SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-6512
TRANSTECH INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-1777533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Centennial Avenue, Piscataway, New Jersey 08854
(Address of principal executive offices)
(908) 981-0777
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by a court.
Yes______ No______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
2,829,090 shares of common stock, $.50 par value, outstanding as of
November 7, 1995. In addition, at such date, the issuer held
1,885,750 shares of common stock, $.50 par value, in treasury.
Transitional Small Business Disclosure Format (Check One):
Yes No X
Page 1 of 54 pages
Exhibit index on page 36
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
The registrant originally filed Form 10-QSB for the period
ended September 30, 1995 on November 14, 1995. Such filing is
hereby amended and restated in its entirety except for the exhibits
filed with the original filing.
I N D E X
Page(s)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September
30, 1995 and December 31, 1994 3 - 4
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1995 and 1994 5 - 6
Consolidated Statements of Operations for the
Three Months Ended September 30, 1995 and 1994 7 - 8
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 9 - 10
Notes to Consolidated Financial Statements 11 - 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19 - 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32 - 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
EXHIBIT INDEX 36 - 37
EXHIBITS 38 - 54
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In $000's)
(Unaudited)
ASSETS
September 30, December 31,
1995 1994
CURRENT ASSETS
Cash and cash equivalents $ 1,233 $ 874
Marketable securities 2,347 2,465
Accounts and notes receivable
(net of allowance for doubtful
accounts of $11) 217 461
Deferred income taxes 730 587
Prepaid expenses and other 506 472
Net assets of discontinued operations:
Valve manufacturing segment 4,749 5,506
Alkali products segment - 173
Total current assets 9,782 10,538
PROPERTY, PLANT AND EQUIPMENT
Land 799 799
Buildings and improvements 327 327
Machinery and equipment 2,966 2,931
4,092 4,057
Less: accumulated depreciation 3,164 3,144
Net property, plant and equipment 928 913
OTHER ASSETS
Notes receivable 797 968
Investment in leveraged lease 280 885
Assets held for sale 2,410 2,421
Clay deposits 1,077 1,077
Other 40 39
Total other assets 4,604 5,390
TOTAL ASSETS $15,314 $16,841
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED BALANCE SHEETS, Cont'd
(In $000's)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
1995 1994
CURRENT LIABILITIES
Current portion of long-term debt $ 65 $ 93
Accounts payable 516 291
Accrued salaries and wages 35 26
Accrued income taxes 2,914 2,318
Accrued miscellaneous expenses 199 225
Total current liabilities 3,729 2,953
OTHER LIABILITIES
Long-term debt 360 388
Accrued remediation and closure
costs 12,740 14,355
Deferred income taxes 874 665
Total other liabilities 13,974 15,408
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.50 par value,
10,000,000 shares authorized:
4,714,840 shares issued 2,357 2,357
Additional paid-in capital 1,516 1,516
Retained earnings 4,662 5,420
Net unrealized gains on marketable
securities 90 201
Subtotal 8,625 9,494
Treasury stock, at cost -
1,885,750 shares (11,014) (11,014)
Total stockholders' equity
(deficit) (2,389) (1,520)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $15,314 $16,841
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS
(In $000's, except per share data)
(Unaudited)
For the Nine Months Ended
September 30,
1995 1994
REVENUES $ 292 $ 449
COST OF OPERATIONS
Direct operating costs 227 340
Selling, general and
administrative expenses 2,090 1,608
Total cost of operations 2,317 1,948
INCOME (LOSS) FROM OPERATIONS (2,025) (1,499)
OTHER INCOME (EXPENSE)
Investment income (loss) 202 208
Interest expense (258) (117)
Gain (loss) of sale of securities 269 -
Income from (writedown of)
interest in leveraged lease (279) (774)
Remediation accrual reversal 1,451 -
Other income (expense) 227 67
Total other income (expense) 1,612 (616)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
(CREDIT) (413) (2,115)
Income taxes (credit) (76) (409)
INCOME (LOSS) FROM CONTINUING
OPERATIONS (337) (1,706)
DISCONTINUED OPERATIONS (NOTE 2):
Valve Manufacturing Segment
Income from discontinued operation,
net of taxes of $104 and $298,
respectively 124 1,430
Loss on disposal of segment, net of
tax credits of $179 (842) -
Alkali Products Segment
Income (loss) from discontinued
operation, net of taxes (credits)
of $18 and $(9), respectively 35 (17)
Gain on disposal of segment, net of
taxes of $155 262 -
(421) 1,413
NET INCOME (LOSS) $ (758) $ (293)
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
(In $000's, except per share data)
(Unaudited)
For the Nine Months Ended
September 30,
1995 1994
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS $(.12) $(.60)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued
operations, net of taxes (credits) .05 .50
Gain (loss) on disposal of
discontinued operations (.20) -
NET INCOME (LOSS) $(.27) $(.10)
NUMBER OF SHARES USED IN
CALCULATION 2,829,090 2,829,090
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
(In $000's, except per share data)
(Unaudited)
For the Three Months Ended
September 30,
1995 1994
REVENUES $ 80 $ 134
COST OF OPERATIONS
Direct operating costs 79 96
Selling, general and
administrative expenses 803 513
Total cost of operations 882 609
INCOME (LOSS) FROM OPERATIONS (802) (475)
OTHER INCOME (EXPENSE)
Investment income (loss) 67 90
Interest expense (78) (38)
Gain (loss) of sale of securities - -
Income from (writedown of)
interest in leveraged lease (35) (166)
Remediation accrual reversal 1,451 -
Other income (expense) 126 26
Total other income (expense) 1,531 (88)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
(CREDIT) 729 (563)
Income taxes (credit) (210) (22)
INCOME (LOSS) FROM CONTINUING
OPERATIONS 939 (541)
DISCONTINUED OPERATIONS (NOTE 2):
Valve Manufacturing Segment
Income from discontinued operation,
net of taxes of $24 and $65,
respectively 35 82
Loss on disposal of segment,
net of tax credits of $179 (842) -
Alkali Products Segment
Income (loss) from discontinued
operation, net of taxes
of $15 - 29
Gain on disposal of segment,
net of taxes of $155 262 -
(545) 111
NET INCOME (LOSS) $ 394 $ (430)
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
(In $000's, except per share data)
(Unaudited)
For the Three Months Ended
September 30,
1995 1994
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS $.33 $(.19)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued
operations net of taxes (credits) .01 .04
Gain (loss) on disposal of
discontinued operations (.20) -
NET INCOME (LOSS) $.14 $(.15)
NUMBER OF SHARES USED IN
CALCULATION 2,829,090 2,829,090
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000's)
(Unaudited)
For the Nine Months Ended
September 30,
1995 1994
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 433 $13,494
Cash paid to suppliers and employees (2,150) (12,745)
Interest and dividends received 152 181
Interest paid (35) (1,326)
Other income received 112 58
Cash received from discontinued
operations 553 -
Net cash provided by (used in)
operating activities (935) (338)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity
of marketable securities 2,851 2,469
Purchase of marketable securities (2,604) (1,961)
Purchase of property, plant and
equipment (51) (210)
Proceeds from sale of property,
plant and equipment 8 33
Collections of notes receivable 352 192
Rent sharing payments from
computer leases 325 159
(Increase) decrease in other assets (2) 11
Cash proceeds from sale of
discontinued segment 600 -
Net cash provided by (used in)
investing activities 1,479 693
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (94) (871)
Proceeds from issuance of long-term debt 39 -
Payment of remediation and closure costs (130) (23)
Net cash provided by (used in)
financing activities (185) (894)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 359 (539)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 874 1,625
CASH AND CASH EQUIVALENTS AT END
OF THE QUARTER $1,233 $ 1,086
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
(In $000's)
(Unaudited)
For the Nine Months Ended
September 30,
1995 1994
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (758) $ (293)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Loss on disposal of discontinued
segments 603 -
Extraordinary gain on elimination
of debt - (95)
Depreciation and amortization 41 1,063
(Gain) loss on sale of marketable
securities (269) -
(Gain) loss on sale of property,
plant and equipment (114) (12)
Increase (decrease) in deferred
income taxes 122 (166)
Leveraged lease (revenue) charge 279 774
Increase (decrease) in minority
interest in consolidated subsidiary - 285
(Increase) decrease in assets:
Accounts and notes receivable,
trade-net 174 (423)
Inventories - (561)
Prepaid expenses and other (85) (93)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 216 219
Accrued taxes 307 120
Accrued remediation costs (1,451) -
Accrued retiree health care
benefit liability - (1,156)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (935) $ (338)
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are presented in
accordance with the requirements of Form 10-QSB and consequently do
not include all of the disclosures normally required by generally
accepted accounting principles or those normally made in the
Company's annual Form 10-KSB filing. Accordingly, the reader of
this Form 10-QSB may wish to refer to the Company's Form 10-KSB for
the year ended December 31, 1994 for further information.
The financial information has been prepared in accordance with
the Company's customary accounting practices except for certain
reclassifications to the 1994 financial statements in order to
conform to the presentation followed in preparing the 1995
financial statements. Quarterly financial information has not been
audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair statement of interim
results. All such adjustments are of a normal and recurring nature
except as disclosed herein.
NOTE 2 - DISCONTINUED OPERATIONS
The consolidated statements of operations have been restated to
report the net results of the Company's Alkali Products and Valve
Manufacturing Segments as discontinued operations. The net assets
of the discontinued segments have been classified as current assets
in the accompanying restated consolidated balance sheets.
Alkali Products Segment
On August 31, 1995, the Company sold certain machinery,
equipment, contract rights and rights to the subsidiary's name, and
gave a non-compete covenant, thereby effectively selling the on-
going operations of its wholly-owned subsidiary, Cal-Lime, Inc.,
for $600,000 in cash plus future payments of up to an additional
$25,000 which are contingent upon the availability of lime slurry
from a specified source to the purchaser. The sale resulted in a
gain of $262,000 after transaction costs and a provision for taxes
of $155,000.
The net assets of Cal-Lime which were sold have been classified
as current assets in the accompanying restated consolidated balance
sheet as of December 31, 1994. The Company intends to liquidate
the remaining assets of the subsidiary and has included the
property, buildings and equipment excluded from this transaction,
having an aggregate book value of $365,000 and $374,000, under the
caption of assets held for sale on the balance sheets as of
September 30, 1995 and December 31, 1994, respectively. Such value
approximates the estimated net realizable value of those assets.
The consolidated statements of operations report the net results of
Cal-Lime's operations as income (loss) from discontinued
operations.
Summarized results of Cal-Lime's operations for the period of
January 1 through September 30, 1995 and 1994 are as follows (in
$000's):
1995 1994
Year-to-date Eight Months Nine Months
Revenues $582 $629
Income (loss) before income tax 23 (26)
Income (tax) credit (8) 9
Net income (loss) 15 (17)
Third Quarter Two Months Three Months
Revenues $ 94 $280
Income (loss) before income tax (30) 56
Income (tax) credit 10 (19)
Net income (loss) (20) 37
Valve Manufacturing
On August 17, 1995, the Company executed a letter of intent
pursuant to which the Company's wholly-owned subsidiary, THV
Acquisition Corp. ("THV"), agreed to sell all of the issued and
outstanding stock of HVHC, Inc. ("HVHC"), the parent of Hunt Valve
Company, Inc. ("Hunt"), and on October 24, 1995, the Company
executed the definitive stock purchase agreement. The assets of
Hunt may be deemed to represent substantially all of the assets of
the Company; therefore, the sale is subject to approval by the
Company's shareholders.
The purchase agreement provides that at the closing the
purchaser shall purchase the HVHC common stock from THV for $18.0
million in cash, reduced by the sum of (i) the amount of Hunt's
indebtedness for borrowed money as of the closing of the proposed
sale which has been fixed by the parties solely for purposes of
determination of the Purchase Price (the "Funded Debt Amount"),
(ii) the amount required to redeem the minority equity position
held by Hunt's senior secured note holders, (iii) the amount
required to be paid by Hunt to THV upon the redemption by Hunt of
its issued and outstanding 7% preferred stock, without par value,
all of which is owned by THV, and (iv) the amount required to be
paid by Hunt to THV in repayment of the senior subordinated note
issued by Hunt to THV in the original principal amount of $500,000.
A portion of the net proceeds ($750,000) is to be placed in escrow
to secure the Company's indemnification obligations to the
purchaser under the purchase agreement, including indemnification
for any payments made by Hunt after the closing in respect of
income taxes owed by the Company during the period that Hunt was a
member of the Company's consolidated tax group. The escrow will
terminate upon the earlier to occur of (i) the release of all funds
from escrow in accordance with the terms thereof or (ii) the later
to occur of (x) the expiration of the applicable statute of
limitations for the assessment of federal income taxes for all
taxable years with respect to which Hunt or HVHC were members of
the Company's consolidated tax group and (y) the satisfaction by
the Company of all assessments or other claims by the Service for
taxes of the consolidated tax group during such years.
The Company expects the sale to be completed on or before
February 29, 1996 and anticipates net cash proceeds from the
proposed sale of approximately $3,981,000 if closed on or around
that date. The Company has estimated that it will incur a loss on
the proposed sale of approximately $842,000 for financial reporting
purposes. The loss has been reported as of August 31, 1995, the
measurement date, and includes (i) estimates of costs to be
incurred in connection with the sale, (ii) operating losses from
the measurement date through January 31, 1996, (iii) an adjustment
to the Company's deferred tax valuation allowance, (iv) a provision
for the loss on redemption of Hunt's minority interest, and (v)
$250,000 representing Hunt's share of a prepayment premium paid to
its former senior secured term lenders in connection with the
acquisition of such term loan by a designee of the entity acquiring
HVHC (discussed further below). Upon consummation of the proposed
sale, and the extinguishment of Hunt's funded debt, the Company
will recognize a charge of approximately $642,000, after deduction
of minority interest and taxes of $594,000. This charge is related
to the write-off of unamortized debt issuance costs and debt
discounts, and the prepayment penalty on Hunt's funded debt in
connection with the sale. The foregoing charge will be reported as
an extraordinary item.
Combined results of HVHC's and Hunt's operations for the nine
month periods ended September 30, 1995 and 1994 are as follows (in
$000):
Eight Nine Nine
Months Months Months
ended Month of ended ended
8/31/95 9/95 9/30/95 9/30/94
Revenues $12,021 $1,476 $13,497 $12,823
Direct operating costs 7,437 896 8,333 7,509
Selling, general and
administrative expense 3,060 361 3,421 3,384
Income from operations 1,524 219 1,743 1,930
Other income (expense)
Interest expense (1,162) (143) (1,305) (1,242)
Other income (expense) (177) (1) (178) 1,230
Total Other (1,339) (144) (1,483) (12)
Income (loss) before taxes
and extraordinary item 185 75 260 1,918
Provision for taxes (104) (30) (134) (298)
Income (loss) before
extraordinary item 81 45 126 1,620
Extraordinary item - - - 95
Net loss 81 45 126 1,715
Minority interest 43 (1) 42 (285)
Net loss after minority
interest $ 124 $ 44 $ 168 $ 1,430
The above amounts of net income or loss for the eight months
ended August 31, 1995 and nine months ended September 30, 1994 have
been adjusted to provide for the minority interest and exclude
intercompany interest and management fees which have been
eliminated in consolidation. The resulting amounts of net loss
after minority interest have been reported as income from
discontinued operations on the accompanying consolidated statements
of operations of the Company for the nine months ended September
30, 1995 and 1994, respectively. The above net income for the
month of September 30, 1995 has been included in the amount
reported as loss on disposal of segment.
Hunt experienced a $674,000, or 5.3% increase in revenues for
the nine months ended September 30, 1995 when compared to the same
period of 1994. Revenues from commercial valves and hydraulic
systems produced and serviced by the Hunt Valve division increased
by 31.5%, to $8,442,000. Revenues from products with military-
related applications manufactured by Hunt's Waeco and Union
Flonetics divisions decreased 21.4%, to $5,018,000. Hunt's direct
costs increased 11% when compared to the same period last year, due
in part to the increase in sales volume, indirect labor costs and
start-up costs attributable to the introduction of new product
lines. Hunt experienced a 1% increase in selling, general and
administrative expenses, due primarily to an increase in salary
expense. Miscellaneous income for the 1994 period includes
$1,300,000 of gain resulting from a reduction in Hunt's long-term
retiree health care benefit liability. The amount of the liability
is determined primarily by discounting the projected future costs
of health benefits based on an estimate of health care cost trend
rates. Calculations performed by the Company's actuaries in 1994
projected a decline in the estimate of future costs to be incurred
by the Company due in part to a reduction in the number of expected
participants and, more significantly, a reduction in the assumed
rate of increase in the cost of health care. The extraordinary
gain on elimination of debt, net of income taxes, reported for the
nine months ended September 30, 1994, recognizes the gain stemming
from the restructuring of Hunt's junior subordinated notes. The
minority interest in earnings/losses reflects the value of Hunt's
losses attributable to the nominal exercise price warrants for
Hunt's common equity held by its senior lenders. The warrants
represent an aggregate 19.34% equity interest in Hunt.
The net assets of Hunt as of September 30, 1995 and December 31,
1994 consisted of:
1995 1994
Current assets $ 7,409 $ 7,323
Current liabilities (2,991) (6,073)
Net fixed assets 6,168 6,504
Other non-current assets 11,002 11,327
Non-current liabilities (16,839) (13,575)
Net assets $ 4,749 $ 5,506
Four individuals affiliated with the Company, namely the
Company's President and Chairman of the Board of Directors, the
Company's Vice President and Chief Financial Officer, who is also
a member of the board, a director of Hunt and Hunt's President and
Chief Operating Officer are to acquire 15% of the equity of the
purchaser for $150,000. These four individuals, together with
certain other members of senior management of Hunt, will also have
the opportunity to acquire up to an additional 15% of the common
stock of the purchaser pursuant to the exercise of performance and
value-based options at an aggregate cost to such members of
management of $2.75 million. In addition, the four directors and
executive officers of the Company and Hunt will be employed as
officers and/or directors of Hunt after the proposed sale.
In September and October 1995, representatives of the Company,
Hunt, Hunt's senior term lenders (the "Term Lenders") and the
purchaser conducted negotiations with respect to the repurchase of
the warrants for Hunt's stock (the "Lender Warrants") and Hunt's
senior term debt (the "Term Debt"), and with respect to the amount
payable to the Term Lenders upon the prepayment of the Term Debt
prior to September 27, 2001 (the "Prepayment Premium"). The
Prepayment Premium was determined by the Term Lenders to be
approximately $1,800,000 measured as of December 31, 1995. On
October 24, 1995 (the "Term Debt Assignment Date"), the Term
Lenders entered into an agreement to assign their entire interests
in the Term Debt and the Lender Warrants (the "Term Debt and
Warrant Assignment") to a designee of the purchaser (the "Term Debt
Purchaser"), in consideration for a total of $11,822,480 paid to
the Term Lenders. Of this amount, (x) $10,822,480 represented
principal plus accrued and unpaid interest on the Term Debt through
the Term Debt Assignment Date, (y) $500,000 represented payment for
the Lender Warrants and (z) $500,000 was a transaction fee payable
to the Term Lenders in lieu of the Prepayment Premium. Such
transaction fee is to be shared equally by the Term Debt Purchaser
and THV. In connection with the Term Debt and Warrant Assignment,
the Company, THV, the Term Debt Purchaser and the purchaser entered
into an agreement on the Term Debt Assignment Date (the
"Recapitalization Agreement") pursuant to which the parties agreed
as follows: On or before the earlier of (i) the closing of the
proposed sale and (ii) December 26, 1995, the Company will cause
Hunt to merge with and into HVHC, with HVHC being the surviving
corporation in the merger (the "Merger"). If a closing of the
proposed sale has not occurred by December 27, 1995, the Term Debt
Purchaser will exercise the Lender Warrants to purchase such number
of shares of HVHC common stock as represents an equivalent
percentage of HVHC common stock as the Term Debt Purchaser would
have acquired upon exercise of the Lender Warrants to purchase
shares of common stock of Hunt. Concurrently with such exercise,
the Term Debt Purchaser shall purchase from the Seller a number of
shares representing 2% of the common stock of HVHC at a price of
$50,000. Accordingly, the amount of loss reported on the proposed
sale was calculated assuming a 20.95% minority interest in the
common stock of HVHC. After giving effect to the exercise by the
Term Debt Purchaser of the Lender Warrants and the purchase by the
Term Debt Purchaser of the foregoing percentage of HVHC common
stock, the Company will own less than 80% of the outstanding HVHC
common stock, thereby relieving HVHC and Hunt from joint and
several liability for the Company's taxes for periods beyond 1995.
Furthermore, if the proposed sale is consummated, the Term Debt
Purchaser will waive its right to collect the Prepayment Premium.
However, if the proposed sale is not consummated and a person or
entity other than the purchaser acquires the business of Hunt, the
Term Debt Purchaser need not waive the Prepayment Premium. In such
event, if the Term Debt Purchaser is paid a premium for the Term
Debt and $500,000 for the Lender Warrants, then THV will be
entitled to recover from the Term Debt Purchaser that portion of
the Prepayment Premium which exceeds $250,000, up to a maximum of
$250,000.
NOTE 3 - MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 115 ("Accounting for
Certain Investments in Debt and Equity Securities"). In accordance
with the statement, the Company classifies all debt securities
purchased with remaining maturities of less than one year as
securities held to maturity which are carried at amortized cost.
All other debt and equity securities are classified as securities
available for sale which are carried at fair value as determined by
quoted market prices. The aggregate excess of fair value over cost
of such securities as of September 30, 1995, of $138,000, net of
deferred income taxes of $48,000, is included as a separate
component of stockholders' equity.
NOTE 4 - LONG-TERM DEBT
At September 30, 1995, long-term debt consisted of the following
(in $000's):
10.5% and 11% mortgages payable due in $390
monthly and semi-annual installments
through July 1996 and April 2000;
secured by land and buildings
Other 36
Total long-term debt 426
Less: current portion (66)
$360
NOTE 5 - REMEDIATION AND CLOSURE COSTS
The Company and certain subsidiaries were previously active in
the resource recovery and waste management industries. These
activities included the operation of three landfills. Although the
sites are now closed, the Company continues to own and/or remediate
them and has both incurred and accrued for the substantial costs
associated therewith.
The Company's accruals for closure and remediation activities
equal the present value of its allocable share of the estimated
future costs related to a site less funds held in trust for such
purposes. Such estimates require a number of assumptions, and
therefore may differ from the ultimate outcome. The costs of
litigation associated with a site are expensed as incurred.
As of September 30, 1995, the Company has accrued $22.0 million
for its estimated share of remediation and closure costs in regard
to the Company's former landfills, $9.2 million of which is held in
trusts and maintained by trustees for financing of the $11.3
million closure plan related to the landfill owned by the Company's
subsidiary, Kinsley's Landfill, Inc.
The most significant portion of the balance of the accrual
relates to remediation efforts at the landfill owned by the
Company's subsidiary, Kin-Buc, Inc. (the "Kin-Buc Landfill"). The
Company and other respondents have been remediating the Kin-Buc
Landfill under an Amended Unilateral Administrative Order issued by
the United States Environmental Protection Agency (the "EPA") in
September 1990. In November 1992, EPA issued an Administrative
Order for the remediation of certain areas neighboring the Kin-Buc
Landfill. (For a discussion of this matter, see Remediation and
Closure Costs contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-QSB.)
As previously reported, the Company was named, along with a
group of waste generators, to an order issued by the EPA which
required remediation of a site in Carlstadt, New Jersey. In
September 1995, the Court approved a settlement agreement which
allocated remediation costs for the site among the Company and
substantially all of the waste generators who have been remediating
the site. This agreement substantially relieves the Company from
future obligations for the site in exchange for a cash payment,
proceeds from the settlement of certain insurance claims and an
assignment of Carlstadt-related claims filed against the Company's
excess insurance carriers. The Company has reversed the balance of
the accrual for future expenditures related to this site, and
recognized income of $1,451,000 associated with such adjustment in
the period ended September 30, 1995. (See Part II, Item 1 of this
Form 10-QSB for a further discussion of this matter.)
The impact of future events or changes in environmental laws and
regulations, which cannot be predicted at this time, could result
in material increases in remediation and closure costs related to
the Company's past waste handling activities, possibly in excess of
the Company's available financial resources. A significant
increase in such costs could have a material adverse effect on the
Company's financial position, results of operations and net cash
flows.
NOTE 6 - LEGAL PROCEEDINGS
See Item 1 of Part II of this Form 10-QSB for a discussion of
legal matters.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of operations for the nine months ended September 30, 1995
compared to the nine months ended September 30, 1994
Consolidated revenues by business segment for the nine months
ended September 30, 1995 and 1994 were as follows (in $000):
1995 1994
Electricity Generation $ 150 $ 249
Environmental Services 380 393
Intercompany (238) (193)
Total $ 292 $ 449
Consolidated revenues for the nine months ended September 30,
1995, were $292,000, a decrease of $157,000 or 35% compared to the
same period of 1994.
Revenues from operations which generate electricity from methane
gas were $150,000, a decrease of $99,000 or 40% compared to the
same period last year. The decrease is the result of a series of
unrelated equipment failures which subjected two of the four
electric generating units to significant down-time for repairs.
Normal capacity was restored during September 1995. The
environmental services subsidiary contributed $142,000 to revenues
(after elimination of intercompany sales) compared to $200,000 for
the same period last year. Approximately $238,000 or 63% of the
environmental services subsidiary's revenues for the period,
compared to $193,000 or 49% for the same period last year, were
either to other members of the consolidated group or to third
parties providing services to another member of the consolidated
group, and were therefore eliminated in consolidation. As part of
the Company's effort to expand the customer base of the
environmental services subsidiary, the subsidiary has recently
entered into a joint marketing agreement with a national
engineering firm with respect to projects involving the closure and
remediation of municipal waste sites in the northeastern United
States.
Consolidated direct operating costs for the nine months ended
September 30, 1995 were $227,000, a decrease of 33% or $113,000
when compared to the same period of 1994, due primarily to the
decrease in sales volume and expenses incurred during 1994 for the
overhaul of certain electric generating equipment.
Consolidated selling, general and administrative expenses for
the nine months ended September 30, 1995 increased $482,000 or 30%
from the same period last year to $2,090,000, due to a $453,000
increase in professional fees primarily relating to the Company's
ongoing environmental and tax litigation, and a $50,000 charge
related to an increase in the bad debt reserve pertaining to a note
held by the Company. Administrative costs are not anticipated to
decline appreciably subsequent to the proposed sale of the valve
manufacturing segment due primarily to continued required support
of the Company's litigation, marketing and asset divestiture
efforts.
The Company's consolidated operating loss for the nine months
ended September 30, 1995 increased to $2,025,000 from a loss of
$1,499,000 in 1994.
Investment income decreased by $6,000 to $202,000 for the nine
months ended September 30, 1995 from the comparable period last
year.
Consolidated interest expense increased $141,000 to $258,000 for
the nine months ended September 30, 1995 compared to the same
period last year, due to an increase in the amount of interest
accrued during the period on amounts reserved for income taxes, as
discussed below.
The Company charged $279,000 against income for the nine months
ended September 30, 1995 to reflect a reduction in the carrying
value of its investment in computer equipment. The charge reflects
a decline in the current market value for IBM mainframe computer
equipment. The Company incurred a $774,000 charge related to the
revaluation of this equipment during the comparable period in 1994.
In September 1995, the court approved a settlement of litigation
regarding the allocation of the cost of remediation of a site in
Carlstadt, New Jersey, on which the Company had operated a solvents
recovery facility. The settlement agreement substantially relieves
the Company from future obligations with respect to the site in
exchange for a cash payment, proceeds of the settlement of certain
insurance claims and an assignment of Carlstadt-related claims that
had been filed against the Company's excess insurance carriers.
The Company has recognized income of $1,451,000 in September 1995
due to the reversal of the balance of amounts previously accrued
for future expenditures related to the site. (See Part II, Item 1
of this Form 10-QSB for further discussion of this matter.)
Consolidated miscellaneous income for the nine months ended
September 30, 1995 increased $160,000 to $227,000 when compared to
the same period of 1994 due primarily to the recognition in 1995 of
$106,000 of deferred gain related to the sale of real property in
1992.
The consolidated loss from continuing operations before income
tax credits was $413,000 for the nine months ended September 30,
1995, compared to income of $2,115,000 for the same period last
year.
Income tax credit for the nine months ended September 30, 1995
equalled $76,000, a $333,000 decrease over the $409,000 credit for
1994. The current period's credit is less than that calculated
using the statutory rates since the recognition of deferred tax
benefits have been limited because realization is not assured.
Income (loss) from discontinued operations relates to the
Company's subsidiaries, one of which manufactures commercial valves
and hydraulic systems, and the other which marketed alkali
products.
On August 31, 1995, the Company sold certain machinery,
equipment, contract rights and rights to the subsidiary's name, and
gave a non-compete covenant, thereby effectively selling the on-
going operations of the subsidiary which markets alkali products to
a competitor. The decision to sell the segment was influenced by
the recent loss of two contracts (effective May 1, 1995 and July 1,
1995) which accounted for approximately 64% of the subsidiary's
revenues for the twelve months ended June 30, 1995. Management
believes the loss of such revenues would likely have resulted in
the need to infuse capital into the segment in order to meet its
on-going expenses. The Company received a cash payment of $600,000
for certain machinery and equipment, contract rights, rights to the
subsidiary's name and a non-compete covenant, and is entitled to
additional payments of up to $25,000 which are contingent upon the
availability of lime slurry from a specified source to the
purchaser. The Company has reported a gain from the sale of
$262,000 which is net of taxes of $155,000. The Company intends to
liquidate the remaining fixed assets of the subsidiary and has
included the book value of the property, buildings and equipment
not part of this transaction under the caption "assets held for
sale" on the accompanying balance sheet. The amount reported as
income (loss) from discontinued operations of $35,000 and $(17,000)
for the nine months ended September 30, 1995 and 1994,
respectively, is reported net of a provision for income taxes
(credit) of $18,000 and $(9,000), respectively.
On October 24, 1995, the Company executed a stock purchase
agreement pursuant to which the Company's wholly-owned subsidiary,
THV Acquisition Corp. ("THV") agreed to sell all of the issued and
outstanding stock of HVHC, Inc. ("HVHC"), the parent of Hunt Valve
Company, Inc. ("Hunt"). The assets of Hunt may be deemed to
represent substantially all of the assets of the Company;
therefore, the sale is subject to approval by the Company's
shareholders.
The purchase agreement provides that at the closing the
purchaser shall purchase the HVHC common stock from THV for $18.0
million in cash, reduced by the sum of (i) the amount of Hunt's
indebtedness for borrowed money as of the closing of the proposed
sale which has been fixed by the parties solely for purposes of
determination of the Purchase Price (the "Funded Debt Amount"),
(ii) the amount required to redeem the minority equity position
held by Hunt's senior secured note holders, (iii) the amount
required to be paid by Hunt to THV upon the redemption by Hunt of
its issued and outstanding 7% preferred stock, without par value,
all of which is owned by THV, and (iv) the amount required to be
paid by Hunt to THV in repayment of the senior subordinated note
issued by Hunt to THV in the original principal amount of $500,000.
A portion of the net proceeds ($750,000) is to be placed in escrow
to secure the Company's indemnification obligations to the
purchaser under the purchase agreement, including indemnification
for any payments made by Hunt after the closing in respect of
income taxes owed by the Company during the period that Hunt was a
member of the Company's consolidated tax group. The escrow will
terminate upon the earlier to occur of (i) the release of all funds
from escrow in accordance with the terms thereof or (ii) the later
to occur of (x) the expiration of the applicable statute of
limitations for the assessment of federal income taxes for all
taxable years with respect to which Hunt or HVHC were members of
the Company's consolidated tax group and (y) the satisfaction by
the Company of all assessments or other claims by the Service for
taxes of the consolidated tax group during such years. (See Note 2
of Notes to Consolidated Financial Statements contained herein for
information regarding interested parties to the transaction and the
acquisition of Hunt's senior term loan by a designee of the
purchaser.)
The Company expects the sale to be completed on or before
February 29, 1996 and estimated net cash proceeds from the proposed
sale of approximately $3,981,000 if closed on or around that date.
The Company has estimated a loss on the proposed sale of
approximately $842,000 for financial reporting purposes. The loss
has been reported as of September 30, 1995 and includes estimates
of costs to be incurred in connection with the sale, operating
results from August 31, 1995 through the date of disposition, and
a portion of the prepayment fee paid to Hunt's former senior
secured lenders in connection with the acquisition of such term
loan by a designee of the entity acquiring HVHC.
Consolidated net loss for the nine months ended September 30,
1995 was $758,000 or $.27 per share, compared to net loss of
$293,000, or $.10 per share, for the nine months ended September
30, 1994.
Results of operations for the three months ended September 30, 1995
compared to the three months ended September 30, 1994
Consolidated revenues by business segment for the three months
ended September 30, 1995 and 1994 were as follows (in $000):
1995 1994
Electricity Generation $ 36 $ 74
Environmental Services 92 131
Intercompany (48) (71)
Total $ 80 $134
Consolidated revenues decreased 40%, or $54,000 for the three
months ended September 30, 1995, compared to the same period of
1994.
Revenues from operations which generate electricity from methane
gas were $36,000, a decrease of $38,000 or 51% compared to the same
period last year. The decline is the result of down-time for
repairs to the electric generating equipment due to the
continuation of a series of equipment failures. The environmental
services subsidiary contributed $44,000 to consolidated revenues
versus $60,000 for the same period last year. Approximately 52% of
the environmental services subsidiary's revenues for the period
were to either other members of the consolidated group or third
parties providing services to another member of the consolidated
group, and were, therefore, eliminated in consolidation, versus 54%
for the same period last year.
Consolidated direct operating costs for the three months ended
September 30, 1995 were $79,000, a decrease of 18%, or $17,000,
when compared to the same period of 1994, due primarily to the
decrease in sales volume.
Consolidated selling, general and administrative expenses for
the three months ended September 30, 1995 increased $290,000 or 57%
from the same period last year to $803,000, due primarily to a
$215,000 increase in professional fees and a $50,000 charge related
to an increase in the bad debt reserve pertaining to a note held by
the Company.
The Company's consolidated operating income for the three months
ended September 30, 1995 decreased to a loss of $802,000, from a
loss of $475,000 in 1994.
Investment income decreased by $23,000 to $67,000 for the three
months ended September 30, 1995 from the comparable period last
year.
Consolidated interest expense increased $40,000 to $78,000 for
the three months ended September 30, 1995 compared to the same
period last year, due primarily to an increase in the amount of
interest accrued during the period on amounts reserved for income
taxes, as discussed below.
The Company charged $35,000 and $166,000 against income for the
three months ended September 30, 1995 and 1994, respectively, to
reflect a reduction in the carrying value of its investment in
computer equipment. The charges reflect a decline in the current
market value of IBM mainframe computer equipment.
In September 1995, the Court approved a settlement of litigation
regarding the allocation of the cost of remediation of a site in
Carlstadt, New Jersey on which the Company had operated a solvents
recovery facility. The settlement agreement substantially relieves
the Company from future obligations with respect to the site in
exchange for a cash payment, proceeds of the settlement of certain
insurance claims and an assignment of Carlstadt-related claims that
had been filed against the Company's excess insurance carriers.
The Company has recognized income of $1,451,000 in September 1995
due to the reversal of the balance of amounts previously accrued
for future expenditures related to the site. (See Part II, Item 1
of this Form 10-QSB for further discussion of this matter.)
Consolidated miscellaneous income for the three months ended
September 30, 1995 increased $100,000 to $126,000 when compared to
the same period of 1994 due primarily to the recognition in 1995 of
$106,000 of deferred gain related to the sale of real property in
1992.
The consolidated income from continuing operations before income
tax (credits) was $729,000 for the three months ended September 30,
1995, compared to a loss of $563,000 for the same period last year.
Income tax credit for the three months ended September 30, 1995
equalled $210,000, a $188,000 increase over the $22,000 credit for
1994.
Income (loss) from discontinued operations relates to the
operations of the Company's subsidiaries which manufactures
commercial valves and hydraulic systems and markets alkali
products. (See discussion regarding sale of these segments in
management's discussion of the results of operations for the nine
months ended September 30, 1995.)
Consolidated net income for the three months ended September 30,
1995 was $394,000, or $.14 per share, compared to a net loss of
$430,000, or $.15 per share, for the three months ended September
30, 1994.
Liquidity and Capital Resources
Liquidity
Net cash used by operating activities for the nine months ended
September 30, 1995 increased to $935,000 from $338,000 when
compared to the same period last year, due in part to the inclusion
of activities of the discontinued segments in 1994. Net cash
provided by investing activities increased for the current period
to $1,479,000 from $693,000, due in part to $600,000 in proceeds
from the sale of a discontinued segment in the current period. The
amount of cash used in financing activities decreased to $185,000
from a use of $894,000 for the same period last year. Funds held
by the Company in the form of cash and cash equivalents increased
as of September 30, 1995 to $1,233,000 from $1,086,000. The sum of
cash, cash equivalents and marketable securities as of September
30, 1995 increased $241,000 to $3,580,000 when compared to last
year.
Working capital was $5.8 million and the ratio of current assets
to current liabilities was 2.6 to 1 as of September 30, 1995,
versus $7.5 million and 3.5 to 1 as of December 31, 1994.
The Company will be facing significant cash requirements due to
(i) the settlement of certain issues in the litigation before the
United States Tax Court described below, (ii) income taxes that
will be imposed in 1996 and 1997 on the rental income generated
from the Company's investment in computer equipment as a result of
the exhaustion of tax depreciation related to the equipment, and
(iii) expenses associated with environmental remediation activity
and related litigation. In light of the need for liquidity to
address these obligations, the Company has been required to
initiate sales of significant assets, including operations of Cal-
Lime and the capital stock of Hunt, the Company's principal
operating subsidiary.
In addition, the uncertainty of the outcome of the Company's
ongoing tax and environmental litigation, discussed below and in
the notes to the Company's consolidated financial statements for
the year ended December 31, 1994, in the Company's Annual Report on
Form 10-KSB, and the impact of future events or changes in
environmental laws or regulations, which cannot be predicted at
this time, could result in material increases in remediation and
closure costs, tax and other potential liabilities. The Company may
ultimately incur costs and liabilities in excess of its available
financial resources.
Taxes
In 1991, the Internal Revenue Service (the "Service") asserted
numerous adjustments to the tax liability of the Company and its
subsidiaries for tax years 1980 through 1988, along with interest
and penalties thereon. In 1993, after the conclusion of
administrative proceedings before the Service, the Service issued
a deficiency notice to the Company, asserting adjustments to income
of $33.3 million, and a corresponding deficiency in federal income
taxes of approximately $13.5 million, as well as penalties of $2.5
million and interest on the asserted deficiency and penalties. In
addition, the Service challenged the carryback of losses incurred
by the Company in taxable years 1989 through 1991, thereby bringing
those years, which had been the subject of an ongoing audit, into
the deficiency notice. The 1989-1991 tax audit is discussed below.
The Company filed a petition with the Tax Court contesting many of
the proposed adjustments asserted in the deficiency notice. On
June 5, 1995 and August 14, 1995 the Company and the Service
executed a stipulation of partial settlement and a revised
stipulation of partial settlement, respectively, covering most of
the adjustments asserted in the deficiency notice.
In addition to the partial settlements that have been concluded
with the Service, on September 18, 1995, the Company's Board of
Directors approved a proposed partial settlement of additional
issues for which the Service had sought adjustments to income
totalling approximately $5.8 million. The Service has agreed in
principle to the Company's proposed partial settlement. However,
language reflecting the terms of the proposed partial settlement
has not yet been drafted and agreed to by the parties. The Company
anticipates that the proposed partial settlement will be concluded
by the end of February 1996.
Taking into account the proposed partial settlement, and the
partial settlements that have already been concluded, the Company
has accepted approximately $5.2 million of the $33.3 million of
total proposed adjustments to income. Many of the adjustments
accepted by the Company relate to issues on which the Service would
likely have prevailed in Court. If the Service accepts the
Company's proposed partial settlement, the Service will have
conceded adjustments totalling $27.4 million of taxable income and
penalties leaving only one issue unresolved from the 1980-88
period. After conclusion of the proposed settlement, the Company
will either settle or litigate the remaining adjustment for the
1980-1988 period and the adjustments, discussed below, asserted by
the Service for the 1989-91 period. There is no assurance,
however, that the proposed partial settlement will be consummated
and the Company cannot predict the outcome of further settlement
negotiations or litigation with the Service as to the remaining
issue from the 1980-88 period or the adjustments for the 1989-91
period.
The Company has incurred net operating loss and tax credit
carryforwards that will partly offset the settled adjustments to
taxable income. Taking into account such carryforwards, the
federal income tax and interest that would be due on account of the
settled adjustments (including the proposed partial settlement)
would be approximately $1,280,000 if payment were made on September
30, 1995 ($94,000 of taxes and $1,186,000 of interest). The
settled adjustments (including the proposed partial settlement)
also will result in approximately $495,000 of state liabilities
($211,000 of state income tax and $284,000 of interest calculated
as of September 30, 1995), not including penalties and penalty
interest that may be assessed by the states involved. Payment of
the federal tax liability and interest resulting from both settled
adjustments and any issues litigated before the Tax Court will be
due after the conclusion of the Tax Court case. The date for
payment of the state tax liabilities varies by state. The first of
such payments, in the amount of approximately $284,000 (including
interest to September 30, 1995), will be made in full by the end of
the first quarter of 1996 absent an agreement permitting payment in
installments. (All estimates of tax liabilities presented herein
exclude penalties which may be sought by the jurisdictions involved.
The Service has conceded penalties on all issues in the Tax Court
case.)
The use of the Company's net operating loss and tax credit
carryforwards to offset the settled adjustments will reduce the net
operating loss and tax credit carryforwards that otherwise would
have been available to partly offset the future tax liabilities
that will arise when the Company recognizes an estimated $15.8
million of taxable income from its investment in computer
equipment. For federal income tax purposes, the Company has had
the benefit of tax deductions for depreciation of the equipment and
for interest on the long-term non-recourse debt that the Company
incurred to finance the acquisition of the computer equipment. In
prior years, those deductions exceeded the rental income the
Company earned from leasing the equipment. Those excess deductions
offset the Company's income from other sources. By a relatively
small amount in 1994 and by approximately $5.8 million in 1995,
rental income from leasing the computer equipment exceeded the
related depreciation and interest deductions. This excess income
was largely offset by the Company's deductions from other sources.
Rental income will continue to exceed depreciation and interest
deductions in 1996 and 1997. The Company anticipates approximately
$6.5 and $3.5 million of taxable income, net of depreciation and
interest, for 1996 and the first seven months of 1997,
respectively, on account of the computer equipment investment. The
Company does not expect to have sufficient deductions from other
sources to offset this net income.
The Company's accrual of $2,480,000 as of September 30, 1995 for
taxes and interest relating to the Tax Court litigation exceeds the
amount of the liability associated with the settled adjustments,
including the pending partial settlement because such settlement
has not yet been formally accepted by the Service.
The Service has concluded an audit of the Company's federal
income tax returns for 1989 through 1991, and has questioned
certain deductions claimed by the Company in connection with its
investment in the computer equipment discussed above. If the
Service prevails in disallowing the computer equipment deductions,
the Company's taxable income for 1989 through 1992 would be
materially increased. However, in that case, its anticipated
taxable income from the computer equipment for 1994 through 1997
would be reduced by a corresponding amount. Specifically, if the
proposed partial settlement is approved and the Company prevails on
the remaining issues from the 1980-88 and 1989-91 periods, the
incremental federal income tax liability attributable to the
disallowance of the computer equipment deductions will not exceed
$5.9 million of tax and $2.4 million of interest, calculated
through September 30, 1995, thereby increasing the Company's
maximum aggregate liability for federal taxes and interest
attributable to the settled issues and the computer lease issue to
$6.0 million and $3.6 million, respectively, calculated through
September 30, 1995. In that case, however, the Company's deferred
tax liability of $874,000 as of September 30, 1995 would be
eliminated, as would most of the $6.5 million and $3.5 million of
taxable income that the Company projects it will realize from the
computer equipment in 1996 and 1997, respectively, as discussed in
the preceding paragraph. Disallowance of the computer equipment
deductions would not result in any state tax liability. The
Service also challenged certain real property deductions and
certain expenses that were deducted by the Company, but that the
Service believes should have been capitalized. The deductions
challenged by the Service for 1989 through 1991 will be addressed
in the pending Tax Court litigation because those deductions
resulted in net operating losses that were carried back and
deducted in years covered by the Tax Court litigation. Settlement
discussions on the 1989-1991 issues are in process.
The incremental amount of federal taxes and interest that the
Company would owe if the Company is unsuccessful in its defense of
the remaining issue from the 1980-88 period and all of the issues
from the 1989-91 period, including the computer equipment
deductions, and provided the proposed partial settlement is
accepted by the Service, is approximately $8 million of additional
federal income taxes and $6.5 million of additional interest,
calculated through September 30, 1995. Such amounts are in
addition to the tax of $94,000 and interest of $1,186,000,
discussed above, that will be owed as a result of the partial
settlements and proposed partial settlement. The Company's
aggregate liability related to this scenario would approximate $8.1
million of federal tax and $7.7 million of interest, calculated
through September 30, 1995. Little or no state income tax and
interest is anticipated as a result of the disallowance of these
issues.
Remediation and Closure Costs
The Company and other responsible parties have been remediating
the Kin-Buc Landfill under an Amended Unilateral Administrative
Order issued by the United States Environmental Protection Agency
("EPA") in September 1990 (the "1990 Order"). In November 1992,
EPA issued an Administrative Order (the "1992 Order", and, together
with the 1990 Order, the "Orders") for the remediation of certain
areas neighboring the Kin-Buc Landfill.
During May 1993, a $22 million contract was awarded for the
construction of a containment system and leachate treatment plant
at the Kin-Buc Landfill in accordance with the engineered design
and standards accepted by the EPA in satisfaction of certain
requirements of the 1990 Order. The contract was to be financed
with funds available in the trust established in 1993 from proceeds
provided from a negotiated settlement with certain parties to a
suit the Company initiated in 1990 with the intent of obtaining
contribution toward the cost of remediation. During May 1994, the
Company met with representatives of EPA to discuss the impact
delays in securing settlement proceeds would have on the Company's
ability to finance the construction within the time frame required
by EPA. In July 1994, after meeting with EPA, SCA Services, Inc.
("SCA"), an affiliate of WMX Technologies, Inc. ("WMX") and a
respondent to the Orders, entered into a contract with the
contractor installing the containment system and treatment plant,
thereby alleviating the potential for delays in this phase of the
construction due to financial limitations. WMX, formerly known as
Waste Management, Inc., had previously provided EPA with a
financial guaranty of SCA's and the Company's obligations under the
Orders. In August 1994, a contract was awarded by SCA for certain
activities mandated by the 1992 Order.
The execution of the contracts between SCA and the contractors
has not relieved the Company of liability for such costs since the
Company entered into an agreement with SCA and certain affiliates
(the "SCA Group") in 1986 which allocated 75% of the costs incurred
by the parties for the remediation of the site to the Company. The
Company filed a demand for arbitration in 1993 seeking rescission
or reformation of the agreement with the SCA Group. During March
1995, the SCA Group filed a demand for arbitration seeking
reimbursement from the Company of $10.7 million, which equals 75%
of the $14.3 million of remediation expenses purportedly funded by
WMX through December 31, 1994. The status of such arbitration
demands, as yet unresolved, is described in Part II, Item 1 of this
report.
The contractors have essentially completed the construction
required under the Orders, and the Company is awaiting EPA review
and acceptance of the work performed. Operation of the treatment
plant and maintenance of the facilities is being conducted by an
affiliate of SCA. The total cost of the construction, operation
and maintenance of remedial systems for a 30-year period, plus the
cost of past remedial activities, has been estimated to be in the
range of approximately $80 million to $100 million.
A study to determine the nature and extent of contamination, and
sources thereof, on approximately one acre of land, adjacent to the
enclosed site has been substantially completed. On the basis of
such study, a design for a remedial program involving the
installation of a slurry cut-off wall around this one acre parcel
will be presented to the EPA on or about January 1996 for its
review and approval. The cost of such installation may range from
$1 million to $2 million. It is not possible to predict, at this
point, whether EPA will require additional remedial measures to be
taken or will mandate long-term maintenance of the slurry wall.
Other areas within the vicinity of the site may become the subject
of future studies due to the historic use of the area for disposal.
The cost of studies and remediation of such areas is not included
in the present estimates of the total cost of the remediation since
such work is outside the scope of the Orders. The Company believes
that the cost of the work addressed by the Orders will not result
in a significant increase in such estimates, and that the remainder
of such work is outside the scope of the Orders. An obligation to
undertake significant remediation of areas outside the scope of the
Orders would have a material adverse effect on the financial
condition, results of operations and net cash flows of the Company.
Additional material adjustments to the Company's current accrual
may become necessary as the allocations to all respondents and
potentially responsible parties are determined.
Accounting Principles
Effective January 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 115 ("Accounting for
Certain Investments in Debt and Equity Securities"). In accordance
with the statement, the Company classifies all debt securities
purchased with remaining maturities of less than one year as
securities held to maturity which are carried at amortized cost.
All other debt and equity securities are classified as securities
available for sale which are carried at fair value as determined by
quoted market prices. The aggregate excess of fair value over cost
of such securities as of September 30, 1995, of $138,000, net of
deferred income taxes of $48,000, is included as a separate
component of stockholders' equity.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1991, the Internal Revenue Service (the "Service") asserted
numerous adjustments to the tax liability of the Company and its
subsidiaries for tax years 1980 through 1988, along with interest
and penalties thereon. In 1993, the Service issued a deficiency
notice to the Company, asserting a deficiency in federal income
taxes of approximately $13.5 million, penalties of $2.5 million and
a significant amount of accrued interest. The Company filed a
petition with the Tax Court contesting many of the proposed
adjustments in the deficiency notice. On June 5, 1995 and August
14, 1995 the Company and the Service executed a stipulation of
partial settlement and a revised stipulation of partial settlement,
respectively, covering most of the adjustments asserted in the
deficiency notice. On September 18, 1995, the Company's Board of
Directors approved a proposed settlement of additional issues for
which the Service had sought adjustments to income totalling
approximately $5.8 million. The Service has agreed in principle to
the proposed partial settlement. However, language reflecting the
terms of the proposed partial settlement has not yet been drafted
and agreed to by the parties. The Company anticipates that the
proposed partial settlement will be concluded by the end of
February 1996. Taking into account the proposed partial
settlement, the Company has accepted approximately $5.2 million of
the $33.3 million of total proposed adjustments to income. The
adjustments accepted by the Company relate principally to issues on
which the Service would likely have prevailed in court. If the
Service accepts the Company's proposed partial settlement, the
Service will have conceded adjustments totalling $27.4 million of
taxable income and penalties. After conclusion of the proposed
partial settlement, the Company will either settle or litigate the
remaining adjustment for the 1980-1988 period. (See Part I, Item
2, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Taxes, for further information about this
matter.)
The Company has previously reported in its Form 10-KSB for the
year ended December 31, 1994 about litigation brought by a group of
generators and transporters of waste handled at a site in
Carlstadt, New Jersey (the "Carlstadt Site") against the Company,
Inmar Associates, Inc. ("Inmar"), a company owned and controlled by
Marvin H. Mahan, a former officer, director and principal
shareholder of the Company, and Mr. Mahan, the purpose of which was
to allocate to the Company, Inmar and Mr. Mahan a portion of the
costs of remediating the Carlstadt Site under orders of the EPA
mandating such remediation. In September 1995, the Court approved
a settlement among Transtech, Inmar, Mr. Mahan and these generators
and transporters and other parties who have contributed to the
costs of the remediation pursuant to which Transtech, Inmar and Mr.
Mahan agreed to (i) pay $4.1 million of proceeds from settlements
with primary insurers of a coverage action brought by the Company
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 1. LEGAL PROCEEDINGS, Cont'd
and Inmar against their primary and excess insurers, (ii) pay an
additional $145,000 ($72,500 from Transtech and $72,500 from Inmar
and Mr. Mahan), and (iii) assign their Carlstadt Site-related
insurance claims against an excess insurer in exchange for a
complete release from these parties of all liability arising from
or on account of environmental contamination at the Carlstadt Site
and the parties' remediation of the same. Notwithstanding such
settlement, the Company may have liability in connection with the
site to the EPA and to parties who had not contributed to the
remediation at the time the settlement was approved, but who may
later do so. The Company has received no indication that the EPA
intends to assert a claim against any responsible party for the
recovery of any costs the EPA may have incurred in overseeing
remediation of the Carlstadt Site. Further, the Company believes
that the EPA may not have the legal right to assert such a claim.
In 1993, the Company's demand for arbitration concerning,
(among other things) the enforceability of provisions of the 1986
agreement among the Company, the SCA Group and others allocating
the costs of the remediation of the Kin-Buc Landfill 75% to the
Company (jointly and severally with others), and 25% to the SCA
Group was stayed pending a decision by the Supreme Court of New
York County (the "Court"), on motion of the SCA Group (as defined
on page 28), that the Company's demand for arbitration was barred
by the statute of limitations. In October 1995, a referee
appointed by the Court to determine when the Company knew or should
have known facts giving rise to its legal right to challenge the
1986 agreement (that is, what the cost to remediate the Kin-Buc
Landfill would be), found that the Company knew or should have
known such facts as early as 1986. In November 1995, the Company
moved to reject the referee's report. If the Company's motion is
denied, and the referee's report is accepted by the judge and
affirmed on appeal, the Company's challenge of the enforceability
of the 1986 agreement will have been barred by the statute of
limitations, and, accordingly, SCA's motion to permanently enjoin
the Company's arbitration will be granted.
In March 1995, while the Court's referral on the Company's
arbitration was pending, the SCA Group demanded that an arbitrator
enforce the cost allocation provisions of the 1986 agreement by
ordering the Company to reimburse it $10.7 million, or 75% of the
$14.3 million of remediation expenses purportedly funded by it
through December 31, 1994. On the Company's motion, the Court
narrowed the issues to be arbitrated to the amount of funds
expended on the remediation and the reasonableness of such
expenditures. The Court also made any findings on such issues
subject to resolution of the Company's arbitration as to the
enforceability of the 1986 agreement. The arbitrators have
scheduled discovery, which is ongoing, and a hearing is tentatively
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 1. LEGAL PROCEEDINGS, Cont'd
set for March 1996. The recovery by SCA of a judgment against the
Company in the SCA Group's arbitration would have a materially
adverse effect on the financial condition, results of operations
and net cash flows of the Company, depending upon the structuring
of payments pursuant to the judgment and the ability of the Company
to recover a portion of such costs from insurance carriers and
other parties liable for remediation of the Kin-Buc site.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 10 - Material Contracts
Exhibit 11 - Computation of Earnings (Loss) Per Common Share
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
None
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TRANSTECH INDUSTRIES, INC.
(Registrant)
Date: November 14, 1995 By: /s/ Robert V. Silva
(February __, 1996 Robert V. Silva, President
as to amendments to and Chief Executive Officer
the original filing)
and
Date: November 14, 1995 By: /s/ Andrew J. Mayer, Jr.
(February __, 1996 Andrew J. Mayer, Jr.
as to amendments to Vice President-Finance, Chief
the original filing) Financial Officer and Secretary
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
EXHIBIT INDEX
EXHIBIT PAGE
NO. NO.
10 Material Contracts
10(aq) Amendment No. 14 dated as of July 27, 1995 between
Hunt Valve Company, Inc. and LaSalle Business
Credit, Inc. to Loan and Security Agreement dated
January 30, 1987, as amended through Amendment No.
5 and Restatement of Loan and Security Agreement
dated September 27, 1991, and as amended through
Amendment No. 13 dated as of June 27, 1995;(*)
10(ar) Letter Agreement dated as of July 27, 1995 between
Hunt Valve Company, Inc., Rhode Island Hospital
Trust National Bank, as Trustee for the Textron
Collective Investment Trust B, Balboa Life
Insurance Company and Balboa Insurance Company, as
consented to by LaSalle Business Credit, Inc.;(*)
10(as) Amendment No. 15 dated as of August 28, 1995
between Hunt Valve Company, Inc. and LaSalle
Business Credit, Inc. to Loan and Security
Agreement dated January 30, 1987, as amended
through Amendment No. 5 and Restatement of Loan
and Security Agreement dated September 27, 1991,
and as amended through Amendment No. 14 dated as
of July 27, 1995;(*)
10(at) Third Amendment Agreement dated as of August 1,
1995 between Hunt Valve Company, Inc., Rhode
Island Hospital Trust National Bank, as Trustee
for the Textron Collective Investment Trust B,
Balboa Life Insurance Company and Balboa Insurance
Company, to the Note Agreement dated as of August
15, 1991;(*)
10(au) Settlement Agreement approved in September 1995
among Transtech Industries, Inc., Inmar
Associates, Inc., Marvin H. Mahan and certain
members of the 216 Paterson Plank Road
Cooperating PRP Group;(*)
10(av) Income Tax Sharing Agreement dated September 27, 1991
among Transtech Industries, Inc., THV Acquisition
Corp., HVHC, Inc. and Hunt Valve Company, Inc. 38-53
11 Computation of Earnings (Loss) Per Common Share 54
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
EXHIBIT INDEX, Cont'd
EXHIBIT PAGE
NO. NO.
27 Financial Data Schedule N/A
* Previously filed with the original filing of Form
10-QSB on March 14, 1995