UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number 0-23454
Total Containment, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2394872
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
422 Business Center, A130 North Dr., Oaks, PA 19456
(Address of principal executive offices ) (Zip Code)
(610) 666-7777
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 4,672,600 shares of Common Stock, par value $0.01 per
share were outstanding at July 30, 1999.
<PAGE>
Total Containment, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
December 31, 1998 and June 30, 1999 3
Condensed Consolidated Statement of
Operations - Three and six months
ended June 30, 1998 and 1999 4
Condensed Consolidated Statement of Cash
Flows - Six months ended June 30, 1998
and 1999 5
Notes to Condensed Consolidated
Financial Statements - June 30, 1999 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote
of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, June 30,
1998 1999
(Unaudited)
(In thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $132 $130
Accounts receivable, net 13,329 6,796
Inventories 7,623 8,245
Deferred income taxes 2,851 2,547
Other assets 767 759
Total current assets 24,702 18,477
Molds and tooling, net 438 367
Property and equipment, net 4,386 4,601
Patents, patent rights and licenses, net 310 280
Goodwill, net 5,792 5,652
Deferred income taxes 1,527 3,163
Total Assets $37,155 $32,540
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit borrowings $3,388 $5,570
Current portion of long-term debt 668 592
Accounts payable, trade and accrued expenses 6,412 4,454
Other payable 4,020 4,020
Warranty reserve 5,452 1,378
Total current liabilities 19,940 16,014
Long-term debt 1,727 1,511
Warranty reserve 667 2,656
Total liabilities 22,334 20,181
Shareholders' Equity:
Preferred stock - $10,000 stated value; authorized 400 shares;
400 shares issued and outstanding 4,000 4,000
Common stock - $0.01 par value;
authorized 20,000,000 shares;
4,652,600 and 4,672,600 shares issued and outstanding 47 47
Capital in excess of par value 13,756 13,808
Retained earnings (2,816) (5,324)
Equity adjustment from foreign
currency translation (166) (172)
Total shareholders' equity 14,821 12,359
Total Liabilities & Shareholders' Equity $37,155 $32,540
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $14,259 $7,136 $24,480 $14,906
Cost of sales (excluding warranty provision) 7,861 6,015 13,902 11,944
6,398 1,121 10,578 2,962
Warranty Provision 428 208 730 436
Gross Profit 5,970 913 9,848 2,526
Selling, general and administrative 3,543 2,920 6,399 5,893
Amortization of patents, licenses and goodwill 125 62 244 123
Income (loss) from operations 2,302 (2,069) 3,205 (3,490)
Interest expense 115 171 264 302
Income (loss) before income taxes 2,187 (2,240) 2,941 (3,792)
Income tax expense (benefit) 851 (851) 1,128 (1,438)
Net income (loss) 1,336 (1,389) 1,813 (2,354)
Preferred stock dividends 88 78 102 154
Net income (loss) applicable to common
shareholders $1,248 ($1,467) $1,711 ($2,508)
======= ======= ====== ========
Net income (loss) per common share $0.27 ($0.31) $0.37 ($0.54)
======= ======= ====== ========
Weighted average shares and share
used in computation of net income (loss)
per share 4,642 4,673 4,642 4,673
======= ======= ====== ========
Earnings (loss) per common share - diluted $0.25 $(0.31) $0.36 $(0.54)
======= ======= ====== ========
Weighted average shares used in computation
of net income (loss) per share - diluted 4,899 4,673 4,809 4,673
======= ======= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TOTAL CONTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
Six months ended
June 30,
1998 1999
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 1,813 (2,354)
Adjustment to reconcile net income (loss) to
net cash used for operating activities:
Depreciation and amortization 1,013 897
Change in operating assets and liabilities (3,432) 2,470
Change in warranty reserve (3,066) (2,085)
Net cash used for operating activities ($3,672) ($1,072)
Cash flows from investing activities:
Purchase of property and equipment (874) (872)
Net cash used for investing activities (874) (872)
Cash flows from financing activities:
Proceeds from the sale of preferred stock 4,000 0
Proceeds from the sale of common stock 20 52
Net borrowings (repayments) on long-term debt (404) (292)
Net borrowings (repayments) under line of credit 992 2,182
Net cash provided by financing activities 4,608 1,942
Net decrease in cash $62 ($2)
======= ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements of
Total Containment, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The results of operations of the Company for the three and six
months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for any other interim period or for
a full year. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Registrant
Company's Annual Report and Form 10-K for the year ended
December 31, 1998.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. Significant estimates made by management that
are reasonably subject to change include the warranty reserve
allowance for doubtful accounts and deferred tax assets.
New Accounting Pronouncements. On January 1, 1998, the
Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change
in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Prior period presentations have been restated to
conform to the provisions of SFAS No. 130. The adoption of SFAS
130 had no impact on the Company's financial position or results
of operations. The Company's total Comprehensive Income (loss)
for the quarters ended June 30, 1998 and 1999 was $1,287,000 and
$(1,360,000) and for the six months ended June 30, 1998 and 1999
was $1,764,000 and $(2,360,000), respectively.
The AICPA's Accounting Standards Executive Committee has
issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP segments an
internal use software project into stages and the accounting is
based on the stage in which a cost is incurred. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 for
costs incurred in those fiscal years for all projects, including
projects in progress when the SOP is adopted. The adoption of
SOP 98-1 did not have a material impact on the Company's
financial position or results of operations.
Note 2 - Inventories
The components of inventory consist of the following:
Dec. 31, June 30,
1998 1999
(In thousands)
Raw Materials $ 785 $ 717
Finished Goods 6,838 7,528
$ 7,623 $ 8,245
Note 3 - Line of Credit
In April 1998, the Company increased its overall working
capital line of credit with its bank to $10.0 million. At
June 30, 1999 the unpaid principal balance under the line of
credit was $ 5.6 million. This facility provides for financing of
working capital needs and equipment purchases and is secured by
the Company's receivables, inventory and other assets. As of
June 30, 1998, the Company met certain financial covenants
contained in the line of credit agreement and therefore received
a reduction in the interest rate effective September 1, 1998,
down to the prime rate.
Due to the losses the Company has sustained in the first and
second quarters of 1999, the Company was in technical default of
certain financial covenants of the line of credit agreement
regarding required earnings before interest, income taxes,
depreciation and amortization levels (EBITDA) and warranty
spending (primarily the pipe replacement program) in excess of
EBITDA. The Company and the bank have entered into a temporary
forbearance agreement which expires on August 17, 1999. This
agreement has reduced the overall maximum amount of the line of
credit from $10 million down to $7 million. The Company and the
bank continue to work to establish a longer-term plan to continue
to provide financing to the Company. As part of the temporary
forbearance agreement, the bank has waived the right to charge a
default rate of interest, which would be 2% in excess of the
current lending rate, through August 17, 1999. If the Company is
required to repay all or a significant amount of the outstanding
balance of the line of credit, and the Company is unable to find
an alternate source of financing, the Company's financial
condition and results of operations could be materially affected.
The bank has also notified the Company that the LIBOR-based
borrowing capability is no longer available and that it may not
provide an additional equipment loan to finance the Company's
expansion of its manufacturing line. See Part II, Item 5. Other
Information.
Note 4 - Sale of Preferred Stock
On March 17, 1998, the Company's principal shareholder
purchased from the Company 400 shares of authorized perpetual
Class A Floating Rate Preferred Stock of the Company at $10,000
cash per share (the "Preferred Stock"), or $4 million in the
aggregate. The perpetual Preferred Stock is entitled to receive,
as and if declared by the Company's Board, dividends at a
floating rate equal to the rate payable by the Company on its
line of credit with its commercial bank. Dividends are paid
quarterly in arrears, and if not declared or paid would cumulate
at the line of credit rate, plus 50 basis points. The preferred
stock: (i) does not possess voting rights, (ii) is not
convertible into common stock, and (iii) is not redeemable at the
option of the holder. The Preferred Stock is redeemable at the
option of the Company, but only (i) if and to the extent the
Company's net tangible assets at the end of any fiscal quarter
and after such dividend exceeds $4.5 million, or (ii) if at least
a majority of the independent and disinterested members of the
audit committee of the Company's Board of Directors approve such
redemption. The preceding provision relating to redemption
constitutes a covenant between the Company, the Company's
principal shareholder and its remaining shareholders and may not
be changed without the approval of at least a majority of the
independent and disinterested members of the audit committee of
the Company's Board of Directors.
As part of the Company's line of credit agreement, the bank
has the right to charge a default rate of interest, which is 2%
above the current prime rate. If the bank elects this right to
increase the rate of interest charged on the line of credit, the
interest rate experienced on the preferred stock would also
increase by 2%. The bank has waived its right to charge the
default rate of interest through August 17, 1999.
Note 5 - Warranty Reserves
The Company's Tank Jacket product line carries 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 product
liability claims and associated legal fees based upon its
industry knowledge and actual claims experience.
As a result of a review of piping problems initiated in
1996, the Company, during the third quarter of 1997, increased
its warranty reserve by approximately $18.6 million primarily to
cover the Company's estimate of the cost, anticipated to be
incurred over a two to three year period, of inspecting and
replacing pipe that had deteriorating cover material on the
retractable inner pipe portion of the Company's double-wall
underground fuel dispensing and containment systems installed
between 1990 and 1994 at approximately 3,000 remaining sites.
The deterioration results from a microbiological fungus, which,
under certain conditions, affects the outer layers of the
system's primary (inner) retractable pipe. The Company has
instituted litigation against the supplier of the pipe to recover
the cost the Company has sustained and will sustain to replace
such pipe, as well as other damages.
As a result of a review performed during the third quarter
of 1998 of the progress made regarding this replacement pipe
program, as well as the costs now expected to be incurred to
complete this process, the Company recorded, during the third
quarter of 1998, a reduction of the warranty reserve of
approximately $ 3.3 million. The Company has been able to
significantly reduce the cost of performing the pipe replacement
program by managing more efficiently the use of outside
contractors as well as controlling the costs incurred by the
Company's service crews.
Due to the decrease in the results of its operations during
the first and second quarters of 1999, the Company has
significantly slowed its pipe replacement program starting in
May 1999. The Company expects that it will continue to replace
the deteriorating pipe as results of operations allow it to
provide funds for such activities.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is a Pennsylvania corporation organized in 1986.
The Company is a leading manufacturer and distributor of
underground systems and products for the conveyance and
containment of petroleum and alcohol based motor vehicle fuels
from underground storage tanks to aboveground fuel dispensers.
The principal end users of the Company's products are service
stations, convenience stores and other retail sellers of
gasoline, gasohol and other motor vehicle fuels, government
bodies, utilities and other fleet vehicle operators.
In addition to historical information, this Form 10-Q
contains forward-looking information. The forward-looking
information contained herein is subject to certain risk and
uncertainties that could cause actual results to differ
materially from those projected. For example, risk and
uncertainties can arise with changes in: general economic
conditions, including their impact on capital expenditures;
business conditions in the manufacturing and distribution
industry; the regulatory environment; rapidly changing technology
and industry standards; competitive factors, including increased
competition with both national and international companies, new
services and products offered by competitors; and price
pressures. Readers are cautioned not to place undue reliance on
the forward-looking information included within, which reflects
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update this
forward-looking information to reflect events or circumstances
that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS - Second Quarter of 1999 compared to Second
Quarter of 1998
Net Sales
The Company's net sales for the quarter ended June 30, 1999,
were $ 7.1 million compared to $14.3 million for the
corresponding quarter in 1998, a decrease of 50.0%. The decrease
was attributable to a decrease in revenues from our field
operations at our American Containment, Inc. subsidiary, as well
as a decrease of product sales, primarily attributable to a
general slowdown in new construction and renovation of petroleum
service stations despite the large number of service stations
still not in compliance with the federally mandated regulations.
The recently announced merger plans of several large oil
companies has created short-term uncertainty regarding their
capital expenditure plans.
Gross Profit (Loss)
The primary component of the Company's cost of sales is the
product manufacturing costs incurred by the Company as well as
costs paid to various third party manufacturers. Other
components are the variable and fixed costs of operating the
Company's manufacturing and warehousing operations, depreciation
of molds, tools and equipment, and warranty expense. The
Company's gross profit, after the warranty provision for the
quarter ended June 30, 1999, was $ 913,000 compared to $ 6.0
million for the corresponding quarter in 1998. The decrease
resulted primarily from a decrease in product sales volume as
well as a decrease in the field operation sales volume.
Comparing margins before the effect of the warranty
provision, the Company experienced a decrease in gross profit
primarily from the decreased sales.
The Company's gross profit percentage after the effect of
the warranty provision decreased to 12.8% for the quarter ended
June 30, 1999 compared to a gross profit percentage of 41.9% for
the corresponding quarter in 1998. The decrease in the gross
profit margin is due to unabsorbed manufacturing costs
attributable to lower than expected manufacturing activity,
increased scrap levels due to production problems experienced by
our standard pipe vendor and higher freight costs.
Operating Expense
Selling, general and administrative expenses consist
primarily of salaries and related benefits, payroll taxes,
commissions, royalties, legal expenses and other general,
administrative and overhead costs. Selling, general and
administrative expenses for the quarter ended June 30, 1999 were
$ 2.9 million compared to $3.5 million for the corresponding
quarter in 1998. The decrease for the quarter resulted mainly
from a decrease in personnel headcount and activity levels due to
cost reductions initiated by the Company during the second
quarter. These reductions are expected to be more evident during
the third and fourth quarters of 1999.
Amortization of Intangibles
Amortization of intangibles consists of the amortization of
goodwill over a period of 40 years and the amortization of
various patents and licenses that are amortized on a straight-
line basis over the estimated lives of the patents (which range
from 13 to 17 years) at the acquisition date or subsequent
issuance date. The decrease in amortization expense to $ 62,000
for the quarter ended June 30, 1999 from $125,000 in 1998 is due
to the write off of a patent license in the third quarter of
1998.
Interest Expense
Interest expense for the quarter ended June 30, 1999 was $
171,000 compared to $115,000 for the corresponding quarter in
1998. Interest expense is incurred on term loans that were used
for purchasing equipment and under the Company's working capital
line of credit. The increase is due to an increase in the
average outstanding balance under the line of credit as compared
to the 1998 period.
Income Taxes
Income tax benefit for the quarter ended June 30, 1999 was
$851,000 compared to an income tax expense of $851,000 for the
corresponding quarter in 1998. The Company recorded income taxes
utilizing an effective tax rate of 38% during the 1998 and 1999
periods.
Net Income (Loss)
The Company's net loss for the quarter ended June 30, 1999
was $ 1.4 million compared to net income of $1.3 million for the
corresponding quarter in 1998. The decrease of $ 2.7 million in
net income (loss) for the quarter resulted from decreased sales
and a decrease in gross margin percentage. The Company has
reduced its spending and staffing levels and will continue to
monitor the industry and its short-term capital expenditure
plans.
Preferred Stock Dividends
The preferred stock dividend, approved by the Company's
Board of Directors, relates to the Company's sale, on March 17,
1998, of 400 shares of authorized perpetual Class A Floating Rate
Preferred Stock (the "Preferred Stock") to the Company's
principal shareholder at $10,000 cash per share, or $4.0 million
in the aggregate. The dividends have been accrued, but
currently the Preferred Stockholder has elected to defer the
actual cash payment of these dividends without penalty to the
Company.
RESULTS OF OPERATIONS - Six Months Ended June 30, 1999 vs. Six
Months Ended June 30, 1998
Net Sales
The Company's net sales for the six months ended June 30,
1999, were $ 14.9 million compared to $24.5 million for the
corresponding six months in 1998, a decrease of 39.1%. The
decrease was attributable to a decrease in revenues from our
field operations at our American Containment, Inc. subsidiary, as
well as a decrease of product sales, primarily attributable to a
general slowdown in new construction and renovation of petroleum
service stations despite the large number of service stations
still not in compliance with the federally mandated regulations.
The recently announced merger plans of several large oil
companies has created short-term uncertainty regarding their
capital expenditure plans.
Gross Profit (Loss)
The Company's gross profit after the warranty provision for
the six months ended June 30, 1999, was $ 2.5 million compared to
$ 9.8 million for the corresponding six months in 1998. The
decrease resulted primarily from a decrease in product sales
volume as well as a decrease in the field operation sales volume.
Comparing margins before the effect of the warranty
provision, the Company experienced a decrease in gross profit
primarily from the decreased sales.
The Company's gross profit percentage after the effect of
the warranty provision decreased to 16.9% for the six months
ended June 30, 1999 compared to a gross profit of 40.2% for the
corresponding six months in 1998. The decrease in the gross
profit margin is due to unabsorbed manufacturing costs
attributable to lower than expected manufacturing activity,
increased scrap levels due to production problems experienced by
our standard pipe vendor and higher freight costs.
Operating Expense
Selling, general and administrative expenses for the six
months ended June 30, 1999 were $ 5.9 million compared to $6.4
million for the corresponding six months in 1998. The decrease
for the six months ended June 30, 1999 resulted mainly from a
decrease in personnel headcount and activity levels due to cost
reductions initiated by the Company.
Amortization of Intangibles
The decrease in amortization expense to $ 123,000 for the
six months ended June 30, 1999 from $244,000 in 1998 is due to
the write off of a patent license in the third quarter of 1998.
Interest Expense
Interest expense for the six months ended June 30, 1999 was
$ 302,000 compared to $264,000 for the corresponding six months
in 1998. Interest expense is incurred on term loans that were
used for purchasing equipment and under the Company's working
capital line of credit. The increase is due to an increase in
the average outstanding balance of the line of credit as compared
to the 1998 period.
Income Taxes
Income tax benefit for the six months ended June 30, 1999
was $ 1.4 million compared to an income tax expense of $ 1.1
million for the corresponding six months in 1998. The Company
recorded income taxes utilizing an effective tax rate of 38%
during the 1998 and 1999 periods. In recognizing this benefit,
the Company increased its deferred tax asset on its balance
sheet. The Company currently believes that it is more likely
than not that this asset will be realized in future years as a
result of its operations, but will continue to monitor the
valuation of this asset on a quarterly basis.
Net Income (Loss)
The Company's net loss for the six months ended June 30,
1999 was $ 2.4 million compared to net income of $1.8 million for
the corresponding six months in 1998. The decrease of $ 4.2
million in net income (loss) for the quarter resulted from
decreased sales and a decrease in gross margin percentage. The
Company has reduced its spending and staffing levels and will
continue to monitor the industry and its short-term capital
expenditure plans.
Preferred Stock Dividends
The preferred stock dividend, approved by the Company's
Board of Directors, relates to the Company's sale of the
Preferred Stock.
Seasonality and Economic Conditions
The Company's sales are affected by the timing of planned
construction of new service stations and the retrofitting of
existing service stations by the end users, both of which are
influenced by inclement weather and general economic conditions.
During the quarter ended March 31, 1999, the Company experienced
adverse sales and operating results due to inclement weather.
The Company's sales have been adversely affected to a slight
extent due to the Asian economic crisis and political changes in
certain Latin American countries.
The recently announced merger plans of several large oil
companies have created short-term uncertainty regarding their
capital expenditure plans. During the quarter ended March 31,
and more significantly in the quarter ended June 30, 1999, the
Company experienced adverse sales and operating results due to a
reduction in capital expenditures by the large oil companies.
The Company's sales slightly benefitted during the first quarter
of 1999 from the increased order volume associated with the
activity related to upgrading to the Federally mandated
compliance regulations. The Company believes that a fair number
of sites have not yet been upgraded but cannot currently predict
when this compliance will be performed.
Financial Condition
On March 17, 1998, the Company sold 400 shares of the
Preferred Stock to the Company's principal shareholder at
$10,000, cash, per share or $4.0 million in the aggregate. For
more information, see "Part II. Item 5. Other Information."
The increase in the Company's inventory to $ 8.2 million as
of June 30, 1999, as compared to $7.6 million as of December 31,
1998, is attributable to building inventory during the first
quarter of 1999 for higher than experienced sales volumes in the
first and second quarters of 1999.
Liquidity and Capital Resources
The Company had working capital of $ 2.5 million and $4.8
million at June 30, 1999 and December 31, 1998, respectively.
During the first and second quarters of 1999, the Company
utilized its line of credit to fund its pre-tax loss of $ 3.8
million and make purchases of equipment of approximately $
872,000.
The Company satisfies its working capital needs primarily
through funds generated by operations and by borrowings under a
$10.0 million secured credit facility with a commercial bank.
The Company is currently in technical default of its credit
facility arrangement but is working with the bank in order to
continue to have available operating financing. As part of a
Temporary Forbearance Agreement that the Company and the bank
have approved, the credit facility was reduced to $7 million.
The Company is currently negotiating with the bank longer term
arrangements in order to continue to provide financing to the
Company, but is also exploring other financing arrangements with
other financial institutions. Management believes that it will
be able to secure financing which will be adequate to satisfy its
anticipated working capital requirements for the foreseeable
future. If the Company was unable to satisfactorily arrange
continued financing with its current bank, or replace the
existing financing arrangement with a satisfactory arrangement
with another financing source, the Company could experience
adverse operating results. See Note 3 of Notes to Condensed
Consolidated Financial Statements and Part II, Item 5., Other
Information.
Year 2000 Disclosure
Management initiated, early in 1998, an enterprise-wide
program to identify areas where Company owned or operated
computer hardware, software, electronically operated
manufacturing and support equipment, and any other application,
could be adversely impacted by the problems presented by the year
2000, and prepare these computer systems, applications, and other
equipment for continuing use through the year 2000. Assessment
and testing of all computer hardware and software and
manufacturing hardware and software is complete. The Company has
identified where a small amount of remediation must be performed
where a few older personal computers will be replaced.
Substantially all of its internal remediation was completed by
June 1999; however, despite its best efforts, business may be
interrupted with potentially material impact on its financial
position or results of operations if any of the following occur:
external supply of raw materials or utilities is delayed or
unavailable for an extended period; manufacturing systems fail;
or, central corporate computer systems fail. To limit the
effects of these potential failures, the Company has completed
corporate contingency planning guidelines and will prepare
contingency plans for potential disruptions of critical systems
or processes. Examples of contingency plans include
modifications to computer systems, ensuring availability of
additional information technology personnel during the critical
time period, backing-up systems at off-site facilities, making
alternate raw material supply arrangements, and preparing for
temporary shut-downs of certain plants and facilities. In
addition, the Company has standard operating procedures in place
for a safe and orderly shutdown of systems and facilities should
this be necessary.
The Company has incurred or 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 has cost approximately $350,000, substantially all
of which has already been incurred as part of the acquisition of
the Company's new information system.
In the opinion of management, the Company believes that all
of its important business resources, either currently or in the
near future, are expected to allow the Company to continue
operating through the year 2000 and that there will be no
disruption of any material business operation or capability.
Part II. Other Information
Item 1. Legal Proceedings
The legal action that is pending against Dayco Products,
Inc., in the United States District Court for the Eastern
District of Pennsylvania, which was reported in the Company's
Annual Report and Form 10-K for the fiscal year ended
December 31, 1998, was proposed to go to trial in July 1999.
However, the trial of this case has now been rescheduled for
January 31, 2000. Dayco Products, Inc. initiated a separate
legal action against the Company in February 1999 in the United
States District Court for the Western District of Missouri,
alleging that the Company is infringing certain patents held by
Dayco relating to hose couplings and is seeking, among other
things, a determination of infringement, damages and injunctive
relief. The Company believes that it has meritorious defenses to
this action. The Company's motion to have this case dismissed on
the basis that it makes claims that are already being litigated
in the Eastern District of Pennsylvania has been denied, and the
case will continue to be litigated in the District Court in
Missouri.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders (the "Meeting") of
the Company was held on April 16, 1999. Notice of the Meeting
was mailed to shareholders on or about March 24, 1999, together
with proxy solicitation materials prepared in accordance with
Section 14 (a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The Meeting was held for the following purposes:
1. To elect three Class II directors to hold office until
the 2002 Annual Meeting of Shareholders and their
successors shall have been elected and qualified
(Matter No, 1);
BL To ratify the appointment by the Company's Board of
Directors of Grant Thornton LLP as the Company's
independent auditors for the fiscal year ending
December 31, 1999 (Matter No. 2); and
There was no solicitation in opposition to the nominees
of the Board of Directors for election to the Board of
Directors. All nominees of the Board of Directors were
elected. The number of votes cast for or withheld, as
well as the number of abstentions and broker nonvotes
for each of the nominees for election to the Board of
Directors were as follows:
Abstentions and
Nominee For Withheld Broker Nonvotes
Pierre Desjardins 3,115,177 ___ ___
Marcel Dutil 3,115,177 ___ ___
Bernard Gouin 3,115,177 ___ ___
Abstentions and
For Withheld Broker Nonvotes
No. 2 3,115,177 ___ ___
A description of the Company's other pending legal
proceedings has been previously reported in the Company's Annual
Report and Form 10-K for the fiscal year ended December 31, 1998.
Item 5. Other Information
Due to the losses the Company has sustained in the first and
second quarters of 1999, the Company was in technical default of
certain financial covenants of the line of credit agreement
regarding required earnings before interest, income taxes,
depreciation and amortization levels (EBITDA) and warranty
spending (primarily the pipe replacement program) in excess of
EBITDA. The Company and the bank have entered into a temporary
forbearance agreement which expires on August 17, 1999. This
agreement has reduced the overall maximum amount of the line of
credit from $10 million down to $7 million. The Company and the
bank continue to work to establish a longer-term plan to continue
to provide financing to the Company. As part of the temporary
forbearance agreement, the bank has waived the right to charge a
default rate of interest, which would be 2% in excess of the
current lending rate, through August 17, 1999. If the Company is
required to repay all or a significant amount of the outstanding
balance of the line of credit, and the Company is unable to find
an alternate source of financing, the Company's financial
condition and results of operations could be materially affected.
The bank has also notified the Company that the LIBOR-based
borrowing capability is no longer available and that it may not
provide an additional equipment loan to finance the Company's
expansion of its manufacturing line.
The Company is currently negotiating with the bank longer
term arrangements in order to continue to provide financing to
the Company, but is also exploring other financing arrangements
with other financial institutions. Management believes that it
will be able to secure financing which will be adequate to
satisfy its anticipated working capital requirements for the
foreseeable future. If the Company was unable to satisfactorily
arrange continued financing with its current bank, or replace the
existing financing arrangement with a satisfactory arrangement
with another financing source, the Company could experience
adverse operating results.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report of Form 10-Q for
the quarter ended June 30, 1997).
3.2 Bylaws of the Company (Incorporated herein by
reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
11 Statement re: Computation of Earnings Per Share
(unaudited)
27 Financial Data Schedule
(b) Reports on form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Total Containment, Inc.
Date August 12, 1999 By/s/ Pierre Desjardins
Pierre Desjardins
President and Chief Executive
Officer
Date August 12, 1999 By/s/ Keith R. Ruck
Keith R. Ruck
Vice President Finance & Chief
Financial Officer
<PAGE>
Exhibit Index
Exhibit No. Description
3.1 Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1
to the Company's Quarterly Report of Form 10-Q for
the quarter ended June 30, 1997).
3.2 Bylaws of the company (Incorporated herein by
reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
11 Statement re: computation of Earnings Per Share
(unaudited)
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1998
(In thousands, except share data)
<S> <C> <C>
Basic:
Average shares outstanding 4,643 4,642
Net income applicable to common
shareholders $1,248 $1,711
Net income per share amount $0.27 $0.37
Assuming dilution
Average shares outstanding 4,643 4,642
Effect of dilutive options 256 167
Totals 4,899 4,809
Net income $1,248 $1,711
Net income per share amount $0.25 $0.36
The computation or earnings (loss) per share is not shown for the
three or six month periods ended June 30, 1999 since the effect
of options would be anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 130
<SECURITIES> 0
<RECEIVABLES> 7,242
<ALLOWANCES> 446
<INVENTORY> 8,245
<CURRENT-ASSETS> 18,477
<PP&E> 9,108
<DEPRECIATION> 4,140
<TOTAL-ASSETS> 32,540
<CURRENT-LIABILITIES> 16,014
<BONDS> 0
0
4,000
<COMMON> 47
<OTHER-SE> 8,312
<TOTAL-LIABILITY-AND-EQUITY> 32,540
<SALES> 14,906
<TOTAL-REVENUES> 14,906
<CGS> 12,380
<TOTAL-COSTS> 5,893
<OTHER-EXPENSES> 123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> (3,792)
<INCOME-TAX> (1,438)
<INCOME-CONTINUING> (2,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,354)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
