SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2004 Commission File Number 0-4539
TRANS-INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2598139
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1780 Opdyke Court, Auburn Hills, MI 48326
-----------------------------------------
(Address) (Zip Code)
Registrant's Telephone Number, including Area Code (248) 364-0400
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 and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
YES [ ] NO [X]
The number of shares outstanding of registrant's Common stock, par value $.10
per share, at September 30, 2004 was 3,139,737.
TRANS-INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
A. Consolidated Statements of Operations ---
Three months ended September 30, 2004 and 2003.
Nine months ended September 30, 2004 and 2003.
B. Consolidated Statements of Comprehensive Income/(Loss)
Nine months ended September 30, 2004 and 2003.
C. Consolidated Balance Sheets ---
September 30, 2004 and December 31, 2003
D. Consolidated Statements of Cash Flows ---
Nine months ended September 30, 2004 and 2003.
E. Notes to Consolidated Financial Statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
2
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
A.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For 3 Months Ended: For 9 Months Ended:
------------------- -------------------
9/30/04 9/30/03 9/30/04 9/30/03
------------ ------------ ------------ ------------
1. Gross sales less discounts, returns and allowances $ 6,908,580 $ 8,310,848 $ 22,141,046 $ 25,503,607
2. Cost of goods sold (note 2) 5,142,557 7,225,458 18,737,366 19,146,859
------------ ------------ ------------ ------------
3. Gross profit 1,766,023 1,085,390 3,403,680 6,356,748
4. Selling, general and administrative exp. 2,133,229 2,227,645 6,240,547 7,523,631
5. Restructuring costs (note 8) 19 361,124 129,017 633,983
------------ ------------ ------------ ------------
6. Operating income/(loss) (367,225) (1,503,379) (2,965,884) (1,800,866)
7. Other (income)/ expense
Interest expense 123,043 160,692 446,619 492,461
Other income (2,384,522) (3,355) (2,395,733) (5,363)
------------ ------------ ------------ ------------
Total other (income)/expense (2,261,479) 157,337 (1,949,114) 487,098
------------ ------------ ------------ ------------
8. Earnings/(loss) before income taxes 1,894,254 (1,660,716) (1,016,770) (2,287,964)
9. Income tax expense/(benefit) -0- -0- -0- (17,000)
------------ ------------ ------------ ------------
10. Net earnings/(loss) 1,894,254 (1,660,716) (1,016,770) (2,270,964)
11. Preferred dividend (18,750) -0- (43,542) -0-
------------ ------------ ------------ ------------
12. Net earnings/(loss) available to common shareholders $ 1,875,504 $ (1,660,716) $ (1,060,312) $ (2,270,964)
============ ============ ============ ============
13. Earnings/(loss) per share: (note 6)
Basic $ .60 $ (.53) $ (.34) $ (.72)
Diluted $ .50 $ (.53) $ (.34) $ (.72)
============ ============ ============ ============
See Notes to Financial Statements
3
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
B.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
----------- -----------
Net earnings/(loss) $(1,016,770) $(2,270,964)
Other comprehensive loss:
Equity adjustment from foreign
currency translation (5,145) (5,756)
----------- -----------
Comprehensive earnings/(loss) $(1,021,915) $(2,276,720)
=========== ===========
See Notes to Financial Statements
4
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
C. CONSOLIDATED BALANCE SHEETS
9/30/04 12/31/03
(Unaudited) (Audited)
------------ ------------
ASSETS
Current Assets
Cash $ 3,677 $ 166,488
Accounts receivable 6,706,525 7,528,157
Notes receivable 39,250 89,000
Inventories (Note 2) 6,528,693 9,204,145
Prepaid expenses 467,917 236,555
------------ ------------
Total current assets 13,746,062 17,224,345
Property, Plant & Equipment, at Cost
Land 140,089 140,089
Buildings 4,195,398 4,257,569
Machinery & equipment 10,919,515 10,732,305
------------ ------------
15,255,002 15,129,963
Less: accumulated
depreciation (12,003,457) (11,518,659)
------------ ------------
Net plant and equipment 3,251,545 3,611,304
Other Assets
Patents, licenses & trademarks,
net of accumulated amortization 83,024 11,071
Net real estate held for sale -0- 142,428
Goodwill 150,369 150,369
Sundry 510,505 25,000
------------ ------------
Total assets $ 17,741,505 $ 21,164,517
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Notes Payable (Note 5) $ 4,174,762 $ 6,298,288
Current installments
- Long term debt (Note 5) 1,973,610 3,143,195
Accounts payable - trade 3,119,185 3,930,700
Accrued liabilities 1,366,323 2,341,322
------------ ------------
Total current liabilities 10,633,880 15,713,505
Long term debt
Long term debt 1,500,000 -0-
Other non-current liabilities 235,739 296,669
Stockholders' Equity
Preferred stock of $1.00 par value
per share - authorized 500,000 Shares,
212,799 and 19,000 shares issued
at 06/30/04 and 12/31/03 respectfully 212,799 19,000
Common stock of $.10 par value per
share - authorized 10,000,000 shares;
3,139,737 shares issued 313,974 313,974
Additional paid-in capital 7,042,283 5,953,081
Retained earnings (2,289,934) (1,229,621)
Accumulated other comprehensive income 92,764 97,909
------------ ------------
5,371,886 5,154,343
Total liabilities and stockholders
equity $ 17,741,505 $ 21,164,517
============ ============
See Notes to Financial Statements
5
TRANS-INDUSTRIES, INC.
Consolidated Statements of Cash Flows
D. For the Nine Months Ended September 30, 2004 and 2003
2004 2003
---- ----
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings/(loss) $(1,016,770) $(2,270,964)
Adjustments to reconcile net earnings/(loss)
to net cash provided by operations:
Loss on disposal of Vultron International Ltd. Assets -0- 272,859
Depreciation/amortization 623,811 690,655
Deferred income taxes (benefit) -0- 40,000
Inventory write down 2,300,000 1,120,000
(Gain) loss on sale of property and equipment (2,381,272) (4,500)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 871,382 1,546,027
Decrease (increase) in inventory 375,452 755,297
Decrease (increase) in prepaid expense (231,362) 20,708
Increase (decrease) in accounts payable (811,515) 913,235
Increase (decrease) in accrued liabilities (974,999) (368,556)
Increase (decrease) in income taxes -0- (17,000)
Other (557,458) (8,203)
----------- -----------
Net Cash Provided (Used) by Operations (1,802,731) 2,689,558
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (264,713) (459,483)
Proceeds from sale of property and equipment 2,524,361 4,500
----------- -----------
Net Cash Provided (Used) by Investing 2,259,648 (454,983)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase of Huntington term debt 1,966,666 -0-
Net (repayment) of Comerica term debt (2,902,918) (713,252)
Net increase of Huntington credit line 4,174,762 -0-
Net (payment) of Comerica credit line (5,363,385) (1,478,984)
Note Payable 1,500,000 -0-
Net proceeds from issuance of preferred stock 1,283,000 -0-
Dividends (43,542) -0-
----------- -----------
Net Cash Provided (Used) by Financing (614,583) (2,192,236)
Effect of foreign currency exchange rate changes (5,145) (5,756)
----------- -----------
Net decrease in cash (162,811) 36,583
Cash at beginning of year 166,488 24,996
----------- -----------
Cash at end of quarter $ 3,677 $ 61,579
=========== ===========
6
TRANS-INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003
D. (Continued)
2004 2003
----------- -----------
Supplemental Disclosures:
Interest paid $ 408,306 $ 486,934
Income taxes paid $ -0- $ -0-
Supplemental disclosure of non-cash investing activities:
In March 2003, the Company sold certain assets of Vultron International, Ltd. in
exchange for a note receivable of $ 160,000.
See Notes to Financial Statements
7
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information presented as of any date other than December 31,
2003 has been prepared from the Company's books and records without audit.
Financial information as of December 31, 2003 has been derived from the
audited financial statements of the Company. In the opinion of management,
all adjustments consisting of normal recurring adjustments necessary for a
fair presentation of the financial information for the periods indicated,
have been included. For further information regarding the Company's
accounting policies, refer to the consolidated financial statements and
related notes included in the Company's annual report on Form 10-K for the
year ended December 31, 2003.
2. Inventories
The major components of inventories are:
9/30/04 12/31/03
------- --------
Raw Materials $3,535,235 $4,886,286
Work in Process 1,278,953 2,373,247
Finished Goods 1,714,505 1,944,612
---------- ----------
$6,528,693 $9,204,145
========== ==========
Inventories are stated net of reserves, which are recorded as a cost of
goods sold when recorded. At September 30, 2004 and December 31, 2003
reserves were $2,817,230 and $1,106,476 respectively. During the second
quarter of 2004 the Company established a $2.3 million reserve for slow
moving and obsolete inventory. This additional inventory reserve resulted
from several factors that occurred during the second quarter. Late in the
first quarter of 2004 and into the second quarter, the Company initiated
the next phase of its restructuring program beginning with the appointment
of a new President and Chief Operating Officer and the development of
strategic product options. The Company's existing product offerings were
analyzed and resulted in curtailments due to the phase out of some
products by OEM manufacturers. Personnel have been further reduced thereby
reducing product absorption costs. Additionally, the Company has moved to
standardize more of its product in the Informational Systems Business. In
light of a decline in sales during the second quarter and the changed
business direction, it was determined a portion of the inventory would not
be used going forward.
3. Principles of Consolidation
There have been no significant changes in the principles of consolidation
since the Company's most recent audited financial statements.
8
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Significant Accounting Policies
There have been no significant changes in accounting policies since the
Company's most recent audited financial statements.
5. Long-Term Debt
Long-term debt at September 30, 2004 consisted of the following:
Term note, payable in monthly
installments of $16,667 plus
Interest at the bank's prime
lending rate plus 1.75%
(effective rate of 6.50% at
September 30, 2004) with a
balloon payment of $1,000,000
due on July 31, 2009. The note
is secured by substantially
all the assets of the Company. $1,966,667
Subordinated convertible note (Note 9) 1,500,000
Other 242,682
----------
Total 3,709,349
Less current installments (1,973,610)
----------
Long-term debt $1,735,739
==========
Prior to August 18, 2004, the Company had a secured $7,500,000 line of
credit, from Comerica Bank in the form of a demand note, of which
$5,326,358 was utilized at June 30, 2004. Interest was charged at
Comerica's prime lending rate, plus 3.5% and was payable monthly. On
August 18, 2004 the Company closed refinancing with Huntington National
Bank. The Company used the proceeds from the refinancing to repay its
former lender Comerica Bank in full. The new loan agreement with
Huntington National Bank includes a mortgage on its real estate for
$2,000,000. The mortgage is a five year note, amortized over ten years
with monthly payments of $16,667.67 a final balloon payment of $1,000,000
due at maturity. Interest on the mortgage is at 1.75 % (effective rate of
6.50% at September 30, 2004) over the banks prime lending rate.
Additionally, the Company obtained a $6,000,000 line of credit secured by
all of the Company's assets. The credit line is a three-year facility with
an interest rate of 1.25 % over the banks prime lending rate. The Company,
at September 30, 2004, had utilized $4,174,762 of its credit line with
Huntington National Bank. Interest is charged at the bank's prime lending
rate, plus 1.25% (effective rate of 6.00% at September 30, 2004) and is
payable monthly. The Company is or may be in violation of certain
provisions in its credit agreement with Huntington, including covenants
relating to tangible net worth, a debt leverage ratio, and minimum fixed
charge ratio. The Company is seeking waivers from Huntington for
non-compliance with these provisions.
The Company's failure to obtain waivers for non-compliance with the credit
agreement could result in a default and the lender could elect to declare
all amounts outstanding to be immediately due and payable and terminate
all commitments to extend further credit. If we are unable to repay those
amounts, the lender could proceed against the collateral that secures the
indebtedness. If the lender under our current or future indebtedness
accelerates the payment of the indebtedness, we cannot assure that our
assets or cash flow would be sufficient to repay in full our outstanding
indebtedness. As a result of these circumstances, the Company reflected
all of its existing lender debt as current, though the lender had not
accelerated term debt maturity or demanded payment.
6. Earnings (Loss) Per Share
For the nine months ended September 30, 2004, and the three and six months
ended September 30, 2003, all outstanding options and shares of
convertible preferred stock have been excluded from the computation of
diluted earnings (loss) per share as the effect would be anti-dilutive.
The following table is a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computation for the three
months ended September 30, 2004.
9
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings (Loss) Per Share (continued)
THREE MONTHS ENDED 9/30/04
--------------------------
PER SHARE
EARNINGS SHARES AMOUNT
---------- ---------- ----
Basic earnings per share:
Earnings available to common stockholders: $1,875,504 3,139,737 $.60
Effect of dilutive securities:
Convertible preferred stock -- 581,397 --
---------- ---------- ----
Diluted earnings per share:
Earnings available to common stock
holders plus assumed conversion: $1,875,504 3,721,134 $.50
========== ========== ====
7. Segment Information
The Company operates in one market segment, the transportation industry,
with products directed towards customers in the mass transit, highway,
airline and rental car segments. Financial information summarized by
geographic area is as follows:
9/30/04 9/30/03
------------------------- -------------------------
LONG- LONG-
LIVED LIVED
REVENUES ASSETS REVENUES ASSETS
----------- ----------- ----------- -----------
United States $18,463,616 $ 3,895,443 $18,138,567 $ 4,060,295
United Kingdom 44,506 -0- 238,558 -0-
Canada 3,565,059 -0- 7,106,817 -0-
Other 67,865 -0- 19,665 -0-
----------- ----------- ----------- -----------
Total $22,141,046 $ 3,895,443 $25,503,607 $ 4,060,295
=========== =========== =========== ===========
10
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Restructuring Costs
In March of 2003, the Company sold the assets of its foreign subsidiary, Vultron
International, Ltd. to its managing director. As a result, the Company recorded
restructuring charges in the amount of $272,859. Additionally, to address
profitability, in July 2003 the Company initiated a significant restructuring
program at Vultron, Inc., its informational systems business. Costs for the
twelve months ended December 31, 2003, associated with the restructuring are
detailed in the table below. These costs include (1) severance and vacation pay
for employees terminated, (2) consulting and advisor fees incurred associated
with the advice and help in identifying and implementing various cost saving
opportunities, (3) fees for various leases terminated early, and (4) legal fees.
RESTRUCTURING COSTS
TWELVE MONTHS ENDED DECEMBER 31, 2003
Severance and Vacation $195,653
Consulting and Financial Advisors Fees 321,989
Canceled Leases 2,831
Legal Fees 38,530
--------
Subtotal 559,003
Sale of Vultron International 272,859
--------
Total $831,862
========
In addition to the restructuring costs discussed above, the Company,
during the third quarter of 2003 recorded an inventory write down of
$1,120,000 relating principally to product offerings, which were
discontinued in connection with the restructuring of Vultron, Inc. This
amount is included in the cost of goods sold.
Restructuring costs for the first nine months of 2004 were $129,017 for
consulting fees as indicated in the table below.
RESTRUCTURING COSTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
Consulting and Financial Advisors Fees $129,017
--------
Total $129,017
========
The consultant was terminated in June 2004 and the Company expects
restructuring costs for the balance of 2004 to be approximately $125,000.
11
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Sale of Series B Preferred Stock and Warrants
On March 4, 2004, the Company completed the sale of 193,799 shares of
Series B Convertible Preferred Stock ("Series B Stock") and 145,384.84
warrants to purchase common stock for $1,500,000 to the Harry E. Figgie,
Jr. Trust (the "Trust"), a trust controlled by a member of the Company's
Board of Directors. Issuance costs were $217,000. The warrants have an
exercise price of $3 per share. The warrants have been allocated a value
of $195,000, which is the estimated fair value of the warrants on the date
of the sale as determined by the Black-Scholes pricing model. The proceeds
allocated to the preferred stock is $1,305,000. The preferred stock
contains a beneficial conversion feature of $78,721 attributable to the
difference between the ascribed value of the preferred stock and the
market value of the underlying number of common shares into which the
preferred stock may be converted. The value assigned to the beneficial
conversion feature is amortized from the date of issuance to the earliest
conversion date and is treated as a dividend. Because the preferred stock
is convertible at any time after issuance, the entire beneficial
conversion feature was treated as a dividend on the date the preferred
stock was issued.
Dividends
The holder is entitled to receive cumulative quarterly dividends at a rate
per annum of $0.387 per share, commencing on April 1, 2004. The Company at
its option, in no more than eight of the first twelve full quarters, may
elect to pay the accruing dividends in additional shares of Series B Stock
at $7.74 per share or in cash.
Conversion
At the holder's option, each share of Series B Stock is convertible into
three shares of the Company's common stock. At any time after February 27,
2007 and on the business day immediately following the period of 30
consecutive business days on which trades occur during which the market
price of the Company's common stock equals or exceeds $5.16 per share,
each share of Series B Stock will automatically be converted into three
shares of common stock
Redemption
At any time after February 27, 2007, the Company may, at its option,
redeem all, but not less than all of the holder's unconverted shares of
Series B Stock by paying cash equal to the stated value, $7.74 per share,
plus all declared or accumulated but unpaid dividends.
12
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Sale of Series B Preferred Stock and Warrants - Continued
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holder of each share of Series B
Convertible Preferred Stock is entitled to receive, prior to and in preference
to any distributions to the holders of common stock, an amount equal to the
stated value of $7.74 per share, plus unpaid, accrued and accumulated dividends.
Voting rights
The holder has the right to vote with other stockholders of the Company on an
as-converted basis.
Issuance of Subordinated Convertible Note
In connection with the initial closing of the sale of Series B Stock and related
warrants described above, the Company granted an option to the Trust to purchase
between $500,000 and $1,500,000 shares of Series B-1 Stock and related warrants
for $9 per share, including warrants. The option must be approved by the
Company's stockholders pursuant to certain National Association of Securities
Dealers, Inc. ("NASD") rules providing for qualitative listing requirements
applicable to securities traded on the NASDAQ National Market and NASDAQ
SmallCap Market. The Company intends to seek stockholder approval at the
Company's next annual meeting.
Huntington required an additional capital infusion as a condition to the closing
of the refinancing disclosed in Note 5. While the Trust indicated willingness to
provide the new capital, the Trust was unable to exercise the option discussed
above until approved by the Company's stockholders pursuant to NASD rules.
Therefore, the Trust loaned the Company $1,500,000 in return for a subordinated
convertible note. Interest on the subordinated note is at the bank's prime
lending rate plus 1.75% (effective rate of 6.50% at September 30, 2004). The
transaction documents between the Company and the Trust were amended
accordingly. The principal and interest due under the note is convertible into a
number of shares of Series B-1 Stock calculated at a price of $9 per share and a
number of warrants to purchase shares of B-1 Stock equal to 25% of the number of
shares of common stock that the shares of Series B-1 stock are convertible into.
In addition, the exercise price for the warrants is $3 per share. The note is
convertible only if the conversion is approved by the Company's stockholders at
the Company's next annual meeting. The holder of shares of Series B-1 Stock is
entitled to receive quarterly dividends at a rate per annum of $0.45 per share
commencing October 1, 2004. In addition, the shares of Series B-1 Stock have
conversion, redemption, and voting rights identical to those of the shares of
Series B Stock.
13
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Based Compensation
At September 30, the Company has a stock-based employee compensation plan, which
is described more fully in Notes B & I in the Company's Annual Report. The
Company accounts for this plan under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price greater
than or equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Three Months Ended September 30,
--------------------------------
2004 2003
------------- -------------
Net earnings (loss), available to common stockholders $ 1,875,504 $ (1,660,716)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (19,108) (10,195)
------------- -------------
Pro forma net earnings (loss) available to
Common stockholders $ 1,856,396 $ (1,670,911)
============= =============
Earnings (loss) per share:
Basic-as reported $ .60 $ (.53)
Basic-pro forma $ .59 $ (.53)
Diluted-as reported $ .50 $ (.53)
Diluted-pro forma $ .50 $ (.53)
14
E. TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 Stock Based Compensation - Continued
Nine Months Ended September 30,
-------------------------------
2004 2003
-------------- -------------
Net earnings (loss), available to common stockholders $ (1,060,312) $ (2,270,964)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (57,324) (30,585)
------------- -------------
Pro forma net earnings (loss) available to
Common stockholders $ (1,117,636) $ (2,301,549)
------------- -------------
Earnings (loss) per share:
Basic-as reported $ (.34) $ (.72)
Basic-pro forma $ (.36) $ (.73)
Diluted-as reported $ (.34) $ (.72)
Diluted-pro forma $ (.36) $ (.73)
15
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Forward-Looking Statements
This discussion highlights significant factors influencing the financial
condition and results of operations of Trans-Industries, Inc. (the "Company").
It should be read in conjunction with the financial statements and related
notes. Except for statements of historical fact, this discussion includes
certain forward-looking statements based on management's estimate of trends and
economic factors in the markets in which the corporation is active, as well as
the corporation's business plans. We have used words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "plan," "intend," and similar
expressions in this report to identify forward-looking statements. In light of
recent securities law developments, including the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the corporation notes that
such forward-looking statements are subject to risks and uncertainties.
Accordingly, the corporation's actual results may differ from those set forth in
such statements. Significant changes in economic conditions, regulatory or
legislative changes affecting Trans-Industries, Inc., its competitors, or the
markets in which it is active, or changes in other factors may cause future
results to vary from those expected by the Company. The Company believes any
forward-looking statements it has made are based on current management
expectations and they are subject to risks and uncertainties. These risks and
uncertainties include, but are not limited to the following:
- A further decline of economic conditions in general and in the mass
transit industry in particular;
- Changes in customer requirements or reduced demand for the Company's
products and services;
- The inability of the Company to successfully implement its
restructuring program in the informational systems business;
- Competitive factors (including the introduction or enhancement of
competitive products and their successful introduction into the
marketplace);
- Product pricing decreases and component price increases that may
result in materially reduced gross profit margins for the Company's
product;
- The success of management's decision to change the Company's
business direction;
- Unforeseen increases in operating expenses; and
- The inability to attract or retain management, sales, or engineering
talent.
All of the Company's forward-looking statements should be considered in
light of the above factors and all other risks discussed from time to time in
our filings with the Securities and Exchange Commission. The Company does not
undertake to update its forward-looking statements to reflect future events or
circumstances.
16
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Recent Developments:
New Bank Lender
On August 18, 2004, the Company closed refinancing with Huntington National
Bank. The Company used the proceeds from the refinancing to repay its former
lender, Comerica Bank, in full. The new loan agreement with Huntington National
Bank includes a mortgage on its real estate for $2,000,000. The mortgage is a
five year note, amortized over ten years with monthly payments of $16,667 and a
final balloon payment of $1,000,000 due at maturity. Interest on the mortgage is
payable at 1.75 percent over the bank's prime lending rate (effective rate of
6.50% at September 30, 2004). Additionally, the Company obtained a $6,000,000
line of credit secured by all of the Company's assets. The credit line is a
three-year facility with an interest rate of 1.25 percent over the bank's prime
lending rate (effective rate of 6.00% at September 30, 2004).
Sale of Series B Preferred Stock and Warrants
On March 4, 2004, the Company completed the sale of 193,799 shares of Series B
Convertible Preferred Stock ("Series B Stock") and 145,384.84 warrants to
purchase common stock for $1,500,000 to the Harry E. Figgie, Jr. Trust (the
"Trust"), a trust controlled by a member of the Company's Board of Directors.
Issuance costs were $217,000. The warrants have an exercise price of $3 per
share. The warrants have been allocated a value of $195,000, which is the
estimated fair value of the warrants on the date of the sale as determined by
the Black-Scholes pricing model. The proceeds allocated to the preferred stock
is $1,305,000. The preferred stock contains a beneficial conversion feature of
$78,721 attributable to the difference between the ascribed value of the
preferred stock and the market value of the underlying number of common shares
into which the preferred stock may be converted. The value assigned to the
beneficial conversion feature is amortized from the date of issuance to the
earliest conversion date and is treated as a dividend. Because the preferred
stock is convertible at any time after issuance, the entire beneficial
conversion feature was treated as a dividend on the date the preferred stock was
issued.
Dividends
The holder is entitled to receive cumulative quarterly dividends at a rate per
annum of $0.387 per share, commencing on April 1, 2004. The Company at its
option, in no more than eight of the first twelve full quarters, may elect to
pay the accruing dividends in additional shares of Series B Stock at $7.74 per
share or in cash.
17
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Conversion
At the holder's option, each share of Series B Stock is convertible into three
shares of the Company's common stock. At any time after February 27, 2007 and on
the business day immediately following the period of 30 consecutive business
days on which trades occur during which the market price of the Company's common
stock equals or exceeds $5.16 per share, each share of Series B Stock will
automatically be converted into three shares of common stock
Redemption
At any time after February 27, 2007, the Company may, at its option, redeem all,
but not less than all of the holder's unconverted shares of Series B Stock by
paying cash equal to the stated value, $7.74 per share, plus all declared or
accumulated but unpaid dividends.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holder of each share of Series B
Convertible Preferred Stock is entitled to receive, prior to and in preference
to any distributions to the holders of common stock, an amount equal to the
stated value of $7.74 per share, plus unpaid, accrued and accumulated dividends.
Voting rights
The holder has the right to vote with other stockholders of the Company on an
as-converted basis.
Issuance of Subordinated Convertible Note
In connection with the initial closing of the sale of Series B Stock and related
warrants described above, the Company granted an option to the Trust to purchase
between $500,000 and $1,500,000 shares of Series B-1 Stock and related warrants
for $9 per share, including warrants. The option must be approved by the
Company's stockholders pursuant to certain National Association of Securities
Dealers, Inc. ("NASD") rules providing for qualitative listing requirements
applicable to securities traded on the NASDAQ National Market and NASDAQ
SmallCap Market. The Company intends to seek stockholder approval at the
Company's next annual meeting.
18
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Huntington required an additional capital infusion as a condition to the closing
of the refinancing. While the Trust indicated a willingness to provide the new
capital the Trust was unable to exercise the option discussed above until
approved by the Company's stockholders pursuant to NASD rules. Therefore, the
Trust loaned the Company $1,500,000 in return for a subordinated convertible
note. The transaction documents between the Company and the Trust were amended
accordingly. The principal and interest due under the note is convertible into a
number of shares of Series B-1 Stock calculated at a price of $9 per share and a
number of warrants to purchase shares of B-1 Stock equal to 25% of the number of
shares of common stock that the shares of Series B-1 stock are convertible into.
In addition, the exercise price for the warrants is $3 per share. The note is
convertible only if the conversion is approved by the Company's stockholders
pursuant to the Company's next annual meeting. The holder of shares of Series
B-1 Stock is entitled to receive quarterly dividends at a rate per annum of
$0.45 per share commencing October 1, 2004. In addition, the shares of Series
B-1 Stock have conversion, redemption, and voting rights identical to those of
the shares of Series B Stock.
Sale of Rochester Hills Plant
On July 12, 2004, the Company closed on the sale of its Rochester Hills facility
and realized net proceeds of approximately $2.5 million, of which $2.3 million
was used to retire, in full, the term debt then due to Comerica Bank.
Sales and Earnings
Sales were $6,908,580 for the quarter. This represented a decline of 16.9
percent from sales of $8,310,848 for the three months ended September 30, 2003.
This decline in sales was evident in all product areas with significant
decreases in sales of information systems and lighting products. The decrease in
revenues was primarily due to the deferral of capital expenditures by highway
departments and by commercial customers of information systems. Additionally,
shipments of lighting products were adversely affected by a reduced level of bus
production caused by a decrease in public funding for the purchases of buses.
Bus production is expected to remain flat into the first quarter of 2005. These
same factors resulted in a decrease in sales of $3,362,561, or 13.2 percent, to
$22,141,046 for the nine months ended September 30, 2004 from $25,503,607 for
the same nine month period of 2003. Additionally, the market place remains very
price sensitive and has prevented the increasing of sales prices.
A profit of $1,894,254 was realized for the current quarter consisting of a
$2,378,390 gain on the sale of the Rochester Hills facility and a loss from
operations of $484,136. The loss from operations was attributable to the decline
in sales as discussed above. For the nine months ending September 30, 2004, a
loss of $1,016,770 was incurred compared to $2,270,964 for the same period of
last year. The 2004 loss includes $2,300,000 for the establishment of an
inventory reserve.
19
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
The inventory reserve resulted from several factors that occurred during the
second quarter of 2004. Late in the first quarter of 2004 and into the second
quarter, the next phase of the Company's restructuring program was initiated,
beginning with the appointment of a new President and Chief Operating Officer
and the development of strategic product options. The Company's existing product
offerings were analyzed and some have been curtailed due to the phase out of
some products by some OEM manufacturers. Personnel have been further reduced
thereby reducing product absorption costs. Additionally, the Company has moved
to standardize more of its product in the Informational Systems Business. In
light of a decline in sales during the second quarter and the changed business
direction, it was determined a portion of the inventory would not be used going
forward. The Company is continuing its cost reduction program through
organizational changes, improved product offerings, additional personnel
downsizing and improving manufacturing operations through outsourcing and
process improvement. Cost reduction opportunities continued to be emphasized
with formal programs initiated in all cost segments. However, savings from these
programs are not expected to be realized in full until later in the year as
legacy costs in the form of severance payments continued throughout the quarter.
We believe improvement in our system for purchasing materials, particularly in
the digital information systems operation, was evident in the period as enhanced
utilization of the Company's materials requirements production system initiated
last year provided needed information for improved production scheduling against
available inventory. Company management believes the successful implementation
of its cost reduction and restructuring programs is a vital component to
returning the Company to profitability.
For the third quarter of 2004, the gross margin was 25.6 percent of sales
compared to 13.1 percent for the same period a year ago when an inventory
write-down of $1,120,000 was established and recorded as a component of cost of
sales. For the nine month period of 2004, the gross margin was 15.4 percent of
sales compared to 24.9 percent for the first nine months of 2003. This decrease
of 9.5 percent is attributable primarily to the 2004 inventory write-down and
lower sales in 2004 to cover fixed costs. Administrative expenses were reduced
by $94,416 and $1,283,084 for the third quarter of 2004 and the 2004 nine month
period respectively. This is primarily due to staff reductions.
Interest
Interest expense amounted to approximately $123,000 and $161,000 for the third
quarter of 2004 and 2003, respectively. Interest expense amounted to
approximately $447,000 and $492,000 for the nine months ended September 30, 2004
and 2003, respectively. The decreases of $38,000 and $46,000, respectively, were
the result of lower debt levels in 2004.
20
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Liquidity and Capital Resources
For the nine-month period ended September 30, 2004, the Company used $1,802,731
from operations. This was a result of the Company making substantial payments to
many of its vendors in order to bring its accounts more current. In March of
2004, the Company completed the private placement of $1.5 million of Series B
Stock and warrants and used the proceeds towards reducing term debt and trade
payables. In July 2004, the Company closed on the sale of its Rochester Hills
facility and realized net proceeds of approximately $2.5 million, of which $2.3
million was used to retire, in full, the term debt due Comerica Bank. On August
18, 2004, the Company closed a refinancing with Huntington National Bank. The
Company used the proceeds from the refinancing to repay its former lender,
Comerica Bank, in full. The new loan agreement with Huntington National Bank
includes a mortgage on its real estate for $2,000,000. The mortgage is a five
year note, amortized over ten years with monthly payments of $16,667 and a final
balloon payment of $1,000,000 due at maturity. Interest on the mortgage is
payable at 1.75 percent over the bank's prime lending rate. The Company also
obtained a $6,000,000 line of credit secured by all of the Company's assets. The
credit line is a three-year facility with an interest rate of 1.25 percent over
the bank's prime lending rate. The Company is or may be in violation of certain
provisions in its credit agreement with Huntington, including covenants relating
to tangible net worth, a debt leverage ratio, and minimum fixed charge ratio.
The Company is seeking waivers from Huntington for non-compliance with these
provisions.
The Company's failure to obtain waivers for non-compliance with the credit
agreement could result in a default and the lender could elect to declare all
amounts outstanding to be immediately due and payable and terminate all
commitments to extend further credit. If we are unable to repay those amounts,
the lender could proceed against the collateral that secures the indebtedness.
If the lender under our current or future indebtedness accelerates the payment
of the indebtedness, we cannot assure that our assets or cash flow would be
sufficient to repay in full our outstanding indebtedness.
In connection with the initial closing of the sale of Series B Stock and related
warrants described above, the Company granted an option to the Trust to
purchase between $500,000 and $1,500,000 shares of Series B-1 Stock and related
warrants for $9 per share, including warrants. The option must be approved by
the Company's stockholders pursuant to certain National Association of
Securities Dealers, Inc. ("NASD") rules providing for qualitative listing
requirements applicable to securities traded on the NASDAQ National Market and
NASDAQ SmallCap Market. The Company intends to seek stockholder approval at the
Company's next annual meeting. Huntington required an additional capital
infusion as a condition to the closing of the refinancing. While the Trust
indicated a willingness to provide the new capital the Trust was unable to
exercise the option discussed above until approved by the Company's stockholders
pursuant to NASD rules. Therefore, in August 2004, the Trust loaned the Company
$1,500,000 in return for a subordinated convertible note. The transaction
documents between the Company and the Trust were amended accordingly. The
principal and interest due under the note is convertible into a number of shares
of Series B-1 Stock calculated at a price of $9 per share and a number of
warrants to purchase shares of B-1 Stock equal to 25% of the number of shares of
common stock that the shares of Series B-1 stock are convertible into. In
addition, the exercise price for the warrants is $3 per share. The note is
convertible only if the conversion is approved by the Company's stockholders
pursuant to the Company's next annual meeting. The holder of shares of Series
B-1 Stock is entitled to receive quarterly dividends at a rate per annum of
$0.45 per share commencing October 1, 2004. In addition, the shares of Series
B-1 Stock have conversion, redemption, and voting rights identical to those of
the shares of Series B Stock. For
21
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Nine Months Ended September 30, 2004
Liquidity and Capital Resources (continued)
the balance of 2004, the Company's required working capital is expected to be
met from the cash flow of operations and refinancing with Huntington National
Bank.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and, to a lesser
extent, foreign currency fluctuations. The Company has not entered into interest
rate transactions for speculative or other purposes. The primary interest rate
risk exposure has resulted from floating rate debt related to the revolving loan
facility and new mortgage loan and would be immaterial to the results from
operations if rates were to increase 1% from September 30, 2004 rates. The
Company does not hedge its exposure to floating interest rate risk. Foreign
currency exposures were immaterial as of September 30, 2004.
Item 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation as of September 30, 2004, that the Company's disclosure
controls and procedures were not effective during the quarter-ended September
30, 2004. This determination was made because of our Chief Executive Officer and
Chief Financial Officer's belief that the Company's resources were insufficient
to address its financial reporting requirements in a timely fashion during the
quarter-ended September 30, 2004. In particular, the Company has suffered from
insufficient personnel resources. Additionally, the Company has struggled with
complying with the increased reporting requirements that have resulted from the
Sarbanes-Oxley Act and new National Association of Security Dealers rules.
The Company is continuing to evaluate its resources for addressing its financial
reporting and making appropriate changes to provide sufficient resources and
time to prepare and file periodic reports within the time periods specified in
the SEC's rules and regulations and provide for reviews by management, the Audit
Committee and the Board of Directors. Our Chief Executive Officer and Chief
Financial Officer are, in connection with the evaluation, reviewing our
personnel, resources and disclosure controls and procedures. The evaluation is
intended to lead to changes that will ensure that our disclosure controls are
effective at a reasonable assurance level. Specifically, the evaluation is aimed
at ensuring that our disclosure controls are effective
22
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
for gathering, analyzing and disclosing in a timely manner the information we
are required to disclose in our reports filed under the Securities Exchange Act
of 1934.
As a part of the evaluation, the Company has concluded that it expects that
Company personnel will have additional time to devote to financial reporting in
the fourth quarter of 2004. Furthermore, in November 2004 an employee was added
to the Company's staff responsible for compliance with reporting obligations.
Accordingly, the Company expects that its disclosure controls and procedures
will be fully effective during the fourth quarter of 2004 or soon thereafter.
(b) CHANGES IN INTERNAL CONTROLS.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Credit and Security Agreement dated August 18,2004 between
Trans Industries, Inc., Transign, Inc., Transmatic, Inc.,
Vultron, Inc., and The Lobb Company, and the Huntington
National Bank.
31.1 Certification of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the CEO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the CFO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
On August 26, 2004 the Company filed a current report on Form 8-K
regarding its second quarter financial results.
24
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS-INDUSTRIES, INC.
Date: November 15, 2004 /s/ Kai Kosanke
--------------------------
Kai Kosanke, Treasurer
and Chief Financial Officer
Date: November 15, 2004 /s/ Keith LaCombe
-----------------------
Keith LaCombe
Assistant Treasurer
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Credit and Security Agreement dated August 18,2004 between
Trans Industries, Inc., Transign, Inc., Transmatic, Inc.,
Vultron, Inc., and The Lobb Company, and the Huntington
National Bank.
31.1 Certification of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the CEO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the CFO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.