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, 1995
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-6512
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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 April 27, 1995. In addition,
at such date, the issuer held 1,885,750 shares of common stock, $.50 par value,
in treasury.
Transitional Small Business Disclosure Format (Check One): Yes__ No _X_
Page 1 of 46 pages
Exhibit index on page 26
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
I N D E X
Page(s)
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1995
and December 31, 1994 3-4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1995 and 1994 5-6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994 7-8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16-22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26-27
EXHIBITS 28-46
2
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED BALANCE SHEETS
(In $000's)
(Unaudited)
ASSETS
March 31, December 31,
1995 1994
--------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 760 $ 880
Marketable securities 2,302 2,465
Accounts and notes receivable
(net of allowance for doubtful
accounts of $28 and $23) 2,729 2,461
Inventories 5,055 4,780
Deferred income taxes 1,065 1,065
Prepaid expenses and other 590 529
------- -------
Total current assets 12,501 12,180
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land 1,107 1,107
Buildings and improvements 2,454 2,442
Machinery and equipment 10,723 10,661
------- -------
14,284 14,210
Less: accumulated depreciation 6,481 6,245
------- -------
Net property, plant and equipment 7,803 7,965
------- -------
OTHER ASSETS
Notes receivable 926 968
Investment in leveraged lease 596 885
Real estate held for sale 2,045 2,046
Cost in excess of net assets
acquired (net of accumulated
amortization of $946 and $875) 9,966 10,088
Debt issue costs (net of
accumulated amortization of
$427 and $396) 914 937
Covenants-not-to compete (net
of accumulated amortization of
$140 and $130) 60 70
Clay deposits 1,077 1,077
Other 189 138
------- -------
Total other assets 15,773 16,209
------- -------
TOTAL ASSETS $36,077 $36,354
------- -------
------- -------
3
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED BALANCE SHEETS, CONT'D
(In $000's)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1995 1994
--------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 4,175 $ 3,700
Accounts payable 1,424 1,453
Accrued salaries and wages 488 638
Accrued income taxes 2,584 2,318
Accrued miscellaneous expenses 864 916
-------- --------
Total current liabilities 9,535 9,025
-------- --------
OTHER LIABILITIES
Long-term debt 9,281 9,327
Accrued remediation and closure
costs 14,347 14,355
Long-term pension and retiree
health care benefit liability 3,271 3,222
Deferred income taxes 1,309 1,468
-------- --------
Total other liabilities 28,208 28,372
-------- --------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 600 609
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.50 par value,
10,000,000 shares authorized:
4,714,840 shares issued 2,357 2,357
Additional paid-in capital 1,516 1,516
Retained earnings 4,799 5,420
Minimum pension liability
adjustment (132) (132)
Net unrealized gains on marketable
securities 208 201
-------- --------
Subtotal 8,748 9,362
Treasury stock, at cost -
1,885,750 shares (11,014) (11,014)
-------- --------
Total stockholders' equity (2,266) (1,652)
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 36,077 $ 36,354
-------- --------
-------- --------
4
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED STATEMENTS OF OPERATIONS
(In $000's, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
---------- ---------
REVENUES $4,755 $4,328
---------- ---------
COST OF OPERATIONS
Direct operating costs 2,865 2,555
Selling, general and
administrative expenses 1,894 1,782
---------- ---------
Total 4,759 4,337
---------- ---------
INCOME (LOSS) FROM OPERATIONS (4) (9)
OTHER INCOME (EXPENSE)
Investment income (loss) 60 80
Interest expense (530) (462)
Writedown of investment in
leveraged lease (211) -
Misc. income (expense) 73 1,302
---------- ---------
Total other income (expense) (608) 920
---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
(CREDIT), EXTRAORDINARY ITEM,
AND MINORITY INTEREST (612) 911
INCOME TAXES (CREDIT) 18 (70)
---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM, AND MINORITY INTEREST (630) 981
EXTRAORDINARY GAIN ON ELIMINATION
OF DEBT, NET OF INCOME TAXES - 89
MINORITY INTEREST IN (EARNINGS)
LOSS OF CONSOLIDATED SUBSIDIARY 9 (267)
---------- ---------
NET INCOME (LOSS) $ (621) $ 803
---------- ---------
---------- ---------
5
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED STATEMENTS OF OPERATIONS, CONT'D
(In $000's, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
---------- ---------
INCOME (LOSS) PER COMMON SHARE:
Before extraordinary item $(.22) $.25
Extraordinary item - .03
------- ------
NET INCOME (LOSS) $(.22) $.28
------- ------
------- ------
NUMBER OF SHARES USED IN
CALCULATION 2,829,090 2,829,090
6
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000's)
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 4,490 $ 4,135
Cash paid to suppliers and employees (4,860) (4,017)
Interest and dividends received 55 59
Interest paid (425) (414)
Other income received 72 46
------- -------
Net cash provided by (used in)
operating activities (668) (191)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity
of marketable securities 772 480
Purchase of marketable securities (599) -
Purchase of property, plant and
equipment (85) (105)
Proceeds from sale of property,
plant and equipment 1 1
Collections of notes receivable 39 66
Rent sharing payments from
computer leases 77 -
Purchase of intangible assets (8) -
(Increase) decrease in other assets (50) (9)
------- -------
Net cash provided by (used in)
investing activities 147 433
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (118) (356)
Proceeds from issuance of long-term
debt 527 54
Payment of remediation and closure
costs (8) (11)
------- -------
Net cash provided by (used in)
financing activities 401 (313)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (120) (71)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 880 1,625
------- -------
CASH AND CASH EQUIVALENTS AT END
OF THE QUARTER $ 760 $ 1,554
------- -------
------- -------
7
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
(In $000's)
(Unaudited)
For the Three Months Ended
March 31,
1995 1994
---------- ---------
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
NET INCOME (LOSS) $(621) $ 803
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Extraordinary gain on elimination
of debt - (89)
Depreciation and amortization 428 371
Unrealized (gain) loss on marketable
securities - (8)
(Gain) loss on sale of property,
plant and equipment (1) 3
Writedown of investment in
leveraged lease 211 -
Increase (decrease) in deferred
income taxes (162) (70)
Increase (decrease) in minority
interest in consolidated subsidiary (9) 267
(Increase) decrease in assets:
Accounts and notes receivable,
trade-net (265) (202)
Inventories (275) (229)
Prepaid expenses and other (147) 66
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses (98) 125
Accrued taxes 267 25
Accrued retiree health care
benefit liability 4 (1,253)
------ -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $(668) $ (191)
------ -------
------ -------
8
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are presented in accordance with the
requirements of Form 10-QSB and consequently do not include all of the
disclosures normally required by generally accepted accounting principles or
those normally made in the Company's annual Form 10-KSB filing. Accordingly,
the reader of this Form 10-QSB may wish to refer to the Company's Form 10-KSB
for the year ended December 31, 1994 for further information.
The financial information has been prepared in accordance with the Company's
customary accounting practices except for certain reclassifications to the 1994
financial statements in order to conform to the presentation followed in
preparing the 1995 financial statements. Quarterly financial information has
not been audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair statement of interim results. All
such adjustments are of a normal and recurring nature except as disclosed
herein.
NOTE 2 - MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted FASB 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, 1995, of $208,000, net of
deferred income taxes of $107,000 is included as a separate component of
stockholders' equity.
NOTE 3 - INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Market for raw materials and purchased products included in finished
goods is based on replacement cost. Market for work-in-process and manufactured
products included in finished goods is based on net realizable value.
Appropriate consideration is given to deterioration, obsolescence, excess
quantities and other factors in evaluating market value.
Finished goods inventory includes purchased and manufactured products which
may be used in valve assemblies or sold as replacement parts. At March 31,
1995, inventories consisted of the following (in $000):
9
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Raw materials $ 556
Work-in-process 845
Finished goods 3,654
------
$5,055
------
------
See Note 4 regarding the pledge of Hunt Valve Company, Inc.'s inventories as
security for its financing.
NOTE 4 - LONG-TERM DEBT
At March 31, 1995, long-term debt consisted of the following (in $000's):
Hunt Valve Company, Inc. ("Hunt"):
Revolving credit facility (a) $ 1,975
13% Senior secured notes (b) 10,629
Secured note 109
Principal and interest at prime
plus 2% due monthly through
November 1996; secured by certain
equipment
Other secured notes 60
Principal and interest due
monthly through May 1998;
secured by certain equipment
Junior subordinated notes (c) 250
Principal and interest at prime
plus 2-1/2% due monthly through
September 1996
Parent and all other subsidiaries:
10.5% and 11% mortgages payable due in 419
monthly and semi-annual installments
through July 1996 and April 2000;
secured by land and buildings
Other 14
-------
Total long-term debt 13,456
Less: current portion (4,175)
-------
$ 9,281
-------
-------
(a) Hunt has a $3 million revolving credit facility with a financial
institution. The facility's initial maturity date of September
27, 1994 has been extended to June 27, 1995. The Company and
the lender are negotiating an extension of the facility,
however, the financial institution has yet to consent to any
further extension. The impact that the Company's outstanding
issues with the Internal Revenue Service (See the discussion of
Taxes contained in Management's Discussion and Analysis of
Financial Condition and Results of Operation of this Form
10-QSB) will have on discussions with the financial institutions
or alternative financing sources is
10
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
undeterminable. If Hunt is unsuccessful in extending or
replacing the current revolving credit facility, Hunt would
be unable to fund its operations and fund the mandatory
principal prepayment on its senior secured note now due on
July 1, 1995.
Borrowings under the revolving credit facility bear interest
at that institution's prime rate plus 2%. Amounts borrowed
are limited to a percentage of eligible accounts receivable,
raw materials and finished goods inventories. The amount
borrowed against inventories may not exceed $1.5 million.
Borrowings under this facility are secured by Hunt's accounts
receivable, intangibles and inventory, and certain other
assets.
The terms of the agreement require that Hunt maintain minimum
levels of net worth and earnings, and certain interest and
debt coverage and debt-to-equity ratios. The agreement also
limits the amount of capital expenditures, officers'
compensation and payments to affiliates, and prohibits the
payment of dividends on common stock. Additionally, the
agreement requires certain prepayment penalties in the event
that Hunt terminates the agreement prior to maturity.
(b) The senior secured notes are collateralized by a mortgage on
Hunt's real estate, a first lien on Hunt's machinery and
equipment, a pledge of Hunt's common stock, and a second lien on
Hunt's accounts receivable, intangibles and inventory. The
senior secured notes require annual mandatory prepayments. The
senior secured lenders have agreed to defer the $1,000,000
prepayment initially due September 30, 1994 to July 1, 1995.
The senior secured notes contain provisions which require Hunt
to maintain certain minimum current, debt-to-equity and fixed
charges coverage ratios, and specified levels of net worth,
and also limit capital expenditures and payments to
affiliates, and prohibit the payment of dividends on common
stock.
The senior secured notes also contain restrictions regarding
the payments of interest and principal on a $500,000
subordinated note issued by Hunt to the Company in March 1993.
The subordinated note bears interest at prime plus 1% and pays
interest through an increase in the principal of the
subordinated note through December 31, 1995. Cash payments of
interest and principal begin in 1996 if certain financial
performance is achieved by Hunt.
11
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
The senior secured notes were issued with detachable stock
purchase warrants. A portion of the proceeds from issuance of
the senior secured notes has been allocated to the common
stock purchase warrants resulting in a reduction in the
recorded principal amount of the senior secured notes which is
being amortized as interest expense over the life of the notes
at an effective interest rate of 14.32%. Unamortized discount
on the senior secured notes at March 31, 1995 was $436,000.
The senior secured notes also grant the lenders the right to
accelerate payment of the notes subsequent to July 3, 1995 if
the lenders are not provided an unencumbered first lien on
certain of Hunt's intangible assets. The accelerated payment
paid to the lenders pursuant to this provision may be subject
to a premium, dependent upon the market interest rate, as
defined in the agreement, in effect at that time. If the
lenders exercise their right to accelerate payment, they would
then forfeit their respective common stock purchase warrants
and any shares of Hunt's common stock received as a result of
the exercise of such warrants.
Pursuant to a Rights Agreement between the senior secured
lenders who are also warrant holders, Hunt and HVHC, Inc.,
Hunt can also be required to repurchase the warrants from the
holders at a market price as specified in the agreement, in
the event, (i) the warrant holders are not provided a first
lien on certain assets, and (ii) Hunt fails to meet certain
levels of earnings.
(c) Hunt's junior subordinated notes were issued in September 1991
to its former owners. During September 1993, Hunt suspended
all payments of scheduled interest and principal payable under
the terms of the junior subordinated notes pending the
resolution of the default conditions discussed in Notes 5(a)
and 5(b) above. The negotiations with the note holders
resulted in the forgiveness of unpaid interest accrued on the
junior subordinated notes through February 28, 1994, and a
$58,000 reduction in the aggregate principal of the junior
subordinated notes. In exchange, the Company agreed to
release certain pending claims against the former owners and
certain indemnification rights granted by the former owners at
the time the Company acquired Hunt. The junior subordinated
notes are to be repaid through monthly principal installments
of $8,323 with interest.
NOTE 5 - REMEDIATION AND CLOSURE COSTS
12
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
The Company and certain subsidiaries were previously active in the resource
recovery and waste management industries. These activities included the
operation of three landfills and a solvents recovery facility. 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, 1995, the Company has accrued $23.5 million for its estimated
share of remediation and closure costs in regard to the Company's former
landfills and waste handling operations, $9.2 million of which is held in trusts
and maintained by Trustees for financing of the Kinsley Landfill closure plan.
The most significant portion of this accrual relates to remediation efforts
at 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 ("EPA") in
September 1990. In November 1992, EPA issued an Administrative Order for the
remediation of certain areas neighboring the Kin-Buc Landfill. (For a
discussion of this matter, see Remediation and Closure Costs contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-QSB).
As of March 31, 1995 the Company had accrued approximately $1.5 million for
its portion of the estimated remediation costs of a site in Carlstadt, New
Jersey. The Company was previously named, along with a group of waste
generators, to an order issued by the EPA which required remediation of the
site. In May 1995, the Company entered into a tentative agreement with
substantially all of the waste generators who have been remediating the site to
settle litigation brought by them to allocate a portion of the cost of such
remediation to the Company and others. This agreement would substantially
relieve the Company from future obligations for the site (See Part II, Item 1 of
this Form 10-QSB for a further discussion of this matter). The Company will
reverse substantially all of the accrual when and if the agreement is approved
by the court and becomes final.
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
13
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
the Company's available financial resources.
NOTE 6 - LONG-TERM PENSION AND RETIREE HEALTH CARE BENEFIT
LIABILITY
In addition to a defined benefit pension plan for eligible union employees,
Hunt maintains an employee benefit program which provides health care benefits
to substantially all employees, eligible union retirees and their eligible
dependents. The retiree health care benefit obligation is unfunded.
Effective January 1, 1993, the Company adopted FASB Statement No. 106
("Employers' Accounting for Post-retirement Benefits Other Than Pensions") which
requires employers to recognize the costs and obligations of post-retirement
benefits other than pensions over the period ending with the date an employee is
fully eligible to receive benefits. Under FASB Statement No. 106, an employer's
post-retirement benefit obligation and costs are primarily measured by
discounting the projected future costs of health benefits based on an estimate
of health care cost trend rates.
The components of the net retiree health care benefit cost for the three
months ended March 31, 1995 and 1994 were as follows:
1995 1994
---- ----
Service cost $16,000 $11,000
Interest cost on accumulated
retiree health care benefit
obligation 58,000 56,000
------- -------
Net provision for retiree health care
benefit cost 74,000 67,000
Amortization of adjustment to
purchase price 21,000 21,000
------- -------
Total associated expense $95,000 $88,000
------- -------
------- -------
The pension and retiree health care benefit liability consisted of the
following as of March 31, 1995 and December 31, 1994:
1995 1994
---- ----
Accrued pension costs $ 523,000 $ 519,000
Less current portion (110,000) (106,000)
Accrued retiree health care
obligations 2,957,000 2,908,000
Less current portion (100,000) (99,000)
---------- ----------
$3,270,000 $3,222,000
---------- ----------
---------- ----------
On adoption as of January 1, 1993, future health care benefit
14
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
costs were estimated assuming retiree health care costs would initially
increase at a 14% annual rate, decreasing ratably over nine years to a 7%
annual rate thereafter. As of January 1, 1994, future health care benefit
costs were estimated assuming retiree health care costs would initially
increase at a 12% annual rate, decreasing ratably over nine years to a 5%
annual rate thereafter. As a result of these actuarial changes, the
Company's accumulated post-retirement obligation was reduced by approximately
$1,427,000. The Company elected to recognize the gain currently, and
reported $1,300,000 of such gain as miscellaneous income for the quarter
ended March 31, 1994. The weighted average discount rate used to estimate
the accumulated retiree health care benefit obligation was 8.0%.
NOTE 7 - LEGAL PROCEEDINGS
See Item 1 of Part II of this Form 10-QSB for a discussion of legal matters.
15
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of operations for the three months ended March 31, 1995
compared to the three months ended March 31, 1994
_______________________________________________________________________________
Consolidated revenues by business segment for the three months ended March
31, 1995 and 1994 were as follows (in $000):
1995 1994
---- ----
Valve Manufacturing $4,383 $3,983
Alkali Products 256 182
Other 116 163
------ ------
Total $4,755 $4,328
------ ------
------ ------
Consolidated revenues increased 10%, or $427,000 for the three months ended
March 31, 1995, compared to the same period of 1994.
Revenues from the Company's Hunt Valve Company, Inc. subsidiary ("Hunt")
represented 92% of consolidated revenue for both periods. Hunt experienced a
$400,000, or 10% increase in year-to-date revenues when compared to 1994.
Revenues from commercial valves and hydraulic systems produced and serviced by
the Hunt Valve division increased by 19%, or $414,000. Revenues from products
with military-related applications manufactured by Hunt's Waeco and Union
Flonetics divisions decreased 1%, or $19,000.
During October 1994, Hunt consummated the purchase of certain tangible and
intangible assets and contract rights from P.J Valves, Inc. The transaction
provides Hunt with additional product lines, primarily a line of ball valves
designed for military-related applications. The revenue figures presented above
include sales of approximately $622,000 related to the acquired product lines
during the first quarter of 1995.
Sales of alkali products for the period increased $74,000, or 41% versus last
year. Revenues from a $576,000 annual contract received during July 1994 offset
a decline in revenues from other clients. In May 1995, an explosion at the
facility of one of the Company's two current suppliers of carbide lime slurry
resulted in the death of the supplier's principal executive. It is not
presently determinable what impact, if any, this may have on the Company's
operation.
Revenues from operations which generate electricity from recovered methane
gas were $62,000, a decrease of $34,000 or 35% compared to the same period last
year as a result of a series of equipment failures. Full capacity is expected
to be restored
16
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
during May 1995. The environmental services subsidiary contributed $54,000
to revenues versus $68,000 for the same period last year. Approximately 60%
of the environmental services subsidiary's revenues for the period were to
either other members of the consolidated group or third parties providing
services to another member of the consolidated group, and therefore
eliminated in consolidation, versus 49% for the same period last year.
Consolidated direct operating costs for the three months ended March 31, 1995
were $2,865,000, an increase of 12%, or $310,000, when compared to the same
period of 1994. Hunt's direct costs increased 14% when compared to the same
period last year, due in part to the increase in sales volume and to start-up
costs attributable to the introduction of new product lines. The Company's
other operations experienced an overall 4%, or $10,000 decrease in expenses, due
primarily to a decrease in labor costs and associated expenses.
Consolidated selling, general and administrative expenses for the three
months ended March 31, 1995 increased $112,000 or 6%, from the same period last
year to $1,894,000. Hunt experienced a 5% increase in selling, general and
administrative expenses, due primarily to an increase in salary expense.
Selling, general and administrative expenses for non-Hunt operations increased
8% compared to last year due to an increase in legal expenses.
The Company's consolidated operating income for the three months ended March
31, 1995 improved to a $4,000 loss from a loss of $9,000 in 1994. Operating
loss for operations other than Hunt increased to $572,000 from an operating loss
of $555,000 for the same period last year.
Consolidated interest expense increased $26,000 to $486,000 for the three
months ended March 31, 1995 compared to the same period last year, due to a
$62,000 increase 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, 1995
decreased $1,229,000 to $73,000 when compared to the same period of 1994.
Miscellaneous income for the 1994 period includes $1,300,000 of gain resulting
from a reduction in Hunt's long-term retiree health care benefit liability. The
amount of the
17
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
liability is determined primarily by discounting the projected future costs
of health benefits based on an estimate of health care cost trend rates.
Calculations performed by the Company's actuaries in 1994 projected a decline
in the estimate of future costs to be incurred by the Company due in part to
a reduction in the number of expected participants and, more significantly, a
reduction in the assumed rate of increase in the cost of health care.
The consolidated loss before income tax credits, extraordinary item and
minority interest in a subsidiary was $612,000 for the three months ended March
31, 1995, compared to income of $911,000 for the same period last year.
Income tax expense for the three months ended March 31, 1995 equalled
$18,000, an $88,000 increase over the $70,000 credit for 1994. The current
period's expense is higher than that calculated using the statutory rates due to
the current provision for alternative minimum taxes for which no deferred tax
benefit can be recognized since realization is not assurred. The alternative
minimum taxes result from the recognition of deferred taxable income associated
with the Company's investment in computer equipment.
The extraordinary gain on elimination of debt, net of income taxes, reported
in the quarter ended March 31, 1994, recognizes the gain stemming from the
restructuring of Hunt's junior subordinated notes.
The minority interest in earnings/losses of consolidated subsidiary reflects
the value of Hunt's earnings attributable to the nominal exercise price warrants
held by its senior lenders. The warrants represent an aggregate 19.34% equity
interest in Hunt.
Consolidated net loss for the three months ended March 31, 1995 was $621,000,
or $.22 per share, compared to net income of $803,000, or $.28 per share, for
the three months ended March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Hunt's financing agreements limit payments to the Company during 1995 to
management fees (subject to Hunt's maintenance of certain covenants) and
payments pursuant to a tax sharing agreement. Lenders participating in the
financing of Hunt have security interests in substantially all of Hunt's assets.
Hunt has a secured revolving credit facility with a finance company available
for general funding requirements. Borrowings are
18
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
limited to a percentage of eligible receivables and inventories. At March
31, 1995, approximately $2.0 million was borrowed under this facility. The
maximum borrowing limit under the facility is $3 million.
The revolving credit facility's initial maturity date of September 27, 1994
has been extended to June 27, 1995. The finance company has yet to consent to
any further extension. If Hunt is unsuccessful in extending or replacing the
current revolving credit facility, Hunt would be unable to fund its operations
and fund the mandatory principal prepayment due under its senior secured note.
In February 1995, Hunt's senior secured lenders agreed to defer the
$1,000,000 installment initially due September 30, 1994 to July 1, 1995.
The Company is continuing to work with an investment banking firm on
extending Hunt's revolving credit facility and restructuring its senior secured
indebtedness.
Net cash used by operating activities for the three months ended March 31,
1995 increased from $191,000 to $668,000 when compared to the same period last
year due primarily to an increase in working capital. Net cash provided by
investing activities decreased for the current period to $147,000 from $433,000,
due to an increase in the purchases of marketable securities. The amount of
cash provided by financing activities increased to $401,000 from a use of
$313,000 for the same period last year. Funds held by the Company in the form
of cash and cash equivalents decreased as of March 31, 1995 to $760,000 from
$1,554,000. The sum of cash, cash equivalents and marketable securities as of
March 31, 1995 decreased $283,000 to $3,062,000 when compared to last year.
Working capital, when calculated excluding Hunt, was $1.7 million and the
ratio of current assets to current liabilities, again excluding Hunt, was 1.6 to
1 as of March 31, 1995, which equals that reported for December 31, 1994.
Working capital, when calculated including Hunt, was $3.0 million with a ratio
of 1.3 to 1, compared to $4.2 million and a ratio of 1.3 to 1 at December 31,
1994.
The uncertainty of the outcome of the Company's ongoing tax and environmental
litigation, discussed below and in the notes to the Company's consolidated
financial statements for the year ended December 31, 1994, in the Company's
Annual Report on Form 10-KSB, and the impact of future events or changes in
environmental laws or regulations, which cannot be predicted at this time, could
result in material increases in remediation and closure costs, tax and other
potential liabilities. The Company may ultimately incur costs
19
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
and liabilities in excess of its available financial resources.
TAXES
In 1991, the Internal Revenue Service (the "Service") asserted numerous and,
in some cases, significant adjustments in connection with its audit of the
Company's federal income tax returns for the years 1982 through 1988. In 1993,
the Service issued a deficiency notice to the Company, asserting a deficiency in
federal income taxes of approximately $13.5 million, penalties of $2.5 million
and a significant amount of accrued interest. The Company filed a petition with
the tax court contesting many of the proposed adjustments in the deficiency
notice. A proposed settlement, under which the Service and the Company would
agree to settle certain of these adjustments, thereby narrowing the issues to
be contested in court, has been presented to the Service for consideration.
The proposed adjustments covered by the settlement represent approximately
$6.5 million of the $13.5 million of tax liability asserted in the deficiency
notice and relate principally to issues on which the Service would likely
prevail in court. The accelerated recognition of certain of the Company's
net operating loss and tax credit carryfowards to offset the adjustments
resulting from the settlement will reduce the Company's estimated current
liability related to the settled adjustments to approximately $1,426,000
($185,000 of taxes and $1,231,000 of interest as of March 31, 1995).
Estimated state income taxes associated with the proposed settlement
approximate $667,000 ($277,000 of tax and $390,000 of interest as of
March 31, 1995). These estimates exclude punitive interest charges and
penalties that may be assessed by the jurisdictions involved. The Company's
aggregate accrual for taxes and interest at March 31, 1995 relating to the
notice of deficiency totals $2,404,000. Payment of the federal tax liability
is due at the conclusion of the tax court proceeding. Payment of the state
tax liability varies by state. The first state payment of approximately
$462,000 as of March 31, 1995, would be due within ninety days following
approval of the settlement by the parties.
The use of the Company's net operating loss and tax credit carry-forwards to
offset adjustments which result from the proposed settlement will result in
increased future tax liabilities as the Company recognizes approximately $15.8
million of taxable income related to the reversal of deferred tax liabilities
generated by the Company's investment in computer equipment. This income
will be recognized during 1995, 1996 and for seven months of 1997.
An audit of the Company's federal income tax returns for the years 1989
through 1992 is continuing.
20
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
REMEDIATION AND CLOSURE COSTS
The Company and other responsible parties have been remediating the Kin-Buc
Landfill under an Amended Unilateral Administrative Order issued by the United
States Environmental Protection Agency ("EPA") in September 1990 (the "1990
Order"). In November 1992, EPA issued an Administrative Order (the "1992
Order", and, together with the 1990 Order, the "Orders") for the remediation of
certain areas neighboring the Kin-Buc Landfill.
During May 1993, a $22 million contract was awarded for the construction of a
containment system and leachate treatment plant at the Kin-Buc Landfill in
accordance with the engineered design and standards accepted by the EPA in
satisfaction of certain requirements of the 1990 Order. The contract was to be
financed with funds available in the trust established in 1993 from proceeds
provided from a negotiated settlement with certain parties to a suit the Company
initiated in 1990 with the intent of obtaining contribution toward the cost of
remediation. During May 1994, the Company met with representatives of EPA to
discuss the impact delays in securing settlement proceeds would have on the
Company's ability to finance the construction within the time frame required by
EPA. In July 1994, after meeting with EPA, SCA Services, Inc. ("SCA"), an
affiliate of WMX Technologies, Inc. ("WMX") and a respondent to the Orders,
entered into a contract with the contractor installing the containment system
and treatment plant, thereby alleviating the potential for delays in this phase
of the construction due to financial limitations. WMX, formerly known as Waste
Management, Inc., had previously provided EPA with a financial guaranty of SCA's
and the Company's obligations under the Orders. In August 1994, a contract was
awarded by SCA for certain activities mandated by the 1992 Order.
The execution of the contracts between SCA and the contractors does not
relieve the Company of liability for such costs since the Company entered into
an agreement with SCA and certain affiliates ("SCA Group") in 1986 which
obligates the Company to bear 75% of the costs incurred by the parties for the
remediation of the site. The Company filed a demand for arbitration in 1993
seeking rescission or reformation of the agreement with the SCA Group. During
March 1995, the SCA Group filed a demand for arbitration seeking reimbursement
from the Company of $10.7 million, which equals 75% of the $14.3 million of
remediation expenses purportedly funded by WMX through December 31, 1994. The
status of such arbitration demands, as yet unresolved, is described in Part II,
Item 1 of this report.
If the current phase of the remediation does not proceed in accordance with
EPA approved plans, or if this phase is not
21
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONT'D
completed by the end of May 1995, EPA could bring an action against the
Company and the other respondents to the Orders for the imposition of fines
for violations of the Orders. Management anticipates the EPA's requirement
will be met.
Additional material adjustments to the Company's current accrual may become
necessary as the above costs are refined and weighed against allocations to
other respondents and potentially responsible parties.
ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Company adopted Financial Accounting Standards
Board ("FASB") 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 or fair value over cost of such securities
as of March 31, 1995, of $208,000, net of deferred income taxes of $107,000, is
included as a separate component of stockholders' equity.
22
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has previously reported in its Form 10-KSB for the year ended
December 31, 1994 about litigation brought by a group of generators and
transporters of waste handled at a site in Carlstadt, New Jersey (the "Carlstadt
Site") against the Company, Inmar Associates, Inc. ("Inmar"), a company owned
and controlled by Marvin H. Mahan, a former officer, director and principal
shareholder of the Company, and Mr. Mahan, the purpose of which was to allocate
to the Company, Inmar and Mr. Mahan a portion of the costs of remediating the
Site under orders of the EPA mandating such remediation. During May 1995,
Transtech, Inmar and Mr. Mahan accepted a tentative settlement with these
generators and transporters and other parties who have contributed to the costs
of the remediation pursuant to which Transtech, Inmar and Mr. Mahan would pay
over to these parties a total of $4.22 million, consisting of $4.075 million of
proceeds from the settlement of a coverage action brought by the Company and
Inmar against their liability insurers, $72,500 from Transtech and $72,500 from
Inmar and Mr. Mahan, in exchange for a complete release of all liability to them
arising from or on account of environmental contamination at the Carlstadt site
and the parties' remediation of the same. The settlement was submitted to the
District Court for approval, and will become final and binding upon all parties
when and if it is approved. The Court is expected to rule by the end of May
1995.
In 1991, the Internal Revenue Service (the "Service") asserted numerous and,
in some cases, significant adjustments in connection with its audit of the
Company's federal income tax returns for the years 1982 through 1988. In 1993,
the Service issued a deficiency notice to the Company, asserting a deficiency in
federal income taxes of approximately $13.5 million, penalties of $2.5 million
and a significant amount of accrued interest. The Company filed a petition with
the tax court contesting many of the proposed adjustments in the deficiency
notice. A proposed settlement, under which the Service and the Company would
agree to settle certain of the adjustments asserted in the deficiency notice,
thereby narrowing the issues to be contested in court, has been presented to the
Service for consideration. The proposed adjustments covered by the settlement
represent approximately $6.5 million of the $13.5 million of tax liability
asserted in the deficiency notice and relate principally to issues on which the
Service would likely prevail in court. (See Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, 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 seeing reformation or
rescission of a 1986 agreement,
23
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
PART II. OTHER INFORMATION, CONT'D
including a formula for apportionment of the costs of remediation of the Kin-Buc
Landfill contained therein, 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. The hearing before the
referee has not yet been scheduled. In March 1995, the SCA Group filed a demand
for arbitration (the "SCA Arbitration") seeking reimbursement from the Company
of $10.7 million, which equals 75% of the $14.3 million of remediation expenses
purportedly funded by WMX through December 31, 1994. The Company brought an
action in the Supreme Court for the State of New York in March 1995 seeking to
stay the SCA Group's motion to enjoin the Transtech Arbitration. On
May 3, 1995, the court signed an order which granted in part and denied in part
the Company's motion to stay the SCA Arbitration, and ordered the SCA
Arbitration to commence. The arbitrator, however, was directed to make limited
factual determinations concerning amounts expended on the remediation, subject
to and without prejudice, pending the Court's ruling on the statute of
limitations, to the Company's rights to seek reformation or rescission of
the Settlement Agreement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 10 - Material Contracts
Exhibit 11 - Computation of Earnings (Loss) Per Common Share
b) Reports on Form 8-K
None
24
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 12, 1995 By: /s/ Robert V. Silva
----------------------------------
Robert V. Silva, President
and Chief Executive Officer
and
Date: May 12, 1995 By: /s/ Andrew J. Mayer, Jr.
-----------------------------------
Andrew J. Mayer, Jr.
Vice President-Finance, Chief
Financial Officer and Secretary
25
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
EXHIBIT INDEX
EXHIBIT PAGE
NO. NO.
- ------- ----
10 Material Contracts
10(ag) Amendment No. 9 dated as of January 25, 1995 between Hunt
Valve Company, Inc. and LaSalle Business Credit, Inc. to
Loan and Security Agreement dated January 30, 1987, as
amended through Amendment No. 5 and Restatement of Loan and
Security Agreement dated September 27, 1991, and as amended
through Amendment No. 8 dated as of December 27, 1994; 28-30
10(ah) Letter Agreement dated as of January 25, 1995 between Hunt
Valve Company, Inc., Rhode Island Hospital Trust National
Bank, as Trustee for the Textron Collective Investment Trust
B, Balboa Life Insurance Company and Balboa Insurance
Company, as consented to by LaSalle Business Credit, Inc. 31-33
10(ai) Amendment No. 10 dated as of February 27, 1995 between Hunt
Valve Company, Inc. and LaSalle Business Credit, Inc. to
Loan and Security Agreement dated January 30, 1987, as
amended through Amendment No. 5 and Restatement of Loan and
Security Agreement dated September 27, 1991, and as amended
through Amendment No. 9 dated as of January 25, 1995; 34-36
10(aj) Letter Agreement dated as of February 27,1995 between Hunt
Valve Company, Inc., Rhode Island Hospital Trust National
Bank, as Trustee for the Textron Collective Investment Trust
B, Balboa Life Insurance Company and Balboa Insurance
Company, as consented to by LaSalle Business Credit, Inc. 37-39
10(ak) Amendment No. 11 dated as of March 27, 1995 between Hunt
Valve Company, Inc. and LaSalle Business Credit, Inc. to
Loan and Security Agreement dated January 30, 1987, as
amended through Amendment No. 5 and Restatement of Loan and
Security Agreement dated September 27, 1991, and as amended
through Amendment No. 10 dated as of February 27, 1995; 40-42
26
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
________________
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
EXHIBIT INDEX, cont'd
10(al) Letter Agreement dated as of March 27, 1995 between Hunt
Valve Company, Inc., Rhode Island Hospital Trust National
Bank, as Trustee for the Textron Collective Investment Trust
B, Balboa Life Insurance Company and Balboa Insurance
Company, as consented to by LaSalle Business Credit, Inc. 43-45
11 Computation of Earnings (Loss) Per Common Share 46
27