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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 June 30, 2004 Commission File Number 0-4539
TRANS-INDUSTRIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2598139
---------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2637 S. Adams Road, Rochester Hills, MI 48309
---------------------------------------------
(Address) (Zip Code)
Registrant's Telephone Number, including Area Code (248) 852-1990
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
YES [ ] NO [X]
The number of shares outstanding of registrant's Common stock, par value $.10
per share, at June 30, 2004 was 3,139,737.
TRANS-INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
A. Consolidated Statements of Operations ---
Three months ended June 30, 2004 and 2003.
Six months ended June 30, 2004 and 2003.
B. Consolidated Statements of Comprehensive Income/(Loss)
Six months ended June 30, 2004 and 2003.
C. Consolidated Balance Sheets ---
June 30, 2004 and December 31, 2003
D. Consolidated Statements of Cash Flows ---
Six months ended June 30, 2004 and 2003.
E. Notes to Consolidated Financial Statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
2
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
A. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For 3 Months Ended: For 6 Months Ended:
------------------- -------------------
6/30/04 6/30/03 6/30/04 6/30/03
------- ------- ------- -------
1. Gross sales less discounts, returns and allowances $ 7,697,537 $ 8,542,959 $ 15,232,466 $ 17,192,759
2. Cost of goods sold (note 2) 7,988,935 5,862,470 13,594,809 11,921,401
----------- ----------- ------------ ------------
3. Gross Profit (291,398) 2,680,489 1,637,657 5,271,358
4. Selling, general and administrative exp. 2,141,985 2,657,598 4,107,318 5,295,986
5. Restructuring costs (note 8) 53,397 -0- 128,998 272,859
----------- ----------- ------------ ------------
6. Operating income/(loss) (2,486,780) 22,891 (2,598,659) (297,487)
7. Other (income)/ expense
Interest expense 161,068 161,720 323,576 331,769
Other income (4,280) (1,999) (11,211) (2,008)
----------- ----------- ------------ ------------
Total other (income)/expense 156,788 159,721 312,365 329,761
----------- ----------- ------------ ------------
8. Earnings/(loss) before income taxes (2,643,568) (136,830) (2,911,024) (627,248)
9. Income tax expense/(benefit) -0- -0- -0- (17,000)
----------- ----------- ------------ ------------
10. Net earnings/(loss) (2,643,568) (136,830) (2,911,024) (610,248)
11. Preferred dividend (24,792) -0- (24,792) -0-
----------- ----------- ------------ ------------
12. Net earnings/(loss) available to common shareholders $(2,668,360) $ (136,830) $ (2,935,816) $ (610,248)
=========== =========== ============ ============
13. Earnings/(loss) per share: (note 6)
Basic $ (.85) $ (.04) $ (.94) $ (.19)
Diluted $ (.85) $ (.04) $ (.94) $ (.19)
=========== =========== ============ ============
See Notes to Financial Statements
3
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS) (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
Net earnings/(loss) $(2,911,024) $ (610,248)
Other comprehensive loss:
Equity adjustment from foreign
currency translation. (5,145) (5,756)
----------- -----------
Comprehensive earnings/(loss) $(2,916,169) $ (616,004)
=========== ===========
See Notes to Financial Statements
4
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
C. CONSOLIDATED BALANCE SHEETS
ASSETS
6/30/04 12/31/03
(Unaudited) (Audited)
----------- ---------
Current Assets
Cash $ 9,564 $ 166,488
Accounts receivable 6,253,631 7,528,157
Notes receivable 79,500 89,000
Inventories (Note 2) 6,501,933 9,204,145
Prepaid expenses 318,359 236,555
----------- -----------
Total current assets 13,162,987 17,224,345
Property, Plant & Equipment, at Cost
Land 140,089 140,089
Buildings 4,195,397 4,257,569
Machinery & equipment 10,834,842 10,732,305
----------- -----------
15,170,328 15,129,963
Less: accumulated
depreciation (11,834,403) (11,518,659)
----------- -----------
Net plant and equipment 3,335,925 3,611,304
Other Assets
Patents, licenses & trademarks,
net of accumulated amortization 9,073 11,071
Net real estate held for sale 141,001 142,428
Goodwill 150,369 150,369
Sundry -0- 25,000
----------- -----------
Total assets $16,799,355 $21,164,517
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
6/30/04 12/31/03
(Unaudited) (Audited)
----------- ---------
Current Liabilities
Notes Payable (Note 5) $ 5,326,358 $ 6,298,288
Current installments
- Long term debt (Note 5) 2,432,062 3,143,195
Accounts payable - trade 3,776,007 3,930,700
Accrued liabilities 1,475,651 2,341,322
----------- -----------
Total current liabilities 13,010,078 15,713,505
Long term debt
Other non-current liabilities 292,896 296,669
Stockholders' Equity
Preferred stock of $1.00 par value
per share - authorized 500,000 Shares,
212,799 and 19,000 shares issued
at 06/30/04 and 12/31/03 respectfully 212,799 19,000
Common stock of $.10 par value per
share - authorized 10,000,000 shares;
3,139,737 shares issued 313,974 313,974
Additional paid-in capital 7,121,004 5,953,081
Retained earnings (4,244,160) (1,229,621)
Accumulated other comprehensive income 92,764 97,909
----------- -----------
3,496,381 5,154,343
Total liabilities
and stockholders equity $16,799,355 $21,164,517
=========== ===========
See Notes to Financial Statements
5
TRANS-INDUSTRIES, INC.
Consolidated Statements of Cash Flows
D. For the Six Months Ended June 30, 2004 and 2003
2004 2003
---- ----
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings/(loss) $(2,911,024) $ (610,248)
Adjustments to reconcile net earnings/(loss)
to net cash provided by operations:
Loss on disposal of Vultron International Ltd. Assets -0- 272,859
Depreciation/Amortization 434,567 467,038
Deferred income taxes (benefit) -0- 40,000
Inventory write down 2,300,000 -0-
(gain) Loss on sale of property and equipment (4,770) (1,500)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,284,026 87,018
Decrease (increase) in inventory 402,211 (140,071)
Decrease (increase) in prepaid expense (81,804) (44,374)
Increase (decrease) in accounts payable (154,693) 1,048,585
Increase (decrease) in accrued liabilities (890,463) (74,254)
Increase (decrease) in income taxes -0- (17,000)
Other 26,998 (47,497)
----------- ----------
Net Cash Provided (Used) by Operations 405,048 980,556
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (157,761) (317,209)
Proceeds from sale of property and equipment 4,770 1,500
Net Cash Provided (Used) by Investing (152,991) (315,709)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (repayment) of term
borrowings (714,906) (459,213)
Net proceeds (payment) of credit line (971,930) (160,416)
Net proceeds from issuance of preferred stock 1,283,000 -0-
----------- ----------
Net Cash Provided (Used) by Financing (403,836) (619,629)
Effect of foreign currency exchange rate changes (5,145) (5,756)
----------- ----------
Net decrease in cash (156,924) 39,462
Cash at beginning of year 166,488 24,996
----------- ----------
Cash at end of quarter $ 9,564 $ 64,458
=========== ==========
Supplemental Disclosures:
Interest paid $ 265,026 $ 330,351
Income taxes paid $ -0- $ -0-
See Notes to Financial Statements
6
TRANS-INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003
D. (Continued)
Supplemental disclosure of non-cash investing activities:
In March 2003, the Company sold certain assets of Vultron International, Ltd. in
exchange for a note receivable of $ 160,000.
See Notes to Financial Statements
7
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,
2003 has been prepared from the Company's books and records without audit.
Financial information as of December 31, 2003 has been derived from the
audited financial statements of the Company. In the opinion of management,
all adjustments consisting of normal recurring adjustments necessary for a
fair presentation of the financial information for the periods indicated,
have been included. For further information regarding the Company's
accounting policies, refer to the consolidated financial statements and
related notes included in the Company's annual report on Form 10-K for the
year ended December 31, 2003.
2. Inventories
The major components of inventories are:
6/30/04 12/31/03
------- --------
Raw Materials $3,223,954 $4,886,286
Work in Process 1,454,428 2,373,247
Finished Goods 1,823,551 1,944,612
---------- ----------
$6,501,933 $9,204,145
========== ==========
Inventories are stated net of reserves, which are recorded as a cost of
sales expense when set up. At 6/30/04 and 12/31/03 reserves were
$3,443,582 and $1,106,476 respectfully. During the second quarter of 2004
the Company established a $2.3 million reserve for slow moving and
obsolete inventory. This additional inventory reserve resulted from
several factors that occurred during the quarter. Late in the first
quarter of 2004 and into the second quarter, the next phase of the
Company's restructuring program was initiated, beginning with the
appointment of a new President and Chief Operating Officer and the
development of strategic product options. The Company's existing product
offerings were analyzed and some have been curtailed due to the phase out
of some products by some OEM manufacturers. Personnel have been further
reduced thereby reducing product absorption costs. Additionally, the
Company has moved to standardize more of its product in the Informational
Systems Business. In light of a decline in sales during the second quarter
and the changed business direction, it was determined a portion of the
inventory would not be used going forward.
3. Principles of Consolidation
There have been no significant changes in the principles of consolidation
since our most recent audited financial statements.
4. Significant Accounting Policies
There have been no significant changes in accounting policies since our
most recent audited financial statements.
8
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long-Term Debt
At June 30, 2004 Trans-Industries continued to be in default of certain
covenants of its bank debt with Comerica Bank ("Comerica"). The Company
did not receive a waiver for these defaults and the lender has reserved
did rights and remedies and indicated that a waiver would not be granted
with regard to the Company's non-compliance with the tangible net worth
covenant. Comerica monitored the Company's demand line of credit and its
mortgage loans. As a result of these circumstances, the Company reflected
all of its existing lender debt as current, though the lender had not
accelerated term debt maturity or demanded payment. Additionally, on July
12, 2004, the Company closed on the sale of its Rochester Hills
manufacturing facility. The sale resulted in a gain of $2.5 million and
$2.3 million of the proceeds were used to pay off the term debt due to
Comerica.
The Company also had a secured $7,500,000 line of credit, from Comerica in
the form of a demand note, of which $5,326,358 was utilized at June 30,
2004. Interest was charged at Comerica's prime lending rate, plus 3.5% and
was payable monthly.
On August 18, 2004 the Company closed refinancing with Huntington National
Bank. The Company used the proceeds from the refinancing to repay its
former lender Comerica Bank in full. The new loan agreement with
Huntington National Bank includes a mortgage on its real estate for
$2,000,000. The mortgage is a five year note, amortized over ten years
with monthly payments of $16,667.67 a final balloon payment of $1,000,000
due at maturity. Interest on the mortgage is at 1.75 percent over the
banks prime lending rate. Additionally, the Company obtained a $6,000,000
line of credit secured by all of the company's assets. The credit line is
a three-year facility with an interest rate of 1.25 percent over the banks
prime lending rate.
6. Earnings (Loss) Per Share
For the three and six months ended June 30, 2004, and the three and six
months ended June 30, 2003, all outstanding options and shares of
convertible preferred stock have been excluded from the computation of
diluted earnings (loss) per share as the effect would be anti-dilutive.
9
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
6/30/04 6/30/03
------------------------------- ----------------------------------
LONG- LONG-
LIVED LIVED
REVENUES ASSETS REVENUES ASSETS
-------- ------ -------- ------
United States $13,383,232 $3,636,368 $11,923,168 $4,249,417
United Kingdom 40,445 -0- 231,284 -0-
Canada 1,754,689 -0- 5,026,217 -0-
Other 54,100 -0- 12,090 -0-
----------- ---------- ----------- ----------
Total $15,232,466 $3,636,368 $17,192,759 $4,249,417
=========== ========== =========== ==========
8. Restructuring Costs
In March of 2003, the Company sold the assets of its foreign subsidiary,
Vultron International, Ltd. to its managing director. As a result, the
Company recorded restructuring charges in the amount of $272,859.
Additionally, in July 2003 the Company initiated a significant
restructuring program at Vultron, Inc., its informational systems
business. Costs for the year ending December 31, 2003, associated with the
restructuring are detailed in the table below. These costs include (1)
severance and vacation pay for those employees terminated, (2) consulting
and advisor fees incurred associated with the advice and help in
identifying and implementing various cost saving opportunities, (3) fees
for various leases terminated early, and (4) legal fees.
Severance and Vacation $195,653
Consulting and Advisor Fees 321,989
Cancelled Leases 2,831
Legal Fees 38,530
--------
Subtotal 559,003
Sale of Vultron International 272,859
--------
Total $831,862
========
In addition to the restructuring costs discussed above, the Company during
the third quarter of 2003 recorded an inventory write down of $1,120,000
relating principally to discontinued product offerings, which were
discontinued in connection with the restructuring of Vultron, Inc. This
amount is included in the cost of goods sold.
10
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Restructuring Costs - Continued
Restructuring costs for the first and second quarter of 2004, were $75,601
and $53,397 respectfully. These costs were for consulting fees. The
consultant was terminated in June 2004 and the Company expects
restructuring costs for the balance of 2004 to be approximately $25,000.
9. Sale of Series B Preferred Stock and Warrants
On March 4, 2004, the Company completed the sale of 193,799 shares of
Series B Convertible Preferred Stock ("Series B Stock") and 145,384.84
warrants to purchase common stock for $1,500,000 to the Harry E. Figgie,
Jr. Trust (the "Trust"), a trust controlled by a member of the Company's
Board of Directors. Issuance costs were $217,000. The warrants have an
exercise price of $3 per share. The warrants have been allocated a value
of $195,000, which is the estimated fair value of the warrants on the date
of the sale as determined by the Black-Sholes pricing model. The proceeds
allocated to the preferred stock is $1,305,000. The preferred stock
contains a beneficial conversion feature of $78,721 attributable to the
difference between the ascribed value of the preferred stock and the
market value of the underlying number of common shares into which the
preferred stock may be converted. The value assigned to the beneficial
conversion feature is amortized from the date of issuance to the earliest
conversion date and is treated as a dividend. Because the preferred stock
is convertible at any time after issuance, the entire beneficial
conversion feature was treated as a dividend on the date the preferred
stock was issued.
Dividends
The holder is entitled to receive cumulative quarterly dividends at a rate
per annum of $0.387 per share, commencing on April 1, 2004. The Company at
its option, in no more than eight of the first twelve full quarters, may
elect to pay the accruing dividends in additional shares of Series B Stock
at $7.74 per share, or in cash.
Conversion
At the holder's option, each share of Series B Stock is convertible into
three shares of the Company's common stock. At any time after February 27,
2007 and on the business day immediately following the period of 30
consecutive business days on which trades occur during which the market
price of the Company's common stock equals or exceeds $5.16 per share,
each share of Series B Stock will automatically be converted into three
shares of common stock
Redemption
At any time after February 27, 2007, the Company may, at its option,
redeem all, but not less than all of the holder's unconverted shares of
Series B Stock by paying cash equal to the stated value, $7.74 per share,
plus all declared or accumulated but unpaid dividends.
11
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.
10 Stock Based Compensation
At June 30, the Company has a stock-based employee compensation plan, which is
described more fully in Notes B & I in the Company's Annual Report. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price greater
than or equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Three Months Ended June 30,
-------------------------------
2004 2003
-------------- ------------
Net earnings (loss), available to common stockholders $ (2,668,360) $ (136,830)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (15,733) (10,195)
-------------- ------------
Pro forma net earnings (loss) available to
Common stockholders $ (2,684,093) $ (147,025)
-------------- ------------
Earnings (loss) per share:
Basic-as reported $ (.85) $ (.04)
Basic-pro forma $ (.85) $ (.05)
Diluted-as reported $ (.85) $ (.04)
Diluted-pro forma $ (.85) $ (.05)
12
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 Stock Based Compensation - Continued
Six Months Ended June 30,
-------------------------------
2004 2003
-------------- ------------
Net earnings (loss), available to common stockholders $ (2,935,816) $ (610,248)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (31,466) (20,390)
-------------- ------------
Pro forma net earnings (loss) available to
Common stockholders $ (2,967,282) $ (630,638)
-------------- ------------
Earnings (loss) per share:
Basic-as reported $ (.94) $ (.19)
Basic-pro forma $ (.95) $ (.20)
Diluted-as reported $ (.94) $ (.19)
Diluted-pro forma $ (.95) $ (.20)
13
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Six Months Ended June 30, 2004
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. Except for
statements of historical fact, this discussion includes certain forward-looking
statements based on management's estimate of trends and economic factors in the
markets in which the corporation is active, as well as the corporation's
business plans. We have used words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "plan," "intend," and similar expressions
in this report to identify forward-looking statements. In light of recent
securities law developments, including the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the corporation notes that
such forward-looking statements are subject to risks and uncertainties.
Accordingly, the corporation's actual results may differ from those set forth in
such statements. Significant changes in economic conditions, regulatory or
legislative changes affecting Trans-Industries, Inc., its competitors, or the
markets in which it is active, or changes in other factors may cause future
results to vary from those expected by the Company. The Company believes any
forward-looking statements it has made are based on current management
expectations and they are subject to risks and uncertainties. These risks and
uncertainties include, but are not limited to the following:
- A further decline of economic conditions in general and in the mass
transit industry in particular;
- Changes in customer requirements or reduced demand for the Company's
products and services;
- The inability of the Company to successfully implement its
restructuring program in the informational systems business;
- Competitive factors (including the introduction or enhancement of
competitive products and their successful introduction into the
marketplace);
- Product pricing decreases and component price increases that may
result in materially reduced gross profit margins for the Company's
product;
- The success of management's decision to change the Company's
business direction;
- Unforeseen increases in operating expenses; and
- The inability to attract or retain management, sales, or engineering
talent.
All of 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.
14
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Six Months Ended June 30, 2004
Recent Developments:
New Bank Lender
On August 18, 2004, the Company closed refinancing with Huntington National
Bank. The Company used the proceeds from the refinancing to repay its former
lender, Comerica Bank, in full. The new loan agreement with Huntington National
Bank includes a mortgage on its real estate for $2,000,000. The mortgage is a
five year note, amortized over ten years with monthly payments of $16,667.67 and
a final balloon payment of $1,000,000 due at maturity. Interest on the mortgage
is at 1.75 percent over the banks prime lending rate. Additionally, the company
obtained a $6,000,000 line of credit secured by all of the Company's assets. The
credit line is a three-year facility with an interest rate at 1.25 percent over
the banks prime lending rate.
Issue of Subordinated Convertible Note
In connection with the initial closing of the sale of Series B Stock and related
warrants discussed in Note 9 to the financial statements above, the Company
granted an option to the Trust to purchase between $500,000 and $1,500,000
shares of Series B-1 Stock and related warrants for $9 per share, including
warrants. The option must be approved by the Company's stockholders pursuant to
certain National Association of Securities Dealers, Inc. ("NASD") rules
providing for qualitative listing requirements applicable to securities traded
on the NASDAQ National Market and NASDAQ SmallCap Market. The Company intends to
seek stockholder approval at the Company's next annual meeting.
Huntington required an additional capital infusion as a condition to the closing
of the refinancing. Due to the fact the Trust was unable to exercise the option
discussed in Note 9 above until approved by the Company's stockholders pursuant
to NASD rules, the Trust loaned the Company $1,500,000 in return for a
subordinated convertible note. The transaction documents between the Company and
the Trust were amended accordingly. The principal and interest due under the
note is convertible into a number of shares of Series B-1 Stock calculated at a
price of $9 per share and a number of warrants to purchase shares of B-1 Stock
equal to 25% of the number of shares of common stock that the shares of Series
B-1 stock are convertible into. In addition, the exercise price for the warrants
is $3 per share. The note is convertible only if the conversion is approved by
the Company's stockholders pursuant to the Company's next annual meeting. The
holder of shares of Series B-1 Stock is entitled to receive quarterly dividends
at a rate per annum of $0.287 per share commencing October 1, 2004. In addition,
the shares of Series B-1 Stock have conversion, redemption, and voting rights
identical to those of the shares of Series B Stock.
15
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Six Months Ended June 30, 2004
Sale of Rochester Hills Plant
On July 12, 2004, the Company closed on the sale of its Rochester Hills facility
and realized net proceeds of approximately $2.6 million, of which $2.3 million
was used to retire, in full, the term debt then due to Comerica Bank.
Sales and Earnings
Sales were $7,697,537 for the quarter. This represented a decline of 9.9% from
sales of $8,542,959 for the three months ended June 30, 2003. This decline in
sales was concentrated in the lighting products business segment and resulted
primarily from a decrease in the level of bus production caused by a decrease in
public funding for the purchases of buses. Bus production is expected to remain
flat for the balance of this year. A slight pickup is expected in 2005.
Moreover, in the current quarter, the Company shipped very little luggage loft
product, which represents a higher dollar content per bus than regular lighting
products. It is expected shipments of luggage loft product will increase as bus
production increases. While sales of digital information products improved, such
sales were insufficient to offset the decrease in lighting shipments noted
above. These same factors resulted in a decrease in sales of $1,960,293, or
11.4%, to $15,232,466 for the six months ended June 30, 2004 from $17,192,739
for the six-month period ended June 30, 2003. Additionally, the market place
remains very price sensitive and has prevented the increasing of sales prices.
A loss of $2,643,568 was incurred for the quarter consisting of $343,568 from
operations in addition to $2,300,000 for the establishment of an additional
inventory reserve. This additional inventory reserve resulted from several
factors that occurred during the quarter. Late in the first quarter of 2004 and
into the second quarter, the next phase of the Company's restructuring program
was initiated, beginning with the appointment of a new President and Chief
Operating Officer and the development of strategic product options. The
Company's existing product offerings were analyzed and some have been curtailed
due to the phase out of some products by some OEM manufacturers. Personnel have
been further reduced thereby reducing product absorption costs. Additionally,
the Company has moved to standardize more of its product in the Informational
Systems Business. In light of a decline in sales during the second quarter and
the changed business direction, it was determined a portion of the inventory
would not be used going forward. The Company is continuing its cost reduction
program through organizational changes, improved product offerings, additional
personnel downsizing and improving manufacturing operations through outsourcing
and process improvement. Cost reduction opportunities continued to be emphasized
with formal programs initiated in all cost segments. However, savings from these
programs are not expected to be realized in full until later in the year as
legacy costs in the form of severance payments continued throughout the quarter.
We believe improvement in our system for purchasing materials, particularly in
the digital information systems operation, was evident in the period as enhanced
utilization of the Company's materials requirements production system initiated
last year provided needed information for improved
16
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three And Six Months Ended June 30, 2004
production scheduling against available inventory. Company management believes
the successful implementation of its cost reduction and restructuring programs
is a vital component to returning the Company to profitability.
For the second quarter of 2004, gross margin, calculated before the inventory
write down, was 26.1 percent compared to 31.4 percent for the same period last
year. For the six month periods of 2004 and 2003 the gross margins before the
inventory write down were 25.9 percent and 30.7 percent respectfully. This
decrease of 5.3 percent for the quarter and 4.8 percent for the six month period
is a result of competitive pricing and product mix of the Company's bus lighting
products. Administrative expenses for the second quarter of 2004 were
approximately $2,142,000, a reduction of $516,000 or 19.4 percent from the same
period a year ago. Administrative expenses for the six month period of 2004 were
$4,107,000 compared to $5,296,000 for the first six months of 2003. This is
primarily attributable to staff reductions.
Interest
Interest expense amounted to approximately $161,000 and $162,000 for the second
quarter of 2004 and 2003, respectively. This decrease of $1,000 was the result
of lower debt levels offset by interest rate increases in 2004.
Liquidity and Capital Resources
For the six-month period ending June 30, 2004, the Company generated $405,048
from operations. This was driven by the decrease in accounts receivable of
$1,284,026 which was the result of reduced sales for the period. In March of
2004, the Company, as discussed in Note 9, completed the private placement of
$1.5 million of Series B Stock and warrants and used the proceeds towards
reducing term debt and trade payables. In July 2004, the Company closed on the
sale of its Rochester Hills facility and realized net proceeds of approximately
$2.6 million, of which $2.3 million was used to retire, in full, the term debt
due Comerica Bank. For the balance of 2004, the Company's required working
capital is expected to be met from the cash flow of operations and refinancing
with Huntington National Bank.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and, to a lesser
extent, foreign currency fluctuations. We have not entered into interest rate
transactions for speculative purposes or otherwise. Our primary interest rate
risk exposure has resulted from floating rate debt related to our revolving loan
facility and would be immaterial to our results from operations if rates were to
increase 1% from June 30, 2004 rates. We currently do not hedge our exposure to
floating interest rate risk. Our foreign currency exposures were immaterial as
of June 30, 2004.
17
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of June 30, 2004, that its disclosure
controls and procedures are not effective for gathering, analyzing and
disclosing on a timely basis the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934. This determination was
made on the basis that our Chief Executive Officer and Chief Financial Officer
believe that the Company's current resources are insufficient to address its
financial reporting requirements in a timely fashion.
The Company is continuing to evaluate its resources for addressing its financial
reporting and making appropriate changes to provide sufficient resources and
time to prepare and file periodic reports within the time periods specified in
the SEC's rules and regulations and provide for reviews by management, the Audit
Committee and the Board of Directors. This evaluation is intended to lead to
changes that will ensure to the extent possible that our disclosure controls are
effective for gathering, analyzing and disclosing the information we are
required to disclose in our reports filed under the Securities Exchange Act of
1934.
(b) CHANGES IN INTERNAL CONTROLS.
There have been no changes in the Company's internal controls that occurred
during the Company's most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
18
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the CEO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the CFO pursuant of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
On May 13, 2004 the Company filed a current report on Form 8-K
regarding its first quarter financial results.
On May 24, 2004 the Company filed a current report on Form 8-K
regarding changes in registrants certifying accountants.
On June 1, 2004 the Company filed a current report on Form 8-K
regarding changes in its certifying accountants.
19
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: August 23, 2004 /s/ Kai Kosanke
--------------------------------
Kai Kosanke, Treasurer
and Chief Financial Officer
Date: August 23, 2004 /s/ Keith LaCombe
--------------------------------
Keith LaCombe
Assistant Treasurer
20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Chief Executive Officer pursuant to Section
302
EX-31.2 Certification of Chief Financial Officer pursuant to Section
302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002