<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 September 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: 2,814,615 shares as
of October 30, 1998.
<PAGE> 2
Part I. Contents of Consolidated Financial Information:
<TABLE>
<CAPTION>
Page Number(s)
--------------
<S> <C> <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>
September 30, December 31,
ASSETS 1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 964 $ 2,869
Receivables:
Trade receivables, net
of allowance of
$48 and $92, respectively 545 737
Other, including interest 368 50
-------- --------
913 787
-------- --------
Current portion of interest-only
strip receivable 481 552
Loans held for sale 26,166 --
Wholesale inventory, net of
valuation allowance of
$1,175 and $905, respectively 2,826 4,193
Other 236 208
-------- --------
Total current assets 31,586 8,609
-------- --------
Property, plant and equipment 3,981 3,415
less accumulated depreciation (1,680) (1,554)
-------- --------
2,301 1,861
-------- --------
Long-term portion of interest-only
strip receivable 1,991 2,362
Other assets 312 429
-------- --------
Total assets $ 36,190 $ 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 September 30, December 31,
SHAREHOLDERS' EQUITY 1998 1997
------------- ------------
<S> <C> <C>
Current liabilities:
Notes payable $ 823 $ 1,925
Loans sold under agreements to repurchase 26,317 --
Current maturities of long-term debt 619 762
Accounts payable 61 350
Accrued expenses 453 327
-------- --------
Total current liabilities 28,273 3,364
Long-term debt, less current
maturities 2,529 2,813
Deferred liabilities 102 110
-------- --------
Total liabilities 30,904 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 8,725 8,733
Accumulated deficit (6,193) (4,401)
-------- --------
5,374 7,174
Less treasury stock,
26,986 and 61,386 shares,
respectively, at cost (88) (200)
-------- --------
Total shareholders'
equity 5,286 6,974
-------- --------
Total liabilities
and shareholders'
equity $ 36,190 $ 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 September 30,
1998 1997
-------- --------
<S> <C> <C>
Financial services:
Sale of securities and loans 12,516 --
Cost of securities and loans sold 12,202 --
-------- --------
Gain on sale of securities 314 --
Commissions and fees 10 --
Interest income 727 --
Interest expense (434) --
-------- --------
Gross profit 617 --
-------- --------
Wholesale distribution:
Revenue $ 988 $ 1,576
Cost of goods sold 783 1,416
-------- --------
Gross profit 205 160
-------- --------
Selling, general and administrative expenses 1,664 1,254
-------- --------
Operating loss (842) (1,094)
-------- --------
Other income (expense):
Interest income 55 16
Interest expense (126) (131)
Other, net 21 16
-------- --------
Net other income (expense) (50) (99)
-------- --------
Loss from continuing operations before
provision for income taxes (893) (1,193)
Provision for state income taxes 1 1
-------- --------
Loss from continuing operations (894) (1,194)
Income from discontinued operation -- 61
Loss from disposal of discontinued operation -- (475)
-------- --------
Net loss $ (894) $ (1,608)
======== ========
Weighted average number of common and
common equivalent shares outstanding 2,803 2,762
======== ========
Basic and diluted earnings (loss) per common share:
From continuing operations $ (0.32) $ (0.43)
From discontinued operation -- 0.02
From disposal of discontinued operation -- (0.17)
-------- --------
Net loss $ (0.32) $ (0.58)
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 6
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1998 1997
-------- --------
<S> <C> <C>
Financial services:
Sale of securities and loans $ 77,463 $ --
Cost of securities and loans sold 76,343 --
-------- --------
Gain on sale of securities 1,120 --
Commissions and fees 482 --
Interest income 1,519 --
Interest expense (824) --
-------- --------
Gross profit 2,297 --
-------- --------
Wholesale distribution:
Revenue 4,453 6,209
Cost of goods sold 3,220 4,817
-------- --------
Gross profit 1,233 1,392
-------- --------
Selling, general and administrative expenses 5,152 3,351
-------- --------
Operating loss (1,622) (1,959)
-------- --------
Other income (expense):
Interest income 192 33
Interest expense (441) (400)
Other, net 81 (448)
-------- --------
(168) (815)
-------- --------
Loss from continuing operations before
provision for income taxes (1,790) (2,774)
Provision for state income taxes 2 4
-------- --------
Loss from continuing operations (1,792) (2,778)
Income from discontinued operation -- 525
Loss from disposal of discontinued operation -- (475)
-------- --------
Net loss $ (1,792) $ (2,728)
======== ========
Weighted average number of common and
common equivalent shares outstanding 2,803 2,762
======== ========
Basic and diluted earnings (loss) per common share:
From continuing operations $ (0.64) $ (1.01)
From discontinued operation -- 0.19
From disposal of discontinued operation -- (0.17)
-------- --------
Net loss $ (0.64) $ (0.99)
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 7
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED September 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 (1,792) (1,792)
Exercise of
stock option (8) 112 104
---------- ---------- ---------- ------------ ---------- ----------
Balances,
September 30, 1998 2,842 $ 2,842 $ 8,725 $ (6,193) $ (88) $ 5,286
---------- ---------- ---------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 8
TCC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1998 1997
-------- --------
<S> <C> <C>
Net cash provided (used) by operating activities:
Continuing operations, net $(26,452) $ (1,783)
Discontinued operation, net -- 441
-------- --------
Net cash used by operating activities $(26,452) (1,342)
-------- --------
Cash flows of investing activities:
Additions to property, plant and
equipment (649) (102)
Proceeds from sale of assets 7 10
Collections of interest-only
strip receivable 442 --
-------- --------
Net cash used by continuing
operations (200) (92)
Proceeds from sale of discontinued
operation -- 5,922
Net cash used by discontinued operation -- (125)
-------- --------
Net cash provided (used) by investing
activities (200) 5,705
-------- --------
Cash flows of financing activities:
Net borrowings on notes payable and
repurchase agreements 25,215 588
Long-term debt paid (572) (93)
Proceeds from exercise of stock options 104 --
-------- --------
Net cash provided by continuing
operations 24,747 495
Net cash used by discontinued operation -- (99)
-------- --------
Net cash provided by financing
activities 24,747 396
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,905) 4,761
Cash and cash equivalents at beginning
of period 2,869 779
-------- --------
Cash and cash equivalents at end
of period $ 964 $ 5,540
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<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 September 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 receivable 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.
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. 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.
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.
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, loans held for sale, loans sold under
agreements to repurchase, 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 September 30, 1998 and December 31, 1997. At
September 30, 1998 and December 31, 1997 the carrying value 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 indicate 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 nine month period ended September 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.
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
<PAGE> 11
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 determined it has two
operating segments and the required disclosures will not have a material effect.
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 determined that SFAS No. 132 will have
no effect on its financial statement disclosures.
<PAGE> 12
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.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Backed Securities", to require that after
an entity that is engaged in mortgage banking activities has securitized
mortgage loans that are held for sale, it must classify the resulting retained
mortgage-backed securities or other retained interests (1) based on its ability
and intent to sell or hold those investments or (2) in cases where the entity
commits to sell a retained mortgage-backed security before or during the
securitization process, they must be classified as trading. Previously, SFAS 65
required that after an entity that is engaged in mortgage banking activities has
securitized a mortgage loan that is held for sale, it must classify the
resulting retained mortgage-backed securities or other retained interests as
trading, regardless of the entity's intent to sell or hold the securities or
retained interests. SFAS 134 conforms (1) the accounting for securities that
have been retained after the securitization of mortgage loans by a mortgage
banking enterprise with (2) the accounting for securities that have been
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. SFAS 134 is effective for the first fiscal quarter beginning
after December 15, 1998, with earlier application encouraged. The Company
intends to early adopt SFAS 134 and, in the opinion of management, its adoption
won't have a material effect on the Company's financial statements and the notes
thereto.
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 "Master 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 Master 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 Master Agreement. As of September 30, 1998, the Bank was holding
approximately $26.3 million (market value) of such loans and securities pursuant
to the Master Agreement, which market value was approximately equivalent to the
original cost of such loans and securities.
Effective October 2, 1998, the Parent and Paladin entered into
a Student Loan Agreement (the "Agreement") with a bank (the "Bank") whereby the
Bank may originate and fund up to $30,000,000 (the "Funding Amount") of
Consolidation Student Loans (the "Loans") referred by Paladin. The Loans are
guaranteed under guarantee programs established under the requirements of the
Higher Education Act of 1965, and Paladin has the absolute and unconditional
obligation to repurchase the Loans from the Bank at any time prior to September
30, 1999, upon three days notice from the Bank. In the event Paladin does not
fulfill its obligation to repurchase the Loans, the Bank is authorized to sell
the Loans
<PAGE> 13
to eligible 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.
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. As of September 15, 1998
the Line Of Credit was renewed for another year and, at the request of the
guarantors, the amount was reduced to $3,000,000. The Line of Credit, which
matures on September 15, 1999, 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 nine month
period ended September 30, 1998 was approximately $4.0 million and as of
September 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.
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 the Company's management, should not result in
any significant liability.
The two principal executives of the Company are serving
without compensation until the Company achieves profitability.
YEAR 2000 COMPLIANCE:
The Company has a program in place designed to bring its
software and hardware systems into Year 2000 compliance in time to minimize any
significant detrimental effects there might be on operations. The program covers
information systems infrastructure, financial and administrative systems,
vendors and customers. The Company is utilizing internal personnel, contract
programmers and vendors to both identify Year 2000 noncompliance problems,
modify code and test the modifications.
The Company's two business segments each have their own
computer equipment and programs.
The financial services segment began business in October 1997
and at that time purchased and installed new computer equipment and software
programs which are Year 2000 compliant. The segment is over 90% complete on
vendor interface and testing, 60% complete with interfaces with legacy systems,
60% complete on contacting business partners and associates and 60% complete
with diagnostic testing. The segment expects to complete all of its work well
before the end of 1999 and expects to incur few additional costs. The segment
expects few, if any, problems due to third party noncompliance.
The wholesale distribution segment is in the process of
upgrading its computer hardware and software at a cost of approximately $60,000.
The upgrades will bring the segment into full Year 2000 compliance. The segment
relies on third party suppliers for all of its inventory, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect the segment's operations. The segment has
initiated efforts to evaluate the status of suppliers' compliance efforts and to
determine alternatives and contingency plan requirements. These activities are
intended to provide a means of managing risk, but cannot eliminate the potential
for disruption due to third party failure. The segment is also dependent upon
its customers for sales and cash flow. Year 2000 interruptions in customer
operations could result in reduced sales, increased inventory or receivable
levels and cash flow reductions. While these events are possible, the segment's
customer base is broad enough to minimize the affects of a single occurrence.
Both customer and supplier contact have just begun and completion of interfacing
and testing is expected to be completed by the middle of 1999.
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 nine
month periods ended September 30, 1997 revenue from Meyer Machine Company and
its subsidiaries was $2.3 million and $7.7 million, 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
<PAGE> 14
Financial, Inc. is primarily engaged in the origination, purchase and
disposition of loans and the related real estate mortgages. Barton Creek Capital
Corporation (Barton Creek) 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 loan programs that are undertaken
by Paladin.
In July, 1998 the Company announced its plan to develop a network of
Small Order Execution System (SOES) cooperative trading operations. A Small
Order Execution System platform enables its customers(who are traders) to access
the stock market through the Electronic Connectivity Network and the Small Order
Execution System, a fully linked and automated computer network run by NASDAQ.
SOES was created to give individuals equal access to the market on par with that
of market makers and allows a small customer order to be input directly into the
NASDAQ system. The Company's first office is being opened in Austin, Texas and
is expected to be operational by November 1998.
Although success in these new fields 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> 15
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of the
results of operations and financial condition of TCC Industries, Inc. and
Subsidiaries (the "Company") during the periods included in the accompanying
consolidated financial statements. The discussion below relates to material
changes in the results of continuing operations for the three and nine month
periods ended September 30, 1998 as compared to the same periods ended September
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 September 30, 1998 AND September 30, 1997
The Company reported a net loss from continuing operations for
the three months ended September 30, 1998 of $894,000 on revenue, including
proceeds from sale of securities, of $14,241,000 as compared to a loss of
$1,608,000 on revenue (no securities were sold) of $1,576,000 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 to consolidated financial statements).
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 to consolidated
financial statements for a description of these businesses.
REVENUE
Consolidated revenue, including proceeds from sale of
securities, from continuing operations increased $12,665,000 to $14,241,000 for
the third quarter of 1998 as compared to revenue (no securities were sold) of
$1,576,000 for the third 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 to consolidated financial
statements). Revenue at the wholesale distribution segment declined $588,000
to $988,000 due to a decline in the booking of orders that occurred during the
1997 booking season (such decline continues a pattern that began in 1993).
GROSS PROFIT
Consolidated gross profit from continuing operations increased
$662,000 to $822,000 in the second quarter of 1998 when compared to $160,000 for
the same period in 1997.
The gross profit at the financial services segment during the
second quarter of 1998 was $617,000. The financial services segment began
operations in the fourth quarter of 1997 (see note 7 to consolidated financial
statements), therefore no gross profit existed during the third quarter of 1997.
At the wholesale distribution segment, gross profit increased
$45,000 to $205,000 (20.7% of sales) during the third quarter of 1998 as
compared to $160,000 (10.1% of sales) for the same quarter of 1997. During the
third quarter of 1997 the wholesale distribution segment recorded a $300,000
provision associated with the segments' decision
<PAGE> 16
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 third 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 $460,000 (29.2% of sales).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses
increased $410,000 during the third quarter of 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 ($808,000) and a
$51,000 increase at the parent company (salaries and wages of $60,000 less a
$9,000 decrease in other general and administrative expenses). These increases
were partially offset by a $473,000 decrease at the wholesale distribution
segment which was primarily due to lower wages ($112,000), lower sales
commissions ($64,000), lower travel expenses ($21,000) and a general reduction
in administrative and selling expenses ($47,000). Also, the 1997 period included
the write-off of $226,000 by the wholesale distribution segment of the remaining
unamortized portion of its goodwill.
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, decreased
$49,000 to $50,000 during the third quarter of 1998 when compared to the same
period in 1997, due to an increase in interest income at the financial services
segment.
<PAGE> 17
TCC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
COMPARISONS OF THE RESULTS OF OPERATIONS FOR THE NINE
MONTHS ENDED September 30, 1998 AND September 30, 1997
The Company reported a net loss for the nine month period
ended September 30, 1998 of $1,792,000 on revenue, including proceeds from sale
of securities, of $83,917,000 as compared to a loss of $2,728,000 on revenue (no
securities were sold) of $6,209,000 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,
from continuing operations increased $77,670,000 to $83,917,000 for the nine
month period ended September 30, 1998 as compared to revenue (no securities were
sold) of $6,209,000 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 $1,756,000 to $4,453,000 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
$2,138,000 to $3,530,000 for the nine month period ended September 30, 1998 when
compared to $1,392,000 for the same period in 1997.
The gross profit at the financial services segment during the first
nine months of 1998 was $2,297,000. The financial services segment began
operations in the fourth quarter of 1997 (see note 7), therefore no gross profit
existed during the first nine months of 1997.
At the wholesale distribution segment, gross profit decreased
$159,000 to $1,233,000 (27.6% of sales) during the first nine months of 1998 as
compared to $1,392,000 (22.4% of sales) for the same period in 1997. During the
first nine months of 1997 the wholesale distribution segment recorded a $729,000
provision associated with the segments' decision to rapidly reduce inventory
levels primarily through incentive on certain items. The recording of this
provision is the primary reason gross profit margin during the first nine months
of 1997 at the wholesale distribution segment was abnormally low. Excluding this
provision gross profit during the first nine months of 1997 would have been
$2,121,000 (34.2% of sales). The reduction in gross profit margin from 34.2% in
1997 to 27.7% in 1998 was due to a high level of sales of discontinued inventory
items at discounted sales prices.
<PAGE> 18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
$1,801,000 during the nine month period ended September 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
($2,616,000) which was offset by a $840,000 decrease at the wholesale
distribution segment. The reduction at the wholesale distribution segment was
primarily due to lower wages ($269,000), lower sales commissions ($170,000),
lower travel expenses ($74,000) and a general reduction in administrative and
selling expenses ($101,000). Also, in 1997, the wholesale distribution segment
wrote-off the remaining $226,000 unamortized portion of its goodwill.
OTHER INCOME (EXPENSE)
Consolidated other expense, net of other income, decreased $647,000
to $168,000 during the nine month period ended September 30, 1998 when compared
to the same period in 1997, primarily due to a reduction in interest expense at
the wholesale distribution segment ($134,000) resulting primarily from a lower
level of borrowings under its Line of Credit, as well as the 1997 period
including one time charges of (1) $241,000 of expenses related to a proxy
contest and (2) $286,000 in severance provisions pursuant to an employment
agreement with the Company's former chief executive officer.
<PAGE> 19
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 (Barton Creek)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. Barton Creek also
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 loan
programs that are undertaken by Paladin.
In July, 1998 the Company announced its plan to develop a network of
Small Order Execution System (SOES) cooperative trading operations. A Small
Order Execution System platform enables its customers(who are traders) to access
the stock market through the Electronic Connectivity Network and the Small Order
Execution System, a fully linked and automated computer network run by NASDAQ.
SOES was created to give individuals equal access to the market on par with that
of market makers and allows a small customer order to be input directly into the
NASDAQ system. The Company's first office is being opened in Austin, Texas and
is expected to be operational by November 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had working capital of $3.3
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
nine months ended September 30, 1998 decreased $1.9 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 incurrence
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 nine months
of 1998.
At September 30, 1998, Allen-Lewis had a demand note credit agreement
with a bank that provided maximum borrowing capabilities of $3.0 million,
subject to a borrowing base calculation, for working capital purposes and
letters of credit. At September 30, 1998, Allen-Lewis had $823,000 outstanding
from this Line of Credit and had $69,000 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 and Robert Thomajan, co-chief
executive officers of the Company, have each personally guaranteed the
performance of the Company's obligations to NationsBank under the Line of
Credit. As of September 15, 1998 the Line Of Credit was renewed for another year
and, at the request of the guarantors, the amount was reduced to $3,000,000. The
Line of Credit, which matures on September 15, 1999, 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
<PAGE> 20
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 nine month period ended
September 30, 1998 was approximately $4.0 million and as of September 30, 1998,
there was no balance outstanding. As of October 31, 1998, the balance
outstanding was $2,250,000.
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 "Master 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 Master 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 Master Agreement. As of September 30, 1998, the Bank was holding
approximately $26.3 million (market value) of such loans and securities pursuant
to the Master Agreement, which market value was approximately equivalent to the
original cost of such loans and securities.
Effective October 2, 1998, the Parent, and Paladin entered
into a Student Loan Agreement (the "Agreement") with a bank (the "Bank") whereby
the Bank may originate and fund up to $30,000,000 (the "Funding Amount") of
Consolidation Student Loans (the "Loans") referred by Paladin. The Loans are
guaranteed under guarantee programs established under the requirements of the
Higher Education Act of 1965, and Paladin has the absolute and unconditional
obligation to repurchase the Loans from the Bank at any time prior to September
30, 1999, upon three days notice from the Bank. In the event Paladin does not
fulfill its obligation to repurchase the Loans, the Bank is authorized to sell
the Loans to eligible 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.
For information on the impact of recent accounting
pronouncements see Note 2 to the consolidated financial statements appearing
elsewhere herein.
<PAGE> 21
TCC INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 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 third quarter of
1998 and the Form 8-K filed subsequently:
Date of Earliest Event
Reported on Form 8-K Description
None.
<PAGE> 22
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: November 12, 1998
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
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 September 30, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 964
<SECURITIES> 28,638
<RECEIVABLES> 961
<ALLOWANCES> (48)
<INVENTORY> 2,826
<CURRENT-ASSETS> 31,586
<PP&E> 3,981
<DEPRECIATION> (1,680)
<TOTAL-ASSETS> 36,190
<CURRENT-LIABILITIES> 28,273
<BONDS> 0
2,842
0
<COMMON> 0
<OTHER-SE> 2,444
<TOTAL-LIABILITY-AND-EQUITY> 36,190
<SALES> 4,453
<TOTAL-REVENUES> 83,917
<CGS> 80,387
<TOTAL-COSTS> 80,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 441
<INCOME-PRETAX> (1,790)
<INCOME-TAX> 2
<INCOME-CONTINUING> (1,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,792)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
