SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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
May 6, 1996. 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 pages 32
Exhibit index on page 31
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
I N D E X
Page(s)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31,
1996 and December 31, 1995 3 - 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 5 - 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 7 - 8
Notes to Consolidated Financial Statements 9 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27 - 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBIT INDEX 31
EXHIBITS 32
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In $000's)
(Unaudited)
ASSETS
March 31, December 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 1,251 $ 420
Marketable securities 4,541 2,044
Accounts and notes receivable
(net of allowance for doubtful
accounts of $11) 199 205
Deferred income taxes - 42
Prepaid expenses and other 362 352
Net assets of discontinued
operation - 4,517
Total current assets 6,353 7,580
PROPERTY, PLANT AND EQUIPMENT
Land 799 799
Buildings and improvements 327 327
Machinery and equipment 2,973 3,001
4,099 4,127
Less: accumulated depreciation 3,148 3,176
Net property, plant and equipment 951 951
OTHER ASSETS
Notes receivable 655 750
Investment in leveraged lease 119 128
Assets held for sale 2,404 2,406
Clay deposits 1,077 1,077
Escrowed funds from sale of
subsidiary 750 750
Deferred income taxes 179 -
Other 60 40
Total other assets 5,244 5,151
TOTAL ASSETS $12,548 $13,682
See Notes to Consolidated Financial Statements
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)
March 31, December 31,
1996 1995
CURRENT LIABILITIES
Current portion of long-term debt $ 331 $ 356
Accounts payable 426 357
Accrued income taxes 2,104 1,942
Accrued miscellaneous expenses 213 422
Total current liabilities 3,074 3,077
OTHER LIABILITIES
Long-term debt 62 66
Accrued remediation and closure
costs 12,848 12,851
Deferred income taxes 8 82
Total other liabilities 12,918 12,999
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 3,597 4,652
Net unrealized gains on marketable
securities 100 95
Subtotal 7,570 8,620
Treasury stock, at cost -
1,885,750 shares (11,014) (11,014)
Total stockholders' equity
(deficit) (3,444) (2,394)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $12,548 $13,682
See Notes to Consolidated Financial Statements
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 Three Months Ended
March 31,
1996 1995
REVENUES $ 83 $ 116
COST OF OPERATIONS
Direct operating costs 81 69
Selling, general and
administrative expenses 672 651
Total cost of operations 753 720
INCOME (LOSS) FROM OPERATIONS (670) (604)
OTHER INCOME (EXPENSE)
Investment income (loss) 61 60
Interest expense (74) (98)
Income from (writedown of)
interest in leveraged lease - (211)
Other income (expense) 82 72
Total other income (expense) 69 (177)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
(CREDIT) AND EXTRAORDINARY ITEM (601) (781)
Income taxes (credit) (58) (61)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEM (543) (720)
DISCONTINUED OPERATIONS (NOTE 3):
Valve Manufacturing Segment
Income from discontinued operation,
net of taxes of $68 - 78
Alkali Products Segment
Income from discontinued
operation, net of taxes
of $11 - 21
- 99
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (543) (621)
EXTRAORDINARY CHARGE ON ELIMINATION
OF DEBT, NET OF TAXES (NOTE 3) (512) -
NET INCOME (LOSS) $(1,055) $(621)
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
March 31,
1996 1995
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEM $(.19) $(.25)
DISCONTINUED OPERATIONS
Income (loss) from discontinued
operations, net of taxes - .03
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (.19) (.22)
EXTRAORDINARY CHARGE (.18) -
NET INCOME (LOSS) $(.37) $(.22)
NUMBER OF SHARES USED IN
CALCULATION 2,829,090 2,829,090
See Notes to Consolidated Financial Statements
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000's)
(Unaudited)
For the Three Months Ended
March 31,
1996 1995
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 94 $4,490
Cash paid to suppliers and employees (887) (4,860)
Interest and dividends received 26 55
Interest paid (22) (425)
Other income received 18 72
Income taxes paid (44) -
Cash received from discontinued
operations 67 -
Net cash provided by (used in)
operating activities (744) (668)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity
of marketable securities 696 772
Purchase of marketable securities (3,162) (599)
Purchase of property, plant and
equipment (37) (85)
Proceeds from sale of property,
plant and equipment 16 1
Collections of notes receivable 102 39
Rent sharing payments from
computer leases 9 77
(Increase) decrease in other assets - (58)
Cash proceeds from sale of
discontinued segment 4,005 -
Net cash provided by (used in)
investing activities 1,629 147
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (29) (118)
Proceeds from issuance of long-term debt - 527
Payment of remediation and closure costs (25) (8)
Net cash provided by (used in)
financing activities (54) 401
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 831 (120)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 420 880
CASH AND CASH EQUIVALENTS AT END
OF THE QUARTER $1,251 $ 760
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
(In $000's)
(Unaudited)
For the Three Months Ended
March 31,
1996 1995
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
NET INCOME (LOSS) $(1,055) $ (621)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Extraordinary charge on elimination
of debt 512 -
Depreciation and amortization 15 428
(Gain) loss on sale of property,
plant and equipment 6 (1)
Increase (decrease) in deferred
income taxes (212) 211
Leveraged lease (revenue) charge - (162)
Increase (decrease) in minority
interest in consolidated subsidiary - (9)
(Increase) decrease in assets:
Accounts and notes receivable,
trade-net (22) (265)
Inventories - (275)
Prepaid expenses and other (9) (147)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses (141) (98)
Accrued taxes 162 267
Accrued retiree health care
benefit liability - 4
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (744) $(668)
See Notes to Consolidated Financial Statements
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(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, 1995 for further information.
The financial information has been prepared in accordance with
the Company's customary accounting practices except for certain
reclassifications to the 1995 financial statements in order to
conform to the presentation followed in preparing the 1996
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 - MARKETABLE SECURITIES
The Company has 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 March 31,
1996, of $151,000, less deferred income taxes of $51,000, is
included as a separate component of stockholders' equity.
NOTE 3 - DISCONTINUED OPERATIONS
The consolidated statements of operations have been restated to
report the net results of the Company's former alkali products and
valve manufacturing segments as discontinued operations. The net
assets of the discontinued valve manufacturing segment has been
classified as "Net assets of discontinued operation" in the
accompanying consolidated balance sheet as of December 31, 1995.
Alkali Products Segment
On August 31, 1995, the Company sold certain machinery,
equipment, contract rights and rights to a subsidiary's name, and
gave a non-compete covenant, thereby effectively selling the on-
going operations of its wholly-owned subsidiary, f/k/a Cal-Lime,
Inc. ("Cal-Lime"), to a competitor. The Company intends to
liquidate the remaining assets of Cal-Lime and has included the
property, buildings and equipment excluded from this transaction,
having an aggregate book value of $359,000 and $362,000, under the
caption of "Assets held for sale" on the balance sheets as of March
31, 1996 and December 31, 1995, respectively. Such value
approximates the estimated net realizable value of those assets.
The consolidated statement of operations for 1995 reports the net
results of Cal-Lime's operations as income from discontinued
operations.
Valve Manufacturing Segment
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., a Delaware corporation ("HVHC"),
the then parent of Hunt Valve Company, Inc., an Ohio corporation
("Old Hunt"), to ValveCo Inc. On October 24, 1995, the Company
executed the definitive stock purchase agreement. On December 26,
1995, Old Hunt was merged into HVHC and HVHC adopted the name of
Hunt Valve Company, Inc. ("Hunt"). The net assets of Hunt
represented substantially all of the net assets of the Company;
therefore, the sale was subject to approval by the Company's
shareholders. Such approval was given at a special meeting of the
shareholders held on February 29, 1996 and the sale was consummated
on March 1, 1996.
The net cash proceeds of the sale, consisting of the sum of the
purchase price for Hunt's common stock plus the amount paid by Hunt
to THV upon the redemption by Hunt of its issued and outstanding 7%
preferred stock, all of which was owned by THV, and the amount paid
by Hunt to THV in repayment of the senior subordinated note issued
by Hunt to THV, less transaction costs, were approximately
$3,975,000. A portion of the net cash proceeds ($750,000) was
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 was
a member of the Company's consolidated tax group and (y) the
satisfaction by the Company of all assessments or other claims by
the Internal Revenue Service for taxes of the consolidated tax
group during such years.
The consolidated statement of operations for 1995 reports the
net results of Hunt's operations as income from discontinued
operations. The Company reported a loss on the sale in its results
for the year ended December 31, 1995.
Upon consummation of the sale, a portion of Hunt's funded debt
was extinguished resulting in a write-off of approximately $775,000
of unamortized debt issuance costs and debt discounts. Pursuant to
Securities and Exchange Commission policy, $512,000 ($775,000 less
income taxes of $263,000) has been reported as an extraordinary
loss in the period ended March 31, 1996 when such debt was deemed
to have been extinguished.
The net assets of Hunt as of December 31, 1995 consisted of:
1995
Current assets $ 8,725
Current liabilities (6,141)
Net fixed assets 6,078
Other non-current assets 10,697
Non-current liabilities (14,092)
Net assets $ 5,267
The portion of the net asset value equal to the escrowed funds
has been classified as long term in the accompanying consolidated
balance sheets.
In connection with the sale, 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,
collectively acquired 15% of the equity of ValveCo Inc. for
$150,000. These four individuals, together with certain other
members of senior management of Hunt not yet identified, will also
have the opportunity to acquire collectively up to an additional
15% of the common stock of ValveCo Inc. pursuant to the exercise of
performance and value-based options at an aggregate cost to such
individuals of $2.75 million. In addition, the aforementioned
directors and executive officers of the Company and Hunt have been
employed in various capacities by ValveCo Inc. and Hunt after the
sale.
NOTE 4 - INCOME 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, 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 Company filed a petition with the Tax Court contesting
many of the proposed adjustments asserted in the deficiency notice.
For a discussion of this matter, see "Taxes" contained in
Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-QSB.
NOTE 5 - LONG-TERM DEBT
At March 31, 1996, long-term debt consisted of the following (in
$000's):
10.5% and 11% mortgages payable due in $360
monthly and semi-annual installments
through July 1996 and April 2000;
secured by land and buildings
Other 33
Total long-term debt 393
Less: current portion (331)
$ 62
NOTE 6 - 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 March 31, 1996, the Company has accrued $22.0 million for
its estimated share of remediation and closure costs in regard to
the Company's former landfills, $9.3 million of which is held in
trusts and maintained by trustees for financing of the $11.2
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.
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 7 - 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
The three months ended March 31, 1996 compared to the three months
ended March 31, 1995
Consolidated revenues by business segment for the three months
ended March 31, 1996 and 1995 were as follows (in $000):
1996 1995
Electricity Generation $ 55 $ 62
Environmental Services 64 149
Intercompany (36) (95)
Total $ 83 $116
Consolidated revenues for the three months ended March 31, 1996
were $83,000, a decrease of $33,000 or 28% compared to the same
period of 1995.
Revenues from operations which generate electricity from methane
gas were $55,000, a decrease of $7,000 or 11% compared to the same
period last year. The decrease is primarily the result of a 3%
decline in operating hours of the four electric generating units.
Approximately 18% and 4% of available machine hours were dedicated
to repairs and scheduled overhaul, respectively, for the period in
1996 versus 21% and 0% for such tasks, respectively, during the
comparable period in 1995. The environmental services subsidiary
reported $64,000 of operating revenues (prior to elimination of
intercompany sales) compared to $149,000 for the same period last
year. Approximately $36,000 or 56% of the environmental services
subsidiary's revenues for the period, compared to $95,000 or 64%
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. The decline in sales (prior to the
elimination of intercompany activity) during 1996 was primarily due
to the completion of the construction phase of its work for a third
party during the second half of 1995 and the substantial completion
of the construction phase of the remediation work at the closed
landfill owned by the Company in mid-1995. As part of the
Company's effort to expand the customer base of the environmental
services subsidiary, the subsidiary 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. Anticipated revenues to the
segment resulting from the joint marketing agreement and through
its individual efforts cannot presently be ascertained.
Consolidated direct operating costs for the three months ended
March 31, 1996 were $81,000, an increase of $12,000 or 17% when
compared to the same period of 1995, due primarily to the expenses
incurred during 1996 for the repair of certain electric generating
equipment.
Consolidated selling, general and administrative expenses for
the three months ended March 31, 1996 increased $21,000 or 3% from
the same period last year to $672,000. Decreases in insurance and
salary expenses were offset by a $45,000 increase in professional
fees relating to the Company's ongoing environmental and tax
litigation. Professional fees and administrative costs are not
anticipated to decline appreciably in the near future due primarily
to continued support of the Company's litigation, marketing and
asset divestiture efforts (see Liquidity and Capital Resources -
Liquidity).
The Company's consolidated operating loss for the three months
ended March 31, 1996 increased to $670,000 from a loss of $604,000
in 1995.
Consolidated investment income increased by $1,000 to $61,000
for the three months ended March 31, 1996 from the comparable
period last year.
Consolidated interest expense decreased $24,000 to $74,000 for
the three months ended March 31, 1996 compared to the same period
last year, due to an decrease in the amount of interest accrued
during the period on amounts reserved for income taxes, as
discussed below.
The Company charged $211,000 against income for the three months
ended March 31, 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.
Consolidated miscellaneous income for the three months ended
March 31, 1996 increased $10,000 to $82,000 when compared to the
same period of 1995. Miscellaneous income reported for 1996
includes $67,000 in management fees paid by a former subsidiary of
the Company.
The consolidated loss from continuing operations before income
tax credits and extraordinary items was $601,000 for the three
months ended March 31, 1996, compared to a loss of $781,000 for the
same period last year.
Income tax credit for the three months ended March 31, 1996
equalled $58,000, a $3,000 decrease from the $61,000 credit for the
comparable period in 1995.
Income (loss) from discontinued operations relates to the
Company's former subsidiaries, one of which manufactured commercial
valves and hydraulic systems, and the other which marketed alkali
products.
On August 31, 1995, the Company sold to a competitor 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. 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 $21,000 for the three months ended
March 31, 1995 is reported less a provision for income taxes of
$11,000.
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 Hunt Valve Company, Inc. ("Hunt") to ValveCo
Inc. Certain directors and executive officers who are members of
management of the Company and Hunt acquired a 15% equity stake in
ValveCo Inc. The net assets of Hunt represented substantially all
of the net assets of the Company; therefore, the sale was subject
to approval by the Company's shareholders. Such approval was given
at a special meeting of the Company's shareholders held on February
29, 1996 and the sale was completed on March 1, 1996. The amount
reported as income from discontinued operations of $78,000 for the
three months ended March 31, 1995 is reported less a provision for
income taxes of $68,000. The Company reported a loss on the sale
in its consolidated statement of operations for the year ended
December 31, 1995. Upon consummation of the sale, a portion of
Hunt's funded debt was extinguished resulting in a write-off of
approximately $775,000 of unamortized debt issuance costs and debt
discounts. Pursuant to Securities and Exchange Commission policy,
$512,000 ($775,000 less income taxes of $263,000) has been reported
as an extraordinary loss in the period ended March 31, 1996 when
such debt was deemed to have been extinguished.
Consolidated net loss for the three months ended March 31, 1996
was $1,055,000 or $.37 per share, compared to net loss of $621,000,
or $.22 per share, for the three months ended March 31, 1995.
Liquidity and Capital Resources
Liquidity
Net cash used in operating activities for the three months ended
March 31, 1996 increased to $744,000 from $668,000 when compared to
the same period last year, due in part to the inclusion of
activities of the discontinued segments in the 1995 data. Net cash
provided by investing activities increased for the current period
to $1,629,000 from $147,000, due in part to $4,005,000 in proceeds
from the sale of a discontinued segment in the current period. The
amount of cash used in financing activities decreased to $54,000
from a source of $401,000 for the same period last year. Funds
held by the Company in the form of cash and cash equivalents
increased as of March 31, 1996 to $1,251,000 from $760,000. The
sum of cash, cash equivalents and marketable securities as of March
31, 1996 increased $3,328,000 to $5,792,000 when compared to last
year.
Working capital was $3,279,000 and the ratio of current assets
to current liabilities was 2.1 to 1 as of March 31, 1996, versus
$4,508,000 and 2.5 to 1 as of December 31, 1995.
The Company holds notes in the aggregate amount of $119,000 as
of March 31, 1996 which were issued by a firm which produces and
distributes industrial gases, and by a partnership whose members
include certain owners of the firm. The notes are secured by a
first mortgage on the real property on which the firm's facility is
located and are guaranteed by certain owners of this firm and
members of the partnership. An explosion destroyed the firm's only
facility on March 26, 1996. It is presently uncertain what
operations of the firm will continue and the extent to which the
firm's insurance proceeds will be available for payment of amounts
due under the notes.
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 contained herein and
for the year ended December 31, 1995, 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.
The Company faces significant short-term and long-term cash
requirements for (i) federal and state income tax obligations, most
of which will become due following litigation or settlement with
the Internal Revenue Service (the "Service") of the Company's tax
liability for the years 1980 through 1991, (ii) income taxes that
will be imposed in 1996 and 1997 on rental income from the
Company's investment in computer equipment as a result of the
exhaustion of tax depreciation that had previously sheltered such
rental income from tax and (iii) expenses associated with
environmental remediation activity and related litigation.
Although the Company has completed the sale of the two business
segments described above, and is pursuing the sale of property held
for sale, no assurance can be given that the timing and amount of
the proceeds of such sales will be sufficient to meet the capital
requirements of the Company, since such requirements can only be
ascertained as the Company resolves its tax and environmental
litigation. The Company cannot ascertain whether its remaining
operations and funding sources will be adequate to satisfy its
future capital requirements, including its anticipated tax and
environmental liabilities. In the event that the proceeds of asset
sales are insufficient to meet the Company's future capital
requirements, including its tax and environmental liabilities,
then, if other alternatives are unavailable at that time, the
Company will be forced to consider a plan of liquidation of its
remaining assets, whether through bankruptcy proceedings or
otherwise.
Taxes
As discussed in greater detail below, the Company is currently
litigating with the Service in Tax Court over its tax liability for
taxable years 1980-88. Certain issues from taxable years 1989-91
are also part of the Tax Court litigation because losses from those
years were carried back to 1988. The Company estimates that after
taking into account partial settlements that have been reached
through March 7, 1996 regarding certain of the adjustments asserted
by the Service, and taking into account available net operating
losses and tax credits, approximately $8.1 million of federal and
$237,000 of state income taxes and $8.6 million of federal and
$240,000 of state interest, calculated through March 31, 1996,
would be owed if the Company were unsuccessful in its defense of
all remaining unsettled issues in the Tax Court litigation. (All
tax liability estimates presented herein exclude penalties which
may be sought by the jurisdictions involved, except that the
Service has conceded penalties on all issues in the Tax Court
litigation.)
In 1991, 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, 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 1989-91 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, August 14, 1995 and March 7,
1996, respectively, the Company and the Service executed a
stipulation of partial settlement of issues in the Tax Court case
and first and second revised stipulations of partial settlement.
These partial settlements have resolved most of the adjustments
asserted in the deficiency notice.
Taking into account the partial settlements to date, the Company
has accepted approximately $5.2 million of the $33.3 million of
total adjustments to income asserted by the Service. Many of the
adjustments accepted by the Company relate to issues on which the
Service would likely have prevailed in court. The Service has
conceded adjustments totalling $27.4 million of taxable income and
penalties, leaving only one issue, involving several taxable years,
unresolved from the 1980-88 period. Also unresolved are the
adjustments, discussed below, asserted by the Service for the 1989-
91 period. The Company cannot predict the outcome of further
settlement negotiations or litigation with the Service over these
issues.
The Company has net operating loss and tax credit carryforwards
that will partly offset the tax liability resulting from the
settled adjustments to taxable income. Taking into account such
carryforwards, the federal income tax and interest that will be due
on account of the settlements reached to date is approximately
$1,375,000, with interest through March 31, 1996 ($93,000 of taxes
and $1,282,000 of interest). The settlements also may result in
approximately $477,000 of state tax liabilities ($237,000 of state
income tax and $240,000 of interest through March 31, 1996), not
including penalties and penalty interest that may be assessed by
the states involved. Payment of the federal tax liability
resulting from both settled issues 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
$98,000 will be paid during May 1996. This state currently has a
tax amnesty program in effect pursuant to which all interest and
penalties for back taxes will be waived upon payment of the tax
liability. The Company believes the terms of this amnesty program
apply to the majority of the amounts owed to the state. The
Company will reverse approximately $240,000 of accrued interest
related to such taxes upon confirmation of the Company's position
by the state.
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 partially offset the future tax liabilities
that will arise when the Company recognizes an estimated $9.7
million of net 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 that the
Company earned from leasing out the equipment. Those excess
deductions offset the Company's income from other sources. Rental
income from leasing the computer equipment exceeded the related
depreciation and interest deductions by approximately $5.8 million
in 1995 and $3.0 million in 1994. This excess income was largely
offset by deductions from other sources. Rental income will
continue to exceed depreciation and interest deductions in 1996 and
1997. The Company anticipates approximately $6.2 million and $3.5
million of net taxable income for 1996 and the first seven months
of 1997, respectively, on account of its computer equipment
investment. The Company does not expect to have sufficient
deductions from other sources in 1996 and 1997 to fully offset this
taxable income.
The Service has concluded an audit of the Company's federal
income tax returns for 1989 through 1991, and has questioned the
deductions claimed by the Company in connection with its investment
in the computer equipment discussed in the preceding paragraph. 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 taxable
income from the computer equipment for 1994 through 1997 would be
reduced by a corresponding amount. Specifically, if the Company
prevails on all remaining issues in the Tax Court case other than
those related to the computer equipment, the incremental federal
income tax liability attributable to disallowance of the computer
equipment deductions will not exceed $5.9 million of tax and $2.9
million of interest, calculated through March 31, 1996. This would
increase the Company's aggregate liability for federal taxes and
interest attributable to both the settled issues and the computer
lease to $6.0 million and $4.1 million, respectively, calculated
through March 31, 1996. (This estimate is less than the
aforementioned estimated federal income tax liability of $8.1
million of tax and $8.6 million of interest, calculated through
March 31, 1996, because those estimates assumed the loss of all
remaining unresolved issues from the 1980-88 and 1989-91 periods,
not just the computer lease issue.) If the Company does not
prevail on the computer lease issue, the Company's accrued income
tax liability and net deferred tax asset as of March 31, 1996 would
be reduced by $154,000, as would most of the $6.2 million and $3.5
million of taxable income that the Company expects to 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. For the
1989-91 period, 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. These
deductions are being addressed in the pending Tax Court case
because losses in 1989-91 were carried back and deducted in years
covered by the Tax Court case. Discussions with the Service on the
1989-91 issues, including the computer equipment issue, are in
progress.
The incremental amount of federal taxes and interest that the
Company would owe if the Company were 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
issue, is approximately $8 million of federal income taxes and $7.3
million of interest, calculated through March 31, 1996. (Such
amounts are in addition to the tax of $93,000 and interest of
$1,282,000, discussed above, that will be owed as a result of the
partial settlements to date.) No state income tax or interest is
anticipated on account of the 1989-91 issues.
Remediation and Closure Costs
As of March 31, 1996, the Company has accrued $22.0 million for
its estimated share of remediation and closure costs related to the
Company's former landfill operations. Approximately $9.3 million
is held in trust and maintained by trustees for the post-closure
activities of one site located in Deptford, New Jersey.
The Company and other responsible parties have been remediating
the Kin-Buc Landfill, located in Edison, New Jersey, 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.
In January 1993, a trust (the "1993 Trust") was established to
fund the remediation of the Kin-Buc Landfill and such neighboring
areas out of proceeds provided from negotiated settlements with
certain parties to a suit the Company initiated in 1990 with the
intent of obtaining contribution toward the cost of remediation.
Approximately $7.1 million had been received from such settlements
and deposited into the 1993 Trust, all of which had been expended
by December 31, 1995. During June 1994, approximately 36
generators of de minimis volumes of waste accepted a settlement by
the Company and other respondents to the 1990 Order, which
resulted in an additional $3.0 million of contributions being
deposited into a new trust established in January 1995 for the
remediation effort. Approximately $2,000 remained in the new trust
as of March 31, 1996.
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 from the 1993 Trust. 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 a cost sharing 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. In August 1993, the Company filed a demand for
arbitration seeking rescission or reformation of the cost sharing
agreement and reimbursement of overpayment. During March 1995, the
SCA Group filed a demand for arbitration seeking reimbursement from
the Company of $17 million, representing 75% of the remediation
expenses purportedly funded by it through March 31, 1995. The
status of such arbitration demands, as yet unresolved, is described
in Item 1 of Part II of this Form 10-QSB.
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, and the cost
of 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
Kin-Buc Landfill has been substantially completed. On the basis of
such study, in January 1996, a design for a remedial program
involving the installation of a slurry cut-off wall around this
one-acre parcel was presented to the EPA 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 waste
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. An
obligation to undertake significant remediation of areas outside
the scope of the Orders could materially increase the total
estimated costs of remediation.
The Company has currently accrued $10,693,000 for future
remediation costs at the Kin-Buc Landfill. The amount ultimately
borne by the Company as well as the timing of such future payments,
however, cannot be determined with certainty and are dependent upon
the following: (i) determination of the total costs to remediate
the landfill as required by the Orders or future orders and
directives of the EPA, (ii) the allocation of the total remediation
costs to each of the potentially responsible parties named to the
Orders, (iii) the success of the Company's pending arbitration for
rescission or reformation of the cost sharing agreement with the
SCA Group, and (iv) the success of the SCA Group's demand in
arbitration for reimbursement of 75% of the costs it has expended
in the remediation effort. Any or all of the preceding items could
ultimately be resolved in a manner that could have a material
adverse effect on the financial condition, results of operations or
net cash flows of the Company.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is currently litigating with the Internal Revenue
Service (the "Service") in Tax Court over its tax liability for
taxable years 1980-88. Certain issues from taxable years 1989-91
are also part of the Tax Court litigation because losses from those
years were carried back to 1988. The Company estimates that after
taking into account partial settlements that have been reached
through March 7, 1996 regarding certain of the adjustments asserted
by the Service, and taking into account available net operating
losses and tax credits, approximately $8.1 million of federal and
$237,000 of state income taxes and $8.6 million of federal and
$240,000 of state interest, calculated through March 31, 1996,
would be owed if the Company were unsuccessful in its defense of
all remaining unsettled issues in the Tax Court litigation. (All
tax liability estimates presented herein exclude penalties which
may be sought by the jurisdictions involved, except that the
Service has conceded penalties on all issues in the Tax Court
litigation.)
In 1991, 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, 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 Company filed a
petition with the Tax Court contesting many of the proposed
adjustments asserted in the deficiency notice. On June 5, 1995,
August 14, 1995 and March 7, 1996, respectively, the Company and
the Service executed a stipulation of partial settlement of issues
in the Tax Court case and first and second revised stipulations of
partial settlement. These partial settlements have resolved most
of the adjustments asserted in the deficiency notice.
Taking into account the partial settlements to date, the Company
has accepted approximately $5.2 million of the $33.3 million of
total adjustments to income asserted by the Service. Many of the
adjustments accepted by the Company relate to issues on which the
Service would likely have prevailed in court. The Service has
conceded adjustments totalling $27.4 million of taxable income and
penalties, leaving only one issue, involving several taxable years,
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 1. LEGAL PROCEEDINGS, Cont'd
unresolved from the 1980-88 period. Also unresolved are the
adjustments asserted by the Service for the 1989-91 period. The
Company cannot predict the outcome of further settlement
negotiations or litigation with the Service over these issues.
(See Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations - Taxes, for further
information about this matter.)
During August 1993, the Company served a demand for arbitration
(the "Transtech Arbitration") on WMX Technologies, Inc. ("WMX")
(formerly named Waste Management, Inc.) and the SCA Group. The
Company is seeking reformation or rescission of the Settlement
Agreement, including the apportionment of Kin-Buc Landfill
remediation costs, and reimbursement of overpayments made in
accordance therewith. WMX brought an action in the Supreme Court
for the State of New York in September 1993 seeking to enjoin the
Transtech Arbitration. The Transtech Arbitration has been stayed
pending a decision by the Court. In February 1995, the Court
assigned WMX's and the SCA Group's motion to permanently enjoin the
Transtech Arbitration to a special referee to report and recommend
with regard to the claim that the Transtech Arbitration should be
enjoined permanently on the grounds that the statute of limitations
has run.
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 SCA Group moved to confirm the referee's report and the
Company moved to reject it. In January 1996, the Court ruled that
the referee had not considered the appropriate issues and remanded
the referral to the same referee for another hearing, which has not
yet been scheduled.
In March 1995, while the Court's referral on the Company's
arbitration was pending, the SCA Group filed a demand for
arbitration (the "SCA Arbitration") seeking reimbursement from the
Company of 75% of remediation expenses purportedly funded by WMX
through that time. The Company brought an action in the Supreme
Court for the State of New York in March 1995 seeking to stay the
SCA Arbitration pending a decision on WMX's and the SCA Group's
motion to enjoin the Transtech Arbitration. In April 1995, the
Court narrowed the issues to be arbitrated to the amount of funds
expended on the remediation and the reasonableness of such
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 1. LEGAL PROCEEDINGS, Cont'd
expenditures and made any findings on such issues subject to
resolution of the Company's arbitration as to the enforceability of
the 1986 agreement. Discovery as to such expenditures has been
substantially completed, and a hearing is set for mid-May 1996.
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
In a report filed on Form 8-K dated March 8, 1996, the Company
reported that on March 1, 1996, THV Acquisition Corp., a wholly-
owned subsidiary of the Company, completed the sale of all of the
issued and outstanding shares of the common stock of Hunt Valve
Company, Inc. to ValveCo Inc. as described in the Company's proxy
statement dated February 9, 1996 (see Part I, Item 1, Discontinued
Operations - Valve Manufacturing Segment).
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: May 15, 1996 By: /s/ Robert V. Silva
Robert V. Silva, President
and Chief Executive Officer
and
Date: May 15, 1996 By: /s/ Andrew J. Mayer, Jr.
Andrew J. Mayer, Jr.
Vice President-Finance, Chief
Financial Officer and Secretary
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
EXHIBIT INDEX
EXHIBIT PAGE
NO. NO.
11 Computation of Earnings (Loss) Per Common Share 32
27 Financial Data Schedule N/A