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, 1998
[ ] 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 (I.R.S. Employer
of Incorporation or Organization) Identification Number)
Post Office Box 198 19317
U.S. Route 1 (Zip Code)
Chadds Ford, Pennsylvania
(Address of principal
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
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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, 1998, were
$7,075,985.
The aggregate market value of the voting stock held by non-affiliates
of Registrant as of March 31, 1998 was approximately $329,451 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 March 31, 1998, 500,970 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The issuer's definitive proxy statement to be filed with the Securities Exchange
Commission within 120 days after January 31, 1998, is incorporated by reference
into Part III of this Form 10-KSB.
Transitional small business disclosure format (check one) YES NO X
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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, under a predecessor corporation, was founded in
1944.
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. Systems currently sold 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
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 ElectricHorizon System, for a temporary exhibit at the Carnegie Science
Center in Pittsburgh, Pennsylvania. The Carnegie Science Center ElectricHorizon
exhibit was owned and funded by Spitz and various suppliers of the hardware and
software content for the purpose of demonstration. At the end of the exhibit,
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the ElectricHorizon components were dismantled and returned to the various
owners. Spitz has not yet sold another ImmersaVision system but there are
several sales prospects for ElectricSky and ElectricHorizon that are expected to
make order decisions within the next year. It is not unusual in the markets
targeted by Spitz for the sales cycle from planning through vender selection to
take a year or more.
- - --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 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 1998, revenues of $2,146,000 (30% of total revenues) were derived
from sales to the five largest customers. 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 their 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.
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Competition
While Spitz believes it 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 yet be quantified. There is currently
one known domestic competitor that manufactures 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 potential
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. A
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
$363,000 in fiscal 1998 and $415,000 in fiscal 1997.
Environmental Compliance
Spitz routinely improves and maintains various systems designed to control the
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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, and local 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, 1998, the Company and Spitz had 48 permanent employees, of whom
41 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 2006, with an option
to renew for an additional eight years. 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, 1998.
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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 1998 and 1997. 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 1998 Fiscal 1997
-----------------------------------
High Low High Low
-----------------------------------
First Quarter ......................... $ 2.25$ 1.50$ 2.00$ 2.00
Second Quarter ........................ 4.00 2.13 2.00 1.50
Third Quarter ......................... 6.50 3.75 1.50 1.50
Fourth Quarter ........................ 6.25 5.38 2.50 1.50
Holders
At March 31, 1998, 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, the loan agreements of the Company and
its subsidiary prohibit the payment of cash dividends, except and to the extent
that the Company satisfies certain financial covenants. In addition, the terms
of the Company's Series B Preferred Stock prohibits the Company from paying
dividends on its common stock until it pays 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 ("Preferred
B") 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, 1998, accumulated but
undeclared and unpaid dividends with respect to the 330 outstanding shares of
Preferred B amounted to $65,794. The Preferred B shares may be redeemed by the
Company at $250 per share plus accumulated unpaid dividends of $199 per share.
The 330 shares of Series B Preferred are convertible into 1,941 shares of the
Company's common stock.
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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, 1998.
Percentage
Change
Percentage of Revenues 1998
Year ended January 31, vs.
1998 1997 1997
-----------------------------------
Revenues 100.0% 100.0% 3.4%
Cost of sales 71.6 69.2 6.9
Gross margin 28.4 30.8 (4.4)
Selling expenses 8.1 7.9 5.9
Research and development 5.1 6.1 (12.5)
General and administrative 10.9 10.8 4.3
Operating income 4.3 6.0 (25.5)
Interest expense 1.8 1.9 (5.3)
Income before income taxes 2.6 4.1 (35.1)
Income taxes 0.2 0.1 *
Income before extraordinary gain 2.4 4.0 (38.8)
Extraordinary gain 4.9 -- *
Net Income 7.2 4.0 87.5
- - -----------
* Not meaningful
-----------
Revenues in the year ended January 31, 1998 (1998) were $7,076,000 compared to
$6,842,000 in the year ended January 31, 1997 (1997), an increase of $234,000
(3%). Revenues from ImmersaVision, the Company's new line of video projection
products, amounted to $178,000 in 1998 compared to $250,000 in 1997. The
ImmersaVision revenue was attributable to the first sale of an ElectricSky
system which was completed in May 1997. Several ImmersaVision sales prospects,
who were expected to order in time to impact 1998 revenue, have delayed order
placement decisions. This lengthening of the sales cycle has delayed the
expected revenue impact from ImmersaVision until the later part of fiscal 1999.
Dome revenues were $4,271,000 in 1998 compared to $4,184,000 in 1997, an
increase of $87,000 (2%). Dome revenues from ride simulation attractions and
military training simulators increased while dome revenue from film theaters and
planetariums decreased. Planetarium revenues were $2,627,000 in 1998 compared to
$2,408,000 in 1997, an increase of $219,000 (9%). The increase in planetarium
revenues was partially due to sales of refurbished systems for the educational
market which offset lower revenues from the sale of new systems. Planetarium
revenues attributable to the sale of maintenance and parts also contributed to
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the increase with $1,295,000 in 1998 compared to $1,153,000 in 1997. The
increase in maintenance and parts revenues resulted from preventive maintenance
agreements as well as increased parts sales and paid service calls.
The Company's revenues from maintenance service and the sale of parts are
expected to increase 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
Company serves. Presently there is a high level of sales prospects for new
planetarium systems and ImmersaVision systems which are expected to contribute
significantly to revenues in the second half of fiscal 1999 through fiscal 2000.
Revenues from the various dome markets are expected to continue at 1998 levels.
The Company expects increasing revenue contributions from ImmersaVision products
in future years as the installed base grows and new applications of the product
are discovered. Research and development efforts will continue with the goal to
promote the creation of software content and new applications for ImmersaVision
that will enhance existing products and provide entry into new commercial
markets over the next several years. While sales prospects remain good and
bookings have improved, uncertainty in the timing and delivery of new sales are
expected to cause revenue levels to continue to fluctuate in future quarters.
Gross margins decreased to 28.4% in 1998 from 30.8% in 1997. Lower gross margins
were attributable to lower profits on dome installation activity, cost overruns
on certain planetarium projects, and lower profits on the first sale of a
product which updates the electronics of an existing planetarium model. The
lower margins on dome installation activity resulted from the lower profit
margins on change orders to recover cost overruns as dictated by construction
contract terms inherent in many of the Company's customer contracts. Selling
expenses rose $32,000 (6%) in 1998 due to sales and proposal efforts for several
major projects and the costs of introducing the new ImmersaVision products.
Selling expenses in fiscal 1999 are expected at current or increasing levels as
marketing efforts on ImmersaVision continue. Research and development expenses
decreased $52,000 (13%) in 1998 as higher levels of engineering resources were
redirected to sales and proposal efforts and invested in capitalized computer
software production. Research and development activities are expected to
increase in future years as efforts continue in the development of proprietary
programming tools for software content development and other commercial
applications for ImmersaVision. Research and development activities will also
continue to improve existing planetarium products in order to maintain and
improve market share among advancing competing technologies. General and
administrative expenses increased $32,000 (4%) in 1998 due to increases in
personnel costs and professional fees.
Reported interest expense amounted to $125,000 in 1998 compared to $132,000 in
1997. The $125,000 reported in 1998 consisted of $154,000 paid on debt
obligations offset by $29,000 of interest income earned on cash invested.
Reported interest expense was reduced in 1997 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. The $132,000 of interest expense reported in
1997 consisted of $167,000 paid on debt obligations, reduced by $18,000 applied
against debt and offset by $17,000 of interest income earned on cash invested.
Unless new customers make advance payments, net interest expense is expected to
increase in fiscal year 1999 as cash balances from previous customer advances
have been depleted resulting in lower interest income from cash invested and
higher interest expense from use of the revolving credit loan. The Company paid
no federal income taxes in 1998 or 1997 as federal taxable income was offset by
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the utilization of net operating loss carryforwards. State income taxes amounted
to $14,000 and $6,000 in 1998 and 1997, respectively. 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 before extraordinary
item of $167,000 in 1998 compared to net income of $273,000 in 1997. In the
second quarter of fiscal 1998, an extraordinary gain from the elimination of
debt of $345,000 was recorded as a result of the refinancing of the Company's
debt agreements. The extraordinary gain increased net income to $512,000 in
1998.
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 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.
On June 12, 1997, the Company entered into a series of debt agreements with a
new lender, a commercial bank, whereby proceeds from two new promissory notes
payable to the new lender were used to retire previous bank debt and a Stock
Subscription Warrant. The prior debt agreements were scheduled to mature in
August 1997 and carried a balance due at June 12, 1997 of $1,373,000. The
previous lender agreed to accept $1,230,000 in full satisfaction for all
existing debt and for the surrender of the Stock Subscription Warrant to
purchase 108,913 shares of the Company's Common Stock for $0.20 per share. Debt
agreements executed with the new lender consist of an $820,000 term loan and an
$800,000 Revolving Credit Agreement. The term loan is payable with interest at
9.25% over five years in equal monthly installments of $17,122. The Revolving
Credit Agreement permits borrowing, subject to an asset based formula, of up to
$800,000 under a Revolving Credit Note. The Revolving Credit Note requires
monthly interest payments at prime plus 2% and also matures in five years. Upon
execution of the new debt agreements, proceeds of $820,000 from the term note
and $410,000 from the revolving credit agreement were used to fund the
$1,230,000 payment to the previous lender. Annual principal and interest
payments on the initial advances under the new loan agreements are approximately
$40,000 lower than the annual payments required in the previous year under the
old loan agreements. The retirement of the previous debt agreements and the
Stock Subscription Warrant for $1,230,000 resulted in a reduction of Additional
Paid in Capital of $298,000 and an extraordinary gain from the forgiveness of
debt of approximately $345,000, net of related expenses, recorded in the second
quarter of fiscal 1998. The retirement of the Stock Subscription Warrant
eliminated its effective twenty-five percent dilution of common shareholders
equity. The initial advance under the new revolving credit agreement also
included an additional amount to partially fund closing costs, which increased
the total to $429,000. This resulted in unused borrowing capacity under the new
$800,000 revolving credit agreement of $371,000. At the time of the refinancing,
the borrowing limit under the previous $500,000 Revolving Credit Agreement,
reduced by $129,000 for an outstanding standby letter of credit, also resulted
in unused borrowing capacity of $371,0000. The $129,000 standby letter of credit
served as collateral on outstanding surety bonds required to guarantee the
performance of Spitz on certain customer contracts. In June 1997, the Surety
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Company determined that the Company's financial strength was sufficient for the
level of bonding outstanding and returned the standby letter of credit for
cancellation. In summary, as a result of the replacement of the debt agreements,
total debt was lowered by $124,000 while maintaining the same credit capacity,
payment schedules were favorably adjusted, near term maturity dates were
extended to five years, and the Company's common shareholders benefited by the
return of a beneficial ownership of twenty five percent of their equity in the
Company.
At January 31, 1998 there was a $600,000 balance on the new revolving credit
note compared to no balance under the previous revolving credit agreement at
January 31, 1997. At January 31, 1998 the unused borrowing capacity on the new
$800,000 revolving credit agreement was $200,000 compared to $371,000 at January
31, 1997 under the previous $500,000 revolving credit agreement. Additional
liquidity was provided by remaining cash balances of $471,000 at January 31,
1998 compared to $953,000 at January 31, 1997. The next sources of liquidity are
trade accounts receivable and contracts in process. Trade accounts receivable
decreased to $737,000 at January 31, 1998 compared to $1,077,000 at January 31,
1997. The higher liquidity available at January 31, 1997 from cash and accounts
receivable was attributable to advanced funding from contracts in progress as
billings exceeded revenue recorded by $658,000 at January 31, 1997 compared to
revenue recorded in excess of billings of $372,000 at January 31, 1998. This
represents a decrease in customer financing of $1,030,000 and illustrates the
previous discussion of effect of progress payments on cash flow. Contracts in
progress at January 31, 1998 will provide liquidity as billings catch up to the
revenue recorded through the completion of each project; however, the payment
terms on new contracts remain uncertain and will also affect liquidity.
The net cash used by operating activities was $49,000 in 1998 compared to net
cash provided of $1,185,000 in 1997, a decrease in cash provided from operations
of $1,234,000. The decrease consists of a $1,197,000 decrease in cash provided
by changes in operating assets and liabilities and a $54,000 decrease in cash
generated from operating income offset by $17,000 of lower net interest and tax
payments. As discussed previously, the change in operating assets is mostly
attributable to progress payment terms on customer contracts.
In addition to the $49,000 used by operating activity in 1998, $303,000 was
invested in capital expenditures and $130,000 was used by financing activities.
Financing activities in 1998 included net borrowings of $171,000 on the
revolving credit agreement (after the initial advance to fund the payoff of the
previous debt), payments of $73,000 on capital leases, and payments of $132,000
on term debt. Remaining financing activities required cash payments of $77,000
related to the refinancing of debt agreements and $19,000 related to an exchange
of preferred stock for common stock. Non cash financing transactions in 1998
consist of $235,000 of equipment acquired through a capital lease.
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.
Total debt at January 31, 1998 was $1,599,000, an increase of $78,000 from the
$1,521,000 at January 31, 1997. In summary, the increase resulted from normal
and recurring transactions combined with the refinancing of the Company's debt
agreements. Normal and recurring transactions contributing to the increase
consist of $171,000 of net borrowings on the new revolving credit note and a new
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$235,000 capital lease obligation offset by $132,000 of scheduled payments
applied to term debt and $73,000 of payments applied to capital lease
obligations. The refinancing transactions consist of proceeds of $820,000 from a
new term note and $429,000 from an initial advance on a revolving credit note
offset by $932,000 of a lump sum payment applied to previous debt balances and
$442,000 of debt forgiveness (before related expenses).
Capital additions consisting of the purchase and fabrication of machinery and
equipment and the development of computer software amounted to $538,000
($235,000 by capital lease) and $186,000 ($65,000 by capital lease), in 1998 and
1997, 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 $235,000 of equipment
to create a research and development laboratory and an in house demonstration
for ImmersaVision which it funded through a capital lease. In addition, in 1998,
$172,000 was invested in software to automate and integrate the control and show
production process of ImmersaVision into a theater environment with other
products. Future opportunities from ImmersaVision are expected to require
continual investments in hardware and software to take advantage of advancing
technologies. The Company will continue to finance capital investments through
operations and external debt sources. In addition, opportunities may require new
equity investment in the Company.
On September 26, 1997 the Company offered holders of 1,744 outstanding shares of
the Company's Series B Cumulative Convertible Preferred Stock (Preferred) to
exchange each share of the Preferred for 125 shares of the Company's common
stock (Common). By exchanging the Preferred for Common, the Company is hoping to
simplify its capital structure and eliminate the accumulating dividend burden.
In addition, by increasing the number of Common shares that can be publicly
traded, the Company hopes to enhance the marketability of its Common. The offer
expired on November 28, 1997. Holders of 1,414 shares of Preferred accepted the
exchange offer. Accordingly, in January 1998, the Company issued 176,750 of its
authorized Common in exchange for 1,414 shares of Preferred, which were retired.
The holders of the remaining 330 shares of Preferred did not respond to the
solicitation and their shares will remain outstanding, unless, either (i) the
shares are redeemed or converted in accordance with the original contractual
terms of the preferred or (ii) the holders of the Preferred request and the
Company agrees to exchange their shares at a future time (which neither side is
obligated to do and which, if done, would be at an exchange ratio to be
negotiated in conjunction therewith).
The new debt agreements, combined with current assets and cash flow from
operations, assuming reasonably consistent revenue levels, should provide the
Company with adequate liquidity for the foreseeable future. However, new growth
opportunities for the Company's business may require funding beyond the
capabilities of the Company's current capital structure. The Company's improved
financial condition and capital structure should improve its ability to raise
additional funds for growth through other capital resources.
Year 2000 Impact
The Company is planning to replace all or part of its financial and
manufacturing information systems, including hardware and software prior to the
year 2000 in order to improve the flow and control of information and to
accommodate changes in the Company's business. New systems under consideration
claim to be Year 2000 compliant. Certain components of the Company's existing
information systems are not Year 2000 compliant. The Company has been advised by
software vendors and consultants that modifications are in process to make such
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components Year 2000 compliant. Consideration will be given to Year 2000
compliance in the decision to keep or replace the components of the information
systems. Although the final costs have not yet been determined, the replacement
or modification of the existing systems is not expected to have a materially
adverse impact on the Company's business. The Company's products rely on a
number of widely used third party software products which claim to be Year 2000
compliant or do not perform date oriented tasks. It is possible, however, that
third party software products are not Year 2000 compliant. Also, Year 2000
issues could impact the Company's customers and suppliers. The Company will
continue to assess the Year 2000 issues with respect to other parties but there
can be no assurance that other's failures to timely address the issues will not
have an affect on the Company.
Forward-Looking Information
The statements in this Annual Report on Form 10-KSB that are not statements of
historical fact constitute "forward-looking statements." Said forward-looking
statements involve risks and uncertainties which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performances or achievements, expressly predicted or implied by
such forward-looking statements. These forward-looking statements are identified
by their use of forms of such terms and phrases as "expects," "intends,"
"goals," "estimates," "projects," "plans," "anticipates," "should," "future,"
"believes," and "scheduled."
The important factors which may cause actual results to differ from the
forward-looking statements contained herein include, but are not limited to, the
following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain key management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and expectations of the Company will be achieved.
13
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Auditors 15
Consolidated Balance Sheets 16
Consolidated Statements of Operations 18
Consolidated Statements of Changes in Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
14
<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, 1998 and 1997, 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, 1998 and 1997, 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 2, 1998
15
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
January 31,
---------- ---------
1998 1997
---------- ---------
Assets
Current Assets:
Cash $ 471 $ 953
Accounts receivable 737 1,077
Inventories 1,412 983
Other current assets 135 123
---------- ---------
Total current assets 2,755 3,136
Machinery and equipment:
Machinery and equipment $ 2,675 $ 2,308
Less accumulated depreciation 1,927 1,723
---------- ---------
Net machinery and equipment 748 585
Other assets:
Repair and maintenance inventories, less provision
for obsolescence (1998--$1,101; 1997--$1,061) 165 190
Computer software, less amortization 322 187
Excess of cost over net assets of business acquired,
less amortization 1,893 1,961
---------- ---------
Total other assets 2,380 2,338
========== =========
Total assets $ 5,883 $ 6,059
========== =========
See notes to consolidated financial statements.
16
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
January 31,
---------- ----------
1998 1997
---------- ----------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 468 $ 228
Deferred maintenance revenue 641 574
Accrued expenses 224 287
Billings in excess of cost and estimated earnings 241 940
Current portion of long-term debt 215 542
---------- ----------
Total current liabilities 1,789 2,571
Long-term debt, less current portion 1,384 979
Stockholders' equity:
Series B cumulative convertible preferred stock,
$0.01 par value - authorized 100,000 shares;
issued and outstanding 330 shares in 1998
(liquidating value $148,294) 1,744 shares in
1997 (liquidating value $735,750) 76 399
Common stock, $0.20 par value -authorized
1,000,000 shares; issued and outstanding 500,970
shares in 1998 and 324,220 shares in 1997 100 65
Additional paid-in capital 8,479 8,502
Accumulated deficit (5,945) (6,457)
---------- ----------
Total stockholders' equity 2,710 2,509
---------- ----------
Total liabilities and stockholders' equity $ 5,883 $ 6,059
========== ==========
See notes to consolidated financial statements.
17
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended January 31,
----------------------------
1998 1997
------------- --------------
Revenues $ 7,076 $ 6,842
Cost of sales 5,064 4,737
------------- --------------
Gross margin 2,012 2,105
Selling expenses 575 543
Research and development 363 415
General and administrative expenses 768 736
------------- --------------
1,706 1,694
------------- --------------
Operating Income 306 411
Interest expense net of income 125 132
------------- --------------
Income before income taxes 181 279
Provision for income taxes 14 6
------------- --------------
Net Income before extraordinary item 167 273
Extraordinary gain on elimination of debt 345 --
------------- --------------
Net income 512 273
Preferred dividend requirement 38 48
============= ==============
Income applicable to common shares $ 474 $ 225
============= ==============
Basic earnings per common share:
Before extraordinary gain $ .34 $ .52
Extraordinary gain on elimination of debt .92 --
------------- --------------
$ 1.26 .52
============= ==============
Diluted earnings per common share: .
Before extraordinary gain $ .33 $ .52
Extraordinary gain on elimination of debt .89 --
------------- --------------
$1.22 $ .52
============= ==============
See notes to consolidated financial statements.
18
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
Preferred Additional
Stock Common Paid in Accumulated
Series B Stock Capital Deficit
------------------------------------------
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)
Retirement of stock warrants ..... (298)
Conversion of Preferred
Stock to Common Stock ............ (323) 35 269
Compensation from stock
options .......................... 6
Net Income ....................... 512
------------------------------------------
Balance at January 31, 1998 ...... $ 76 $ 100 $ 8,479 $(5,945)
==========================================
See notes to consolidated financial statements.
19
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year ended January 31
----------- ---------
1998 1997
--------- ---------
Operating activities
Net income $ 512 $ 273
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Extraordinary gain from elimination of debt (345) --
Depreciation and amortization 309 264
Provision for obsolescence 40 40
Interest Payments applied to debt (18)
Compensation from stock options 6
Changes in operating assets and liabilities, net:
Accounts receivable 340 101
Inventories (113) 6
Other current assets (12) (12)
Cost and estimated earnings on contracts net of billings (1,030) 683
Accounts payable 240 (180)
Accrued expenses 4 28
--------- ---------
Net cash provided (used) by operating activities (49) 1185
--------- ---------
Investing activities
Capital expenditures (303) (121)
--------- ---------
Net cash used by investing activities (303) (121)
--------- ---------
Financing activities
Proceeds from revolving line of credit 600 2,787
Payments on revolving line of credit (429) (3,056)
Payments on capital leases (73) (25)
Scheduled payments on long term debt (132) (156)
Payments related to refinancing (77)
Payments related to conversion of preferred stock (19)
--------- ---------
Net cash used by financing activities (130) (450)
--------- ---------
Increase (decrease) in cash (482) 614
Cash at beginning of year 953 339
--------- ---------
Cash at end of year $ 471 $ 953
========= =========
See notes to consolidated financial statements.
20
<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-two
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 and computer graphics 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 covered services are recognized
over the one year term of the contract. Revenues from parts and other services
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.
21
<PAGE>
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 and show production tools sold with projection
systems. Costs are amortized over the estimated 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 each of fiscal 1998 and fiscal 1997.
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 $855,000 and $788,000 at January 31,
1998 and 1997, 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.
Earnings Per Share
Earnings per share have been computed in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128) which is a different method of computing
earnings per share than was required for prior reporting periods. Accordingly,
earnings per share for the prior year have been restated for presentation in
accordance with SFAS 128. Basic earnings per share reflect the amount of income
available for each share of common stock outstanding during the year. Shares
used in computing basic earnings per share include shares contingently issuable
for nominal cash consideration. As such, shares issuable under a Stock
Subscription Warrant to purchase 108,913 shares at $0.20 per share are
considered common shares outstanding in the computation of basic earnings per
share. Diluted earnings per share reflects the amount of income available for
each share of common stock outstanding during the year assuming the issuance of
all dilutive potential shares.
The following table sets forth the computation of basic and diluted earnings per
share (dollars in thousands except per share data):
22
<PAGE>
<TABLE>
<CAPTION>
Year ended January 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
Numerator (same for basic and dilutive):
Net income before extraordinary gain $ 167 $ 273
Preferred dividend requirement 38 48
------------- -------------
Net income before extraordinary gain available to common
stockholders 129 225
Extraordinary gain on elimination of debt 345 --
============= =============
Net income available to common stockholders $ 474 $ 225
============= =============
Denominator:
Weighted average shares outstanding for basic earnings per
share 375,253 433,133
Dilutive effect of employee stock options 12,301 --
============= =============
Weighted average shares outstanding and assumed
conversions for dilutive earnings per share 387,554 433,133
============= =============
Basic earnings per share:
Before extraordinary gain $ .34 $ .52
Extraordinary gain on elimination of debt .92 --
============= =============
Total $ 1.26 $ .52
============= =============
Diluted earnings per share:
Before extraordinary gain $ .33 $ .52
Extraordinary gain on elimination of debt .89 --
------------- -------------
Total $ 1.22 $ .52
============= =============
</TABLE>
Common shares potentially issuable under the contractual conversion rights of
the Preferred B shares would have an antidilutive effect on earnings per share
and therefore have not been included in the above computations. Weighted average
common shares issuable under the contractual conversion rights of the Preferred
B shares amounted to 9,566 shares in fiscal year 1998 and 10,259 shares in
fiscal 1997.
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.
23
<PAGE>
2. Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------------
1998 1997
--------- -----------
<S> <C> <C>
Raw materials, parts, and subassemblies $ 822 $ 734
Work-in-process 140 153
Finished 2 4
Cost and estimated earnings in excess of billings 613 282
--------- -----------
Total inventories 1,577 1,173
Repairs and maintenance inventories recorded with other assets 165 190
--------- ----------
Inventory recorded within current assets $ 1,412 $ 983
========= ===========
</TABLE>
3. Costs and Estimated Earnings on Contracts in Progress
Costs and estimated earnings on contracts in progress consisted of:
<TABLE>
<CAPTION>
January 31,
--------- ----------
1998 1997
--------- ----------
<S> <C> <C>
Costs incurred on contracts in progress $ 1,830 $ 2,698
Estimated earnings 779 953
-------- ----------
Total costs and estimated earnings on contracts in progress 2,609 3,651
Less billings to date (2,237) (4,309)
--------- ----------
Total costs and estimated earnings on contracts in progress net of
billings $ 372 $ (658)
========= ==========
</TABLE>
Included in the accompanying balance sheet or footnotes
under the following captions:
<TABLE>
<CAPTION>
January 31,
--------- ---------
1998 1997
--------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings recorded
with inventory $ 613 $ 282
Billings in excess of costs and estimated earnings recorded with
liabilities (241) (940)
--------- ---------
Total costs and estimated earnings on contracts in progress net of
billings $ 372 $ (658)
========= =========
</TABLE>
24
<PAGE>
4. Debt
Current and long term debt consists of (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------- ---------------
1998 1997
--------------- ---------------
<S> <C> <C>
Capitalized lease obligations (Note 6) $ 251 $ 88
Convertible term note payable to Comerica Bank, due August 1, 1997 with
monthly installments of $13,000 ($20,000 effective June 1, 1997) plus
interest at 2% over prime -- 1,411
Time note payable to Comerica Bank, due March 31, 2004 with no interest -- 22
Revolving credit note payable to First Keystone Federal Savings Bank, due
July 1, 2002 with monthly interest at 2% over prime 600
Term note payable to First Keystone Federal Savings Bank, payable in equal --
monthly installments of $17,122 including interest at 9.25% through July
1, 2002 748
--------------- ---------------
Total debt 1,599 1,521
Less current portion 215 542
=============== ===============
Long term debt, less current portion $ 1,384 $ 979
=============== ===============
</TABLE>
The 1997 balance on the convertible term note consists of the balance of a
$1,800,000 note issued to the Company's previous lender, Comerica Bank
(Comerica) on April 1, 1994. The note represented 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 required additional principal
payments from excess cash balances determined by a formula based on unrestricted
cash balances and working capital. The terms allowed for the Bank to convert the
full remaining principal amount into common shares of the Company at a rate of
$10 per share subject to limitations protecting the Company's ability to
carryforward its tax net operating losses. The $22,000 time note required
mandatory prepayments in amounts equal to the warrant price for shares that
could have been purchased by the Bank under a Stock Subscription Warrant to
purchase 108,913 shares of common stock of the Company for $.20 per share. On
June 12, 1987, the balance of both notes and the Stock Subscription Warrant were
extinguished by a lump sum payment under an agreement with Comerica (NOTE 14).
The 1998 balance on the term note payable to First Keystone Federal Savings Bank
(First Keystone) represents the balance due on an $820,000 note issued to the
Company's new lender. The note is payable jointly by the Company and Spitz with
interest at 9.25% over five years in equal monthly installments of $17,122. The
25
<PAGE>
1998 balance on the revolving credit note payable to First Keystone represents
the balance due under a new $800,000 Revolving Credit Agreement executed on June
12, 1997. The Revolving Credit Note is also jointly payable by the Company and
Spitz, requires monthly interest payments at prime plus 2% and matures on July
1, 2002. The Revolving Credit Agreement permits borrowing, subject to an asset
based formula, of up to $800,000 resulting in unused borrowing capacity of
$200,000 at January 31, 1998. The new debt agreements with First Keystone are
secured by virtually all of the Company's assets and require the maintenance of
certain financial covenants.
5. Common and Preferred Stock
On September 26, 1997 the Company offered holders of 1,744 outstanding shares of
the Company's Series B Cumulative Convertible Preferred Stock (Preferred) the
right to exchange each share of the Preferred for 125 shares of the Company's
Common Stock (Common). The offer expired on November 28, 1997. Holders of 1,414
shares of Preferred accepted the exchange offer. Accordingly, in January 1998,
the Company issued 176,750 of its authorized Common in exchange for 1,414 shares
of Preferred, which were retired. The holders of the remaining 330 shares of
Preferred did not respond to the solicitation and their shares will remain
outstanding, unless either (i) the shares are redeemed or converted in
accordance with the original contractual terms of the Preferred or (ii) the
holders of the Preferred request and the Company agrees to exchange their shares
at a future time (which neither side is obligated to do and which, if done,
would be at an exchange ratio to be negotiated in conjunction therewith).
The holders of the remaining 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, 1998, accumulated but undeclared and unpaid dividends with
respect to the 330 outstanding shares of Preferred amounted to $65,794. The
Preferred shares may be redeemed by the Company at $250 per share plus
accumulated unpaid dividends of $199 per share. The 330 shares of Preferred are
convertible, at the option of the holders thereof, into 1,941 shares of the
Company's common stock, and such common shares have been reserved by the Company
for issuance upon conversion.
Upon liquidation, dissolution, or winding up of the Company, before any
distribution with respect to the common stock, the holders of shares of the
Preferred are entitled to receive an amount equal to the aggregate liquidation
value, which would include any accumulated and unpaid dividends. The 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
Preferred and as required by law. In such instances, each holder of Preferred is
entitled to the number of votes equal to the number of shares of common stock
that would be obtained upon conversion of the Preferred.
6. Leases
Spitz leases its office and production facilities under an operating lease.
Total rent expense under the lease amounted to $241,500 in each of fiscal years
1998 and 1997. On April 30, 1998, the current five year term will expire. Spitz
has exercised the renewal option under the lease which provides for an
additional five years rental at fair market. As a result of further
negotiations, Spitz and the Lessor have agreed to an amendment to the lease
agreement which will provide a new eight year extended term commencing May 1,
1998 with a renewal option for an additional eight years. In addition the lessor
26
<PAGE>
agreed to make certain modifications and improvements to the facility. Under the
new lease amendment, annual rent will be $262,200 for the first five years of
the new eight year term. Rent for the remaining three years and the optional
renewal term will be escalated based on the Consumer Price Index. Minimum rental
commitments under the operating lease are as follows for the fiscal years ended:
1999--$257,025; 2000 through 2006 -- $262,200; 2007 $65,550.
Spitz finances purchases of certain machinery and equipment through capital
leases. Assets under capital lease included in Machinery and Equipment are as
follows (in thousands):
January 31,
---------------------------------------
1998 1997
-------------------- ------------------
Machinery and equipment $ 353 $ 131
Less accumulated depreciation 74 30
-------------------- ------------------
Net book value $ 279 $ 101
==================== ==================
The asset and liability are recorded at the present value of the minimum lease
payments based on the interest rates imputed in the leases at rates ranging from
12.0% to 12.8%. Depreciation on the assets under capital lease is included in
depreciation expense.
Future minimum annual rentals under capital lease agreements at January 31,
1998, are as follows (in thousands):
Fiscal 1999 $ 102
Fiscal 2000 79
Fiscal 2001 60
Fiscal 2002 60
Fiscal 2003 15
--------------
Total payments 316
Less amount representing interest 65
--------------
Present value of capital lease obligations 251
Less current portion 74
--------------
Long term obligation $ 177
==============
7. Stock Compensation Plan
Under the 1995 Stock Option and Performance Incentive Plan, the Company may
grant stock options, stock appreciate rights or shares aggregating 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
at an exercise price of $2.25, the market price of the Company's common stock on
the grant date. On July 8, 1997, 39,500 stock options were granted to certain
management and other employees at an exercise price of $2.50. The market price
of the Company's common stock on July 8, 1997 was $3.63. The options vest
ratably over four years from the date of grant and expire ten years from the
date of grant. The following table summarizes the activity:
27
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended January 31,
-------------------------------------------------------
1998 1997
------------------------------------------------------
Weighted Weighted
Number Average Number Average
of shares exercise price of shares exercise price
------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period 10,500 $ 2.25 --
Options granted 39,500 2.50 10,500 $ 2.25
========== ===========
Options outstanding at end of period 50,000 $ 2.45 10,500 $ 2.25
========== ===========
Options excercisable at end of period 2,625 $ 2.25 --
========== ===========
</TABLE>
The weighted average remaining contractual life of the 50,000 outstanding
stock options at January 31, 1998 is 9.2 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25) in accounting for its employee stock options because the alternative
fair value accounting provided under Financial Accounting Standards Board
Statement No. 123 (FAS 123) requires the use of option valuation models that, in
management's opinion, do not necessarily provide a reliable measure of the value
of its employee stock options. Under APB 25, compensation is measured under the
intrinsic value method at the grant date and recorded ratably over the vesting
period. Intrinsic value is measured by the difference between the option
exercise price and the market price of the underlying stock at the grant date
for the options granted by the Company. No compensation expense resulted from
the options granted in fiscal year ended 1997 since the options had an exercise
price equal to market value. The options granted in fiscal year ended 1998 had
an exercise price ($2.50) below market value ($3.63) at the grant date. As a
result compensation expense from stock options amounting to $6,296 was recorded
in fiscal year ended January 31, 1998 in accordance with APB 25.
Pro forma information regarding net income and earnings per share is required
under FAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for the options granted was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions: risk free
interest rate 6%; dividend yield 0%, expected volatility of 40%; and a weighted
average expected life of 8.43 and 7.22 years for the options granted in the
years ended January 31, 1997 and 1998, respectively. As a result, the weighted
average fair value of the options granted in the year ended January 31, 1997 at
an exercise price equal to market was estimated at $1.29 and the weighted
average fair value of the options granted in the year ended January 31, 1998 at
an exercise price below market was estimated at $2.32. Under FAS 123 the
estimated fair value of the options is amortized to expense over the vesting
period. The following pro forma information reflects net income and earnings per
share had the Company accounted for the employee stock options under FAS 123 (in
thousands except per share data):
28
<PAGE>
Year ended January 31,
-----------------------------
1998 1997
-----------------------------
Net income As reported $ 512 $ 273
Pro forma 502 271
Basic earnings per common share As reported 1.26 .52
Pro forma 1.24 .51
Diluted earnings per common share As reported 1.22 .52
Pro forma 1.22 .51
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 accounts 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 $73,000 and $61,000 in fiscal 1998 and 1997, respectively.
9. Income Taxes
Income tax expense for 1998 and 1997 consists of applicable state income taxes
on the income before taxes of Spitz. Federal income taxes for both 1998 and 1997
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 of the Company's
net deferred tax at January 31, 1998 and 1997 are as follows: (in thousands)
1998 1997
-------------- ----------------
Net operating loss carryforwards $ 4,363 $ 4,745
Obsolescence reserve 375 361
-------------- ----------------
Net deferred tax assets 4,738 5,106
Valuation allowance (4,738) (5,106)
-------------- ----------------
Deferred income tax, net $ 0 $ 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 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, 1998, the Company had investment tax credit carryforwards of
29
<PAGE>
$443,000 expiring in 1999 through 2002 and a net operating loss carryforward for
tax purposes of $12,833,000 expiring 2006 through 2009. For financial reporting
purposes, the net operating loss carryforward in 1998 is approximately
$13,934,000. The difference relates to the nondeductible reserve for inventory
valuation not recognized for tax purposes. The net operating loss carrforward
was reduced by approximately $686,000 and $430,000 from the utilization of a net
operating loss deduction in 1998 and 1997, 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 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 $235,000 and $65,000
acquired through capital leases in fiscal 1998 and 1997, respectively.
Interest paid on debt including capital lease obligations amounted to $154,000
in Fiscal 1998 and $167,000 in Fiscal 1997. The Company paid no federal income
taxes in Fiscal 1998 and 1997.
12. Significant Customers and Geographic Information
In fiscal year 1998, no single customer accounted for more than 10% of total
revenue. In fiscal 1997, revenues of $769,000 (11.2%) were earned from a single
customer. Export revenues by geographic area for the years ended January 31
consist of (in thousands):
30
<PAGE>
1998 1997
----------- -----------
Canada $ 436 $ 763
Central America 79 129
South America 169 47
Europe 842 412
Middle East -- 39
Far East 301 761
=========== ===========
Total export revenues $ 1,827 $ 2,151
=========== ===========
13. Contingencies and Commitments
In 1995, 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 communicated any threats to carry out its assertion against
Spitz since July 1996, but it has indicated to Spitz that proceedings continue
in an effort to recover damages from the other parties involved. 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, 1998.
At January 31, 1997 there was an outstanding standby letter of credit issued by
Spitz in the amount of $129,000 which was canceled in June 1997. At January 31,
1998, there were no outstanding standby letters of credit issued by the Company
or Spitz.
14. Refinancing and Debt Forgiveness
On June 12, 1997, the Company and Spitz executed a series of agreements with a
new lender, First Keystone Federal Savings Bank (First Keystone) whereby the
proceeds from two new promissory notes were used to retire all existing debt and
a Stock Subscription Warrant held by the Company's previous lender, Comerica
Bank (Comerica). Under an agreement with Comerica, all existing debt amounting
to $1,373,000 as of June 12, 1997, and a Stock Subscription Warrant to purchase
108,913 shares of the Company's Common Stock for $0.20 per share were retired
for a cash payment of $1,230,000. Debt agreements executed with First Keystone
consisted of an $820,000 term loan and an $800,000 Revolving Credit Agreement.
Upon execution of the new debt agreements, proceeds of $820,000 from the term
note and $429,000 from the revolving credit agreement were used to fund the
31
<PAGE>
$1,230,000 payment to the previous lender and a portion of other costs related
to the refinancing transactions.
The initial advance of $429,000 resulted in unused borrowing capacity of
$371,0000 under the new $800,000 Revolving Credit Agreement. Immediately before
the refinancing, the borrowing limit under the previous $500,000 Revolving
Credit Agreement, reduced by $129,000 for an outstanding standby letter of
credit, also resulted in unused borrowing capacity of $371,0000. The $129,000
standby letter of credit served as collateral on outstanding surety bonds
required to guarantee the performance of Spitz on certain customer contracts. In
June 1997, the Surety Company determined that the Company's financial strength
was sufficient for the level of bonding outstanding and returned the standby
letter of credit for cancellation.
The retirement of the $1,373,000 balance from the previous debt
agreements and the Stock Subscription Warrant for cash of $1,230,000 resulted in
a reduction of Additional Paid in Capital of $298,000 and an extraordinary gain
from the forgiveness of debt of $345,000, net of related expenses of $96,000.
Also, the refinancing eliminated the dilutive affect on the Company's common
stockholders resulting from the Stock Subscription Warrant which represented 25%
of the common stock upon its conversion.
32
<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
The information required by this Item is incorporated herein by reference to the
sections entitled "Proposal No. 1 -- Election of Directors - Executive Officers
of the Company" and "-- Section 16(a) Beneficial Ownership Reporting Compliance"
of the Company's Definitive Proxy Statement to be filed with the Commission
within 120 days after January 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
sections entitled "Proposal No. 1 -- Election of Directors -- Compensation of
Directors" and "-- Executive Compensation" of the Company's Definitive Proxy
Statement to be filed with the Commission within 120 days after January 31,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's Definitive Proxy Statement to be filed with the
Commission within 120 days after January 31, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
section entitled "Proposal No. 1 -- Election of Directors -- Certain
Relationships and Transactions" of the Company's Definitive Proxy Statement to
filed with the Commission within 120 days after January 31, 1998.
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).
33
<PAGE>
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).
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).
34
<PAGE>
10.1 Transnational Industries Inc. 1995 Stock Option and Performance
Incentive Plan (Exhibit "A to egistrant's Proxy Statement dated June
16, 1995 incorporated herein by reference).
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 Agreemen dated May 1, 1995 between Paul Dailey and Spitz
Inc. (Exhibit 10.3 to Registrant's 1996 10-K incorporate 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).
10.6 Line of Credit Agreement, dated June 12, 1997, between First Keystone
Savings Bank, the Company and Spitz, Inc. (Exhibit 10.1 to Registrant's
Form 10-QSB for the quarterly period ended July 31, 1997 (the "7/97
Form 10-QSB") incorporated herein by reference).
10.7 Line of Credit Note, dated June 12, 1997, of the Company and Spitz,
Inc. to First Keystone Savings Bank (Exhibit 10.2 to the 7/97 Form
10-QSB incorporated herein by reference).
10.8 Term Note, dated June 12, 1997, of the Company and Spitz, Inc. to First
Keystone Savings Bank (Exhibit 10.3 to the 7/97 Form 10-QSB
incorporated herein by reference).
10.9 Agreement, dated June 12, 1997, between the Company, Spitz, Inc. and
Comerica Bank (Exhibit 10.4 to the 7/97 Form 10-QSB incorporated
herein by reference).
21 Subsidiaries of Registrant (a Delaware corporation):
Spitz, Inc.
27 Financial Data Schedules*
*Filed electronically herewith
(b) Reports on Form 8-K for the quarter ended January 31, 1998.
None
35
<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 1, 1998 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 1, 1998
/s/ Charles H. Holmes, Jr
- - --------------------------
Charles H. Holmes, Jr. Director, President and
Chief Executive Officer May 1, 1998
/s/ William D. Witter
- - ------------------------
William D. Witter Vice Chairman of the Board May 1, 1998
/s/ Michael S. Gostomski
- - -------------------------
Michael S. Gostomski Director May 1, 1998
/s/ Calvin A. Thompson
- - -------------------------
Calvin A. Thompson Director May 1, 1998
36
<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,
1998 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-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 471
<SECURITIES> 0
<RECEIVABLES> 737
<ALLOWANCES> 0
<INVENTORY> 1412
<CURRENT-ASSETS> 2755
<PP&E> 2675
<DEPRECIATION> 1927
<TOTAL-ASSETS> 5883
<CURRENT-LIABILITIES> 1789
<BONDS> 0
0
76
<COMMON> 100
<OTHER-SE> 2534
<TOTAL-LIABILITY-AND-EQUITY> 5883
<SALES> 7076
<TOTAL-REVENUES> 7076
<CGS> 5064
<TOTAL-COSTS> 5064
<OTHER-EXPENSES> 363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 181
<INCOME-TAX> 14
<INCOME-CONTINUING> 167
<DISCONTINUED> 0
<EXTRAORDINARY> 345
<CHANGES> 0
<NET-INCOME> 512
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.22
</TABLE>
