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, 2005 Commission File Number 0-4539
TRANS-INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 13-2598139
incorporation or organization) (I.R.S. Employer Identification No.)
1780 Opdyke Ct. 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
----- -----
Indicate by check mark whether the registrant is a shell company (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, 2005 was 6,198,761.
TRANS-INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 2005
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
A. Consolidated Statements of Operations ---
Three months ended September 30, 2005 and 2004.
Nine months ended September 30, 2005 and 2004.
B. Consolidated Statements of Comprehensive Income/ (Loss)
Nine months ended September 30, 2005 and 2004.
C. Consolidated Balance Sheets ---
September 30, 2005 and December 31, 2004
D. Consolidated Statements of Cash Flows ---
Nine months ended September 30, 2005 and 2004.
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
2
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
A. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For 3 Months Ended: For 9 Months Ended:
------------------------- -------------------------
9/30/05 9/30/04 9/30/05 9/30/04
----------- ----------- ----------- -----------
1 Gross sales less discounts, returns and allowances $ 6,143,112 $ 6,908,580 $17,187,962 $22,141,046
2 Cost of goods sold (note 2) 5,315,116 5,142,557 13,781,575 18,737,366
----------- ----------- ----------- -----------
3 Gross profit 827,996 1,766,023 3,406,387 3,403,680
4 Selling, general and administrative expense 1,972,915 2,133,229 5,624,940 6,240,547
5 Restructuring costs (note 8) -- 19 -- 129,017
----------- ----------- ----------- -----------
6 Operating income (loss) (1,144,919) (367,225) (2,218,553) (2,965,884)
7 Other (income) expense
Interest expense 145,794 123,043 386,364 446,619
Other income 387,283 (2,384,522) 349,223 (2,395,733)
----------- ----------- ----------- -----------
Total other (income) expense 533,077 (2,261,479) 735,587 (1,949,114)
----------- ----------- ----------- -----------
8 Earnings (loss) before income taxes (1,677,996) 1,894,254 (2,954,140) (1,016,770)
9 Income tax expense (benefit) -- -- -- --
----------- ----------- ----------- -----------
10 Net earnings (loss) (1,677,996) 1,894,254 (2,954,140) (1,016,770)
11 Preferred dividend -- (18,750) (708,461) (43,542)
----------- ----------- ----------- -----------
12 Net earnings (loss) available to common shareholders $(1,677,996) $ 1,875,504 $(3,662,601) $(1,060,312)
=========== =========== =========== ===========
13 Earnings (loss) per share: (note 6)
Basic $ (0.43) $ 0.60 $ (0.94) $ (0.34)
Diluted $ (0.43) $ 0.50 $ (0.94) $ (0.34)
=========== =========== =========== ===========
See Notes to Financial Statements
3
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
----------- -----------
Net earnings/(loss) $(2,954,140) $(1,016,770)
Other comprehensive loss:
Equity adjustment from foreign
currency translation (2,952) (5,145)
----------- -----------
Comprehensive earnings/(loss) $(2,957,092) $(1,021,915)
=========== ===========
See Notes to Financial Statements
4
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
C.
(Unaudited) (Audited)
9/30/05 12/31/04
----------- ------------
ASSETS
Current Assets
Cash $ 45,390 $ 20,438
Accounts receivable 4,105,733 5,620,741
Inventories (Note 2) 4,363,876 6,015,202
Prepaid expenses 441,410 406,033
----------- ------------
Total current assets 8,956,409 12,062,414
Property, Plant & Equipment, at Cost
Land 49,973 49,973
Buildings 2,050,251 2,050,251
Machinery & equipment 7,149,912 10,932,246
----------- ------------
9,250,136 13,032,470
Less: accumulated depreciation (7,800,281) (10,992,355)
----------- ------------
Net plant and equipment 1,449,855 2,040,115
Other Assets
Patents, licenses & trademarks,
net of accumulated amortization 76,028 81,275
Net real estate & assets held for sale 1,033,664 1,087,691
Other assets 322,505 457,505
Total assets $11,838,461 $ 15,729,000
=========== ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Notes payable (Note 5) $ 2,825,141 $ 4,350,368
Current Installments
-Long term debt (Note 5) 2,516,667 1,916,667
Accounts payable - trade 2,481,627 3,225,804
Accrued liabilities 2,149,574 2,038,879
----------- ------------
Total current liabilities 9,973,009 11,531,718
Long term debt, less current installments
Promissory note payable -- 1,500,000
Other non-current liabilities 181,415 235,000
Stockholders Equity
Preferred stock, Series A, of $1 par value per share,
100,000 authorized, 19,000 issued and outstanding 12/31/04,
9,766 issued and outstanding 9/30/05 9,766 19,000
Preferred stock, Series B, of $1 par value per share,
215,000 authorized, 193,799 issued and outstanding 193,799 193,799
Preferred stock, Series B-1, of $1 par value per share,
185,000 authorized, 166,667 issued and outstanding 166,667 --
Common stock of $.10 par value per share, 10,000,000
authorized, 3,139,737 issued and outstanding 12/31/04,
6,198,761 issued and outstanding 9/30/05 619,877 313,974
Common stock warrants, 270,385 outstanding 422,000 195,000
Additional paid-in capital 9,261,255 6,847,283
Accumulated deficit (9,081,978) (5,202,377)
Foreign currency translation 92,651 95,603
----------- ------------
1,684,037 2,462,282
Total liabilities and stockholders equity $11,838,461 $ 15,729,000
=========== ============
See Notes to Financial Statements
5
TRANS-INDUSTRIES, INC.
D. Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2005 and 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings/(loss) $(2,954,140) $(1,016,770)
Adjustments to reconcile net earnings/(loss)
To net cash provided by operations:
Depreciation/Amortization 650,551 623,811
Decrease (increase) in accounts receivable 1,515,008 871,382
Decrease (increase) in inventory 1,651,326 375,452
Inventory write down -- 2,300,000
Decrease (increase) in prepaid expenses (35,377) (231,362)
Increase (decrease) in accounts payable (744,177) (811,515)
Increase (decrease) in accrued liabilities 110,695 (974,999)
(Gain) loss on sale of property & equipment (121,581) (2,381,272)
Other 5,245 (557,458)
----------- -----------
Net Cash Provided (Used) by Operations 77,550 (1,802,731)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (59,190) (264,713)
Proceeds from sale of property and equipment 309,508 2,524,361
----------- -----------
Net Cash Provided (Used) by Investing 250,318 2,259,648
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt (53,585) --
Net proceeds from term borrowing 750,000 --
Net repayment of term borrowings (154,029) 1,966,666
Net (repayment) of Comerica term debt -- (3,197,181)
Net proceeds (payment) of credit line (1,521,198) 4,174,762
Net (payment) of Comerica credit line -- (6,298,288)
Note Payable -- 1,500,000
Proceeds from issuance of common stock 2,310,709
Proceeds from issuance of preferred stock -- 1,283,000
Payment of called preferred stock (923,400)
Preferred stock dividends (708,461) (43,542)
----------- -----------
Net Cash Provided (Used) by Financing (299,964) (614,583)
Effect of foreign currency exchange rate changes (2,952) (5,145)
----------- -----------
Net decrease (increase) in cash 24,952 (162,811)
Cash at beginning of year 20,438 166,488
----------- -----------
Cash at end of quarter $ 45,390 $ 3,677
=========== ===========
Supplemental Disclosures:
Interest paid $ 371,031 $ 408,306
Income taxes paid $ -- $ --
See Notes to Financial Statements
6
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information presented as of any date other than December 31,
2004 has been prepared from the Company's books and records without audit.
Financial information as of December 31, 2004 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, 2004.
2. Inventories
The major components of inventories are:
9/30/05 12/31/04
---------- ----------
Raw Materials $2,395,746 $2,719,367
Work in Process 764,841 1,343,767
Finished Goods 1,203,289 1,952,068
---------- ----------
$4,363,876 $6,015,202
========== ==========
Inventories are stated net of reserves, which are recorded as a cost of
sales expense when set up. At 9/30/05 and 12/31/04 reserves were $896,264
and $2,128,000 respectfully.
3. Principles of Consolidation
There have been no significant changes in the principles of consolidation
since the most recent audited financial statements.
4. Significant Accounting Policies
There have been no significant changes in accounting policies since the
most recent audited financial statements.
7
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Note Payable and Long-Term Debt :
Long-term debt consisted of the following:
9/30/05 12/31/04
---------- ----------
Term note payable in monthly installments of $16,667, including
interest at the bank's prime lending rate plus 1.75% (effective
rate of 8.50% at September 30, 2005) with a balloon payment of
$1,000,000 on July 31, 2009. The note is secured by
substantially all the assets of the Company. $1,766,667 1,916,667
Term note due December 31, 2005, secured by substantially all
of the Company's assets, with an interest rate of 1.00% over
the banks' prime lending rate (effective rate of 7.75% at
September 30, 2005) and is payable at maturity. 750,000 --
Subordinated Convertible Note (See note 9) -- 1,500,000
Other long term commitments 181,415 235,000
---------- ----------
Total 2,698,082 3,651,667
Less current maturities 2,516,667 1,916,667
---------- ----------
Long term portion $ 181,415 $1,735,000
========== ==========
The aggregate maturities of long-term debt by year, as stated in the
original agreements, are as follows:
2005 $ 800,000
2006 200,000
2007 200,000
2008 200,000
2009 1,116,667
Thereafter 181,415
----------
$2,698,082
==========
The credit facility 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 and a final balloon
payment of $1,000,000 due at maturity. Interest on the mortgage is at 1.75%
(effective rate of 8.50% at September 30, 2005) over the banks prime
lending rate. Additionally, the credit facility includes 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% (effective rate of 8.0%
at September 30, 2005) over the bank's prime lending rate and is payable
monthly. The Company, at September 30, 2005, had utilized $2,825,141 of its
credit line with Huntington National Bank. The Company is in violation of
an earnings requirement in its credit agreement with Huntington. The
Company is not seeking waivers from Huntington for non-compliance of this
provision.
8
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Note Payable and Long-Term Debt (continued)
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 the Company is unable to repay
those amounts; the lender could proceed against all collateral that secures
the indebtedness. If the lender under the current or future indebtedness
accelerates the payment of the indebtedness, the Company cannot assure that
its assets or cash flow would be sufficient to repay in full its
outstanding indebtedness. As a result of these circumstances, the Company
reflected all of its existing lender debt as current, though the lender has
not accelerated term debt maturity or demanded payment.
6. Earnings (Loss) Per Share
For the three and nine months ended September 30, 2005, and nine months
ended September 30, 2004, 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.
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 -- 531,397 --
---------- --------- ----
Diluted earnings per share:
Earnings available to common stockholders
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:
9/30/05 9/30/04
------------------------ ------------------------
LONG LIVED LONG LIVED
REVENUES ASSETS REVENUES ASSETS
----------- ---------- ----------- ----------
United States $11,835,817 $2,882,052 $18,463,616 $3,895,443
United Kingdom 29,425 -0- 44,506 -0-
Canada 5,289,374 -0- 3,565,059 -0-
Other 33,346 -0- 67,865 -0-
----------- ---------- ----------- ----------
Total $17,187,962 $2,882,052 $22,141,046 $3,895,443
=========== ========== =========== ==========
9
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information (continued)
Revenue by Product Line is as follows:
PRODUCT LINE 9/30/2005 9/30/2004
- ------------ ----------- -----------
Lighting Products $ 8,205,475 $11,391,210
Digital Display Products 4,626,041 6,766,224
Mechanical Display Product 1,423,863 1,148,133
Dust Abatement Equipment 2,802,244 2,524,147
Other 130,069 311,332
----------- -----------
Total $17,187,962 $22,141,046
=========== ===========
8. Restructuring Costs
The Company is continuing its restructuring program initiated in 2003 aimed
at addressing profitability. Restructuring costs for the third quarter of
2004 and first nine months of 2004 amounted to $19 and $129,017
respectively. These costs were for consulting fees. There have been no
restructuring costs incurred in 2005.
9. Preferred and Common Stock:
During June 2001, the Company issued 19,000 shares of 8.25% cumulative
preferred stock (Series A) with a par value of $1 to the Trans-Industries,
Inc. Employees 401(k) and Profit Sharing Plan for $1,900,000. In June 2005,
the Company closed three private sales of its common stock. Total proceeds
amounted to $1,560,709 from the sale of 2,050,418 shares of common stock.
The Company used $637,000 of these proceeds to pay all dividends in arrears
on the Series A preferred stock and $923,400 to retire 9,234 shares of the
Series A preferred stock.
On September 30, 2005, the Company closed a previously disclosed private
placement pursuant to which 1,008,606 shares of Company common stock were
sold to the Clark-Reliance Corporation for $.7436 per share. The Company
received net proceeds from the sale of $750,000. These proceeds were used
for working capital, financing expenses and the reduction of certain term
debt held by the Company's present lender.
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 were allocated a value of
$195,000, 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 Series B Stock were $1,305,000. The Series B 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
10
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Sale of Series B Preferred Stock (continued)
into which the Series B 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 Series B
Stock is convertible at any time after issuance, the entire beneficial
conversion feature was charged directly to retained earnings. Following is
a summary of the Series B Stock features.
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.
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.
11
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Sale of Series B Preferred Stock (continued)
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
Harry E. Figgie, Jr. Trust to purchase between 55,556 and 166,667 shares of
Series B-1 Convertible Preferred Stock ("Series B-1 Stock") and related
warrants for $9 per share, including warrants. The option required approval
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 received stockholder approval at
the Company's January 19, 2005 annual meeting.
Huntington National Bank required an additional capital infusion as a
condition to the closing of the refinancing completed in August 2004. While
the Harry E. Figgie, Jr. Trust indicated willingness to provide the new
capital, exercise of the option discussed above was not possible until
approval by the Company's stockholders pursuant to NASD rules. Therefore,
the Trust loaned the Company $1,500,000 in exchange for a subordinated
convertible note. Interest on the subordinated note was at Huntington
National Bank's prime lending rate plus 1.75% (effective rate of 7.00% at
December 31, 2004). The principal and accrued interest due under the note
was 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. 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. 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.
On January 19, 2005, the convertible promissory note holder converted the
note and received 166,667 shares of Series B-1 Stock and warrants to
purchase 125,000 shares of common stock. The warrants have an exercise
price of $3.00 per share. The warrants have been allocated a value of
$227,000, which is the estimated fair value of the warrants on the date of
the sale as determined by the Black-Scholes pricing model. The preferred
stock contains a beneficial conversion feature of $217,000 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 charged directly to retained earnings. Following is a summary
of the Series B-1 Stock features.
Dividends
The holder is entitled to receive cumulative quarterly dividends at a rate
per annum of $0.45 per share, commencing on April 1, 2005. The Company, at
its option and in no more than eight of the first twelve full quarters, may
elect to pay these dividends in the form of additional shares of Series B-1
Stock at a stated amount of $9.00 per share, or in cash.
12
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Sale of Series B Preferred Stock (continued)
Conversion
At the holder's option, each share of Series B-1 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-1 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 outstanding shares of Series B-1 Stock by paying cash equal to the
stated value of $9.00 per share, plus all declared and 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-1
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 $9.00 per share, plus declared and accumulated but unpaid
dividends.
Voting rights
The holder of Series B-1 Stock has the right to vote with other
stockholders of the Company on an as-converted basis.
10. Stock Based Compensation
At September 30, 2005, 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.
13
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Based Compensation (continued)
Three Months Ended September 30,
--------------------------------
2005 2004
----------- ----------
Net earnings (loss), available to common stockholders $(1,677,996) $1,875,504
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (15,093) (19,108)
----------- ----------
Pro forma net earnings (loss) available to
Common stockholders $(1,693,089) $1,856,396
=========== ==========
Earnings (loss) per share:
Basic-as reported $ (.43) $ .60
Basic-pro forma $ (.43) $ .59
Diluted-as reported $ (.43) $ .50
Diluted-pro forma $ (.43) $ .50
Nine Months Ended September 30,
-------------------------------
2005 2004
----------- -----------
Net earnings (loss), available to common stockholders $(3,662,601) $(1,060,312)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (45,279) (57,324)
----------- -----------
Pro forma net earnings (loss) available to
Common stockholders $(3,707,880) $(1,117,636)
=========== ===========
Earnings (loss) per share:
Basic-as reported $ (.94) $ (.34)
Basic-pro forma $ (.95) $ (.36)
Diluted-as reported $ (.94) $ (.34)
Diluted-pro forma $ (.95) $ (.36)
In December 2004, the FASB issued a revision of FAS 123, "Share-Based Payment"
(FAS 123R). FAS 123R requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost to be
recognized will be measured based on the fair
14
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stock Based Compensation (continued)
value of the equity or liability instruments issued. The scope of FAS 123R
includes a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. FAS 123R replaces FAS 123, "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." As originally issued in 1995, FAS
123 established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance of APB 25 as
long as the footnotes to the financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. At that
time, we determined to continue to apply the guidance of APB 25 and make the
required disclosures in our financial statement footnotes. Accordingly, we will
be required to change our method of accounting for stock compensation costs. We
will be required to adopt FAS 123R as of January 1, 2006. FAS 123R applies only
to those awards granted or which become vested after the required effective
date. We expect that the adoption of FAS 123R in the first quarter of 2006 will
have no material effect on our results of operations, financial condition or
cash flows.
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, 2005
Forward-Looking Statements
This discussion highlights significant factors influencing the financial
condition and results of operations of Trans-Industries, Inc. It should be read
in conjunction with the financial statements and related notes. This discussion
includes certain forward-looking statements based on management's estimate of
trends and economic factors in the markets in which the Company is active, as
well as the Company'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 Company notes that
such forward-looking statements are subject to risks and uncertainties.
Accordingly, the Company's actual results may differ from these set forth in
such statements. Among these are significant changes in economic conditions and
regulatory or legislative changes that can affect the Company, its competitors,
or the markets in which it is active. 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:
- Uncertainties discussed in "Management's Discussion and Analysis" and
those set forth elsewhere in this report and the Company's other SEC
filings;
- The continued forbearance by the Company's bank lender of its right to
call the Company's outstanding bank debt;
- 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
informational systems operation restructuring program;
- 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
products;
- Unforeseen increases in operating expenses; and
- The inability to attract or retain management, sales or engineering
talent.
All of our 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. We do not undertake to update our
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, 2005
Results of Operations:
Sales for the third quarter of 2005 were $6,143,112 compared with $6,908,580 for
the same period a year ago. This decrease of $765,468 was primarily due to
decreased sales of the Company's lighting products. Sales for lighting products
were down for the third quarter of 2005 by approximately $706,000 compared to
the third quarter of 2004. The reduction in lighting products revenues is a
result of reduced transit bus production, lower demand for the Company's modular
parcel racks, and market acceptance of a competitor's product. Additionally,
because the Company sold all the assets of the Lobb Company in June of 2005,
$85,000 of the third quarter reduction in sales was attributed to the absence of
humidifier sales. These same factors, including a $2,000,000 reduction in the
sales of digital display products, resulted in a decrease in sales of $4,953,000
to $17,187,962 for the nine month period ending September 30, 2005. Sales for
the first nine months of 2004 were $22,141,046. Cost of sales for the third
quarter of 2005 was $5,315,116 compared to $5,142,557 for the third quarter of
2004. Included in the cost of sales for the third quarter of 2005 is
approximately $882,000 of expense related to inventory adjustments consisting of
a loss on the auction of obsolete inventory, adjustments to labor and overhead
rates applied to work in process and finished goods inventory, and an adjustment
to the Company's inventory reserve as a result of the complete shutdown of the
Bad Axe facility and the resulting identification of certain slow moving
inventory still remaining there. Cost of sales for the nine months ending 2005
was $13,781,575 compared to $18,737,366 for the same nine month period of 2004.
This reduction is primarily the result of lower sales for the 2005 period.
Furthermore, in the second quarter of 2004, the company established an inventory
reserve in the amount of $2.3 million. This was recorded as a component of cost
of sales during the second quarter of 2004.
For the third quarter of 2005 the Company posted a loss of $1,677,996 or $.43
per share, compared to a profit of $1,875,504, or $.60 per share, for the same
period of 2004. For the third quarter of 2005, the Company incurred a number of
one-time expenses that increased the losses for the quarter. These primarily
related to the continued downsizing of Vultron. $185,000 was reserved for
anticipated costs associated with the termination of employees. $350,000 was
reserved for the close out and completion of a highway signage contract that the
company previously had anticipated would be resolved through more favorable
negotiations. For the third quarter of 2005, the Company also recorded as a
component of material cost of sales, a charge of approximately $550,000.
Approximately, one-half of this amount was the result of auction proceeds from
obsolete inventory being less than Company expectations. The other half related
to the shut down of the Bad Axe facility and the resulting slow moving inventory
still remaining there. Finally, the Company increased its bad debt reserve by
$212,000 for one specific customer due to this customer's deteriorating
financial condition. Included in the profit for the third quarter of 2004, was a
gain of $2,378,000 realized on the sale of a manufacturing facility. For the
third quarter of 2005, the Company's general and administrative costs totaled
$1,972,915; a 7.5% decrease from the third quarter of 2004 when costs totaled
$2,133,229. This decrease of $160,314 is primarily attributable to staff
reductions.
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, 2005
Interest
Interest expense amounted to approximately $146,000 and $123,000 for the third
quarters of 2005 and 2004, respectively. This increase of $23,000 was primarily
the result of higher debt levels in 2005.
Liquidity and Capital Resources
As of September 30, 2005, the Company was in violation of an earnings
requirement in its credit agreement with Huntington National Bank. As a result,
all debt obligations to Huntington were callable at September 30, 2005, and
currently remain callable. The Company has not sought waiver of these covenant
violations from Huntington and the lender could elect to declare a default at
any time, rendering all amounts outstanding immediately due and payable and
terminating all commitments to extend further credit. In the event of a
declaration of default, if the Company is unable to repay outstanding amounts,
the lender could proceed against the collateral securing the indebtedness. If
Huntington declares a default or otherwise accelerates the payment of the
Company's obligations, there is no assurance that the Company's assets or cash
flow would be sufficient to repay the amounts due. As a result of these
circumstances, the Company has reflected all obligations to Huntington as
current liabilities, although the lender has not accelerated or demanded
payment. The Company continues to have frequent discussions with Huntington. The
relationship is cooperative, cordial and professional. The Company and
Huntington are currently discussing options, including additional equity
infusion, to alleviate the credit facility issues. The Company expects
Huntington to continue to extend the Company credit until the credit agreement
issues discussed above are resolved.
In connection with the issuance of Series B Stock and related warrants, the
Company granted an option to purchase between 55,556 and 166,667 shares of
Series B-1 Stock and related common stock warrants for $9 per preferred share
and warrant unit. This option grant was approved on January 19, 2005 by the
Company's stockholders pursuant to certain NASD rules providing for qualitative
listing requirements applicable to securities traded on the Nasdaq National
Market and Nasdaq SmallCap Market.
Immediately after approval by the stockholders of the Company, the note was
automatically converted into 166,667 shares of Series B-1 Stock (calculated at a
price of $9.00 per share) that were issued to the Investor; and the Company also
issued a warrant to purchase 125,000 shares of Common Stock at a price of $3.00
per share to the Investor. Each outstanding share of Series B-1 Stock is
convertible into three shares of Common Stock. 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.
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, 2005
Liquidity and Capital Resources (continued)
In June 2005, the Company closed three private sales of its common stock. Total
proceeds amounted to $1,560,709 from the sale of 2,050,418 shares of common
stock. Specifically, on June 24, 2005, the Company closed a previously disclosed
private placement pursuant to which 1,061,185 shares of Company common stock
were sold to Dale S. Coenen. The purchase price for the sale to Mr. Coenen of
$0.8582 per share was equal to the greater of book value, the closing price of
the common stock on the day before the purchase, or the average closing price of
the common stock for the thirty calendar day period preceding the purchase. The
Company received net proceeds from the sale to Mr. Coenen of approximately
$910,000.
On June 27, 2005, the Company closed a private placement pursuant to which
392,218 shares of Company common stock were sold to Clark-Reliance pursuant to
the Agreement discussed above. The purchase price for the sale to Clark-Reliance
of $0.6509 per share was equal to the greater of the closing price of the common
stock on the day before the purchase or the average closing price of the common
stock for the thirty calendar day period preceding the purchase. The Company
received net proceeds from the sale to Clark-Reliance of approximately $250,000.
On June 29, 2005, the Company closed a previously disclosed private placement
pursuant to which 597,015 shares of Company common stock were sold to Delmer
Fields. The purchase price for the sale to Mr. Fields of $0.67 per share was
equal to the greater of the closing price of the common stock on the day before
the purchase or the average closing price of the common stock for the thirty
calendar day period preceding the purchase. The Company received net proceeds
from the sale to Mr. Fields of approximately $400,000. The Company used $637,000
of the proceeds from the above private placements to pay dividends in arrears
for the Series A Preferred Stock. $923,400 of the proceeds were used to purchase
9,234 shares of the Series A Preferred Stock. The Company's Profit Sharing Plan
used the proceeds from the sale of the Series A Preferred Stock to make
distributions to certain participants, including Mr. Coenen and Mr. Fields.
On July 29, 2005 the Company sold certain machinery and equipment used at its
Bad Axe, Michigan location with a net carrying amount of approximately $178,000
for $274,500. The transaction resulted in a gain of approximately $96,000 and
the proceeds were then used to pay down bank debt.
On June 7, 2005, the Company sold all of the fixed assets and inventory of the
Lobb Company for $100,000 and recorded a loss on the sale of approximately
$3,000. The proceeds were used to pay down bank debt.
On September 30, 2005, the Company closed a previously disclosed private
placement pursuant to which 1,008,606 shares of Company common stock were sold
to the Clark-Reliance Corporation for $.7436 per share. The Company received net
proceeds from the sale of $750,000. These proceeds were used for working
capital, financing expenses and the reduction of certain term debt held by the
Company's present lender.
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, 2005
Liquidity and Capital Resources (continued)
For 2005, anticipated working capital requirements are expected to be met from
the cash flow from operations and the sale of one or more of the Company's
manufacturing facilities and machinery and equipment. At December 31, 2004,
there were no material commitments for capital expenditures for the ensuing year
beyond the Company's normal tooling and line maintenance requirements.
As previously disclosed, on July 5, 2005, Trans-Industries, Inc. (the "Company")
received a notice from the Nasdaq Stock Market ("Nasdaq") indicating the Company
is not in compliance with Nasdaq's requirements for continued listing because,
for the previous 30 consecutive business days, the bid price of the Company's
common stock had closed below the minimum $1.00 per share requirement for
continued inclusion under Nasdaq Marketplace Rule 4310 (c) (4) (the "Minimum Bid
Price Rule"). Nasdaq stated in its notice that in accordance with Nasdaq
Marketplace Rule 4310 (c) (8) (D), the Company will be provided 180 calendar
days, or until January 3, 2006, to regain compliance with the Minimum Bid Price
Rule. This notification has no effect on the listing of the Company's common
stock at this time. For additional detail regarding the notice from the Nasdaq,
see our Current Report on form 8-K dated July 5, 2005.
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 and has not entered into interest rate
transactions for speculative purposes or otherwise. Foreign currency exposures
were immaterial as of September 30, 2005. The primary interest rate risk
exposure has resulted from floating rate debt related to the Company's revolving
loan facility and would be immaterial to the results from operations if rates
were to increase 1% from September 30, 2005 rates. The Company does not
currently hedge its exposure to floating interest rate risk.
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, 2005, that the Company's disclosure
controls and procedures were not effective during the quarter-ended September
30, 2005. This determination was made because of our Chief Executive Officer and
Chief Financial Officer's belief that the Company's resources have been
insufficient to address its financial reporting requirements in a timely fashion
during recent periods. The Company has had to extend the filing deadlines for
its fiscal year 2004 Form 10-K, its fiscal year 2003 Form 10-K, its September
30, 2003 Form 10-Q and one of its fiscal year 2004 Form 10-Qs because it lacked
the resources to address the financial reporting related to significant and
complex business transactions.
20
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
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
NASD rules. Areas of the Company's internal controls and procedures that are
insufficient include inventory quantity determination, inventory valuation,
revenue recognition, warranty obligations, controls over fair value of equity
securities, basic controls over the accuracy of general ledger information and
controls over accounting for income taxes and required disclosure. Certain of
these areas were recently brought to our attention by the Company's auditors and
we are currently continuing to assess these areas. The Company's internal
controls and procedures are also ineffective in ensuring that material
information relating to the Company is made known to the Chief Executive Officer
and Chief Financial Officer by others within the Company.
Specifically, our independent auditors have advised the Company that its
internal controls over the following aspects of the Company's accounting are
insufficient or non-existent and represent reportable conditions that they
believe to be material weaknesses: inventory quantity determination, inventory
valuation, revenue recognition, warranty obligations, controls over fair value
of equity securities, basic controls over the accuracy of general ledger
information and controls over accounting for income taxes and required
disclosure.
The Company reported in its September 30, 2004 Form 10-Q that as a part of its
evaluation of internal controls and procedures, it expected that Company
personnel, would have additional time to devote to financial reporting in the
fourth quarter of 2004, that an employee was added to the Company's staff
responsible for compliance with reporting obligations in November 2004, and that
the Company expected that its disclosure controls and procedures would be fully
effective during the fourth quarter of 2004 or soon thereafter. However, the
additional staff and employee time was insufficient to provide the Company with
the necessary resources to adequately address its internal controls and
procedures. In addition, Company staff required additional time to adjust to the
procedures of its new auditor.
The Company, including its new Chief Executive Officer appointed on March 16,
2005, 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 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. In addition, the
Company was able to timely file the Form 10-Q for the first, second and third
quarter of 2005 and expects to timely file future periodic reports.
21
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
(b) CHANGES IN INTERNAL CONTROLS.
There were no changes in the Company's internal controls over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. However, as noted above, the Company has
taken, and is continuing to take, certain actions designed to enhance the
Company's internal control over financial reporting and its disclosure controls
and procedures.
Item 6. EXHIBITS
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
Exhibit 31.1 Sarbanes-Oxley, Section 302 CEO certification.
Exhibit 31.2 Sarbanes-Oxley, Section 302 CFO certification.
Exhibit 32.1 Sarbanes-Oxley, Section 906 CEO certification.
Exhibit 32.2 Sarbanes-Oxley, Section 906 CFO certification.
Exhibit 10.1 Clark-Reliance Stock Purchase Agreement (incorporated by
reference to the 8-K filed October 5, 2005)
22
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 14, 2005 /s/ Kai Kosanke
----------------------------------------
Kai Kosanke, Treasurer
and Chief Financial Officer
Date: November 14, 2005 /s/ Keith LaCombe
----------------------------------------
Keith LaCombe
Assistant Treasurer
23
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
Exhibit 31.1 Sarbanes-Oxley, Section 302 CEO certification.
Exhibit 31.2 Sarbanes-Oxley, Section 302 CFO certification.
Exhibit 32.1 Sarbanes-Oxley, Section 906 CEO certification.
Exhibit 32.2 Sarbanes-Oxley, Section 906 CFO certification.
Exhibit 10.1 Clark-Reliance Stock Purchase Agreement (incorporated by
reference to the 8-K filed October 5, 2005)