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 two major customers - Orion Bus Industries and Nova Bus Corp. - which accounted for over 10 percent of consolidated annual sales. Although Orion Bus Industries and Nova Bus Corp. are highly valued customers, the Company does not consider itself dependent upon them 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, 1998, the Company's backlog was $13,232,400, compared with $10,748,200 and approximately $8,641,900 for the same dates in 1997 and 1996, 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 Notes G and I 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 $700,000, $587,000, and $438,000 were spent on research and development during the years ended December 31, 1997, 1996, and 1995, 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 290 people, supplemented by temporary workers, with a minority of these employees covered by a union contract that expires August 7, 1998. 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 six principal facilities. Four are owned, of which two are located in Waterford, Michigan, one in Rochester Hills, Michigan and one in Bad Axe, Michigan. Two locations are leased. One of the leased facilities is located in Rochester Hills, Michigan under a lease agreement expiring in February 1999. The other leased facility is in
Wilmington, North Carolina and is leased through January 1999. 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 219,000 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 is the plaintiff in a patent infringement lawsuit filed in the Federal District Court for the Eastern District of Michigan, the Southern Division. During November of 1993, an advisory jury recommended a decision in favor of the Company. In April of 1994, the judge concurred with the advisory jury and ordered that the defendant be enjoined from any further manufacture, use, or sale of the accused patented device. It was also ordered that the defendant pay approximately $3 million in damages. During 1994, the defendant appealed the case. In 1995, the Court of Appeals reaffirmed the Company's patent as valid and infringed but remanded the case back to the Federal District Court to make further findings of fact and to reevaluate the amount of the award. In January of 1998, the Federal District Court again ordered that the defendant pay approximately $3 million in damages with interest to be determined by the court. A final outcome is expected to be reached in 1998. Because this decision can be further appealed by the Defendant, the ultimate award to the Company will be recorded in the financial statements when realized. Additionally, any award received by the Company will be net of certain contingent fees related to the lawsuit.
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:
Trade Prices
High Low ---- --- First Quarter 6.50 4.69 Second Quarter 6.75 5.50 Third Quarter 10.13 5.88 Fourth Quarter 13.25 9.50
First Quarter 5.13 2.88 Second Quarter 8.13 4.75 Third Quarter 7.50 4.63 Fourth Quarter 5.50 4.63
These quotations reflect actual transactions without retail markup, markdown, or commission.
As of December 31, 1997, there were 270 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. (See Note E of notes to consolidated financial statements.)
(b) Based on weighted average number of common shares and equivalents outstanding.
(c) Based on shares outstanding at year end.
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. The "Forward-Looking Information" section in the corporation's Information Statement discusses certain factors that may cause such differences to occur.
OPERATIONS
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, 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 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, is 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 64.6 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. The Company has reviewed its computer processing systems and does not expect to incur any material costs associated with the start of a new millenium and the "year 2000 issue".
1996 Compared With 1995
Sales for 1996 were $29.9 million compared to $24.9 million for the previous year. This sales increase of $5.0 million, or 20.1 percent from 1995 sales levels, was attributable to continued growth in sales of the Company's multi-functional lighting systems used in mass transit vehicles. Additionally, the Company enjoyed a substantial increase in the sale of its electronic destination signs. 1996 sales of this product to the mass transit market doubled over the 1995 sales level. Increased bus production, as well as increased market share, accounted for the improved sales levels in 1996. Inflationary impact on sales for 1995 and 1996 was minimal.
For the first quarter of 1997, the Company's sales were up from the levels achieved for the same period last year. The increase in sales was due primarily to a strong market for the Company's bus lighting products and its variable message displays.
The Company's pretax income for 1996 amounted to $2,573,758 compared to $1,100,733 of pretax income for the 1995 fiscal year. This increase of $1,473,025, or 134 percent, was primarily attributable to increased sales volume.
Cost of sales for 1996 was $19,007,311 compared to $17,109,368 for the year before. As a percentage of sales, cost of sales decreased to 63.5 percent in 1996, from 68.6 percent in 1995. The decrease of 5.1 percent was attributable primarily to the increased sales volume in 1996.
Selling, general, and administrative expenses increased to $7,654,370 in 1996, from $5,937,896 in 1995. This increase of $1,716,474 was not isolated in any specific area of operations, rather it was made up of many varied expenditures relating to increased sales volume. A majority of the increase can be isolated to these areas: (1) Bad debt expense increased approximately $394,000 over 1995 levels. This was primarily the result of a major U.S. bus builder declaring bankruptcy in 1996. The Company believes its possibility of ever collecting is nil, therefore the entire receivable was written off. (2) Increased sales and marketing efforts, though quite effective, accounted for approximately $236,000 of increased expenditures over 1995. (3) The Company also recorded increases in its incentive pay, professional fees, and research and development expenses of approximately $239,000, $135,000, and $149,000, respectively.
Interest expense decreased in 1996 to $782,684 from $909,458. This decrease of $126,774 was primarily due to lower borrowings in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of year end 1997, the Company had $8.3 million of working capital compared with $6.2 million at year end 1996 and $5.3 million at year end 1995. This increase in working capital of $2.1 million resulted primarily from the Company's increased profitability and utilization of assets. In October of 1995 the Company retired $700,000 of convertible debentures with funds acquired through short term borrowings, which were repaid in 1996. 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. If the Company's award of approximately $3 million in its patent litigation is upheld on appeal, liquidity will be enhanced.
At December 31, 1997, there were no material commitments for capital expenditures. It is expected that capital expenditures for 1998 will approximate those recorded in 1997. 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.
DIVIDENDS
The Company has not paid cash dividends on its common stock for its three most recent fiscal years. The Company's term loan agreement restricts the payment of cash dividends on its common stock. See Note E to the Consolidated Financial Statements.
Item 8.
Item 8. Financial Statements.
The following pages contain the Consolidated Balance Sheets as of December 31, 1997 and 1996 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, 1997, including the reports 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, 1997, 1996 AND 1995
CONTENTS
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, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, 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, 1997. 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 6, 1998
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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, 1997, 1996 AND 1995
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, 1997, 1996, AND 1995
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
During 1995, the deferred compensation plan sponsored by the Company (the Plan) acquired $300,000 of the Company's convertible subordinated debentures held by Figgie International, Inc. The Plan exercised its conversion privileges and the Company issued 150,000 shares of its common stock and retired the debt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 AND EQUIPMENT
Property 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
The excess of the cost of the investment in a wholly owned subsidiary (Transign, Inc.) over the equity in underlying net assets at the date of acquisition is being amortized over 30 years.
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 $700,000, $587,000 and $438,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
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 is effective for financial statements issued after December 15, 1997. The new standard eliminates 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 new 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 carrying amounts of financial instruments approximate their fair values.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW PRONOUNCEMENTS
In June 1997, the FASB issued 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 is effective for fiscal years beginning after December 15, 1997. Earlier application is permitted. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company does not anticipate that adoption of SFAS 130 will have a material effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of adoption, comparative information for earlier years is to be restated. The Company does not anticipate that the adoption of SFAS 131 will have a material effect on the consolidated financial statements.
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, 1997, 1996 AND 1995
NOTE C - EARNINGS PER SHARE (CONTINUED)
NOTE D - INVENTORIES
The major components of inventories at December 31 are:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE E - LINE OF CREDIT AND LONG-TERM DEBT
The Company has a secured line of credit facility with a bank. The facility allows the Company to borrow, based on qualifying accounts receivable and inventory, up to $6,500,000 with interest at the bank's prime lending rate (effective rate of 8.50% at December 31, 1997) or a Eurodollar based rate (effective rate of 8.3875% at December 31, 1997), elected by the Company at the time of each advance. Interest is payable monthly on prime rate based advances and no less frequently than quarterly on Eurodollar rate based advances.
Long-term debt at December 31 consisted of the following:
The convertible subordinated debentures were held by the Gerald J. Murphy charitable trust, Kirksville College of Osteopathic Medicine, trustee. Dr. Murphy is a member of the board of directors of Trans-Industries, Inc. These subordinated debentures were convertible into common shares at any time at a conversion price of $2 per share (or as adjusted, as defined in the debenture agreement). The debentures were paid in full during 1997.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
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 fixed assets.
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 $321,000, $309,000, and $331,000 for 1997, 1996 and 1995, 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, 1997, 1996 AND 1995
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, 1997 and 1996 are as follows:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE G - INCOME TAXES (CONTINUED)
The Company has a foreign tax net operating loss carryforward of approximately $1,680,000 at December 31, 1997. A valuation allowance of $554,000 has been recognized to reduce the deferred tax assets principally due to the uncertainty of realizing the benefit of the tax loss carryforward. The valuation allowance increased by $65,000 and $19,000 in 1997 and 1996, respectively.
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a Voluntary Employee Benefit Trust (Plan) 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 Plan, on a contributory basis, for up to 18 months subsequent to the date of termination or retirement. The provision for Company contributions to the Plan approximated $380,000, $321,000 and $402,000 for the years ended December 31, 1997, 1996 and 1995, 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 Plan were $260,000, $229,000 and $225,000 for 1997, 1996 and 1995, 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 not 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 such as warrants, 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, 1997, 1996 AND 1995
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 operation.
The Company accounts for the stock option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees." No compensation costs have been recognized for the plan. Had compensation cost 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 income and income per share would have been as follows for the year ended December 31, 1996:
Net earnings As reported $ 1,722,758 Pro forma $ 1,645,428
Basic earnings per share As reported $ .56 Pro forma $ .54
Diluted earnings per share As reported $ .54 Pro forma $ .51
The fair value of each option is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions:
Dividend yield 0% Expected volatility 67.39% Risk-free interest rate 6.84% Expected lives 10 years
A summary of the status of the Company's stock option plan as of December 31, 1996 and 1997 and changes during the years then ended is as follows:
The fair value of the options and SAR's granted during 1996 was $5.50.
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE H - EMPLOYEE BENEFIT PLANS (CONTINUED)
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 not, upon exercise, be issued shares of stock, but will receive in cash or other property in 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.
All of the above options and SAR's were issued during 1996. 26,000 shares underlying the options and the SAR's were exercisable at December 31, 1997.
NOTE I - CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC SEGMENT INFORMATION
The Company has two major customers which account for 10 percent or more of consolidated net sales 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. The Company had two major customers in 1995. Sales to these customers amounted to $4,100,000. Additionally, sales to foreign customers (primarily in the United Kingdom and Canada) amounted to 23 percent of consolidated net sales in 1997, 1996 and 1995. Total accounts receivable from foreign customers approximated $1,525,000 and $1,600,000 at December 31, 1997 and 1996, respectively.
Financial information summarized by geographic area is as follows:
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
NOTE I - CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
NOTE J - CONTINGENCIES
The Company is the plaintiff in a patent infringement lawsuit filed in the Federal District Court for the Eastern District of Michigan, the Southern Division. During November of 1993, an advisory jury recommended a decision in favor of the Company. In April of 1994, the judge concurred with the advisory jury and ordered that the defendant be enjoined from any further manufacture, use, or sale of the accused patented device. It was also ordered that the defendant pay approximately $3,000,000 in damages. During 1994, the defendant appealed the case. In 1995, the Court of Appeals reaffirmed the Company's patent as valid and infringed but remanded the case back to the Federal District Court to make further findings of fact and to reevaluate the amount of the award. In January of 1998, the Federal District Court again ordered that the defendant pay approximately $3,000,000 in damages with interest to be determined by the court. A final outcome is expected to be reached in 1998. Because this decision can be further appealed by the Defendant, the ultimate award to the Company will be recorded in the financial statements when realized. Additionally, any award received by the Company will be net of certain contingent fees related to the lawsuit.
SUPPLEMENTAL INFORMATION
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1996, AND 1995
Item 9.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Company's directors and executive committee's fees for 1997 were as follows: Dale S. Coenen $25,000.00; Duncan Miller, $25,000.00; Gerald J. Murphy, $25,000.00; and Matthew M. Wirgau, $25,000.00.
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 13, 1998, 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, 1997, 1996, and 1995 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, 1997, filed with the Securities and Exchange Commission on November 10, 1997 incorporated herein by reference. Exhibit 21 List of Subsidiaries (see page 35).
(b) No reports on Form 8-K for the three months ended December 31, 1997 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: 3/25/98 /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:
/s/ Dale S. Coene President 3/25/98 - -------------------------- ---------------- (Dale S. Coenen) /s/ Kai Kosanke - -------------------------- Vice-President 3/25/98 (Kai Kosanke) and Chief Financial Officer -----------------
/s/ Paul Clemo Assistant Treasurer 3/25/98 - -------------------------- ----------------- (Paul Clemo)
/s/ Matthew M. Wirgau Director 3/25/98 - -------------------------- ----------------- (Matthew M. Wirgau)
Exhibit Index