Pity the poor shareholders when a sure thing fails

May 20, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

Sure things looked no surer than the business opportunity presented to TVI Corp. on Sept. 11, 2001.

The Glenn Dale company made decontamination shelters and other equipment used by rescuers after the Pentagon terrorist attack. Government was about to blow big money on such products, and TVI's chief executive soon spoke confidently of "increased interest," "numerous product inquiries" and "higher order flow in the coming year."

So how in the world could TVI flub it so spectacularly?

Last week TVI stock was trading for 66 cents, one-tenth of its level three years ago. The company's CEO and another top executive just left under a cloud, with the company turning evidence over to unidentified authorities. The interim CEO felt compelled to deny any resemblance between the TVI and the Titanic.

Maybe the most heartening lesson to draw from the mess is this: Defense spending isn't so profligate that just any incompetent contractor can get rich.

TVI's catalog evokes the post-9/11 mood at its grimmest. You can find dozens of products for "first responders," who used to be called emergency workers, and "first receivers," who used to be called doctors and nurses.

There is the transparent plastic "autopsy pod," which is about the size of a coffin and allows gloved access to contaminated bodies. There are air filtration systems for preventing anthrax or other hazards from entering shelters. There are face masks "used by U.S. National Guard WMD response teams."

It looks like a prop list from the TV show 24: decontamination showers, hazardous-material tubs, generators, "Road Closed" signs and numerous kinds of folding tents designed to be quickly erected at an emergency site.

By TVI's account, the Department of Homeland Security has allocated nearly $20 billion to states and cities over the past five years to support first receivers and first responders.

That ought to buy a lot of decontamination tents. And it probably did. But in TVI's case, something went wrong.

"It seems to me they had a good product and should have been able to get more sales and profits out of it," says George Schwartz, whose Michigan money-management firm, Schwartz Investment Counsel, had the misfortune of buying numerous TVI shares at more than $3 apiece. It owns more than 2 million shares.

Homeland Security spending didn't get rolling until a year or so after the 2001 tragedies. TVI's revenue rose from $11 million in 2002 to $27 million in 2003, prompting a surge in the stock from $1 and change to more than $6 by September 2004.

Its main products were tents with patented metal frames that could be quickly unfolded and deployed for rescue crews. On-scene disaster recovery involves replicating hospital conditions as much as possible, and that means sheltering victims and caregivers from elements and germs.

TVI decided to try to grow by buying companies with related items. In 2004 and 2005, it purchased two respirator companies in Frederick with the idea of expanding sales from defense and law enforcement to hospitals and industry.

It was selling products to Singapore, Australia, Italy and elsewhere. Revenue hit $37 million in 2004 and profits came to $6.4 million. The Sun and The Washington Post profiled the company. The Daily Record named it an "Innovator of the Year" in 2003. Its stock graduated from the "pink sheets" to the Nasdaq electronic trading system.

But 2004 turned out to be the high point. Sales never got better, for which managers partially blamed stop-and-go government appropriations. Competitors, including Zumro Inc., maker of emergency tents supported by inflatable tubes, took business TVI had hoped to get. Profits fell to $1.9 million on sales of $36 million last year.

Recently things got much worse. An accounting misstatement, which an internal investigation found did not result from wrongdoing, nevertheless consumed scarce resources. Then CEO Richard Priddy and Executive Vice President Charles Sample resigned last month after the board said it found "evidence of a series of questionable business transactions" from 2003 to 2005 that resulted in overpayment of $1.7 million to unidentified outside parties.

Wow. Declining revenue amid a legendary government procurement boom, and now maybe improprieties, too. I was unable to reach Priddy, who took over as CEO in 2002. The company doesn't know how to locate him, either, said Don Yount, a director and TVI's interim chief operating officer.

Yount wouldn't discuss the overpayment that preceded Priddy's departure. But, he said, potential impropriety aside, "there was a performance issue there" for previous management.

He contends that federal money for homeland security has declined since 2005, challenging TVI and the rest of the industry. The expense of the war in Iraq, he said, caused a shortage of funds for first responders.

Even so, he added, management could have worked harder to cultivate clients and distributors to keep sales rising. The board, too, "has to take some responsibility for this," he said. "There was a sense around the place that the money will come back," Yount added. "And the fact is, it hasn't. There are still funds available. There are still programs going on. It's just that you have to work a lot harder to win them."

Job 1 for the company now is hiring a new CEO. But meanwhile, poor shareholders. Without the right management, there is no sure thing.

jay.hancock@baltsun.com

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