Item 1 Business.
Introduction
Trans-Industries, Inc. (the "Company") was incorporated in Delaware in 1967 to acquire the business of Transign, Inc., a company founded in 1952 to manufacture mechanical bus signs. Initially, the Company produced mechanical signage for the mass transit market, but its current efforts are concentrated on electronic systems for the display of information, bus lighting products and source extraction systems for the environmental market. These products are sold to virtually all aspects of the transportation industry and to a broad range of commercial and industrial markets. The Company has one major customer - Gillig Corporation - which accounted for over 10 percent of consolidated annual sales. Although Gillig Corp. is a highly valued customer, the Company does not consider itself dependent upon it for continued, ongoing sales. Sales volume is significantly affected by state and municipal government spending for mass transit, highway systems, and airports. As of February 28, 1999, the Company's backlog was $17,811,600, compared with $13,232,400 and approximately $10,748,200 for the same dates in 1998 and 1997, respectively. Of the current backlog, it is anticipated that 90 percent will be completed within one year.
Operations
A. Industry Segment.
The Company is a leader in the supply of lighting and information display systems for mass transit operations. Also, new and growing markets are being developed for electronic information display systems, liquid crystal displays, and the Company's dust control product line. Dust control is an air impurity extraction system that is designed to remove air pollution at its source. Based on the nature of the Company's products, production process, types of customers, and marketing methods, management believes the Company operates in predominately one broad industry segment which is the transportation industry. The Company continues to decrease its dependence upon the mass transit portion of this market.
B. Foreign and Domestic Operations and Export Sales.
Through subsidiaries, the Company operates manufacturing, assembly, sales, and service facilities in the United Kingdom. These operations sell products purchased from the affiliated domestic companies, as well as products manufactured in the United Kingdom, to customers in Europe, Australia, and Asia. Additional foreign sales are made on an export basis from domestic offices as well as through certain agents abroad. Summarized financial information about foreign operations and exports are in Note L to the Consolidated Financial Statements.
C. Research and Quality Control.
The Company's principal research activities are conducted at its product development center in Rochester Hills, Michigan, where line maintenance and new product programs are carried out according to perceived market opportunities. Quality control, rather than being centralized, is a function performed at each manufacturing plant.
Approximately $849,000, $700,000, and $587,000 were spent on research and development during the years ended December 31, 1998, 1997, and 1996, respectively.
D. Competition.
In each of the market niches where the Company competes, there are one or more competitors. Sizes of these concerns range from small to large integrated enterprises, both domestically and internationally, with no single company dominating the various markets. The Company owns and has licensed United States and foreign patents relating to the manufacture of most of its products, but these are not deemed sufficient to substantially minimize competition from other parties. It is felt that success in the marketplace is due to the ability to compete on the basis of price, service, and product performance.
E. Raw Materials.
The principal raw materials used by the Company include steel, plastics, electronic components, and synthetic materials, all of which are presently available in adequate supply on the open market.
F. Employee Relations.
The Company employs approximately 300 people, supplemented by temporary workers, with a minority of these employees covered by a union contract that expires August 7, 2001. The Company considers its overall labor relations with employees to be good.
The Company maintains profit sharing and 401-K plans for all of its full-time employees who are not part of a bargaining unit.
The Company adopted a stock option plan, in 1996, for officers, directors, and key employees of the Company and its subsidiaries. (See Note H to the financial statements)
G. Environmental Considerations.
The Company believes it is in compliance with all state and federal regulations for environmental control and safety, and the related expenditures are generally not significant.
H. Directors and Officers of the Registrant.
See Part III, Item 10 for certain information regarding officers and directors.
Item 2.
Item 2. Properties.
Domestic operations are conducted at eight principal facilities. Four are owned, of which two are located in Waterford, Michigan, one in Rochester Hills, Michigan and one in Bad Axe, Michigan. Four locations are leased. One of the leased facilities is located in Rochester Hills, Michigan under a lease agreement expiring in February 2002. Two leased facilities are in Wilmington, North Carolina. One facility is leased through January 2001. The other facility is leased through August 2001. The fourth facility is in Bad Axe, Michigan and is leased on a month to month basis.
International operations are conducted in England at a leased facility located in Leeds, and an owned facility in Telford. The lease agreement for the facility in Leeds expires in December 2009.
The plants, all of which are well maintained and in good operating condition, contain an aggregate of approximately 251,000 square feet of floor space. Generally, the plants have been operating on a five day a week basis with frequent overtime.
Item 3.
Item 3. Legal Proceedings.
The Company was the plaintiff in a patent infringement lawsuit filed in the Federal District Court for the Eastern District of Michigan, the Southern Division. On April 9, 1998, the District Court awarded the Company $3,023,773 in damages and $1,119,588 in interest. On May 1, 1998, the defendant paid the damages awarded to the Company and appealed the interest award. On January 3, 1999, the Court of Appeals heard the appeal but has yet rendered its' opinion.
Item 4.
Item 4. Submission of Matters to a Vote for Security Holders.
No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitations of proxies or otherwise.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock is traded on the Over-the-Counter Market and is included in the National Association of Securities Dealers Automated Quotation System under the symbol TRNI. The following table sets forth the range of trade prices as reported by the National Securities Dealers Association, Inc. for the preceding two years:
These quotations reflect actual transactions without retail markup, markdown, or commission.
As of December 31, 1998, there were 244 registered holders of the Common Stock of the Registrant.
Item 6.
Item 6. Selected Financial Data.
(a) Tangible net worth equals total assets less intangible assets, less total liabilities. Subordinated debt in the period of 1993 to 1996 consisted of two convertible subordinated debentures, the last of which was retired in 1997.
(b) Based on weighted average number of common shares and equivalents outstanding.
(c) Based on shares outstanding at year end.
(d) The average shares outstanding and net earnings/(loss) per share data for the years 1994 through 1997 have been restated to give effect to the issuance in 1998 of 62,948 common shares that were previously not reflected as issued and outstanding. See Note C to the Consolidated Financial Statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 estimates of trends and economic factors in the markets in which the corporation is active, as well as the corporation's business plans. 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 corporation.
OPERATIONS
1998 Compared With 1997
Sales for 1998 were $35.8 million compared to $35.4 million for the previous year. Demand for the Company's lighting and environmental products remained strong during 1998 with revenues from such products increasing approximately 14%. Overall sales, however, remained essentially unchanged as this increase was essentially offset by a reduction in the sales level of the Company's variable message signs.
Several factors contributed to this reduction and management believes this was a transitional situation with significant growth of variable message revenues expected in the future due to recently enacted legislation. The Transportation Equity Act for the 21st Century, which was signed into law in June of 1998, has spawned a great deal of interest and demand for the Company's variable message signs, particularly the large overhead highway signs used to help control traffic patterns and communicate messages to the driving public. To accommodate the production and sale of these larger signs, the Company addressed several issues during the year, including software requirements, engineering design and documentation, reallocation of
production space, and establishment of procedures for the scheduling and achievement of factory sign-offs of the completed product. Inflationary impact on sales for 1998 and 1997 was minimal.
For the first quarter of 1999, the Company expects sales to be up from the levels achieved for the same period last year. This sales increase reflects the continuation of growth in each of the niche markets the Company serves. The Company's pretax income for 1998 amounted to $6,358,729 compared to $4,209,560 for 1997. This increase of $2,149,169, or 51%, is attributable to proceeds received in settlement of a patent lawsuit which it filed against a competitor for infringing upon its patented lighting module. The amount of the judgement, net of legal fees, was approximately $2,420.000.
Cost of sales for 1998 was $22,296,059 compared to $22,824,939 for the prior year. As a percentage of sales, this amounted to a decrease to 62.3 percent in 1998, from 64.5 percent in 1997. This decrease of 2.2 percent is primarily the result of higher labor and overhead absorption in work-in-process and finished goods inventory.
Selling, general, and administrative expenses increased to $9,754,750 in 1998, from $7,917,545 in 1997. This increase of $1,837,205 is primarily the result of the following:
- Payroll and related costs were up approximately $215,000 - to accommodate/pay adjustments and the addition of new personnel.
- Legal fees were up approximately $780,000 - primarily related to settlement of the patent infringement lawsuit.
- Professional fees were up approximately $100,000 - primarily attributable to tax accounting and investor relation fees.
- Advertising and sales promotion expenses were up approximately $185,000.
- Service costs were up approximately $206,000 - related to expansion of the Company's field service and customer support capabilities.
Interest expense decreased in 1998 to $565,889 from $637,401 in 1997 due primarily to more favorable borrowing rates.
1997 Compared With 1996
Sales for 1997 were $35.4 million compared to $29.9 million for the previous year. This sales increase of $5.5 million, or 18.4 percent, from 1996 sales levels was attributable to continued growth in sales of the Company's multi-functional lighting systems and its electronic variable message signs. For 1997, all subsidiaries contributed to the increased sales volume by surpassing 1996 sales levels. Continued strong demand for transit buses, as well as increased market share, accounted for the improved sales levels in 1997. Inflationary impact on sales for 1996 and 1997 was minimal.
For the first quarter of 1998, sales were up 15% from the levels achieved for the same period in 1997. This sales increase reflects the continuation of growth in each of the niche markets the Company serves.
The Company's pretax income for 1997 amounted to $4,209,560 compared to $2,573,758 for the 1996 fiscal year. This increase of $1,635,802, or 64 percent, was primarily attributable to increased sales volume.
Cost of sales for 1997 was $22,824,939 compared to $19,007,311 for the prior year. As a percentage of sales, cost of sales showed a slight increase to 64.5 percent in 1997, from 63.5 percent in 1996. The increase of 1.1 percent reflects pricing and delivery problems associated with a major international contract realized by the Company in 1997.
Selling, general, and administrative expenses increased to $7,917,545 in 1997, from $7,654,370 in 1996. This increase of $263,175, or 3.4 percent, was primarily associated with increased marketing efforts and an increase in research and development expenditures.
Interest expense decreased in 1997 to $637,401 from $782,684 in 1996. This decrease of $145,283 was due to lower borrowings in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of year-end 1998, the Company had $10.9 million of working capital compared with $8.3 million at year-end 1997 and $6.2 million at year-end 1996. This increase in working capital of $2.6 million resulted primarily from the Company's increased profitability and utilization of assets. In 1997, the Company repurchased the last of the convertible subordinated debentures
which were outstanding in the amount of $214,284. Funds for this transaction were provided for by the Company's short-term credit line.
On April 9, 1998, the district court awarded the Company $3,023,773 in damages and $1,119,588 in interest relating to a patent infringement lawsuit brought against a competitor. On May 1, 1998, the defendant paid the damages' awarded to the Company and appealed the interest award. If the Company's interest award of approximately $1.1 million is upheld on appeal, liquidity will be enhanced.
At December 31, 1998, there were no material commitments for capital expenditures. However, the Company does expect to double the size and capacity of one of its manufacturing facilities, at a cost of approximately $600,000, and to increase its manufacturing capabilities at another location through the purchase of additional equipment at a cost of approximately $600,000. With that in mind, capital expenditures are expected to exceed 1998 levels by 80 - 100 percent.
It is management's belief that cash flow from operations and short term borrowings will be sufficient for working capital requirements, debt service obligations, and capital expenditures for the ensuing year.
YEAR 2000 DISCLOSURE
Fortunately, the Company, as a whole, is not faced with any serious consequences relating to the year 2000 issue. An internal review of its computer systems has been completed and all areas have been identified where modifications and/or upgrades may be required. This process was completed in the first half of 1998.
Both U.K. operations are utilizing relatively new software systems and are already "Year 2000 Compliant". Likewise, the Company's lighting and dust control operations have installed a new system over the last year and a half. Testing of the system was completed in October of 1998 and went live in November 1998, thus eliminating potential year 2000 compliance issues. The balance of the Company's operations utilize the same software, and these modules have been or are being upgraded. Testing has been completed, and most are in daily use. One module (payroll) is going to be replaced with new, more current software during the third
quarter of 1999. The balance of the modules are in the modification stage and are expected to be completed during the second quarter of 1999.
Additionally, the Company has talked to some of its larger vendors and received assurances that there will not be any undue disruptions of services or products due to year 2000 issues.
The Company has estimated the magnitude of costs to accommodate the year 2000 date change to be less than $30,000. Because the Company sees little risk associated with the year 2000 date change, and modifications and enhancements have progressed so favorably, the Company has not developed a contingency plan nor does it intend to.
DIVIDENDS
Typically, the Company does not pay cash dividends on its common stock. However, due to the favorable settlement of the patent infringement lawsuit, a special one-time dividend of $.10 per share was declared and paid in 1998.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements.
The following pages contain the Consolidated Balance Sheets as of December 31, 1998 and 1997 and the related Consolidated Statement of Earnings, Stockholders' Equity and Cash Flows for each of the years in the three year period ended December 31, 1998, including the report of the Company's independent certified public accountants.
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
PAGE
Report of Independent Certified Public Accountants......................... 15
FINANCIAL STATEMENTS
Consolidated Balance Sheet............................................. 16
Consolidated Statements of Earnings.................................... 18
Consolidated Statements of Comprehensive Income........................ 19
Consolidated Statement of Stockholders' Equity......................... 20
Consolidated Statements of Cash Flows.................................. 21
Notes to Consolidated Financial Statements............................. 22
SUPPLEMENTAL INFORMATION
Schedule II - Valuation and Qualifying Accounts........................ 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Trans-Industries, Inc.
We have audited the accompanying consolidated balance sheets of Trans-Industries, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Trans-Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
We have also audited Schedule II for each of the three years in the period ended December 31, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
Grant Thornton LLP
Detroit, Michigan February 5, 1999
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
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TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 - --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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NOTE A - NATURE OF OPERATIONS
The Company is a multinational manufacturer of lighting and information display systems. The principal markets for its products are the United States, the United Kingdom and Canada. Sales volume is significantly affected by state and municipal government spending for mass transit, highway systems and airports.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided using straight line and accelerated methods over the estimated useful lives of the assets which range from 10-40 years for buildings and 3-10 years for machinery and equipment.
GOODWILL
Goodwill is the excess of the cost over the fair value of net assets acquired and is amortized over a 10 to 30 year period using the straight-line method.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated principally at year-end exchange rates. Income and expense accounts are converted using the average exchange rate prevailing throughout the period. The gains and losses resulting from the translation of these accounts are reported as a separate component of stockholders' equity.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and development costs approximated $849,000, $700,000 and $587,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the effects of operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes enactment date.
EARNINGS PER SHARE
During 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which was effective for financial statements issued after December 15, 1997. The new standard eliminated primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company adopted this pronouncement at December 31, 1997. All per share data in the accompanying consolidated financial statements has been restated to reflect application of this pronouncement.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of the line of credit facility and long-term debt. The carrying value approximates the estimated fair value based upon rates and terms available for loans and notes with similar characteristics.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components (revenues, expense, gains, and losses) in a full set of financial statements. This statement also requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement was effective for fiscal years beginning after December 15, 1997. The Company adopted this pronouncement during 1998.
NOTE C - EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE C - EARNINGS PER SHARE (CONTINUED)
During 1998, the Company's stock transfer agent (agent) notified the Company that the agent's records did not reflect the issuance of 62,948 shares of the Company's common stock which shares were presented for the payment of dividends. The certificates underlying the shares were issued prior to 1995. The Company's Board of Directors authorized the issuance of the 62,948 shares to validate the underlying certificates. Prior year earnings per share computations were based on information furnished by the transfer agent and have been revised to give effect to these shares as if they had been outstanding for all periods presented. Earnings per share as presented in the accompanying financial statements have been restated and are less than those previously reported for 1997 and 1996 by $.02 and $.01, respectively.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE D - INVENTORIES
The major components of inventories at December 31 are:
NOTE E - LINE OF CREDIT AND LONG-TERM DEBT
The Company has an unsecured line of credit facility with a bank. The facility allows the Company to borrow up to $10,000,000. At December 31, 1997, borrowings under the facility bore interest at the bank's prime lending rate or the Eurodollar rate plus 2.45%, elected by the Company at the time of each advance. During 1998, the facility was amended reducing the interest rates to the bank's prime lending rate minus .25% or the Eurodollar rate plus 2.25% (effective rate of 7.5% at December 31, 1998). Interest is payable monthly on prime rate based advances and no less frequently than quarterly on Eurodollar based rate advances.
Long-term debt at December 31 consisted of the following:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE E - LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt by year are as follows:
The term loan and line of credit agreements, as amended, require the Company to maintain certain financial ratios. The agreements also restrict the payment of dividends, repurchase of common stock, and acquisition of property and equipment.
NOTE F - LEASES
The Company leases facilities and equipment under operating leases with unexpired terms ranging from one to five years. Rent expense for all operating leases approximated $419,000, $321,000, and $309,000 for 1998, 1997 and 1996, respectively. Future minimum rentals required under noncancelable lease agreements are not material.
NOTE G - INCOME TAXES
The components of earnings before income taxes were as follows:
Income taxes have been charged to operations as follows:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE G - INCOME TAXES (CONTINUED)
A reconciliation of actual income tax expense to the expected amounts computed by applying the effective U.S. federal income tax rate of 34 percent to earnings or losses before income taxes is as follows:
The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE G - INCOME TAXES (CONTINUED)
The Company has a foreign tax net operating loss carryforward of approximately $1,876,000 at December 31, 1998. A valuation allowance of $619,000 has been recognized to reduce the deferred tax assets principally due to the uncertainty of realizing the benefit of the tax loss carryforward.
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a Voluntary Employee Benefit Trust (the Trust) designed to provide for the payment or reimbursement of all or a portion of certain medical and dental expenses to eligible participants. Eligible participants include active full-time employees of the Company and their dependents. Eligible terminated and retired employees may continue to participate in the Trust, on a contributory basis, for up to 18 months subsequent to the date of termination or retirement. The provision for Company contributions to the Trust approximated $455,000, $380,000 and $321,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has a deferred compensation plan for all employees who are not part of a bargaining unit. Company contributions are voluntary and are established as a percentage of each participant's base salary. Company contributions to the deferred compensation plan were approximately $270,000, $260,000 and $229,000 for 1998, 1997 and 1996, respectively.
In 1996, shareholders approved the adoption of the 1996 Stock Option Plan (the Plan) for the officers, directors, and key employees of the Company.
The Plan is administered by an Option Committee (Committee) appointed by the Board of Directors. The Committee has the authority, subject to Board of Directors resolutions and the provisions of the Plan, to determine the persons to whom awards will be granted, the number, type and terms of the awards, including vesting and to interpret the Plan.
The Plan permits the granting of incentive stock options, non-qualified stock options and stock appreciation rights (SAR). The total number of shares of common stock with respect to which awards may be granted under the Plan is 200,000 shares. The option price of each option and the base for calculation of appreciation of each SAR will be no less than the fair market value at the date of grant. The term of each option will be fixed and may not exceed ten years from the date of grant. The Committee may make options exercisable in installments and may accelerate exercisability.
The Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123") for transactions entered into during 1996 and thereafter. The Statement established a fair value method of accounting for employee stock options and similar equity instruments, and encourages all companies to adopt that method of accounting for all of their employee stock compensation plans. However, the Statement allows companies to continue measuring compensation cost for such plans using accounting guidance in place prior to SFAS No. 123. Companies that elect to remain with the former method of accounting must make pro-forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has not adopted the fair value accounting provisions of SFAS No. 123. Accordingly, SFAS No. 123 has no impact on the Company's consolidated financial position or results of operations.
The Company accounts for the Plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation costs have been recognized for the Plan. Had compensation costs for the Plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions for the options and SAR's granted in 1998 and 1996, respectively: risk-free interest rates of 5.63% and 6.84%; expected volatility of 56.15% and 67.39%; expected lives of 10 years for options and four years for SAR's for all years; and no dividend yield for all years.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
A summary of the status of the Plan as of December 31, 1998, 1997, and 1996 and changes during the years then ended is as follows:
The options are for a ten year duration with twenty percent vesting in each of the first five years. The SAR's are for a four year duration with one-third vesting in each of the first three years. Holders of SAR's will upon exercise, receive in cash or other property at the sole discretion of the option committee, the difference between the base price and the market price of the Company's stock on the date of exercise. Since the SAR's were issued in tandem with stock options, upon exercise of an SAR the holder must surrender an equivalent number of stock options.
NOTE I - BUSINESS ACQUISITION
On September 1, 1998, the Company acquired all of the issued and outstanding common and preferred stock of The Lobb Company (Lobb), in exchange for $286,200. The Lobb Company was owned by certain officers and directors of the Company and is in the residential humidifier business. Goodwill of $217,000 was recorded in connection with this acquisition, which has been accounted for under the purchase method of accounting and accordingly the accompanying consolidated financial statements include Lobb's results from the date of acquisition. Lobb's operating results for 1998 and 1997 were not significant, accordingly, no pro forma information is presented.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
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NOTE J - SIGNIFICANT CUSTOMERS
The Company has one major customer which accounted for ten percent or more of consolidated net sales in 1998. Sales to this customer amounted to $3,658,000. The Company had two major customers in 1997. Sales to these customers amounted to $8,538,000. The Company had one major customer in 1996. Sales to this customer amounted to $4,200,000.
NOTE K - PATENT LITIGATION
The Company was the plaintiff in a patent infringement lawsuit filed in the Federal District Court for the Eastern District of Michigan, the Southern Division. On April 9, 1998, the District Court awarded the Company $3,023,773 in damages and $1,119,588 in interest. On May 1, 1998 the defendant paid the damages awarded to the Company and appealed the interest award. On January 3, 1999, the Court of Appeals heard the appeal but has yet rendered its' opinion.
NOTE L - SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments. This statement also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in one market segment, the transportation industry.
Financial information summarized by geographic is as follows:
SUPPLEMENTAL INFORMATION
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998, 1997, AND 1996
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Company's directors and executive committee's fees for 1998 were as follows: Dale S. Coenen $25,000.00; Duncan Miller, $25,000.00; Gerald J. Murphy, $4,167.00; Matthew M. Wirgau, $25,000.00; O.K. Dealey, Jr., $15,625.00; and Jessie D. Swinea, Jr., $15,625.00
Mr. Miller is a director of W. R. Berkley Corp.
Item 11.
Item 11. Executive Compensation.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information called for by Part III (Items 11, 12, and 13, and additional information regarding Item 10), is incorporated by reference from the Registrant's definitive proxy statement in connection with its Annual Meeting of Shareholders to be held on May 12, 1999, which Proxy Statement will be filed pursuant to Regulation 14A.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1, 2. Consolidated Financial Statements for Trans-Industries, Inc. and Subsidiaries for years ended December 31, 1998, 1997, and 1996 are filed under Part II, Item 8.
3. Exhibits: Exhibit 3 (a) Restated Certificate of Incorporation incorporated herein by reference to Form 8 filed May 17, 1982. Exhibit 3 (b) Bylaws incorporated herein by reference to Registration Statement No. 2-30317. Exhibit 13 (b) Form 10-Q for quarter ended September 30, 1998, filed with the Securities and Exchange Commission on November 12, 1998 incorporated herein by reference. Exhibit 21 List of Subsidiaries (see page 38).
(b) No reports on Form 8-K for the three months ended December 31, 1998 were required to be filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANS-INDUSTRIES, INC.
Date: 3/23/99 /s/ Dale S. Coenen -------------- ------------------------------------ Dale S. Coenen Chairman of the Board of Directors and Chief Executive Office
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include the President, the Chief Financial Officer, the Assistant Treasurer, and a majority of the Board of Directors on behalf of the Registrant and in the capacities and on the dates indicated: