1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________________
Commission file number 1-7399
TCC INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1366626
- ------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization Identification No.)
816 Congress Avenue, Suite 1250, Austin, TX 78701
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(512)320-0976
----------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 2,778,615 shares as
of November 7, 1997.
2
Part I. Contents of Consolidated Financial Information:
Page Number(s)
--------------
Consolidated Balance Sheet 1 - 2
Consolidated Statement of Operations 3 - 4
Consolidated Statement of Shareholders' Equity 5
Condensed Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 10
Management's Discussion and Analysis 11 - 13
Part II. Other Information 14 - 16
Signatures 17
3
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
September 30, December 31,
ASSETS 1997 1996
------------- ------------
Current assets:
Cash and cash equivalents $ 5,540 $ 779
Receivables:
Trade receivables, net
of allowance of
$90 and $89, respectively 1,117 1,027
Other, including interest 72 21
-------- --------
1,189 1,048
-------- --------
Inventory, net of
valuation allowance of
$872 and $182, respectively 4,510 5,295
Other 194 98
Current assets of discontinued operation -- 4,885
-------- --------
Total current assets 11,433 12,105
-------- --------
Property, plant and equipment 2,917 2,843
Accumulated depreciation (1,538) (1,436)
-------- --------
1,379 1,407
-------- --------
Other assets 471 702
Non-current assets of discontinued operation -- 3,515
-------- --------
Total assets $ 13,283 $ 17,729
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-1-
4
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - continued
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND September 30, December 31,
SHAREHOLDERS' EQUITY 1997 1996
------------- ------------
Current liabilities:
Notes payable $ 2,622 $ 2,033
Current maturities of
long-term debt 113 120
Accounts payable 369 137
Accrued expenses 282 359
Current liabilities of discontinued
operation -- 1,577
-------- --------
Total current liabilities 3,386 4,226
Long-term debt, less current
maturities 1,032 1,119
Deferred liabilities 111 74
Non-current liabilities of discontinued
operation -- 786
-------- --------
Total liabilities 4,529 6,205
-------- --------
Commitments and contingencies
Shareholder's equity:
Preferred stock, authorized
2,000,000 shares, no par
value, no shares issued -- --
Common stock, authorized
10,000,000 shares, par
value $1 per share,
2,841,601 shares issued 2,842 2,842
Additional paid-in capital 8,744 8,746
Cumulative foreign currency
translation adjustment -- 54
Retained earnings (accumulated
deficit) (2,573) 144
-------- --------
9,013 11,786
Less treasury stock,
79,486 and 80,486 shares,
respectively, at cost (259) (262)
-------- --------
Total shareholders'
equity 8,754 11,524
-------- --------
Total liabilities
and shareholders'
equity $ 13,283 $ 17,729
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
5
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
For the Three Months Ended
September 30,
1997 1996
------- -------
Revenue $ 1,585 $ 1,813
Cost of goods sold 1,416 1,266
------- -------
Gross profit 169 547
Selling, general and administrative
expenses 1,254 1,062
------- -------
Operating loss (1,085) (515)
------- -------
Other income (expense):
Interest income 16 13
Interest expense (131) (96)
Other, net 7 10
------- -------
(108) (73)
------- -------
Loss from continuing operations before
provision for income taxes (1,193) (588)
Provision for state income taxes 1 2
------- -------
Loss from continuing operations (1,194) (590)
Income from discontinued operation 61 219
Loss from disposal of discontinued
operation (475) --
------- -------
Net loss $(1,608) $ (371)
======= =======
Weighted average number of common
and common equivalent shares
outstanding 2,762 2,761
======= =======
Earnings loss per common and common equivalent
share:
From continuing operations $ (0.43) $ (0.21)
From discontinued operation 0.02 0.08
From disposal of discontinued
operation (0.17) --
------- -------
Net loss $ (0.58) $ (0.13)
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
6
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
For the Nine Months Ended
September 30,
1997 1996
------- -------
Revenue $ 6,247 $ 7,464
Cost of goods sold 4,817 5,047
------- -------
Gross profit 1,430 2,417
Selling, general and administrative
expenses 3,351 3,366
------- -------
Operating loss (1,921) (949)
------- -------
Other income (expense):
Interest income 33 46
Interest expense (400) (311)
Other, net (486) 44
------- -------
(853) (221)
------- -------
Loss from continuing operations before
provision for income taxes (2,774) (1,170)
Provision for state income taxes 4 1
------- -------
Loss from continuing operations (2,778) (1,171)
Income from discontinued operation 525 447
Loss from disposal of discontinued
operation (475) --
------- -------
Net loss $(2,728) $ (724)
======= =======
Weighted average number of common
and common equivalent shares
outstanding 2,762 $ 2,761
======= =======
Earnings loss per common and common equivalent
share:
From continuing operations $ (1.01) $ (0.42)
From discontinued operations 0.19 0.16
From disposal of discontinued
operation (0.17) --
------- -------
Net loss $ (0.99) $ (0.26)
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
7
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
(In thousands)
Cumulative
Foreign Retained
Par Value Addt'l Currency Earnings
Number of of Common Paid-in Translation (Accumulated Treasury
Shares Shares Capital Adjustment Deficit) Stock Total
--------- --------- ------- ----------- ------------ -------- ---------
Balances,
January 1, 1997 2,842 $ 2,842 $ 8,746 $ 54 $ 144 $(262) $ 11,524
Net loss (2,728) (2,728)
Exercise of
stock option (2) 3 1
Foreign
currency
translation
adjustment (54) 11 (43)
----- ------- ------- ---- ------- ----- --------
Balances,
September 31, 1997 2,842 $ 2,842 $ 8,744 -- $(2,573) $(259) $ 8,754
----- ------- ------- ---- ------- ----- --------
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
8
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1997 1996
------- -------
Net cash provided (used) by operating activities:
Continuing operations, net $(1,783) $ 20
Discontinued operation, net 441 61
------- -------
Net cash provided (used) by
operating activities (1,342) 81
------- -------
Cash flows of investing activities:
Additions to property, plant and
equipment (102) (48)
Proceeds from sale of assets 10 110
Other, net 1 2
Proceeds from sale of discontinued
operation, net 5,922 --
Discontinued operation, net (125) (162)
------- -------
Net cash provided (used) by investing
activities 5,706 (98)
------- -------
Cash flows of financing activities:
Net borrowings of notes payable debt 588 761
Long-term debt paid (93) (1,115)
Other, net 1 2
Discontinued operation, net (99) (93)
------- -------
Net cash provided (used) by financing
activities 397 (445)
------- -------
Net increase (decrease) in cash and cash
equivalents 4,761 (462)
Cash and cash equivalents at beginning
of period 779 2,224
------- -------
Cash and cash equivalents at end
of period $ 5,540 $ 1,762
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
-6-
9
TCC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of TCC
Industries, Inc. and Subsidiaries ("the Company"), and have been presented in
accordance with the reporting requirements for interim financial statements.
Such requirements do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made in an Annual
Report on Form 10-K. Certain amounts have been reclassified for consistency in
presentation. In connection therewith readers are referred to the Company's most
recent Annual Report on Form 10-K filed for the year ended December 31, 1996.
The information furnished herein reflects all adjustments which, in the opinion
of management, are of a normal recurring nature and necessary for a fair
statement of the results of interim periods. Such results for interim periods
are not necessarily indicative of the results to be expected for a full year,
principally due to seasonal fluctuations in wholesale distribution revenue.
Income Taxes
The Company and its wholly owned domestic subsidiaries join in filing a
consolidated federal income tax return. The provision (benefit) for income taxes
for interim financial reporting is determined utilizing the estimated annual
effective tax rate method of allocation. Separate state and foreign income tax
returns are filed by subsidiaries where required.
Statement of Cash Flows
For purposes of the condensed consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Foreign Currency Translation
The consolidated financial statements of Meyer Europe, Ltd. are
translated into U.S. dollars in accordance with SFAS 52, "Foreign Currency
Translation". SFAS 52 requires the foreign operations to be translated using
current exchange rates for balance sheet items, historical rates for capital
accounts, and average exchange rates for income statement items. The resulting
translation adjustments are recorded directly into a separate component of
shareholders' equity.
Note 2 Commitments and Contingencies
There are sundry claims pending against certain of the Company's
subsidiaries, all of which are incidental to the ordinary course of business
and, in the opinion of Company management, should not result in any significant
liability.
Note 3 Shareholders' Equity
The loss per share for the three and nine months ended September 30,
1997 is calculated using the weighted average number of common shares
outstanding for the three and nine months ended September 30, 1997. Common share
equivalents would have diluted the loss per share and were therefore excluded
from the computation.
-7-
10
TCC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Note 4 Inventories
During the nine month period ended September 30, 1997, the Company
recorded a $729,000 provision for finished goods valuation allowance at the
wholesale distribution segment related to the decision to more rapidly reduce
inventory levels and the estimated incentive discounts that are expected to be
incurred to reduce the levels of certain items.
Note 5 Discontinued Operation
On September 19, 1997 a wholly owned indirect subsidiary of the
Company, Meyer Machine Company, completed the sale of substantially all of its
assets for a cash consideration of $6,000,000 plus the assumption of its
liabilities and contractual obligations by the purchaser. The purchaser was
Meyer Acquisition Corporation, Inc. whose principal, Eugene Teeter, had been
the President of Meyer Machine Company. In determining the amount of
consideration paid by the buyer for the assets of Meyer Machine Company, the
parties reviewed the historical financial statements of Meyer Machine Company
and considered the book value and historical cash flow and the value of the
goodwill of the company. Such consideration was determined as a result of arms
length negotiations between representatives of the Company and the buyer. The
Board received an opinion from Fowler Valuation Services, LC as to the fairness
of the sale price from a financial point of view. The Company reported a loss
on the sale of $475,000 (this loss does not take into consideration the
extinguishment of a contingent liability of over $293,000 for golden parachute
severance agreements with Mr. Teeter and with Mr. John Basketfield, the
Managing Director of one of Meyer Machine Company's subsidiary companies).
During the three months ended September 30, 1997 revenue from the Meyer Group
was $2.3 million as compared to $3.0 million during the same period in 1996 and
for the nine months ended September 30, 1997 revenue was $7.7 million as
compared to $8.5 million during the same period in 1996.
Note 6 Other Expenses
During the nine month period ended September 30, 1997, the Company
incurred the following unusual and nonrecurring charges, both of which were
reported as "Other income (expense) - other, net", on the Consolidated Statement
of Operations:
- $241,000 charge for the cost of the proxy election contest that was
concluded in May, 1997.
- $286,000 charge for the cost of the severance provisions pursuant
to the employment agreement with the Company's former Chief
Executive Officer.
Note 7 Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
-8-
11
TCC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In February 1997, the FASB issued SFAS 128, "Earnings Per Share" and
SFAS 129, "Disclosure of Information About Capital Structure." SFAS 128
contains new computational guidelines and disclosure requirements for reporting
earnings per share. SFAS 129 requires that disclosure about an entity's capital
structure include a brief discussion of rights and privileges for securities
outstanding, including dividend and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking-fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. Both of the new
standards become effective for financial statements issued for periods ending
after December 15, 1997.
Management believes that the Company currently substantially complies
with the requirements of these new standards and that the implementation of the
standards will not have a material impact on the Company's financial results.
Note 8 New Businesses
In early September, 1997 the Company completed the organization of and
commenced the operations of three new subsidiaries to engage in a broad range
of merchant and investment banking services and to build a national consumer
finance organization. Paladin Financial, Inc. ("Paladin") is primarily engaged
in the origination, purchase and disposition of loans and the related real
estate mortgages. Barton Creek Capital Corporation is engaged in developing an
external client base for which it will provide a broad range of merchant and
investment banking services, including private placements, mergers and
acquisitions, and other financial advisory services. Texas Capital Markets,
Inc., assists Paladin with the development and implementation of loan products
and programs, the negotiation and closing of bulk loan purchases, the
development and implementation of various loan disposition strategies and the
procurement of the various financing facilities necessary for the
implementation of the loan programs to be undertaken by Paladin. Although
success in these new endeavors cannot be assured, the Company believes that
the unique synergy among these subsidiaries will help provide a competitive
advantage as the Company enters a new era of operations.
Note 9 Pending Matters
On September 3, 1997, the Board of Directors of the Company adopted the
TCC Industries, Inc. 1997 Incentive and Performance Stock Option Plan ("1997
Option Plan") in order to permit the grant of stock options to employees and
directors of the Company and its subsidiaries, and reserved a total of 6,000,000
shares of Common Stock for issuance thereunder. The 1997 Option Plan, including
the options awarded by the Compensation Committee of the Board of Directors
thereunder, is subject to approval by the shareholders of the Company at a
Special Meeting of Shareholders presently scheduled to be held on December 19,
1997. On October 17, 1997 the Company filed preliminary proxy materials with the
Securities and Exchange Commission and intends to distribute definitive copies
of the proxy materials to shareholders on or about November 17, 1997.
As of November 7, 1997, there were 2,778,615 shares of Common Stock
issued and outstanding, of which approximately 16.4% were owned beneficially by
Walter A DeRoeck, Chairman and Chief Executive Officer of the Company, and
Robert Thomajan, President of the Company, and approximately 2.9% of which were
owned beneficially by the other directors of the Company and the other executive
officers of the Company and its principal subsidiaries.
-9-
12
TCC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
If the Shareholders of the Company approve the 1997 Option Plan, and if
the 6,000,000 shares of Common Stock (the maximum number of shares issuable
under the 1997 Option Plan, subject to the adjustments described therein, are
issued thereunder to the persons and in the amounts designated by the
Compensation Committee (excluding any other shares of Common Stock that may be
issued under the Company's other option plans or otherwise upon the
determination of its Board of Directors), 8,778,615 shares of Common Stock will
then be outstanding, of which approximately 39.4% will then be owned
beneficially by Messrs. DeRoeck and Thomajan, and approximately 33.8% of which
will then be owned beneficially by the other directors of the Company and the
other executive officers of the Company and its principal subsidiaries, or their
respective permitted assigns.
Subject to certain "cliff vesting" provisions set forth in the 1997
Option Plan, the Company will be required to have realized, over the
four-year-period that commenced on October 1, 1997 and ends on September 30,
2001, a minimum of $5.0 million in aggregate cumulative earnings in order for
any shares to vest and, in order for the full 6,000,000 shares of Common Stock
to be issued under the 1997 Option Plan, the Company will be required to have
realized over the four-year period at least $60.0 million in aggregate
cumulative earnings.
Note 10 Goodwill
During the third quarter ended September 30, 1997, the Company
determined that goodwill at the wholesale distribution segmment had been
impaired as the sum of the expected future cash flows from this segment was not
sufficient to support the recorded goodwill balance. As a result, the Company
recorded a $226,000 impairment loss of goodwill, which is included in the
selling, general and administrative expense caption. The loss was measured as
the excess of the recorded goodwill balance over its fair value, with the fair
value being estimated based on the expected future cash flows from the
wholesale distribution segment for the next ten years, discounted at the
Company's primary borrowing rate.
-10-
13
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of the results of
operations and financial condition of TCC Industries, Inc. and Subsidiaries
("the Company") during the periods included in the accompanying consolidated
financial statements. The discussion below relates to material changes in the
results of continuing operations for the three and nine months ended September
30, 1997 as compared to the same periods ended September 30, 1996 and to
material changes in the financial condition of the Company occurring since the
prior year end of December 31, 1996. The reader is invited to review
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 for further details regarding the significant factors
affecting the results of operations and financial condition of the Company.
COMPARISONS OF THE RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
The Company reported a net loss for the three months ended September
30, 1997 of $1,608,000 on revenue of $1,585,000 as compared to a loss of
$371,000 on revenue of $1,813,000 for the same period in 1996.
On September 19, 1997 the Company sold substantially all of the assets
of its manufacturing segment for $6,000,000 in cash and the assumption of its
liabilities and contractual obligations by the purchaser and reported a loss
on sale of $475,000 (see Note 5).
During the three month period ended September 30, 1997, the Company
recorded the following unusual and nonrecurring charges to expense:
- $300,000 provision for finished goods valuation allowance at the
wholesale distribution segment related to the decision to more
rapidly reduce inventory levels and the estimated incentive
discounts that are expected to be incurred to reduce the levels of
certain items.
- $226,000 write-off at the wholesale distribution segment of the
remaining unamortized portion of its goodwill.
Excluding the above mentioned unusual and nonrecurring charges and the
items related to discontinued operations, the Company realized a loss from
continuing operations of $668,000 for the third quarter of 1997 as compared to a
loss of $590,000 for the third quarter of 1996.
REVENUE
Consolidated revenue from continuing operations decreased $228,000
(12.6%) to $1,585,000 for the third quarter of 1997 as compared to revenue of
$1,813,000 for the third quarter of 1996. The decline in revenue is primarily
due to the continuing declines in the booking of orders in the wholesale
distribution segment, which have resulted in a 30% decline in the backlog at
September 30, 1997 as compared to September 30, 1996.
GROSS PROFIT
Consolidated gross profit from continuing operations decreased $378,000
to $169,000 in the third quarter of 1997 when compared to $547,000 for the same
period in 1996.
At the wholesale distribution segment, gross profit declined $372,000
to $160,000 (10.1% of sales) during the third quarter of 1997 when compared
to $532,000 (29.6% of sales) for the same quarter of 1996, primarily due to
the $300,000 provision for finished goods inventory valuation allowance and
the decline in revenue, discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
$192,000 during the third quarter of 1997 when compared to the third quarter of
1996. The increase is primarily the result of the write-off of the remaining
$226,000 of unamortized goodwill at the wholesale segment, discussed above.
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, increased $35,000 to
$108,000 during the third quarter of 1997 when compared to the same period in
1996, primarily due to both a higher level of borrowing and higher interest
rates on the working capital line of credit at the wholesale distribution
segment.
-11-
14
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
COMPARISONS OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
The Company reported a net loss for the nine month period ended
September 30, 1997 of $2,728,000 on revenue of $6,247,000 as compared to a loss
of $724,000 on revenue of $7,464,000 for the same period in 1996.
On September 19, 1997 the Company sold substantially all of the assets
of its manufacturing segment for $6,000,000 million in cash and the assumption
of its liabilities and contractual obligations by the purchaser and reported a
loss on sale of $475,000 (see Note 5).
During the nine month period ended September 30, 1997, the Company
recorded the following unusual and nonrecurring charges to expense:
- $729,000 provision for finished goods valuation allowance at the
wholesale distribution segment related to the decision to more
rapidly reduce inventory levels and the estimated incentive
discounts that are expected to be incurred to reduce the levels of
certain items.
- $241,000 charge for the cost of the proxy election contest that was
concluded in May, 1997.
- $286,000 charge for the cost of funding severance provisions
pursuant to the employment agreement with the Company's former Chief
Executive Officer.
- $226,000 write-off at the wholesale distribution segment of the
remaining unamortized portion of its goodwill.
Excluding the above mentioned unusual and nonrecurring charges and the
items related to discontinued operations, the Company realized a loss from
continuing operations of $1,296,000 for the nine month period ended September
30, 1997 as compared to a loss of $1,171,000 for the same period in 1996.
REVENUE
Consolidated revenue decreased $1,217,000 (16.3%) to $6,247,000 for the
nine month period ended September 30, 1997 as compared to revenue of $7,464,000
for the same period in 1996. The decline in revenue is primarily due to the
continuing declines in the booking of orders in the wholesale distribution
segment, which have resulted in a 30% decline in the backlog at September 30,
1997 as compared to September 30, 1996.
GROSS PROFIT
Consolidated gross profit from continuing operations decreased $987,000
to $1,430,000 in the nine month period ended September 30, 1997 when compared
to $2,417,000 for the same period in 1996.
At the wholesale distribution segment, gross profit declined $983,000
to $1,392,000 (22.4% of sales) for the first nine months of 1997 when compared
to $2,375,000 (32.0% of sales) for the same period in 1996, primarily due to the
$729,000 provision for finished goods inventory valuation allowance and the
decline in revenue, discussed above.
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, increased
$631,000 to $853,000 during the nine month period ended September 30, 1997 when
compared to the same period in 1996, primarily due to (1) a higher level of
borrowing and higher interest rates on the working capital line of credit at
the wholesale distribution segment (2) 241,000 attributable to the cost of the
proxy election contest and (3) a $286,000 charge for funding the severance
provisions pursuant to the employment agreement with the Company's former Chief
Executive.
-12-
15
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
NEW FINANCIAL SERVICES GROUP:
In early September, 1997 the Company completed the organization of and
commenced the operations of three new subsidiaries to engage in a broad range of
merchant and investment banking services and to build a national consumer
finance organization. Paladin Financial, Inc. ("Paladin") is primarily engaged
in the origination, purchase and disposition of loans and the related real
estate mortgages. Barton Creek Capital Corporation is engaged in developing an
external client base for which it will provide a broad range of merchant and
investment banking services, including private placements, mergers and
acquisitions, and other financial advisory services. Texas Capital Markets,
Inc., assists Paladin with the development and implementation of loan products
and programs, the negotiation and closing of bulk loan purchases, the
development and implementation of various loan disposition strategies and the
procurement of the various financing facilities necessary for the
implementation of the loan programs to be undertaken by Paladin. Although
success in these new endeavors cannot be assured, the Company believes that the
unique synergy among these subsidiaries will help provide a competitive
advantage as the Company enters a new era of operations.
PROPOSED 1997 STOCK OPTION PLAN:
On September 3, 1997, the Board of Directors of the Company adopted the
TCC Industries, Inc. 1997 Incentive and Performance Stock Option Plan ("1997
Option Plan") in order to permit the grant of stock options to employees and
directors of the Company and its subsidiaries, and reserved a total of 6,000,000
shares of Common Stock for issuance thereunder. The 1997 Option Plan, including
the options awarded by the Compensation Committee of the Board of Directors
thereunder, is subject to approval by the shareholders of the Company at a
Special Meeting of Shareholders presently scheduled to be held on December 19,
1997. On October 17, 1997 the Company filed preliminary proxy materials with
the Securities and Exchange Commission and intends to distribute definitive
copies of the proxy materials to shareholders on or about November 17, 1997.
As of November 7, 1997, there were 2,778,615 shares of Common Stock
issued and outstanding, of which approximately 16.4% were owned beneficially by
Walter A DeRoeck, Chairman and Chief Executive Officer of the Company, and
Robert Thomajan, President of the Company, and approximately 2.9% of which were
owned beneficially by the other directors of the Company and the other executive
officers of the Company and its principal subsidiaries.
If the Shareholders of the Company approve and adopt the 1997 Option
Plan, and if the 6,000,000 shares of Common Stock (the maximum number of shares
issuable under the 1997 Option Plan, subject to the adjustments described
therein, are issued thereunder to the persons and in the amounts designated by
the Compensation Committee (excluding any other shares of Common Stock that may
be issued under the Company's other option plans or otherwise upon the
determination of its Board of Directors), 8,778,615 shares of Common Stock will
then be outstanding, of which approximately 39.3% will then be owned
beneficially by Messrs. DeRoeck and Thomajan, and approximately 33.9% of which
will then be owned beneficially by the other directors of the Company and the
other executive officers of the Company and its principal subsidiaries, or their
respective permitted assigns.
Subject to certain "cliff vesting" provisions set forth in the 1997
Option Plan, the Company will be required to have realized, over the
four-year-period that commenced on October 1, 1997 and ends on September 30,
2001, a minimum of $5.0 million in aggregate cumulative earnings in order for
any shares to vest and, in order for the full 6,000,000 shares of Common Stock
to be issued under the 1997 Option Plan, the Company will be required to have
realized over the four-year period at least $60.0 million in aggregate
cumulative earnings.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $8.0 million
and a current ratio of 3.4 to 1. This compares to working capital of $7.9
million and a current ratio of 2.9 to 1 at December 31, 1996. Cash for the nine
months ended September 30, 1997 increased $4.8 million. The improvement in the
current ratio and cash position is primarily due to the sale of the assets of
the manufacturing segment for $6.0 million (see Note 5).
At September 30, 1997, Allen-Lewis had a demand note credit agreement
with a bank that provided maximum borrowing capabilities of $4.0 million,
subject to a borrowing base calculation, for working capital purposes and
letters of credit. At September 30, 1997, Allen-Lewis had less than $1,000
available for borrowing under this line of credit.
On September 15, 1997, NationsBank of Texas, N.A. ("Bank"), agreed to
extend to the Company a $5,000,000 line of credit ("Line of Credit) for the
Company's use in financing, to the extent the Company's funds are not
sufficient, the initial operations of its new Financial Services Group. In order
to obtain the Line of Credit and to secure a favorable rate of interest, Walter
A. DeRoeck, Chairman and Chief Executive Officer of the Company, and Robert
Thomajan, President of the Company, have each personally guaranteed the
performance of the Company's obligations to the Bank under the Line of Credit.
The Line of Credit, which matures on September 15, 1998, calls for quarterly
interest payments to be made by the Company at the Bank's prime rate of
interest, less .5%, per annum. Because of the guaranties provided by Messrs.
DeRoeck and Thomajan, the Company was not required to secure the performance of
its obligations under the Line of Credit by pledging as collateral any of its
assets or other properties. Mr. DeRoeck and Mr. Thomajan have advised the
Company that, in the event the shareholders of the Company do not approve the
1997 Option Plan prior to March 31, 1998, they will reserve the right to
withdraw their personal guaranties. Should that occur, it is likely that the
Bank would require immediate payment of any amount that was then payable under
the Line of Credit and it is also likely that the Bank would withdraw its
commitment to the Company to fund the Line of Credit. As of September 30, 1997,
no funds had been drawn under this Line of Credit.
For information on the impact of future changes in accounting
principles see Note 7 to the consolidated financial statements appearing
elsewhere herein.
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16
TCC INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 2 to the consolidated financial statements included
elsewhere herein for a discussion of legal proceedings.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits:
10 Agreement with Lawrence W. Schumann entered into on July 2,
1997 to become effective on July 11, 1997 concerning Mr.
Schumann's resignation from various positions with the
Company and the related severance payment.
11 The computation of fully diluted earnings per share would be
the same as primary earnings per share, which is easily
discernible on the face of the statements of operations
included elsewhere herein.
27 Financial Data Schedules:
(i) For the quarterly period ended September 30, 1997.
6(b) Reports on Form 8-K:
The following is the date and description of the events reported
on Form 8-K filed during the third quarter of 1997:
Date of Earliest Event
Reported on Form 8-K Description
July 7, 1997 Walter A. DeRoeck was elected Chairman
and and Interim Chief Executive Officer
of the Company, replacing Lawrence W.
Schumann who resigned those positions.
Mr. Schumann also agreed to resign as
President and Director of the Company.
In addition, Robert Thomajan was
elected to replace Frank Denius who
resigned his
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17
TCC INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART II - OTHER INFORMATION (CONTINUED)
position as Secretary of the Company.
The Board also approved a resolution to
expand the size of the Board by two
seats and to add an advisory director
to the Board. Mr. Schumann also agreed
to sell the shares of the Company's
common stock that he beneficially owned
to Mr. DeRoeck and Mr. Thomajan for a
price equal to the average closing
price for the Company's shares for the
past fifteen trading day period. The
Board agreed to waive the provisions of
the Company's Shareholder' Rights Plan
to allow for Mr. DeRoeck and Mr.
Thomajan to acquire up to twenty
percent of the Company's outstanding
shares in view of their agreement to
acquire Mr. Schumann's shares.
July 11, 1997 Three new directors elected to the
Board of Directors: Lawrence E. Tilton,
Richard B. Curran and Alan M. Sager.
Additionally, Robert D. Starnes was
named as an advisory director.
September 3, 1997 The Board of Directors approved the
forming of wholly-owned subsidiaries to
engage in a broad range of merchant and
investment banking services and to
build a national consumer finance
organization, in connection with which
the Board adopted a stock option plan.
The Company also announced the prior
resignations of Messrs. Grogan Lord,
Frank W. Denius and Patrick Kaine as
directors and the election of Robert D.
Starnes as a new director.
September 9, 1997 Chairman Walter A. DeRoeck and
President Robert Thomajan expressed
surprise at the extent of the stock
market reaction to the Company's
announcement last week concerning its
entry into the financial services and
Title I business. They noted that prior
to the announcement the daily volume of
trading in the shares of TCC had been
quite low while since the announcement,
approximately 900,000 shares had been
traded. At the same time, in the last
three trading days, the price of TCC
shares had risen from about $2.40 to
over $5.00. While they both expressed
optimism for the future of the Company,
they pointed out that there was a
considerable task before them and that
they were starting from a base that had
been weakened over the last several
years by continued losses at the
Company's subsidiaries.
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18
TCC INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART II - OTHER INFORMATION (CONTINUED)
On September 16, 1997 the Company
announced that it had an agreement in
principle to sell all of the assets of
one of its subsidiaries, Meyer Machine
Company, to Meyer Acquisition
Corporation, Inc., whose principal,
Eugene Teeter, had been the President
of Meyer Machine, for $6.0 million cash
plus the assumption of all of Meyer
Machine Company's liabilities and
contract obligations.
September 19, 1997 The Company announced that on September
19, 1997 a wholly owned indirect
subsidiary, Meyer Machine Company, had
sold substantially all of its assets
for a cash consideration of $6.0
million plus the assumption of its
liabilities and contractual obligations
by the purchaser. The purchaser was
Meyer Acquisition Corporation, Inc.
whose principal, Eugene Teeter, had
been the President of Meyer Machine
Company. Pro forma financial
information was filed.
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19
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.
TCC INDUSTRIES, INC.
------------------------------------
(Registrant)
/s/ WALTER A. DEROECK
------------------------------------
WALTER A. DEROECK
Chairman of the Board of Directors,
Chief Executive Officer and
Principal Financial Officer
Date: November 12, 1997
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20
EXHIBIT INDEX
EXHIBIT
NO.
- -------
10 Agreement by and between Lawrence W. Schumann and TCC Industries, Inc.
11 The computation of fully diluted earnings per shares would be the same
as primary earnings per share, which is easily discernible on the face
of the statements of operations included elsewhere herein.
27 Financial Data Schedules:
(i) For the quarterly period ended September 30, 1997