
Income taxes paid...................... 1,959,971 75,604 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
TOTAL CONTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Total Containment, Inc. (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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, TCI Environment
NV/SA (TCI-NV), Rene Morin, Inc. and American Containment, Inc. (acquired in
1996). All significant intercompany balances and transactions have been
eliminated in consolidation.
On July 11, 1996, the Company purchased all of the assets and certain
liabilities of American Containment, Inc., a manufacturer and installer of
fiberglass tank and dispenser sumps. This transaction was accounted for under
the purchase method of accounting. The results of operations of American
Containment, Inc. are reflected in the Company's consolidated statement of
operations from July 11, 1996 to December 31, 1996. Goodwill associated with
this purchase will be amortized over approximately forty years. 1996 pro forma
(unaudited) revenues, net income, and earnings per share would be approximately
$39,530,000, $517,470, and $.11, respectively, if the operating results of
American Containment, Inc. were included in the operations of the Company for
the entire year. The pro forma results in 1995 would not have been materially
different had American Containment, Inc. been included in the financial results
of the Company.
Foreign currency translation. TCI-NV uses the Belgian Franc as its
functional currency. Translation adjustments are reported separately and
accumulated as a separate component of stockholders' equity.
Concentration of credit risks. The Company's trade receivables result
primarily from the sale of product to distributors who sell to automobile
service stations and convenience store markets including several large chains.
The
20
<PAGE>
Company traditionally relies on a limited number of suppliers on an exclusive
basis.
Inventories. Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out (FIFO) basis.
Property and equipment. Property and equipment are valued at cost.
Depreciation is computed on a straight-line basis over the useful lives of the
assets.
Patents, patent rights and licenses. The Company capitalizes costs of
acquired patents, and other costs related to obtaining and maintaining patents.
Patents, patent rights and licenses are being amortized on a straight-line basis
over the estimated lives of the patents and licenses which range from 13 to 17
years. Amortization expense aggregated $326,757, $347,381 and $365,554 for
1995, 1996 and 1997, respectively. A patent was written off in the third
quarter of 1997 for a product line that was discontinued with a value of
$564,684. Accumulated amortization was $1,276,350 and $1,641,904 at December
31, 1996 and 1997, respectively.
Goodwill. Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identified intangible assets, and is being
amortized over forty years. Goodwill amortization approximated $155,843,
$160,928 and $166,009 for 1995, 1996 and 1997, respectively. Accumulated
goodwill amortization was $1,102,108 and $1,268,117 at December 31, 1996 and
1997, respectively.
The Company evaluates the carrying value of long-lived assets, including
goodwill, whenever changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such review for recoverability,
the Company compares the expected future cash flows to the carrying value of
long-lived assets and identifiable intangibles. If the anticipated undiscounted
future cash flows are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the carrying amount of
the assets and their estimated fair value.
Warranty reserve. 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.
21
<PAGE>
As the 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 over 3,000 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 and will sustain to replace such pipe, as well
as other damages (See Note 11).
During 1995, the Company increased its warranty reserve through a charge to
expense of approximately $7.5 million to cover its then expected estimate of
warranty claims associated with the pipe discussed above.
Income taxes. The Company uses the liability method of accounting for
income taxes. Under this method, deferred tax liabilities and assets are
recorded for the expected future tax consequences of temporary differences
between the carrying amounts for financial statement purposes and the tax bases
of assets and liabilities. Income tax expense (benefit) for the years ended
December 31, 1995, 1996 and 1997 were ($1,112,121), $761,565 and benefit of
$(7,108,795), respectively. The variance from 1997 to 1996 and 1996 to 1995 was
due to the change in the Company's income before income taxes. The income tax
benefit derived principally from the future deductibility of warranty expense
recognized for financial statement purposes in 1997 has been established as a
deferred tax asset in the amount of $7,420,059 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 valuation allowance relating to the state net
operating loss carryforward component of deferred tax asset was $159,687 at
December 31, 1996 and $275,465 at December 31, 1997.
The Company's foreign subsidiary has undistributed retained earnings of
$1,138,192 and $1,232,186 at December 31, 1996 and 1997, respectively. Because
a substantial portion of these earnings has been reinvested in working capital
and the remainder is not expected to be remitted to the Company, U.S. income and
foreign withholding taxes have not been provided on these unremitted earnings.
Other expenses. The other expense in 1997 of $1.8 million was associated
with the legal settlement regarding licensing of certain patented technology.
22
<PAGE>
During 1995, the Company incurred non-recurring transaction expenses,
consisting primarily of legal fees and special committee and board fees and
expenses, of $407,000 related to negotiations with a third party and certain
members of management in connection with attempts to acquire the Company. In
August, 1995, the Company announced the acquisition negotiations had been
terminated and expensed all costs associated with those failed acquisition
attempts.
Revenue recognition. Sales are recorded upon shipment. Expenses for
estimated product returns and warranty costs are accrued in the period of sale
recognition.
Earnings (loss) per share. On December 15, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share". SFAS 128 eliminates the primary and fully diluted
earnings per share and requires the presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings. Basic earnings per share excludes the dilution and is
computed by dividing income available to common shareholders by the weighted
average number of shares outstanding during the period. Dilutive earnings per
share takes into account the potential dilution that could occur if securities
and other contracts to issue common stock were exercised and converted into
common stock. Prior periods income (loss) per share calculations have been
restated to reflect the adoption of SFAS No. 128.
Advertising Cost. The Company expenses advertising costs as incurred.
Research and Development. Research and Development cost, which are
expensed by the Company as incurred were $760,000, $786,000 and $527,000 in
1995, 1996, and 1997, respectively.
New Accounting Pronouncements. In June 1997, the FASB issued 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. SFAS No. 130 is
effective for all periods beginning after December 15, 1997. Subsequent to the
effective date, all prior-period amounts are required to be restated to conform
to the provisions of SFAS No. 130. The adoption of SFAS 130 is not expected to
have a material impact on the Corporation's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial
23
<PAGE>
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
SFAS No. 131 is effective for all periods beginning after December 15, 1997.
The adoption of SFAS 131 will have no impact on the Corporation's financial
position or results of operations.
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 subject to change include the
warranty reserve and deferred tax assets.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
Raw materials..................................... $ 502,954 $ 516,042
Finished goods.................................... 6,745,339 6,789,601
----------- -----------
$ 7,248,293 $ 7,305,643
=========== ===========
4. MOLDS AND TOOLING COSTS
Molds and tooling costs include the following:
Useful
Lives December 31,
------- -------------------------
1996 1997
----------- -----------
Molds and tooling costs .................. 3 years $ 3,928,475 $ 4,418,081
Less - accumulated
amortization..................................... (2,566,363) (3,431,469)
----------- -----------
$ 1,362,112 $ 986,612
=========== ===========
</TABLE>
Amortization expense of molds and tooling costs was $781,300, $772,536 and
$865,106 for the years ended December 31, 1995, 1996 and 1997, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment include the following:
24
<PAGE>
Useful
Lives December 31,
------- -------------------------
1996 1997
------------ ------------
Furniture, fixtures and
office equipment ...... 3-5 years $ 542,459 $ 568,397
Equipment ............... 5-10 years 2,510,165 3,781,410
Leasehold improvements .. lease term 472,764 674,874
----------- -----------
3,525,388 5,024,681
Less - Accumulated depreciation....... (1,014,087) (1,154,157)
----------- -----------
$ 2,511,301 $ 3,870,524
=========== ===========
Depreciation expense on property and equipment was $243,998, $285,447 and
$322,640 for the years ended December 31, 1995, 1996 and 1997, respectively.
Fully depreciated assets of $196,284 were removed from both the fixed asset and
accumulated depreciation account in 1997.
6. LONG-TERM DEBT
Term Loans. In 1995, the Company executed a term loan agreement with a
bank for $1,600,000 which was used exclusively for the purchase of equipment.
The term loan bears interest at the bank's national commercial rate plus .125%
(8.625% at December 31, 1997) and is secured by all equipment financed
thereunder. At December 31, 1996 and 1997, $1,293,264 and $1,200,000
respectively were outstanding under the term loan. The loan requires the
payment of equal monthly installments of principal in the amount of $26,667 plus
interest on the unpaid principal balance.
In 1996, the Company executed a term loan with a bank for $1,000,000 which
was used for the acquisition of American Containment, Inc. The term loan bears
interest at the bank's national commercial rate plus .125% (8.625% at December
31, 1997.) and is secured by the assets of American Containment, Inc. At
December 31, 1996 and 1997, $933,329 and $733,317 was outstanding under the term
loan. The loan requires the payment of equal monthly installments of principal
in the amount of $16,667 plus interest on the unpaid principal balance.
In 1996, the Company signed a note payable to a third party of $500,000.
The note payable bears an interest rate of 8% compounded annually. At December
31, 1997, the balance of $187,500 was outstanding under this note payable. The
note requires the payment of equal quarterly installments of $62,500 plus
interest on the unpaid principal balance.
In 1997, the Company borrowed under a term loan credit availability to
acquire equipment related to a new pipe manufacturing line. The term loan bears
interest at the bank's national commercial rate plus .125% (8.625% at December
31, 1997) and is secured by all equipment financed thereunder. At
25
<PAGE>
December 31, 1997, a balance of $807,977 was outstanding under the term loan.
In 1996, Rene Morin, Inc. borrowed under a term loan for manufacturing
equipment. The term loan bears interest at 9.5%. At December 31, 1997, a
balance of $120,000 was outstanding.
Aggregate maturities of the borrowings is as follows:
1998 ........................................ 743,512
1999 ........................................ 556,012
2000 ........................................ 556,012
2001 ........................................ 385,281
2002 ........................................ 0
Thereafter .................................. 807,977
---------
3,048,794
=========
7. LINE OF CREDIT
The Company has a line of credit agreement with a bank which provides for
borrowings up to an aggregate limit of $6,000,000. Advances under the line of
credit bear interest at the bank's national commercial rate (8.5% at December
31, 1997) and are unsecured. At December 31, 1997, $3,197,000 was outstanding
under the line of credit.
Interest expense on borrowings under the line of credit was $144,000,
$195,337 and $353,796 in 1995, 1996 and 1997, respectively.
8. EARNINGS (LOSS) PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
<S> <C> <C> <C>
(Loss) before accounting change ($12,356,204)
=============
BASIC EPS
Income available to common stockholders ($12,356,204) 4,641,600 ($2.66)
=======
EFFECT OF DILUTIVE SECURITIES
Options -- 15,147 --
------------ ------------ ---------
DILUTED EPS
Income available to common stockholders
plus assumed conversions ($12,356,204) 4,656,747 ($2.66)
============ ============ =========
</TABLE>
Options to purchase 480,000 shares of common stock at a range of $2.75 to
$9.50 a share were outstanding during the year.
26
<PAGE>
They were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire from January 16, 1999 to August 7, 2002, were still
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Income before accounting change $398,210
===========
BASIC EPS
Income available to common stockholders $398,210 4,641,600 $0.09
=========
EFFECT OF DILUTIVE SECURITIES
Options -- 67,538 --
----------- ------------ ---------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $398,210 4,709,138 $0.08
=========== ============ =========
</TABLE>
Options to purchase 180,000 shares of common stock at a range of $3.50 to
$9.50 a share were outstanding during the year. They were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire from
January 16, 1999 to July 10, 2001, were still outstanding at December 31, 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
<S> <C> <C> <C>
(Loss) before accounting change ($ 2,248,037)
------------ ------------ ---------
BASIC EPS
(Loss) available to common stockholders ($ 2,248,037) 4,641,600 ($0.48)
=====
EFFECT OF DILUTIVE SECURITIES
Options -- -- --
------------ ------------ ---------
DILUTED EPS
(Loss) available to common stockholders
plus assumed conversions ($ 2,248,037) 4,641,600 ($0.48)
============ ============ =========
</TABLE>
Options to purchase 205,000 shares of common stock at $9.50 a share were
outstanding during the year. They were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. 130,000 options, which expire on January 16,
1999, were still outstanding at December 31, 1997.
27
<PAGE>
9. STOCK OPTION PLAN
At December 31, 1997, the Company had two stock option plans. The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation costs
have been recognized for either plan.
On January 16, 1994, the Stockholders of the Company approved a Stock
Compensation Plan (the "Plan"). The Plan authorizes the issuance of up to
400,000 shares of the common stock to key employees of the Company and its
subsidiaries. The number of shares authorized for issuance under the Plan, and
the outstanding awards granted under the Plan, are subject to adjustment in the
event of stock dividends, stock splits and similar transactions. Awards may be
granted in the form of nonqualified stock options, incentive stock options,
stock appreciation rights, performance units and restricted stock. The options
granted under the Plan are restricted and unvested at the date of grant. Stock
options are issued at prices equal to the market price at the date of grant.
The stock options have a vesting period of five years from the date of issuance.
On February 27, 1997, the Board of Directors of the Company approved and
adopted the 1997 Stock Compensation Plan, subject to stockholder approval
obtained on April 11, 1997. The 1997 Plan authorizes the issuance of up to an
additional 400,000 shares of Common Stock to employees of the Company and its
subsidiaries. The 1997 plan is substantially identical to the 1994 plan.
Options to acquire 440,000 shares were outstanding under the 1997 plan at
December 31, 1997.
On August 28, 1996, the Company granted to its current Chief Executive
Officer, in connection with his employment, incentive stock options of the
Company to purchase 225,000 shares. The options have a term of five years from
the date of grant. The stock options have a vesting period of three years from
the date of issuance, beginning one year from the date of grant. The options
granted to the Chief Executive Officer were not issued under the 1994 Plan. In
August, 1997, following the approval of an additional 400,000 option allotment
under the 1997 Plan, the 1996 options granted to the Chief Executive Officer
which were not issued under the Plans were subsequently incorporated into the
1997 Plan without any change in terms.
Had compensation cost for the plan year been determined based on the fair
value of options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock-Based Compensation", the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below.
28
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------- -----------
<S> <C> <C> <C>
Net Income (loss) ... as reported $(12,356,204) $398,210 $(2,248,037)
pro forma $(12,584,174) $139,880 $(2,358,327)
Basic earnings (loss)
per share ......... as reported $ (2.66) $ .09 $ (.48)
pro forma $ (2.71) $ .03 $ (.51)
Diluted earnings (loss)
per share ......... as reported $ (2.66) $ .08 $ (.48)
pro forma $ (2.71) $ .03 $ (.51)
</TABLE>
These pro forma amounts may not be representative of future disclosure
because they do not take into effect the pro forma compensation expense related
to grants before 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996 respectively; no dividend yield for
all years; expected volatility of 32.00% and 61.63%; risk-free interest rate of
6.11%, and 6.79%; and expected lives of 10 years for all years for options under
the Plan, and five years for options granted to the Chief Executive Officer.
A summary of the status of the Company's option plans as of December 31,
1997, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
------- --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 595,000 $4.20 205,000 $9.50 205,000 $9.50
Options granted 70,000 2.70 480,000 $2.77 - -
Options exercised - - - - - -
Options forfeited - - 90,000 $8.33 - -
------- --------- ------- --------- -------- ---------
Outstanding at
end of year 665,000 $4.10 595,000 $4.24 205,000 $9.50
======= ========= ======= ========= ======== =========
Options exercisable
at year end 201,000 $5.41 52,000 $9.50 41,000 $9.50
------- --------- ------- --------- -------- ---------
Weighted average
fair value of
options granted
during the year $1.53 $2.54 $2.69
</TABLE>
29
<PAGE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding.............................. 665,000
Range of exercise prices........................ $2.50 to $9.50
Weighted average exercise price................. $4.10
Weighted average remaining contractual life .... 2 years 6 months
</TABLE>
The following table summarizes information about non-qualified stock
options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life Price 1997 Price
- -------- ------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
$2.50 to
$3.75 535,000 2 yr. 10 ms. $2.79 123,000 $2.82
$9.50 to
$14.25 130,000 1 yr. $9.50 78,000 $9.50
</TABLE>
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Currently payable:
Federal................... $ 869,015 $(1,043,920) $(1,390,866)
State..................... 232,759 - ( 178,732)
Foreign................... 281,249 289,040 180,241
Deferred.................... (2,495,144) 1,516,445 (5,719,438)
----------- ------------ -----------
$(1,112,121) $ 761,565 $(7,108,795)
=========== ============ ===========
</TABLE>
The Company's income, as reported in the statement of operations, differs
from taxable income as reported in its tax return principally due to the use of
accelerated depreciation for income tax purposes, and the accrual of warranty
expenses and other accruals for financial reporting purposes which are
deductible for income tax purposes when paid.
Deferred income tax expense (benefit) consists of the following:
30
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Depreciation.................................................... $ (10,103) $ 4,209 $ 31,633
Allowance for doubtful
accounts...................................................... (58,500)
Warranty reserve................................................ (2,492,392) 1,522,413 (5,021,502)
Other reserves.................................................. - - (672,011)
Other........................................................... 7,351 (10,177) $ 942
----------- ---------- -----------
$(2,495,144) $1,516,445 $(5,719,438)
=========== ========== ===========
</TABLE>
A reconciliation of income taxes with the amounts which
would result from applying the U.S. statutory rate follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at U.S.
statutory rate................................................ $(1,142,454) $ 394,324 $(6,618,099)
State income taxes, net of
federal benefit............................................... (155,239) - (910,592)
Excess foreign tax on foreign
subsidiary income............................................. 38,000 36,363 35,028
Amortization of certain
intangible assets............................................. 148,100 172,825 261,794
Increase in valuation allowance. - 159,687 115,778
Other........................................................... (528) (1,634) 7,296
----------- ---------- -----------
$(1,112,121) $ 761,565 $(7,108,795)
=========== ========== ===========
</TABLE>
Significant components of the deferred tax balances at
December 31, 1996 and 1997 are:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------------- ------------------------
Current Noncurrent Current Noncurrent
deferred deferred deferred deferred
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Warranty reserve................................................ $ 496,260 $ 1,167,306 $2,303,873 $ 4,381,195
Accrued vacation................................................ 43,598 - 43,325 -
Other reserves.................................................. - - 672,010 -
Allowance for doubtful
accounts...................................................... 19,500 - 78,000 -
Depreciation.................................................... - (43,668) - (75,301)
Net operating loss
carry forward................................................. 159,687 - 275,465 -
Other........................................................... 17,625 - 16,957 -
--------- ----------- ---------- -----------
$ 736,670 $ 1,123,638 $3,389,630 $ 4,305,894
Valuation
Allowance..................................................... (159,687) - (275,465) -
--------- ----------- ---------- -----------
$ 576,983 $ 1,123,638 $3,114,165 $ 4,305,894
========= =========== ========== ===========
</TABLE>
Realization of deferred tax assets associated with the 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
31
<PAGE>
established a valuation allowance of $275,465 against them. The valuation
allowance at December 31, 1997 relates to state net operating loss carryforwards
expiring through the year 2000. Although realization is not assured for the
remaining deferred tax assets, the Company believes it is more likely than not
that they will be realized through future taxable earnings.
11. PATENTS AND TRADEMARKS, LITIGATION AND CONTINGENCIES
In January, 1998 the Company settled and terminated litigation with two
competitors who claimed that they possessed licenses to manufacture and sell
underground systems with retractability and other features covered by patents
licensed to the Company. The purported licensees acknowledged that whatever
license rights they had were terminated and the Company paid approximately $1.64
million to them, excluding various other expenses associated with this
litigation of approximately $.16 million.
During 1997 the Company was a party in litigation involving the owner of
the patents referred to above and a third party to whom the owner of such patent
proposed to transfer his business, including patent rights with respect to the
retractability feature, among others, of the underground containment systems
sold by the Company.
In April, 1997 a court held that the owner of the patent was entitled to
transfer his business, including his patent rights. The Company did not
appeal the Court's decision.
During 1997, the Company initiated a legal action against Dayco Products,
Inc., a subsidiary of Mark IV Industries, 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.
In its suit, the Company requests that the Court award damages, to cover,
among other things, the cost of inspecting and replacing defective pipe and
related costs in an amount to be determined at trial and for further appropriate
relief. The Company, in consultation with its legal counsel, believes that it
is more likely than not that the Company will prevail with respect to its
material claims. (See "Significant Accounting Policies - Warranty Reserve.")
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 the Company, Dayco, and Senter Petroleum, Inc. for damages allegedly
resulting from the failure of the Company's Enviroflex piping system on or
32
<PAGE>
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 1,800 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 the plaintiffs
are seeking approximately $23 million in damages. The Company has and maintains
insurance with policy limits at the time of this claim of $3 million which may
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. The Company believes that it has no material
uninsured liability in connection with this matter and that if it does, it is
covered by Dayco's indemnity.
Other Litigation. The Company is also involved in various other legal
actions incidental to the conduct of its business. Management is contesting
these cases vigorously and believes it has meritorious defenses in each matter.
Management does not believe the ultimate outcome of these various legal actions
will have a material effect on the Company's financial condition, results of
operations or working capital requirements.
12. COMMITMENTS
Dayco Agreement. On January 1, 1993, Dayco and the Company entered into a
five year supply agreement (the "Dayco Agreement") pursuant to which Dayco
agreed to sell Enviroflex primary pipe exclusively to the Company for use in
flexible double-wall underground piping systems and the Company agreed to
purchase such pipe exclusively from Dayco. Under the Dayco Agreement, the
Company has minimum purchase requirements per calendar year. The Company
exceeded the minimum purchase requirements in each calendar year the Dayco
Agreement has been in effect. During 1997, the Company terminated this
agreement (see Note 11). Dayco has asserted that it is entitled to payment of
$4,038,000 for goods, services, and freight contracted for by the Company under
the Dayco Agreement. The Company has declined to pay this for the reason, among
other things, that management estimates that
33
<PAGE>
amounts owed to the Company by Dayco exceed the amount to which Dayco claims it
is entitled.
The Company has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the Company.
The agreements will continue in effect on a year-to-year basis until terminated
or not renewed by the Company or key executives. Upon a change in control, the
Company shall continue to pay the key executives' salaries per the agreements
and certain benefits for the agreed upon time periods. The maximum contingent
liability under the agreements at December 31, 1997 was $1,073,000.
Lease Commitments. The Company leases its facilities, certain office
equipment and vehicles under noncancelable operating leases. Total rental
expense under these leases for the years ended December 31, 1995, 1996 and 1997
was approximately $265,000, $235,000 and $867,000, respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows:
Year ended
December 31,
- ------------
1998............................................ 1,069,564
1999............................................ 582,049
2000............................................ 525,029
2001............................................ 373,711
2002............................................ 126,220
----------
$2,673,973
==========
13. FOREIGN OPERATIONS AND EXPORT SALES
Summarized financial data with respect to the operations of TCI-NV at
December 31, 1996 and 1997 and for the years then ended follows:
1996 1997
----------- -----------
Total assets................................... $ 1,989,000 $ 2,144,000
Total liabilities.............................. 786,000 912,000
----------- -----------
Net assets..................................... $ 1,203,000 $ 1,232,000
=========== ===========
Net sales...................................... $ 3,761,000 $ 3,536,000
=========== ===========
Net income..................................... $ 335,000 $ 248,257
=========== ===========
The Company's net sales by geographic region are as follows:
Year Ended December 31,
- -----------------------------------------------------------------
1995 1996 1997
----------- ----------- -----------
Net Sales:
United States........................ $26,762,000 $25,001,000 $33,128,000
Canada............................... 1,811,000 1,566,000 1,463,000
Mexico, Central and
34
<PAGE>
South America....................... 4,957,000 6,028,000 6,412,000
Europe and the Middle
East................................ 4,431,000 3,761,000 3,536,000
Southeast Asia,
Australia and New
Zealand............................. 1,108,000 1,374,000 1,110,000
----------- ----------- -----------
Total................................. $39,069,000 $37,730,000 $45,649,000
=========== =========== ===========
14. SUBSEQUENT EVENT
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.
If this transaction was enacted as of December 31, 1997, the balance sheet
would have changed as follows:
Historical Pro Forma Pro Forma
December 31, 1997 Adjustment December 31, 1997
----------------- ---------- -----------------
Current Assets........ $21,195,819 $4,000,000 $25,195,819
Other Assets.......... $18,850,975 -- $18,850,975
----------- ---------- -----------
Total Assets.......... $40,046,794 $4,000,000 $44,046,794
=========== ========== ===========
Current Liabilities $20,067,823 $ -- $20,067,823
Other................. $13,539,115 -- $13,539,115
----------- ---------- -----------
Total Liabilities . $33,606,938 $33,606,938
Stockholder Equity . $ 6,439,856 $4,000,000 $10,439,856
----------- ---------- -----------
Total Liabilities &
Equity.............. $40,046,794 $4,000,000 $44,046,794
=========== ========== ===========
35
<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1997,
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
422 Business Center, A130 North Drive,
P.O. Box 939, Oaks, Pennsylvania 19546
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)666-7777
-------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by
36
<PAGE>
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Based on the closing sale price of the Registrant's Common Stock as quoted
on the Nasdaq Stock Market, the aggregate market value of the shares of Common
Stock held by nonaffiliates as of February 27, 1998, was $4,380,364.80.
As of February 27, 1998 the Registrant had 4,641,600 shares of Common Stock
outstanding.
Documents incorporated by reference. Portions of the 1997 Annual Report to
Stockholders of the Registrant are incorporated by reference into Part II of
this Report and portions of the Proxy Statement of the Registrant relating to
the Registrant's Annual Meeting to be held on April 17, 1998 are incorporated by
reference into Part III of this Report.
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.
Examples of forward-looking statements include, but are not limited to (a)
projections of revenues, cost of raw materials, income or loss, earnings or loss
per share, capital expenditures, growth prospects, dividends, the effect of
currency translations, capital structure and other financial items, (b)
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, (c) statements of future economic performance and (d) statements of
assumptions, such as the prevailing weather conditions in the Company's market
areas, underlying other statements and statements about the Company or its
business.
37
<PAGE>
TOTAL CONTAINMENT, INC.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 4
ITEM 3. LEGAL PROCEEDINGS........................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..................................................... 5
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT........................ 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 6
ITEM 6. SELECTED FINANCIAL DATA..................................... 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................. 7
ITEM 11. EXECUTIVE COMPENSATION..................................... 7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 7
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 8
38
<PAGE>
PART I
ITEM 1. BUSINESS
Total Containment, Inc. (the "Company") was incorporated in the State of
Pennsylvania. 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 Company's systems and products are used in
connection with the installation of new and the retrofitting of existing
underground fuel containment and distribution systems ("Fuel Containment
Systems") worldwide. The principal end users of the Company's products are
major oil companies and convenience stores. End users also include government
bodies, utilities and other fleet vehicle operators.
During the third quarter of 1996, the Company acquired American
Containment, Inc. ("ACI"). ACI is principally engaged in the manufacture and
installation of fiberglass tank and dispenser sumps used in underground piping
systems. The Company acquired ACI to have a supply of quality fiberglass
components in addition to an increased presence in the Western United States.
The Company intends to transfer this business from ACI to the Company. During
1997, the Company caused ACI to redirect its focus solely on the custom part
service business, as well as on becoming the field technical arm of the Company.
The Company believes that this action will complement the Company's parts
business, enhance its field level expertise and provide an additional resource
to its customers.
PRINCIPAL PRODUCTS
The principal products of the Company and their primary features are
summarized in the following table:
Enviroflex A flexible double-wall - Double-wall construc-
pipe for the conveyance tion provides primary
and secondary contain- pipe protection and
ment of motor vehicle secondary containment
fuels from underground
storage tanks to - Flexible
product dispensers
- No joints
- UL-approved for gaso-
line and gasohol
- Primary pipe can be
retracted for repair or
replacement
- Ease of installation
39
<PAGE>
- Thermoplastic
construction
- Certain features
protected by patent
Sump/risers Liquid-resistent access - Secondary containment
chambers made from
fiberglass or polyethy- - Mounted on all types of
lene for submersible underground storage
pumps and other fit- tanks
tings attached to
underground storage - Provides easy above-
tanks ground access to pumps
and fittings
- Sumps and risers can be
stacked and trimmed to
achieve required burial
depth
Dispenser Liquid-resistant - Secondary containment
sumps secondary containment
chambers made from - UL-approved mounting
fiberglass or poly- frames, brackets and
ethylene for above stabilizer bars
ground fuel dispensers
- Provides aboveground
access to dispenser
valves, joints and
connectors
- Polyethylene and
fiberglass construction
- Certain features
protected by patent
Bulkhead Specially designed fit- - Ease of installation
fittings tings used to seal pipe/
and sump connections - Thermoplastic
reducers construction
- Certain features
protected by patent
Tank A polyethylene jacket - Secondary containment
Jacket that provides secondary
containment and corro- - UL-approved secondary
sion protection for containment and corro-
steel underground sion protection jacket
storage tanks
- UL-approved for
gasoline and gasohol
40
<PAGE>
- Less expensive than
fiberglass tanks
- Ease of transportation
- Polyethylene
construction
- Certain features
protected by patent
Pipe A telescoping poly- - Secondary containment
Jacket ethylene pipe that
provides liquid con- - Polyethylene construc-
veyance and corro- tion
sion protection for
rigid fiberglass or - Certain features pro-
steel underground tected by patent
piping systems
SALES ACTIVITIES
General
The sales of the Company's principal products and the sales of each product
as a percentage of total sales in 1995, 1996 and 1997 are set forth in the
following table:
Sales and Percentages of Total Sales
Year Ended December 31,
------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
(Dollars in thousands)
Enviroflex and
other piping... $ 18,466 47.3% $ 16,912 44.8% $ 19,550 42.8%
Sump/risers and
bulkhead fit-
tings and
reducers....... 7,696 19.7 8,374 22.2 10,168 22.3
Dispenser sumps.. 4,732 12.1 4,876 12.9 5,060 11.1
Tank Jacket..... 5,983 15.3 6,008 15.9 6,109 13.4
Pipe Jacket...... 774 2.0 624 1.7 485 1.1
Installation..... -- -- -- -- 1,977 4.3
Applicator equip-
ment and other. 1,418 3.6 936 2.5 2,300 5.0
-------- ---- ------- ----- ------- -----
Totals........... $ 39,069 100.0% $37,730 100.0% $45,649 100.0%
======== ===== ======= ===== ======= =====
Geographic Markets
In addition to the United States, the Company's geographic market for its
products includes Canada, Mexico, Central and South America, Europe (including
the EEC, Hungary and Poland), Australia, New Zealand, Southeast Asia (including
Singapore, Thailand, Taiwan and Hong Kong), and the Middle East (including
41
<PAGE>
Turkey and Israel). The Company's net sales to customers outside the United
States in 1997, 1996 and 1995 were $12.5 million, $12.7 million and $12.3
million, respectively. The Company's principal foreign end users are the major
oil companies.
The following table sets forth, for the periods indicated, the net sales of
the Company's products by geographic market area.
NET SALES BY GEOGRAPHIC MARKET AREA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net Sales:
United States....................... $26,762 $25,001 $33,128
Canada.............................. 1,811 1,566 1,463
Mexico, Central and South America. 4,957 6,028 6,412
Europe and the Middle East.......... 4,431 3,761 3,536
Southeast Asia, Australia and
New Zealand....................... 1,108 1,374 1,110
------- ------- -------
Total................................. $39,069 $37,730 $45,649
======= ======= =======
</TABLE>
Information relating to foreign operating income and foreign assets is set
forth in Note 13 of Notes to Consolidated Financial Statements included
elsewhere herein.
PRODUCT DEVELOPMENT
The Company is committed to a program of continuous product evaluation and
continuous improvement in order to maintain the technological competitiveness of
its product line. In addition, the Company is actively engaged in developing
new products for traditional markets in addition to expanding into non-
traditional markets.
NEW MANUFACTURING LINE
In the fourth quarter of 1997, the Company completed the installation of a
new primary pipe manufacturing line at its Oaks, Pennsylvania facility. Prior
to such completion, the Company, since its inception, had purchased its primary
pipe from Dayco Products, Inc., a subsidiary of Mark IV Industries. See "Notes
to Consolidated Financial Statements -- Warranty Reserve" and "Item 3. Legal
Proceedings." With this equipment, the Company was able to redesign and
significantly improve certain important features of the Enviroflex and Omniflex
primary pipes. This primary pipe carries the approval of Underwriters'
Laboratories.
Also, the Company finalized the design and began producing a new pipe for
use in remote fill applications. This pipe is a 4 inch corrugated composite
extrusion with field attachable
42
<PAGE>
fittings. The Company expects that this pipe will be sold principally overseas.
END USERS
The principal domestic end users of the Company's products are major oil
companies and convenience store chains which purchase the Company's products in
connection with the installation of new and the retrofitting of existing Fuel
Containment Systems. The Company's other domestic customers are primarily state
and local government bodies, utilities and other fleet vehicle operators.
Substantially all of the Company's sales relating to oil company and
convenience store chain end users are performed pursuant to purchase orders or
non-exclusive contracts, neither of which provide for any minimum purchase
requirements. During 1995 and 1996 the two previous fiscal years, the Company's
backlog of orders averaged less than $770,000. In 1997, the backlog averaged
$1.7 million. The Company typically ships incoming orders within approximately
seven days and, therefore, does not have a significant backlog.
COMPETITION
The industry in which the Company operates is highly competitive and
dominated by a few companies. The companies compete on several factors including
product performance, service, and pricing.
The Company's principal competitors in the market for underground piping
systems (including sump risers and dispenser sumps) are divisions or
subsidiaries of A. O. Smith Corporation and Ameron, Inc. both fiberglass
manufacturers, as well as Environ Products, Inc., a manufacturer of flexible
piping systems, and a new competitor of the Company, OPW Fueling Components
("OPW"), a division of Dover Resources, Inc. (See "Item 3 - Legal
Proceedings"). Many of these companies have greater financial resources than
the Company.
The Company's primary competition for Tank Jacket are manufacturers of
fiberglass, fiberglass clad, and steel tanks. Of these competing manufacturers,
Fluid Containment, Inc. and Xerxes Corporation, are both fiberglass tank
manufacturers.
MANUFACTURERS AND SUPPLIERS
During the fourth quarter of 1997, the Company began manufacturing the
primary pipe component of its Enviroflex and Omniflex flexible piping systems.
Prior thereto, the Company purchased its primary pipe from Dayco Products, Inc.,
a subsidiary of Mark IV Industries (See Item 3 - "Legal Proceedings"). The
Company also manufacturers its Tank Jacket
43
<PAGE>
product, as well as molded bulkhead fittings and other seals, and fiberglass
tanks and dispenser sumps.
Ten suppliers provide the Company approximately 75% of its purchases.
During 1997, the Company has entered into a written supply contract with
Cleveland Tubing, Inc. (which manufactures various extruded pipes for the
Company, including the Enviroflex secondary pipe). The Company does not have
any written supply contracts with any other principal suppliers.
PATENTS AND TRADEMARKS, LICENSING AGREEMENTS
The Company derives revenues from the sale of Enviroflex and Omniflex
piping systems and its Tank Jacket product, certain features of which are
covered by patent owned by, assigned to, or licensed to the Company. The
Company relies on its intellectual property rights to protect its interest in
these design features.
The Company has the right to practice certain claims with respect to piping
used in the Enviroflex and Omniflex system pursuant to an exclusive worldwide
license (the "license") covered under patents owned by OPW Fueling Components
Division of Dover Industries, Inc. ("OPW"), which also possesses the right to
practice these claims. Under the license, the Company is obligated to pay a
royalty of three percent of net sales of the Company attributable to products
covered by the patents to OPW, payable quarterly, with a minimum payment of
$75,000 per calendar quarter.
On April 1, 1994 the Company paid an advance of $1.5 million against the
royalties. The Company used the last of the prepaid royalties during the fourth
quarter of 1997. For information relating to litigation with OPW, see "Item 3.
Legal Proceedings." See also "Competition."
The Company also relies on unpatented proprietary information to maintain
and promote its commercial position.
EMPLOYEES
As of December 31, 1997, the Company employed 257 persons, of which 17 were
engaged in marketing and sales; 4 were engaged in research and development; 138
were engaged in manufacturing and assembly; 54 were engaged in field service
installations; and 40 were engaged in finance, administration and management.
Of the total number of employees, 4 were located outside the United States.
None of the Company's employees are covered by a collective bargaining
agreement.
44
<PAGE>
ITEM 2. PROPERTIES
The Company operates in a 125,000 square foot leased facility located in
Oaks, Pennsylvania. The Company believes that the facility will accommodate its
administrative and manufacturing needs for the foreseeable future.
Rene Morin, Inc. operates from a 12,000 square foot leased facility located
in Plainfield, Connecticut.
American Containment, Inc. operates from several leased buildings, totaling
approximately 10,000 square feet, located in Bakersfield, California.
TCI Environment operates from an office located in Antwerp, Belgium. In
addition, TCI Environment has warehouse space in Antwerp, Belgium.
ITEM 3. LEGAL PROCEEDINGS
In January, 1998 the Company settled and terminated litigation with two
competitors who claimed that they possessed licenses to manufacture and sell
underground systems with retractability and other features covered by patents
licensed to the Company. The purported licensees acknowledged that whatever
license rights they had were terminated and the Company paid $1.6 million to
them.
During 1997, the Company was a party in litigation involving the owner of
the patents referred to above and a third party to whom the owner of such
patents proposed to transfer his business, including patent rights with respect
to the retractability feature of the underground containment systems sold by the
Company.
In April, 1997 a court held that the owner of the patents was entitled to
transfer his business, including his patent rights. The Company did not
appeal the Court's decision.
During 1997, the Company initiated a legal action against Dayco Products,
Inc., a subsidiary of Mark IV Industries, 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.
In its suit, the Company requests that the Court award damages, to cover,
among other things, the cost of inspecting and replacing defective pipe and
related costs in an amount to be determined at trial and for further appropriate
relief. The Company, in consultation with its legal counsel, believes that it
is more likely than not that the Company will prevail with
45
<PAGE>
respect to its material claims. (See "Significant Accounting Policies -
Warranty Reserve.")
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 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 1,800 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 Compliant, 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
with policy limits at the time of this claim of $3 million which may 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. The Company believes that it has no material
uninsured liability in connection with this matter and that if it does, it is
covered by Dayco's contractual indemnity.
The Company is also involved in various other legal actions incidental to
the conduct of its business. Management is contesting these cases vigorously and
believes it has meritorious defenses in each matter. Management does not
believe the ultimate outcome of these various legal actions will have a material
effect on the Company's financial condition, results of operations or working
capital requirements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
46
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages and positions with the
Company are as follows:
Name Age Position
- ---------------------------- ----------------------------------
Pierre Desjardins...... 56 President and Chief Executive
Officer
Jeffrey A. Boehmer..... 32 Vice President Finance
Randolph B. Braun...... 40 Vice President Sales and Marketing
David L. Gilbert....... 48 Vice President Engineering
Homer N. Holden........ 61 Vice President - Research and
Product Development
John R. Wright, Jr..... 37 Vice President Operations
The principal occupation and business experience during the last five years
of the executive officers of the Company are as follows:
Pierre Desjardins joined the Company in September 1996 as President and
Chief Executive Officer. From 1990 to 1994, he was President and Chief
Executive Officer of Domtar, Inc., a publicly held Canadian pulp and paper
corporation. He is currently a director for Discreet Logic, a publicly held
Canadian company that develops, assembles, markets, and supports systems for
creating, editing and compositing imagery and special effects for film and
video, as well as Canam Manac Group, Inc., a publicly owned Canadian industrial
corporation engaged in the manufacture of construction steel components and
trailers in Canada, the United States, France and Mexico.
Jeffrey A. Boehmer joined the Company as an accountant in 1987. From 1990
until 1996, Mr. Boehmer served as Operations Manager, Vice President Operations
from January 1996 until June 1997, and presently Vice President Finance. Mr.
Boehmer has also served as Secretary of the Company since 1994.
Randolph B. Braun joined the Company as Director of Marketing in April 1995
and became Vice President of Sales and Marketing in January 1996. Prior to
joining the Company, from 1992 to 1995, Mr. Braun was a Sales and Marketing
Account Executive for Mark IV Automotive, concentrating on customers in the
Pacific Rim and the Japanese auto manufacturers transplanted in the United
States.
David L. Gilbert joined the Company in March of 1996 as Vice President
Engineering. Prior to joining the Company, from 1992 to 1996, Mr. Gilbert was
Manager of Program Development with Mark IV automotive. In this position he was
responsible for establishing new manufacturing plants in Europe.
Homer N. Holden joined the Company as Director of Research in 1990 and
became Vice President - Research and Product
47
<PAGE>
Development in 1992. Prior to joining the Company, from 1988 to 1990, Mr.
Holden managed the Plastic Products Development Laboratory at Dayco.
John R. Wright, Jr. joined the company in June 1997 as Vice President
Operations. Prior to joining the Company, from 1982 to 1997, Mr. Wright was
Director of Materials Management for Lukens, a specialty steel manufacturer.
Prior responsibilities at Lukens included Corporate planning, manager, and
various sales positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
The Company's Common Stock (the "Common Stock") commenced trading on the
Nasdaq Stock Market National Market System ("Nasdaq NMS") under the symbol TCIX
on February 25, 1994, the date on which the Company completed its initial public
offering (the "Offering"). Prior to the Offering there was no public market for
the Common Stock. As of February 27, 1998, the Company had 17 shareholders of
record and approximately 459 beneficial owners of the Common Stock. The Company
has been advised by Nasdaq NMS that the Company's net tangible assets do not
meet NASDAQ's criteria for continued listing on the Nasdaq NMS. On March 13,
1998, the Company's principal shareholder purchased from the Company 400 shares
of authorized perpetual preferred stock at $10,000, cash, per share or $4
million in the aggregate. This $4 million equity infusion is expected to cause
the Company to meet NASDAQ's listing requirements and should permit the Company
to maintain its NASDAQ NMS listing over the foreseeable future.
The following table sets forth the quarterly ranges of high and low sale
prices, and the closing sale price, for shares of the Common Stock for the
periods indicated. Such prices represent quotations between dealers and do not
include mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
Sale Prices
------------------ Closing
High Low Sale Price
--------- -------- ----------
1997
- ----
First Quarter... $ 3 $ 2 3/8 $ 3
Second Quarter.. 3 2 1/4 2 5/8
Third Quarter... 2 15/16 2 1/4 2 5/8
Fourth Quarter.. 2 7/8 2 3/16 2 3/4
48
<PAGE>
1996
- ----
First Quarter... $ 5 $ 3 1/4 $ 3 5/8
Second Quarter.. 3 3/4 2 1/4 3 1/2
Third Quarter... 4 1/4 1 27/32 3 1/4
Fourth Quarter.. 3 1/2 2 1/4 3 3/8
The Company has not paid any cash dividends on the Common Stock in the past
and does not anticipate that any cash dividends will be declared or paid in the
foreseeable future. The Company's current line of credit facility prohibits the
payment of any dividends by the Company without the lender's prior written
consent.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included on Page 3 of the Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this Item is included on Pages 4 through 7 of the
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited Consolidated Financial Statements of the Company at December
31, 1996 and 1997 and for the three years ended December 31, 1997 required by
this Item are included on Pages 9 through 21 of the Annual Report. No
supplementary financial data is required to be included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 12, 1998, the Company engaged Grant Thornton LLP as the
Company's principal accountant to audit the Company's financial statements. The
Company did not consult with Grant Thornton LLP regarding any accounting matter
during the two most recent fiscal years or any subsequent interim period prior
to engaging Grant Thornton LLP.
The following information is set forth in accordance with the relevant
provisions of Item 304 of Regulation S-K:
Item 304(a)(1)--
(i) On December 3, 1997, Price Waterhouse LLP resigned as the
independent accountants of the Registrant.
(ii) The reports of Price Waterhouse LLP on the financial statements
for the past two fiscal years contained no adverse opinion or
disclaimer of
49
<PAGE>
opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.
(iii) Not applicable.
(iv) In connection with its audits for the two most recent fiscal
years and through December 3, 1997, there have been no
disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Price Waterhouse LLP,
would have caused them to make reference thereto in their report
on the financial statements for such years, except as described
in (A) below:
(A) During the third quarter of 1997, the Company sustained a
$20.4 million operating loss due in large measure to an $18
million warranty charge and certain other charges of $2.4
million. Based on its review of all evidence and other
information available to it at September 30, 1997, the
Company recorded a $6.8 million tax benefit represented by
deferred tax assets which management believes are fully
realizable, based on the Company's historical results of
operation, management's forecast of future taxable income,
and other factors. Based on procedures performed in
connection with its review of the Company's unaudited
financial information for the quarter ended September 30,
1997, Price Waterhouse LLP stated the Company should record
a substantial valuation allowance because, in its view, the
objective evidence indicated it is more likely than not that
such deferred assets will not be fully realized. This
matter was discussed by the Company's Audit Committee with
representatives of Price Waterhouse LLP.
This disagreement between the Company and Price Waterhouse
LLP, which occurred prior to the commencement of the 1997
year-end audit process, was not resolved at the time of
Price Waterhouse LLP's resignation.
The Company has evaluated whether a valuation allowance is
appropriate under all the facts and circumstances existing
at December 31, 1997, in connection with the 1997 audit
process and concluded that a valuation allowance of $275,465
is required to cover
50
<PAGE>
various state net operating loss carryforwards with
relatively short carryforward periods. Grant Thornton LLP
concurs with the Company's determination that no additional
valuation allowance is required.
The Company is unable to quantify the amount of the
required valuation allowance. A substantial valuation
allowance would have reduced the Company's consolidated
assets, net worth, and net income by the amount of the
increase in the valuation allowance.
(B) The Audit Committee of the Registrant's Board of Directors
discussed the subject matter of the disagreement referenced
above with Price Waterhouse LLP.
(C) The Registrant has authorized Price Waterhouse LLP to
respond fully to the inquiries of Grant Thornton LLP,
concerning the subject matter of the disagreement referenced
above.
(v) During the two most recent fiscal years and through December 3,
1997, there have been no reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K)).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference herein is the information appearing in the Proxy
Statement relating to the Company's Annual Meeting of Stockholders to be held on
April 17, 1998 (the "Proxy Statement") under the heading "Election of Directors
- --Continuing Directors and Nominees for Election as Director" and under the
heading "Report of the Compensation Committee on Executive Compensation --
Additional Information Regarding Directors and Officers."
Information regarding executive officers of the Company is presented in
Part I, Item 4A of this Form 10-K.
51
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference herein is the information appearing in the Proxy
Statement under the heading "Report of the Compensation Committee on Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference herein is the information appearing in the Proxy
Statement under the headings "General --Principal Stockholders" and "Election of
Directors -- Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. AUDITED FINANCIAL STATEMENTS
The financial statements of the Company listed on the index set forth below
are filed as part of this Annual Report on Form 10-K.
PAGE OF THE
ANNUAL REPORT
-------------
Reports of Independent Accountants............... 8-9
Consolidated Balance Sheets as of December 31,
1996 and 1997.................................. 10
Consolidated Statements of Operations for the
years ended December 31, 1995, 1996 and 1997... 11
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997............... 12
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997... 13
Notes to Consolidated Financial Statements....... 14
2. FINANCIAL STATEMENT SCHEDULES.
A schedule setting forth the warranty reserves of the Company as of
December 31, 1995, 1996 and 1997 is attached as an Appendix to this Annual
Report on Form 10-K.
52
<PAGE>
3. EXHIBITS.
The following is a list of the Exhibits required by Item 601 of Regulation
S-K and incorporated by reference herein or attached as Exhibits to this Annual
Report on Form 10-K.
3.1 Certificate of Incorporation of the Company incorporated herein by
reference to Exhibit 3.1 to the Quarterly Report of the Company on
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 Quarterly Report of the Company on Form 10-Q for the quarter
ended June 30, 1997.
3.3 Certificate Representing Shares of Class A Floating Rate Preferred
Stock and Related Statement With Respect to Shares - Domestic Business
Corporation, with Attachments (Exhibit 1).
4.1 Specimen of Common Stock Certificate of the Company, incorporated
herein by reference to Exhibit 4(a) to Registration Statement No. 33-
70456 on Form S-1 of the Company.
10.1 Stock Compensation Plan, dated January 14, 1994, incorporated herein
by reference to Exhibit 10(a) to Registration Statement No. 33-70456
on Form S-1 of the Company.*
10.2 Stock Compensation Plan, dated February 27, 1997 incorporated herein
by reference to Exhibit 10.2 to the Annual Report of the company on
Form 10-K for the fiscal year ended December 31, 1996.*
10.3 Employment Agreement between the Company and Marc Guindon,
incorporated by reference to Exhibit 10(b) to Registration Statement
No. 33-70456 on Form S-1 of the Company.*
10.4 Employment Agreement between the Company and Pierre Desjardins
incorporated herein by reference to Exhibit 10.4 to the Annual Report
of the Company on Form 10-K for the fiscal year ended December 31,
1996.*
10.5 Employment Agreement between the Company and Homer N. Holden,
incorporated by reference to Exhibit 10(o) to Registration Statement
No. 33-70456 on Form S-1 of the Company.*
53
<PAGE>
10.6 Employment Agreement between the Company and Jeffrey A. Boehmer,
incorporated by reference to the Quarterly Report of the Company on
Form 10-Q for the quarter ended March 31, 1994.*
10.7 Settlement Agreement between the Company Ameron, Inc., Environ
Products, Inc., Michael C. Webb, Keith Osborne, Intelpro Corporation,
and Buffalo Environmental Products Corporation, dated as of January
26, 1998. (Exhibit 2).
10.8 Secrecy Agreement, dated November 2, 1987, between the Company and
Remcon Plastics, Inc., incorporated herein by reference to Exhibit
10(m) to Registration Statement No. 33-70456 on Form S-1 of the
Company.
10.9 Settlement Agreement, dated December 16, 1994, between the Company and
the Settlement Counterparty, incorporated by reference to Exhibit
10.14 to the Annual Report on Form 10-K of the Company for the fiscal
year ended December 31, 1994.
10.10 Release of All Claims/Settlement Agreement, dated March 5, 1996,
between the Company and James Lawrence, incorporated by reference to
Exhibit 10.11 to the Annual Report of the Company on Form 10-K for the
fiscal year ended December 31, 1996.
10.11 Commitment Letter from Commercial Bank dated January 17, 1998 setting
forth terms of $10 million line of credit facility.
11 Statement re: Computation of per share earnings.
16 Letter of Price Waterhouse re: Change in Certifying Accountant,
incorporated by reference to Exhibit 16 to the Current Report on Form
8-K/A of the Company dated December 15, 1997.
21 Subsidiaries of the Company.
27 Financial Data Schedule (December 31, 1997).
27.2 Financial Data Schedule (December 31, 1996).
27.3 Financial Data Schedule (December 31, 1995).
___________________
54
<PAGE>
* Denotes compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1997:
(a) The Company's Current Report on Form 8-K, File No. 000-23454, as filed
with the Securities and Exchange Commission on December 10, 1997, and any
amendments thereto.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
/s/ Pierre Desjardins
-----------------------------------
Pierre Desjardins,
President and Chief Executive Officer
Dated: February 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Pierre Desjardins President and Chief February 27, 1998
- ---------------------------
Pierre Desjardins Executive Officer
/s/ Jeffrey A. Boehmer Vice President March 9, 1998
- ---------------------------
Jeffrey A. Boehmer Finance and
Secretary (Principal
Financial Officer)
/s/ Marc Guindon Director March 13, 1998
- ---------------------------
Marc Guindon
/s/ Jean-Claude Arpin Director March 4, 1998
- ---------------------------
Jean-Claude Arpin
/s/ Marcel Dutil Director March 4, 1998
- ---------------------------
Marcel Dutil
/s/ Paul Gobeil Director March 4, 1998
- ---------------------------
Paul Gobeil
/s/ Nycole Pageau-Goyette Director March 8, 1998
- ---------------------------
Nycole Pageau-Goyette
/s/ Bernard Gouin Director March 4, 1998
- ---------------------------
Bernard Gouin
/s/ Charles Frey, Sr. Director March 10, 1998
- ---------------------------
Charles Frey, Sr.
</TABLE>
56
<PAGE>
Schedule VIII
TOTAL CONTAINMENT, INC.
RESERVES
DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at Charged to Balance
beginning cost and at end
of period expenses Deductions of period
---------- ----------- ----------- -----------
<S> <C> <C> <C>
Warranty Reserve December 31, 1995 $1,803,925 $ 8,073,005(1) $(1,605,374) $ 8,271,556
December 31, 1996 $8,271,556 $ 2,877,806(2) $(6,666,348) $ 4,483,014
December 31, 1997 $4,483,014 $18,596,329(3) $(5,757,945) $17,321,398
</TABLE>
___________________
(1) Includes pipe warranty of $7,500,000 (See Notes 2 and 10).
(2) Includes Dayco receivable for replacement materials (See Note 10).
(3) Includes pipe warranty of $17,200,000 (See Notes 2 and 10).
57
<PAGE>
EXHIBIT 3.3
================================================================================
NUMBER SHARES
**4** **100**
-----------------------------------------------------------------
TOTAL CONTAINMENT, INC.
SERIES A FLOATING RATE PREFERRED STOCK
THE SHARES PRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER IS NOT
IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE
ENDORSED UPON ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE.
This Certifies that Finloc, Inc. is the
----------------------------------
registered holder of One Hundred - - - - - - - Shares of
----------------------------------
SERIES A FLOATING RATE PREFERRED STOCK HAVING THE PREFERENCE AND RIGHTS SET
FORTH IN THE STATEMENT WITH RESPECT TO SHARES AND EXHIBITS THERETO FILED WITH
THE SECRETARY OF STATE OF THE COMMONWEALTH OF PENNSYLVANIA ON MARCH , 1998,
A COPY OF WHICH IS ATTACHED HERETO.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____________________day of March A.D. 1998.
TOTAL CONTAINMENT, INC.
By /s/ Pierre Desjardins
----------------------------
Pierre Desjardins
Chairman, President and CEO
[CERTIFICATE SEAL APPEARS HERE]
================================================================================
<PAGE>
================================================================================
NUMBER SHARES
**2** **100**
-----------------------------------------------------------------
TOTAL CONTAINMENT, INC.
SERIES A FLOATING RATE PREFERRED STOCK
THE SHARES PRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER IS NOT
IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE
ENDORSED UPON ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE.
This Certifies that Finloc, Inc. is the
----------------------------------
registered holder of One Hundred - - - - - - - Shares of
----------------------------------
SERIES A FLOATING RATE PREFERRED STOCK HAVING THE PREFERENCE AND RIGHTS SET
FORTH IN THE STATEMENT WITH RESPECT TO SHARES AND EXHIBITS THERETO FILED WITH
THE SECRETARY OF STATE OF THE COMMONWEALTH OF PENNSYLVANIA ON MARCH , 1998,
A COPY OF WHICH IS ATTACHED HERETO.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____________________day of March A.D. 1998.
---------- ------
TOTAL CONTAINMENT, INC.
By /s/ Pierre Desjardins
----------------------------
Pierre Desjardins
Chairman, President and CEO
[CERTIFICATE SEAL APPEARS HERE]
================================================================================
<PAGE>
================================================================================
NUMBER SHARES
**3** **100**
-----------------------------------------------------------------
TOTAL CONTAINMENT, INC.
SERIES A FLOATING RATE PREFERRED STOCK
THE SHARES PRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER IS NOT
IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE
ENDORSED UPON ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE.
This Certifies that Finloc, Inc. is the
----------------------------------
registered holder of One Hundred - - - - - - - Shares of
----------------------------------
SERIES A FLOATING RATE PREFERRED STOCK HAVING THE PREFERENCE AND RIGHTS SET
FORTH IN THE STATEMENT WITH RESPECT TO SHARES AND EXHIBITS THERETO FILED WITH
THE SECRETARY OF STATE OF THE COMMONWEALTH OF PENNSYLVANIA ON MARCH , 1998,
A COPY OF WHICH IS ATTACHED HERETO.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____________________day of _________________ A.D._______.
TOTAL CONTAINMENT, INC.
By /s/ Pierre Desjardins
----------------------------
Pierre Desjardins
Chairman, President and CEO
[CERTIFICATE SEAL APPEARS HERE]
================================================================================
<PAGE>
================================================================================
NUMBER SHARES
**4** **100**
-----------------------------------------------------------------
TOTAL CONTAINMENT, INC.
SERIES A FLOATING RATE PREFERRED STOCK
THE SHARES PRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER IS NOT
IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE
ENDORSED UPON ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE.
This Certifies that Finloc, Inc. is the
----------------------------------
registered holder of One Hundred - - - - - - - Shares of
----------------------------------
SERIES A FLOATING RATE PREFERRED STOCK HAVING THE PREFERENCE AND RIGHTS SET
FORTH IN THE STATEMENT WITH RESPECT TO SHARES AND EXHIBITS THERETO FILED WITH
THE SECRETARY OF STATE OF THE COMMONWEALTH OF PENNSYLVANIA ON MARCH , 1998,
A COPY OF WHICH IS ATTACHED HERETO.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this _____________________day of _________________ A.D._______.
TOTAL CONTAINMENT, INC.
By /s/ Pierre Desjardins
----------------------------
Pierre Desjardins
Chairman, President and CEO
[CERTIFICATE SEAL APPEARS HERE]
================================================================================
<PAGE>
STATEMENT WITH RESPECT TO SHARES-DOMESTIC BUSINESS CORPORATION
DSCB: 15-1522
In compliance with the requirements of 54 Pa. C.S. 1522(b) (relating to
statement with respect to shares), the undersigned corporation, desiring to
state the designation and voting rights, preferences, limitations, and special
rights, if any, of a class or series of its shares, hereby states that:
1. The name of the corporation is: TOTAL CONTAINMENT, INC.
2. The resolution amending the Articles under 15 Pa. C.S. 1522(b) is set forth
in full in Attachment A appended hereto and made a part hereof.
3. The aggregate number of shares of such class or series established and
designated by (a) such resolution, (b) all prior statements, if any, filed
under 15 Pa. C.S. 1522 with respect thereto, and (c) any other provision
of the Articles is 400 shares.
4. The resolution was adopted by the Board of Directors or an authorized
committee thereof on February 20, 1998.
5. The resolution shall be effective upon the filing of this statement with
respect to shares in the Department of State.
IN TESTIMONY WHEREOF, the undersigned corporation has caused this
statement to be signed by a duly authorized officer thereof this 5th day of
March, 1998.
TOTAL CONTAINMENT, INC.
By: /s/ Pierre Desjardins
-------------------------------
Pierre Desjardins
Chairman, President & CEO
<PAGE>
Attachment A
TOTAL CONTAINMENT, INC.
Resolutions with Respect to
Series A Floating Rate Preferred Stock
of Total Containment, Inc.
RESOLVED, that pursuant to authority vested in the Board of Directors by
Article SIXTH of the Articles of Incorporation, this Board of Directors hereby
authorizes the issuance of a series of Preferred Stock of Total Containment,
Inc. (the "Company") and hereby fixes the designation and the terms and
conditions and relative rights and preferences thereof, in addition to those set
forth in the Articles of Incorporation, as follows:
1. Designation of Series. The distinctive designation of this series of
---------------------
Preferred Stock shall be as follows: "Series A Floating Rate Preferred Stock."
The Series A Floating Rate Preferred Stock does not have par value. Each share
of the Series A Floating Rate Preferred Stock shall be identical in all respects
with the other shares of Series A Floating Rate Preferred Stock.
2. Number of Shares. The number of authorized shares of Series A
----------------
Floating Rate Preferred Stock shall initially be four hundred (400). Shares of
the Series A Floating Rate Preferred Stock that are redeemed, purchased or
otherwise acquired by the Corporation may be reissued and the foregoing number
of authorized shares shall not be reduced by the number of shares of the Series
A Floating Rate Preferred Stock which are redeemed, purchased or otherwise
acquired by the Corporation.
3. Stated Value. Each share of Series A Floating Rate Preferred Stock
------------
shall have a "Stated Value" of Ten Thousand Dollars ($10,000) per share.
-1-
<PAGE>
4. Dividends.
---------
(a) The holders of shares of Series A Floating Rate Preferred Stock
shall be entitled to receive, as and if declared by the Board of Directors of
the Company, out of any funds legally available for the purpose, dividends which
accrue under this Paragraph 4, which shall be paid quarterly in arrears, on the
fifteenth day of each April, July, October, and January, with respect to the
preceding calendar quarter.
(b) The shares of Series A Floating Rate Preferred Stock shall accrue
dividends upon the Stated Value of such shares at a rate equal to the "Reference
Rate" (as hereinafter defined) as in effect on the first day of the second month
of each calendar quarter. However, if from time to time any accrued dividends
have not been timely paid in accordance with this Paragraph 4 and are in
arrears, then the shares of Series A Floating Rate Preferred Stock shall accrue
dividends upon the Stated Value of such shares at the "Arrearage Rate" (as
hereinafter defined) as in effect on the first day of each calendar quarter,
provided, that the Arrearage Rate shall apply from the date from which dividends
become in arrears until all dividends then due and owing have been paid. Accrued
dividends shall be calculated and paid upon the basis of a 360 day year and
equal calendar quarters of 90 days each.
(c) Unpaid dividends shall cumulate. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments which may be in arrears.
(d) No cash dividend or other cash distribution shall be declared or
paid on shares of common stock or on other stock of the Corporation ranking
junior to the Series A Floating Rate Preferred Stock in the payment of dividends
-2-
<PAGE>
unless and until all accrued and unpaid Series A Floating Rate Preferred Stock
dividends have been concurrently declared and concurrently paid.
5. Reference Rate, etc. The "Reference Rate" shall be the rate of
-------------------
interest per annum which the Company does pay (or, if no amounts are
outstanding, would pay) on the Company's line of credit borrowings from its
commercial bank (CoreStates Bank, N.A. on the date hereof) determined from time
to time on the relevant dates specified in Paragraph 4, above. The "Arrearage
Rate" shall be equal to the Reference Rate as in effect on the relevant date
plus one-half of one percent (0.5%). The full text of the Company's credit
agreement with CoreStates Bank, N.A. is on file (and the full text of any future
relevant credit agreement shall be on file) at the principal place of business
of the Company at A130 North Drive, Oaks, Pennsylvania, 19456, and relevant
portions thereof will be provided, on request and without cost, to any
shareholder.
6. Liquidation Rights.
------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the Series A Floating
Rate Preferred Stock shall be entitled to receive, before any payment in regard
to or distribution of the assets of the Company shall be made to or set apart
for any class or classes of common stock or other stock of the Company ranking
junior to the Series A Floating Rate Preferred Stock in the distribution of
liquidation proceeds, an amount equal to the Stated Value per share, plus an
amount equal to all dividends accrued and unpaid thereon to the date of final
distribution to such holders; but such holders shall be entitled to no further
payments whatsoever.
-3-
<PAGE>
(b) None of the following shall be considered a liquidation,
dissolution or winding up of the Company within the meaning of this Paragraph 6:
(i) a consolidation or merger of the Company with or into any
other corporation;
(ii) a merger of any other corporation into the Company;
(iii) a reorganization of the Company;
(iv) the purchase or redemption of all or part of the
outstanding shares of any class or series of the Company;
(v) a sale or transfer of all or any part of the assets of the
Company;
(vi) a share exchange to which the Company is a party; or
(vii) a division of the Company.
7. No Conversion. The holders of Series A Floating Rate Preferred Stock
-------------
shall not have the right to convert such stock into any other shares, whether
common stock or other stock ranking senior or junior to the Series A Floating
Rate Preferred Stock.
8. Redemption.
----------
(a) Right to Redeem. Subject to the limitations set forth in this
---------------
Paragraph 8(a), the Company may in its sole and absolute discretion at any time
and from time to time redeem some or all outstanding shares of Series A Floating
-4-
<PAGE>
Rate Preferred Stock at a redemption price equal to the Stated Value per share
plus any accrued and unpaid dividends thereon to the redemption date. Redemption
shall be made following notice given as hereinafter specified. The redemption
price shall be payable in cash. The Company may effect a redemption of some or
all outstanding shares of Series A Floating Rate Preferred Stock only if:
(i) after giving effect to the redemption, the Company's net
tangible assets (which for purposes hereof shall mean the Company's total assets
minus its total liabilities and goodwill) is equal to or greater than Four
Million Five Hundred Thousand Dollars ($4,500,000) at the end of any fiscal
quarter; or
(ii) such redemption shall have been approved by the
affirmative vote of at least a majority of the members of the audit committee of
the Company's Board of Directors who (i) are not employees or officers of the
Company, (ii) are independent of the holders of Series A Floating Rate Preferred
Stock and, (iii) who have no financial or beneficial interest in the Series A
Floating Rate Preferred Stock or in the redemption thereof; and
(iii) Such redemption shall have been evidenced by a
resolution, certified as true and correct by the appropriate officer of the
Company.
(b) Notice. Notice of every redemption of shares of Series A
------
Floating Rate Preferred Stock shall be mailed by first class mail, postage
prepaid, addressed to the holders of record of the shares to be redeemed at
their respective last addresses as they shall appear on the books of the
Corporation. Such mailing shall be at least 5 days prior to the redemption date;
but failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the
-5-
<PAGE>
validity of the proceeding for the redemption of any shares to be redeemed. The
notice of redemption shall state: (i) the redemption date ("Redemption Date")
determined by the Board of Directors of the Company in compliance with
subparagraph (a); (ii) the amount of accrued and unpaid dividends on each share
and the amount of the redemption price; (iii) that on the Redemption Date the
redemption price plus the amount of accrued but unpaid dividends will become due
and payable upon each share as of the close of business on the business day
prior to such Redemption Date; and (iv) the place or places where certificates
representing the shares to be redeemed are to be surrendered for payment of the
redemption price.
(c) Deposit of Funds. If notice of redemption shall have been duly
----------------
given, and if on or before the Redemption Date specified therein the Company
shall have deposited the funds necessary for such redemption with a Qualified
Institution (as defined below) in trust for the pro rata benefit of the holders
of the shares called for redemption, then, notwithstanding that any certificates
for shares so called for redemption shall not have been surrendered for
cancellation, and after the Redemption Date, all shares so called for redemption
shall no longer be deemed to be outstanding and all other rights with respect to
such shares shall forthwith cease and terminate, except only the right of the
holders thereof to receive from such Qualified Institution at any time after the
Redemption Date the funds so deposited. Any interest accrued on such funds and
not necessary to pay for shares redeemed shall be paid to the Corporation from
time to time. Any funds so set aside or deposited, as the case may be, and
unclaimed at the end of two years from the applicable Redemption Date shall, to
the extent permitted by law, shall be released or repaid to the Company, after
which repayment the holders of the shares so called for redemption shall look
only to the Company for payment thereof. "Qualified Institution" means a bank or
trust company organized and in
-6-
<PAGE>
good standing under the laws of the United States of America or of the State of
Pennsylvania, shall be doing business in Pennsylvania, shall have capital,
surplus and undivided profits aggregating at least $25,000,000 according to its
last published statement of condition, and shall be identified in the notice of
redemption.
(d) Certain Amendments Prohibited. The provisions of Paragraph 8(a)
-----------------------------
hereof shall not be amended or superseded, unless such amendment shall have been
approved by the affirmative vote of at least a majority of the members of the
audit committee of the Company's Board of Directors who (i) are not employees or
officers of the Company, (ii) are independent of the holders of Series A
Floating Rate Preferred Stock, and (iii) have no financial or beneficial
interest in the Series A Floating Rate Preferred Stock or in the redemption
thereof. The provisions of Paragraph 8(d) hereof, which specify the manner in
which Paragraph 8(a) hereof shall be amended, constitute a covenant between the
Company, the holders of the Company's common stock, and the holders of the
Series A Floating Rate Preferred Stock.
9. Voting. The shares of Series A Floating Rate Preferred Stock shall have
------
no voting rights whatsoever.
-7-
<PAGE>
EXHIBIT 10.7
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
---------------------------------------
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (collectively, "Agreement") is
entered into by and between Total Containment, Inc. ("TCI"), Ameron, Inc.
("Ameron"), Environ Products, Inc. ("Environ"), Michael C. Webb ("Webb"), Keith
Osborne ("Osborne"), Intelpro Corporation ("Intelpro") and Buffalo Environmental
Products Corporation ("Buffalo") (Osborne, Intelpro and Buffalo will
collectively be referred to as "the Osborne Group") as of the date of execution
of this Agreement by the last party hereto (the "Execution Date"). The Agreement
is intended by the parties to be binding in its entirety on themselves, their
employees, agents, attorneys, successors, assigns and other representatives of
whatever kind.
RECITALS
--------
WHEREAS, TCI and the Osborne Group were engaged in a patent interference
proceeding before the Patent and Trademark Office (the "Interference")
concerning, among other things, priority of ownership of the invention claimed
in Osborne application serial no. 07/286,893;
WHEREAS, Ameron and the Osborne Group entered into a certain Agreement for
Purchase of a Non-Exclusive License, dated August 26, 1992 (the "License
Agreement") pursuant to which, among other things, Ameron paid the Osborne Group
prepaid royalties in the amount of $1,000,000.00 and the Osborne Group granted
a license to Ameron to practice the inventions referenced therein (the
"Inventions");
WHEREAS, Ameron and the Osborne Group entered into a certain Supplement to
Ameron, Inc./Osborne License Agreement, dated July 22, 1994 (the "Supplemental
Agreement") pursuant to which, among other things, Ameron paid the Osborne
Group prepaid royalties in the amount of $950,000.00 and the Osborne Group
<PAGE>
granted Ameron the right to enter into one sublicense agreement permitting an
Ameron sublicensee to utilize the Inventions;
WHEREAS, Ameron and Environ entered into a certain licensing agreement
dated July 22, 1994 (the "Ameron/Environ License Agreement") pursuant to which,
among other things, Environ paid $950,000.00 to obtain a sublicense from Ameron
to practice the Inventions;
WHEREAS, on December 16, 1994, TCI and the Osborne Group entered into a
Settlement Agreement (the "Settlement Agreement") pursuant to which, among other
things, TCI and the Osborne Group settled the Interference;
WHEREAS, Ameron and Environ filed Civil Actions against TCI and the Osborne
Group in the United States District Court for the Central District of
California, captioned at Civil Action Nos. 94-7871 HLH and 95-6464 HLH,
respectively, which were consolidated for pretrial and trial proceedings (the
"License Termination Action") contending, among other things, that the
termination of their rights under the License Agreement and Supplemental
Agreement was invalid;
WHEREAS, TCI and the Osborne Group filed answers to the complaints in the
License Termination Action and asserted certain counterclaims;
WHEREAS, the License Termination Action was tried before a jury in June and
July, 1996 and the Court dismissed certain of Ameron's and Environ's claims and
the jury found in favor of TCI and the Osborne Group on all of Ameron's and
Environ's remaining claims and all of TCI's and the Osborne Group's
counterclaims against Ameron and Environ were dismissed and/or withdrawn;
WHEREAS, judgment was entered in favor of TCI and the Osborne Group and
against Ameron and Environ in the License
2
<PAGE>
Termination Action and on January 6, 1997 the Court taxed costs in the amount of
$27,725.43 (the "Costs") in favor of TCI and the Osborne Group as prevailing
parties;
WHEREAS, Ameron and Environ filed appeals in the United States Court of
Appeals for the Ninth Circuit, captioned at Docket No. 97-55344, following the
determinations of the Court and jury in the License Termination Action (the
"Ameron and Environ Appeal");
WHEREAS, Ameron filed a Civil Action against the Osborne Group in the
United States District Court for the Central District of California, captioned
at Civil Action No. 96-6429, (the "First Refund Action") contending that the
Osborne Group was obligated to refund to Ameron prepaid royalties in the amount
of $1,000,000.00;
WHEREAS, on February 20, 1997 summary judgment was entered in favor of
Ameron and against the Osborne Group in the First Refund Action in the amount of
$1,046,575.34 plus interest (the "$1,000,000.00 Judgment");
WHEREAS, the Osborne Group filed an appeal in the United States Court of
Appeals for the Ninth Circuit, captioned at Docket No. 97-55491, following entry
of the $1,000,000.00 Judgment (the "Summary Judgment Appeal");
WHEREAS, the Osborne Group paid into the registry of the United States
District Court for the Central District of California the amount of
$1,200,000.00 as security (the "1,200,000.00 Security") for the $1,000,000.00
Judgment pending the appeal therefrom;
WHEREAS, Ameron filed a Civil Action against the Osborne Group in the
United States District Court for the Central District of California, captioned
at Civil Action No. 97-3486
3
<PAGE>
HLH, (the "Second Refund Action") contending that the Osborne Group was
obligated to refund to Ameron prepaid royalties in the amount of $950,000.00;
WHEREAS, the Osborne Group filed an answer to the complaint in the Second
Refund Action, filed a counterclaim against Ameron, and thereafter filed a
third-party complaint against TCI contending, among other things, that TCI was
obligated to reimburse the Osborne Group for the $1,200,000.00 Security as well
as for any amounts the Osborne Group was obligated to reimburse to Ameron or
Environ as a result of the termination of their license rights to the
Inventions;
WHEREAS, TCI filed a Civil Action against Environ and Webb in United States
District Court for the Eastern District of Pennsylvania, captioned at Civil
Action No. 91-7911 (the "Sump Litigation"), contending, among other things,
that Environ and Webb were infringing certain patents owned by TCI covering the
design of sumps;
WHEREAS, the Sump Litigation was tried and a verdict was rendered pursuant
to which, among other things, TCI was awarded certain royalties and attorneys'
fees, which verdict was appealed by TCI and cross-appealed by Environ and
affirmed in part and reversed in part and remanded by the United States Court of
Appeals for the Federal Circuit, which remand is currently pending before the
Court that originally tried the Sump Litigation;
WHEREAS, Environ filed an action in the Court of Common Pleas of Montgomery
County, Pennsylvania, against TCI, captioned at Civil Action-Law No. 97-14225
(the "Montgomery County Action"), contending, among other things, that TCI
breached certain duties and obligations to Environ resulting in Environ not
being obligated for TCI's counsel fees and costs in the Sump Litigation;
4
<PAGE>
WHEREAS, TCI and Intelpro filed a Civil Action against Environ currently
pending in the United States District Court for the Eastern District of
Pennsylvania, captioned at Civil Action No. 97-1020 asserting claims for patent
infringement, and Environ filed an action in the same Court, against TCI and
Intelpro captioned at Civil Action No. 97-707 asserting claims of
non-infringement and invalidity (the "Patent Infringement Actions");
WHEREAS, Environ has sold and is currently selling a product known as
GeoDuct (the "Current GeoDuct") on the asserted basis that it has a license for
such sales from the Osborne Group pursuant to the Supplement Agreement and
certain royalties on such sales calculated pursuant to the Supplemental
Agreement and the Ameron/Environ Agreement (the "Royalties") have been escrowed
by Ameron and Environ (a true and correct illustration of Environ's Current
GeoDuct is attached as Exhibit "A");
WHEREAS, to avoid the additional burden and expense of litigation, and
without the parties admitting liability to each other in any way whatsoever,
each of the parties to the Agreement wishes to compromise and settle certain
disputed claims and counterclaims.
NOW, THEREFORE, the parties to the Agreement, for and in consideration of
the promises expressed herein and intending to be legally bound thereby, do
hereby agree as follows:
AGREEMENT AND RELEASE
---------------------
1. On the Execution Date, TCI will wire transfer to an account
designated by Ameron in immediately available funds a sum equal to: (a)
$1,046,575.34; plus (b) accumulated interest on the $1,000,000.00 Judgement
totalling $4,918.90 per month and $163.96 per day until the Execution Date,
calculated in accordance with 28 U.S.C (S) 1961 on the basis of 5.64% from
February 20, 1997; plus (c) $80,000.00.
5
<PAGE>
2. On the Execution Date, Ameron will wire transfer to an account
designated by Environ in immediately available funds the sum of $78,504.81 paid
to it by Environ and escrowed by Ameron.
3. On the Execution Date, TCI will wire transfer to an account
designated by Environ in immediately available funds the sum of $444,919.06,
calculated as follows: (a) $950,000.00 (representing the refund sought in the
Second Refund Action); less (b) $266,576.13 (representing the Royalties); less
(c) $160,000.00 (representing all infringement damages, counsel fees,
costs, expenses and all other charges of any kind arising from the Sump
Litigation); less (d) $78,504.81 (representing the Royalties returned to Environ
by Ameron hereunder).
4. On the Execution Date, Environ may release for its own use and
benefit any and all Royalties currently held by it in escrow.
5. The parties agree that expect as explicitly provided for in this
Agreement, no party has any claim to any of the Royalties and the distribution
and application of the Royalties as set forth in this Agreement is binding and
final on all parties.
6. Effective immediately upon receipt of the funds described in
paragraphs 1, 2, and 3, above, Ameron and Environ acknowledge and agree that any
license rights ever granted to them by the Osborne Group pursuant to the License
Agreement and/or Supplemental Agreement, or otherwise, are terminated and that
they have no rights to manufacture, sell, distribute, produce or use, in any
way, the Inventions except as otherwise provided in paragraph 7 of this
Agreement.
6
<PAGE>
7. Notwithstanding the provisions of paragraph 6, hereof, the
parties agree as follows:
a. As of January 31, 1998, Environ shall cease the sale,
offering for sale, distribution, or use, in any way, of the
Current GeoDuct for the terms of U.S. Patent Nos. 5,553,971,
5,567,083 and 5,590,981 subject only to the right to resume
such sales in the event of a final, non-appealable
determination of invalidity or unenforceability of such
patents;
b. As of January 31, 1998 Environ consents to, and shall be
enjoined from the sale, offering for sale, distribution, or
use of Current GeoDuct for the terms of U.S. Patent Nos.
5,553,971, 5,567,083 and 5,590,981 subject only to the
right to resume such sales in the event of a final, non-
appealable determination of invalidity or unenforceability
of such patents;
c. Between the dates of December 10, 1997 and January 31, 1998,
Environ may sell no more than 25,000 lineal feet of Current
GeoDuct;
d. TCI and the Osborne Group release Environ, as well as
Environ's customers, distributors, sales agents,
manufacturing agents, and any all other representatives of
any kind or nature, from any and claims for patent
infringement that currently exist, may have existed, or
might in the future arise from the manufacture, sale,
offering for sale, distribution, production or use of the
7
<PAGE>
Current GeoDuct; provided, however, that such release shall only
release claims arising from the sale by Environ of Current
GeoDuct: (i) through December 9, 1997 and (ii) for sale of no
more than an additional 25,000 lineal feet of Current GeoDuct
during the period December 10, 1997 through January 31, 1998. The
parties further agree that the release provided for in this
subparagraph and paragraph 13 does not include, and Environ and
its customers, distributors, sales agents, manufacturing agents,
and any other representatives of any kind or nature, are
therefore not release from, any claims for patent infringement
that may be or have been asserted by TCI or the Osborne Group
against Environ as a result of Environ's GeoFlex secondary piping
system, any design of any product other than the Current GeoDuct,
or any other product; and
e. Environ agrees that in the Patent Infringement Actions
interrogatories 35-38 and document requests 19 and 20 in its
Second Set of Interrogatories and Requests for Production of
Documents and Things are hereby withdrawn with prejudice and
shall not be reasserted. To the extent that any previous
unanswered discovery request addressed issues relating to the
continuing existence of a license to practice the Inventions, no
further discovery on this matter shall be sought. TCI and
Intelpro shall have no duty to supplement discovery about the
existence of a license.
8
<PAGE>
8. Environ, TCI and Intelpro will execute a stipulation and order,
in the form attached hereto as Exhibit "B" and Environ, TCI and Intelpro agree
to use their best efforts to have the Court promptly enter such order.
9. Environ has advised the parties and the parties agree that the
total amount of Royalties arising as a result of the sale by Environ of Current
GeoDuct is $266,576.13 through January 31, 1998 including the $78,504.81 held in
escrow by Ameron; provided, however, that TCI shall be entitled to have an audit
of Environ conducted on its behalf, and at its expense, by no later than
February 28, 1998 to confirm the accuracy of the amount of the Royalties as
stated by Environ. In the event discrepancies in the Royalty amount are revealed
by any such audit, TCI and Environ agree to negotiate in good faith in an
attempt to resolve such discrepancies for a period not to exceed 10 days from
the date notice of such discrepancies is received by Environ. In the event such
negotiations do not finally resolve the discrepancies revealed by the audit, TCI
and Environ agree to submit such dispute to binding arbitration before a
mutually agreeable third party arbitrator. In the event TCI and Environ cannot
agree upon a third party arbitrator, TCI and Environ agree to submit the dispute
to the American Arbitration Association (the "AAA") for resolution by a single
arbitrator pursuant to the AAA's rules governing commercial disputes. In the
event an award is issued requiring the payment of additional Royalties by
Environ, such additional Royalties shall be paid by Environ within 15 days of
the date of the arbitration award. All parties to this Agreement agree that no
party other than TCI shall have any right to or interest in any recovery
obtained in such arbitration.
10. Ameron is not a party to litigation or agreements between and
among Environ, TCI and the Osborne Group (or any entity thereof). Accordingly,
it is not a party to nor is it bound by any of the terms of any "Whereas" clause
herein,
9
<PAGE>
beginning at page 4, line 12 and ending at page 5, line 15; nor by any of the
terms of paragraphs Nos. 7 to 9, inclusive; Nos. 13 to 16, inclusive; and Nos.
21 to 22; with the exception that Ameron will assert no claim for Royalties from
Environ as described herein.
11. Ameron Release of TCI and the Osborne Group: Ameron for itself and
-------------------------------------------
its successors and assigns, hereby fully and forever releases, waives,
discharges and covenants not to sue TCI and the Osborne Group, and their past
and present officers, directors, employees, attorneys, and agents and their
respective successors and assigns (collectively, the "TCI and Osborne Group
Releasees") from and in connection with any and all causes of action, suits,
claims, demands, counterclaims, setoffs and contributions, at law or in equity,
whether foreseen or unforeseen, whether known or unknown, which Ameron had, has
or may have against the TCI and Osborne Group Releasees for any liability for
any loss, damage, injury or expense of any kind arising from or relating to: (a)
the Osborne Group's execution of, entry into, or performance under the License
Agreement and Supplemental Agreement; (b) execution of, entry into or
performance of the Settlement Agreement by TCI and the Osborne Group; (c)
termination of Ameron's license rights to the Inventions; (d) termination of the
License Agreement and Supplemental Agreement; (e) any and all claims asserted by
Ameron in the License Termination Action; (f) refund of any royalties paid by
Ameron to the Osborne Group except as provided in Paragraphs 1 and 3, above; (g)
any and all claims asserted or pursued by Ameron in the Ameron and Environ
Appeal; (h) any and all claims asserted by Ameron in the First Refund Action;
(i) any and all claims asserted by Ameron in the Second Refund Action; (j) any
and all claims arising from and relating to the $1,000,000.00 Judgment; (k) any
and all claims arising from or relating to the $1,200,000.00 Security; (1) any
and all claims relating to the Royalties; (m) the license to the Inventions
granted by the Osborne Group to TCI; (n) manufacture, use,
10
<PAGE>
distribution, licensing, or sale of the Inventions or rights to the Inventions
by TCI or the Osborne Group; and/or (o) termination of the Interference.
12. TCI and the Osborne Group Release of Ameron: TCI and the Osborne
-------------------------------------------
Group, for themselves and their successors and assigns, hereby fully and forever
release, waive, discharge and covenant not to sue Ameron and Ameron's past and
present officers, directors, employees, attorneys and agents and their
respective successors and assigns (collectively, the "Ameron Releasees") form
and in connection with any and all causes of action, claims, demands,
counterclaims, setoffs and contributions, at law or in equity, whether foreseen
or unforeseen, whether known or unknown, which TCI or the Osborne Group had, has
or may have against the Ameron Releasees for any liability for any loss, damage,
injury or expense of any kind arising from or relating to: (a) the execution of,
entry into, or performance under the License Agreement and Supplemental
Agreement; (b) any claims asserted by TCI or the Osborne Group against Ameron in
the License Termination Action; (c) any claims asserted by the Osborne Group
against Ameron in the First Refund Action or the Second Refund Action; (d) the
Costs; (e) the Summary Judgment Appeal; or (f) the $1,200,000.00 Security.
13. Webb and Environ Release of TCI and the Osborne Group: Webb and
-----------------------------------------------------
Environ for themselves and their successors and assigns, hereby fully and
forever release, waive, discharge and covenant not to sue the TCI and Osborne
Group Releasees form and in connection with any and all causes of action, suits,
claims, demands, counterclaims, setoffs and contributions, at law or in equity,
whether foreseen or unforeseen, whether known or unknown, which Environ or Webb
had, has or may have against the TCI or Osborne Group Releasees for any
liability for any loss, damage, injury or expense of any kind arising from or
relating to: (a) the Osborne Group's execution of, entry into, or
performance under the License Agreement and Supplemental Agreement;
11
<PAGE>
(b) execution of, entry into, performance or effect of the Settlement Agreement
by TCI and the Osborne Group; (c) termination of Environ's license rights to the
Inventions; (d) termination of the License Agreement and Supplemental Agreement;
(e) any and all claims asserted by Environ in the License Termination Action;
(f) refund of any royalties paid by Ameron and/or Environ to the Osborne Group;
(g) any and all claims asserted or pursued by Environ in the Ameron and Environ
Appeal; (h) any and all claims asserted by Ameron in the First Refund Action;
(i) any and all claims asserted by Ameron in the Second Refund Action; (j) any
and all claims arising from or relating to the $1,000,000.00 Judgment; (k) any
and all claims arising from or relating to the $1,200,000.00 Security; (l) any
and all claims relating to the Royalties; (m) the license to the Inventions
granted by the Osborne Group to TCI; (n) any and all affirmative claims seeking
money damages relating to the manufacture, use, distribution, licensing, or sale
of the Inventions or rights to the Inventions by TCI or the Osborne Group; (o)
termination of the Interference; (p) any and all claims asserted by Environ in
the Montgomery County Action; (q) any and all claims asserted by Environ or Webb
in the Sump Litigation; (r) the settlement of the sump patent litigation between
TCI and the Osborne Group.
14. TCI and the Osborne Group Release of Environ and Webb: In
-----------------------------------------------------
addition to the release of claims set forth in paragraph 7, above, TCI and the
Osborne Group, for themselves and their successors and assigns, hereby fully and
forever release, waive, discharge and covenant not to sue Environ, Webb and
Environ's past and present officers, directors, employees, attorneys and agents
and their respective successors and assigns (collectively, the "Environ
Releasees") from and in connection with any and all causes of action, suits,
claims, demands, counterclaims, setoffs and contributions, at law or in equity,
whether foreseen or unforeseen, whether known or unknown, which TCI or the
Osborne Group had, has or may have against the Environ
12
<PAGE>
Releasees for any liability for any loss, damage, injury or expense of any kind
arising from or relating to: (a) the execution of, entry into, or performance
under the License Agreement and Supplemental Agreement; (b) any claims asserted
by TCI or the Osborne Group against Environ in the License Termination Action;
(c) any claims asserted by the Osborne Group against Ameron in the First Refund
Action or the Second Refund Action; (d) the Costs; (e) any claims asserted by
TCI for damages, costs, fees, expenses or attorneys fees, of any kind or nature,
against Environ in the Sump Litigation; (f) the Summary Judgment Appeal; (g) the
Royalties, expect as specifically provided for in this Agreement.
15. The Osborne Group Release of TCI and McDermott, Will & Emery:
------------------------------------------------------------
Upon receipt by the Osborne Group of the refund of the $1,200,000.00 security
from the Clerk of the United States District Court for the Central District of
California, the Osborne Group for themselves and their successors and assigns,
hereby fully and forever release, waive, discharge and covenant not to sue TCI,
and its past and present officers, directors, employees, attorneys and agents
and their respective successors and assigns and McDermott, Will & Emery and its
past and present partners, employees and agents (collectively, the "TCI
Releasees") from and in connection with any and all causes of action, suits,
claims, demands, counterclaims, setoffs and contributions, at law or in equity,
whether foreseen or unforeseen, whether known or unknown, which the Osborne
Group had, has or may have against the TCI Releasees for any liability for any
loss, damage, injury or expense of any kind arising from or relating to: (a) the
License Termination Action; (b) the Ameron and Environ Appeal; (c) the First
Refund Action; (d) the Second Refund Action; (e) the Summary Judgment Appeal;
(f) TCI's defense of the Osborne Group in the License Termination Action, the
Ameron and Environ Appeal, the First Refund Action, the Second Refund Action,
the Summary Judgment Appeal; (g) any claims asserted by the Osborne Group in its
third-party complaint
13
<PAGE>
against TCI in the Second Refund Action; (h) the $1,000,000.00 Judgment; (i) the
$1,200,000.00 Security; (j) Ameron's efforts to collect the $1,000,000.00
Judgment; (k) any costs, fees, damages or expenses of any kind or nature
incurred by the Osborne Group in connection with or as a result of the License
Termination Action, the Ameron and Environ Appeal, the First Refund Action, the
Second Refund Action, and/or the Summary Judgment Appeal; (1) any claim against
TCI asserting that the Osborne Group was damaged as a result of entry of the
$1,000,000.00 Judgment or filing and/or deposit of the $1,200,000.00 Security;
(m) any claim against TCI contending that TCI failed to comply with sections
2.2, 6.1, or 7.5 of the Settlement Agreement; (n) the Royalties; (o) any claim
against TCI contending that the Osborne Group is entitled to receive and/or
obtain any or all of the Royalties.
16. TCI Release of the Osborne Group: TCI for itself and its
--------------------------------
successors and assigns, hereby fully and forever releases, waives, discharges
and covenants not to sue the Osborne Group, and their past and present officers,
directors, employees, attorneys, and agents and their respective successors and
assigns (collectively, the "Osborne Group Releasees") from and in connection
with any and all causes of action, suits, claims, demands, counterclaims,
setoffs and contributions, at law or in equity, whether foreseen or unforeseen,
whether known or unknown, which TCI had, has or may have against the Osborne
Group Releasees for any liability for any costs, fees, loss, damage, injury or
expense of any kind arising from or relating to: (a) the License Termination
Action; (b) the Ameron and Environ Appeal; (c) the First Refund Action; (d) the
Second Refund Action; (e) the Summary Judgment Appeal; (f) any costs, fees,
losses, damages, injuries or expenses of any kind or nature incurred by TCI
settling or defending itself or the Osborne Group in the License Termination
Action, the Ameron and Environ Appeal, the First Refund Action, the Second
Refund Action, the Summary Judgment Appeal and/or the Montgomery County Action;
(g) any
14
<PAGE>
claim against the Osborne Group contending that the Osborne Group failed to
comply with sections 2.2, 6.1 or 7.5 of the Settlement Agreement; (h) the
Montgomery County Action; (i) the Royalties; (j) any claim against the Osborne
Group arising from or relating to the Royalties; (k) any claim for fees or costs
due to McDermott, Will & Emery relating to any action referenced in this
Agreement and TCI further agrees to hold the Osborne Group harmless from any
such claim by McDermott, Will & Emery.
17. Ameron and Environ, for themselves, their successors, and
assigns, mutually, fully and forever release, waive, discharge and covenant with
each other not to sue the other, their past and present officers, directors,
employees, attorneys, agents, successors and assigns, from and in connection
with any and all causes of action, suits, claims, demands, counterclaims, at law
or in equity, foreseen or unforeseen, whether known or unknown which either had,
has, or may have against each other for any and all liability of any kind
arising from or relating to: (1) the August 29, 1992 "License Agreement" between
Ameron and the Osborne Group; (2) the "Supplement Agreement" of July 22, 1994,
between Ameron and the Osborne Group; and (3) the "Ameron/Environ License
Agreement" of July 22, 1994 including but not limited to (a) the execution of
each document; (b) the implementation of either party of the Agreements; and (c)
litigation arising therefrom.
18. Immediately following compliance with Paragraphs 1 through 3,
above, counsel for the Osborne Group and Ameron will execute the Stipulation re
Disbursement in the form attached hereto as Exhibit "C" directing the Clerk of
the United States District Court for the Central District of California to
disburse the $1,200,000.00 Security, plus and accumulated interest thereon, to
the Osborne Group and all parties to this Agreement acknowledge and agree that
no party, other than the Osborne Group, has any right, title, interest or claim
to or in the $1,200,000.00 Security and the Osborne Group may receive and
15
<PAGE>
retain for their benefit the $1,200,000.00 Security free of any claim of any
other party to this Agreement.
19. Immediately following compliance with Paragraphs 1 through 3,
above, pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure,
counsel for the appropriate parties will, immediately following the Execution
Date, execute and file a notice in the form attached as Exhibit "D" notifying
the United States Court of Appeals for the Ninth Circuit that the Ameron and
Environ Appeal should be dismissed with prejudice with each party to bear its
own costs.
20. Immediately following compliance with Paragraphs 1 through 3,
above, pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure,
counsel for the appropriate parties will, immediately following the Execution
Date, execute and file a notice in the form attached as Exhibit "D" notifying
the United States Court of Appeal for the Ninth Circuit that the Summary
Judgment Appeal should be dismissed with prejudice with each party to bear its
own costs.
21. Immediately following the Execution Date, counsel for Environ
will file a praecipe in the form attached as Exhibit "E" notifying the Court of
--------
Common Pleas of Montgomery County, Pennsylvania that the Montgomery County
Action should be marked settled, discontinued and ended with prejudice, with
each party to bear its own costs.
22. Immediately following the Execution Date, counsel for TCI,
Environ and Webb will file a stipulation of dismissal in the form attached as
Exhibit "F" notifying the United States District Court for the Eastern District
of Pennsylvania that the Sump Litigation should be dismissed with prejudice with
each party to bear its own costs.
16
<PAGE>
23. Immediately following the Execution Date, counsel for Ameron and
the Osborne Group will file a stipulation of dismissal in the form attached as
Exhibit "G" notifying the United States District Court for the Central District
of California that the Second Refund Action, and all complaints filed in that
action, should be dismissed with prejudice with each party to bear its own
costs.
24. In the event it becomes necessary for any party or parties hereto
to initiate litigation due to the failure of any other party or parties hereto
to fulfill its or their obligations hereunder, or otherwise breach this
agreement, the prevailing party (parties) shall be entitled to reasonable
attorney fees from the party (parties) against which judgment is entered.
25. All the parties agree that the terms and conditions of this
Agreement will not be discussed, disclosed, or revealed, directly or indirectly,
to any person or entity, except for the disclosure necessary in connection with
the preparation of tax returns, the preparation of financial statements, and any
filings or reports necessary to be made with any regulatory body, or otherwise
required by law and except that the Osborne Group may disclose the terms and
conditions of this Agreement to counsel, and only counsel, to PICES by OPW and
its affiliates.
26. The parties acknowledge, having been advised by the counsel
listed below, that they and their duly authorized representatives and agents had
read the Agreement and that they fully know, understand, and appreciate its
contents and that they execute the Agreement and make the settlement provided
for herein voluntarily and of their own free will.
27. This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17
<PAGE>
28. This Agreement contains the entire Agreement among the parties on
the subject matter hereof, and supersedes all prior agreements and
understandings, oral and/or written. This Agreement may not be changed orally,
but may only be changed by writing signed by all parties. The invalidity of all
or any part of this Agreement will not render invalid the remainder hereof.
This Agreement will inure to the benefit of, and will be binding upon, the
parties hereto and their respective heirs, successors and assigns.
29. THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY
LEGAL COUNSEL AND ARE FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE
SECTION 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR."
THE PARTIES HERETO, BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVE ANY
RIGHTS THEY MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON
LAW PRINCIPLES OF SIMILAR
18
<PAGE>
AFFECT. THESE WAIVERS DO NOT, IN ANY MANNER, MODIFY THE OBLIGATIONS ASSUMED BY
THE PARTIES IN ANY OF THE PRECEDING PARAGRAPHS OF THIS AGREEMENT.
AGREED AS SET FORTH ABOVE:
_________________________________ TOTAL CONTAINMENT, INC.
Keith Osborne
By /s/ Pierre Desjardins
------------------------------
Dated:___________________________
Dated: Jan 22\98
--------------------------
Witness: [SIGNATURE ILLEGIBLE]
------------------------
BUFFALO ENVIRONMENTAL AMERON, INC.
PRODUCTS CORP.
By__________________________________ By______________________________
Dated:______________________________ Dated:__________________________
Witness:____________________________ Witness:________________________
INTELPRO CORP. ENVIRON PRODUCTS, INC.
By__________________________________ By______________________________
Dated:______________________________ Dated:__________________________
Witness:____________________________ Witness:________________________
________________________________
MICHAEL C. WEBB
Dated:__________________________
19
<PAGE>
APPROVED AS TO FORMS
_________________________________ ____________________________________
John L. Alex, Esquire Joseph J. O'Malley, Esquire
Lockwood, Alex, Counsel to Ameron, Inc.
Fitzgibbon & Cummings
General Counsel to the
Osborne Group
_________________________________ ____________________________________
Elliot Disner, Esquire Jeremy T. Ross, Esquire
Ervin, Cohen & Jessup, L.L.P. Schiffman & Ross
Counsel to the Osborne Group Counsel to Environ Products,
as Third Party Claimant in the Inc. and Michael C. Webb
Second Refund Action
\s\ Joseph Wolfson,
_________________________________ ------------------------------------
Allan L. Schare, Esquire Joseph Wolfson, Esquire
McDermott, Will & Emery Stevens & Lee
Defense Counsel to the Counsel to Total Containment,
Osborne Group Inc.
20
<PAGE>
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
[GeoDuct]
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
EXHIBIT A
<PAGE>
[ILLUSTRATION APPEARS HERE]
GeoDuct, a 4" flexible, corrugated conduit, offers the feature of pipe
removability while providing additional support against backfill.
EXHIBIT A - Page 2
------------------
<PAGE>
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
ENVIRON PRODUCTS, INC., :
:
Plaintiff, :
: Civil Action No. 97-707
vs. :
:
TOTAL CONTAINMENT, INC. :
and INTELPRO CORPORATION, :
:
Defendants. :
------------
TOTAL CONTAINMENT, INC. :
and INTELPRO CORPORATION, :
:
Plaintiffs, :
: Civil Action No. 97-1020
vs. :
:
ENVIRON PRODUCTS, INC., :
:
Defendant. :
CONSENT JUDGMENT RESOLVING ONLY ISSUES PERTAINING
TO ENVIRON'S CURRENT DESIGN OF GEODUCT AND
THE ASSERTION BY ENVIRON OF A SUB-LICENSE DEFENSE
-------------------------------------------------
AND NOW, this day of , 1998, it is hereby stipulated by,
between, and among Total Containment, Inc. ("TCI"), Intelpro Corporation
("Intelpro") and Environ Products, Inc. ("Environ") as follows:
1. As of January 31, 1998, Environ shall for the terms of U.S. Patents
5,553,971, 5,567,083, and 5,590,981 cease the manufacture, sale, offering for
sale, distribution, production or
EXHIBIT B
---------
<PAGE>
use, in any way ("prohibited acts"), of the current design of its GeoDuct
secondary containment pipe ("current GeoDuct") subject only to the right to
resume such prohibited acts in the event of a final, non-appealable
determination of invalidity or unenforceability of such patents. A true and
correct illustration of Environ's current GeoDuct is attached hereto and
incorporated herein as though fully set forth at length as Exhibit "A".
2. Environ consents to, and shall be, enjoined from the manufacture,
sale, offering for sale, distribution, production or use ("enjoined acts") of
its current Geoduct after January 31, 1998 for the terms of U.S. patents
5,553,971, 5,567,083 and 5,590,981 ("the patents") subject only to the right to
resume such enjoined acts in the event of a final, non-appealable determination
of invalidity or unenforceability of such patents.
3. Environ voluntarily strikes with prejudice Paragraphs 14 - 19 of Count
I of its Complaint for declaratory judgment in Case No. 97-707. Environ
voluntarily strikes with prejudice from its Answer in Case No. 97-1020 its First
Affirmative Defense and Fifth Affirmative Defense pertaining to the sub-license.
These affirmative defenses shall not be re-asserted.
4. Environ acknowledges that the sub-license has been terminated and
will not be asserted as a defense to this or any other infringement action.
-2-
<PAGE>
5. Environ agrees that Interrogatories 35 - 38 and Document Requests 19
and 20 in its Second Set of Interrogatories and Requests for Production of
Documents and Things are hereby withdrawn with prejudice and shall not be
re-asserted. To the extent that any previous unanswered discovery requests to
TCI, Intelpro or any other person addressed issues relating to the continuing
existence of a license to practice the Inventions, no further discovery on this
matter shall be sought. TCI and Intelpro shall have no duty to supplement
discovery about the existence of a license.
6. The parties agree that the issues raised in Environ's Motion to
Bifurcate are now moot and there is, consequently, no need for a trial on the
sub-licensing issue. The parties jointly request that the Court vacate its Order
of November 12, 1997.
7. Nothing in this Stipulation is intended by the parties to affect the
claims of Total Containment, Inc. and Intelpro Corporation that Environ's
Geoflex piping system infringes the '981 patent. Likewise, nothing in this
Stipulation is intended to affect the claims to Total Containment, Inc. and
Intelpro Corporation that any subsequent redesign of the current Geoduct or any
other product infringes the '971, '083 and '981 patents. All such claims are
specifically preserved.
-3-
<PAGE>
It is so stipulated.
WHITE AND WILLIAMS LLP SEIDEL, GONDA, LAVORGNA &
MONACO, P.C.
BY:_________________________
Francis P. Devine, III BY:___________________________
Michael N. Onufrak Joseph R. Delmaster, Jr.
1800 One Liberty Place Two Penn Center Plaza
Philadelphia, PA 19103-7395 Suite 1800
(215) 864-7174 Philadelphia, PA 19102
Attorneys for Total Attorneys for Environ
Containment, Inc. Products, Inc.
CONRAD, O'BRIEN, GELLMAN
AND ROHN, PC
BY:_________________________
John A. Guernsey
1515 Market Street
16th Floor
Philadelphia, PA 19102-1916
Attorneys for Intelpro Corporation
Approved and so Ordered.
It is Further Ordered that, for
Good Cause Shown, the Court's Order
of November 12, 1997 is hereby Vacated.
_______________________________________
Fullam, S.J.
-4-
<PAGE>
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
[GeoDuct
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
[ILLUSTRATION APPEARS HERE]
EXHIBIT A
<PAGE>
[ILLUSTRATION APPEARS HERE]
GeoDuct, a 4" flexible, corrugated conduit, offers the feature of pipe
removability while providing additional support against backfill.
EXHIBIT A - PAGE 2
------------------
<PAGE>
McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
2049 Century Park East, Suite 3400
Los Angeles, California 90067
(310) 277-4110
Attorneys for Defendants
Keith Osborne, Buffalo Environmental
Products Corporation and Intelpro Corporation
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
AMERON, INC., ) Case No. CV 96-6429 HLH
) (BQRX)
Plaintiff, )
v. ) STIPULATION RE DISBURSEMENT
) TO DEFENDANTS OF SUMS HELD IN
KEITH OSBORNE, BUFFALO ) COURT REGISTRY
ENVIRONMENTAL PRODUCTS, and )
INTELPRO CORPORATION, )
)
Defendants. )
)
)
)
______________________________
Plaintiff Ameron, Inc. and defendants Keith Osborne Buffalo
Environmental Products Corporation and Intelpro Corporation ("Defendants"), by
and through their respective counsel of record, hereby stipulate as follows:
WHEREAS, the Court on April 28, 1997 entered an order providing for,
among other things, the deposit of $1,200,000.00 in cash into the registry of
this Court as security for the pending appeal in this matter;
WHEREAS, Defendants deposited $1,200,000.00 in cash into the registry of
this Court, pursuant to this Court's April 28, 1997 Order and Local Rule 24.7,
on June 3, 1997;
EXHIBIT C
---------
<PAGE>
WHEREAS, the Court on June 12, 1997 entered an order providing that, among
other things, the clerk shall hold the $1,200,000.00 deposited by Defendants in
the registry of the Court in an interest-bearing account, in accordance with
Local Rule 22, in lieu of a supersedeas bond as security for the judgment
entered herein until the Court issues further orders concerning disposition of
said sums; and
WHEREAS, the parties have resolved this case and the pending appeal from
the Court's judgment herein.
NOW THEREFORE, it is hereby stipulated that:
1. Subject to approval of the Court, the Court shall order the Clerk of the
Court to pay to Defendants all amounts currently on deposit in the registry of
the Court (including accrued interest). Said order shall be in the form attached
hereto as Exhibit A.
Dated: December __, 1997 LAW OFFICES OF JOSEPH J. O'MALLEY
Joseph J. O'Malley
By: _____________________________
Joseph J. O'Malley
Attorneys for Plaintiff
Ameron, Inc.
Dated: December __, 1997 McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
By: _____________________________
Allan L. Schare
Attorneys for Defendants Keith
Osborne, Buffalo Environmental
Products Corporation and Intelpro
Corporation
-2-
<PAGE>
McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
2045 Century Park East, Suite 3400
Los Angeles, California 90067
(310) 277-4110
Attornerys for Defendants
Keith Osborne, Buffalo Environmental
Products Corporation and Intelpro Corporation
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
AMERON, INC., ) CASE No. CV 96-6429 HLH
) (BQRX)
Plaintiff, )
v. ) ORDER DIRECTING CLERK TO
) DISBURST TO DEFENDANTS ALL
KEITH OSBORNE, BUFFALO ) SUMS HELD IN COURT REGISTRY
ENVIRONMENTAL PRODUCTS, and )
INTELPRO CORPORATION, )
)
Defendants. )
)
)
____________________________ )
Based on the Stipulation Re Disbursemant To Defendants of Sums Held
In Court Registry filed by the parties herein on December __, 1997, and good
cause appearing therefor,
IT IS HEREBY ORDERED that:
1. The Clerk of this Court shall pay to defendant Buffalo
Environmental Products Corporation all amounts currently on deposit in the
registry of the Court in the above-captioned action, including accrued interest.
The Clerk shall mail such payment to defendant's counsel, Allan L. Schare, Esq.,
McDermott,
<PAGE>
Will & Emery, 2049 Century Park East, 34th Floor, Los Angeles, California 90067.
Dated: __________________ ___________________________________
The Honorable Harry L. Rupp
United States District Judge
Approved as to Form:
LAW OFFICES OF JOSEPH J. O'MALLEY
Joseph J. O'Malley
By: ____________________________________
Joseph J. O'Malley
Attorneys for Plantiff
Ameron, Inc.
McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
By: ____________________________________
Allan L. Schare
Attorneys for Defendants Keith
Osborne, Buffalo Environmental
Products Corporation and Intelpro
Corporation
-2-
<PAGE>
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
AMERON, INC., et al., ) No. 97-55344
)
Plaintiffs-Appellants, ) DC# CV-94-07871-HLH
) Central California
) (Los Angeles)
)
v. )
)
TOTAL CONTAINMENT, INC., et al., )
)
Defendants/Counter- )
claimants/Appellees )
)
__________________________________ )
)
AMERON, INC., ) No. 97-55491
) DC# CV-96-06429-HLH
Plaintiff-Appellee, ) Central California
) (Los Angeles)
v. )
)
KEITH OSBORNE, et al., ) STIPULATION RE
) DISMISSAL OF APPEALS
Defendants-Appellants. )
)
__________________________________ )
Pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure,
the parties to these appeals hereby stipulate and agree that the above-captioned
appeals should be dismissed
EXHIBIT D
---------
1
<PAGE>
with prejudice, with each party to bear its own costs.
________________________________
Joseph J. O'Malley, Esquire
801 N. Brand Blvd., Suite 950
Glendale, CA 91203-1243
(818) 543-3274
Counsel For AMERON, Inc.
Plaintiff-Appellant,
No. 97-55344 and
Plaintiff-Appellee
No. 97-55491
QUISENBERRY & BARBANEL
By______________________________
John N. Quisenberry, Esquire
2049 Century Park East, Suite 2200
Los Angeles, CA 90067
(310) 785-7966
Counsel for Environ Products,
Inc., Plaintiff-Appellant,
No. 97-55344
STEVENS & LEE
By /s/ Joseph Wolfson
------------------------------
Joseph Wolfson, Esquire
111 N. 6th St P.O. Box 679
Reading, PA 19603-0679
Counsel for Total Containment,
Inc., Defendant/Counter-claimant/
Appellee, No. 97-55344
McDERMOTT, WILL & EMERY
By______________________________
Allan L. Schare, Esquire
2049 Century Park East, Suite 3400
Los Angeles, CA 90067
(310) 277-4110
Counsel for Keith Osborne,
Buffalo Environmental Products;
Intelpro Corporation,
Defendants-Appellants,
No. 97-55491, Defendants-
Appellees, No. 97-55344
2
<PAGE>
Jeremy T. Ross, Esquire
Identification No.: 34824
Schiffman & Ross
1650 Market St. - 50th Floor
Philadelphia, PA 19103-7301
(215) 419-6471
_____________________________
:
ENVIRON PRODUCTS, INC. :
: COURT OF COMMON PLEAS OF
Plaintiff, : MONTGOMERY COUNTY,
: PENNSYLVANIA
vs. :
: CIVIL ACTION - LAW
TOTAL CONTAINMENT, INC. :
: No. 97-14225
Defendant. :
_____________________________:
PRAECIPE
--------
TO THE PROTHONOTARY:
Please mark this action settled, discontinued and ended with prejudice with
each party to bear its own costs.
DATED: _________________ SCHIFFMAN & ROSS
By___________________________
Jeremy T. Ross, Esquire
Attorney I.D. No. 34824
1650 Market St. - 50th Floor
Philadelphia, PA 19103-7301
(215) 419-6471
Attorneys for Environ Products,
Inc.
EXHIBIT E
---------
<PAGE>
IN THE UNITED STATES DISTRICT COURT FOR
THE EASTERN DISTRICT OF PENNSYLVANIA
TOTAL CONTAINMENT, INC., )
)
Plaintiff, )
)
v. ) Civil Action No. 91-7911 (RSG)
)
ENVIRON PRODUCTS, INC. and )
MICHAEL C. WEBB, )
)
Defendants. )
STIPULATION AND ORDER
AND NOW, this ____ day of __________________, it is hereby stipulated
by and between the parties that the following unresolved issues shall be
dismissed with prejudice, and this action marked "Terminated and Closed" by the
Clerk, with each party to bear its own costs: (1) damages on account of
defendant Environ Products, Inc.'s infringement on claim 5 of Plaintiff's U.S.
Patent No. 5,040,408 and (2) defendant Environ Products, Inc.'s liability to
plaintiff for its attorney fees, costs and
EXHIBIT F
---------
<PAGE>
expenses incurred in response to defendant's inequitable conduct defense.
DATED:___________________ STEVENS & LEE
By /s/ Charles J. Bloom
------------------------
Charles J. Bloom, Esquire
Joseph Wolfson, Esquire
11l N. 6th St., P.O. Box 679
Reading, PA 19607-0679
(610) 478-2000
Attorneys for Plaintiff,
Total Containment, Inc.
SCHIFFMAN & ROSS
By_________________________
Jeremy T. Ross, Esquire
1650 Market St., 50th Floor
Philadelphia, PA 19103-7301
(215) 419-6471
Attorneys for Defendants
Environ Products, Inc. and
Michael C. Webb
SO ORDERED:
____________________________________
U.S.D.J.
EXHIBIT F
---------
<PAGE>
McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
STEVEN M. GOLDSOBEL
2049 Century Park East, Suite 3400
Los Angeles, California 90067
(310) 277-4110
Attorneys for Defendants and Counterclaimants
Keith Osborne, Buffalo Environmental
Products Corporation and Intelpro Corporation
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
AMERON, INC., ) Case No. CV 97-3486 HLH
) (BQRX)
Plaintiff, )
v. ) STIPULATION OF DISMISSAL
)
KEITH OSBORNE, BUFFALO ) [F.R.C.P. 41(a)(1)(i) and
ENVIRONMENTAL PRODUCTS AND ) F.R.C.P. 41(a)(1)(ii)]
INTELPRO CORPORATION, )
)
Defendants )
)
____________________________________
Plaintiff Ameron, Inc. ("Ameron") and defendants Keith Osborne, Buffalo
Environmental Products Corporation and Intelpro Corporation (collectively, the
"Osborne Group"), by and through their respective counsel of record, hereby
stipulate and agree as follows:
1) The Complaint filed by Ameron and the Counterclaim filed by the
Osborne Group shall be and hereby are dismissed in their entirety with
prejudice pursuant to Federal Rules of Civil Procedure Rule
41(a)(1)(ii). Each party shall bear its own costs and attorneys' fees.
EXHIBIT G
---------
<PAGE>
2) The Third Party Complaint filed by the Osborne Group against Total
Containment, Inc., to which no responsive pleading has yet been filed,
shall be and hereby is dismissed in its entirety with prejudice
pursuant to Federal Rules of Civil Procedure Rule 41(a)(1)(i). The
Osborne Group shall bear its own costs and attorneys'
<PAGE>
fees in connection with the filing of the Third Party Complaint.
Dated: January __, 1998 LAW OFFICES OF JOSEPH J. O'MALLEY
Joseph J. O'Malley
By: ______________________________
Joseph J. O'Malley
Attorneys for Plaintiff
Ameron, Inc.
Dated: January __, 1998 McDERMOTT, WILL & EMERY
RICHARD K. SIMON
ALLAN L. SCHARE
STEVEN M. GOLDSOBEL
By: -______________________________
Allan L. Schare
Attorneys for Defendants and
Counterclaimants Keith Osborne,
Buffalo Environmental Products
Corporation and Intelpro Corporation
Dated: January __, 1998 ERVIN, COHEN & JESSUP LLP
ELIOT G. DISNER
ELLEN S. KORNBLUM
By: ______________________________
Eliot G. Disner
Attorneys for Third Party Plaintiffs
Keith Osborne, Buffalo Environmental
Products Corporation and Intelpro
Corporation
IT IS SO ORDERED.
DATED: _____________, 1998 ___________________________________
Hon. Harry L. Hudd
<PAGE>
Exhibit 10.12
CoreStates Bank, N.A.
2240 Butler Pike
Plymouth Meeting PA 19462
Fax 610 834 2089
[LOGO OF CORESTATES BANK APPEARS HERE]
January 17,1998
Total Containment, Inc.
422 Business Center
A 130 North Drive
P.O. Box 939
Oaks, PA 19456
Attention: Pierre Desjardins
President and CEO
Gentlemen:
CoreStates Bank is pleased to make the following commitment available:
Borrower(s): Total Containment, Inc., TCI Environment NV/Sa,
- ------------ Rene Morin, Inc., and American Containment, Inc.
("Borrower")
Lender: CoreStates Bank, N.A. ("Bank")
- -------
Loan Amount: $10,000,000 Secured Revolving Line of Credit.
- ------------
Use of Proceeds: Finance current assets and the expenses associated
- ---------------- with replacing defective pipe manufactured by Dayco
Corporation and general corporate purposes.
Loan Payments and
- -----------------
Advances: All remittances to be directed to a CoreStates
- --------- account. Collected funds will be applied to reduce
outstandings under the Loan Facility on a direct
------
application basis. Borrowing certificates are to be
-----------
submitted to the Bank on a weekly basis. Each
certificate will indicate a
<PAGE>
January 17, 1998
Total Containment, Inc. 2
current accounts receivable balance and the previous
month-end inventory amount.
Maturity Date: June 30, 1999
- --------------
Collateral: First, perfected, security interest in all of borrower's
- ----------- existing and future accounts, inventory, general
intangibles, and other business assets as defined in
current documentation. This facility will be cross-
collateralized with all other loans extended to the
Company by the Bank.
Borrowing Formula: Advances will not exceed the lesser of $10,000,000,
- ------------------ or the sum of the following:
Accounts: Loans of up to eighty percent (80%) of the net
---------
amount of eligible accounts receivable of the Company.
Eligible accounts receivable will be determined by the
Bank pursuant to general criteria which will be set
forth in the loan documentation. Eligible accounts
receivable shall exclude accounts which are unpaid more
than sixty (60) days past the original due date thereof,
but in any event are unpaid more than ninety (90) days
from the original invoice date, and accounts owed by an
account debtor which has more than fifty percent (50%)
of the aggregate amount thereof unpaid more than 90 days
past the original invoice date thereof. In addition, all
otherwise eligible receivables will exclude accounts
which are contra accounts, poor credits, employee or
affiliate accounts receivable, and those other accounts
which do not constitute collateral acceptable for
leading purposes as outlined in current documentation.
Subject to the Bank's determination, foreign accounts
receivable payable in the United States in U.S. dollars
may be eligible accounts receivable if a letter of
credit has been issued with respect to such foreign
accounts receivable or credit insurance satisfactory to
the Bank covers them or the Bank is otherwise satisfied
with the creditworthiness of the account debtor and its
ability to collect the foreign accounts receivable. Any
<PAGE>
January 17, 1998
Total Containment, Inc. 3
advance rate with respect to foreign accounts receivable
will be determined on an account by account basis.
Inventory: Loans of up to twenty-five percent (25%) of
---------
the value of eligible inventory of the Company, valued at
the lower of cost or market, as determined by the Bank,
with cost determined under the first-in-first-out method.
Eligible inventory will be determined pursuant to general
criteria which will be set forth in the loan
documentation. Generally, eligible inventory will exclude
packaging, slow-moving or obsolete inventory, and those
other items which do not constitute collateral acceptable
for lending purposes as outlined in current
documentation.
The inventory advance rate will temporarily increase to
35% from 7/31/98 through 3/31/99. At 4/30/99, the
inventory advance rate will revert to 25%. Inventory
advances will not exceed $2,500,000 during the 25%
advance rate periods and $3,300,000 during the 35%
periods. The advance rates referenced above are
conditional upon the Borrower's meeting their final
projections as measured by the Financial Covenants.
Guarantor(a): None
- ------------
Origination Fee: $50,000, payable at closing.
- ---------------
Fees: .25% of the unused portion of the revolving line of
- ---- credit, payable quarterly in arrears.
Interest Rate: CoreStates Bank, N.A.'s Prime Rate plus 1/2%, floating.
- ------------- Performance based pricing covenants will be incorporated
into the agreement based on performance parameters to be
achieved in the nine months ending 9/30/98.
Letters of Credit: 1.50% commission per annum.
<PAGE>
January 17, 1998
Total Containment, Inc. 4
Financial
- ---------
Covenants: Certain Financial Covenants to be mutually agreed to
- --------- by Bank and Borrower
Non-Financial
- -------------
Covenants: Customary for transactions of this type, such as
- --------- financial reporting, payment of taxes, compliance with
laws, maintenance of corporate existence, maintenance of
insurance, no material adverse change, no change in
ownership or basic business, such as mergers,
acquisitions, guarantees, other liens and other
indebtedness.
Events of Default: Customary for this type of facility, including but not
- ----------------- limited to:
1) Failure to pay principal, interest, or fees when
due;
2) Noncompliance with covenants;
3) Any representations or warranty shall prove to be
incorrect, false or misleading in a material respect
when made;
4) Insolvency, bankruptcy.
Cross Default: Loan will be cross defaulted with all other loans to
- ------------- Borrower from Bank.
Conditions Precedent: 1) Documentation satisfactory to the Bank and its
- -------------------- counsel. Documentation will include an agreed-upon
format for a warranty reserve/expenditure report.
2) Subject to receipt and satisfactory review by the
Bank of a Certificate of the Borrower that describes
in sufficient detail the components of the
$18,000,000 Reserve taken as of 9/30/97. Borrower
shall provide to the Bank a monthly report which
details the Warranty Expenditures for the current
period and year to date and reconciles to the
Certificate referenced above. Any additional
increases to the Dayco Warranty Reserve in excess of
$500,000 on a cumulative basis shall constitute a
default.
3) Borrowing Base Formula availability at closing of
$500,000.
<PAGE>
January 17, 1998
Total Containment, Inc. 5
4) Legal and out-of-pocket expenses incurred by
the Bank to document this transaction shall
be for the account of the Borrower.
5) Satisfactory review of Borrower's books and
records by the Bank's collateral auditors.
6) Fire and hazard insurance on all personal
and real property with the Bank named Lender
Loss Payee as its interests may appear on
all policies of insurance covering assets in
which the Bank has a security interest.
7) No material adverse change in the financial
condition of Borrower.
8) Satisfactory results in our continuing due
diligence including customary bank, trade,
and professional checkings.
9) Borrower will utilize CoreStates as primary
bank of account.
10) The existing $1,500,000 equipment revolving
facility will be reduced to $1,058,000, of
which $808,000 has been drawn down as of
this date. This limit anticipates financing
80% of the purchase and installation of
equipment (subject to terms in the existing
agreements).
11) Subject to the receipt and satisfactory
review by the Bank of the Borrower's monthly
financial statements, including Balance
Sheet, Income Statement and Cash Flow
Statement for the years 1998 and 1999.
Financial Reporting: 1) Borrower will deliver to Bank its annual
- -------------------- financial statements and 10-K within 90 days
of the close of its fiscal year; Quarterly
financial statements and 10-Q, within 45
days after the end of each quarter; and
Monthly financial statements within 30 days
of each month end. The annual financial
statements will be audited by an independent
accounting firm acceptable to the Bank.
2) Borrower will deliver to the Bank monthly,
within 15 days of month end: accounts
receivable and accounts payable agings, a
borrowing base summary certificate, and a
warranty reserve expenditure/progress
report.
<PAGE>
January 17, 1998
Total Containment, Inc. 6
Governing Law: Commonwealth of Pennsylvania
- -------------
Collateral Audits: Two (2) audits will be performed in the first twelve
- ----------------- months by Bank auditors. Cost of said audits to be
absorbed by the Borrowers Per audit, as follows:
- 100% of amounts up to $6,000; plus
- 50% of amounts over $6,000 but less than $10,000.
- Borrowers will not be responsible for any amounts in
excess of $10,000.
Bank reserves the right to conduct additional
collateral audits at its discretion.
This letter is intended solely for the Borrower, is not assignable by the
Borrower, and shall not benefit or be relied upon by any third party without
prior written consent of the Bank.
If the foregoing is satisfactory, please evidence that fact, intending to be
legally bound hereby, by having the copy of this letter enclosed for that
purpose signed by all parties indicated and returning the executed copy to us.
Unless the Bank receives acceptance of this letter by the Borrower on or before
February 20, 1998, the terms set forth herein shall, at the option of the Bank,
become null and void.
<PAGE>
January 17, 1998
Total Containment, Inc. 7
We at CoreStates are very pleased about this opportunity and look forward to a
mutually beneficial relationship between Total Containment, Inc. and CoreStates
Bank.
Very truly yours,
CoreStates Bank, N.A.
By: /s/ Charles H. O'Donnell V.P. for
----------------------------
Charles H. O'Donnell
Vice President
CHO/sjr
ACCEPTED AND AGREED, INTENDING TO BE LEGALLY BOUND
HEREBY ON February 20, 1998.
-----------
Total Containment, Inc.
By: /s/ Pierre Desjardins
----------------------------
Pierre Desjardins, President
TCI Environment, NV/SA
By: /s/ Pierre Desjardins
----------------------------
Pierre Desjardins, President
Rene Morin, Inc.
By: /s/ Jeffrey Boehmer
----------------------------
Jeffrey Boehmer, President
American Containment, Inc.
By: /s/ Jeffrey Boehmer
----------------------------
Jeffrey Boehmer, Secretary
<PAGE>
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNING PER SHARE
(Unaudited)
Twelve Months Ended
December 31,
1997 1996
---- ----
(In thousands)
Primary:
Average shares outstanding 4,642 4,642
Options were anti-dilutive - -
------- -----
Totals 4,642 4,642
------- -----
Net Income $(12,356) $ 398
------- -----
Per share amount $ (2.66) $ 0.09
------- -----
Fully diluted:
Average share outstanding 4,642 4,642
Options were anti-dilutive - -
------- -----
Totals 4,642 4,642
------- -----
Net Income $(12,356) $ 398
------- -----
Per share amount $ (2.66) $ 0.08
------- -----
<PAGE>
Exhibit 21
----------
List of Subsidiaries of
Total Containment, Inc.
Name Place of Organization
---- ---------------------
TCI Environment NV/SA Belgium
Rene Morin, Inc. Delaware
American Containment, Inc. Delaware
FMW, Inc. Delaware
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 612
<SECURITIES> 0
<RECEIVABLES> 8,087
<ALLOWANCES> (200)
<INVENTORY> 7,306
<CURRENT-ASSETS> 21,196
<PP&E> 9,443
<DEPRECIATION> 4,586
<TOTAL-ASSETS> 40,047
<CURRENT-LIABILITIES> 20,068
<BONDS> 0
0
0
<COMMON> 4,642
<OTHER-SE> (196)
<TOTAL-LIABILITY-AND-EQUITY> 40,047
<SALES> 45,649
<TOTAL-REVENUES> 45,649
<CGS> 49,294
<TOTAL-COSTS> 12,308
<OTHER-EXPENSES> 2,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 627
<INCOME-PRETAX> (19,465)
<INCOME-TAX> (7,108)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,356)
<EPS-PRIMARY> (2.66)
<EPS-DILUTED> (2.66)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 616
<SECURITIES> 0
<RECEIVABLES> 7,503
<ALLOWANCES> (50)
<INVENTORY> 7,248
<CURRENT-ASSETS> 18,994
<PP&E> 7,454
<DEPRECIATION> (3,580)
<TOTAL-ASSETS> 34,965
<CURRENT-LIABILITIES> 10,733
<BONDS> 0
0
0
<COMMON> 4,642
<OTHER-SE> 24
<TOTAL-LIABILITY-AND-EQUITY> 34,965
<SALES> 37,730
<TOTAL-REVENUES> 37,730
<CGS> 25,035
<TOTAL-COSTS> 10,665
<OTHER-EXPENSES> 508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362
<INCOME-PRETAX> 1,160
<INCOME-TAX> 762
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 337
<SECURITIES> 0
<RECEIVABLES> 6,366
<ALLOWANCES> (50)
<INVENTORY> 5,691
<CURRENT-ASSETS> 14,588
<PP&E> 5,465
<DEPRECIATION> (2,522)
<TOTAL-ASSETS> 30,702
<CURRENT-LIABILITIES> 6,364
<BONDS> 0
0
0
<COMMON> 4,642
<OTHER-SE> 22
<TOTAL-LIABILITY-AND-EQUITY> 30,702
<SALES> 39,069
<TOTAL-REVENUES> 30,069
<CGS> 31,131
<TOTAL-COSTS> 10,262
<OTHER-EXPENSES> 890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> (3,360)
<INCOME-TAX> (1,112)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,248)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
