<PAGE> 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 March 31, 1998
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.)
504 Lavaca Street, Suite 1004, Austin, TX 78701
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
(512)708-5000
----------------------------------------------------
(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: 2,813,815 shares as
of May 11, 1998.
<PAGE> 2
Part I. Contents of Consolidated Financial Information:
<TABLE>
<S> <C>
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Equity
Condensed Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis
Part II. Other Information
Signatures
</TABLE>
<PAGE> 3
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 528 $ 2,869
Receivables:
Trade receivables, net
of allowance of
$46 and $92, respectively 1,473 737
Other, including interest 604 50
------------ ------------
2,077 787
------------ ------------
Current portion of interest-only
strip receivable 598 552
Loans held for sale 9,165 --
Mortgage-backed securities 57,466 --
Wholesale inventories, net of
valuation allowance of
$800 and $182, respectively 3,482 4,193
Other 476 208
------------ ------------
Total current assets 73,792 8,609
------------ ------------
Property, plant and equipment 3,555 3,415
Accumulated depreciation (1,555) (1,554)
------------ ------------
2,000 1,861
------------ ------------
Long-term portion of interest-only
strip receivable 2,191 2,362
Other assets 281 429
------------ ------------
Total assets $ 78,264 $ 13,261
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND March 31, December 31,
SHAREHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Notes payable $ 16,158 $ 1,925
Securities and loans sold under
agreements to repurchase 52,009 --
Current maturities of
long-term debt 804 762
Accounts payable 244 350
Accrued expenses 467 327
------------ ------------
Total current liabilities 69,682 3,364
Long-term debt, less current
maturities 2,714 2,813
Deferred liabilities 141 110
------------ ------------
Total liabilities 72,537 6,287
------------ ------------
Commitments and contingencies
Shareholders' 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 8,726 8,733
Accumulated deficit (5,750) (4,401)
------------ ------------
5,818 7,174
Less treasury stock,
27,786 and 61,386 shares,
respectively, at cost (91) (200)
------------ ------------
Total shareholders'
equity 5,727 6,974
------------ ------------
Total liabilities
and shareholders'
equity $ 78,264 $ 13,261
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 5
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998 1997
---------- ----------
<S> <C> <C>
Wholesale distribution:
Revenue $ 1,723 $ 2,101
Cost of goods sold 1,259 1,346
---------- ----------
Gross profit on wholesale distribution 464 755
---------- ----------
Financial services:
Gain on sale of securities -- --
Commissions and fees 8 --
Interest income - loans and securities 139 --
Interest expense - loans and securities (74) --
---------- ----------
73 --
---------- ----------
Selling, general and administrative
expenses 1,809 1,086
---------- ----------
Operating loss (1,272) (331)
---------- ----------
Other income (expense):
Interest income 13 7
Interest expense (116) (122)
Other, net 27 30
---------- ----------
(76) (85)
---------- ----------
Loss from continuing operations before
provision for income taxes (1,348) (416)
Provision for state income taxes 1 1
---------- ----------
Loss from continuing operations (1,349) (417)
Income from discontinued operation -- 184
---------- ----------
Net loss $ (1,349) $ (233)
========== ==========
Weighted average number of common
shares outstanding 2,777 2,762
========== ==========
Basic and diluted earnings (loss) per
common share:
From continuing operations $ (0.49) $ (0.15)
From discontinued operation -- 0.07
---------- ----------
Net loss $ (0.49) $ (0.08)
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Par Value Additional
Number of of Common Paid-in (Accumulated Treasury
Shares Shares Capital Deficit) Stock Total
---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1998 2,842 $ 2,842 $ 8,733 $ (4,401) $ 200 $ 6,974
Net loss (1,349) (1,349)
Exercise of
stock option (7) (109) 102
---------- ---------- ---------- ------------ ---------- ----------
Balances,
March 31, 1988 2,842 $ 2,842 $ 8,726 $ (5,750) $ 91 $ 5,727
---------- ---------- ---------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 7
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
Net cash provided (used) by operating activities:
Continuing operations, net $ (68,405) $ (1,193)
Discontinued operation, net -- 168
------------ ------------
Net cash used by operating activities (68,405) (1,025)
------------ ------------
Cash flows from investing activities:
Additions to property, plant and
equipment (217) (88)
Proceeds from sale of assets 10 10
Collections of interest-only
strip receivable 124 --
------------ ------------
Net cash used by continuing operations (83) (78)
Net cash used by discontinued operation -- (26)
------------ ------------
Net cash used by investing activities (83) (104)
------------ ------------
Cash flows from financing activities:
Net borrowings of notes payable 66,242 1,197
Long-term debt paid (197) (41)
Proceeds from exercise of stock options 102 1
------------ ------------
Net cash provided by continuing
operations 66,147 1,157
Net cash used by discontinued operation -- (52)
------------ ------------
Net cash provided by financing
activities 66,147 1,105
------------ ------------
Net decrease in cash and cash equivalents (2,341) (24)
Cash and cash equivalents at beginning
of period 2,869 778
------------ ------------
Cash and cash equivalents at end
of period $ 528 $ 754
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 8
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, 1997.
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.
Inventories
Wholesale inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
Advertising
Advertising costs are expensed during the year in which they are
incurred.
Loans held for Sale
Loans held for sale are carried at the lower of aggregated cost or
market value. Purchase premiums and discounts are included in the carrying value
of loans held for sale.
Mortgage-Backed Securities
Mortgage-backed securities consist entirely of Federal National
Mortgage Association ("Fannie Mae") mortgage-backed securities that have been
created and issued by Fannie Mae. These mortgage-backed securities represent
interest-bearing, marketable obligations of Fannie Mae, which are carried at
market value and accounted for as trading securities pursuant to Financial
Accounting Standards Board (FASB") Statement of Financial Accounting Standards
("SFAS") No. 65, "Accounting for Certain Mortgage Banking Activities".
Interest-Only Strip Receivables
The Company follows SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings and requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value.
Interest-only strip receivables resulting from the securitization of
mortgage-backed securities are classified as available for sale securities. The
Company periodically reviews the fair value of the interest-only strip
receivables. The difference between the fair value and allocated carrying values
for securities classified as available for sale would be included as a component
of stockholders' equity.
The Company carries its interest-only strip receivables based upon
estimates of future cash flow, which considers assumptions as to the rates of
prepayments, and defaults of the Title I Mortgage Loans underlying the mortgage
backed securities. There is a reasonable possibility that changes in the value
of the interest-only strip receivable could occur in the short term and that
the changes could be material to the Company's financial statements.
<PAGE> 9
For the interest-only strip receivable from mortgage-backed securities
sold during 1997, the estimated cash flow was discounted at 11%. Estimated cash
flows include the effect of variable prepayment rates, which includes defaults,
generally ranging from 20% to 12% depending on the seasoning of loans underlying
the securities. Such prepayment and default assumptions are based on available
market data and information from regulatory agencies.
The Company has estimated the fair value of the interest-only strip
receivable to approximate amortized cost at March 31, 1998.
Revenue Recognition
Gain on sale of securities includes sale of loans and mortgage-backed
securities that are recognized upon the sale of such loans or mortgage-backed
securities to investors. The calculation of the gain on sale of such loans and
mortgage-backed securities is based upon the difference between the net proceeds
from the sale, including the value of an interest-only strip receivable derived
from the excess interest spread on the loans, and the allocated carrying values
of mortgage-backed securities sold and the interest-only receivables.
The fair value of the interest-only strip receivables is calculated
based upon the present value of the estimated future excess interest spread
after considering the effects of estimated prepayments, defaults and future
expenses. The discount rate utilized is based upon assumptions that market
participants would use for similar financial instruments subject to prepayments,
defaults, collateral value and interest rate risks.
The wholesale distribution segment recognizes revenue at the time
products are shipped.
Fair Value of Financial Instruments
The Company's financial instruments as defined by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", include cash and cash
equivalents, trade receivables, interest-only strip receivable, mortgage-backed
securities, loans held for sale, accounts payable, accrued expenses and debt.
Cash and cash equivalents, trade receivables, accounts payable, accrued expenses
and debt are accounted for on a historical cost basis, which approximates fair
value at March 31, 1998 and December 31, 1997.
Impairment of Long-Lived Assets
Effective October 1, 1997 the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of". SFAS No. 121 prescribes that an impairment loss is recognized in the event
that facts and circumstances indicated that the carrying amount of an asset may
not be recoverable, and an estimate of future undiscounted cash flows is less
than the carrying amount of the asset. Impairment is recorded based on an
estimate of future discounted cash flows as identified at the lowest level for
which there are identifiable cash flows for a particular group of assets. No
impairment of long-lived assets was recorded on the financial statements for the
quarter ended March 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
<PAGE> 10
Income Taxes
The Company and its wholly owned domestic subsidiaries join in filing a
consolidated federal income tax return. Separate state income tax returns are
filed by subsidiaries where required. The Company accounts for its income taxes
in accordance with SFAS No. 109, "Accounting for Income Taxes", under which
deferred tax assets and liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or benefits are based on
the changes in the net deferred asset or liability from period to period.
Valuation allowances are established when considered necessary to reduce
deferred tax assets by amounts which are more likely than not to be realized.
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.
Reporting Comprehensive Income
In 1998, the Company adopted 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. Comprehensive loss was the same as net loss reported.
Earnings (Loss) Per Share
In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which
requires the Company to present its basic loss per share and diluted loss per
share, and certain other loss per share disclosures for each year presented.
Basic loss per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the year. The computation of diluted loss per share is similar to the
computation of basic loss per share except that the denominator is increased to
include the number of additional shares that would have been outstanding if the
dilutive potential common shares had been issued. In addition, the numerator is
adjusted for any changes in income or loss that would result from the assumed
conversions of those potential shares.
In 1998 and 1997, the Company had various amounts of common stock
options outstanding during the years which were not included in the diluted loss
per share calculation because the options would have been anti-dilutive.
Note 2 Recent Accounting Pronouncements
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 fiscal years beginning
after December 15, 1997. Management has not yet determined the impact, if any,
that SFAS No. 131 will have on its financial statement disclosures.
<PAGE> 11
TCC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits", which significantly changes
current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions". SFAS No. 132 does
not change the existing measurement or recognition provisions of SFAS Nos. 87,
88 or 106. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the impact, if any, that SFAS No.
132 will have on its financial statement disclosures.
Note 3 Loans Held for Sale
At March 31, 1998, loans held for sale consisted of approximately
$2,102,000 in Title I Loans and $7,063,000 in 125 Loan to Value loans
("LTV's"), a type of non-prime conventional loan.
Note 4 Securities and Loans Sold Under Agreements to Repurchase
Effective January 30, 1998, TCC Industries, Inc. (the "Parent") and
Paladin Financial, Inc. ("Paladin"), a wholly owned financial services
subsidiary of the Company, entered into a Master Purchase Agreement (the
"Agreement") with a bank (the "Bank") whereby Paladin can sell to the Bank up to
$50,000,000 (the "Purchase Amount") of individual FHA Title I Home Improvement
loans, mortgage-backed securities and conventional mortgage loans selected by
Paladin and Paladin has the absolute and unconditional obligation to purchase
said loans and securities from the Bank at any time prior to January 30, 1999,
upon five (5) Days notice from the Bank. On March 12, 1998 the Agreement was
amended to increase the Purchase Amount to $60,000,000. In the event Paladin
does not fulfill its obligation to purchase said loans and securities, the Bank
is authorized to sell the individual loans and securities to third parties and
Paladin is obligated to cover any loss incurred by the Bank on the sale. The
Parent guaranteed Paladin's obligations in the Agreement. As of March 31, 1998,
the Bank was holding approximately $52,009,000 (market value) of such loans and
securities pursuant to the Agreement, which market value was approximately
equivalent to the original cost of such loans and securities.
Note 5 Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
Type of indebtedness Interest rate 1998 1997
- -------------------- ------------- -------- -----------
<S> <C> <C> <C>
Demand line of credit with
a bank, collateralized by
all of the assets of
Allen-Lewis 12% $ 1,856 $ 1,925
Demand line of credit with
a bank Prime less 0.5% 4,050 --
Note payable to related
party 6.1% to 6.8% 10,252 --
-------- ---------
$ 16,158 $ 1,925
======== =========
</TABLE>
At March 31, 1998, 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 March 31, 1998, Allen-Lewis had approximately $1.9 million
outstanding from this line of credit and had less than $1,000 available for
borrowing.
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 segment. In
order to obtain the Line of Credit and to secure a favorable rate of interest,
Walter A. DeRoeck, Chairman 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.
As of March 27, 1998, the Chairman of the Board entered into an
accommodation with Paladin whereby the Chairman acquired on Paladin's behalf
approximately $10.3 million in FNMA mortgage-backed securities. Paladin is
obligated to purchase the securities from the Chairman within 90 days of the
above stated purchase date at the purchase price plus any interest and other
costs incurred. The transaction has no consequence or benefit to the Chairman
and all gains, losses and expenses related to the transaction will pass to
Paladin.
<PAGE> 12
Note 6 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.
The Company's computer software programs utilize four digits to define
the applicable year and therefore the Company believes it has no internal risk
concerning the Year 2000 issue. Any problems the Company's suppliers and
customers may have related to this issue are not expected to affect the Company.
The Company has not incurred any costs related to this issue and is not
expecting to incur any such costs in the future.
The two principal executives of the Company are serving without
compensation until the Company achieves profitability.
Note 7 Discontinued Operation
On September 19, 1997 a wholly-owned subsidiary of the Company, Meyer
Machine Company, completed the sale of all of its assets for a cash
consideration of $6,000,000 plus the assumption of its liabilities by the
purchaser. The purchaser was Meyer Acquisition Corporation, Inc. whose
principal, Eugene Teeter, had been the President of Meyer Machine Company. The
Company reported a net loss on sale of $457,000. During the three months ended
March 31, 1997 revenue from Meyer Machine Company and its subsidiaries was
$2,422,000.
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 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 this new field of endeavor 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.
<PAGE> 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 months ended March 31, 1998 as
compared to the same periods ended March 31, 1997 and to material changes in the
financial condition of the Company occurring since the prior year end of
December 31, 1997. 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, 1997 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 MARCH 31, 1998 AND MARCH 31, 1997
The Company reported a net loss for the three months ended March 31,
1998 of $1,349,000 on revenue of $1,870,000 as compared to a loss of $233,000 on
revenue of $2,101,000 for the same period in 1997.
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 by the purchaser and reported a loss on sale of $457,000 (see Note
7 to the consolidated financial statements).
REVENUE
Consolidated revenue from continuing operations decreased $231,000
(11.0%) to $1,870,000 for the first quarter of 1998 as compared to revenue of
$2,101,000 for the first quarter of 1997. The decline in revenue is primarily
due to a decline in the booking of orders at the wholesale distribution segment
that occurred during the 1997 booking season, such decline continuing a pattern
that began in 1993. This decline was partially offset by $147,000 in revenue
from the financial services segment which initiated operations during the
fourth quarter of 1997.
GROSS PROFIT
Consolidated gross profit from continuing operations declined $291,000
to $464,000 (26.9% of sales) as compared to $755,000 (35.9% of sales) for the
same quarter of 1997. This decline was primarily due to lower revenues discussed
above, and an increase in the sale of slow moving and discontinued items at
discounted prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
$723,000 during the first quarter of 1998 when compared to the first quarter of
1997. The increase is primarily the result of the administrative expenses of the
financial services segment ($985,000) which initiated operations during the
fourth quarter of 1997. This was partially offset by a $144,000 decrease at the
wholesale distribution segment and a $121,000 decrease at the parent company.
The reduction at the wholesale distribution segment was primarily due to lower
wages ($78,000) and lower selling expenses ($56,000). The reduction at the
parent company was primarily due to lower wages ($37,000) and the elimination of
the proxy contest expenses ($80,000) that were incurred during the first quarter
of 1997.
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, decreased $9,000 to
$76,000 during the first quarter of 1998 when compared to the same period in
1997, primarily due to a lower level of borrowing at the wholesale distribution
segment.
<PAGE> 14
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.
During the fourth quarter of 1997 the financial services segment
consummated its first securitization, a $25 million transaction on which it
reported a gain on sale of $504,000. During the first quarter of 1998 Paladin
began purchasing FHA Title I Home Improvement and conventional mortgage loans.
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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had working capital of $4.1 million and a
current ratio of 1.1 to 1. This compares to working capital of $5.2 million and
a current ratio of 2.6 to 1 at December 31, 1997. Cash for the three months
ended March 31, 1998 decreased $2.3 million. The decline in the current ratio is
primarily due to the purchases of large quantities of mortgage related
securities by the financial services segment and the incurring of short-term
obligations related to such purchases (the financial services segment began
operations in the fourth quarter of 1997). The decline in working capital and
cash is primarily the result of the loss reported during the first quarter of
1998 and investment in the above mentioned mortgage related securities.
At March 31, 1998, 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 March 31, 1998, Allen-Lewis had approximately $1.9 million
outstanding from this line of credit and had less than $1,000 available for
borrowing.
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 segment. In
order to obtain the Line of Credit and to secure a favorable rate of interest,
Walter A. DeRoeck, Chairman 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. As of
March 31, 1998, $4,050,000 was outstanding under this Line of Credit.
<PAGE> 15
As of March 27, 1998, the Chairman of the Board entered into an
accommodation with Paladin whereby the Chairman acquired on Paladin's behalf
approximately $10.3 million in FNMA mortgage-backed securities. Paladin is
obligated to purchase the securities from the Chairman within 90 days of the
above stated purchase date at the purchase price plus any interest and other
costs incurred. The transaction has no consequence or benefit to the Chairman
and all gains, losses and expenses related to the transaction will pass to
Paladin.
Effective January 30, 1998, TCC Industries, Inc. (the "Parent") and
Paladin Financial, Inc. (Paladin), a wholly owned financial services subsidiary
of the Company, entered into a Master Purchase Agreement (the "Agreement") with
a bank (the "Bank") whereby the Bank agreed to purchase up to $50,000,000 (the
"Purchase Amount") of individual FHA Title I Home Improvement loans,
mortgage-backed securities and conventional mortgage loans selected by Paladin
and Paladin has the absolute and unconditional obligation to purchase said loans
and securities from the Bank at any time prior to January 30, 1999, upon five
(5) Days notice from the Bank. On March 12, 1998 the Agreement was amended to
increase the Purchase Amount to $60,000,000. In the event Paladin does not
fulfill its obligation to purchase said loans and securities, the Bank is
authorized to sell the individual loans and securities to third parties and
Paladin is obligated to cover any loss incurred by the Bank on the sale. The
Parent guaranteed Paladin's obligations in the Agreement. As of March 31, 1998,
the Bank was holding approximately $52,009,000 (market value) of such loans and
securities pursuant to the Agreement, which market value was approximately
equivalent to the original cost of such loans and securities.
For information on the impact of recent accounting pronouncements see
Note 2 to the consolidated financial statements appearing elsewhere herein.
<PAGE> 16
TCC INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 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
The Annual Meeting of Shareholders of TCC Industries, Inc. was
held on May 4, 1998, for the purpose of (1) electing five
directors to the Board of Directors, (2) approving the
appointment by the Board of Directors of Coopers & Lybrand L.L.P.
as the firm of independent accountants to audit the accounts of
the Company for the fiscal year ended December 31, 1998, (3)
approving the Company's 1998 Non-Employee Directors Stock Option
Plan, having the effect of replacing the 1995 Non-Employee
Directors Stock Option Plan, and (4) approving the Company's 1998
Employee Incentive Stock Option Plan. The Company pursuant to
Section 14(a) of the Securities Exchange Act of 1934 solicited
proxies for the meeting.
The vote on the election of the nominees for director was:
Walter A. DeRoeck Robert Thomajan
For 2,356,494 2,356,494
Withheld 30,136 30,136
Lawrence E. Tilton Robert D. Starnes
For 2,356,494 2,356,134
Withheld 30,136 30,496
Alan M. Sager
For 2,356,494
Withheld 30,136
Richard B. Curran was not up for election and continues to serve
as a director.
The vote on approving the appointment of Coopers & Lybrand L.L.P.
as the firm of independent accountants to audit the accounts of
the Company for the fiscal year ended December 31, 1998 was:
For 2,354,532
Against 22,810
Abstain 9,188
<PAGE> 17
The vote approving the Company's 1998 Non-Employee Directors
Stock Option Plan, having the effect of replacing the 1995
Non-Employee Directors Stock Option Plan was:
For 1,248,854
Against 188,253
Abstain 17,194
The vote approving the Company's 1998 Employees Incentive Stock
Option Plan was:
For 1,256,640
Against 182,187
Abstain 15,474
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits:
11 The computation of diluted earnings per share
would be the same as basic 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 March 31, 1998.
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 first quarter of 1998
and the Form 8-K filed subsequently:
Date of Earliest Event
Reported on Form 8-K Description
March 25, 1998 TCC announced that it was in
preliminary discussions to sell all
of the shares of its subsidiary,
Paladin Financial, Inc., to an
acquisition group consisting of
some of the senior management of
Paladin.
April 1, 1998 TCC announced that it had
terminated discussions with the
acquisition group that had offered
to acquire the business of one of
its subsidiaries, Paladin
Financial, Inc.
<PAGE> 18
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: May 14, 1998
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NO.
- -------
11 The computation of diluted earnings per shares would be the same as
basic 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 March 31, 1998
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