<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 June 30, 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 August 4, 1998.
<PAGE> 2
Part I. Contents of Consolidated Financial Information:
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
<PAGE> 3
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,294 $ 2,869
Receivables:
Trade receivables, net
of allowance of
$53 and $92, respectively 1,697 737
Other, including interest 316 50
-------- ------------
2,013 787
-------- ------------
Current portion of interest-only
strip receivable 498 552
Loans held for sale 16,148 --
Wholesale inventory, net of
valuation allowance of
$775 and $905, respectively 3,335 4,193
Other 371 208
-------- ------------
Total current assets 23,659 8,609
-------- ------------
Property, plant and equipment 3,608 3,415
Accumulated depreciation (1,614) (1,554)
-------- ------------
1,994 1,861
-------- ------------
Long-term portion of interest-only
strip receivable 2,116 2,362
Other assets 276 429
-------- ------------
Total assets $ 28,045 $ 13,261
======== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-1-
<PAGE> 4
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND June 30, December 31,
SHAREHOLDERS' EQUITY 1998 1997
--------- ------------
<S> <C> <C>
Current liabilities:
Notes payable $ 2,050 $ 1,925
Loans sold under agreements to repurchase 15,724 --
Current maturities of long-term debt 667 762
Accounts payable 127 350
Accrued expenses 536 327
-------- ------------
Total current liabilities 19,104 3,364
Long-term debt, less current
maturities 2,657 2,813
Deferred liabilities 105 110
-------- ------------
Total liabilities 21,866 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 (5,298) (4,401)
-------- ------------
6,270 7,174
Less treasury stock,
27,786 and 61,386 shares,
respectively, at cost (91) (200)
-------- ------------
Total shareholders' equity 6,179 6,974
-------- ------------
Total liabilities
and shareholders' equity $ 28,045 $ 13,261
======== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
<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 June 30,
1998 1997
-------- --------
<S> <C> <C>
Financial services:
Sale of securities $ 64,947 --
Cost of securities sold 64,141 --
-------- --------
Gain on sale of securities 806 --
Commissions and fees 464 --
Interest income 770 --
Interest expense (428) --
-------- --------
Gross profit 1,612 --
-------- --------
Wholesale distribution:
Revenue 1,742 $ 2,532
Cost of goods sold 1,178 2,055
-------- --------
Gross profit 564 477
-------- --------
Selling, general and administrative expenses 1,678 1,012
-------- --------
Operating profit (loss) 498 (535)
-------- --------
Other income (expense):
Interest income 7 10
Interest expense (87) (146)
Other, net 35 (495)
-------- --------
(45) (631)
-------- --------
Profit (loss) from continuing operations
before provision for income taxes 453 (1,166)
Provision for state income taxes 1 2
-------- --------
Profit (loss) from continuing operations 452 (1,168)
Income from discontinued operation -- 280
-------- --------
Net income (loss) $ 452 $ (888)
======== ========
Weighted average number of common and
common equivalent shares outstanding 2,790 2,762
======== ========
Basic and diluted earnings (loss) per common share:
From continuing operations $ 0.16 $ (0.42)
From discontinued operation -- 0.10
-------- --------
Net income (loss) $ .16 $ (0.32)
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE> 6
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Financial services:
Sale of securities $ 64,947 $ --
Cost of securities sold 64,141 --
-------- --------
Gain on sale of securities 806 --
Commissions and fees 472 --
Interest income 904 --
Interest expense - loans (502) --
-------- --------
Gross profit 1,680 --
-------- --------
Wholesale distribution:
Revenue 3,464 4,633
Cost of goods sold 2,437 3,401
-------- --------
Gross profit 1,027 1,232
-------- --------
Selling, general and administrative expenses 3,487 2,097
-------- --------
Operating loss (780) (865)
-------- --------
Other income (expense):
Interest income 24 18
Interest expense (202) (269)
Other, net 62 (465)
-------- --------
(116) (716)
-------- --------
Loss from continuing operations before
provision for income taxes (896) (1,581)
Provision for state income taxes 1 3
-------- --------
Loss from continuing operations (897) (1,584)
Income from discontinued operation -- 463
-------- --------
Net loss $ (897) $ (1,121)
======== ========
Weighted average number of common and
common equivalent shares outstanding 2,790 2,762
======== ========
Basic and diluted earnings loss per common:
From continuing operations $ (0.32) $ (0.58)
From discontinued operation -- 0.17
-------- --------
Net loss $ (0.32) $ (0.41)
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
<PAGE> 7
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED June 30, 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 (897) (897)
Exercise of
stock option (7) 109 102
----------- ----------- ----------- ----------- ----------- -----------
Balances,
June 30, 1998 2,842 $ 2,842 $ 8,726 $ (5,298) $ (91) $ 6,179
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<PAGE> 8
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided (used) by operating activities:
Continuing operations, net $ (17,163) $ (1,866)
Discontinued operation, net -- 197
--------- ---------
Net cash used by operating activities $ (17,163) (1,669)
--------- ---------
Cash flows of investing activities:
Additions to property, plant and
equipment (277) (96)
Proceeds from sale of assets 8 11
Collections of interest-only
strip receivable 299 --
--------- ---------
Net cash provided (used) by continuing
Operations 30 (85)
Net cash used by discontinued operation -- (196)
--------- ---------
Net cash provided (used) by investing
activities 30 (281)
--------- ---------
Cash flows of financing activities:
Net borrowings of notes payable debt 15,850 1,765
Long-term debt paid (394) (67)
Proceeds from exercise of stock options 102 1
--------- ---------
Net cash provided by continuing
operations 15,558 1,699
Net cash used by discontinued operation -- (62)
--------- ---------
Net cash provided by financing
activities 15,558 1,637
--------- ---------
Net decrease in cash and cash equivalents (1,575) (313)
Cash and cash equivalents at beginning
of period 2,869 778
--------- ---------
Cash and cash equivalents at end
of period $ 1,294 $ 465
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-6-
<PAGE> 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, 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. Loans held for sale consist primarily of FHA Title I
Home Improvement loans and 125 Loan To Value loans, a type of non-prime
conventional loan.
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". No
mortgage-backed securities were outstanding at June 30, 1998 and December 31,
1997.
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 trading securities. The Company
periodically reviews the fair value of the interest-only strip receivables.
<PAGE> 10
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.
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 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.
Revenue Recognition
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, accounts
payable, accrued expenses and debt. All financial instruments except the
interest-only strip receivable are accounted for on a historical cost basis,
which approximates fair value at June 30, 1998 and December 31, 1997. At June
30, 1998 and December 31, 1997 the amortized cost of the interest-only strip
receivable approximates fair value.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of", 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 six month period ended June 30, 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> 11
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 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.
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.
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
<PAGE> 12
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
Note 3 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 repurchase
said loans and securities from the Bank at any time prior to January 30, 1999,
upon five 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 repurchase 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 June 30, 1998,
the Bank was holding approximately $15.7 million (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 4 Agreements With Related Parties
On September 15, 1997, NationsBank of Texas, N.A. ("NationsBank"),
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 NationsBank 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 NationsBank'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. The
highest balance outstanding under this Line of Credit during the six month
period ended June 30, 1998 was approximately $4.0 million and as of June 30,
1998, there was no balance outstanding.
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. These securities
were sold during the quarter ended June 30, 1998 resulting in a gain to Paladin,
and the transaction had no consequence or benefit to the Chairman.
<PAGE> 13
Note 5 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 6 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 loss on the sale of $457,000. During the three month and six
month periods ended June 30, 1997 revenue from Meyer Machine Company and its
subsidiaries was $2,422,000 and $5,348,000, respectively.
Note 7 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. 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> 14
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 six month periods ended June
30, 1998 as compared to the same periods ended June 30, 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 June 30, 1998 AND June 30, 1997
The Company reported a net profit for the three months ended June 30,
1998 of $452,000 on revenue, including proceeds from sale of securities and
loans, of $67,923,000 as compared to a loss of $888,000 on revenue of $2,532,000
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
6).
In early September, 1997 the Company completed the organization of and
commenced the operations of three new subsidiaries that are engaged in a broad
range of merchant and investment banking services and consumer finance (the
financial services segment). See note 7 for a description of these businesses.
REVENUE
Consolidated revenue, including proceeds from sale of securities and
loans, from continuing operations increased $65,391,000 to $67,923,000 for the
second quarter of 1998 as compared to revenue of $2,532,000 for the second
quarter of 1997. The increase in revenue is primarily due to the purchase and
sale of financial instruments by the financial services segment and reflects the
shift of the Company from a manufacturing company to primarily a financial
services company (see note 7). Revenue at the wholesale distribution segment
declined $790,000 to $1,742,000 due to a decline in the booking of orders that
occurred during the 1997 booking season, such decline continuing a pattern that
began in 1993.
GROSS PROFIT
Consolidated gross profit from continuing operations increased
$1,699,000 to $2,176,000 in the second quarter of 1998 when compared to $477,000
for the same period in 1997.
The gross profit at the financial services segment during the second
quarter of 1998 was $1,612,000. The financial services segment began operations
in the fourth quarter of 1997 (see note 7), therefore no gross profit existed
during the second quarter of 1997.
At the wholesale distribution segment, gross profit increased $87,000
to $564,000 (32.4% of sales) as compared to $477,000 (18.8% of sales) for the
same quarter of 1997. During the second quarter of 1997 the wholesale
distribution segment recorded a $429,000 provision associated with the
segments's decision to rapidly reduce inventory levels primarily through
<PAGE> 15
incentive discounts on certain items. The recording of this provision is the
primary reason gross profit during the second quarter of 1997 at the wholesale
distribution segment was abnormally low. Excluding this provision gross profit
during the second quarter of 1997 would have been $906,000 (35.8% of sales),
and using this adjusted amount, gross profit actually declined $342,000 during
the second quarter of 1998 as compared to the same period in 1997. This decline
was primarily due to the decline in revenue discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
$666,000 during the second quarter of 1998 when compared to the second quarter
of 1997. The increase is primarily the result of the selling, general and
administrative expenses of the financial services segment ($824,000). This was
partially offset by a $222,000 decrease at the wholesale distribution segment.
The reduction at the wholesale distribution segment was primarily due to lower
wages ($79,000), lower sales commissions ($58,000), lower travel expenses
($37,000) and a general reduction in administrative expenses ($39,000).
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, decreased $586,000 to
$45,000 during the second quarter of 1998 when compared to the same period in
1997, primarily due to a reduction in interest expense at the wholesale
distribution segment ($51,000) resulting from a lower level of borrowings under
its Line of Credit as well as the 1997 quarter including one time charges of (1)
$235,000 of expenses related to a proxy contest and (2) $282,000 in severance
provisions pursuant to an employment agreement with the Company's former chief
executive officer.
<PAGE> 16
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
COMPARISONS OF THE RESULTS OF OPERATIONS FOR THE SIX
MONTHS ENDED June 30, 1998 AND June 30, 1997
The Company reported a net loss for the six month period ended June 30,
1998 of $897,000 on revenue, including proceeds from sale of securities and
loans, of $69,787,000 as compared to a loss of $1,121,000 on revenue of
$4,633,000 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
6).
In early September, 1997 the Company completed the organization of and
commenced the operations of three new subsidiaries that are engaged in a broad
range of merchant and investment banking services and consumer finance (the
financial services segment). See note 7 for a description of these businesses.
REVENUE
Consolidated revenue, including proceeds from sale of securities and
loans, from continuing operations increased $65,154,000 to $69,787,000 for the
six month period ended June 30, 1998 as compared to revenue of $4,633,000 for
the same period in 1997. The increase in revenue is primarily due to the
purchase and sale of financial instruments by the financial services segment and
reflects the shift of the company from a manufacturing company to primarily a
financial services company (see note 7). Revenue at the wholesale distribution
segment declined $1,169,000 to $3,464,000 due to a decline in the booking of
orders that occurred during the 1997 booking season, such decline continuing a
pattern that began in 1993.
GROSS PROFIT
Consolidated gross profit from continuing operations increased
$1,475,000 to $2,707,000 for the six month period ended June 30, 1998 when
compared to $1,232,000 for the same period in 1997.
The gross profit at the financial services segment during the first six
months of 1998 was $1,680,000. The financial services segment began operations
in the fourth quarter of 1997 (see note 7), therefore no gross profit existed
during the first six months of 1997.
At the wholesale distribution segment, gross profit decreased $205,000
to $1,027,000 (29.6% of sales) during the first six months of 1998 as compared
to $1,232,000 (26.6% of sales) for the same period in 1997. During the first six
months of 1997 the wholesale distribution segment recorded a $429,000 provision
associated with the segments' decision to rapidly reduce inventory levels
primarily through incentive discounts on certain items. The recording of this
provision is the primary reason gross profit during the second quarter of 1997
at the wholesale distribution segment was abnormally low. Excluding this
provision gross profit during the first six months of 1997 would have been
$1,661,000 (35.9% of sales), and using this adjusted amount, gross profit
actually declined $634,000 during the first six months of 1998 as compared to
the same period in 1997. This decline was due to the decline in revenue
discussed above and a decline in gross profit margin from 35.9% in 1997 to 29.6%
in 1998, due to a high level of sales of discontinued inventory items at
discounted sales prices.
<PAGE> 17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
$1,390,000 during the six month period ended June 30, 1998 when compared to the
same period in 1997. The increase is primarily the result of the selling,
general and administrative expenses of the financial services segment
($1,810,000). This was partially offset by a $367,000 decrease at the wholesale
distribution segment and a $58,000 decrease at the parent company. The reduction
at the wholesale distribution segment was primarily due to lower wages
($157,000), lower sales commissions ($106,000), lower travel expenses ($53,000)
and a general reduction in administrative expenses ($56,000). The decrease at
the parent company was primarily due to lower salaries and wages ($61,000).
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, decreased $600,000 to
$116,000 during the six month period ended June 30, 1998 when compared to the
same period in 1997, primarily due to a reduction in interest expense at the
wholesale distribution segment ($83,000) resulting from a lower level of
borrowings under its Line of Credit as well as the 1997 period including one
time charges of (1) $235,000 of expenses related to a proxy contest and (2)
$282,000 in severance provisions pursuant to an employment agreement with the
Company's former chief executive officer.
<PAGE> 18
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. 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had working capital of $4.6 million and a
current ratio of 1.2 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 six months ended
June 30, 1998 decreased $1.6 million. The decline in the working capital 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 decline in working capital and cash
is primarily the result of investment in the above mentioned mortgage related
securities and the loss reported during the first six months of 1998.
At June 30, 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 June 30, 1998, Allen-Lewis had approximately $2.1 million outstanding from
this Line of Credit and had approximately $394,000 available for borrowing.
On September 15, 1997, NationsBank of Texas, N.A. ("NationsBank"),
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 NationsBank 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 NationsBank'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. The
highest balance outstanding under this Line of Credit during the six month
period ended June 30, 1998 was approximately $4.0 million and as of June 30,
1998, there was no balance outstanding.
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
<PAGE> 19
by Paladin and Paladin has the absolute and unconditional obligation to
repurchase said loans and securities from the Bank at any time prior to January
30, 1999, upon five 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 repurchase 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 June 30, 1998, the Bank was holding approximately $15.7 million (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> 20
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits:
11 The computation of diluted earnings (loss) per share
would be the same as basic earnings (loss) 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 June 30, 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 second quarter of 1998
and the Form 8-K filed subsequently:
Date of Earliest Event
Reported on Form 8-K Description
(None)
<PAGE> 21
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,
Co-Chief Executive Officer and
Principal Financial Officer
Date: August 5, 1998
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NO.
- -------
11 The computation of diluted earnings (loss) per share would be
the same as basic earnings (loss) 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 June 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,294
<SECURITIES> 16,148
<RECEIVABLES> 2,066
<ALLOWANCES> (53)
<INVENTORY> 3,335
<CURRENT-ASSETS> 23,659
<PP&E> 3,608
<DEPRECIATION> (1,614)
<TOTAL-ASSETS> 28,045
<CURRENT-LIABILITIES> 19,104
<BONDS> 0
0
0
<COMMON> 2,842
<OTHER-SE> 3,337
<TOTAL-LIABILITY-AND-EQUITY> 28,045
<SALES> 3,464
<TOTAL-REVENUES> 69,675
<CGS> 66,968
<TOTAL-COSTS> 66,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 314
<INCOME-PRETAX> (896)
<INCOME-TAX> 1
<INCOME-CONTINUING> (897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
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