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, 1998
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:
2,829,190 shares of common stock, $.50 par value, outstanding as of
March 31, 1998. 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 28 pages
Exhibit index on page 27
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
I N D E X
Page(s)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997 3 - 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 6 - 7
Notes to Consolidated Financial Statements 8 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21 - 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
EXHIBITS 28
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In $000's)
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 445 $ 311
Marketable securities 2,357 2,610
Accounts and notes receivable
(net of allowance for doubtful
accounts of $15) 144 125
Deferred income taxes 30 30
Prepaid expenses and other 356 331
Total current assets 3,332 3,407
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment 2,898 2,892
Less accumulated depreciation (2,757) (2,742)
Net property, plant and equipment 141 150
OTHER ASSETS
Notes receivable 175 178
Assets held for sale 1,313 1,581
Receivable, clay deposit 530 530
Escrowed funds from sale of
subsidiary 828 817
Deferred income taxes 305 302
Other 32 33
Total other assets 3,183 3,441
TOTAL ASSETS $ 6,656 $ 6,998
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)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
1998 1997
(Unaudited)
CURRENT LIABILITIES
Current portion of long-term debt $ 22 $ 22
Accounts payable 163 256
Accrued income taxes and related
interest 4,140 4,192
Accrued miscellaneous expenses 242 157
Total current liabilities 4,567 4,627
OTHER LIABILITIES
Long-term debt 33 38
Accrued remediation and closure
costs 2,133 2,135
Total other liabilities 2,166 2,173
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.50 par value,
10,000,000 shares authorized:
4,714,940 shares issued 2,357 2,357
Additional paid-in capital 1,516 1,516
Retained earnings 7,035 7,305
Net unrealized gains on marketable
securities 29 34
Subtotal 10,937 11,212
Treasury stock, at cost -
1,885,750 shares (11,014) (11,014)
Total stockholders' equity
(deficit) (77) 198
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 6,656 $ 6,998
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,
1998 1997
REVENUES $ 205 $ 108
COST OF OPERATIONS
Direct operating costs 185 124
Selling, general and
administrative expenses 412 496
Total cost of operations 597 620
INCOME (LOSS) FROM OPERATIONS (392) (512)
OTHER INCOME (EXPENSE)
Investment income (loss) 53 76
Interest expense (2) (2)
Interest related to income taxes
payable (88) (44)
Gain (loss) from sale of property - -
Miscellaneous income (expense) 19 21
Total other income (expense) (18) 51
INCOME (LOSS) BEFORE INCOME TAXES
(CREDIT) (410) (461)
Income taxes (credit) (140) -
NET INCOME (LOSS) $ (270) $ (461)
INCOME (LOSS) PER COMMON SHARE:
NET INCOME (LOSS) $(.10) $(.16)
NUMBER OF SHARES USED IN
CALCULATION 2,829,190 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,
1998 1997
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 186 $ 121
Cash paid to suppliers and employees (614) (358)
Interest and dividends received 43 68
Interest paid (2) (2)
Other income received 18 18
Income taxes paid - (14)
Net cash provided by (used in)
operating activities (369) (167)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity
of marketable securities 247 918
Purchase of marketable securities - (501)
Purchase of property, plant and
equipment (6) (32)
Proceeds from sale of property,
plant and equipment 267 149
Collections of notes receivable 3 12
Rent sharing payments from
computer leases - 15
Net cash provided by (used in)
investing activities 511 561
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (5) (5)
Payment of remediation and closure
costs (3) (2)
Net cash provided by (used in)
financing activities (8) (7)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 134 387
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 311 260
CASH AND CASH EQUIVALENTS AT END
OF THE QUARTER $ 445 $ 647
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,
1998 1997
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (270) $ (461)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 15 14
Increase (decrease) in deferred
income taxes (1) -
(Increase) decrease in assets:
Accounts and notes receivable,
trade-net (19) 20
Prepaid expenses and other (25) 98
Escrowed funds from sale of subsidiary (10) (13)
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses (8) 145
Accrued taxes and related interest (51) 30
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (369) $ (167)
See Notes to Consolidated Financial Statements
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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, 1997 for further information.
The financial information has been prepared in accordance with
the Company's customary accounting practices except for certain
reclassifications to the 1997 financial statements in order to
conform to the presentation followed in preparing the 1998
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 classifies all equity securities and debt
securities purchased with remaining maturities of less than two
years as available-for-sale securities. Available-for-sale debt
securities are carried at amortized cost, which approximates fair
value because of their short term to maturity. At March 31, 1998,
available-for-sale debt securities consisted of $2,276,000 of U.S.
Government Securities with maturities through April 1999.
Available-for-sale equity securities are carried at fair value as
determined by quoted market prices. The portfolio of available-
for-sale equity securities had a cost of $38,000 and a market value
of $81,000 as of March 31, 1998. The aggregate excess of market
value over cost of such securities as of March 31, 1998 of $43,000
is presented less deferred income taxes of $14,000 and included as
a separate component of stockholders' equity. The excess of fair
value over cost consisted of gross unrealized gains of $66,000 and
gross unrealized losses of $23,000 as of March 31, 1998. The cost
of marketable securities sold is determined on the specific
identification method and realized gains and losses are reflected
in income. Proceeds from sale of available-for-sale securities
during the quarter ended March 31, 1998 amounted to $247,000.
Dividend and interest income is accrued as earned.
NOTE 3 - ASSETS HELD FOR SALE
Assets held for sale consist of real estate which is carried
at a cost of $1,313,000 as of March 31, 1998. The real estate
included in this category as of March 31, 1998 consists of
approximately 430 acres in Deptford, N.J., including approximately
100 acres upon which a landfill owned and operated by the Company's
subsidiary, Kinsley's Landfill, Inc., is situated. The Company is
pursuing the disposition of these properties. However, based upon
market conditions for real estate of this type the Company is
unable to determine when such sales will be consummated.
During March 1998, the Company sold approximately two acres of
property in Readington Township, N.J., classified as assets held
for sale, for net proceeds, after expenses, of $267,000. No gain or
loss related to the sale has been reported since the proceeds
approximated the carrying value of the property.
NOTE 4 - RECEIVABLE, CLAY DEPOSIT
In 1988, Kin-Buc, Inc. ("Kin-Buc") purchased 150,000 cubic
yards of clay for use in the closure of the Kin-Buc Landfill for
$1.2 million from Inmar Associates, Inc. ("Inmar"), a corporation
owned and controlled by a former principal shareholder, director
and officer of the Company, and applied this amount against its
accrual for remediation and closure costs. In 1992, the Company
reclassified approximately $1.1 million of this accrual,
representing the cost of the clay not required for such closure, to
other long-term assets, recognizing the Company's plan to market
the clay to third parties. Pursuant to the agreement for the
purchase of the clay, Kin-Buc is entitled to a refund of the
purchase price of clay it is unable to mine or can not use. In
October 1996, the Company learned that Inmar had contracted to sell
a substantial portion of its land, upon which a substantial portion
of the clay is situated. In November 1996, Kin-Buc brought suit
against Inmar and the prospective buyer. For a discussion of this
suit, see Item 1 of Part II of this Form 10-QSB. In January 1997,
the closing of the sale took place. In accordance with a court
order entered in another suit against Inmar, the net proceeds of
the sale were paid into the Court. These proceeds are
substantially less than Kin-Buc's judgment against Inmar and Inmar
may use the proceeds for other purposes if it obtains Court
approval to do so.
During the fourth quarters of 1997 and 1996, the Company
charged $47,000 and $500,000, respectively, to operations to reduce
the carrying value of this asset to management's best estimate of
the values it may ultimately realize from resolution of these
matters, considering the amount of the proceeds held by the
Superior Court and assuming the Company will be able to recover
such proceeds. There is no assurance that Kin-Buc will be
permitted to draw against the proceeds in the Superior Court.
NOTE 5 - 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 6 - LONG-TERM DEBT
At March 31, 1998, long-term debt consisted of the following (in
$000's):
10.5% mortgage payable in $ 25
installments through April 2000;
secured by land and buildings
Other 30
Total long-term debt 55
Less: current portion (22)
$ 33
NOTE 7 - REMEDIATION AND CLOSURE COSTS
The Company and certain subsidiaries were previously active in
the resource recovery and waste management industries. These
activities included the hauling of waste and the operation of three
landfills. Although the sites are now closed, the Company
continues to own and/or remediate two of the sites 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, 1998, the Company has accruals totalling $11.2
million for its estimated share of remediation and closure costs in
regard to the Company's former landfill operations, $9.1 million of
which is held in trusts and maintained by trustees for financing of
the estimated $11.1 million required to fund the closure plan
related to the landfill owned by the Company's subsidiary,
Kinsley's Landfill, Inc.
On December 23, 1997, the Company entered into four agreements
which settled lawsuits related to the allocation of costs of
remediation of the landfill in Edison, New Jersey owned and
operated by Kin-Buc, Inc., a wholly-owned subsidiary of the
Company, and which substantially relieved the Company from future
obligation with respect to the site. The Kin-Buc Landfill ceased
operations in 1977. 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.
At December 31, 1996, Kin-Buc had accrued approximately
$10,672,000 for its share of the costs of such remediation and
closure. The Company has reversed the balance of such accrual as
a result of the December 1997 settlements and recognized income of
$10.6 million in the year ended December 31, 1997 due to the
elimination of such accrual.
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 related 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 8 - LEGAL PROCEEDINGS
See Item 1 of Part II of this Form 10-QSB for a discussion of
recent developments with respect to the Company's 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, 1998 compared to the three
months ended March 31, 1997
Consolidated revenues by business segment for the three months
ended March 31, 1998 and 1997 were as follows (in $000):
1998 1997
Electricity Generation $ 65 $ 81
Environmental Services 244 261
Intercompany (104) (234)
Total $205 $108
Consolidated net revenues for the three months ended March 31,
1998 were $205,000, an increase of $97,000 or 90% compared to the
same period of 1997.
Revenues from the operation which generates electricity using
methane gas as fuel were $65,000 for the three months ended March
31, 1998, a decrease of $16,000 or 20% compared to the same period
of the prior year. The electricity generating facility consists of
four diesel/generating units each capable of generating
approximately 48,000 kwh/day at full capacity. Methane gas is a
component of the landfill gas generated by a landfill site owned by
the Company. Engineering studies indicate sufficient quantities of
gas at the landfill to continue the operation of the facility for
approximately 14 years. Electricity generated is sold pursuant to
a long term contract with a local utility. Revenues are a function
of the number of kilowatt hours sold, the rate received per
kilowatt and capacity payments. The Company sold 2.6 million kwh
during the three months ended March 31, 1998 compared to 2.7
million kwh sold in the same period of the prior year. The
combined rate received per Kilowatt and capacity payment declined
16% in the current period when compared to the comparable period
last year.
The environmental services segment reported $244,000 of
operating revenues for the three months ended March 31, 1998 (prior
to elimination of intercompany sales) compared to $261,000 for
1997, a decrease of 7%. Approximately $104,000 or 43% of the
environmental services segment's revenues for the period, compared
to $234,000 or 90% for last year, were for services provided to
other members of the consolidated group and therefore eliminated in
consolidation. Third party sales during the period in 1998 and
1997 were $140,000 and $27,000, respectively. The increase in
sales to third parties during 1998 was primarily due to
commencement of a six month construction project during the second
half of 1997.
Consolidated direct operating costs for the three months ended
March 31, 1998 were $185,000, an increase of $61,000 or 49% when
compared to the same period in 1997. The costs of the electricity
generating operation increased 3% for the three months ended March
31, 1998 when compared to the same period in 1997 due to an
increase in repair and maintenance costs related to the electric
generating equipment. Costs of the environmental services segment
increased 132% overall due primarily to the increase in sales
volume.
Consolidated selling, general and administrative expenses for
the three months ended March 31, 1998 were $412,000, a decrease of
$84,000 from the same period in 1997. The decrease was primarily
due to lower professional fees and expenses incurred with respect
to the Company's environmental litigation. Professional fees and
administrative costs are incurred in support of the Company's
ongoing 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, 1998 decreased to $392,000 from a loss of $512,000
for the same period in 1997.
Consolidated investment income decreased by $23,000 to $53,000
for the three months ended March 31, 1998 from $76,000 for the
comparable period last year.
Consolidated interest expense of $2,000 for the three months
ended March 31, 1998 was unchanged from the same period last year.
Interest expense or credit reported as "Interest related to
income taxes payable" represents the increase or decrease,
respectively, in the amount of interest accrued on estimated income
taxes payable as a result of the Company's tax litigation discussed
below. Such interest expense for the three months ended March 31,
1998 was $88,000 versus $44,000 reported for the comparable period
in 1997.
Consolidated miscellaneous income for the three months ended
March 31, 1998 decreased $2,000 to $19,000 when compared to the
same period of 1997.
The consolidated loss before income tax credits was $410,000 for
the three months ended March 31, 1998, compared to a loss of
$461,000 for the same period last year.
Income tax credit for the three months ended March 31, 1998
equalled $140,000. No provision for taxes has been recognized for
the same period of 1997.
Consolidated net loss for the three months ended March 31, 1998
was $270,000 or $.10 per share, compared to net loss of $461,000,
or $.16 per share, for the three months ended March 31, 1997.
Liquidity and Capital Resources
Liquidity
Net cash used in operating activities for the three months ended
March 31, 1998 increased to $369,000 from $167,000 when compared to
the same period last year. Net cash provided by investing
activities decreased for the current period to $511,000 from
$561,000 reported for the same period of last year. The amount of
cash used in financing activities increased to $8,000 from $7,000
for the same period last year. Funds held by the Company in the
form of cash and cash equivalents decreased as of March 31, 1998 to
$445,000 from $647,000 as of March 31, 1997. The sum of cash, cash
equivalents and marketable securities as of March 31, 1998
decreased $1,203,000 to $2,802,000 when compared to March 31 of
last year.
Working capital deficit was $(1,235,000) and the ratio of
current assets to current liabilities was .73 to 1 as of March 31,
1998, versus $(1,220,000) and .74 to 1 as of December 31, 1997.
The Company faces significant short-term and long-term cash
requirements for (i) federal and state income tax obligations
discussed below, most of which will become due following the
conclusion of litigation or a settlement with the Internal Revenue
Service (the "Service") of the Company's tax liability for the
years 1980 through 1991, (ii) funding its professional and
administrative costs, and (iii) funding remediation costs
associated with sites of past operations. In addition, the
Company's past participation in the waste handling and disposal
industries subjects the Company to future events or changes in
environmental laws or regulations, which cannot be predicted at
this time, which could result in material increases in remediation
and closure costs, and other potential liabilities that may
ultimately result in costs and liabilities in excess of its
available financial resources.
Although the Company has completed the sale of two business
segments, one in each 1995 and 1996, and continues to pursue the
sale of property held for sale and claims against insurance
carriers for recoveries of past remediation costs, no assurance can
be given that the timing and amount of the proceeds from such
sources will be sufficient to meet the capital requirements of the
Company as they come due. In addition, the Company cannot
ascertain whether its remaining operations and funding sources will
be adequate to satisfy its future capital requirements, including
its anticipated tax liabilities. In the event of an unfavorable
resolution of the tax and insurance litigation, or the proceeds of
asset sales are insufficient to meet the Company's future capital
requirements, including its tax 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 January 22, 1998 of all but one of the adjustments asserted
by the Service, and taking into account available net operating
losses and tax credits as of March 31, 1998, approximately $3.4
million of federal income tax and $127,000 of state income tax and
$8.1 million of federal interest, calculated through March 31,
1998, would be owed if the Company were unsuccessful in its defense
of the remaining unsettled issue in the Tax Court litigation. (The
tax liability estimates presented herein exclude penalties. The
Service has conceded all of the penalties that it had asserted in
the Tax Court litigation, but state tax authorities may assert that
penalties are due.)
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. In 1994, the Company
filed a petition with the Tax Court contesting many of the
adjustments asserted in the deficiency notice. On June 5, 1995,
August 14, 1995, March 7, 1996, July 31, 1996 and January 22, 1998,
respectively, the Company and the Service executed a stipulation of
partial settlement, first, second and third revised stipulations
for partial settlement, and a supplement to the third revised
stipulation of settlement. These partial settlements resolved all
but one of the adjustments asserted in the deficiency notice.
Taking into account the settlements to date, the Company has
accepted approximately $5.9 million of the $33.3 million of total
adjustments to income asserted by the Service for the 1980-88
period. Many of the adjustments accepted by the Company relate to
issues on which the Service would likely have prevailed in Tax
Court. The Service has conceded adjustments totalling $26.7 million
of taxable income and $2.5 million of penalties, leaving only one
issue, involving several taxable years, unresolved from the 1980-88
period. The Company cannot predict the outcome of further
settlement negotiations or litigation with the Service over the one
remaining issue.
All of the adjustments from the 1989-91 period were settled in
the revised stipulations of partial settlement, except for the
adjustment relating to computer equipment acquired in 1989. The
computer leasing issue was settled in the supplement to the third
stipulation of settlement that was executed on January 22, 1998.
The computer equipment issue was resolved by the Company agreeing
to the disallowance of approximately $3.8 million of deductions for
1989 and no other adjustments to deductions or income in respect of
the computer equipment transaction for 1989 or subsequent years.
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 estimated federal income tax and
interest that is owed on account of the settlements reached to date
is approximately $4,014,000, with interest through March 31, 1998
($1,672,000 of taxes and $2,342,000 of interest). The settlements
also will result in approximately $237,000 of state income tax (not
including penalties and penalty interest that may be assessed)
$110,000 of which was paid to one state during the second quarter
of 1996. This state had a tax amnesty program in effect pursuant
to which all interest and penalties for back taxes were waived upon
payment of the tax liability. In conjunction with the $110,000
payment, the Company reversed approximately $240,000 of interest
that was previously accrued on the $110,000 tax liability. Payment
of the federal tax liability and the remaining state tax liability
from both the settled issues and the remaining unsettled issue will
be due after the conclusion of the Tax Court case. The above
$4,014,000 estimated tax liability to be paid at that time (plus
additional interest from April 1, 1998 forward) exceeds the
Company's current liquid assets (i.e., cash and marketable
securities).
The remaining issue in the case relates to the timing of
significant deductions that were taken by the Company for certain
landfill closing costs in several taxable years from the 1980-88
period. The incremental amount of federal income tax and interest
that the Company would owe if it were unsuccessful in its defense
of this issue from the 1980-88 period is approximately $1.7 million
of federal income taxes and $5.8 million of interest, calculated
through March 31, 1998. (This is in addition to the tax of $1.7
million and interest of $2.3 million, discussed above, that the
Company owes as a result of the partial settlements entered into to
date.) No additional state income tax or interest is anticipated
on account of the remaining unsettled issue.
Remediation and Closure Costs
As of March 31, 1998, the Company has accrued $11.2 million
for its estimated share of remediation and closure costs related to
the Company's former landfill and waste handling operations.
Approximately $9.1 million is held in trust and maintained by
trustees for the post-closure activities of one site located in
Deptford, New Jersey (see Note 7 to the Company's Consolidated
Financial Statements).
On December 23, 1997, the Company entered into four agreements
which settled lawsuits related to the allocation of costs of
remediation of the Kin-Buc Landfill and substantially relieved the
Company from future obligation with respect to the site. 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. In
November 1992, EPA issued an Administrative Order for the
remediation of certain areas neighboring the Kin-Buc Landfill. The
Company initiated a suit in 1990 against generators and
transporters of waste deposited at a site with the intent of
obtaining contribution toward the cost of remediation.
The Company carried an accrued remediation liability of
approximately $10 million related to the Kin-Buc Landfill,
essentially all of which has been reversed as a result of the
settlements described above. The Company recognized income in an
amount equal to the reduction of such accrued remediation liability
in the year ended December 31, 1997.
The substantial expense of the Company's prosecution and
defense of claims in the litigation relating to the Kin-Buc
Landfill as well as the substantial expense of the Company's
efforts in respect to the settlements described above, which the
Company has incurred through 1997, will no longer be borne by the
Company. There may be some continuing expenses in respect of the
Kin-Buc Landfill, but not of the magnitude experienced in the past.
Assets Held for Sale/Claims for Past Remediation Costs
Assets held for sale consist of real estate and certain
equipment remaining from the alkali products segment which are
carried at a cost of $1,313,000 and $1,581,000 as of March 31, 1998
and December 31, 1997, respectively. The real estate included in
this category as of December 31, 1997 consisted of approximately
430 acres located in Deptford, N.J. (including approximately 100
acres upon which the landfill owned and operated by the Company's
subsidiary Kinsley's Landfill, Inc. is situated) and approximately
two acres located in Readington Township, N.J. During the fourth
quarter of 1997 the Company charged $33,000 to operations to reduce
the carrying value of the Readington Township, N.J. property to
$268,000, the approximate proceeds received by the Company from the
March 1998 sale of such property. The Company is actively pursuing
the disposition of the remaining properties. However, based upon
market conditions for real estate of this type the Company is
unable to determine when such sales will ultimately be consummated.
In 1995, the Company commenced suit to obtain indemnification
from its excess insurers during the period 1965 through 1986
against costs incurred in connection with the remediation of the
Kin-Buc Landfill, a site located in Piscataway, N.J., and for the
defense of litigation related thereto. The defendant insurers,
which include various London and London Market insurance companies,
First State Insurance Company and International Insurance Company,
have answered the complaint against them and discovery is
proceeding. All of the policies of excess insurance issued by the
defendant insurers cover Transtech, its present subsidiaries and
former subsidiaries, some of which Transtech no longer controls.
They also cover companies presently or formerly owned or controlled
by a former principal shareholder, director and officer of the
Company.
The Company can not assure that the timing and amount of the
net proceeds from the sale of such assets held for sale and the
successful litigation or settlement of the insurance claims will be
sufficient to meet the capital requirements of the Company
discussed above.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1988, the Company's subsidiary, Kin-Buc, Inc. ("Kin-Buc")
purchased 150,000 cubic yards of clay for use in the closure of the
Kin-Buc Landfill for $1.2 million from Inmar Associates, Inc.
("Inmar"), a corporation owned and controlled by Marvin H. Mahan,
a former principal shareholder, director and officer of the
Company. The agreement for the purchase of the clay provided that
Kin-Buc would be entitled to a refund of the purchase price of clay
it was unable to use. The Company used a small portion of the clay
for the closure of the Kin-Buc Landfill and was planning to sell
the remainder to third parties.
In May 1996, Inmar applied to the Superior Court, Essex
County, New Jersey for an order vacating a 1983 order of that Court
entered in a suit against Inmar entitled State of New Jersey,
Department of Environmental Protection v. Inmar Associates et al.,
Docket No. C-1852-83E. That order prohibited Inmar from selling
any of its real property until all of Inmar's and Mahan's
obligations for the environmental cleanup of a Carlstadt, New
Jersey Superfund Site are fulfilled. In August 1996, the Superior
Court denied Inmar's application but permitted it to reapply for
relief from the 1983 order in respect of any specific sale of real
property.
In October 1996, Kin-Buc learned that Inmar had contracted to
sell a substantial portion of its land, upon which a substantial
amount of the clay is situated, to Edison Expansion, Inc.
("Expansion"), an unrelated company. In November 1996, Inmar
reapplied to the Superior Court for permission to consummate the
sale to Expansion. At the same time, Kin-Buc brought suit
entitled Kin-Buc, Inc. v. Inmar Associates, Inc. and Edison
Expansion, Inc., Docket No. MRS-C-249-96, in Superior Court, Morris
County, New Jersey against Inmar and Expansion for, among other
things, a declaratory judgment that Kin-Buc's rights in the clay
would survive a sale of the property to Expansion, and,
alternatively, a money judgment against Inmar. Inmar's
reapplication for relief from the 1983 order had been moved, on the
Court's motion, to the Superior Court, Morris County, where Kin-
Buc's action was pending. In December 1996, Kin-Buc also filed a
lis pendens against the property.
In December 1996, the Superior Court agreed to permit Inmar to
sell the land under contract to Expansion, but ordered that the net
proceeds of the sale be paid into the Superior Court to secure
the fulfillment of any Carlstadt cleanup obligations which Inmar
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS Cont'd
and Mahan may be held liable to perform. The December 1996 order
also permitted Inmar to apply to the Superior Court for permission
to withdraw funds on deposit with the Court for other purposes.
Inmar appealed this order to the Appellate Division of the Superior
Court.
In December 1996, Expansion obtained a discharge of Kin-Buc's
lis pendens, and a closing of the sale of the land to Expansion
took place in January 1997. The net proceeds of the sale,
totalling approximately $530,000, were paid into the Superior Court
pending the outcome of Inmar's appeal. In March 1997, the Superior
Court denied Kin-Buc's request that the net proceeds be dedicated
to the payment of whatever money judgment Kin-Buc might obtain
against Inmar, but agreed that Kin-Buc could reapply for such
relief when and if it obtained such a judgment.
In June 1997, Kin-Buc requested the entry of a default against
Inmar for its failure to answer Kin-Buc's complaint, and in August
1997, Kin-Buc obtained such a judgment in the amount of
approximately $1.1 million. In October 1997, the Superior Court
granted summary judgment to Expansion, dismissing Kin-Buc's suit
for a declaratory judgment that Kin-Buc's rights to the clay
survived the sale of the land to Expansion. Kin-Buc did not appeal
this decision.
In April 1998, the Appellate Division of the Superior Court
ruled on Inmar's appeal of the December 1996 order. Referring to
a specific section of the State's environmental laws, the Appellate
Division remanded Inmar's application for relief from the 1983
order for consideration of whether four specific methods of
securing the fulfillment of cleanup obligations set forth in that
section are the only permissible methods of securing such
obligations.
There is substantial uncertainty that Inmar is financially
capable of responding to Kin-Buc's judgment against it, and there
is no assurance that, whatever the decision of the Superior Court
as to the disposition of the net proceeds of the sale of Inmar's
land, Kin-Buc will be permitted to satisfy its judgment, in part,
out of such proceeds.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS Cont'd
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. In 1994, 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, March 7,
1996, July 31, 1996 and January 22, 1998, respectively, the Company
and the Service executed a stipulation of partial settlement,
first, second and third revised stipulations of partial settlement
and a supplement to the third revised stipulation of partial
settlement. These partial settlements resolved all but one of the
adjustments asserted in the deficiency notice.
The Service's audit of the Company's 1989-91 federal income
tax returns, resulted in the Service's challenging the deductions
claimed by the Company in connection with its investment in
computer equipment under lease. The Service also asserted a number
of smaller adjustments which were settled in 1995 and 1996.
The stipulation of settlement executed on January 22, 1998
resolved the computer equipment issue by the Company's agreeing to
the disallowance of approximately $3.8 million of deductions for
1989 and no other adjustments to deductions and income in respect
of the computer equipment transaction for 1989 or subsequent years.
The remaining issue in the case relates to the timing of
significant deductions taken by the Company for certain landfill
closing costs in several taxable years from the 1980-88 period.
The Company cannot predict the outcome of further settlement
negotiations or litigation with the Service over the remaining
issue. See Part I, Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of
the impact of the tax litigation on the Company's capital
resources.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS Cont'd
The Company is a party to other pending legal proceedings, all
of which have been reported in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997. Reference is
made thereto for a description of such litigation.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 11 - Computation of Earnings (Loss) Per Common Share
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
The Company filed a report on Form 8-K dated January 22,
1998 to report the execution of a supplement to the Third
Revised Stipulation of Settled Issues with the Internal
Revenue Service thereby agreeing to settle one of the two
remaining issues in the Company's ongoing litigation with the
Internal Revenue Service.
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 14, 1998 By: /s/ Robert V. Silva
Robert V. Silva, President
and Chief Executive Officer
and
Date: May 14, 1998 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, 1998
EXHIBIT INDEX
EXHIBIT PAGE
NO. NO.
11 Computation of Earnings (Loss) Per Common Share 28
27 Financial Data Schedule N/A