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FORM 10-K
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, 1999,
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)
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<S> <C>
PENNSYLVANIA 23-2394872
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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<TABLE>
<S> <C>
422 BUSINESS CENTER, A130 NORTH DRIVE, 19546
P.O. BOX 939, OAKS, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 666-7777
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
(TITLE OF CLASS)
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<PAGE>
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 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 26, 2000, was $4,290,525.
As of February 26, 2000 the Registrant had 4,672,600 shares of Common Stock
outstanding.
Documents incorporated by reference. Portions of the 1999 Annual Report to
Shareholders 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 May 2, 2000 are incorporated by
reference into Part III of this Report.
<PAGE>
TOTAL CONTAINMENT, INC.
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 7
ITEM 3. LEGAL PROCEEDINGS........................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT........................ 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 10
ITEM 6. SELECTED FINANCIAL DATA..................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 12
ITEM 11. EXECUTIVE COMPENSATION...................................... 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 13
</TABLE>
<PAGE>
Except for historical information, this report may be deemed to contain
"forward-looking" statements. The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.
These forward-looking statements include statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including but not
limited to, (i) projections of revenues, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
the effect of currency fluctuations, capital structure and other financial
items, (ii) statements of plans of and objectives of the Company or its
management or board of directors, including the introduction of new products, or
its management or board of directors, including the introduction of new
products, or estimates or predictions of actions by customers, suppliers,
competitors or regulating authorities, (iii) statements of future economic
performance, (iv) statements of assumptions, such as the prevailing weather
conditions in the Company's market areas, and other statements about the Company
or its business, and (v) statements preceded by, followed by or that include the
words "may," "could," "should," "pro forma," "looking forward," "would,"
"believe," "expect," "anticipate," "estimate," "intend," "plan," or similar
expressions. These forward-looking statements involve risks and uncertainties,
which are subject to change based on various important factors (some of which,
in whole or in part, are beyond the Company's control). The following factors,
among others, could cause the Company's financial performance to differ
materially from the goals, plans, objectives, intentions and expectations
expressed in such forward-looking statements: (1) the strength of the United
States and global economies in general and the strength of the regional and
local economies in which the Company conducts operations; (2) the effects of,
and changes in, U.S. and foreign governmental trade, monetary and fiscal
policies and laws; (3) the timely development of competitive new products and
services by the Company and the acceptance of such products and services by the
Company and the acceptance of such products and services by the Company and the
acceptance of such products and services by customers; (4) the willingness of
customers to substitute competitors' products and services and vise versa; (5)
the impact on operations of changes in U.S. and foreign governmental laws and
public policy, including environmental regulations; (6) the level of export
sales impacted by export controls, changes in legal and regulatory requirements,
policy changes affecting the markets, changes in tax laws and tariffs, exchange
rate fluctuations, political and economic instability, and accounts receivable
collection; (7) changes in capital expenditures by major oil companies resulting
from proposed and completed mergers and consolidations of the oil companies; (8)
technological changes; (9) regulatory or judicial proceedings; and (10) the
success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
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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, products and services 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, retail business operators 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 has transferred this business from ACI to the Company. During 1997,
the Company caused ACI to focus 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.
Rene Morin, Inc., a wholly owned subsidiary, fabricates rubber components
mainly for the Company. TCI-Environment NV provides sales support for the
Company's products in Europe.
PRINCIPAL PRODUCTS
The principal products of the Company and their primary features are
summarized in the following table:
<TABLE>
<S> <C> <C>
Enviroflex(R) A flexible double-wall pipe --Double-wall construction
for the conveyance and provides primary pipe
secondary containment of motor protection and secondary
vehicle fuels from underground containment
storage tanks to product
dispensers --Flexible
--No joints
--UL-approved for gasoline and
gasohol
--Primary pipe can be
retracted for repair or
replacement
--Ease of installation
--Thermoplastic construction
--Certain features protected
by patent
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Sump/risers Liquid-resistant access --Secondary containment
chambers made from fiberglass
or polyethylene for --Mounted on all types of
submersible pumps and other underground storage tanks
fittings attached to
underground storage tanks and --Provides easy aboveground
fittings access to pumps
--Sumps and risers can be
stacked and trimmed to achieve
required burial depth
Dispenser sumps Liquid-resistant secondary --Secondary containment
containment chambers made from
fiberglass or polyethylene for --UL-approved mounting frames,
above ground fuel dispensers brackets and stabilizer bars
--Provides aboveground access
to dispenser valves, joints
and connectors
--Polyethylene and fiberglass
construction
--Certain features protected
by patent
Bulkhead fittings Specially designed fittings --Ease of installation
and reducers used to seal pipe/sump
connections --Thermoplastic construction
Certain features protected by
patent
Tank Jacket(R) A polyethylene jacket that --Secondary containment
provides secondary containment
and corrosion protection for --UL-approved secondary
rigid fiberglass or steel containment and corrosion
underground storage tanks protection jacket
--Certain features protected
by patents
--UL-approved for gasoline and
gasohol
--Less expensive than
fiberglass tanks
--Ease of transportation
--Polyethylene construction
--Certain features protected
by patent
</TABLE>
The Company discontinued its Pipe Jacket product line in 1995.
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SALES ACTIVITIES
General
The sales of the Company's principal products and the sales of each product
as a percentage of total sales in 1997, 1998 and 1999 are set forth in the
following table:
SALES AND PERCENTAGES OF TOTAL SALES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Enviroflex and other piping......... $19,550 42.8% $21,709 40.5% $ 8,036 32.3%
Sump/risers, bulkheads, fittings and
reducers.......................... 10,168 22.3 14,489 27.0 8,320 33.4
Dispenser sumps..................... 5,060 11.1 5,746 10.7 3,631 14.6
Tank Jacket......................... 6,109 13.4 5,800 10.8 2,382 9.6
Pipe Jacket......................... 485 1.1 51 0.1 -- --
Installation........................ 1,977 4.3 4,517 8.4 1,208 4.8
Applicator equipment and other...... 2,300 5.0 1,270 2.5 1,336 5.3
------- ----- ------- ----- ------- -----
Totals......................... $45,649 100.0% $53,582 100.0% 24,913 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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
Turkey and Israel). The Company's net sales to customers outside the United
States in 1997, 1998 and 1999 were $12.5 million, $11.6 million and $6.0
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,
---------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales:
United States....................................... $33,128 $41,950 $18,938
Canada.............................................. 1,463 1,646 892
Mexico, Central and South America................... 6,412 5,059 1,407
Europe and the Middle East.......................... 3,536 3,781 3,248
Southeast Asia, Australia and New Zealand........... 1,110 1,146 428
------- ------- -------
Total......................................... $45,649 $53,582 $24,913
======= ======= =======
</TABLE>
Information relating to foreign operating income and foreign assets is set
forth in Note 14 of Notes to Consolidated Financial Statements included
elsewhere herein.
4
<PAGE>
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 initiated the installation of a
new primary pipe manufacturing line at its Oaks, Pennsylvania facility. Prior to
such activity, the Company, since its inception, had purchased its primary pipe
from Dayco Products, Inc., a subsidiary of Mark IV Industries. See Note 12 of
Notes to Consolidated Financial Statements and "Item 3. Legal Proceedings." With
this new manufacturing equipment, the Company was able to redesign and
significantly improve certain important features of the Enviroflex(R) and
Omniflex(R) primary pipes. This primary pipe carries the approval of
Underwriters' Laboratories and ERA. In the fourth quarter of 1999, the Company
completed the installation of its pipe manufacturing line at the Oaks,
Pennsylvania facility by purchasing, for approximately $2.1 million, a
"Corrugator", a plastic extruder which makes the base pipe for all of its piping
products. Previously, between 1997 and 1999, the Company purchased the base pipe
from an outside vendor.
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 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, retail business operators 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. In 1997, the Company's backlog of orders averaged $1.7 million. In
1998, the backlog averaged less than $1.5 million. During 1999, the product
backlog averaged less than $500,000. The Company typically ships incoming orders
within approximately seven days and, therefore, does not have a significant
product backlog. As of December 31, 1999, the Company had approximately $1.1
million in field service revenue 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 of which are
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.
5
<PAGE>
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 Xeroxes Corporation are both fiberglass tank
manufacturers.
MANUFACTURERS AND SUPPLIERS
In 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 product, as well as molded bulkhead fittings,
other seals, fiberglass tanks and dispenser sumps.
Ten suppliers provide the Company approximately 75% of its inventory
purchases. The Company does not have any written supply contracts with its
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 patents 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.
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 licenses 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 $160,000.
The Company had 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") with respect to patents owned by OPW, which also
possessed the right to practice these claims. Due to a judicial order issued in
September 1998 in litigation between the Company and Environ Products, Inc.,
which declared invalid the patent licensed by the Company, the company wrote off
in 1998 approximately $3.7 million of current unamortized cost of the patent
license. By a decision dated September 15, 1999, the U.S. Court of Appeals,
Federal Circuit reversed the decision of the U.S. District Court, and Environ
has petitioned the U.S. Supreme Court for a Writ of Certiorari.
Under the license, the Company was 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. Beginning with the third quarter of 1998 the Company
ceased paying the quarterly royalty. For information relating to litigation with
OPW, see "Item 3. Legal Proceedings." See also "Competition." The Company does
not believe that the loss of the patent has had or will have a material adverse
effect on its business. (See Note 12 of Notes to Consolidated Financial
Statements).
The Company also relies on unpatented proprietary information to maintain
and promote its commercial position.
EMPLOYEES
As of December 31, 1999, the Company employed 108 persons, 15 of whom were
engaged in marketing and sales; 3 of whom were engaged in research and
development; 51 of whom were engaged in manufacturing, warehousing, and
assembly; 15 of whom were engaged in field service
6
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installations; and 24 of whom 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.
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. a wholly owned subsidiary of the Company, 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 NV, a wholly owned subsidiary of the Company, operates from
an office and warehouse space located in Antwerp, Belgium.
ITEM 3. LEGAL PROCEEDINGS
Two cases were pending in the Eastern District of Pennsylvania, in which
the Company, as exclusive licensee of these certain patents, and the licensor of
those patents sought money damages and an injunction due to patent infringement
by Environ Products, Inc. ("Environ") and Environ sought a declaration of
invalidity of the patents, non-infringement, and unenforceability. These cases
were to be tried in the Fall of 1998. The court issued an Order on September 29,
1998 which, among other things, granted Environ's motions for summary judgment
of invalidity of the patents and non-infringement by Environ. This constituted a
final judgment of all issues which were material to these cases, and the
licensor filed an appeal to the U.S. Court of Appeals, Federal Circuit. As a
result of this decision, the Company wrote off during 1998 the current
unamortized cost of this license, which was approximately $3.7 million. By a
decision dated September 15, 1999, the U.S. Court of Appeals, Federal Circuit
reversed the decision of the U.S. District Court, and Environ has petitioned the
U.S. Supreme Court for a Writ of Certiorari.
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 Note 2 to the Company's Consolidated
Financial Statements--"Summary of Significant Accounting Policies--Warranty
Reserve."). Dayco has filed a counterclaim for approximately $4.0 million for
goods, services, and freight contracted for by the Company, under the Dayco
Agreement (see Note 13 to the Company's Consolidated Financial
Statements--"Commitments.") and damages for alleged breaches of various duties
purportedly owed to Dayco. In addition, Dayco initiated a separate legal action
against the Company in February 1999 in the 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 Dayco's claims. As of January 1,
1999 the Company has entered into a contingency fee arrangement with its legal
counsel whereby the Company will only pay for out-of-pocket expenses for the
remainder of the discovery period and the trial-related costs. The trial is
currently scheduled to commence April 3,
7
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2000 and, although there are outstanding motions that may delay the trial date,
the Company continues to press for the earliest possible trial date.
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. ("Senter") for damages
allegedly resulting from the failure of the 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 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 has vigorously defended 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.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages and positions with the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Pierre Desjardins................. 58 Chairman and Chief Executive Officer
John R. Wright, Jr................ 39 President and Chief Operating Officer
Jeffrey A. Boehmer................ 34 Vice President Operations
Richard DiMaggio.................. 41 Vice President
Keith R. Ruck..................... 38 Vice President Finance and Chief Financial Officer
</TABLE>
The principal occupation and business experience during the last five years
of the executive officers of the Company are as follows:
Pierre Desjardins. Since September 1996, Mr. Desjardins has served as Chief
Executive Officer of the Company, and since April 1997, Chairman of the Board of
the Company. During the period from September 1996 through September 1999, Mr.
Desjardins also served as President.
8
<PAGE>
From 1990 to 1994, he was President and Chief Executive Officer of Domtar, Inc.,
a publicly owned Canadian pulp and paper corporation. He is currently a director
of Uni-Select Inc., a publicly owned, Canadian company engaged in the
distribution of parts and systems for motor vehicles and is a consultant for The
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.
John R. Wright, Jr. joined the company in June 1997 as Vice President
Operations. In December 1998, he became Vice President of Marketing and
Engineering. In October 1999, he became President and Chief Operating Officer
and was elected to the Board of Directors of the Company. From 1982 to 1997, Mr.
Wright was Director of Materials Management for Lukens Inc., a specialty steel
manufacturer. Prior responsibilities at Lukens included Corporate planning,
manager, and various sales positions.
Jeffrey A. Boehmer joined the Company as an accountant in 1987. From 1990
until 1996, Mr. Boehmer served as Operations Manager. He served as Vice
President Operations from January 1996 until June 1997, and as Vice President
Finance from June 1997 until December 1997. Mr. Boehmer presently serves as Vice
President of Operations. Mr. Boehmer has also served as Secretary of the Company
from 1994 to December 1998.
Richard DiMaggio joined the Company as part of its acquisition of American
Containment, Inc. ("ACI") in 1996. Mr. DiMaggio has been the President of ACI
since 1993 and was elected Vice President of the Company in April 1998.
Keith R. Ruck joined the Company in April 1998 as Vice President Finance
and Chief Financial Officer. Previously Mr. Ruck had been Corporate Controller
from December 1994 to April 1998 and Assistant Controller from July 1993 to
December 1994 for InterDigital Communications Corporation, a wireless
telecommunications company. Mr. Ruck began his career with Arthur Andersen LLP
and has held a variety of accounting and financial positions with public
companies.
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 26, 2000, the Company had 71 shareholders of
record and approximately 500 beneficial owners of the Common Stock.
On December 22, 1999, the Company sold to Canam Steel Corporation, the
current holder of the Series A Preferred Stock, 400 shares of Series B Floating
Rate Preferred Stock of the Company for $10,000 cash per share or $4 million in
the aggregate. The sale of the Series B Preferred Stock was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
because it was a transaction not involving a public offering. The Series B
Preferred Stock is entitled to dividends at a floating rate equal to the rate
payable by the Company on its line of credit with its commercial bank plus .8%.
Dividends are paid quarterly in arrears and if not paid would cumulate at the
above mentioned rates plus 50 basis points. This shareholder has waived payment
of the dividends for the foreseeable future, including the additional interest
which accrues if payment is not made. The Series B 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 Series B Preferred Stock is
redeemable at the option of the Company, but only (i) if, after giving effect to
the redemption, the Company's net tangible assets are equal to or greater than
$4.5 million at the end of any fiscal quarter, or (ii) if at least the majority
of the independent and disinterested members of the audit committee of the
Company's Board of Directors approves such redemption.
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.
<TABLE>
<CAPTION>
SALE PRICES
--------------- CLOSING
HIGH LOW SALE PRICE
---- --- ----------
<S> <C> <C> <C>
1999
First Quarter............................................... $ 6 3/4 $ 4 5/8 $57/16
Second Quarter.............................................. 5 3/4 2 1/2 3
Third Quarter............................................... 3 1/4 2 3 1/4
Fourth Quarter.............................................. 3 3/16 11 3/16 2 1/8
1998
First Quarter............................................... $ 3 15/16 $ 2 3/8 $3 7/8
Second Quarter.............................................. 6 1/2 3 3/8 5
Third Quarter............................................... 6 7/8 3 5/8 6 5/16
Fourth Quarter.............................................. 7 1/8 4 1/2 6 15/16
</TABLE>
The Company has not paid any cash dividends on the Common Stock in the past
and does not anticipate that any cash dividends on Common Stock 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.
10
<PAGE>
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 5 through 13 of the
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited Consolidated Financial Statements of the Company at December
31, 1998 and 1999 and for the three years ended December 31, 1999 required by
this Item are included on Pages 14 through 32 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
None.
11
<PAGE>
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 Shareholders to be held on
May 2, 2000 (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 Annual Report on Form 10-K.
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 Shareholders" and "Election of
Directors--Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
12
<PAGE>
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
-------------
Report of Independent Accountant............................ 14
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 15
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... 16
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1998 and 1999...... 17
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 18
Notes to Consolidated Financial Statements.................. 19
2. FINANCIAL STATEMENT SCHEDULES.
Schedules setting forth valuation and qualifying accounts and the warranty
reserves of the Company as of December 31, 1997, 1998 and 1999 are attached as
Appendices to this Annual Report on Form 10-K.
13
<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.
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.
4.2 Certificate Representing Shares of Class A Floating Rate
Preferred Stock and Related Statement With Respect to
Shares--Domestic Business Corporation, with Attachments
incorporated herein by reference to Exhibit 3.3 to the
Annual Report on Form 10-K of the Company for the year ended
December 31, 1997.
4.3 Certificate Representing Shares of Class B Floating Rate
Preferred Stock and Related Statement With Respect to
Shares--Domestic Business Corporation, with Attachments.
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.*
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, incorporated
herein by reference to Exhibit 10.7 to the Annual Report on
Form 10-K of the Company for the year ended December 31,
1997.
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 Keith Osborne, et al. 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.
14
<PAGE>
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 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, 1997.
10.12 Employment Agreement between the Company and Richard
DiMaggio dated July 10, 1996 incorporated by reference to
Exhibit 10.12 to the Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 1998.
10.13 Employment Agreement between the Company and John R. Wright
Jr. dated June 12, 1997 incorporated by reference to Exhibit
10.13 to the Annual Report on Form 10-K of the Company for
the fiscal year ended December 31, 1998.
10.14 Employment Agreement between the Company and Keith R. Ruck
dated July 16, 1998 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, 1998.
10.15 Loan Modification Agreement and Allonge dated December 23,
1998 amending the line of credit agreement incorporated by
reference to Exhibit 10.15 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31, 1998.
10.16 Promissory Note in the amount of $4,000,000 dated September
27, 1999, between the Company and Finloc Inc.
10.17 Loan Agreement dated December 14, 1999 between the Company
and Bank of America, N.A.
10.18 Promissory Note, with the maximum principal of $5,000,000,
dated December 14, 1999 between the Company and Bank of
America, N.A.
10.19 Loan Modification Agreement dated March 16, 2000, amending
the Loan Agreement.
13 1999 Annual Report to Shareholders of Total Containment, Inc.
21 Subsidiaries of the Company.
23.1 Consent of Grant Thornton LLP.
27 Financial Data Schedule
- ------------------
* 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 1999:
None.
15
<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)
By: /s/ PIERRE DESJARDINS
---------------------------------------
PIERRE DESJARDINS,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Dated: February 23, 1999
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
--------- ----- ----
<C> <S> <C>
/s/ PIERRE DESJARDINS Chairman and Chief February 23, 2000
- ------------------------------------------------ Executive Officer
PIERRE DESJARDINS
/s/ KEITH R. RUCK Vice President Finance and February 23, 2000
- ------------------------------------------------ Chief Financial Officer
KEITH R. RUCK
/s/ MARC GUINDON Director February 23, 2000
- ------------------------------------------------
MARC GUINDON
/s/ JEAN-CLAUDE ARPIN Director February 23, 2000
- ------------------------------------------------
JEAN-CLAUDE ARPIN
/s/ MARCEL DUTIL Director February 23, 2000
- ------------------------------------------------
MARCEL DUTIL
/s/ PAUL GOBEIL Director February 23, 2000
- ------------------------------------------------
PAUL GOBEIL
/s/ NYCOLE PAGEAU-GOYETTE Director February 23, 2000
- ------------------------------------------------
NYCOLE PAGEAU-GOYETTE
/s/ BERNARD GOUIN Director February 23, 2000
- ------------------------------------------------
BERNARD GOUIN
/s/ JOHN R. WRIGHT JR. Director February 23, 2000
- ------------------------------------------------
JOHN R. WRIGHT JR.
</TABLE>
16
<PAGE>
SCHEDULE II
TOTAL CONTAINMENT, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES RECOVERIES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful
accounts..................... $ 50,000 $254,845 $64,552(2) $169,397(1) $200,000
1998
Allowance for doubtful
accounts..................... $200,000 $470,640 $ 8,877(2) $259,018(1) $420,499
1999
Allowance for doubtful
accounts..................... $420,499 $250,057 $33,163(2) $343,880(1) $359,839
</TABLE>
- ------------------
Notes: (1) Write-off of amounts reserved in prior periods.
(2) Recovery of a previously reserved receivable.
17
<PAGE>
SCHEDULE VIII
TOTAL CONTAINMENT, INC. AND SUBSIDIARIES
RESERVES
DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Warranty Reserve December 31,
1997......................... $ 4,483,014 $18,596,329 (1) $(5,757,945) $17,321,398
December 31, 1998.............. $17,321,398 $(1,711,907)(2) $(9,490,609) $ 6,118,882
December 31, 1999.............. $ 6,118,882 $ 1,509,727 (3) $(4,286,714) $ 3,341,895
</TABLE>
- ------------------
(1) Includes pipe warranty of $17,200,000 (See Notes 2 and 10 of Notes to
Consolidated Financial Statements).
(2) Includes a reversal of the pipe warranty reserve of $3.3 million (see Note 2
of Notes to Consolidated Financial Statements).
(3) Includes special warranty charge of $800,000 (See Note 2 of Notes to
Consolidated Financial Statements).
18
TOTAL CONTAINMENT, INC.
FORM OF SERIES B FLOATING RATE
PREFERRED STOCK
THIS CERTIFIES that Canam Steel Corporation is the registered holder of
Four Hundred (400) Shares of Series B Floating Rate Preferred Stock 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 30th day of December, A.D., 1999.
/s/ Richard H. Gross /s/ John R. Wright, Jr.
- ---------------------------------- -----------------------------------
Secretary President
<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 is 400 shares.
4. The date of adoption of such resolution was December 10, 1999.
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 20th day of December,
1999.
TOTAL CONTAINMENT, INC.
By: /s/ Pierre Desjardins
------------------------------
Pierre Desjardins
Chairman & CEO
<PAGE>
Attachment A
TOTAL CONTAINMENT, INC.
Resolutions with Respect to
Series B 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 B Floating Rate Preferred Stock."
The Series B Floating Rate Preferred Stock does not have par value. Each share
of the Series B Floating Rate Preferred Stock shall be identical in all respects
with the other shares of Series B Floating Rate Preferred Stock.
2. Number of Shares. The number of authorized shares of Series B Floating
Rate Preferred Stock shall initially be four hundred (400). Shares of the Series
B 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 B
Floating Rate Preferred Stock which are redeemed, purchased or otherwise
acquired by the Corporation.
3. Stated Value. Each share of Series B Floating Rate Preferred Stock shall
have a "Stated Value" of Ten Thousand Dollars ($10,000) per share.
4. Dividends.
(a) The holders of shares of Series B 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 of April, July, October, and January, with respect
to the preceding calendar quarter (such day known as the "Required Dividend
Payment Date).
(b) The shares of Series B Floating Rate Preferred Stock shall accrue
dividends upon the Stated Value of such shares during each calendar quarter 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, plus eight-tenths
percent (0.8%). 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 B 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.
1
<PAGE>
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 B Floating Rate Preferred Stock in the payment of dividends
unless and until all accrued and unpaid Series B Floating Rate Preferred Stock
dividends have been concurrently declared and concurrently paid.
5. Reference Rate, etc. The "Reference Rate" shall be the "prime rate"
as defined by and reported in the money rates section of The Wall Street
Journal (being defined, on the date hereof, as the base rate on corporate
loans posted by at least 75% of the 30 largest banks in the United States),
as such may change from time to time. The "Arrearage Rate" shall be equal to
the Reference Rate as in effect on the relevant date plus one and
three-tenths percent (1.3%).
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 B
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 B 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. The Series B Floating
Rate Preferred Stock shall be of equal priority with all shares of the
Company's Series A Floating Rate Preferred Stock.
(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
2
<PAGE>
(vii) a division of the Company.
7. No Conversion. The holders of Series B 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 B 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 B
Floating 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 B 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 B Floating Rate Preferred Stock
and, (iii) who have no financial or beneficial interest in the Series B
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 B 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 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, from and after the Redemption Date, all shares
so called for
3
<PAGE>
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 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 B Floating Rate Preferred Stock, and (iii) have no financial or
beneficial interest in the Series B 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 B Floating Rate Preferred Stock.
9. Voting. The shares of Series B Floating Rate Preferred Stock shall
have no voting rights whatsoever.
4
PROMISSORY NOTE
NOTE NUMBER 1
US $ 4,000,000.00 SEPTEMBER 27, 1999
FOR VALUE RECEIVED, TOTAL CONTAINMENT, INC., a corporation organized under the
laws of the State of Pennsylvania (the "MAKER") promise to pay to FINLOC INC.or
to its order (the "PAYEE"), or its assignee, the principal sum of $ 4,000,000.00
United States Dollars (hereinafter the "PRINCIPAL") with interest thereon, as
hereinafter set forth:
The principal sum specified above shall bear interest at a rate per
annum equal to 9,94%. Interest shall commence to accrue on the date hereof and
shall be payable on March 21, 2000. Interest hereunder shall be calculated
daily, not in advance and compounded monthly, as well after as before maturity,
default and judgment.
For the purpose of the Interest Act of Canada, only to the extent is
may be applicable, where a rate of interest is to be calculated on the basis of
a year having less than the actual number of days in the year, the yearly rate
of interest to which such interest rate is equivalent is such rate multiplied by
the actual number of days in the year for which such calculation is made and
divided by the number of days in the year used for the original interest rate
calculation.
Principal and interest shall be repaid by Maker in one (1) installment
in an amount equal to the unpaid principal and interest amount of this Note. The
maturity date of this Note is March 21, 2000.
This Note arises out of a certain Credit Agreement (the "CREDIT AGREEMENT")
dated as of September 8, 1999 by and between the Maker as borrower and Payee as
lender and is secured by a certain security interest on the Collateral (as
defined in the Credit Agreement) as security for the obligations of the Maker
hereunder and under the Credit Agreement.
If default is made in the punctual payment of principal or interest under
this Note, or if maker breaches any provision of the Credit Agreement, and
failed to cure the same within the grace period, if any, provided therefor, this
Note shall, at Payee's option, upon demand, become immediately due and payable.
Every legal holder of this Note shall have and may exercise all of the
rights and powers given to the Payee in this Note.
If for the purpose of obtaining judgment in any court in any jurisdiction
with respect to this Note, it becomes necessary to convert into the currency of
such jurisdiction (herein called the "JUDGMENT CURRENCY") any amount due
hereunder in any currency other than the Judgment Currency, then conversion
shall be made at the rate of exchange prevailing on the Business Day before the
day on which judgment is given. For this purpose, "rate of exchange" means the
rate at which the Payee is able on the relevant date, to sell the currency of
the amount due hereunder in Montreal against the Judgment Currency. In the event
that there is a change in the rate of exchange prevailing between the Business
Day before the day on which the judgment is given and the date of payment of the
amount due, the Maker will, on the date of payment, pay such additional amounts
(if any) as may be necessary to ensure that the amount paid on such date is the
amount in the Judgment Currency which, when converted at the rate of exchange
prevailing on the date of payment, is the amount then due under this Note in
United States Dollars. Any additional amount due under this under this paragraph
will be due as a separate debt and shall not be affected by judgment being
obtained for any other sums due under or in respect of this Note.
This Note shall in all respects be governed by, and construed in
accordance with, the laws of Pennsylvania.
IN WITNESS WHEREOF, the Maker has executed this Note as of the date set
forth above.
TOTAL CONTAINMENT, INC.
/s/ Keith R. Ruck
-----------------------------
Name: Keith R. Ruck
Title: Vice President Finance
BANK OF AMERICA, N.A.
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of December 14, 1999, is
made by and between Bank of America, N.A. a national banking association
("Bank") and the Borrower described below.
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined
herein, the following terms shall have the meaning set forth with respect
thereto:
A. BORROWER:
Total Containment, Inc., a Pennsylvania corporation.
B. BORROWER'S ADDRESS:
422 Business Center
A130 North Drive
Post Office Box 939
Oaks, PA 19456
C. LOAN. Any loan described in Section 2 hereof and any subsequent
loan which states that it is subject to this Loan Agreement.
D. LOAN DOCUMENTS. Loan Documents means this Loan Agreement and any
and all promissory notes executed by Borrower in favor of Bank and all other
documents, instruments, guarantees, certificates and agreements executed and/or
delivered by Borrower, any guarantor or third party in connection with any Loan.
E. TANGIBLE NET WORTH. Tangible Net Worth means the amount by which
total assets exceed total liabilities, in accordance with GAAP, minus
capitalized molds and tooling costs, patents, and goodwill.
F. ACCOUNTING TERMS. All accounting terms not specifically defined or
specified herein shall have the meanings generally attributed to such terms
under generally accepted accounting principles ("GAAP"), as in effect from time
to time, consistently applied, with respect to the financial statements
referenced in Section 3.H. hereof.
G. HAZARDOUS MATERIALS. Hazardous Materials include all materials
defined as hazardous materials or substances under any local, state or federal
environmental laws, rules or regulations, and petroleum, petroleum products, oil
and asbestos.
2. LOANS.
A. LOAN. Bank hereby agrees to make (or has made) one or more loans to
Borrower in the aggregate principal face amount of $5,000,000.00. The obligation
to repay the loans is evidenced by a promissory note or notes dated December 14,
1999 (the promissory note or notes together with any and all renewals,
extensions or rearrangements thereof being hereafter collectively referred to as
the "Note") having a maturity date, repayment terms and interest rate as set
forth in the Note.
i. REVOLVING CREDIT FEATURE. The Loan provides for a revolving line
of credit (the "Line") under which Borrower may from time to
time, borrow, repay and re-borrow funds.
ii. COMMITMENT FEE. Borrower shall pay a commitment fee of $5,000.00
at the closing of the Loan.
iii. LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line, Bank
may from time to time issue letters of credit for the account of
Borrower (each, a "Letter of Credit" and collectively, "Letters
of Credit"); provided, however, that the form and substance of
each Letter of Credit shall be subject to approval by Bank in its
sole discretion; and provided further that the aggregate undrawn
amount of all outstanding Letters of Credit shall not at any time
exceed $100,000.00. Each Letter of Credit shall be issued for a
term not to exceed 180 days for Commercial Letters of Credit, and
not to exceed 365 days for Standby Letters of Credit, as
designated by Borrower, provided, however, that no Letter of
Credit shall have an expiration date subsequent to June 30, 2001.
The undrawn amount of all Letters of Credit plus any and all
amounts paid by Bank in connection with drawings under any Letter
of
<PAGE>
Credit for which the Bank has not been reimbursed shall be
reserved under the Line and shall not be available for advances
thereunder. Each draft paid by Bank under a Letter of Credit
shall be deemed an advance under the Line and shall be repaid in
accordance with the terms of the Line; provided however, that if
the Line is not available for any reason whatsoever, at the time
any draft is paid by Bank, or if advances are not available under
the Line in such amount due to any limitation of borrowing set
forth herein, then the full amount of such drafts shall be
immediately due and payable, together with interest thereon, from
the date such amount is paid by Bank to the date such amount is
fully repaid by Borrower, at that rate of interest applicable to
advances under the Line. In such event, Borrower agrees that
Bank, at Bank's sole discretion may debit Borrower's deposit
account with Bank for the amount of such draft.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants
to Bank as follows:
A. GOOD STANDING. Borrower is a corporation, duly organized, validly
existing and in good standing under the laws of Pennsylvania and has the power
and authority to own its property and to carry on its business in each
jurisdiction in which Borrower does business.
B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to
execute and deliver the Loan Documents and to incur and perform the obligations
provided for therein, all of which have been duly authorized by all proper and
necessary action of the appropriate governing body of Borrower. No consent or
approval of any public authority or other third party is required as a condition
to the validity of any Loan Document, and Borrower is in compliance with all
laws and regulatory requirements to which it is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan Documents
executed by Borrower constitute valid and legally binding obligations of
Borrower, enforceable in accordance with their terms.
D. LITIGATION. There is no material proceeding involving Borrower
pending or, to the knowledge of Borrower, threatened before any court or
governmental authority, agency or arbitration authority, except as disclosed to
Bank in writing and acknowledged by Bank prior to the date of this Agreement.
E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock
provision, partnership agreement or other document pertaining to the
organization, power or authority of Borrower and no provision of any existing
agreement, mortgage, indenture or contract binding on Borrower or affecting its
property, which would conflict with or in any way prevent the execution,
delivery or carrying out of the terms of this Agreement and the other Loan
Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its
assets are free and clear of liens, except those granted to Bank and those
disclosed to Bank in writing prior to the date of this Agreement, and except
those liens granted to First Union Bank that shall be released as of the date of
this Agreement or immediately thereafter.
G. TAXES. All taxes and assessments due and payable by Borrower have
been paid or are being contested in good faith by appropriate proceedings and
the Borrower has filed all tax returns which it is required to file.
H. FINANCIAL STATEMENTS. The financial statements of Borrower
heretofore delivered to Bank have been prepared in accordance with GAAP applied
on a consistent basis throughout the period involved and fairly present
Borrower's financial condition as of the date or dates thereof, and there has
been no material adverse change in Borrower's financial condition or operations
since September 30, 1999. All factual information furnished by Borrower to Bank
in connection with this Agreement and the other Loan Documents is and will be
accurate and complete on the date as of which such information is delivered to
Bank and is not and will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
I. PLACE OF BUSINESS. Borrower's chief executive office is located at:
422 Business Center
A130 North Drive
Post Office Box 939
Oaks, PA 19456
J. ENVIRONMENTAL. To the best of Borrower's knowledge, after
reasonable examination, the conduct of Borrower's business operations and the
condition of Borrower's property does not and will not violate any federal laws,
rules or ordinances for environmental protection, regulations of the
Environmental Protection Agency, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation thereof relating
primarily to the environment or Hazardous Materials.
-2-
<PAGE>
K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made under this Agreement shall be deemed to be made at and as of
the date hereof and at and as of the date of any advance under any Loan.
4. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will, unless Bank
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
A. FINANCIAL CONDITION. Maintain Borrower's financial condition as
follows, as determined in accordance with GAAP, except to the extent modified by
any definitions contained herein, and applied on a consistent basis throughout
the period involved:
i. Maintain a Tangible Net Worth of not less than $6,250,000.00 as
of December 31, 1999, increasing by 50% of the net income after
taxes of Borrower for the fiscal year ending December 31, 2000;
provided, however, that if net income after taxes for the fiscal
year is a deficit (i.e. a net loss), then there will be no
reduction as a result thereof in the required minimum Tangible
Net Worth. This covenant shall be tested quarterly for each
fiscal quarter.
B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of
accounting satisfactory to Bank and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of Bank
selected by Bank for the foregoing purposes. Unless written notice of another
location is given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above.
In addition, Borrower will:
i. Furnish to Bank audited consolidated financial statements of
Borrower for each fiscal year of Borrower within 150 days after
the close of each such fiscal year. All such financial statements
shall be prepared by independent certified public accountants
acceptable to Bank.
ii. Furnish to Bank internally prepared consolidated financial
statements, including a balance sheet and related statements of
income and cash flows, of Borrower for each fiscal quarter of
Borrower, within 45 days after the close of each such period. All
such financial statements shall be certified by the chief
financial officer of Borrower subject to year end adjustments.
iii. Furnish to Bank promptly such additional information, reports and
statements respecting the business operations and financial
condition of Borrower from time to time as Bank may reasonably
request, including but not limited to consolidated accounts
receivable aging reports and inventory reports monthly within 30
days after the close of each such period.
C. INSURANCE. Maintain insurance with responsible insurance companies
on such of its properties, in such amounts and against such risks as is
customarily maintained by similar businesses operating in the same vicinity,
specifically to include fire and extended coverage insurance covering all
assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Bank and providing for at least 30 days prior notice to Bank of
any cancellation thereof. Satisfactory evidence of such insurance will be
supplied to Bank prior to funding under the Loan(s) and 30 days prior to each
policy renewal.
D. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and
qualification to do business, where required and comply with all laws,
regulations and governmental requirements including, without limitation,
environmental laws applicable to it or to any of its property, business
operations and transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of
(i) any condition, event or act which comes to its attention that would or might
materially adversely affect Borrower's financial condition or operations or
Bank's rights under the Loan Documents, (ii) any litigation involving claims,
counterclaims and cross claims in aggregate amounts exceeding $100,000.00 filed
by or against Borrower, (iii) any event that has occurred that would constitute
an event of default under any Loan Documents and (iv) any uninsured or partially
uninsured loss through fire, theft, liability or property damage.
F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments and
other obligations, including, but not limited to taxes, costs or other expenses
arising out of this transaction, as the same become due and payable, except to
the extent the same are being contested in good faith by appropriate proceedings
in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property in good
condition and repair and make all necessary replacements thereof, and preserve
and maintain all licenses, trademarks,
-3-
<PAGE>
privileges, permits, franchises, certificates and the like which the
Borrower reasonably believes are necessary for the operation of its business.
H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any and
all enforcement, cleanup, remedial, removal, or other governmental or regulatory
actions instituted, completed or threatened pursuant to any applicable federal,
state, or local laws, ordinances or regulations relating to any Hazardous
Materials affecting Borrower's business operations; and (ii) all litigation
involving claims, counterclaims and cross claims in aggregate amounts exceeding
$100,000.00 made or threatened by any third party against Borrower relating to
damages, contribution, cost recovery, compensation, loss or injury resulting
from any Hazardous Materials. Borrower shall immediately notify Bank of any
remedial action taken by Borrower with respect to Borrower's business
operations. Borrower will not use or permit any other party to use any Hazardous
Materials at any of Borrower's places of business or at any other property owned
by Borrower except such materials as are incidental to Borrower's normal course
of business, maintenance and repairs and which are handled in compliance with
all applicable environmental laws. When Bank has reason to believe that action
is necessary, Borrower agrees to permit Bank, its agents, contractors and
employees to enter and inspect any of Borrower's places of business or any other
property of Borrower at any reasonable times upon three (3) days prior notice
for the purposes of conducting an environmental investigation and audit
(including taking physical samples) to insure that Borrower is complying with
this covenant and Borrower shall reimburse Bank on demand for the costs of any
such environmental investigation and audit. Borrower shall provide Bank, its
agents, contractors, employees and representatives with access to and copies of
any and all data and documents relating to or dealing with any Hazardous
Materials used, generated, manufactured, stored or disposed of by Borrower's
business operations within five (5) days of the request therefore.
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise
dispose of or transfer any assets, except in the normal course of its business,
or enter into any merger or consolidation, or transfer control or ownership of
the Borrower or form or acquire any subsidiary.
B. LIENS. Grant, suffer or permit any contractual or noncontractual
lien on or security interest in its assets, except in favor of Bank, or fail to
promptly pay when due all lawful claims, whether for labor, materials or
otherwise.
C. EXTENSIONS OF CREDIT. Make or permit any subsidiary to make, any
loan or advance to any person or entity, or purchase or otherwise acquire, or
permit any subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations, or other securities of, make any capital contribution to,
or otherwise invest in or acquire any interest in any entity, or participate as
a partner or joint venturer with any person or entity.
D. BORROWINGS. Create, incur, assume or become liable in any manner
for any indebtedness (for borrowed money, deferred payment for the purchase of
assets, lease payments, as surety or guarantor for the debt for another, or
otherwise) other than to Bank, except for normal trade debts incurred in the
ordinary course of Borrower's business, except for future indebtedness to
related parties, and except for existing indebtedness disclosed to Bank in
writing and acknowledged by Bank prior to the date of this Agreement.
E. CHARACTER OF BUSINESS. Change the general character of business as
conducted at the date hereof, or engage in any type of business not reasonably
related to its business as presently conducted.
F. MANAGEMENT CHANGE. Make any substantial change in its present
executive or management personnel.
6. DEFAULT. Borrower shall be in default under this Agreement and under
each of the other Loan Documents if it shall default in the payment of any
amounts due and owing under the Loan or should it fail to timely and properly
observe, keep or perform any term, covenant, agreement or condition in any Loan
Document or in any other loan agreement, promissory note, security agreement,
deed of trust, deed to secure debt, mortgage, assignment or other contract
securing or evidencing payment of any indebtedness of Borrower to Bank or any
affiliate or subsidiary of Bank of America Corporation.
7. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank shall
have all rights, powers and remedies available under each of the Loan Documents
as well as all rights and remedies available at law or in equity.
8. NOTICES. All notices, requests or demands which any party is required or
may desire to give to any other party under any provision of this Agreement must
be in writing delivered to the other party at the following address:
-4-
<PAGE>
Borrower:
Total Containment, Inc.
422 Business Center
A130 North Drive
Post Office Box 939
Oaks, PA 19456
Fax No. 610-666-5321
Bank: Bank of America, N.A
1070 West Patrick Street
Frederick, MD 21703
Fax No. 301-696-0179
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by mail, upon the earlier of the date of receipt or five
(5) days after deposit in the U.S. Mail, first class postage prepaid;
B. If sent by any other means , upon delivery.
9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel if permitted by applicable law), incurred by
Bank in connection with (a) negotiation and preparation of this Agreement and
each of the Loan Documents, and (b) all other costs and attorneys' fees incurred
by Bank for which Borrower is obligated to reimburse Bank in accordance with the
Terms of the Loan Documents.
10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows,
without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to
Bank under any Loan Document, or allowed it by law or equity shall be cumulative
of each other and may be exercised in addition to any and all other rights of
Bank, and no delay in exercising any right shall operate as a waiver thereof,
nor shall any single or partial exercise by Bank of any right preclude any other
or future exercise thereof or the exercise of any other right. Borrower
expressly waives any presentment, demand, protest or other notice of any kind,
including but not limited to notice of intent to accelerate and notice of
acceleration. No notice to or demand on Borrower in any case shall, of itself,
entitle Borrower to any other or future notice or demand in similar or other
circumstances.
B. APPLICABLE LAW. This Loan Agreement and the rights and obligations
of the parties hereunder shall be governed by and interpreted in accordance with
the laws of Maryland and applicable United States federal law.
C. AMENDMENT. No modification, consent, amendment or waiver of any
provision of this Loan Agreement, nor consent to any departure by Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
an officer of Bank, and then shall be effective only in the specified instance
and for the purpose for which given. This Loan Agreement is binding upon
Borrower, its successors and assigns, and inures to the benefit of Bank, its
successors and assigns; however, no assignment or other transfer of Borrower's
rights or obligations hereunder shall be made or be effective without Bank's
prior written consent, nor shall it relieve Borrower of any obligations
hereunder. There is no third party beneficiary of this Loan Agreement.
D. DOCUMENTS. All documents, certificates and other items required
under this Loan Agreement to be executed and/or delivered to Bank shall be in
form and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or invalidity of any
provision of this Loan Agreement shall not affect the enforceability or validity
of any other provision herein and the invalidity or unenforceability of any
provision of any Loan Document to any person or circumstance shall not affect
the enforceability or validity of such provision as it may apply to other
persons or circumstances.
F. INDEMNIFICATION. Notwithstanding anything to the contrary contained
in Section 10(G), Borrower shall indemnify, defend and hold Bank and its
successors and assigns harmless from and against any and all claims, demands,
suits, losses, damages, assessments, fines, penalties, costs or other
-5-
<PAGE>
expenses (including reasonable attorneys' fees and court costs) arising
from or in any way related to any of the transactions contemplated hereby,
including but not limited to actual or threatened damage to the environment,
agency costs of investigation, personal injury or death, or property damage, due
to a release or alleged release of Hazardous Materials, arising from Borrower's
business operations, any other property owned by Borrower or in the surface or
ground water arising from Borrower's business operations, or gaseous emissions
arising from Borrower's business operations or any other condition existing or
arising from Borrower's business operations resulting from the use or existence
of Hazardous Materials, whether such claim proves to be true or false. Borrower
further agrees that its indemnity obligations shall include, but are not limited
to, liability for damages resulting from the personal injury or death of an
employee of the Borrower, regardless of whether the Borrower has paid the
employee under the workmen's compensation laws of any state or other similar
federal or state legislation for the protection of employees. The term "property
damage" as used in this paragraph includes, but is not limited to, damage to any
real or personal property of the Borrower, the Bank, and of any third parties.
The Borrower's obligations under this paragraph shall survive the repayment of
the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to
Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan.
G. SURVIVABILITY. All covenants, agreements, representations and
warranties made herein or in the other Loan Documents shall survive the making
of the Loan and shall continue in full force and effect so long as the Loan is
outstanding or the obligation of the Bank to make any advances under the Line
shall not have expired.
11. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
BORROWER: BANK:
Total Containment, Inc. Bank of America, N.A.
By: /s/ Keith R. Ruck (Seal) By: /s/ Richard C. Marshall III (Seal)
----------------- ---------------------------
Name: Keith R. Ruck Name: Richard C. Marshall III
Title: Vice President Finance & CFO Title: Senior Vice President
[Corporate Seal]
If the Borrower is a corporation, the signature should be attested by the
Secretary or Assistant Secretary of the corporation and the corporate seal
affixed.
Attest: /s/ Richard H. Gross (Seal)
--------------------
Name: Richard H. Gross
Title: Secretary
-6-
[LOGO]
Promissory Note
Date December 14, 1999 [x] New [] Renewal Amount $5,000,000.00 Maturity Date
June 30, 2001
Bank:
Bank of America, N.A.
Banking Center:
Mid-Atlantic Commercial
1070 W. Patrick Street
Frederick, Maryland 21702
County: Frederick
Borrower:
Total Containment, Inc.,
TCI Environment NV/SA,
Rene Morin, Inc. and
American Containment, Inc.
A130 North Drive
Oaks, Pennsylvania 19456
County: ___________________
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank, the
principal amount of Five Million and 00/100 Dollars ($5,000,000.00), or so much
thereof as may be advanced from time to time in immediately available funds,
together with interest computed daily on the outstanding principal balance
hereunder, at an annua1 interest rate, and in accordance with the payment
schedule, indicated below.
[This Note contains some provisions preceded by boxes. If a box is marked, the
provision applies to this transaction; if it is not marked, the provision does
not apply to this transaction.]
1. Rate.
Eurodollar Daily Floating Rate. The Rate shall be the Eurodollar Daily
Floating Rate plus 1.50 percent, per annum. The "Eurodollar Daily Floating Rate"
is a fluctuating rate of interest equal to the one month rate of interest
(rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Telerate
Page 3750 (or any successor page) as the one month London interbank offered rate
for deposits in Dollars at approximately 11:00 a.m. (London time) on the second
preceding business day, as adjusted from time to time in Bank's sole discretion
for then-applicable reserve requirements, deposits insurance assessment rates
and other regulatory costs. If for any reason such rate is not available, the
term "Eurodollar Daily Floating Rate" shall mean the fluctuating rate of
interest equal to the one month rate of interest (rounded upwards, if necessary
to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the one
month London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) on the second preceding business day, as adjusted from
time to time in Bank's sole discretion for then-applicable reserve requirements,
deposits insurance assessment rates and other regulatory costs; provided,
however, if more than one rate is specified on Reuters Screen LIBO page, the
applicable rate shall be the arithmetic mean of all such rates.
Notwithstanding any provision of this. Note, Bank does not intend to charge and
Borrower shall not be required to pay any amount of interest or other charges in
excess of the maximum permitted by the applicable law of the State of Maryland;
if any higher rate ceiling is (lawful, then that higher rate ceiling shall
apply. Any payment in excess of such maximum shall be refunded to Borrower or
credited against principal, at the option of Bank.
2. Accrual Method. Unless otherwise indicated, interest at the Rate set forth
above will be calculated by the 365/360 day method (a daily amount of intereat
is computed for a hypothetical year of 360 days; that amount is multiplied by
the actual number of days for which any principal is outstanding hereunder). If
interest is not to be computed using this method, the method shall be: N/A.
3. Rate Change Date. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the index
or base rate changes. If the Rate is to change on any other date or at any other
interval, the change shall be: N/A. In the event any index is discontinued, Bank
shall substitute an index determined by Bank to be comparable, in its sole
discretion.
4. Payment Schedule. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents executed in connection with this Note, then to interest due and
payable, with the balance applied to principal, or in such other order as Bank
shall determine at its option.
Single Principal Payment. Principal shall be paid in full in a single payment on
June 30, 2001. Interest thereon shall be paid monthly, commencing on January 31,
2000, and continuing on the last day of each successive month, quarter or other
period (as applicable) thereafter, with a final payment of all unpaid interest
at the stated maturity of this Note.
5. Revolving Feature.
[X] Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the principal
amount of this Note, provided, that Borrower is not in default under any
provision of this Note, any other documents executed in connection with the
Note, or any other note or other loan documents now or hereafter executed in
connection with any other obligation of Borrower to Bank, and provided that the
borrowings hereunder do not exceed any borrowing base or other limitation on
borrowings by Borrower. Bank shall incur no liability for its refusal to advance
funds based upon its determination that any conditions of such further advances
have not been met. Bank records of the amounts borrowed from time to time shall
be conclusive proof thereof.
[] Uncommited Facility. Borrower acknowledges and agrees that,
notwithstanding any provisions of this Note or any other documents executed
in connection with this Note, Bank has no obligation to make any advance,
and that all advances are at the sole discretion of Bank.
<PAGE>
[] Out-Of-Debt Period. For a period of at least _ consecutive days during
[] each fiscal year, [] any consecutive 12-month period, Borrower shall
fully pay down the balance of this Note, so that no amount of principal or
interest and no other obligation under this Note remains outstanding.
6. Automatic Payment.
[] Borrower has elected to authorize Bank to effect payment of sums due
under this Note by means of debiting Borrower's account number __________ .
This authorization shall not affect the obligation of Borrower to pay such
sums when due, without notice, if there are insufficient funds in such
account to make such payment in full on the due date thereof, or if Bank
fails to debit the account.
7. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor hereof
or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to any Obligor
in connection with the delivery, acceptance, performance, default or enforcement
of this Note, any indorsement or guaranty of this Note, or any other documents
executed in connection with this Note or any other note or other loan documents
now or hereafter executed in connection with any obligation of Borrower to Bank
(the "Loan Documents"); (b) consent to all delays, extensions, renewals or other
modifications of this Note or the Loan Documents, or waivers of any term hereof
or of the Loan Documents, or release or discharge by Bank of any of Obligors, or
release, substitution or exchange of any security for the payment hereof, or the
failure to act on the part of Bank, or any indulgence shown by Bank (without
notice to or further assent from any of Obligors), and agree that no such
action, failure to act or failure to exercise ally right or remedy by Bank shall
in any way affect or impair the obligations of any Obligors or be construed as a
waive, by Bank of, or otherwise affect, any of Bank's rights under this Note,
under any indorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agree to pay, on demand, all costs and expenses of collection
or defense of this Note or of any indorsement or guaranty hereof and/or the
enforcement or defense of Bank's rights with respect to, or the administration,
supervision, preservation, protection of, or realization upon, any property
securing payment hereof, including, without limitation, reasonable attorney's
fees, including fees related to any suit, mediation or arbitration proceeding,
out of court payment agreement, trial, appeal, bankruptcy proceedings or other
proceeding, In the amount of 15% of the principal amount of this Note, or such
greater amount as may be determined reasonable by any arbitrator or court,
whichever is applicable.
8. Prepayments. Prepayments may be made in whole or in part at any time on any
loan for which the Rate is based on the Prime Rate or on any other fluctuating
Rate or Index which may change daily. All prepayments of principal shall be
applied in the inverse order of maturity, or in such other order as Bank shell
determine in its sole discretion. No prepayment of any other loan shall be
permitted without the prior written consent of Bank. Notwithstanding such
prohibition, if there is a prepayment of any such loan, whether by consent of
Bank, or because of acceleration or otherwise, Borrower shall, within 15 days of
any request by Bank, pay to Bank any loss or expense which Bank may incur or
sustain as a result of such prepayment. For the purposes of calculating the
amounts owed only, it shall be assumed that Bank actually funded or committed to
fund the loan through the purchase of an underlying deposit in an amount and for
a term comparable to the loan, and such determination by Bank shall be
conclusive, absent a manifest error In computation.
9. Delinquency Charge. To the extent permitted by law, a delinquency charge may
be imposed in an amount not to exceed four percent (4%) of any payment that is
more than fifteen days late.
10. Events of Default. The following are events of default hereunder: (a) the
failure to pay or perform any obligation, liability or indebtedness of any
Obligor to Bank, or to any affiliate or subsidiary of Bank of America
Corporation, whether under this Note or any Loan Documents, as and when due
(whether upon demand, at maturity or by acceleration); (b) the failure to pay or
perform any other obligation, liability or indebtedness of any Obligor to any
other party which failure has a material adverse effect on Obligor; (c) the
death of any Obligor (if an individual), (d) the resignation or withdrawal of
any partner or a material Owner/Guarantor of Borrower, as determined by Bank in
________________ its sole discretion; (a) the commencement of a proceeding
against any Obligor for dissolution or liquidation, the voluntary or involuntary
termination or dissolution of any Obligor or the merger or consolidation of any
Obligor with or into another entity, (f) the insolvency of, the business failure
of, the appointment of a custodian, trustee, liquidator or receiver for or for
any of the property of, the assignment for the benefit of creditors by, or the
filing of a petition under bankruptcy, insolvency or debtor's relief law or the
filing of a petition for any adjustment of indebtedness, composition or
extension by or against any Obligor and if against, not dismissed within 60
days; (g) the determination by Bank that any representation or warranty made to
Bank by any Obligor in any Loan Documents or otherwise is or was, when it was
made, untrue in any material respect or materially misleading; (h) the failure
of any Obligor to timely deliver such financial statements, including tax
returns, other statements of condition or other information, as Bank shall
request from time to time; (i) the entry of a judgment a against any Obligor
which Bank deems to be of a material nature, in Bank's sole discretion; (j) the
seizure or forfeiture of or the issuance of any writ of possession, garnishment
or attachment, or any turnover order for any property of any Obligor in excess
of $50,000; (l) the determination by Bank that a material adverse change has
occurred in the financial condition of any Obligor; or (m) the failure of
Borrower's business to comply with any law or regulation ontrolling its
operation.
11. Remedies upon Default. Whe never there is a default, which has not been
remedied after five (5) days notice has been given by the Bank, under this Note
(a) the entire balance outstanding hereunder and all other obligations of any
Obligor to Bank (however acquired or evidenced) shall, at the option of Bank,
become immediately due and payable and any obligation of Bank to permit further
borrowing under this Note shall immediately cease and terminate, and/or (b) to
the extent permitted by law, the Rate of interest on the unpaid principal shall
be increased at Bank's discretion up to the maximum rate allowed by law, or if
none, 15% per annum (the "Default Rate"). The provisions herein for a Default
Rate shall not be deemed to extend the time for any payment hereunder or to
constitute a "grace period" giving Obligors a right to cure any default. At
Bank's option, any accrued and unpaid interest, fees or charges may, for
purposes of computing and accruing interest on a daily basis after the due date
of the Note or any installment thereof, be deemed to be a part of the principal
balance, and interest shall accrue on a daily compounded basis after such date
at the Default Rate provided in this Note until the entire outstanding balance
of principal and interest is paid in full. Bank is hereby authorized at any time
to set off and charge against any deposit accounts of any Obligor, as well as
any money, instruments, securities, documents, chattel paper, credits, claims,
demands, income and any other property, rights and interests of any Obligor
which at any time shall come into the possession or custody or under the control
of Bank or any of its agents, affiliates or correspondents, without notice or
demand, any and all obligations due hereunder. Additionally, Bank shall have all
rights and remedies available under each of the Loan Documents, as well as
rights and remedies available at law or in equity.
DEBTOR AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD
IN THE UNITED STATES TO APPEAR ON BEHALF OF DEBTOR IN ANY COURT IN ONE OR MORE
PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OR PROTHONOTARY OR OTHER COURT
OFFICIAL, AND TO CONFESS JUDGMENT AGAINST
<PAGE>
DEBTOR IN FAVOR OF THE HOLDER 0F THIS AGREEMENT IN THE FULL, AMOUNT DUE UNDER
THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES,
FEES AND COSTS) PLUS ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE
AMOUNT DUE. PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF DEBTOR
FOR PRIOR HEARING. DEBTOR AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL
BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF
BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MARYLAND. DEBTOR WAIVES THE BENEFIT OF ANY AND EVERY STATUTE,
ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON DEBTOR
ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR
SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE
ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY
AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST DEBTOR SHALL NOT BE EXHAUSTED
BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND
SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH
AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME,
IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS THE HOLDER SHALL DEEM
NECESSARY, CONVENIENT, OR PROPER.
12. Non-waiver. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Bank shall be cumulative and may be pursued singly,
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of Bank's
rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Bank or the obligations of Obligor to Bank
in any other respect at any other time.
13. Applicable Law, Venue and Jurisdiction. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of Maryland. In any litigation in
connection with or to enforce this Note or any indorsement or guaranty of this
Note or any Loan Documents, Obligors, and each of them, irrevocably consent to
and confer personal jurisdiction on the courts of the State of Maryland or the
United States located within the State of Maryland and expressly waive any
objections as to venue in any such courts. Nothing contained herein shall,
however, prevent Bank from bringing any action or exercising any rights within
any other state or jurisdiction or from obtaining personal jurisdiction by any
other means available under applicable law.
14. Partial Invalidity. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or validity of any other provision
herein and the invalidity or unenforceability of any provision of this Note or
of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
15. Waiver of Jury Trial. Obligors waive trial by jury in any action or
proceeding to which Obligors and Bank may be parties, arising out of, in
connection with or in any way pertaining to, this Note or the Loan Documents. It
is agreed and understood that this waiver constitutes a waiver of trial by jury
of all claims against all parties to such action or proceedings, including
claims against parties who are not parties to this Note. This waiver is
knowingly, willingly and voluntarily made by Obligors.
16. Binding Effect. This Note shall be binding upon and inure to the benefit of
Borrower, Obligors and Bank and their respective successors, assigns, heirs and
personal representatives, provided, however, that no obligations of Borrower or
Obligors hereunder can be assigned without prior written consent of Bank.
17. Controlling Document. To the extent that this Note conflicts with or is in
any way incompatible with any other Loan Document concerning this obligation,
the Note shall control over any other document, and if the Note does not address
an issue, then each other document shall control to the extent that it deals
most specifically with an issue.
18. YEAR 2000 REPRESENTATIONS AND WARRANTIES.
(A) Borrower has (i) begun analyzing the operations of Borrower and its
subsidiaries and affiliates that could be adversely affected by failure to
become Year 2000 compliant (that is, that computer applications, imbedded
microchips and other systems will be able to perform date-sensitive functions
prior to and after December 31, 1999) and; (ii) developed a plan for becoming
Year 2000 compliant in a timely manner, the implementation of which is on
schedule in all material respects. Borrower reasonably believes that it will
become Year 2000 compliant for its operations and those of its subsidiaries and
affiliates on a timely basis except to the extent that a failure to do so could
not reasonably be expected to have a material adverse effect upon the financial
condition of Borrower.
(B) Borrower reasonably believes any suppliers and vendors that are
material to the operations of Borrower or its subsidiaries and affiliates will
be Year 2000 compliant for their own computer applications except to the extent
that a failure to do so could not reasonably be expected to have a material
adverse effect upon the financial condition of Borrower.
(C) Borrower will promptly notify Bank in the event Borrower determines
that any computer application which is material to the operations of Borrowor,
its subsidiaries or any of its material vendors or suppliers will not be fully
Year 2000 compliant on a timely basis, except to the extent that such failure
could not reasonably be expected to have a material adverse effect upon the
financial condition of Borrower.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by, all terms
and conditions of this Note, and hereby executes this Note intending to create
an instrument executed under seal.
<PAGE>
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS.
Corporate or Partnership Borrower
Total Containment, Inc.
By: /s/ Keith R. Ruck (Seal)
-------------------------------
Name: Keith R. Ruck
-----------------------------
Title: Vice President Finance & CEO
----------------------------
-----------------------------------
Attest (If Applicable)
[Corporate Seal]
TCI Environment NV/SA
By: /s/ Keith R. Ruck (Seal)
-------------------------------
Name: Keith R. Ruck
-----------------------------
Title: Secretary
----------------------------
-----------------------------------
Attest (If Applicable)
[Corporate Seal]
Rene Morin, Inc.
By: /s/ Keith R. Ruck (Seal)
-------------------------------
Name: Keith R. Ruck
-----------------------------
Title: Secretary
----------------------------
-----------------------------------
Attest (If Applicable)
[Corporate Seal]
American Containment, Inc.
By: /s/ Keith R. Ruck (Seal)
-------------------------------
Name: Keith R. Ruck
-----------------------------
Title: Secretary
----------------------------
-----------------------------------
Attest (If Applicable)
[Corporate Seal]
[LOGO]
Bank of America, N.A.
Western Maryland Commercial
1070 West Patrick Street
Frederick, MD 21703-3963
Tel 301.698.6073
Fax 301.696.0179
March 16, 2000
Pierre Desjardins
Chairman of the Board
Total Containment, Inc.
A130 North Drive
P.O. Box 939
Oaks, Pennsylvania 19456
Re: Covenant Compliance
Dear Pierre:
You have advised us that as of December 31, 1999 actual tangible net worth,
as defined in the existing Loan Agreement dated December 14, 1999 between Total
Containment, Inc. and Bank of America, was leas than the initial requirement.
The specific covenant requirement is as follows:
o Section 4.A.i. -- Maintain a Tangible Net Worth of not less than $6,250,000
as of December 31, 1999, increasing by 50% of net income after taxes for
the fiscal year ending December 31, 2000.
Based on our understanding of the factors that contributed to the company's
equity position at the end of 1999, the Bank hereby agrees to retroactively
reset the minimum tangible net worth requirement at $5,000,000 as of December
31, 1999. The Loan Agreement will be modified to reflect this change and we will
notify you when the necessary documents have been prepared.
Please let me know if you have any questions about the new requirement.
Sincerey,
/s/ Richard C. Marshall
- ------------------------------
Richard C. Marshall III
Senior Vice President
EXHIBIT 11
TOTAL CONTAINMENT, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Basic:
Average shares outstanding........ 4,642 4,646 4,668
======== ====== =======
Net income applicable to common
shareholders $(12,356) $4,323 $(6,476)
======== ====== =======
Net income per share amount....... $ (2.66) $ 0.93 $ (1.39)
======== ====== =======
Assuming dilution:
Average shares outstanding........ 4,646
Effect of dilutive options........ 214
------
Totals.......................... 4,860
======
Net income applicable to common
shareholders.................... $4,323
======
Net income per share amount....... $ 0.89
======
</TABLE>
The calculations for the twelve month period for 1997 and 1999 are not presented
as the effect of the options would be anti-dilutive.
[LOGO]
To Our Shareholders:
Total Containment completed a difficult 1999 after the record year
experienced in 1998. The mergers of various major oil companies and the
extension of the EPA deadline for conformity with tank deregulation created an
overall slowdown in underground gas station construction which reduced revenues
dramatically and pushed back in time the opportunities which the industry had
hoped to capture. This slowdown, coupled with our aggressive investment program
initiated in late 1997 for both our pipe manufacturing facility and the pipe
replacement program, put a great deal of strain on the financial situation of
the Company during 1999. I would now like to tell you a little more about our
achievements, disappointments, and progress made during 1999.
Achievements
Product Positioning
We have positioned our products to provide system flexibility to adapt to
the potential change in fuel additives to replace Methyl Tertiary Butyl Ether
("MTBE's"). We have developed, over the last 10 years, an expertise to deal with
very sophisticated materials to provide the hardest and the best anti-permeation
inner layer in the industry. Both of these strengths, as well as superior pipe
construction, allow for the easiest installation worldwide. Depending on the
ultimate choice of fuel additive, our current development program should allow
our retractable piping systems to remain the easiest to install while providing
the flexibility to meet future requirements without breaking concrete.
As regulators push for "dry" underground systems, Total Containment has
developed TotalGard(R) services to eliminate water intrusion into underground
piping systems. Utilizing years of experience and our patented Resump(TM)
technology, Total Containment can solve water intrusion problems, without
digging up a site, requiring minimal downtime and at a fraction of the cost of
new site installation.
Pipe Manufacturing Capabilities
As of November 1999, Total Containment completed the task of bringing in
house the entire pipe manufacturing process by purchasing and installing a
"Corrugator," a plastic extruder that makes the various base pipes for the
Company's piping products. Previously, this base pipe was manufactured by an
outside vendor. The Corrugator is expected to allow the Company to reduce scrap,
product lead times, and overall cost of its products as well as allow the
Company greater possibility regarding research and development.
Disappointments
Sales
In 1999, the Company experienced a significant decrease in sales, due
primarily to the mergers of several large oil companies and their temporary
reductions in capital spending while awaiting Federal Trade Commission approvals
and due also to the extension of the EPA deadline for conformity with tank
regulations. The Company's net sales decreased to $24.9 million in 1999 from
$53.6 million in 1998. This decrease affected both our product sales as well as
field service operation revenues.
<PAGE>
Profits
Net income decreased substantially from net income of $4.6 million in 1998
to a net loss of $6.2 million in 1999. Total Containment was late in reacting to
such a sudden change in industry volume but nevertheless made significant
reductions in personnel levels and activities during the year. However it was
not sufficient to maintain profitable levels.
Pipe Replacement Program
Following a thorough assessment to deal with the deteriorating piping
previously supplied to us by Dayco Products, Inc. prior to 1994, we committed to
a very substantial proactive plan in 1997 and 1998 to replace this product.
Unfortunately, cash flows from operations did not allow us to continue the pipe
replacement program in 1999 at the same levels as 1997 and 1998. Total
Containment expects to continue replacing pipe as results from operations
permit.
We continued pursuing litigation against Dayco Products, Inc. to recover
the damages we sustained as a result of Dayco's deteriorating pipe.
Outlook
During 1997, 1998 and 1999, Total Containment, Inc. laid the foundation for
enhanced profitability with a plan for increased sales, efficiencies and
continued cost reduction. Unfortunately, the significant reduction in industry
volume did not allow the Company to realize these cost reductions and we
incurred substantial one-time expenditures to reduce personnel and cancel
activities. The good news is that we anticipate that the great majority of the
service stations not in conformity with current regulations will start to
install new underground containment systems in order to be in compliance with
the regulations within the mandated time periods. We also anticipate that once
the mergers of the major oil companies are approved and completed, they will
resume their capital expenditure programs. We also anticipate that established
retailers not previously involved in the petroleum industry will build stations
this year. We also anticipate that our new unique TotalGard product which is
designed to cater to new regulations for dry containment systems should provide
ample opportunity to resume growth and profitability.
Very truly yours,
/s/ Pierre Desjardins
---------------------------------------
Pierre Desjardins
Chairman and Chief Executive Officer
/s/ John R. Wright, Jr.
---------------------------------------
John R. Wright, Jr.
President and Chief Operating Officer
<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,
------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $39,069 $37,730 $ 45,649 $53,582 $24,913
Cost of sales (excluding warranty
expense)............................. 23,058 24,288 30,698 30,991 20,618
------- ------- -------- ------- -------
16,011 13,442 14,951 22,591 4,295
Warranty expense....................... 573 747 1,396 1,636 710
Special pipe warranty charge
(reversal)(1)(2)..................... 7,500 -- 17,200 (3,347) 800
------- ------- -------- ------- -------
Gross profit (loss).................... 7,938 12,695 (3,645) 24,302 2,785
Selling, general and administrative.... 10,262 10,665 12,307 12,261 11,510
Amortization of patents, licenses and
goodwill(3)(4)....................... 483 508 521 430 245
Loss on write-off of patent and patent
license(4)........................... -- -- 565 3,727 --
Other operating expense(5)............. -- -- 1,800 -- --
------- ------- -------- ------- -------
Income (loss) from operations.......... (2,807) 1,522 (18,838) 7,884 (8,970)
Interest expense....................... 146 362 627 537 725
Other expense(6)....................... 407 -- -- -- --
------- ------- -------- ------- -------
Income (loss) before income taxes...... (3,360) 1,160 (19,465) 7,347 (9,695)
Income tax expense (benefit)........... (1,112) 762 (7,109) 2,759 (3,525)
------- ------- -------- ------- -------
Net income (loss)(7)................... $(2,248) $ 398 $(12,356) $ 4,588 (6,170)
Preferred stock dividend(8)............ -- -- -- 264 307
------- ------- -------- ------- -------
Net income (loss) applicable to common
shareholders......................... $(2,248) $ 398 $(12,356) $ 4,324 $(6,477)
======= ======= ======== ======= =======
Earnings (loss) per common
share-basic(9)....................... $ (.48) $ .09 $ (2.66) $ .93 $ (1.39)
======= ======= ======== ======= =======
Earnings (loss) per common share --
assuming dilution.................... $ (.48) $ .08 $ (2.66) $ .89 $ (1.39)
======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 8,224 $ 8,261 $ 1,128 $ 4,761 $ (469)
Goodwill, patents and patent rights and
license, net(2)(3)................... 10,317 10,700 9,672 6,102 5,810
Deferred income taxes.................. 3,228 1,701 7,420 4,377 8,124
Total assets........................... 30,702 34,965 40,047 37,155 30,792
Line of credit borrowings(10)(11)...... 251 3,677 3,197 3,388 3,189
Debt(12)............................... 654 2,664 3,049 2,394 4,102
Stockholders' equity(8)................ 18,616 19,016 6,440 14,821 12,242
</TABLE>
3
<PAGE>
- ------------------
(1) As a result of a review performed during 1998 of the progress regarding the
Company's replacement of deteriorating pipe supplied by Dayco Products,
Inc. ("Dayco") prior to 1994 which the Company sold to end-users, as well
as the costs 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.
(2) As a result of a review performed during the fourth quarter of 1999 of the
progress regarding the Company's replacement of deteriorating pipe supplied
by Dayco, and the effects of the Company's decision, during the second
quarter of 1999, to only replace pipe at locations where the pipe is
significantly deteriorated, as well as the costs expected to be incurred to
complete this process, the Company recorded, during the fourth quarter of
1999, a charge to the warranty reserve of $800,000.
(3) 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"), in consideration of the
issuance by the Company to Treco of 45,000 shares of the Company's common
stock. The Tank Jacket patent was valued at $427,500. See Note 12 of Notes
to Consolidated Financial Statements.
(4) Due to a judicial order issued in September 1998 in litigation between the
Company and Environ Products, Inc., which declared invalid a patent
licensed by the Company, the Company wrote off in 1998 approximately $3.7
million of current unamortized cost of the patent license. See Note 12 of
Notes to Consolidated Financial Statements.
(5) The other expense of $1.8 million incurred in 1997 was associated with the
legal settlement regarding licensing of certain patented technology.
(6) In 1995, the Company incurred non-recurring transaction expenses,
consisting primarily of legal fees and special committee and board fees of
approximately $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.
(7) The net loss in 1997, resulting principally from the $20.4 million of
warranty and other expense in 1997, created a deferred tax asset of
approximately $7.4 million. This future tax asset is reflected under
"Deferred Income Taxes" (both current and long-term) on the Company's
balance sheet which will be deductible in future years.
(8) On March 17, 1998, the Company's principal shareholder purchased from the
Company 400 shares of authorized Series A Floating Rate Preferred Stock of
the Company at $10,000 cash per share or $4 million in the aggregate. In
December 1999, the Company's principal shareholder purchased an additional
400 shares of authorized Series B Floating Rate Preferred Stock of the
Company at $10,000 cash per share or $4 million in the aggregate.
(9) Based on approximately 4.6 million weighted average shares outstanding
during 1995, 1996, 1997, 1998 and 1999.
(10) 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(R) pipe, as well as two term loans for expansion
and the acquisition of American Containment, Inc.
(11) In December 1999, the Company entered into a new $5 million line of credit
which expires in June 2001. The line of credit is to be used for working
capital purposes.
(12) In September 1999, the Company refinanced all of its existing long-term
debt with a new $4 million facility with Finloc Inc. Proceeds from the loan
were used to repay $1.9 million of long-term debt, $1 million was used to
pay down the existing short-term line of credit and approximately $1.1
million was used to pay existing vendors who had supplied various
components in connection with the Company's installation of its corrugator.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, this report may be deemed to contain
"forward-looking" statements. The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.
These forward-looking statements include statements with respect to the
Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including but not
limited to, (i) projections of revenues, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
the effect of currency fluctuations, capital structure and other financial
items, (ii) statements of plans of and objectives of the Company or its
management or board of directors, including the introduction of new products, or
its management or board of directors, including the introduction of new
products, or estimates or predictions of actions by customers, suppliers,
competitors or regulating authorities, (iii) statements of future economic
performance, (iv) statements of assumptions, such as the prevailing weather
conditions in the Company's market areas, and other statements about the Company
or its business, and (v) statements preceded by, followed by or that include the
words "may," "could," "should," "pro forma," "looking forward," "would,"
"believe," "expect," "anticipate," "estimate," "intend," "plan," or similar
expressions. These forward-looking statements involve risks and uncertainties,
which are subject to change based on various important factors (some of which,
in whole or in part, are beyond the Company's control). The following factors,
among others, could cause the Company's financial performance to differ
materially from the goals, plans, objectives, intentions and expectations
expressed in such forward-looking statements: (1) the strength of the United
States and global economies in general and the strength of the regional and
local economies in which the Company conducts operations; (2) the effects of,
and changes in, U.S. and foreign governmental trade, monetary and fiscal
policies and laws; (3) the timely development of competitive new products and
services by the Company and the acceptance of such products and services by the
Company and the acceptance of such products and services by the Company and the
acceptance of such products and services by customers; (4) the willingness of
customers to substitute competitors' products and services and vise versa; (5)
the impact on operations of changes in U.S. and foreign governmental laws and
public policy, including environmental regulations; (6) the level of export
sales impacted by export controls, changes in legal and regulatory requirements,
policy changes affecting the markets, changes in tax laws and tariffs, exchange
rate fluctuations, political and economic instability, and accounts receivable
collection; (7) changes in capital expenditures by major oil companies resulting
from proposed and completed mergers and consolidations of the oil companies; (8)
technological changes; (9) regulatory or judicial proceedings; and (10) the
success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
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.
5
<PAGE>
RESULTS OF OPERATIONS -- 1997-1999
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0%
Cost of sales (excluding warranties)..................... 67.2 57.8 82.8
----- ----- -----
32.8 42.2 17.2
Warranty expense......................................... 3.1 3.0 2.8
Special pipe warranty charge (reversal).................. 37.7 (6.2) 3.2
----- ----- -----
Gross profit............................................. (8.0) 45.4 11.2
Selling, general and administrative...................... 27.0 22.9 46.2
Amortization of patents, licenses and goodwill........... 1.1 0.8 1.0
Loss on write-off of patent and patent license........... 1.2 7.0 --
Other operating expense.................................. 3.9 -- --
----- ----- -----
Operating income (loss).................................. (41.2) 14.7 (36.0)
Interest expense......................................... 1.4 1.0 2.9
----- ----- -----
Income (loss) before income taxes........................ (42.6) 13.7 (38.9)
Income tax expense (benefit)............................. (15.6) 5.1 (14.1)
----- ----- -----
Net income (loss)........................................ (27.0)% 8.6% (24.8)%
----- ----- -----
Preferred stock dividend................................. -- .5 1.2
----- ----- -----
Net income (loss) applicable to common shareholders...... (27.0)% 8.1% (26.0)%
===== ===== =====
</TABLE>
6
<PAGE>
1999 VERSUS 1998
NET SALES
The Company's net sales for the year ended December 31, 1999 were $24.9
million compared to $53.6 million for the year ended December 31, 1998, a
decrease of 53.5%. The decrease was attributable to a decrease in sales from
both our flexible underground piping system products, and our field operations
at our American Containment, Inc. subsidiary, partly 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 decrease was also caused in part by the
Environmental Protection Agency's ("EPA") extension of the deadline for
conformity to new tank regulations. The recently announced merger plans of
several large oil companies has resulted in a decrease in their capital
expenditure plans (with some large oil companies, a temporary suspension) which
has also had a negative impact on the Company's revenues.
GROSS PROFIT (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, field service and warehousing operations,
depreciation of molds, tools and equipment, and warranty expense. The Company's
gross profit after the warranty provision for the year ended December 31, 1999
was $2.8 million compared to a $24.3 million profit after the warranty provision
for the year ended December 31, 1998. The decrease is due primarily to the
decrease in product sales volume as well as a decrease in the field service
operation sales volume. Additionally, at the lower revenue levels,
manufacturing, warehousing and field service costs were not fully absorbed. As a
result of a review performed during the fourth quarter of 1999 of the progress
regarding the Company's replacement of deteriorating pipe supplied by Dayco, and
the effects of the Company's decision, during the second quarter of 1999, to
selectively replace pipe as operations permit, as well as the costs expected to
be incurred to complete this process, the Company recorded, during the fourth
quarter of 1999, a charge to the warranty reserve of $800,000. As a result of a
review performed in 1998 of the progress made regarding this replacement pipe
program, including the costs then expected to be incurred to complete this
process, the Company recorded a reduction of the warranty reserve of
approximately $3.3 million in 1998.
Comparing margins before the effect of the warranty provision, the Company
experienced a decrease in gross profit primarily from decreased sales of our
main piping products and field service operations and the resultant unabsorbed
manufacturing, warehousing and field operation costs.
The Company's gross profit percentage after the effect of the warranty
provision decreased to 11.2% for the year ended December 31, 1999, compared to a
gross profit percentage after the effect of the warranty provision of 45.4% for
the year ended December 31, 1998. The gross margin for 1999 was adversely
affected by the decrease in product sales volume as well as a decrease in the
field service operation sales volume and the unabsorbed manufacturing,
warehousing and field services operations costs. The gross profit margin
percentage was also adversely affected by the special warranty charge of
$800,000. The gross margin for 1998 experienced a benefit from the $3.3 million
reduction of the warranty reserve. The Company's gross profit percentage before
effect of the warranty provision for the year ended December 31, 1999 decreased
to 17.2%, compared to a gross profit percentage before the effect of the
warranty provision of 42.2% for the year ended December 31, 1998. The decrease
was primarily attributable to the decrease in product sales volume as well as a
decrease in the field service operation sales volume.
7
<PAGE>
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 year ended December 31, 1999 were $11.5 million,
compared to $12.3 million for the year ended December 31, 1998. The decrease
from 1998 to 1999 resulted mainly from a decrease in personnel headcount and
activity levels due to cost reductions initiated by the Company during the
second quarter of 1999. These reductions are partially offset by approximately
$1.5 million in one-time charges for reductions in operations, shutdown of
certain activities, write down of certain asset valuations, severance costs,
truck lease termination expenses, bank line of credit renegotiation costs,
accounts receivable reserves and insurance coverage adjustments.
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 $244,884 in fiscal 1999 from
$430,468 in fiscal 1998 is due to the write off of the patent license in the
third quarter of 1998 (See Note 12 of Notes to Consolidated Financial
Statements).
OTHER EXPENSE
Other expense of $3.7 million incurred during the year ended December 31,
1998 was associated with the write off of a patent license (originally
capitalized by the Company) in connection with litigation which invalidated the
underlying patent. The Company does not believe that the loss of the patent has
had or will have a material adverse effect on its business. (See Note 12 of
Notes to Consolidated Financial Statements).
INTEREST EXPENSE
Interest expense for the year ended December 31, 1999 was $725,003,
compared to $536,490 for the year ended December 31, 1998. Interest expense is
incurred on term loans that were used for acquisitions and purchasing equipment
and under the Company's working capital line of credit. The increase is due to a
higher average balance outstanding on the Company's lines of credit during 1999
compared to 1998 that were used to fund the operations of the Company during
1999 (see Note 7 of the Consolidated Financial Statements.) The increase is also
due to a higher variable lending rate experienced in the second half of 1999
compared to 1998.
INCOME TAXES
The income tax benefit for the year ended December 31, 1999 was $3.5
million compared to an expense of $2.8 million for the year ended December 31,
1998. The Company's effective tax rate was 36.3% during 1999 compared to an
effective tax rate of 37.6% in 1998. In recognizing this benefit in the 1999
period, the Company increased its deferred tax asset on its balance sheet.
Realization of deferred tax assets associated with net operating loss (NOL)
carryforwards is dependent upon generating sufficient taxable income prior to
their expiration. Management believes that the general slowdown that the Company
experienced in its market during 1999 is temporary in nature. Management also
believes that when the mergers of the several large oil companies are approved
by the Federal Trade Commission and when these large oil companies plan and
execute their new capital expenditure plans, the Company will experience an
increase in its revenues and will return to profitable operations. Based on
current projections by management, the expected taxable earnings for the near
future are sufficient to realize the current value of the deferred tax
8
<PAGE>
assets. These projections include results of operations from both product sales
as well as field service operations, and possible outcomes of the Dayco lawsuit.
Although realization is not assured for the remaining deferred tax assets at
December 31, 1999 the Company currently believes that it is more likely than not
that this asset will be realized in future years as a result of taxable income
to be generated by its overall operations, but will continue to monitor the
valuation of this asset on an ongoing basis.
PREFERRED STOCK DIVIDENDS
In 1999, the Company accrued a dividend of $306,599 on the Company's
outstanding Series A and B Floating Rate Preferred Stock (the "Preferred
Stock"). (See Note 10 of Notes to Consolidated Financial Statements).
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS
The Company's net loss applicable to common shareholders for the year ended
December 31, 1999 was $6.5 million, or $1.39 per share, compared to net income
applicable to common shareholders of $4.3 million, or $.93 per share, for the
year ended December 31, 1998. The decrease of $10.8 million was primarily a
result of the decrease in product sales volume as well as a decrease in the
field service operation sales volume, unabsorbed manufacturing, warehousing and
field service costs, charges associated with the shutdown or curtailment of
several activities of the Company and the 1999 special warranty charge of
$800,000. The 1998 results were adversely affected by the $3.7 million write off
of a patent license, which was substantially offset by the reversal of $3.3
million of the warranty reserve.
1998 VERSUS 1997
NET SALES
The Company's net sales for the year ended December 31, 1998 were $53.6
million compared to $45.6 million for the year ended December 31, 1997, an
increase of 17.4%. The increase was primarily attributable to increased sales
from our field operations at our American Containment, Inc. subsidiary, as well
as continued strong sales of our flexible underground piping systems driven by
the buoyancy of the North American market.
GROSS PROFIT (LOSS)
The Company's gross profit after the warranty provision for the year ended
December 31, 1998 was $24.3 million compared to a $3.6 million loss after the
warranty provision for the year ended December 31, 1997. During 1997, the
Company recorded warranty expense of $18.6 million primarily to cover the cost
of replacing deteriorating pipe (see Note 2 of Notes to Consolidated Financial
Statements). As a result of a review performed in 1998 of the progress made
regarding this replacement pipe program, including the costs then expected to be
incurred to complete this process, the Company recorded a reduction of the
warranty reserve of approximately $3.3 million in 1998. 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.
Comparing margins before the effect of the warranty provision, the Company
experienced an increase in gross profit primarily from increased sales and
reduced costs of producing our main piping products. The integration of our pipe
manufacturing plant in October 1997, coupled with lower costs in certain other
products due to our cost reduction program initiated in the second half of 1997
has reduced the overall cost of the Company's products. The Company also
experienced an increase in gross margin due to a decrease in the costs of
producing certain fiberglass products at its Bakersfield, California operations.
9
<PAGE>
The Company's gross profit percentage after the effect of the warranty
provision increased to 45.4% for the year ended December 31, 1998, compared to a
gross loss after the effect of the warranty provision of 8.0% for the year ended
December 31, 1997. The gross margin for 1997 was adversely affected by the $18.6
million warranty charge. The gross margin for 1998 experienced a benefit from
the $3.3 million reduction of the warranty reserve. The Company's gross profit
percentage before effect of the warranty provision for the year ended December
31, 1998 increased to 42.2%, compared to a gross profit percentage before the
effect of the warranty provision of 32.8% for the year ended December 31, 1997.
The increase was primarily attributable to the reduced costs of our main piping
products as well as lower costs in certain other products.
OPERATING EXPENSE
Selling, general and administrative expenses for the year ended December
31, 1998 were $12.26 million, compared to $12.31 million for the year ended
December 31, 1997. The Company experienced a decrease in overall legal costs but
it was almost entirely offset by an increase in bad debt expense and training
costs related to the implementation of our new information system.
AMORTIZATION OF INTANGIBLES
The decrease in amortization expense to $430,468 in fiscal 1998 from
$521,077 in fiscal 1997 is due to the write off of the patent license in the
third quarter of 1998 (See Note 12 of Notes to Consolidated Financial
Statements).
OTHER EXPENSE
Other expense of $3.7 million incurred during the year ended December 31,
1998 was associated with the write off of a patent license originally
capitalized by the Company in connection with litigation, which invalidated the
underlying patent. The Company does not believe that the loss of the patent has
had or will have a material adverse effect on its business. (See Note 12 of
Notes to Consolidated Financial Statements). The other expense of $1.8 million
incurred in the year ended December 31, 1997 was associated with the legal
settlement regarding licensing of certain patented technology. The Company also
incurred $564,684 of other expense during 1997 related to the write off of a
patent of a product line that has been discontinued.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998 was $536,490,
compared to $626,575 for the year ended December 31, 1997. Interest expense is
incurred on term loans that were used for purchasing equipment and under the
Company's working capital line of credit. The decrease is due to a lower average
balance outstanding on the Company's line of credit during 1998 compared to 1997
due to the proceeds from the issuance of the $4 million of Preferred Stock, and
a decrease in the interest rate charged on the line of credit (see Note 7 of the
Consolidated Financial Statements.)
INCOME TAXES
Income taxes for the year ended December 31, 1998 were $2.8 million
compared to a benefit of $7.1 million for the year ended December 31, 1997. The
Company's effective tax rate was 38% during 1998 compared to an effective tax
rate of 37% in 1997. The Company provided a valuation allowance of $275,465 for
state deferred income tax assets in 1997 but removed the valuation allowance in
1998 due to the expectation that they will be fully realized.
10
<PAGE>
PREFERRED STOCK DIVIDENDS
In 1998, the Company accrued a dividend of $264,301 on the Company's
outstanding Series A Floating Rate Preferred Stock (the "Preferred Stock"). (See
Note 10 of Notes to Consolidated Financial Statements).
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS
The Company's net income applicable to common shareholders for the year
ended December 31, 1998 was $4.3 million, or $.93 per share, compared to a loss
of $12.4 million, or $2.66 per share, for the year ended December 31, 1997. The
increase of $16.7 million was a result of the prior year results containing a
$20.4 million pre-tax charge to earnings to increase the company's warranty
reserve, to write down certain inventory, as well as to record charges
associated with licensing of certain patented technology and the write off of a
patent. The 1998 results were adversely affected by the $3.7 million write off
of a patent license, which was substantially offset by the reversal of $3.3
million of the warranty reserve. The increase in net income for the year,
excluding the previously mentioned charges, resulted from increased sales and an
increase in gross margin percentage, which was partially offset by the increase
in income tax expense.
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. The Company's sales
have also been adversely affected, to a slight extent, due to the recent Asian
economic crisis and political changes in certain Latin American countries.
The recently announced merger plans of several large oil companies have
created a short-term uncertainty regarding their retail operation capital
expenditure plans. The Company's 1999 results experienced adverse sales and
operating results due to a reduction in capital expenditures by the large oil
companies related to their retail operations. The decrease was also caused in
part by the EPA's extension of the deadline for conformity to the new tank
regulations. The Company believes that once these mergers receive Federal Trade
Commission approvals, and the major oil companies execute the requirements
mandated by the Federal Trade Commission, the major oil companies will renew
their related capital expenditures.
INFLATION
Management does not believe that inflation has had a material impact upon
results of operations during the years ended December 31, 1997, 1998 or 1999.
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 No.
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. Diluted 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.
11
<PAGE>
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards to provide prominent
disclosure of comprehensive income items. Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Prior period amounts have been
restated to conform to the provisions of SFAS No. 130. The adoption of SFAS No.
130 had no impact on the Company's financial position or results of operations.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires that
public business enterprises report certain information about the operating
segments in a complete set of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires the reporting of certain information about their products and
services, the geographic area in which they operate, and their major customers.
The adoption of SFAS No. 131 had no impact on the Company's financial position
or results of operations.
On January 1, 1999, the Company, in accordance with the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants adopted 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. The adoption of SOP 98-1 had no material impact on the
Company's financial position or results of operations.
UPDATE ON YEAR 2000 ISSUES
As of the filing date of this Annual Report on Form 10-K, no significant
problems have been encountered as a result of computer problems related to
operating in calendar year 2000. All known remediation projects and all critical
projects throughout Total Containment have been completed. Contingency plans
were developed for any process determined to be mission critical to the Company.
All manufacturing, shipping and administrative functions have operated normally
since January 1, 2000 and no significant problems have been experienced with
suppliers or customers.
The Company has incurred 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 cost approximately $350,000, of which approximately $300,000 was
incurred as part of the Company's acquisition of a new information system in
1998.
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.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of approximately $469,000 at
December 31, 1999, compared to a positive $4.8 million at December 31, 1998. The
decrease is due primarily to the 1999 operating loss of the Company and the use
by the Company of its short-term line of credit to fund such losses.
In December 1999, the Company entered into a new short term, $5 million
line of credit facility with a new bank. This line of credit, as well as funds
from operations, are used to satisfy the Company's working capital needs. This
line expires on June 30, 2001. Proceeds from this facility were used to repay
the old facility of approximately $3 million. This facility charges interest at
a rate of LIBOR plus 1.50% (7.33% as of December 31, 1999) and is guaranteed by
Canam Steel Corporation, a subsidiary of The Canam Manac Group, Inc. Canam Steel
Corporation
12
<PAGE>
charges a fee for this guarantee at the rate of .50% of the outstanding balance.
The line of credit requires the Company to maintain $5.0 million in tangible net
worth as defined in the agreement.
In September 1999, the Company refinanced all of its long-term debt of
approximately $1.9 million with a new five-year, $4 million facility with
Finloc, Inc. ("Finloc"), an affiliate of The Canam Manac Group, Inc. Finloc is
currently the holder of approximately 56% of the Company's common stock. The
facility charges interest at the rate of LIBOR plus 4.00% (9.83% at December 31,
1999). The loan is in the form of a six-month promissory note, which requires
payment of the entire principal and accrued interest at its term. Finloc has
provided a written notice of its intent to renew this note every six months for
a period of five years with a reduction of principal of approximately $400,000
from the principal of the previous note. The proceeds of this note were used to
repay the $1.9 million outstanding under the previous long term facilities, $1
million was used to pay down the existing short term line of credit facility and
approximately $1.1 million was used to pay existing vendors who supplied various
components in connection with the Company's installation of its corrugator (see
Note 6 of Notes to Consolidated Financial Statements).
The Company invested $2.2 million, $1.5 million and $2.4 million in capital
equipment and leasehold improvements in 1997, 1998 and 1999, respectively. In
the fourth quarter of 1999, the Company completed the installation of its pipe
manufacturing line at the Oaks, Pennsylvania facility by purchasing, for
approximately $2.1 million, and installing a "corrugator," a plastic extruder
which makes the base pipe for all of its piping products. Previously, between
1997 and 1999, the Company purchased the base pipe from an outside vendor. The
purchase of product molds and tooling constituted $501,000, $197,000 and
$188,000 of these capital expenditures in 1997, 1998, and 1999, respectively.
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.
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders,
Total Containment, Inc.
We have audited the consolidated balance sheets of Total Containment, Inc.
(a Pennsylvania Corporation) and Subsidiaries as of December 31, 1998 and 1999,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1999. 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 audits.
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 that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 1998 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three year period ended December 31, 1999 in conformity
with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
February 18, 2000
14
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 132,164 $ 730,822
Accounts receivable, net of allowance for doubtful
accounts of $420,499 and $359,839 for 1998 and
1999, respectively................................. 13,329,081 4,158,027
Inventories........................................... 7,622,796 5,438,388
Deferred income taxes................................. 2,850,602 1,535,137
Other current assets.................................. 766,962 624,730
----------- -----------
Total current assets............................ 24,701,605 12,487,104
Molds and tooling, net................................ 437,721 329,439
Property and equipment, net........................... 4,386,726 5,576,097
Patents, patent rights and licenses, net.............. 309,880 250,551
Goodwill, net......................................... 5,792,391 5,559,608
Deferred income taxes................................. 1,526,823 6,589,243
----------- -----------
$37,155,146 $30,792,042
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings............................. $ 3,388,000 $ 3,189,391
Current portion of long-term debt..................... 667,576 875,292
Accounts payable, trade and accrued expenses.......... 6,147,949 3,588,950
Accrued preferred stock dividends..................... 264,301 306,599
Other payable......................................... 4,020,481 4,020,481
Warranty reserve--current............................. 5,451,992 975,170
----------- -----------
Total current liabilities....................... 19,940,299 12,955,883
Long-term debt............................................. 1,726,798 3,227,097
Non-current warranty....................................... 666,890 2,366,725
----------- -----------
Total liabilities............................... 22,333,987 18,549,705
----------- -----------
Commitments and contingencies.............................. -- --
Shareholders' equity:
Preferred stock--Series A, $10,000 par value;
authorized, issued and outstanding 400 shares...... 4,000,000 4,000,000
Preferred stock--Series B, $10,000 par value;
authorized, issued and outstanding 400 shares...... -- 4,000,000
Common stock--$.01 par value; authorized 20,000,000
shares; 4,652,600 and 4,672,600 shares issued and
outstanding........................................ 46,526 46,726
Capital in excess of par value........................ 13,756,355 13,808,655
Retained earnings..................................... (2,815,886) (9,292,432)
Accumulated other comprehensive income................ (165,836) (320,612)
----------- -----------
Total shareholders' equity...................... 14,821,159 12,242,337
----------- -----------
$37,155,146 $30,792,042
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Net sales..................................... $ 45,648,699 $53,581,818 $24,913,485
Cost of sales (excluding warranty expense).... 30,697,518 30,991,472 20,618,098
------------ ----------- -----------
14,951,181 22,590,346 4,295,387
Warranty expense.............................. 1,396,329 1,635,660 709,727
Special pipe warranty charge (reversal)....... 17,200,000 (3,347,567) 800,000
------------ ----------- -----------
Gross profit (loss)........................... (3,645,148) 24,302,253 2,785,660
Selling, general and administrative........... 12,307,515 12,261,077 11,510,429
Amortization of patents, licenses and
goodwill.................................... 521,077 430,468 244,884
Loss on write-off of patent and patent
license..................................... 564,684 3,727,250 --
Other operating expense....................... 1,800,000 -- --
------------ ----------- -----------
Income (loss) from operations................. (18,838,424) 7,883,458 (8,969,653)
Interest expense.............................. 626,575 536,490 725,003
------------ ----------- -----------
Income (loss) before income taxes............. (19,464,999) 7,346,968 (9,694,656)
Income tax expense (benefit).................. (7,108,795) 2,759,195 (3,524,709)
------------ ----------- -----------
Net income (loss)............................. $(12,356,204) $ 4,587,773 $(6,169,947)
Preferred stock dividend...................... -- 264,301 306,599
------------ ----------- -----------
Net income (loss) applicable to common
shareholders................................ $(12,356,204) $ 4,323,472 $(6,476,546)
============ =========== ===========
Per share data:
Earnings (loss) per common share--basic....... $ (2.66) $ .93 $ (1.39)
============ =========== ===========
Earnings (loss) per common share assuming
dilution.................................... $ (2.66) $ .89 $ (1.39)
============ =========== ===========
Weighted average shares used in computation of
earnings (loss) per common share--basic..... 4,641,600 4,646,000 4,667,855
============ =========== ===========
Weighted average shares used in computation of
earnings (loss) per common share--assuming
dilution.................................... 4,641,600 4,859,872 4,667,855
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL OTHER
PREFERRED COMMON IN EXCESS RETAINED COMPREHENSIVE
STOCK STOCK OF PAR VALUE EARNINGS INCOME (LOSS) TOTAL
---------- ------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997...... $ -- $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
Net income........... 4,587,773 4,587,773
Equity adjustment
from foreign
currency
translation........ 30,144 30,144
Issuance of preferred
stock.............. 4,000,000 4,000,000
Issuance of common
stock.............. 110 27,577 27,687
Preferred stock
dividends.......... (264,301) (264,301)
---------- ------- ----------- ----------- --------- -----------
December 31,
1998............... 4,000,000 46,526 13,756,355 (2,815,886) (165,836) 14,821,159
Net loss............. (6,169,947) (6,169,947)
Equity adjustment
from foreign
currency
translation........ (154,776) (154,776)
Issuance of preferred
stock.............. 4,000,000 4,000,000
Issuance of common
stock.............. 200 52,300 52,500
Preferred stock
dividends.......... (306,599) (306,599)
---------- ------- ----------- ----------- --------- -----------
December 31,
1999............... $8,000,000 $46,726 $13,808,655 $(9,292,432) $(320,612) $12,242,337
========== ======= =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
TOTAL CONTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operation activities:
Net income (loss)......................... $(12,356,204) $ 4,587,773 $(6,169,947)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 1,744,418 1,940,778 1,629,614
Loss on write-off of patent............... 564,684 3,727,250 --
Change in assets and liabilities:
Accounts receivable....................... (561,500) (5,424,842) 8,834,718
Inventories............................... (158,721) (303,804) 2,138,847
Other assets.............................. 1,081,230 1,525,848 78,953
Deferred taxes............................ (5,719,438) 3,042,634 (3,746,956)
Accounts payable, trade and accrued
expenses............................... 987,414 (436,771) (2,275,025)
Other payable............................. 4,020,481 -- --
Warranty reserve.......................... 12,855,711 (11,205,524) (2,734,445)
------------ ----------- -----------
Net cash provided by (used for)
operating activities.............. 2,458,075 (2,546,658) (2,244,241)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of molds and tooling............. (500,688) (197,066) (187,948)
Purchase of property and equipment........ (1,699,212) (1,279,361) (2,237,346)
Patent costs and license fees............. (67,744) -- --
------------ ----------- -----------
Net cash used for investing
activities........................ (2,267,644) (1,476,427) (2,425,294)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock..... -- 4,000,000 4,000,000
Dividends paid on Preferred Stock......... -- -- (264,301)
Proceeds from sale of common stock........ -- 27,687 52,500
Borrowings on long-term debt.............. 1,154,712 105,000 2,125,392
Payments on long-term debt................ (770,012) (759,420) (417,377)
Net borrowings (payments) under line of
credit................................. (480,000) 191,000 (198,609)
------------ ----------- -----------
Net cash provided by (used for)
financing activities.............. (95,300) 3,564,267 5,297,605
------------ ----------- -----------
Effect of foreign currency exchange rate....... (99,027) (21,137) (29,412)
------------ ----------- -----------
Net increase (decrease)........................ (3,896) (479,955) 598,658
Cash and cash equivalents at beginning of
year......................................... 616,015 612,119 132,164
------------ ----------- -----------
Cash and cash equivalents at end of year....... $ 612,119 $ 132,164 730,822
============ =========== ===========
Supplemental cash flow information:
Interest paid............................. $ 626,575 $ 540,469 $ 533,105
Income taxes paid (received) net of
refunds................................ $ (1,024,129) $(1,567,063) $ (369,407)
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<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, products and services 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 (TCIE-NV), Rene Morin, Inc., FMW Inc. and American Containment, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Consolidated Balance Sheets for the 1997 and 1998 periods
were reclassified to conform with current year presentation.
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. Goodwill associated with this purchase is
being amortized over approximately forty years.
Foreign currency translation. TCI Environment NV used the Belgian Franc
through 1998 and has used the Euro since January 1, 1999 as its functional
currency. Changes in the amount of the translation adjustment during each
reporting period are reported as a separate component of Shareholders' Equity
under Accumulated Other Comprehensive Income.
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 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, $255,500 and $59,329 for 1997,
1998 and 1999, respectively. A patent was written off in the third quarter of
1997 for a product line that was discontinued with a book value of $564,684. Due
to a judicial order issued in September 1998 in the litigation between the
Company and Environ Products, Inc., which declared the underlying patent to the
license invalid, the Company wrote off in 1998 approximately $3.7 million of
current unamortized cost of the patent license. Accumulated amortization was
$346,620 and $405,949 at December 31, 1998 and 1999, 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 $166,009,
$174,968 and $185,555 for 1997, 1998 and 1999, respectively. Accumulated
goodwill amortization was $1,443,085 and $1,628,640 at December 31, 1998 and
1999, respectively.
19
<PAGE>
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.
Company sponsored retirement plan. Certain employees of the Company
participate in a Company sponsored 401(k) retirement plan. The Company's only
costs during the years ended December 31, 1997, 1998, and 1999 were the
management fees charged for administration of the plan. These costs were
immaterial in each of the three years presented.
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 product liability claims and associated legal
fees based upon its industry knowledge and actual claims experience.
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, then 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 4,000
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. As a result of a review performed during the
third quarter of 1998 of the progress made regarding this replacement pipe
program, as well as the costs then expected to be incurred to complete this
process, the Company recorded, during the third quarter of 1998, a reduction of
the warranty reserve of approximately $3.3 million. As a result of a review
performed during the fourth quarter of 1999 of the progress regarding the
Company's replacement of deteriorating pipe supplied by Dayco, and the effects
of the Company's decision, during the second quarter of 1999, to only replace
pipe at locations where the pipe is significantly deteriorated, as well as the
costs expected to be incurred to complete this process, the Company recorded,
during the fourth quarter of 1999, a charge to the warranty reserve of
approximately $800,000. (See Note 12 of the Notes to Consolidated Financial
Statements).
Income taxes. The Company uses the liability method (specified by SFAS No.
109) 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, 1997, 1998 and 1999 were a benefit of $7.1 million, a
charge of $2.8 million and a benefit of $3.5 million, respectively. The
variances from 1999 to 1998 and 1998 to 1997 were due to the change in the
Company's income before income taxes. An income tax benefit was recorded in
1997, which was derived principally from the future deductibility of warranty
expense recognized for financial statement purposes in 1997, had been
established as a deferred tax asset in the amount of $7.4 million as of December
31, 1997 and was segmented into current and long term portions based upon
projections as to the tax period in which the Company expected to receive these
benefits. The Company utilized a portion of the deferred tax asset during 1998,
thereby decreasing its balance to $4.4 million as of December 31, 1998. As a
result of the
20
<PAGE>
losses sustained by the Company during 1999, the Company increased its deferred
tax asset by $3.7 million to $8.1 million as of December 31, 1999. The valuation
allowance relating to the state net operating loss carryforward component of the
deferred tax asset was $275,465 at December 31, 1997 but was eliminated as of
December 31, 1998 due to the expectation that the state net operating loss
carryforwards will be utilized. Realization of deferred tax assets associated
with NOL carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. The Company currently believes that it is more likely
than not that this asset will be realized in future years as a result of taxable
income to be generated but will continue to monitor the valuation of this asset
on an ongoing basis.
The Company's foreign subsidiary has undistributed retained earnings of
$1.4 million and $1.6 million at December 31, 1998 and 1999, 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.
The other expense in 1998 of $3.7 million was associated with the write-off of a
patent license (See Note 12 of Notes to Consolidated Financial Statements).
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 No. 128 eliminates the presentation of 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. Diluted
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.
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 $527,000, $375,500 and $270,000 in
1997, 1998, and 1999, respectively.
New Accounting Pronouncements. On January 1, 1998, the Company adopted
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 No. 130 had no impact on the
Company's financial position or results of operations. The Company's total
comprehensive income (loss) for the years ended December 31, 1997, 1998 and 1999
was $(12,575,723), $4,617,917 and $(6,324,723) respectively.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires that
public business enterprises report certain information about the operating
segments in a complete set of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires the reporting of certain information about their products and
services, the geographic area in which they operate, and their major customers.
The adoption of SFAS No. 131 had no impact on the Company's financial position
or results of operation.
21
<PAGE>
On January 1, 1999, the Company, in accordance with the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants adopted 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. The adoption of SOP 98-1 had no material impact on the
Company'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 reasonably subject to change
include the warranty reserve and deferred tax assets.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Raw materials............................................... $ 784,719 $ 525,923
Finished goods.............................................. 6,838,077 4,912,465
---------- ----------
$7,622,796 $5,438,388
========== ==========
</TABLE>
4. MOLDS AND TOOLING
Molds and tooling include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL -----------------------
LIVES 1998 1999
------- ---------- ----------
<S> <C> <C> <C>
Molds and tooling.................................... 3 years $2,386,973 $2,566,482
Less--accumulated amortization....................... (1,949,252) (2,237,043)
---------- ----------
$ 437,721 $ 329,439
========== ==========
</TABLE>
Amortization expense of molds and tooling costs was $865,106, $698,058 and
$287,791 for the years ended December 31, 1997, 1998 and 1999, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL -----------------------
LIVES 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Furniture, fixtures and office equipment.......... 3-5 years $ 981,801 $1,045,605
Equipment......................................... 5-10 years 4,075,351 6,183,542
Leasehold improvements............................ lease term 861,212 963,866
---------- ----------
5,918,364 8,193,013
Less--Accumulated depreciation.................... (1,531,638) (2,616,916)
---------- ----------
$4,386,726 $5,576,097
========== ==========
</TABLE>
22
<PAGE>
Depreciation expense on property and equipment was $322,640, $814,663 and
$1,096,939 for the years ended December 31, 1997, 1998 and 1999, respectively.
Fully depreciated assets of $437,181 and $11,661 were removed from both the
fixed asset and accumulated depreciation account in 1998 and 1999 respectively.
In the fourth quarter of 1999, the Company completed the installation of
its pipe manufacturing line at the Oaks, Pennsylvania facility by purchasing,
for approximately $2.1 million, a "Corrugator", a plastic extruder which makes
the base pipe for all of its piping products. Previously, between 1997 and 1999,
the Company purchased the base pipe from an outside vendor.
6. LONG-TERM DEBT
In September 1999, the Company refinanced all of its long-term debt of
approximately $1.9 million with a new five-year, $4 million facility with
Finloc, Inc. ("Finloc"), an affiliate of The Canam Manac Group, Inc. Finloc is
currently the holder of approximately 56% of the Company's common stock. The
facility charges interest at the rate of LIBOR plus 4.00% (9.83% at December 31,
1999). The loan is in the form of a six-month promissory note, which requires
payment of the entire principal and accrued interest at its term. Finloc has
provided a written notice of its intent to renew this note every six months for
a period of five years with a reduction of principal of approximately $400,000
from the principal of the previous note. The proceeds of this note were used to
repay the $1.9 million outstanding under the previous long term facilities, $1
million was used to pay down the existing short term line of credit facility and
approximately $1.1 million was used to pay existing vendors who supplied various
components in connection with the Company's installation of its corrugator (see
Note 5).
In 1997, the Company borrowed from the bank under a term loan credit
facility to acquire equipment related to a new pipe manufacturing line. The term
loan charged interest at the bank's national commercial rate plus .125% and was
secured by all equipment financed thereunder. At both December 31, 1998 and
August 31, 1999, balances of $807,977 were outstanding under the term loan. This
loan was refinanced in September 1999 as discussed above.
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 charged
interest at the bank's national commercial rate plus .125% and was secured by
the assets of American Containment, Inc. At December 31, 1998 and August 31,
1999, $533,305 and $399,964 was outstanding under the term loan. The loan
required the payment of equal monthly installments of principal in the amount of
$16,667 plus interest on the unpaid principal balance. This loan was refinanced
in September 1999 as discussed above.
In 1996, Rene Morin, Inc. borrowed under a term loan for manufacturing
equipment. The term loan bears interest at 9.5%. At December 31, 1998 and 1999,
a balance of $84,000 and $48,000, respectively, was outstanding.
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 charged interest at the bank's national commercial rate plus .125% and was
secured by all equipment financed thereunder. At December 31, 1998, and August
31, 1999, $880,000 and $666,667, respectively, was outstanding under the term
loan. The loan required the payment of equal monthly installments of principal
in the amount of $26,667 plus interest on the unpaid principal balance. This
loan was refinanced in September 1999 as discussed above.
23
<PAGE>
Aggregate maturities of the borrowings is as follows:
<TABLE>
<S> <C>
2000........................................................ $ 875,292
2001........................................................ 827,097
2002........................................................ 800,000
2003........................................................ 800,000
2004........................................................ 800,000
----------
$4,102,389
==========
</TABLE>
7. LINE OF CREDIT
In December 1999, the Company entered into a new short term, $5 million
line of credit facility with a new bank. The line of credit is to be used for
operating working capital purposes and expires on June 30, 2001. Proceeds from
this facility were used to repay the old facility of approximately $3 million.
This facility charges interest at a rate of LIBOR plus 1.50% (7.33% as of
December 31, 1999) and is guaranteed by Canam Steel Corporation, a subsidiary of
The Canam Manac Group, Inc. Canam Steel Corporation is currently the holder of
all of the Preferred Stock of the Company. Canam Steel Corporation charges a fee
for this guarantee at the rate of .50% of the outstanding balance. The line of
credit requires the Company to maintain $5.0 million in tangible net worth as
defined in the agreement.
In April 1998, the Company established an overall working capital line of
credit with its then current bank at $10.0 million. Subsequently, the overall
line availability was reduced to $4 million by November 1999. This facility
provided for financing of working capital needs and equipment purchases and was
secured by the Company's receivables, inventory and other assets. The initial
interest rate for this facility was the prime rate plus one-quarter (1/4)
percent and was to expire on December 31, 1999. 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 (7.75% at December 31, 1998).
Interest expense on borrowings under the lines of credit was $353,796,
$307,794 and $499,366 in 1997, 1998 and 1999, 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, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Loss applicable to common shareholders.............. $(6,476,546)
===========
BASIC EPS
Loss applicable to common shareholders.............. $(6,476,546) 4,667,855 $ (1.39)
EFFECT OF DILUTIVE SECURITIES
Options............................................. -- -- --
----------- --------- -------
DILUTED EPS
Loss applicable to common shareholders plus assumed
conversions....................................... $(6,476,546) 4,667,855 $ (1.39)
=========== ========= =======
</TABLE>
24
<PAGE>
Options to purchase 715,000 shares of common stock at a range of $2.50 to
$9.50 a share were outstanding during 1999 that were not included in the
computation of diluted EPS because the effect of the options would have been
antidilutive. The options, which expire from December 31, 2000 to December 31,
2009, were still outstanding at December 31, 1999.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Income applicable to common shareholders............. $4,323,472
==========
BASIC EPS
Income applicable to common shareholders............. $4,323,472 4,646,000 $ .93
EFFECT OF DILUTIVE SECURITIES
Options.............................................. -- 213,872 --
---------- --------- -----
DILUTED EPS
Income applicable to common shareholders plus assumed
conversions........................................ $4,323,472 4,859,872 $ .89
========== ========= =====
</TABLE>
Options to purchase 148,000 shares of common stock at a range of $6.63 to
$9.50 a share were outstanding during 1998 that 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. 115,000 of these options, which
expire from December 31, 2000 to August 7, 2002, were still outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Loss applicable to common shareholders............. $(12,356,204)
============
BASIC EPS
Loss applicable to common shareholders............. $(12,356,204) 4,641,600 $ (2.66)
EFFECT OF DILUTIVE SECURITIES
Options............................................ -- -- --
------------ --------- -------
DILUTED EPS
Loss applicable to common shareholders plus assumed
conversions...................................... $(12,356,204) 4,641,600 $ (2.66)
============ ========= =======
</TABLE>
Options to purchase 665,000 shares of common stock at a range of $2.50 to
$9.50 a share were outstanding during 1997 that were not included in the
computation of diluted EPS because of the effect of the options would have been
antidilutive. 525,000 of these options, which expire from December 31, 2000 to
August 7, 2002, were still outstanding at December 31, 1999.
9. STOCK OPTION PLAN
At December 31, 1999, 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 shareholders 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
25
<PAGE>
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, which was approved by shareholders 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
715,000 shares were outstanding under both plans at December 31, 1999.
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.
<TABLE>
<CAPTION>
1997 1998 1999
------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Income (loss) applicable to
Common Shareholders........... as reported $(12,356,204) $4,323,472 $(6,476,546)
pro forma $(12,554,174) $4,207,743 $(6,608,552)
Basic earnings (loss)
per share..................... as reported $ (2.66) $ .93 $ (1.39)
pro forma $ (2.71) $ .91 $ (1.42)
Diluted earnings (loss)
per share..................... as reported $ (2.66) $ .89 $ (1.39)
pro forma $ (2.71) $ .87 $ (1.42)
</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, 1998 and 1999, respectively; no dividend
yield for all years; expected volatility of 32.00%, 66.63% and 55.20%; risk-free
interest rate of 6.11%, 5.23% and 5.64%; 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.
26
<PAGE>
A summary of the status of the Company's option plans as of December 31,
1999, and changes for the three years then ended was as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
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 $4.20 665,000 $4.10 683,000 $4.51
Options granted.................. 70,000 2.70 88,000 5.56 128,000 $2.73
Options exercised................ -- -- (11,000) 2.52 (20,000) $2.63
Options forfeited................ (59,000) 4.92 (76,000) $4.73
------- ----- ------- ----- ------- -----
Outstanding at end of year....... 665,000 $4.10 683,000 $4.51 715,000 $3.98
======= ===== ======= ===== ======= =====
Options exercisable at year
end............................ 201,000 $5.41 268,600 $5.01 451,000 $4.39
------- ----- ------- ----- ------- -----
Weighted average fair value of
options granted during the
year........................... $1.53 $4.33 $2.00
===== ===== =====
</TABLE>
The following information applies to options outstanding at December 31,
1999:
<TABLE>
<S> <C>
Number outstanding.......................................... 715,000
Range of exercise prices.................................... $2.50 to $9.50
Weighted average exercise price............................. $3.98
Weighted average remaining contractual life................. 2 years 2 months
</TABLE>
The following table summarizes information about non-qualified stock
options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
- ----------------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$2.50 to $3.50.................... 540,000 2 yr. 4 ms. $2.80 338,000 $2.85
$4.44 to $6.63.................... 75,000 3 yr. 7 ms. $5.08 13,000 $5.18
$9.50............................. 100,000 0 yrs. $9.50 100,000 $9.50
</TABLE>
10. PREFERRED STOCK
In March 1998, the Company's principal shareholder purchased from the
Company 400 shares of authorized Series A Floating Rate Preferred Stock of the
Company at $10,000 cash per share or $4 million in the aggregate. In December
1999, the Company's principal shareholder purchased an additional 400 shares of
Series B Floating Rate Preferred Stock of the Company at $10,000 cash per share,
or $4 million in the aggregate (the Series A and Series B Floating Rate
Preferred Stock are hereafter collectively referred to as the "Preferred
Stock"). The Series A Preferred Stock is entitled to receive, as and if declared
by the Company's Board, dividends at a floating rate equal to the rate payable
by the Company on its line of credit with its commercial bank. Series B
Preferred Stock is entitled to dividends at a floating rate equal to the rate
payable by the Company on its line of credit with its commercial bank plus .8%.
Dividends are paid quarterly in arrears, and if not declared or paid would
cumulate at the above mentioned rates, plus 50 basis points. As of January 1,
1999, the principal shareholder has waived payment of the dividends for the
foreseeable future, including the nonpayment portion of the interest rate. 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
27
<PAGE>
(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.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Currently payable:
Federal..................................... $(1,390,866) $ (354,236) $ (6,399)
State....................................... (178,732) 23,018 (35,294)
Foreign..................................... 180,241 47,779 263,940
Deferred......................................... (5,719,438) 3,042,634 (3,746,956)
----------- ---------- -----------
$(7,108,795) $2,759,195 $(3,524,709)
=========== ========== ===========
</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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Depreciation..................................... $ 31,633 $ 51,133 $ 35,100
Allowance for doubtful accounts.................. (58,500) (85,995) 23,658
Warranty reserve................................. (5,021,502) 4,298,704 1,083,025
Other reserves................................... (672,011) 549,398 --
Federal and state NOL carryforward............... -- (1,490,071) (4,887,470)
Decrease in valuation allowance of state NOL..... -- (275,465) --
Other............................................ $ 942 $ (5,070) $ (1,269)
----------- ---------- -----------
$(5,719,438) $3,042,634 $(3,746,956)
=========== ========== ===========
</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,
--------------------------------------
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate..... $(6,618,099) $2,497,969 $(3,296,183)
State income tax expense (benefit), net of
federal benefit................................ (910,592) 413,099 (348,359)
Excess foreign tax on foreign subsidiary
income......................................... 35,028 5,029 27,783
Amortization of certain intangible assets and
non-deductible meals and entertainment......... 261,794 115,623 93,881
Increase (decrease) in valuation allowance....... 115,778 (275,465) --
Other............................................ 7,296 2,940 (1,831)
----------- ---------- -----------
$(7,108,795) $2,759,195 $(3,524,709)
=========== ========== ===========
</TABLE>
28
<PAGE>
Significant components of the deferred tax balances at December 31, 1998
and 1999 are:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------- -----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
DEFERRED DEFERRED DEFERRED DEFERRED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Warranty reserve....................... $2,126,277 $ 260,087 $ 380,316 $ 923,023
Other reserves......................... 165,937 165,937
Allowance for doubtful accounts........ 163,995 140,337 --
Depreciation........................... -- (126,434) -- (161,534)
Net operating loss carryforward........ 372,366 1,393,170 825,252 5,827,754
Other.................................. 22,027 23,295 --
---------- ---------- ---------- ----------
$2,850,602 $1,526,823 $1,535,137 $6,589,243
========== ========== ========== ==========
</TABLE>
The Company's NOL carryforwards begin to expire in 2017. The Company
provided a valuation allowance of $275,465 for state deferred income tax assets
in 1997 but removed the valuation allowance in 1998 due to the expectation that
they will be fully realized. Realization of deferred tax assets associated with
NOL carryforwards is dependent upon generating sufficient taxable income prior
to their expiration. The Company currently believes that it is more likely than
not that this asset will be realized in future years as a result of taxable
income to be generated but will continue to monitor the valuation of this asset
on an ongoing basis.
12. PATENTS AND TRADEMARKS, LITIGATION AND CONTINGENCIES
In December 1994, the Company acquired a license for all inventions covered
by a third party's patents, patent applications and continuations in exchange
for a payment of $2.0 million in cash and $1.5 million of the Company's Common
Stock. The Company capitalized these costs as well as certain other acquisition
costs. The Company was expensing these costs over a 17-year amortization period.
Two cases were pending in the Eastern District of Pennsylvania, in which
the Company, as exclusive licensee of these certain patents, and the licensor of
those patents sought money damages and an injunction due to patent infringement
by Environ Products, Inc. ("Environ") and Environ sought a declaration of
invalidity of the patents, non-infringement, and unenforceability. These cases
were to be tried in the fall of 1998. The court issued an order on September 29,
1998, which among other things, granted Environ's motions for summary judgment
of invalidity of the patents and non-infringement by Environ. This constituted a
final judgment of all issues which were material to these cases, and the
licensor has filed an appeal to the U.S. Court of Appeals, Federal Circuit. As a
result of this decision, the Company wrote off during 1998 the current
unamortized cost of this license, which was approximately $3.7 million. By a
decision dated September 15, 1999, the U.S. Court of Appeals, Federal Circuit
reversed the decision of the U.S. District Court, and Environ has petitioned the
U.S. Supreme Court for a Writ of Certiorari.
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 licenses 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 $160,000.
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.
29
<PAGE>
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 Note 2 of the Notes to Consolidated Financial
Statements--"Significant Accounting Policies--Warranty Reserve.") Dayco has
filed a counterclaim for approximately $4.0 million for goods, services, and
freight contracted for by the Company, under the Dayco Agreement (see Note 13 of
the Notes to Consolidated Financial Statements--"Commitments.") and damages for
alleged breaches of various duties purportedly owed to Dayco. The Company
believes that it has meritorious defenses to Dayco's claims. As of January 1,
1999 the Company has entered into a contingency fee arrangement with its legal
counsel whereby the Company will only pay for out-of-pocket expenses for the
remainder of the discovery period and the trial-related costs. The court's
previous order, scheduling on April 3, 2000 trial date, has been vacated.
However, the Company continues to press for the earlist possible trial date.
In addition, Dayco initiated a separate legal action against the Company in
February 1999 in the 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.
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 about
August 12, 1996 at The Little Gas Shack (the "Shack"), a retail gasoline service
facility supplied by Senter Petroleum, Inc., 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 (see Note 13 of the Notes to Consolidated
Financial Statements--"Commitments."). 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
has vigorously defended 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.
30
<PAGE>
13. 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. During 1997, the Company terminated
this agreement (see Note 12). Dayco has asserted that it is entitled to payment
of approximately $4.0 million 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 amounts owed to
the Company by Dayco exceed the amount to which Dayco claims it is entitled.
Employment Agreements. 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,
1999 was $359,000.
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, 1997, 1998 and 1999
was approximately $867,000, $943,000 and $1,075,000 respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows (rounded to the nearest thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ 912,000
2001........................................................ 861,000
2002........................................................ 709,000
2003........................................................ 672,000
2004........................................................ 3,000
----------
3,157,000
==========
</TABLE>
14. FOREIGN OPERATIONS AND EXPORT SALES
Summarized financial data with respect to the operations of TCI-Environment
NV at December 31, 1998 and 1999 and for the years then ended follows (rounded
to the nearest thousand):
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Total assets......................................... $1,783,000 $2,113,000
Total liabilities.................................... 418,000 537,000
---------- ----------
Net assets........................................... $1,365,000 $1,576,000
========== ==========
Net sales............................................ $3,782,000 $3,248,000
========== ==========
Net income........................................... $ 78,000 $ 384,000
========== ==========
</TABLE>
31
<PAGE>
The Company's net sales by geographic region (rounded to the nearest
thousand) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
United States............................. $33,128,000 $41,950,000 $18,938,000
Canada.................................... 1,463,000 1,646,000 892,000
Mexico, Central and South America......... 6,412,000 5,059,000 1,407,000
Europe and the Middle East................ 3,536,000 3,781,000 3,248,000
Southeast Asia, Australia and New
Zealand................................ 1,110,000 1,146,000 428,000
----------- ----------- -----------
Total............................... $45,649,000 $53,582,000 $24,913,000
=========== =========== ===========
</TABLE>
15. RELATED PARTY TRANSACTIONS
Richard DiMaggio, Vice President of the Company, leases space to the
Company and American Containment, Inc. ("ACI"), a wholly owned subsidiary of the
Company, for ACI's office and the Company's fiberglass manufacturing facility,
both of which are located in Bakersfield, California. The aggregate monthly
rental of this space is $7,700, excluding operating expenses and reimbursement
for electricity. The Company believes that the amount of rent charged by Mr.
DiMaggio is not in excess of the amount of rent charged by unrelated parties for
similar premises in the area.
32
EXHIBIT 21
SUBSIDIARIES OF TOTAL CONTAINMENT, INC.
<TABLE>
<CAPTION>
STATE OR COUNTRY
COMPANY OF INCORPORATION
- ------- ----------------
<S> <C>
American Containment, Inc............................. Delaware
FMW Inc............................................... Delaware
Total Containment FSC, Inc............................ Barbados
Rene Morin, Inc....................................... Delaware
TCI-Environment N.V................................... Belgium
</TABLE>
EXHIBIT 23.1
CONSENT OF GRANT THORNTON LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 18, 2000, accompanying the
consolidated financial statements incorporated by reference or included in the
1999 Annual Report of Total Containment, Inc. on Form 10-K for the year ended
December 31, 1999. We hereby consent to the incorporation by reference of said
report in the Registration Statements of Total Containment, Inc. on Forms S-8
(Registration No. 333-56707 and Registration No. 333-61747).
/s/ Grant Thornton LLP
- --------------------------
Philadelphia, Pennsylvania
March 19, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 731
<SECURITIES> 0
<RECEIVABLES> 4,518
<ALLOWANCES> 360
<INVENTORY> 5,438
<CURRENT-ASSETS> 12,487
<PP&E> 10,697
<DEPRECIATION> 4,791
<TOTAL-ASSETS> 30,792
<CURRENT-LIABILITIES> 12,956
<BONDS> 0
0
8,000
<COMMON> 47
<OTHER-SE> 4,196
<TOTAL-LIABILITY-AND-EQUITY> 30,792
<SALES> 24,913
<TOTAL-REVENUES> 24,913
<CGS> 20,618
<TOTAL-COSTS> 13,020
<OTHER-EXPENSES> 245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 725
<INCOME-PRETAX> (9,695)
<INCOME-TAX> (3,525)
<INCOME-CONTINUING> (6,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,170)
<EPS-BASIC> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
