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, 1997
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-6512
TRANSTECH INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-1777533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Centennial Avenue, Piscataway, New Jersey 08854
(Address of principal executive offices)
(908) 981-0777
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by a court.
Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
2,829,090 shares of common stock, $.50 par value, outstanding as of
March 31, 1997. In addition, at such date, the issuer held
1,885,750 shares of common stock, $.50 par value, in treasury.
Transitional Small Business Disclosure Format
(Check One): Yes No X
Page 1 of 28 pages
Exhibit index on page 27
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
I N D E X
Page(s)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31,
1997 and December 31, 1996 3 - 4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 5 - 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 7 - 8
Notes to Consolidated Financial Statements 9 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
EXHIBITS 28
<PAGE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In $000's)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 647 $ 260
Marketable securities 3,358 3,783
Accounts and notes receivable
(net of allowance for doubtful
accounts of $16) 295 318
Deferred income taxes 33 44
Prepaid expenses and other 341 439
Total current assets 4,674 4,844
PROPERTY, PLANT AND EQUIPMENT
Land 799 799
Buildings and improvements 339 339
Machinery and equipment 3,024 2,992
4,162 4,130
Less accumulated depreciation 3,204 3,190
Net property, plant and equipment 958 940
OTHER ASSETS
Notes receivable 281 284
Investment in leveraged lease 25 41
Assets held for sale 1,576 1,724
Clay deposits 577 577
Escrowed funds from sale of
subsidiary 790 777
Deferred income taxes 332 320
Other 60 60
Total other assets 3,641 3,783
TOTAL ASSETS $ 9,273 $ 9,567
See Notes to Consolidated Financial Statements
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED BALANCE SHEETS, Cont'd
(In $000's)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 18 $ 18
Accounts payable 365 215
Accrued income taxes 2,078 2,048
Accrued miscellaneous expenses 160 164
Total current liabilities 2,621 2,445
OTHER LIABILITIES
Long-term debt 43 48
Accrued remediation and closure
costs 12,815 12,817
Total other liabilities 12,858 12,865
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.50 par value,
10,000,000 shares authorized:
4,714,840 shares issued 2,357 2,357
Additional paid-in capital 1,516 1,516
Retained earnings 924 1,385
Net unrealized gains on marketable
securities 11 13
Subtotal 4,808 5,271
Treasury stock, at cost -
1,885,750 shares (11,014) (11,014)
Total stockholders' equity
(deficit) (6,206) (5,743)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 9,273 $ 9,567
See Notes to Consolidated Financial Statements
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS
(In $000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
<S> <C> <C>
REVENUES $ 108 $ 83
COST OF OPERATIONS
Direct operating costs 124 83
Selling, general and
administrative expenses 496 670
Total cost of operations 620 753
INCOME (LOSS) FROM OPERATIONS (512) ( 670)
OTHER INCOME (EXPENSE)
Investment income (loss) 76 61
Interest expense (2) (22)
Interest related to income taxes
payable (44) (52)
Miscellaneous income (expense) 21 82
Total other income (expense) 51 69
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
(CREDIT) AND EXTRAORDINARY ITEM (461) (601)
Income taxes (credit) - (58)
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (461) (543)
EXTRAORDINARY CHARGE ON ELIMINATION
OF DEBT, NET OF TAXES (NOTE 3) - (512)
NET INCOME (LOSS) $ (461) $(1,055)
See Notes to Consolidated Financial Statements
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
(In $000's, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
INCOME (LOSS) PER COMMON SHARE:
<S> <C> <C>
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM $(.16) $(.19)
EXTRAORDINARY CHARGE - (.18)
NET INCOME (LOSS) $(.16) $(.37)
NUMBER OF SHARES USED IN
CALCULATION 2,829,090 2,829,090
See Notes to Consolidated Financial Statements
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $000's)
(Unaudited)
For the Three Months Ended
<TABLE>
<CAPTION>
March 31,
1997 1996
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 121 $ 94
Cash paid to suppliers and employees (358) (883)
Interest and dividends received 68 26
Interest paid (2) (22)
Other income received 18 18
Income taxes paid (14) (44)
Cash received from discontinued
operations - 67
Net cash provided by (used in)
operating activities (167) (744)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity
of marketable securities 918 696
Purchase of marketable securities (501) (3,162)
Purchase of property, plant and
equipment (32) (37)
Proceeds from sale of property,
plant and equipment 149 16
Collections of notes receivable 12 102
Rent sharing payments from
computer leases 15 9
Cash proceeds from sale of
discontinued segments - 4,005
Net cash provided by (used in)
investing activities 561 1,629
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (5) (29)
Payment of remediation and closure
costs (2) (25)
Net cash provided by (used in)
financing activities (7) (54)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 387 831
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR 260 420
CASH AND CASH EQUIVALENTS AT END
OF THE QUARTER $ 647 $1,251
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
(In $000's)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
RECONCILIATION OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME (LOSS) $ (461) $(1,055)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Extraordinary charge on elimination
of debt - 512
Depreciation and amortization 14 15
(Gain) loss on sale of property,
plant and equipment - 6
Increase (decrease) in deferred
income taxes - (212)
(Increase) decrease in assets:
Accounts and notes receivable,
trade-net 20 (22)
Prepaid expenses and other 98 (9)
Escrowed funds from sale of subsidiary (13) -
Increase (decrease) in liabilities:
Accounts payable and accrued
expenses 145 (141)
Accrued taxes 30 162
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (167) $ (744)
See Notes to Consolidated Financial Statements
</TABLE>
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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, 1996 for further information.
The financial information has been prepared in accordance with
the Company's customary accounting practices except for certain
reclassifications to the 1996 financial statements in order to
conform to the presentation followed in preparing the 1997
financial statements. Quarterly financial information has not been
audited. In the opinion of management, the information presented
reflects all adjustments necessary for a fair statement of interim
results. All such adjustments are of a normal and recurring nature
except as disclosed herein.
NOTE 2 - MARKETABLE SECURITIES
The Company has adopted Financial Accounting Standards Board
Statement No. 115 ("Accounting for Certain Investments in Debt and
Equity Securities"). In accordance with the statement, the Company
classifies all debt securities purchased with remaining maturities
of less than one year as securities held-to-maturity which are
carried at amortized cost. At March 31, 1997 held-to-maturity
securities consisted of $3,249,000 of U.S. Government Securities
with maturities through December 1997. 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, 1997, of $17,000, less deferred income taxes of
$6,000, is included as a separate component of stockholders'
equity.
NOTE 3 - DISCONTINUED OPERATIONS
On March 1, 1996, the Company's wholly-owned subsidiary, THV
Acquisition Corp. ("THV"), sold all of the issued and outstanding
stock of Hunt Valve Company, Inc. ("Hunt") to ValveCo Inc. The
Company reported a loss on the sale in its results for the year
ended December 31, 1995.
A portion of the net cash proceeds of the sale ($750,000) was
placed in escrow to secure the Company's indemnification
obligations to the purchaser under the purchase agreement. The
escrow will terminate upon the earlier to occur of (i) the release
of all funds from escrow in accordance with the terms thereof or
(ii) the later to occur of (x) the expiration of the applicable
statute of limitations for the assessment of federal income taxes
for all taxable years with respect to which Hunt was a member of
the Company's consolidated tax group and (y) the satisfaction by
the Company of all assessments or other claims by the Internal
Revenue Service for taxes of the consolidated tax group during such
years. The portion of the net asset value equal to the escrowed
funds has been classified as long-term in the accompanying
consolidated balance sheets.
Upon consummation of the sale, a portion of Hunt's funded debt
was extinguished resulting in a write-off of approximately $775,000
of unamortized debt issuance costs and debt discounts. Pursuant to
Securities and Exchange Commission policy, $512,000 ($775,000 less
income taxes of $263,000) was reported as an extraordinary loss in
the period ended March 31, 1996 when such debt was deemed to have
been extinguished.
In connection with the sale, four individuals affiliated with
the Company, namely the Company's President and Chairman of the
Board of Directors, the Company's Vice President and Chief
Financial Officer, who is also a member of the board, a director of
Hunt, and Hunt's President and Chief Operating Officer,
collectively acquired 15% of the equity of ValveCo Inc. for
$150,000. These four individuals also obtained options to acquire
up to an additional 12.5% of the common stock of ValveCo Inc.
pursuant to the exercise of performance and value-based options at
an aggregate cost to such individuals of $2.3 million. In
addition, the aforementioned directors and executive officers of
the Company and/or Hunt were employed in various capacities by
ValveCo Inc. and Hunt after the sale. The Company's President and
Chairman of the Board of Directors resigned from his employment
with ValveCo Inc. and Hunt effective January 1, 1997, but remains
a director of Hunt. The Company's Vice President and Chief
Financial Officer also resigned from his employment with ValveCo
Inc. and Hunt effective January 1, 1997.
NOTE 4 - ASSETS HELD FOR SALE
Assets held for sale consist of approximately 203 acres of real
estate, including real property and certain equipment remaining
from the Company's former alkali products segment, which are
carried at a cost of $1,576,000 as of March 31, 1997. The real
estate is currently listed for sale with real estate brokers and
the Company is actively pursuing the disposition of such
properties. However, based upon market conditions for real estate
of this type the Company is unable to determine when such sales
will ultimately be consummated. During the fourth quarter of 1996,
the Company charged $671,000 to operations to reduce the carrying
value of this real estate to amounts which approximate current net
realizable values. Estimates of net realizable values were based
upon current indications of value received from professional real
estate brokers and certain offers received from potential
purchasers of such property.
During March 1997 the Company sold approximately 12 acres of
property classified as assets held for sale for gross proceeds
totalling $157,000. No gain or loss has been reported related to
the sale since the proceeds approximated the carrying value of the
property.
In May 1997 the Company agreed to sell approximately 95 acres of
property classified as assets held for sale with a book value of
approximately $773,000 for gross proceeds of approximately $674,000
plus, if available, reimbursement of real estate tax credits
related to the property. The Company expects to complete the
transaction by the end of May 1997.
NOTE 5 - INCOME TAXES
In 1991, the Internal Revenue Service (the "Service") asserted
numerous adjustments to the tax liability of the Company and its
subsidiaries for tax years 1980 through 1988, along with interest
and penalties thereon. In 1993, after the conclusion of
administrative proceedings, the Service issued a deficiency notice
to the Company asserting adjustments to income of $33.3 million and
a corresponding deficiency in federal income taxes of approximately
$13.5 million, as well as penalties of $2.5 million and interest on
the asserted deficiency and penalties. In addition, the Service
challenged the carryback of losses incurred by the Company in
taxable years 1989 through 1991, thereby bringing those years,
which had been the subject of an ongoing audit, into the deficiency
notice. The Company filed a petition with the Tax Court contesting
many of the proposed adjustments asserted in the deficiency notice.
For a discussion of this matter, see "Taxes" contained in
Management's Discussion and Analysis of Financial Condition and
Results of Operations of this Form 10-QSB.
NOTE 6 - LONG-TERM DEBT
At March 31, 1997, long-term debt consisted of the following (in
$000's):
10.5% mortgage payable in $35
installments through April 2000;
secured by land and buildings
Other 26
Total long-term debt 61
Less: current portion (18)
$43
NOTE 7 - REMEDIATION AND CLOSURE COSTS
The Company and certain subsidiaries were previously active in
the resource recovery and waste management industries. These
activities included the operation of three landfills. Although the
sites are now closed, the Company continues to own and/or remediate
them and has both incurred and accrued for the substantial costs
associated therewith.
The Company's accruals for closure and remediation activities
equal the present value of its allocable share of the estimated
future costs related to a site less funds held in trust for such
purposes. Such estimates require a number of assumptions, and
therefore may differ from the ultimate outcome. The costs of
litigation associated with a site are expensed as incurred.
As of March 31, 1997, the Company has accruals totalling $21.9
million for its estimated share of remediation and closure costs in
regard to the Company's former landfills, $9.1 million of which is
held in trusts and maintained by trustees for financing of the
estimated $11.0 million required to fund the closure plan related
to the landfill owned by the Company's subsidiary, Kinsley's
Landfill, Inc.
The most significant portion of the accruals relates to
remediation efforts at the landfill owned by the Company's
subsidiary, Kin-Buc, Inc. (the "Kin-Buc Landfill"). The Company
and other respondents have been remediating the Kin-Buc Landfill
under an Amended Unilateral Administrative Order issued by the
United States Environmental Protection Agency (the "EPA") in
September 1990. In November 1992, EPA issued an Administrative
Order for the remediation of certain areas neighboring the Kin-Buc
Landfill. For a discussion of this matter, see "Remediation and
Closure Costs" contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-QSB.
The impact of future events or changes in environmental laws and
regulations, which cannot be predicted at this time, could result
in material increases in remediation and closure costs related to
the Company's past waste handling activities, possibly in excess of
the Company's available financial resources. A significant
increase in such costs could have a material adverse effect on the
Company's financial position, results of operations and net cash
flows.
NOTE 8 - LEGAL PROCEEDINGS
See Item 1 of Part II of this Form 10-QSB for a discussion of
recent developments with respect to the Company's legal matters.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION, Cont'd
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The three months ended March 31, 1997 compared to the three
months ended March 31, 1996
Consolidated revenues by business segment for the three months
ended March 31, 1997 and 1996 were as follows (in $000):
1997 1996
Electricity Generation $ 81 $ 55
Environmental Services 65 64
Intercompany (38) (36)
Total $108 $ 83
Consolidated revenues for the three months ended March 31, 1997
were $108,000, an increase of $25,000 or 30% compared to the same
period of 1996.
Revenues from operations which generate electricity from
methane gas were $81,000, an increase of $26,000 or 47% compared to
the same period last year. Such revenues are a function of the
number of kilowatt hours sold, the rate received per kilowatt and
capacity payments. The increase in revenues is primarily the
result of an increase in kilowatt hours sold which in turn is due
in part to a 6% increase in operating hours of the Company's four
electric generating units. Approximately 17% of available machine
hours were dedicated to repairs and scheduled overhaul in the three
months ended March 31, 1997 versus 22% for such tasks during the
comparable period of 1996.
The environmental services subsidiary reported $65,000 of
operating revenues (prior to elimination of intercompany sales) for
the three months ended March 31, 1997 compared to $64,000 for the
same period last year. Approximately $38,000 or 58% of the
environmental services subsidiary's revenues for the period,
compared to $36,000 or 56% for the same period last year, were for
services provided either to other members of the consolidated group
or to third parties providing services to another member of the
consolidated group, and were therefore eliminated in consolidation.
Consolidated direct operating costs for the three months ended
March 31, 1997 were $124,000, an increase of $41,000 or 49% when
compared to the same period of 1996, due primarily to expenses
incurred for scheduled maintenance of electric generating
equipment.
Consolidated selling, general and administrative expenses for
the three months ended March 31, 1997 decreased $174,000 or 26% to
$496,000 from $670,000 for the same period last year. Decreases
were reported in insurance, real estate taxes and professional fees
relating to the Company's ongoing environmental and tax litigation.
Professional fees and administrative costs are incurred in support
of the Company's ongoing litigation, marketing and asset
divestiture efforts (see Liquidity and Capital Resources -
Liquidity). The Company cannot therefore be certain that such
expenses will decline in the near future.
The Company's consolidated operating loss for the three months
ended March 31, 1997 decreased to $512,000 from a loss of $670,000
for the same period in 1996.
Consolidated investment income increased by $15,000 to $76,000
for the three months ended March 31, 1997 from the comparable
period last year.
Consolidated interest expense decreased $20,000 to $2,000 for
the three months ended March 31, 1997 compared to the same period
last year.
Interest expense or credit reported as "Interest related to
income taxes payable" represents the increase or decrease,
respectively, in the amount of interest accrued on estimated income
taxes payable as a result of the Company's tax litigation discussed
below. The Company reported interest expense of $44,000 for the
three months ended March 31, 1997 versus $52,000 for the comparable
period of 1996.
Consolidated miscellaneous income for the three months ended
March 31, 1997 decreased $61,000 to $21,000 when compared to the
same period of 1996. Miscellaneous income reported for 1996
includes $67,000 in management fees paid by a former subsidiary of
the Company.
The consolidated loss from continuing operations before income
tax credits and extraordinary item was $461,000 for the three
months ended March 31, 1997, compared to a loss of $601,000 for the
same period last year.
Income tax credit for the three months ended March 31, 1996
equalled $58,000. No provision for taxes has been recognized for
the same period of 1997.
On March 1, 1996 the Company sold all of the issued and
outstanding stock of Hunt Valve Company, Inc. ("Hunt") to ValveCo
Inc. Upon consummation of the sale, a portion of Hunt's funded
debt was extinguished resulting in a write-off of approximately
$775,000 of unamortized debt issuance costs and debt discounts.
Pursuant to Securities and Exchange Commission policy, $512,000
($775,000 less income taxes of $263,000) was reported as an
extraordinary loss in the period ended March 31, 1996 when such
debt was deemed to have been extinguished. The Company recognized
a loss on the sale in its consolidated statement of operations for
1995.
Consolidated net loss for the three months ended March 31, 1997
was $461,000 or $.16 per share, compared to net loss of $1,055,000,
or $.37 per share, for the three months ended March 31, 1996.
Liquidity and Capital Resources
Liquidity
Net cash used in operating activities for the three months ended
March 31, 1997 decreased to $167,000 from $744,000 when compared to
the same period last year. Net cash provided by investing
activities decreased for the current period to $561,000 from
$1,629,000, due in part to $4,005,000 in proceeds from the sale of
a discontinued segment in 1996. The amount of cash used in
financing activities decreased to $7,000 from $54,000 for the same
period last year. Funds held by the Company in the form of cash
and cash equivalents decreased as of March 31, 1997 to $647,000
from $1,251,000 as of March 31, 1996. The sum of cash, cash
equivalents and marketable securities as of March 31, 1997
decreased $1,787,000 to $4,005,000 when compared to last year.
Working capital was $2,053,000 and the ratio of current assets
to current liabilities was 1.8 to 1 as of March 31, 1997, versus
$2.4 million and 2.0 to 1 as of December 31, 1996.
The uncertainty of the outcome of the Company's ongoing tax and
environmental litigation, discussed below and in the notes to the
Company's consolidated financial statements contained herein and in
the Company's filing on Form 10-KSB for the year ended December 31,
1996, and the impact of future events or changes in environmental
laws or regulations, which cannot be predicted at this time, could
result in material increases in remediation and closure costs, tax
and other potential liabilities. The Company may ultimately incur
costs and liabilities in excess of its available financial
resources.
The Company faces significant short-term and long-term cash
requirements for (i) federal and state income tax obligations, most
of which will become due following litigation or settlement with
the Internal Revenue Service of the Company's tax liability for the
years 1980 through 1991, (ii) income taxes that will ultimately be
imposed with respect to 1996 and 1997 on rental income from the
Company's investment in computer equipment (the Company expects to
offset such income, which results from the exhaustion of tax
depreciation that had previously sheltered the rental income from
tax with loss carryforwards on its 1996 and 1997 tax returns;
however, some or all of these loss carryforwards subsequently will
be reduced or absorbed by settled or litigated adjustments in the
Tax Court case) and (iii) expenses associated with environmental
remediation activity and related litigation.
Although the Company has completed the sale of the two business
segments, one in each of 1995 and 1996, and is pursuing the sale of
property held for sale, no assurance can be given that the timing
and amount of the proceeds of such sales will be sufficient to meet
the capital requirements of the Company, since such requirements
can only be ascertained as the Company resolves its tax and
environmental litigation. The Company cannot ascertain whether its
remaining operations and funding sources will be adequate to
satisfy its future capital requirements, including its anticipated
tax and environmental liabilities. In the event of an unfavorable
resolution of the tax and environmental litigation, or the proceeds
of asset sales are insufficient to meet the Company's future
capital requirements, including its tax and environmental
liabilities, then, if other alternatives are unavailable at that
time, the Company will be forced to consider a plan of liquidation
of its remaining assets, whether through bankruptcy proceedings or
otherwise.
Taxes
As discussed in greater detail below, the Company is currently
litigating with the Internal Revenue Service (the "Service") in Tax
Court over its tax liability for taxable years 1980-88. Certain
issues from taxable years 1989-91 are also part of the Tax Court
litigation because losses from those years were carried back to
1988. The Company estimates that, after taking into account
partial settlements that have been reached through July 31, 1996
regarding certain of the adjustments asserted by the Service, and
taking into account available net operating losses and tax credits,
approximately $7.7 million of federal and $237,000 of state income
taxes and $10.1 million of federal interest, calculated through
March 31, 1997, would be owed if the Company were unsuccessful in
its defense of the two remaining unsettled issues in the Tax Court
litigation. (All tax liability estimates presented herein exclude
penalties. The Service has conceded federal penalties on all
issues in the Tax Court litigation.)
In 1991, the Service asserted numerous adjustments to the tax
liability of the Company and its subsidiaries for tax years 1980-
88, along with interest and penalties thereon. In 1993, after the
conclusion of administrative proceedings, the Service issued a
deficiency notice to the Company asserting adjustments to income of
$33.3 million and a corresponding deficiency in federal income
taxes of approximately $13.5 million, as well as penalties of $2.5
million and interest on the asserted deficiency and penalties. In
addition, the Service challenged the carryback of losses incurred
by the Company in taxable years 1989-91, thereby bringing those
years, which had been the subject of an ongoing audit, into the
deficiency notice. The 1989-91 tax audit is discussed below. The
Company filed a petition with the Tax Court contesting many of the
proposed adjustments asserted in the deficiency notice. On June 5,
1995, August 14, 1995, March 7, 1996 and July 31, 1996,
respectively, the Company and the Service executed a stipulation of
partial settlement of issues in the Tax Court case. These partial
settlements resolved all but two of the adjustments asserted in the
deficiency notice.
Taking into account the partial settlements to date, the Company
has accepted approximately $5.9 million of the $33.3 million of
total adjustments to income asserted by the Service for the 1980-88
period. Many of the adjustments accepted by the Company relate to
issues on which the Service would likely have prevailed in Tax
Court. The Service has conceded adjustments totalling $26.7 million
of taxable income and $2.5 million of penalties, leaving only one
issue, involving several taxable years, unresolved from the 1980-88
period. The Company cannot predict the outcome of further
settlement negotiations or litigation with the Service over that
issue.
The Company has net operating loss and tax credit carryforwards
that will partly offset the tax liability resulting from the
settled adjustments to taxable income. Taking into account such
carryforwards, the federal income tax and interest that will be due
on account of the settlements reached to date totals approximately
$1,580,000, with interest through March 31, 1997 ($143,000 of taxes
and $1,437,000 of interest). The settlements also result in
approximately $237,000 of state income tax (not including penalties
and penalty interest that may be assessed), $110,000 of which was
paid to one state during the second quarter of 1996. This state
had a tax amnesty program in effect pursuant to which all interest
and penalties for back taxes was waived upon payment of the tax
liability. In conjunction with the $110,000 payment, the Company
reversed approximately $240,000 of interest that was previously
accrued on the $110,000 tax liability. Payment of the federal and
remaining state tax liability resulting from both the settled
issues and any issues litigated before the Tax Court will be due
after the conclusion of the Tax Court case.
The accelerated utilization of the Company's net operating loss
and tax credit carryforwards to offset the settled adjustments will
reduce the net operating loss and tax credit carryforwards that
otherwise would have been available to partially offset the taxable
income that arises as the Company recognizes net taxable income
from its investment in computer equipment. For federal income tax
purposes, the Company has had the benefit of tax deductions for
depreciation of the computer equipment and for interest on the
long-term non-recourse debt that the Company incurred to finance
the acquisition of the computer equipment. In prior years, those
deductions exceeded the rental income that the Company earned from
leasing out the equipment. Those excess deductions offset the
Company's income from other sources. However, rental income from
leasing the computer equipment exceeded the related depreciation
and interest deductions by approximately $6.2 million in 1996 and
$5.8 million in 1995. This excess income was largely offset by
deductions from other sources. Rental income will continue to
exceed depreciation and interest deductions in 1997. The Company
anticipates approximately $3.4 million of net taxable income for
the first seven months of 1997, on account of its computer
equipment investment. The Company does not expect to have
sufficient deductions from other sources in 1996 and 1997 to fully
offset this taxable income after taking into account the net
operating loss carryforwards and credits that will be utilized to
offset the tax liabilities resulting from the settled adjustments.
The Service also audited the Company's federal income tax
returns for 1989-91, and has questioned the deductions claimed by
the Company in connection with its investment in the computer
equipment discussed in the preceding paragraph. The Service also
asserted a number of smaller adjustments for that period which have
been settled. If the Service prevails in disallowing the computer
equipment deductions, the Company's taxable income for 1989 through
1992 would be materially increased. However, in that case, its
taxable income from the computer equipment for 1994 through 1997
would be reduced by a corresponding amount. Specifically, if the
Company prevails on the one remaining unsettled issue from the
1980-1988 period but is unsuccessful in its defense of the computer
equipment issue, the incremental federal income tax liability
attributable to disallowance of the computer equipment deductions
would be approximately $5.8 million of tax and $3.9 million of
interest, calculated through March 31, 1997. This would increase
the Company's aggregate liability for federal taxes and interest
attributable to both the settled issues and the computer lease to
$6.0 million and $5.3 million, respectively, calculated through
March 31, 1997. Disallowance of the computer equipment deductions
would not result in any state tax liability.
The incremental amount of federal taxes and interest that the
Company would owe if the Company were unsuccessful in its defense
of both the remaining unsettled issue from the 1980-88 period and
the computer equipment issue is approximately $7.6 million of
federal income taxes and $8.7 million of interest, calculated
through March 31, 1997. (Such amounts are in addition to the tax
of $143,000 and interest of $1,437,000, discussed above, that will
be owed as a result of the partial settlements to date.) No state
income tax or interest is anticipated on account of the unsettled
1980-88 issues.
Remediation and Closure Costs
As of March 31, 1997, the Company has accruals totalling $21.9
million for its estimated share of remediation and closure costs
related to the Company's former landfill operations. Approximately
$9.1 million is held in trust and maintained by trustees for the
post-closure activities of one site located in Deptford, New
Jersey.
The Company and other responsible parties have been remediating
the Kin-Buc Landfill, located in Edison, New Jersey, under an
Amended Unilateral Administrative Order issued by the United States
Environmental Protection Agency ("EPA") in September 1990 (the
"1990 Order"). In November 1992, EPA issued an Administrative
Order (the "1992 Order", and, together with the 1990 Order, the
"Orders") for the remediation of certain areas neighboring the Kin-
Buc Landfill.
In January 1993, a trust (the "1993 Trust") was established to
fund the remediation of the Kin-Buc Landfill and such neighboring
areas out of proceeds provided from negotiated settlements with
certain parties to a suit the Company initiated in 1990 with the
intent of obtaining contribution toward the cost of remediation.
Approximately $7.1 million had been received from such settlements
and deposited into the 1993 Trust, all of which had been expended
by December 31, 1995. During June 1994, approximately 36
generators of de minimis volumes of waste accepted a settlement by
the Company and other respondents to the Orders, which resulted in
an additional $3.0 million of contributions being deposited into a
new trust established in January 1995 for the remediation effort.
Substantially all of the funds held in this new trust had been
expended as of December 31, 1996.
During May 1993, a $22 million contract was awarded for the
construction of a containment system and leachate treatment plant
at the Kin-Buc Landfill in accordance with the engineered design
and standards accepted by the EPA in satisfaction of certain
requirements of the 1990 Order. The contract was to be financed
with funds from the 1993 Trust. During May 1994, the Company met
with representatives of EPA to discuss the impact delays in
securing settlement proceeds would have on the Company's ability to
finance the construction within the time frame required by EPA. In
July 1994, after meeting with EPA, SCA Services, Inc. ("SCA"), an
affiliate of WMX Technologies, Inc. ("WMX") and a respondent to the
Orders, entered into a contract with the contractor installing the
containment system and treatment plant, thereby alleviating the
potential for delays in that 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. Starting in
August 1994, other contracts were awarded by SCA for certain other
remedial activities mandated by the 1992 Order.
The execution of the contracts between SCA and the contractors
has not relieved the Company of liability for such costs since the
Company entered into a cost sharing agreement with SCA and certain
affiliates (the "SCA Group") in 1986 which allocated 75% of the
costs incurred by the parties for the remediation of the site to
the Company. In August 1993, the Company filed a demand for
arbitration seeking rescission or reformation of the cost sharing
agreement and reimbursement of overpayment. During March 1995, the
SCA Group filed a demand for arbitration seeking reimbursement from
the Company of $17 million, representing 75% of the remediation
expenses purportedly funded by it through June 30, 1995. These
arbitrations have been stayed since 1996 pending the outcome of
settlement discussions with the SCA Group which are ongoing.
The contractors have completed the construction required under
the Orders, and the Company is awaiting EPA acceptance of the work
performed. Operation of the treatment plant and maintenance of the
facilities is being conducted by an affiliate of SCA. The cost of
the construction, and of the operation and maintenance of remedial
systems for a 30-year period, plus past remedial activities, has
been estimated to be in the range of approximately $80 million to
$100 million.
In January 1996, a design for a remedial program involving the
installation of a slurry cut-off wall around a one-acre parcel of
land adjacent to the Kin-Buc Landfill was presented to the EPA for
its review and approval. EPA approved the plan, and construction
began in August 1996. The construction is substantially complete
and the Company is awaiting EPA acceptance of the work performed.
The cost of such installation has been estimated at $2.0 million
and is being financed by the SCA Group. SCA may assert that this
cost is subject to the cost sharing agreement and seek
reimbursement of 75% of amounts expended from the Company.
The EPA has notified the Company that it will conduct a limited
investigation of an area in the vicinity of the Kin-Buc Landfill,
known as Mound B, and that it may seek to recover its costs in
connection therewith from the Company and the SCA Group. The cost
of studies and remediation of this area is not included in the
present estimates of the total cost of the remediation since such
work is outside the scope of the Orders. An obligation to
undertake significant remediation of areas outside the scope of the
Orders could materially increase the total estimated costs of
remediation.
The Company has currently accrued $10.8 million for future
remediation costs at the Kin-Buc Landfill. The amount ultimately
borne by the Company as well as the timing of such future payments,
however, cannot be determined with certainty and are dependent upon
the following: (i) determination of the total costs to remediate
the landfill as required by the Orders or future orders and
directives of the EPA, (ii) the allocation of the total remediation
costs to each of the potentially responsible parties named to the
Orders, (iii) the success of the Company's pending arbitration for
rescission or reformation of the cost sharing agreement with the
SCA Group, and (iv) the success of the SCA Group's demand in
arbitration for reimbursement of 75% of the costs it has expended
in the remediation effort. Any or all of the preceding items could
ultimately be resolved in a manner that could have a material
adverse effect on the financial condition, results of operations or
net cash flows of the Company.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In 1988, Kin-Buc purchased 150,000 cubic yards of clay for use
in the closure of the Kin-Buc Landfill for $1.2 million from Inmar
Associates, Inc. ("Inmar"), a corporation owned and controlled by
a former principal shareholder, director and officer of the
Company. Pursuant to the agreement for the purchase of the clay,
Kin-Buc is entitled to a refund of the purchase price of clay it is
unable to mine or can not use. In October 1996, the Company
learned that Inmar had contracted to sell a substantial portion of
its land, upon which a substantial amount of the clay is situated,
to Edison Expansion, Inc. ("Expansion"). In November 1996, Kin-Buc
brought suit entitled Kin-Buc, Inc., v. Inmar Associates, Inc. and
Edison Expansion, Inc. in Superior Court, Morris County, New Jersey
("Superior Court") against Inmar and Expansion for, among other
things, a declaratory judgment that Kin-Buc's rights in the clay
would survive a sale of the land to Expansion and, alternatively,
a money judgment against Inmar. Kin-Buc also filed a lis pendens
against the Inmar property. In December 1996, Expansion sought and
obtained a discharge of the lis pendens and a closing of the sale
to Expansion took place in January 1997. In accordance with an
order of the Superior Court entered in another matter involving
Inmar, the net proceeds of the sale were paid into the Superior
Court. In March 1997, the Superior Court denied Kin-Buc's request
that the net proceeds be dedicated to the payment of whatever money
judgment Kin-Buc might obtain in its suit against Inmar, but agreed
that Kin-Buc could reapply for such relief when and if it obtains
a judgment. The net proceeds are substantially less than Kin-Buc's
claim against Inmar, and Inmar may use the proceeds for other
purposes. At Kin-Buc's request, however, the Superior Court
ordered that notice of any application for use of the proceeds be
given to Kin-Buc at the time the application is made. In April
1997, Expansion answered Kin-Buc's complaint; Inmar's answer is
overdue. Kin-Buc may ultimately obtain a declaratory judgment, an
award of money damages against Inmar, or both. There is no
assurance that Kin-Buc will be able to mine and remove the clay on
Expansion's property or Inmar's remaining property even if Kin-Buc
obtains a declaratory judgment. In addition, there is no assurance
that Kin-Buc will be permitted to draw against the proceeds in the
Superior Court. Lastly, there is substantial uncertainty that
Inmar will be financially capable of paying damages to Kin-Buc.
The Company is a party to other pending legal proceedings
previously reported in the Company's Annual Report on Form 10KSB
for the fiscal year ended December 31, 1996, and reference is made
thereto for a description of such litigation.
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION, Cont'd
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 11 - Computation of Earnings (Loss) Per Common Share
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
None
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TRANSTECH INDUSTRIES, INC.
(Registrant)
Date: May 15, 1997 By: /s/ Robert V. Silva
Robert V. Silva, President
and Chief Executive Officer
and
Date: May 15, 1997 By: /s/ Andrew J. Mayer, Jr.
Andrew J. Mayer, Jr.
Vice President-Finance, Chief
Financial Officer and Secretary
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
EXHIBIT INDEX
EXHIBIT PAGE
NO. NO.
11 Computation of Earnings (Loss) Per Common Share 28
27 Financial Data Schedule N/A
TRANSTECH INDUSTRIES, INC.
AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF INCOME (LOSS) PER SHARE
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For the Three Months Ended
March 31,
1997 1996
PRIMARY:
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Weighted average common shares
outstanding 2,829,090 2,829,090
Dilutive effect of common stock
equivalents - -
2,829,090 2,829,090
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM $(.16) $(.19)
EXTRAORDINARY CHARGE - (.18)
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE $(.16) $(.37)
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FULLY DILUTED*
* For the three months ended March 31, 1997 and 1996, fully
diluted earnings per share did not differ significantly from
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