U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0 - 14835
TRANSNATIONAL INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 22-2328806
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Identification Number)
Organization)
Post Office Box 198
U.S. Route 1
Chadds Ford, Pennsylvania 19317
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number (610) 459-5200
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock
($0.20 par value per share)
(Title of class)
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
(1)
<PAGE>
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
The Issuer's revenues for the fiscal year January 31, 1997, were
$6,842,216.
The aggregate market value of the voting stock held by non-affiliates
of Registrant as of April 30, 1997 was approximately $250,521 based on the
average of bid and asked price of these shares. Shares of Common Stock held by
each executive officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates.
As of April 30, 1997, 324,220 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional small business disclosure format (check one) YES NO X
(2)
<PAGE>
PART I
ITEM 1. BUSINESS
General Development of Business
Transnational Industries, Inc., ("the Company"), is a holding company. The
Company specializes through its subsidiary, Spitz, Inc. ("Spitz"), in the design
and manufacture of computer-controlled astronomical simulation equipment, and
domed projection screens.
Spitz was incorporated in 1985 and, in 1986, acquired 94.5% of Spitz Space
Systems, Inc. ("Space"), which had been founded in 1944. Space merged into Spitz
and became a wholly-owned subsidiary of the Company on September 30, 1986.
Narrative Description of Business
Planetarium and Dome Equipment
Spitz is the world's leading producer of astronomical simulation equipment and
domed projection screens, which are proprietary to Spitz.
- --Planetarium projector systems
Spitz designs, manufactures, installs, repairs, and maintains (under renewable
annual contracts) planetarium projector systems. More recent systems
manufactured by Spitz emphasize computer controls, integrated sound and lighting
systems, and peripheral special effects such as video projection. Systems are
designed to meet individual customer preferences, through the selection of
standardized basic systems and various add on options. Spitz is capable of
providing all of the interior furnishings and equipment for the planetarium
theater as well as complete planetarium show productions. Additionally, Spitz's
experience enables it to advise on the theater design and architectural
integration of the planetarium equipment. Spitz believes that these skills and
capabilities are becoming increasingly important to buyers of planetarium
systems. The principal customers for the Company's planetarium business are
entities in the entertainment and educational markets such as museums and
schools.
- --New video projector systems
In fiscal 1997 Spitz introduced ImmersaVision(TM), its new line of video
projector products. ImmersaVision uses the latest advances in video projection
and desktop video graphics combined with other panoramic visual displays and
sound effects in dome theaters to create an immersive virtual reality
experience. Markets targeted include existing and new planetarium theaters and
various other applications which will benefit from immersive multi-media
displays for wide audiences. ElectricSky(TM) is an ImmersaVision system
configured for the Planetarium market. ElectricHorizon(TM) is an ImmersaVision
system configured for interactive virtual reality applications. In fiscal 1997,
Spitz sold the first ElectricSky system to the Town of Watson Lake, Yukon,
Canada for a new theater for tourism. In fiscal 1997, Spitz also delivered the
first
(3)
<PAGE>
ElectricHorizon System, for an exhibit at the Carnegie Science Center in
Pittsburgh, Pennsylvania. The Carnegie Science Center ElectricHorizon exhibit is
owned and funded by Spitz and various suppliers of the hardware and software
content for the purpose of demonstration.
- --Domed Structures
Spitz also designs, manufactures, and installs domed projection screens which
are used in planetarium theaters and a variety of other applications such as
ride simulators, special or large format film theaters, and simulation training
systems. Spitz's experience enables it to advise on the architectural
integration of domed projection screens and solve complex optical problems
involving reflectivity and image distortion on compoundly curved surfaces. Spitz
believes that these skills are becoming increasingly important to buyers of
domed projection screens. The principal customers in Spitz's dome business are
entities in the entertainment, educational and commercial and military
simulation markets. Customers include major theme parks, world expositions,
museums, schools, and military defense contractors.
Materials and Supplies
Planetarium systems, ImmersaVision systems and domes are manufactured and
assembled from standard metal materials, complex electronic components and
computer controls. The majority of the components are standard but some are
custom made by vendors at the direction of Spitz. The components, as well as the
metal materials, are readily available from numerous supply sources.
Patents and Licenses
Spitz relies principally on a combination of contracts and trade secrets to
protect its proprietary interests in its production processes and its business.
None of the products sold by Spitz are subject to patents and Spitz does not
believe its success depends on the ownership of patents.
Principal Customers
During fiscal 1997, revenues of $769,000 (11.2% of total revenues) were derived
from sales to one customer. Revenues of $1,709,000 (25.0% of total revenues)
were derived from sales to the next largest four customers. Of these four, no
individual customer exceeded 10% of total revenues. Users of Spitz products
normally have not had the need for recurring purchases except for maintenance
and parts. Accordingly, Spitz relies on sales to new projects or replacement of
or enhancement to existing systems. Spitz domed projection screens are sometimes
sold to the suppliers of large format film projectors for inclusion with systems
sold to its customers as opposed to Spitz selling directly to the end user.
Also, the large aerospace companies typically buy domed projection screens from
Spitz for inclusion in military training systems sold to its customers. While
this creates a competitive strength for Spitz because of its strong support
capabilities and preference among the system suppliers, it will also result in
reliance on sales to a few system suppliers.
(4)
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Competition
While Spitz is the world's leading producer of astronomical simulation equipment
and domed projection screens, its business is competitive. Management estimates
that there are one domestic and four foreign competitors that manufacture
competing planetarium systems. Competition is expected for ImmersaVision from
existing planetarium competitors and other suppliers of virtual reality display
mediums but cannot be quantified yet. There are two known domestic competitors
that manufacture domed projection screens. In addition, construction or metal
fabrication contractors will occasionally supply domed projection screens,
particularly in foreign markets. The many competitive factors influencing the
markets for Spitz's products include price, performance, customer preferences,
design and integration support, and service capabilities.
Spitz is unique among its competitors by virtue of its capability as a single
source that can directly supply and integrate all of the equipment in the
planetarium theater including the projection system, sound, lighting, computer
control system and domed projection screen. Years of involvement in the design
of domed theater systems for many different applications and dome market
distribution channels are expected to provide Spitz competitive strength in the
markets targeted by ImmersaVision. As a single source, capable of integrating
all of the equipment in the theater from the screen through show production,
Spitz expects to attract customers who are unwilling to take on such complex
tasks. Also, Spitz plans to develop proprietary programming tools while
maintaining strong compatibility with various formats to keep a competitive
advantage in ImmersaVision markets. The Company believes that Spitz's long
history and proven performance as the supplier of the vast majority of the
world's domed projection screens are also competitive strengths.
Competitors selling planetarium projector systems have significantly greater
financial resources than the Company, putting the Company at a disadvantage in
new system development and sales promotion. Competitors selling domed projection
screens continue to provide strong price competition. Foreign currency
fluctuations affect Spitz's pricing against its foreign competitors. The
strengthening U.S. dollar will weaken Spitz's price competitiveness among
foreign competitors. Also, future fluctuations and indirect economic effects of
the foreign currency markets remain uncertain. The continued success of Spitz's
products will depend on keeping pace with competing technologies and selling
efforts while maintaining price competitiveness and good relationships with
system suppliers in the large format film and military training markets.
Research and Development
Spitz conducts research and development and the costs of such activities were
$415,000 in fiscal 1997 and $365,000 in fiscal 1996.
Environmental Compliance
Spitz routinely improves and maintains various systems designed to control the
quality of air and water discharged from its plant, including dust control and
ventilation. Spitz anticipates that it will continue to make similar routine
expenditures to comply with current federal, state, or local
(5)
<PAGE>
environmental regulations. The Company does not believe, however, that such
expenditures will be significant or materially affect its earnings or
competitive position.
Employees
At January 31, 1997, the Company and Spitz had 53 permanent employees, of whom
48 were employed full time.
ITEM 2. PROPERTIES
The Company and Spitz are located in a 46,525 square-foot building on
approximately 16.7 acres on U.S. Route 1, Chadds Ford, Pennsylvania, which is
leased to Spitz by an unrelated third party through April 1998, with an option
to renew. The building houses all of the companies administrative offices and
production facilities and is in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
There was no material litigation pending at the date of this filing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the three
months ended January 31, 1997.
(6)
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information for Common Stock
The principal market on which the Company's Common Stock is traded is the Over
the Counter market. Various market dealers make the market of the Company's
stock and trades are made through the OTC Bulletin Board or what is commonly
known as the "pink sheets." The table below presents the high and low bid
over-the-counter market quotations by quarter for fiscal 1997 and 1996. Prices
have been adjusted retroactively to reflect a one for twenty reverse stock split
effective in August 1995. The quotations, obtained from OTC Bulletin Board
statistics, reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
Fiscal 1997 Fiscal 1996
-------------------------------------
High Low High Low
-------------------------------------
First Quarter $2.00 $2.00 $3.20 $3.00
Second Quarter 2.00 2.00 3.00 3.00
Third Quarter 2.00 1.50 3.00 2.50
Fourth Quarter 1.63 1.25 2.63 2.00
Holders
At April 30, 1997, there were approximately 100 holders of record of common
stock.
Dividends
The Company has never paid cash dividends on its common stock, and the current
policy of its Board of Directors is to retain all earnings to provide funds for
the growth of the Company. In addition, covenants contained in the current loan
agreements of the Company and its subsidiary with their primary lender prohibit
the payment of cash dividends by the Company. If the Company's financial
structure permitted the payment of cash dividends, it could not pay dividends on
its common stock until it paid to holders of the Company's preferred stock all
accrued and unpaid dividends thereon.
Preferred Stock
The holders of the Series B Cumulative Convertible Preferred Stock ("Series B
Preferred") are entitled to receive quarterly dividends, when and if declared by
the Company's Board of Directors, at an annual per share amount of $27.50. The
payment of such dividends would be prior and in preference to the payment of any
dividends on the Company's common stock. At January 31, 1997, accumulated but
undeclared and unpaid dividends with respect to the 1,744 outstanding shares of
Series B Preferred amounted to $299,750. The Series B Preferred shares may be
redeemed by the Company at $250 per share plus accumulated unpaid dividends of
$172 per share. The 1,744 shares of Series B Preferred are convertible into
10,259 shares of the Company's common stock.
(7)
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table presents for the periods indicated (i) the percentage which
certain items in the consolidated financial statements of the Company bear to
revenues and (ii) the percentage change in the dollar amount of such items from
year to year in the two-year period ended January 31, 1997.
Percentage of Revenues Percentage Change
Year ended January 31, 1997
------------------------- vs.
1997 1996 1996
---------------------------------------------------
Revenues 100.0% 100.0% 19.1%
Cost of sales 69.2 69.5 18.6
Gross margin 30.8 30.5 20.3
Selling expenses 7.9 7.6 24.3
Research and development 6.1 6.4 13.7
General and administrative 10.8 13.1 (1.9)
Operating income 6.0 3.4 107.6
Interest expense (income) 1.9 (0.3) *
Income before income taxes 4.1 3.8 29.2
Income taxes 0.1 - *
Net Income 4.0 3.8 26.3
- -----------
* Not meaningful
-----------
Revenues in the year ended January 31, 1997 (1997) were $6,842,000 compared to
$5,743,000 in the year ended January 31, 1996 (1996). The increase of $1,099,000
(19%) resulted from higher revenues from all of the Company's products. The
first revenues from ImmersaVision, the Company's new line of video projection
products, amounted to $250,000 in 1997. Dome revenues were $4,184,000 in 1997
compared to $3,906,000 in 1996, an increase of $278,000 (7.1%). The increase in
dome revenues was attributable to a higher revenue on domes sold for film
theaters, planetariums and ride simulators which was partially offset by lower
revenues from domes sold for military simulation. Planetarium revenues were
$2,408,000 in 1997 compared to $1,837,000 in 1996, an increase of $571,000
(31.1%). The increase in planetarium revenues was primarily due to sales of new
and refurbished systems for the educational market. Planetarium revenues include
amounts attributable to the sale of maintenance and parts of $1,153,000 in 1997
compared to $1,101,000 in 1996. The increase in maintenance and parts revenues
was primarily due to the timing of performance on preventive maintenance
agreements.
The Company's revenues from maintenance service and the sale of parts are
expected to increase moderately over time due to both inflationary price
increases and the expansion of the Company's customer base resulting from the
sale of new planetarium systems. For the remaining (and predominant) portions of
its revenues, the Company must rely on the sale of systems, both as replacements
for existing systems and new installations, in all of the various markets that
the
(8)
<PAGE>
Company serves. Sales orders and prospects for new film theater and ride
simulator domes remain at a high level at the present time. Revenues from new
and refurbished planetarium systems are also expected to continue at 1997
levels. In addition, the Company expects the ImmersaVision products to impact
revenue at increasing levels in fiscal 1998 and beyond. Research and development
efforts will continue with the goal to create new applications for ImmersaVision
that will enhance existing products and provide entry into new commercial
markets over the next several years.
Gross margins were relatively constant at 30.8% and 30.5 % in 1997 and 1996,
respectively. Gross margins on planetarium and dome products improved from
volume related efficiencies but were offset by lower gross margins on
introductory pricing on the sale of the first ImmersaVision system. Selling
expenses rose $106,000 (24%) in 1997 due to the restoration of selling staff
levels, promotional expenditures related to Spitz's fiftieth anniversary, and
costs of introducing the new ImmersaVision products. Selling expenses in fiscal
1998 are expected at current or increasing levels as marketing efforts on
ImmersaVision continue. Research and development expenses increased $50,000
(14%) in 1997 due to development efforts on ImmersaVision products. The Company
expects continuing increases in research and development activities in the
following years to develop proprietary programming tools and other commercial
applications for ImmersaVision. Research and development efforts to improve
existing planetarium products will also continue in order to maintain and
improve its market share among advancing competing technologies. General and
administrative expenses decreased $14,000 (2%) in 1997 due to reductions in
professional fees and costs associated with the shareholders meeting and reverse
stock split in fiscal 1996.
Reported interest expense was reduced in 1997 and eliminated in 1996 as a result
of the accounting in accordance with Statement of Financial Accounting Standards
No. 15 (Accounting by Debtors and Creditors for Troubled Debt Restructuring) by
which interest payments on modified debt agreements are not expensed but applied
to the adjusted book value of the debt. At January 31, 1996, debt book value
included $18,000 of expected interest payments remaining from the estimate based
on the original maturity date of February 1, 1996. Interest paid on modified
debt agreements amounted to $162,000 in 1997 of which $18,000 was applied
against the debt book value, reducing reported interest expense on modified debt
agreements to $144,000. Combined with interest paid on capital lease obligations
and reduced by interest income from temporary cash investments, this resulted in
net interest expense of $132,000 reported in 1997. In 1996, the entire amount of
$180,000 of interest paid on modified debt agreements was applied against the
debt book value. As a result, interest income net of interest paid on capital
lease obligations was reported in the amount of $18,000 in 1996. The Company
paid no federal income taxes in 1997 or 1996 as federal taxable income was
offset by the utilization of net operating loss carryforwards. State income
taxes amounted to $6,000 in 1997. In 1996, the Company was able to offset state
taxable income with prior net operating losses. Net operating losses are
expected to continue to offset federal taxable income for the foreseeable
future. The Company does expect to incur state income taxes in future years.
As a result of the above, the Company reported net income of $273,000 in 1997
compared to $216,000 in 1996
Liquidity and Capital Resources
The Company funds its continuing operations primarily by cash provided from
operating activities. The Company also uses a revolving credit agreement to fund
its working capital requirements. The Company usually receives progress payments
under the terms of its customer
(9)
<PAGE>
agreements. Payments are typically based on the
completion of various chronological, production and installation milestones.
Timing and the level of progress payments vary among agreements depending upon
many factors. The cumulative progress payments can be more or less than the cost
and estimated earnings recognized on an agreement during the period of
performance. The nature and timing of progress payments can cause cash flow from
operations to fluctuate from period to period. Some customer agreements require
the Company to provide standby letters of credit as performance security.
At January 31, 1997 there was no balance under the revolving credit agreement
compared to a balance of $269,000 at January 31, 1996. At January 31, 1997 and
1996 the $500,000 borrowing limit under the revolving credit agreement was
reduced by $129,000 for standby letters of credit. This resulted in unused
borrowing capacity of $371,000 at January 31, 1997 compared to $102,000 at
January 31, 1996. Additional standby letters of credit amounting to $138,000
were collateralized by cash at January 31, 1996. Additional liquidity was
provided by remaining cash balances of $953,000 at January 31, 1997 compared to
$201,000 at January 31, 1996. The increase in liquidity available from the cash
balances was due primarily to changes in operating assets resulting from the
timing of progress payments on customer contracts. The next source of liquidity,
trade accounts receivable, decreased to $1,077,000 at January 31, 1997 compared
to $1,178,000 at January 31, 1996.
The net cash provided by operating activities was $1,185,000 in 1997 compared to
net cash used of $299,000 in 1996, an increase in cash provided from operations
of $1,484,000. The increase consists of a $201,000 increase in cash generated
from operating income, $13,000 of lower interest payments net of interest
income, and an increase of $1,270,000 in cash provided by changes in operating
assets and liabilities.
Of the $1,185,000 provided by operations in 1997, $121,000 was invested in
capital additions and $450,000 was used by financing activities. Financing
activities included net pay downs of $269,000 on the revolving credit note,
payments of $25,000 on capital leases, and monthly principal payments on the
convertible term note of $156,000. Non cash financing transactions in 1997
consist of $65,000 of machinery and equipment acquired through capital leases.
In 1996, the $299,000 used by operations and $155,000 invested in capital
additions was partially offset by $123,000 provided from financing activities.
Financing activities included borrowing of $269,000 on the revolving credit
agreement less payments of $23,000 on capital leases, and monthly principal
payments on the convertible term note of $123,000. The activity netted to a
$331,000 decrease in cash balances to $339,000 at January 31, 1996. Non cash
financing transactions in 1996 consist of $57,000 of machinery and equipment
acquired through capital leases.
Total debt at January 31, 1997 was $1,521,000, a decrease of $403,000 from the
$1,924,000 at January 31,1996. In summary, this decrease was achieved through
$269,000 of net payments applied to the revolving credit note, $174,000 of
payments applied to term debt (including interest payments of $18,000) and
$25,000 of payments applied to capital lease obligations offset by $65,000 in
new capital lease obligations.
Capital additions consisting of the purchase and fabrication of machinery and
equipment and the development of computer software amounted to of $186,000
($65,000 by capital lease) and $206,000 ($51,000 by capital lease), in 1997 and
1996, respectively. When appropriate, the Company will fund the acquisition of
capital assets through capital leases or equipment financing notes. In the first
quarter of fiscal 1998, the Company acquired approximately $240,000 of
(10)
<PAGE>
equipment to create an in house demonstration of ImmersaVision. The Company is
exploring equipment financing alternatives for this purchase which will depend
on the outcome of the extension or replacement of its existing bank debt
agreements as well as the potential sale of the equipment to a customer.
The existing revolving credit agreement permits borrowing up to $500,000 subject
to a formula based on inventory and accounts receivable. The note under the
revolving credit agreement is payable by Spitz with monthly interest at prime
plus 2%. The Company is currently in discussions with a new lender regarding a
commitment to replace the existing debt agreements. In anticipation of the
replacement of the debt agreements, the existing lender has extended the
maturity of the current debt agreements from May 1, 1997 to August 1,1997. Under
the extension, the monthly payment on the term debt will be increased from
principal of $13,000 to $20,000 plus interest at prime plus 2% effective June 1,
1997. It is anticipated that the existing lender would extend the maturity
beyond one year under similar terms if the Company were unable to agree to terms
for the replacement of its existing debt agreements through a new lender.
However, there are no absolute assurances that the existing lender will agree to
such an extension.
The Company believes that with the extension or replacement of its debt
agreements under terms currently being discussed, its cash flow from operations
and existing cash balances will be sufficient to meet its cash requirements
through fiscal 1998. Liquidity beyond fiscal 1998 will depend on the Company's
ability to replace or further extend the existing debt agreements. The Company's
ability to expand and improve its existing products could be adversely affected
by restrictive terms of new or extended debt agreements.
(11)
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Auditors 13
Consolidated Balance Sheets 15
Consolidated Statements of Operations 16
Consolidated Statements of Changes in Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
(12)
<PAGE>
Report of Independent Auditors
To the Stockholders and
the Board of Directors
Transnational Industries, Inc.
We have audited the accompanying consolidated balance sheet of Transnational
Industries, Inc. as of January 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. 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 audit.
We conducted our audit 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 that our audit provides 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
Transnational Industries, Inc. at January 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ STOCKTON BATES & COMPANY, P.C
STOCKTON BATES & COMPANY, P.C.
Philadelphia, Pennsylvania
April 4, 1997
(13)
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
January 31,
-------------------
1997 1996
-------------------
Assets
Current Assets:
Cash $ 953 $ 339
Accounts receivable 1,077 1,178
Inventories 983 1,197
Other current assets 123 111
-------------------
Total current assets 3,136 2,825
Machinery and equipment:
Machinery and equipment, at cost 2,308 2,147
Less allowances for depreciation 1,723 1,563
-------------------
Net machinery and equipment 585 584
Other assets:
Repair and maintenance inventories, less provision
for obsolescence (1997--$1,061; 1996--$1,021) 190 206
Computer software, less amortization 187 199
Excess of cost over net assets of business acquired,
less amortization 1,961 2,028
-------------------
Total other assets 2,338 2,433
-------------------
Total assets $6,059 $5,842
===================
See notes to consolidated financial statements.
(14)
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
January 31,
-------------------
1997 1996
-------------------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 228 $ 408
Deferred maintenance revenue 574 536
Other current liabilities 287 297
Billings in excess of cost and estimated earnings 940 441
Current portion of long-term debt 542 190
-------------------
Total current liabilities 2,571 1,872
Long-term debt, less current portion 979 1,734
Stockholders' equity:
Series B Cumulative Convertible Preferred Stock,
$0.01 par value - 1,744 shares authorized, issued
and outstanding (liquidating value $735,750) 399 399
Common Stock, $0.20 par value--authorized
1,000,000 shares; issued and outstanding
324,220 shares 65 65
Additional paid-in capital 8,502 8,502
Accumulated deficit (6,457) (6,730)
-------------------
Total stockholders' equity 2,509 2,236
-------------------
Total liabilities and stockholders' equity $6,059 $5,842
===================
See notes to consolidated financial statements.
(15)
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended January 31,
----------------------
1997 1996
----------------------
Revenues $6,842 $5,743
Cost of sales 4,737 3,993
----------------------
Gross margin 2,105 1,750
Selling expenses 543 437
Research and development 415 365
General and administrative expenses 736 750
----------------------
1,694 1,552
----------------------
Operating Income 411 198
Interest expense (income) 132 (18)
----------------------
Income before provision for income taxes 279 216
Provision for income taxes 6 -
----------------------
Net Income 273 216
Preferred dividend requirement 48 48
----------------------
Income applicable to common shares 225 168
----------------------
Net income per common share $ .51 $ .39
----------------------
Weighted average number of common shares outstanding 440,133 433,133
======================
See notes to consolidated financial statements.
(16)
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
Preferred Additional Accumulated
Stock Common Paid in Deficit
Series B Stock Capital
-------------------------------------------------
Balance at January 31, 1995 $ 399 $ 65 $ 8,502 $ (6,946)
Net Income 216
-------------------------------------------------
Balance at January 31, 1996 $ 399 $ 65 $ 8,502 $ (6,730)
Net Income 273
-------------------------------------------------
Balance at January 31, 1997 $ 399 $ 65 $ 8,502 $ (6,457)
=================================================
See notes to consolidated financial statements.
(17)
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year ended January 31,
----------------------
1997 1996
----------------------
in thousands
Operating activities
Net Income $ 273 216
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 264 270
Provisions for obsolescence 40 40
Interest payments applied to debt (18) (181)
Changes in operating assets and liabilities, net:
(Increase) decrease in accounts receivable 101 (471)
(Increase) decrease in inventories 6 (88)
(Increase) decrease in other current assets (12) (16)
(Increase) decrease in net billings in
excess of cost and estimated earnings on
customer contracts 683 22
Increase (decrease) in accounts payable (180) 166
Increase (decrease) in accrued expenses
and other liabilities, excluding debt 28 (257)
----------------------
Net cash provided (used) by operating activities 1185 (299)
----------------------
Investing activities
Capital expenditures (121) (155)
----------------------
Net cash used by investing activities (121) (155)
----------------------
Financing activities
Proceeds from revolving line of credit 2,787 603
Payments on revolving line of credit (3,056) (334)
Payments on capital leases (25) (23)
Repayment of long term debt (156) (123)
----------------------
Net cash (used) provided by financing activities (450) 123
----------------------
Increase (decrease) in cash 614 (331)
Cash at beginning of year 339 670
----------------------
Cash at end of year $ 953 $ 339
======================
See notes to consolidated financial statements.
(18)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business
Transnational Industries, Inc. (the Company) is a holding company. The Company,
through its subsidiary, Spitz, Inc. (Spitz) operates in one business segment,
supplying visual immersion theaters with systems and subsystems for simulation
applications used in entertainment, education and training. In its fifty year
history, Spitz has predominantly manufactured astronomical simulation systems
(planetariums), projection domes, and other curved projection screens.
Projection domes and curved projection screens are used for various applications
including large format film theaters such as Omnimax theaters and various
simulation systems. It also services the systems it sells under maintenance
contracts. Recently, Spitz introduced new video projection products for
planetarium theaters and other applications using immersive multimedia displays
for wide audiences. Principal customers are domestic and international museums,
schools, military defense contractors, theme parks and other entities in the
entertainment industry.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Spitz. Upon consolidation, all significant
intercompany transactions have been eliminated. Certain reclassifications to
prior year amounts have been made to conform with the current year presentation.
Revenue Recognition
Revenues from sales of equipment are recognized on the percentage of completion
method, measured by the percentage of cost incurred to estimated total cost for
each contract. Estimated losses under the percentage of completion method are
charged to operations immediately. Revenues from maintenance contracts
representing the estimated portion for preventive service (40% of contract
value) are recognized upon completion of the preventive service. The balance of
revenues from maintenance contracts representing warranty are recognized over
the one year term of the contract. Revenues from parts and other service are
recognized upon shipment or completion of the service, respectively.
Inventories
Inventories are stated at the lower of cost, determined by the first-in
first-out method, or market value. Certain repair and maintenance inventories
having realization cycles longer than one year have been classified as
long-term. Inventories include amounts related to long term contracts as
determined by the percentage of completion method of accounting.
(19)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Machinery and Equipment
Machinery and equipment are stated at cost, which is depreciated using the
straight-line method over the estimated useful lives of the assets.
Computer Software
Computer software consists of costs of developing software products for
automated control systems for astronomical simulation equipment held for sale.
Costs are amortized over the sale of units not to exceed a period of 10 years.
Amortization of costs related to computer software products held for sale
amounted to $37,000 in fiscal 1997 and $54,000 in fiscal 1996.
Excess of Cost Over Net Assets of Business Acquired
The excess of cost over net assets of business acquired is amortized on the
straight-line basis over forty years. The Company continually evaluates the
carrying amount of this asset. Accumulated amortization of excess of cost over
net assets of business acquired amounted to $788,000 and $720,000 at January 31,
1997 and 1996, respectively.
Income Taxes
Income taxes are accounted for by the asset and liability approach in accordance
with Statement of Financial Accounting Standard No. 109 "Accounting for Income
Taxes". Deferred taxes will arise, subject to a valuation allowance, from
differences between the financial reporting and tax bases of assets and
liabilities and are adjusted for changes in the tax laws when those changes are
enacted.
Net Income (Loss) Per Share
Net income (loss) per share amounts have been computed based upon the weighted
average number of shares outstanding during the year. Per share amounts are
adjusted for Preferred Stock dividend requirements. Common equivalent shares
from warrants issued in June 1994 and incentive stock options issued in May 1996
have been considered outstanding in determining the weighted shares outstanding.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimated.
(20)
<PAGE>
2. Inventories
Inventories consist of:
January 31,
-----------------------
1997 1996
-----------------------
(in thousands)
Raw materials, parts, and subassemblies $ 734 $ 735
Work-in-process 153 196
Finished 4 6
Cost and estimated earnings in excess of billings 282 466
-----------------------
Total inventories 1,173 1,403
Repairs and maintenance inventories recorded with
other assets 190 206
-----------------------
Inventory recorded within current assets $ 983 $ 1,197
=======================
3. Costs and Estimated Earnings on Contracts in Progress
Costs and estimated earnings on contracts in progress consisted of:
January 31,
-----------------------
1997 1996
-----------------------
(in thousands)
Costs incurred on contracts in progress $2,698 $2,244
Estimated earnings 953 1,080
-----------------------
Total costs and estimated earnings on contracts
in progress 3,651 3,324
Less billings to date (4,309) (3,299)
-----------------------
Total costs and estimated earnings on contracts
in progress net of billings $ (658) $ 25
=======================
Included in the accompanying balance sheet or footnotes under the following
captions:
January 31,
-----------------------
1997 1996
-----------------------
(in thousands)
Costs and estimated earnings in excess of billings
recorded with inventory $ 282 $ 466
Billings in excess of costs and estimated earnings
recorded with liabilities (940) (441)
-----------------------
Total costs and estimated earnings on contracts in
progress net of billings $ (658) $ 25
=======================
(21)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt
January 31,
-----------------------
1997 1996
-----------------------
(in thousands)
Capitalized lease obligations $ 88 $ 48
Revolving credit note payable to bank, due Aug 1, 1997
with monthly interest of 2% over prime - 269
Convertible term note payable to bank, due Aug 1, 1997
with monthly installments of $13,000 ($20,000
effective June 1, 1997)plus interest of 2% over prime 1,411 1,567
Time note payable to bank, due March 31, 2004 with
no interest 22 22
Estimated future interest payments on modified debt
agreements - 18
-----------------------
Total debt 1,521 1,924
Less current portion 542 190
-----------------------
Long term debt, less current portion $ 979 $1,734
=======================
The January 31, 1996 balance on the revolving credit note represents the amount
outstanding under a $500,000 revolving credit agreement with the Company's
primary lender (the Bank) dated April 1, 1994. The note and the revolving credit
agreement originally matured on February 1, 1996 but were extended to August 1,
1997 pursuant to subsequent amendments. The revolving credit agreement permits
borrowing subject to a formula based on inventory and accounts receivable.
Interest at prime plus 2% is payable monthly. The $500,000 limit is reduced for
outstanding standby letters of credit issued by Spitz. The borrowing limit was
reduced by $129,104 for standby letters of credit at January 31, 1997 and 1996.
Unused borrowing capacity amounted to $370,896 and $101,927 at January 31, 1997
and 1996, respectively.
The convertible term note consists of the balance of a $1,800,000 note issued to
the Bank on April 1, 1994. The note represents a modification of terms pursuant
to a 1994 debt restructuring. The note was payable by Spitz, originally, in
monthly principal payments of $10,000 plus interest at prime plus 2% commencing
on April 1, 1994 with the balance maturing on February 1, 1996. Subsequent
amendments extended the maturity date to August 1, 1997 and increased monthly
principal payments to $13,000 effective February 1, 1996 and $20,000 effective
June 1, 1997. The amended terms also
(22)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
require additional principal payments from excess cash balances determined by a
formula based on unrestricted cash balances and working capital. The terms allow
for the Bank to convert the full remaining principal amount into common shares
of the Company at an original rate of $.50 per share subject to limitations
protecting the Company's ability to carryforward its tax net operating losses.
As a result of the one-for-twenty reverse stock split in July 1995 (see Note 5),
the conversion rate was adjusted to $10 per share.
The $21,783 time note is payable by the Company and matures on March 31, 2004.
No interest is payable under the time note. The time note requires mandatory
prepayments in amounts equal to the warrant price for shares that may be
purchased from time to time by the Bank under a Stock Subscription Warrant to
purchase 2,178,268 shares of common stock of the Company for $.01 per share. As
a result of the one-for-twenty reverse stock split in August 1995 (see Note 5),
the shares acquirable under the stock subscription warrant are adjusted to
108,913 shares at $0.20 per share
The January 31, 1996 balance of estimated future interest payments on modified
debt agreements resulted from the application of Statement of Financial
Accounting Standards No. 15, "Accounting for Troubled Debt Restructurings by
Debtors and Creditors " (SFAS No. 15), to 1994 debt restructuring transactions.
Under SFAS No. 15, the estimated future interest payments on modified debt
agreements are included with the carrying value of the debt. Interest payments
of $18,000 and $181,000 were applied to debt in the fiscal year ended January
31, 1997 and 1996, respectively.
The debt agreements are secured by virtually all of the Company's assets,
prohibit the payment of dividends on capital stock and require the maintenance
of certain financial covenants. The debt agreements also include cross
guarantees by the Company and Spitz.
The Company is currently in the process of evaluating refinancing alternatives
for its various debt agreements. The current debt maturity dates have been
extended to August 1, 1997 in order to complete the evaluation. The current
portion of the existing note balances reflects payments expected to be made in
the fiscal year ended January 31, 1998 under new debt agreements.
5. Common and Preferred Stock
On July 14, 1995 the stockholders of the Company voted to authorize the Board of
Directors of the Company to adopt amendments to the Company's certificate of
incorporation to effect a reverse stock split on a one-for-twenty basis,
decrease the authorized number of shares of common stock from 10,000,000 to
1,000,000 and increase the per share par value from $0.01 to $0.20. The
effective date of the amendment was August 15, 1995. All references in the
accompanying financial statements to the number of common shares and per share
amounts have been restated to reflect the amendments.
The holders of the Series B Cumulative Convertible Preferred Stock (Series B
Preferred) are entitled to receive quarterly dividends, when and if declared by
the Company's Board of Directors, at an annual per share amount of $27.50. The
payment of such dividends would be prior and in preference to the payment of any
dividends on the Company's common stock. At January 31, 1997, accumulated but
undeclared and unpaid dividends with respect to the 1,744 outstanding shares of
Series B Preferred amounted to $299,750. The Series B Preferred shares may be
redeemed by the Company at $250 per share plus accumulated unpaid dividends of
$172 per share. The 1,744 shares of Series B Preferred are convertible into
10,259 shares of the Company's common stock, and such common shares have been
reserved by the Company for issuance upon conversion.
(23)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
Upon liquidation, dissolution, or winding up of the Company, before any
distribution with respect to the common stock, the holders of shares of the
Series B Preferred are entitled to receive an amount equal to the aggregate
liquidation value, which would include any accumulated and unpaid dividends. The
Series B Preferred has no voting rights except as to any change in the Company's
Certificate of Incorporation adversely affecting the preferences of the holders
of the Series B Preferred and as required by law. In such instances, each holder
of Preferred Stock is entitled to the number of votes equal to the number of
shares of common stock that would be obtained upon conversion of the Series B
Preferred.
6. Leases
Total rent expense under an operating lease for office and production facilities
amounted to $241,500 in each of fiscal years 1997 and 1996. Spitz's lease for
its facility contains a renewal option for an additional five years at fair
market value upon the expiration of the current term in April 1998. Future
minimum rental commitments under the operating lease are as follows for the
fiscal years: 1998--$241,500; 1999--$60,400.
Spitz finances purchases of certain machinery and equipment through capital
leases. Assets under capital lease included in Machinery and Equipment are as
follows:
January 31,
---------------------------
1997 1996
---------------------------
Machinery and equipment, at cost $ 131,106 $ 80,071
Accumulated depreciation 29,585 17,352
===========================
Net book value $ 101,521 $ 62,719
===========================
The asset and liability are recorded at the present value of the minimum lease
payments based on the interest rates imputed in the leases which approximate
12%. Depreciation on the assets under capital lease is included in depreciation
expense.
Future minimum annual rentals under capital lease agreements at January 31,
1997, are as follows:
1998 $ 43,743
1999 41,090
2000 18,715
-------
Total Payments 103,548
Less amount representing interest 14,186
-------
Present value of capital lease obligations 89,362
Less current portion 34,803
-------
Long term obligation $ 54,559
=======
(24)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stock Compensation Plan
Under the 1995 Stock Option and Performance Incentive Plan, the Company may
grant stock options, stock appreciate rights or shares of up to 50,000 shares of
the Company's common stock to employees of the Company and Spitz. On May 20,
1996, 10,500 stock options were granted to certain management employees. The
options are excercisable at the market price (defined as the average of the bid
and asked price) on the date of grant for up to five years, and are subject to a
four year vesting schedule at the rate of 25 % per year from the date of grant.
The fair value of each option was estimated on the date of grant using a pricing
model which assumed a risk free interest rate of 8% and volatility of 25%.
Compensation cost, which is determined by the fair value of each option and the
number of options that actually vest, amounts to $706 for the fiscal year ended
January 31, 1997.
8. Profit Sharing Plan
The Company has a funded profit-sharing plan covering substantially all
employees. The plan permits the Company to make discretionary contributions to
the account of participants.
Under the plan, the Company makes a partial matching contribution to each
participant's account equal to 50 percent of the participant's contribution,
subject to a maximum of 3 percent of the participant's total cash compensation
and subject to certain limitations contained in the Internal Revenue Code.
Profit-sharing expense related to the plan was $61,000 and $63,000 in fiscal
1997 and 1996, respectively.
9. Income Taxes
Income tax expense for 1997 consists of applicable state income taxes on the
income before taxes of Spitz. State income taxes for 1996 have been eliminated
by the utilization of a net operating loss carryforward, the balance of which
expired in 1996. Federal taxes for both 1997 and 1996 have been eliminated by
the utilization of federal net operating loss carryforwards.
Deferred income taxes result from temporary differences in the financial bases
and tax bases of assets and liabilities. Significant components on the Company's
net deferred tax at January 31, 1997, are as follows (in thousands).
Net operating loss carry forwards $ 4,745
Obsolescence reserve 361
----------
Net deferred tax assets 5,106
Valuation allowance (5,106)
==========
Deferred income tax, net $ 0
==========
The valuation allowance is intended to represent the corresponding amount of
deferred tax assets which may not be realized. The Company's provision for
income taxes may be impacted by adjustments to the valuation allowance which may
be required if circumstances change regarding the
(25)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
utilization of the deferred tax assets in future periods. The valuation
allowance remained equal to the net deferred tax asset for the years presented.
At January 31, 1997 the Company had investment tax credit carryforwards of
$591,000 expiring in 1998 through 2002 and a net operating loss carryforward for
tax purposes of $13,529,000 expiring in 2005 through 2009. For financial
reporting purposes, the net operating loss carryforward in 1997 is approximately
$14,590,000. The difference relates to the nondeductible reserves for inventory
valuation not recognized for tax purposes. The net operating loss carryforward
was reduced by approximately $430,000 and $187,000 from the utilization of a net
operating loss deduction in 1997 and 1996, respectively. The Internal Revenue
Service has not examined the Company tax returns during the years in which the
net operating losses were generated or since that time. The effects of such
examinations on the Company's tax loss carryforwards, if any, cannot currently
be determined.
10. Financial Instruments
Risk Management
Spitz's financial instruments subject to credit risk are primarily trade
accounts receivable and cash. Credit is granted to its customers in the ordinary
course of business but the Company usually receives progress payments under the
terms of its customer contracts. Additionally, letters of credit are usually
arranged to secure payment from international customers.
The Company and its subsidiary maintain cash balances at two financial
institutions located in Michigan and Pennsylvania. Accounts are secured by the
Federal Deposit Insurance Corporation. During the normal course of business,
balances may exceed the insured amount.
Spitz customer contracts are generally payable in U.S. currency. Occasionally,
foreign currency will be required to purchase goods and services related to the
installation of products at foreign customers sites. Spitz generally does not
use derivative financial instruments with respect to such foreign currency
requirements as their amounts are generally minor relative to the overall
contract costs.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
disclosures about the fair value of certain financial instruments for which it
is practicable to estimate that value. For purposes of such disclosures, the
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. Management believes that the fair value of its
financial instruments is generally equal to its book value.
11. Supplemental Cash Flow Information
Non cash financing transactions consist of equipment of $65,000 and $51,000
acquired through capital leases in fiscal 1997 and 1996, respectively.
Interest paid on debt including capital lease obligations amounted to $167,000
in 1997 and $184,000 in 1996. The Company paid no federal income taxes in 1997
and 1996.
(26)
<PAGE>
Transnational Industries, Inc.
Notes to Consolidated Financial Statements (continued)
12. Significant Customers and Geographic Information
In fiscal years 1997 and 1996 revenues of $769,000 (11.2%) and $948,000 (16.5%)
were earned from a single customer. Export revenues by geographic area for the
years ended January 31 consist of (in thousands):
1997 1996
----------- -----------
Canada $ 763 $ 290
Central America 129 335
South America 47 -
Europe 412 662
Middle East 39 222
Far East 761 926
----------- -----------
Total export revenues $ 2,151 $ 2,435
=========== ===========
13. Contingencies and Commitments
In the fiscal year ended January 31, 1996, Spitz became involved in a dispute in
connection with a public bid for the supply of planetarium equipment for an
expansion project at a public community college. Spitz's subcontract bid was the
lowest submitted and the general contractor for the project allegedly used
Spitz's pricing in submitting its total contract bid to the college. After the
total contract was awarded to the general contractor, however, the college's
architect alleged that Spitz's equipment did not conform to the bid
specifications. The bid for the equipment which the architect deemed to be in
conformance with the specifications was allegedly approximately $150,000 higher
than Spitz's bid. Because the Contractor has been forced to supply the more
expensive equipment, it is attempting to recover the $150,000 price differential
plus alleged related amounts due to adverse impacts on the project schedule from
various parties. At various times, the Contractor has threatened to assert its
claim against Spitz because it has been unsuccessful in its attempts to recover
its alleged damages from the College or other involved parties. The Company
believes the bid specifications, to the extent that they excluded Spitz's
equipment, constituted an improper sole-source of equipment which violates
competitive bidding laws because the specifications appear to have been copied
from a competitor's equipment. The Company also believes that the Spitz
equipment meets all of the valid functional requirements in the bid
specifications. No lawsuit has been filed against Spitz or the Company and the
parties have discussed settling the matter. The Contractor has not threatened to
carry out its assertion nor has it communicated with the Company since July
1996. The Company believes that it is likely that the parties will reach an
agreement to resolve the dispute short of litigation. It is too early to
estimate a probable outcome and its effect, if any, on Spitz. Accordingly, no
liability for the potential claim has been recorded at January 31, 1997.
The Company had outstanding standby letters of credit of $129,000 and $267,000
at January 31, 1997 and 1996, respectively. Cash of $138,000 was pledged as
collateral for outstanding standby letters of credit at January 31, 1996. No
cash was pledged as collateral for the outstanding standby letter of credit at
January 31, 1997.
(27)
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE
EXCHANGE ACT
Directors of the Company
Pursuant to the Registrant's By-laws, the number of Directors of the Registrant
is determined by Board action, which is currently seven. There currently exists,
however, two vacancies.
The following information is submitted with respect to the current directors of
the Company. All such directors were elected as directors by the holders of
Common Stock at the Company's last annual meeting of stockholders. All directors
serve until the next annual meeting of shareholders and until their successors
have been duly elected and shall have qualified.
Director
Name Age Since
Michael S. Gostomski(1)(2) 46 1986
Charles H. Holmes, Jr. 56 1994
Charles F. Huber(1) 67 1992
William D. Witter(1) 67 1977
Calvin A. Thompson(1)(2) 72 1994
(1)Member of Compensation Committee.
(2)Member of Audit Committee.
Michael S. Gostomski joined the Company in May 1986 as Vice-President Finance,
Treasurer, and a director and became Corporate Secretary in March of 1988. In
October of 1989, he became Executive Vice-President of the Company. On May 1,
1992, he became President and Chief Executive Officer of the Company. Mr.
Gostomski resigned as an employee of the Company, while remaining as a director
of the Company, in September, 1993, at which time he became Executive Vice
President of Roller Bearing Company. From 1980 to 1986, he held various
financial and management positions at Peabody International Corporation, most
recently as a Sector Vice President in charge of its engineering and
construction subsidiaries. Mr. Gostomski, who is a Certified Public Accountant,
holds B.S. and MBA degrees from the University of Connecticut.
Charles H. Holmes, Jr., became a director of the Company in 1994. He has held
various operating and management positions at the Company's Spitz, Inc.,
subsidiary since 1962. Mr. Holmes has been President of Spitz since 1988. He has
been President of the Company since September, 1993. Mr. Holmes holds a degree
in Business Management from Goldey Beacom College.
Charles F. Huber became a director of the Company in February 1992. He is
currently a
(28)
<PAGE>
managing director of William D. Witter Associates, Inc. and Chairman
of the Board of Directors of Merrimax Corporation. He holds a B.A. degree from
Princeton University.
William D. Witter became a director of the Company in 1977 and Vice-Chairman in
August of 1987. He has been President of William D. Witter, Inc., an investment
management concern, since 1976. Mr. Witter holds an A.B. degree from Yale
University and an M.B.A. from Stanford Business School.
Calvin A. Thompson became a director of the Company in October 1994. He has been
a Managing Director of William D. Witter Associates, Inc. since 1982. Mr.
Thompson holds a B.S. degree in industrial engineering from Columbia University.
.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Position Age
Charles H. Holmes, Jr. President and Chief Executive 56
Officer and President of Spitz, Inc.
Paul L. Dailey, Jr. Chief Financial Officer and Vice 40
President-Finance of Spitz, Inc.
Information with respect to Mr. Holmes is set forth above in this Item 9. Paul
Dailey joined Spitz in September of 1983 as Controller. In June of 1986, he
became Vice President - Finance for Spitz. In April 1993, he become Chief
Accounting Officer of the Company. In September 1993 he became Chief Financial
Officer and Secretary of the Company. Mr. Dailey is a certified public
accountant and holds a B.A. degree in accounting from Rutgers University.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers and 10% beneficial owners of the Company's Common
Stock to file certain reports concerning their ownership of the Company's equity
securities. Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recently completed fiscal year, and
Forms 5 and amendments thereto furnished to the Company with respect to its most
recently completed fiscal year, the directors, executive officers and beneficial
owners of 10% or more of the Company's Common Stock who failed to make the
requisite filings on a timely basis are as follows: Messrs. Holmes and Dailey
failed to file Forms 5 reporting the granting to them of options under the
Company's stock option plan to purchase 3000 and 2500, respectively, shares of
Common Stock.
(29)
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Management Remuneration
The following table sets forth the cash, as well as certain other compensation,
paid to Charles H. Holmes, Jr., the President and Chief Executive Officer of
both the Company and the Company's Spitz, Inc., subsidiary. Except for Mr.
Holmes, the Company did not have any executive officer whose total annual salary
and bonus exceeded $100,000 for the last completed fiscal year.
Annual Long Term
Compensation (a) Compensation
-------------------- --------------
Securities Under
Name and Options Granted All Other
Principal Position Year Salary (#) Compensation
- -------------------------------------------------------------------------------
Charles H. Holmes, Jr. 1997 $130,999 3,000 $4,480 (b)
President of Spitz, Inc. 1996 128,077 0 4,421 (b)
1995 110,914 0 3,867 (b)
- ------------
(a) Other annual compensation consisting of an automobile allowance and
supplemental medical benefits amounted to less than ten percent of salary
and is therefore not reported in table.
(b) Consists entirely of contributions to 401 (k) plan.
Stock Option and Performance Incentive Plan
On July 14, 1995 the stockholders of the Company voted to approve the
Transnational Industries Inc. 1995 Stock Option and Performance Incentive Plan
(Option Plan) adopted by the Board of Directors of the Company on March 21,
1995. The purpose of the Option Plan is to attract and retain the best available
employees for the Company and its subsidiaries and to encourage the highest
level of performance by such employees, thereby enhancing the value of the
Company for the benefit of its stockholders. The Option Plan is also intended to
motivate employees to contribute to the Company's future growth and
profitability and to reward their performance in a manner that provides them
with means to increase their holdings of Common Stock of the Company and aligns
their interest with the interest of the stockholders of the Company. Under the
Option Plan, awards are granted to key employees whose initiative is deemed
valuable for the successful conduct and development of the Company's business.
The Option Plan provides for up to 50,000 shares of the Company's Common Stock
to employees of the Company and its subsidiaries. Awards may be in various forms
of stock options, stock appreciation rights, and shares of common stock. Awards
are granted by the Compensation Committee of the Board of Directors of the
Company.
(30)
<PAGE>
The following table sets forth the information relating to individual grants of
options to purchase common shares of the Company to Charles H. Holmes, Jr. under
the Option Plan during the fiscal year ended January 31, 1997.
Option Grants in Fiscal Year ended January 31, 1997
- --------------------------------------------------------------------------------
Securities % of Total
Under Options
Name Options Granted to Exercise
Granted Employees Price Expiration
(#) in Fiscal Year ($ per share) Date
- --------------------------------------------------------------------------------
Charles H. Holmes, Jr. 3,000 (1) 28.6% $2.25 May 20, 2001
- ------------
(1) Options vest over four years at a rate of 25% per year.
Aggregated Option Exercises in Fiscal Year Ended January 31, 1997
and Fiscal Year End Option Values
- --------------------------------------------------------------------------------
Unexercised in-the-money
Unexercised Options (#) Options at Fiscal Year
at Fiscal Year End End ($)
Name Exercisable / Unexercisable Exercisable / Unexercisable
- --------------------------------------------------------------------------------
Charles H. Holmes, Jr. 0 / 3,000 0 / 0
Employment Agreements
The Company entered into an employment agreement with Mr. Holmes effective May
1, 1995. Under the agreement Mr. Holmes is paid an annual base salary of
$130,000, which may be increased from time to time by the Company's Board of
Directors, plus certain fringe benefits including group insurance, supplemental
medical benefits and an automobile allowance. Mr. Holmes may also receive, at
the sole discretion of the Company's Board of Directors, additional compensation
in the form of a cash bonus or equity securities under the Transnational
Industries Inc. 1995 Stock Option and Performance Incentive Plan. The original
term of the agreement was one year, but the agreement automatically extends an
additional one year unless otherwise terminated by either party by October 31 of
an existing term. Pursuant to such provision, Mr. Holmes's contract
automatically renewed on May 1, 1997, for the period through April 30, 1998. In
the event that Mr. Holmes's employment is terminated without cause, he will be
entitled to a lump sum payment equal to twice his annual base salary and the
continuation of his fringe benefits for a period of two years. A non renewal of
the contract term by the Company within six months prior to or three years after
a "Change in Control" will be treated as a termination without cause. A "Change
in Control" is defined as (i) a change within twelve months of a majority of the
Company's Board of Directors, (ii) a change in control of fifty percent of the
Company's voting stock, (iii) the sale of the assets of Spitz, or (iv) any
merger or consolidation of the Company's business which results in a change in
ownership of the majority of the equity of the Company. The agreement also
includes a restrictive covenant whereby Mr. Holmes agrees not to engage in a
competing business of the Company for a period of (i) three years in the event
of a termination for cause or (ii) one year in the event that his employment is
otherwise terminated.
(31)
<PAGE>
Compensation of Directors
Commencing with the fourth calendar quarter of 1994, the Chairman of the Board
of Directors began earning a fee of $10,000 per annum, and each other outside
director began earning a fee of $6,000 per annum. Beginning with the second
calendar quarter of 1995, these amounts were increased to $50,000 and $10,000
per annum, respectively. The fee paid to the Chairman was based on the
Chairman's spending one-third of his working hours assisting the Company and its
subsidiary.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as to the only persons known
to the Company to be the beneficial owners of more than five percent (5%) of the
outstanding Common Stock of the Company as of April 30, 1997 (except for William
D. Witter and Charles Huber, whose respective beneficial ownership is disclosed
in the immediately following table). The Common Stock is the Company's only
class of voting securities.
Name and Amount and Nature % of Common
Address of Beneficial Ownership Stock
- -------------------------------------------------------------------------------
Comerica Bank, N. A. 247,413(1) 43.3%(2)
500 Woodward Avenue
Detroit, MI 48226
Penfield Limited Partnership c/o 37,353(3) 11.4%(4)
William D. Witter, Inc.
153 East 53rd Street
New York, NY 10022
Estate of Alan Drew 24,887(5) 7.6%(6)
421 Sable Palm Lane
Vero Beach, FL 32963
(1) 108,913 of such shares are currently acquirable upon the exercise of
warrants to purchase 108,913 shares of the Company's Common Stock at a price of
$0.20 per share. The remaining 138,500 shares of the Company's Common Stock can
be acquired in exchange for $1,385,000 of the Company's indebtedness to Comerica
Bank, N.A., at an exchange rate equal to $10.00 per share, subject to (i) the
availability of a sufficient number of authorized but unissued and unreserved
shares of the Company's Common Stock to allow such conversion, and (ii) such
exercise not materially and adversely affecting the amount of, or the ability to
use, the Company's tax net operating loss carryforward.
(2) Assumes the issuance of the Company's Common Stock pursuant to the exercise
and conversion of the derivative securities owned by Comerica Bank, N.A., and
described in Footnote 1 above.
(32)
<PAGE>
(3) 2,353 of such shares are currently acquirable upon the conversion of 400
shares of the Company's Series B Preferred Stock.
4 Assumes the issuance of 2,353 shares of the Company's Common Stock pursuant to
the conversion of the Series B Preferred Stock described in footnote 3 above.
5 Includes 1,176 shares of Common stock acquirable upon the conversion of Estate
of Mr. Drew's Series B Preferred.
6 Assumes the issuance of 1,176 shares of the Company's Common Stock pursuant to
the conversion of the Series B Preferred Stock described in footnote 5 above.
Security Ownership of Management
The following table sets forth, as of April 30, 1997 the number of shares of the
outstanding Common Stock of the Company beneficially owned by each of the
current directors and executive officers for whom disclosure is required to be
made under the Summary Compensation Table pursuant to Item 402(a) (2) of
Regulation S-B promulgated under the Securities Exchange Act of 1934, as
amended, individually, and by the directors and the executive officers as a
group:
Name Shares Owned % of Common Stock
William D. Witter 164,608(1) 50.3%(2)
Charles Huber 37,588(3) 11.6%(2)
Michael S. Gostomski 6,043(4) 1.9%(2)
Charles H. Holmes, Jr. 868(5) *
Calvin A. Thompson 6,488(6) 2.0%(2)
All current Directors and executive 216,279(7) 65.4%(2)
officers as a group (6 persons)
---------
* Less than 1%
------------
(1) Includes 87,219 shares of Common Stock (of which 824 are acquirable upon the
conversion of the Company's Series B Preferred Stock) owned by Mr. Witter's
spouse and children, (ii) 1083 shares of Common Stock owned by ADW Inc. and
(iii) the 37,353 shares of Common Stock beneficially owned by Penfield Limited
Partnership and described in the immediately preceding table. This figure does
not include 1,541 shares of Common Stock (of which 941 are acquirable upon the
conversion of the Company's Series B Preferred Stock) owned by the William D.
Witter, Inc., Profit Sharing Fund, of which Mr. Witter is one of several
trustees. Mr. Witter disclaims a beneficial interest in the shares of Common
Stock owned by the profit sharing fund and by Mr. Witter's spouse and children.
(2) Assumes the issuance by the Company of all securities issuable to such
director or all directors and executive officers as a group, as the case may be,
upon the exercise and/or conversion of any Preferred Stock owned by such person
or group.
(33)
<PAGE>
(3) Includes 588 shares of Common Stock acquirable upon the conversion of Mr.
Huber's Series B Preferred Stock.
(4) Includes 753 shares of Common Stock acquirable upon the conversion of Mr.
Gostomski's Series B Preferred Stock.
(5) Consists of 118 shares of Common Stock acquirable upon the conversion of Mr.
Holmes' Series B Preferred Stock and 750 shares of Common Stock acquirable upon
the exercise of stock options which vest and become exercisable on May 20,1997.
(6) Includes 588 shares of Common Stock acquirable upon the conversation of Mr.
Thompson's Series B Preferred Stock and 2,500 shares of Common Stock owned by
Mr. Thompson's spouse. Mr. Thompson disclaims a beneficial interest in the
shares of Common Stock owned by his spouse.
(7) Includes a total of 5,283 shares of Common Stock acquirable upon the
conversion of all Series B Preferred Stock owned by the Company's directors and
executive officers.
ITEM 12. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description of Document
3.1 Certificate of Incorporation of Registrant, as amended (Exhibit
3.1 to Registrant's Registration Statement No. 33-6826 on Form S-1
incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation of Registrant,
filed August 31, 1990 (Exhibit 3.2 to Registrant's Form 10-K for the
fiscal year ended January 31, 1991 (the "1991 10-K") incorporated
herein by reference).
3.3 Certificate of Designations, Preferences and Rights of the Preferred
Stock (Exhibit 4(b) to Registrant's 1989 Form 8-K filed with the
Securities and Exchange Commission on February 15, 1989 ["1989 Form
8-K"] incorporated herein by reference).
3.4 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock of Registrant, filed September 5, 1990
(Exhibit 3.4 to the 1991 10-K, incorporated herein by reference).
3.5 By-laws of Registrant, as amended (Exhibit 3.3 to Registrant's Form
10-K for the fiscal year ended January 31, 1989 ["1989 10-K"]
incorporated herein by reference).
(34)
<PAGE>
4.1 Certificate of Incorporation of Registrant, as amended, listed as
Exhibit 3.1 above and incorporated herein by reference.
4.2 Certificate of Amendment of Certificate of Incorporation of Registrant,
listed as Exhibit 3.2 above and incorporated herein by reference.
4.3 Certificate of Designations, Preferences and Rights of the Preferred
Stock,listed as Exhibit 3.3 above and incorporated herein by reference.
4.4 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock of Registrant, listed as Exhibit 3.4 above
and incorporated herein by reference.
4.5 Convertible Subordinated Debenture Purchase Agreement, dated as of
November 22, 1989, between Registrant and the purchasers of convertible
subordinated debentures set forth therein (Exhibit 4(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1989
[the "10/31/89 10-Q"] incorporated herein by reference).
4.6 Subordinated Debenture Purchase Agreement, dated as of April 11, 1990,
between Registrant and the purchasers of subordinated debentures set
forth therein, including forms of Registrant's Subordinated Debentures
and Warrant Certificates issued on April 11, 1990, attached thereto as
Exhibits B and C, respectively (Exhibit 4.11 to Registrant's Form 10-K
for the fiscal year ended January 31, 1990 [the "1990 10-K"]
incorporated herein by reference).
4.7 Securities Purchase Agreement, dated January 5, 1994, by and among
William D. Witter, First Aerospace, Inc., Aaron Hollander, Michael
Culver, First Equity Development Incorporated and Interconnect of
Connecticut. (Exhibit 4.7 to Registrant's Form 10-K for the fiscal year
ended January 31, 1994 ["1994 10-K"] incorporated herein by reference).
4.8 Stock Purchase and Restructuring Agreement, dated as of June 30, 1994,
between the Company, Slusser Associates, Inc., the holders of $375,000
principal amount of the Company's subordinated debentures and the
purchasers of 3,000,000 shares of the Company's Common Stock. (Exhibit
4.8 to Registrant's 1994 10-K incorporated herein by reference).
4.9 Credit Agreement, dated as of April 1, 1994, between the Company,
Spitz, Inc., and Comerica Bank. (Exhibit 4.9 to Registrant's 1994 10-K
incorporated herein by reference).
4.10 Partial Release Agreement, dated as of April 1, 1994, between the
Company, Spitz, Inc., and Comerica Bank. (Exhibit 4.10 to Registrant's
1994 10-K incorporated herein by reference).
4.11 Agreement, dated as of June 30, 1994, between the Company, Spitz, Inc.
and Comerica Bank.(Exhibit 4.11 to Registrant's 1994 10-K incorporated
herein by reference).
4.12 Partial Release of Comerica Bank, dated as of June 30, 1994. (Exhibit
4.12 to Registrant's 1994 10-K incorporated herein by reference).
10.1 Transnational Industries Inc. 1995 Stock Option and Performance
Incentive Plan (Exhibit "A" to Registrant's Proxy Statement dated June
16, 1995 incorporated herein by reference).
(35)
<PAGE>
10.2 Employment Agreement dated May 1, 1995 between Charles Holmes
and Spitz Inc (Exhibit 10.2 to Registrant's 1996 10-K incorporated
herein by reference).
10.3 Employment Agreement dated May 1, 1995 between Paul Dailey and Spitz
Inc. (Exhibit 10.3 to Registrant's 1996 10-K incorporated herein by
reference).
10.4 Employment Agreement dated May 1, 1995 between Jonathan Shaw and Spitz
Inc.(Exhibit 10.4 to Registrant's 1996 10-K incorporated herein by
reference).
10.5 Employment Agreement dated May 1, 1995 between John Fogleman and Spitz
Inc. (Exhibit 10.5 to Registrant's 1996 10-K incorporated herein by
reference).
21 Subsidiaries of Registrant (a Delaware corporation):
Spitz, Inc.
27 Financial Data Schedules
(b) Reports on Form 8-K for the quarter ended January 31, 1997.
None
(36)
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 15, 1997 Transnational Industries, Inc.
By: /s/ Paul L. Dailey
Paul L. Dailey
Secretary - Treasurer
Chief Financial Officer
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
/s/ Charles F. Huber
- ---------------------------
Charles F. Huber Chairman of the Board May 15, 1997
/s/ Charles H. Holmes, Jr.
- ---------------------------
Charles H. Holmes, Jr. Director, President and May 15, 1997
Chief Executive Officer
/s/ William D. Witter
- ---------------------------
William D. Witter Vice Chairman of the Board May 15, 1997
/s/ Michael S. Gostomski
- ---------------------------
Michael S. Gostomski Director May 15, 1997
/s/ Calvin A. Thompson
- ---------------------------
Calvin A. Thompson Director May 15, 1997
(37)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Transnational Industries, Inc. as of January 31,
1997 and the related consolidated statement of operations and statement of cash
flows for the year then ended and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000796228
<NAME> SPITZ, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 953
<SECURITIES> 0
<RECEIVABLES> 1077
<ALLOWANCES> 0
<INVENTORY> 983
<CURRENT-ASSETS> 3136
<PP&E> 2308
<DEPRECIATION> 1723
<TOTAL-ASSETS> 6059
<CURRENT-LIABILITIES> 2571
<BONDS> 0
0
399
<COMMON> 65
<OTHER-SE> 2045
<TOTAL-LIABILITY-AND-EQUITY> 6059
<SALES> 6842
<TOTAL-REVENUES> 6842
<CGS> 4737
<TOTAL-COSTS> 4737
<OTHER-EXPENSES> 415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 279
<INCOME-TAX> 6
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0
</TABLE>
