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, 1999
[ ] 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, 1999, were
$7,509,312.
The aggregate market value of the voting stock held by non-affiliates
of Registrant as of March 31, 1999 was approximately $221,489 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, 1999, 502,470 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, 1999, 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, manufacture and integration of computer-controlled immersive
visualization systems and domed projection screens. Spitz, under a predecessor
corporation, was founded in 1944.
NARRATIVE DESCRIPTION OF BUSINESS
Products
- --------
- --Video projector systems
In 1997 Spitz introduced ImmersaVision(TM), a 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 that 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. Spitz has sold three ElectricSky
systems. The first was sold to the Town of Watson Lake, Yukon, Canada for a new
theater for tourism, which opened in May 1997. The second two were sold to new
science and technology visitor centers in the United States and England and are
expected to be delivered later in 1999, and in mid 2000, respectively. In 1997,
Spitz also delivered the first ElectricHorizon System, for a temporary exhibit
at a domestic science museum. The temporary 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, the ElectricHorizon
components were dismantled and returned to the various owners. Spitz has not yet
sold another ElectricHorizon 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.
- --Planetarium projector systems
Spitz is the world's leading producer of planetarium 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
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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.
- --Domed Structures
Spitz is also the world's leading producer of domed projection screens. Spitz
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 1999, revenues of $2,351,000 (31% 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 planetarium systems
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 evolving for ImmersaVision from
existing planetarium competitors and other suppliers of virtual reality display
mediums resulting in two known domestic and one known foreign competitor. 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 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 attracts
customers who are unwilling to take on such complex tasks. Also, Spitz is
developing 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
$521,000 in fiscal 1999 and $363,000 in fiscal 1998.
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
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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, 1999, the Company and Spitz had 58 permanent employees, of whom
51 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, 1999.
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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 1999 and 1998. 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.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
--------------------- ---------------------
High Low High Low
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First Quarter $5.75 $2.88 $2.25 $1.50
Second Quarter 4.38 3.00 4.00 2.13
Third Quarter 3.05 1.75 6.50 3.75
Fourth Quarter 1.75 1.50 6.25 5.38
</TABLE>
Holders
At March 31, 1999, 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, 1999, accumulated but
undeclared and unpaid dividends with respect to the 318 outstanding shares of
Preferred B amounted to $72,146. The Preferred B shares may be redeemed by the
Company at $250 per share plus accumulated unpaid dividends of $227 per share.
The 318 shares of Series B Preferred are convertible into 1,871 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, 1999.
<TABLE>
<CAPTION>
Percentage
Percentage of Revenues Change
Year ended January 31, 1999
-------------------------- vs.
1999 1998 1998
------------- ---------- ------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 6.1%
Cost of sales 69.2 71.6 2.6
Gross margin 30.8 28.4 15.0
Selling expenses 9.9 8.1 29.9
Research and development 6.9 5.1 43.5
General and administrative 10.7 10.9 4.2
Operating income 3.3 4.3 (19.6)
Interest expense 1.6 1.8 (1.6)
Income before income taxes 1.6 2.6 (32.0)
Income taxes 0.2 0.2 *
Income before extraordinary gain 1.5 2.4 (34.7)
Extraordinary gain - 4.9 *
Net Income 1.5 7.2 (78.7)
</TABLE>
- -----------
* Not meaningful
-----------
Revenues in the year ended January 31, 1999 (fiscal 1999) were $7,509,000
compared to $7,076,000 in the year ended January 31, 1998 (fiscal 1998), an
increase of $433,000 (6%). In the last half of fiscal 1999, work commenced on
two new sales of ElectricSky systems resulting in ImmersaVision revenue of
$273,000 for fiscal 1999 compared to $178,000 for fiscal 1998. The ImmersaVision
revenue in fiscal 1998 was attributable to the first sale of an ElectricSky
system, which was completed in May 1997. More significant revenue from
ImmersaVision is expected in fiscal 2000 as work intensifies on the two new
sales as well as other anticipated new sales. Dome revenues were $4,259,000 in
1999 compared to $4,271,000 in 1998, a decrease of $12,000 due to lower revenue
from ride simulation attractions. Otherwise, dome revenues from planetariums,
military training simulators, special projects and film theaters increased.
Planetarium revenues were $2,977,000 in 1999 compared to $2,627,000 in 1998, an
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increase of $350,000 (13%). The increase in planetarium revenues was due to
several new orders for new and refurbished systems for the educational market
booked in the second and third quarters of fiscal 1999. Planetarium revenues
include amounts attributable to the sale of maintenance and parts of $1,207,000
in 1999 compared to $1,295,000 in 1998, a decrease of $88,000 (7%). The decrease
in maintenance and parts revenues was due mostly to lower sales of parts and
paid service visits, and to a lesser degree, the timing of performance on
preventive maintenance agreements.
The Company's revenues from maintenance and parts are recurring and are expected
to remain steady or increase over time due to the expansion of the Company's
customer base resulting from new sales. 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. The Company's products are often sold together
as components of a complete system. In addition to a competitive advantage, this
provides each of the Company's products with efficient direct access to a wide
breadth of markets that might otherwise be difficult to reach. By being sold as
a complete system, ImmersaVision products provide new sales opportunities for
domes and planetarium systems. More importantly, ImmersaVision products and
their use in planetarium theaters are creating new opportunities beyond the
Company's traditional markets.
New sales order bookings have been significant in the second half of fiscal
1999, increasing the backlog of unearned revenue to approximately $9,800,000 as
of January 31, 1999. About ninety percent of the revenue backlog is scheduled to
be earned through the end of fiscal 2000. Bookings have been strong for all of
the Company's products and include two ElectricSky systems, with optical
planetarium projectors and domes, for two new visitor attractions. The Company
expects increasing revenue contributions from ImmersaVision products in future
years as the installed base grows and new applications of the product are
developed. 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 entertainment and
other commercial markets. While revenue levels are expected to increase over the
next year, uncertainty in the timing and delivery of new sales are expected to
cause revenue levels to continue to fluctuate in interim periods.
Gross margins increased to 30.8% in 1999 from 28.4% in 1998. Successful efforts
in 1999 on many dome projects resulted in gross margin improvements that were
weighted down by expected lower margins on subcontracted work for a special
device to rotate a large film theater dome and the large ImmersaVision projects.
Unanticipated cost on certain planetarium refurbishment projects also weighted
down strong 1999 gross margins. Selling expenses increased $172,000 (30%) in
1999 as more labor resources were directed to sales and marketing efforts
through reassignment of personnel, a sales staff addition, and the use of
engineering resources in sales proposal efforts. Also contributing to the
increased selling expenses were travel costs for foreign sales presentations.
Selling expenses in fiscal 2000 are expected to be at current or increasing
levels as marketing efforts on ImmersaVision continue to demand significant
resource commitments. Research and development expenses increased $158,000 (44%)
in 1999 due to research and development of proprietary programming tools for
software content development for ImmersaVision, improvements to ImmersaVision
subsystems, and improvements to optical planetarium products. Research and
development efforts are expected to continue at increasing levels in future
periods. Fluctuating research and development expenses in the past have been
attributable to the deployment of engineering personnel to work on selling and
customer contract related tasks. Through organizational changes, staff
additions, and a more constant volume of customer contract activity the Company
is deploying a more constant level of engineering resources to research and
development projects which will be necessary to maintain and grow the business.
General and administrative expenses increased $32,000 (4%) in 1999 due to new
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employee recruitment costs and a $25,000 charge to account for potentially
uncollectible accounts receivable.
Net interest expense amounted to $123,000 in 1999 compared to $125,000 in 1998.
The $123,000 reported in 1999 consisted of $93,000 paid on bank debt plus
$31,000 paid on capital lease obligations offset by $1,000 of interest income
earned on cash invested. The $125,000 reported in 1998 consisted of $124,000
paid on bank debt plus $30,000 paid on capital lease obligations offset by
$29,000 of interest income earned on cash invested. The Company paid no federal
income taxes in 1999 or 1998 as federal taxable income was offset by the
utilization of net operating loss carryforwards. State income taxes amounted to
$14,000 in 1999 and 1998. 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 $109,000 in 1999
compared to net income before extraordinary item of $167,000 in 1998. 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 addition of the extraordinary gain resulted in net income
of $512,000 for fiscal 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.
At January 31, 1999 there was a $150,000 balance on the revolving credit note
compared to $600,000 at January 31, 1998. This resulted in unused borrowing
capacity of $650,000 at January 31, 1999 compared to $200,000 at January 31,
1998. Cash balances of $455,000 provided additional liquidity at January 31,
1999 compared to $471,000 at January 31, 1998. The next sources of liquidity are
trade accounts receivable and contracts in process. Trade accounts receivable
increased to $1,712,000 at January 31, 1999 compared to $737,000 at January 31,
1998. The higher liquidity available at January 31, 1999 from borrowing capacity
and accounts receivable was attributable to advanced funding from contracts in
progress as billings exceeded revenue recorded by $763,000 at January 31, 1999
compared to revenue recorded in excess of billings of $372,000 at January 31,
1998. This represents an increase in customer financing of $1,135,000 and
illustrates the previous discussion of the effect of progress payments on cash
flow. Contracts in progress at January 31, 1999 will use the other sources of
liquidity as performance catches up to the billings through the completion of
each project. The payment terms on new contracts remain uncertain and will also
affect liquidity.
The net cash provided by operating activities was $956,000 in 1999 compared to
net cash used of $49,000 in 1998, an increase in cash provided from operations
of $1,005,000. The increase consists of a $1,000,000 increase in cash provided
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by changes in operating assets and liabilities and a $5,000 increase in cash
generated from earnings. As discussed previously, the change in operating assets
is mostly attributable to progress payment terms on customer contracts.
Of the $956,000 provided by operations in 1999, $310,000 was invested in capital
additions and financing activities used $662,000. Financing activities included
net pay downs of $450,000 on the revolving credit note, payments of $83,000 on
capital leases, and monthly principal payments on the bank term note of
$129,000. Non cash financing transactions in 1999 consist of $32,000 of computer
equipment acquired through capital leases.
In addition to the $49,000 used by operating activity in 1998, $303,000 was
invested in capital additions and financing activities used $130,000. 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.
Total debt at January 31, 1999 was $969,000, a decrease of $630,000 from
$1,599,000 at January 31, 1998. In summary, the decrease resulted from $450,000
of net pay downs on the revolving credit note, $129,000 of scheduled payments
applied to term debt and $83,000 of payments applied to capital lease
obligations, offset by a new $32,000 capital lease obligation.
Capital additions consisting of the purchase and fabrication of machinery and
equipment and the development of computer software amounted to $342,000 ($32,000
by capital lease) and $538,000 ($235,000 by capital lease), in 1999 and 1998,
respectively. Cost of computer software developed to automate and integrate the
control and show production process of ImmersaVision into a theater environment
with other products amounted to $233,000 and $172,000 in 1999 and 1998,
respectively. Future opportunities from ImmersaVision are expected to require
continual investments in hardware and software to take advantage of advancing
technologies. When appropriate, the Company will fund the acquisition of capital
assets through capital leases or equipment financing notes. 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 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
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debt of approximately $345,000, net of related expenses, recorded in the second
quarter of fiscal 1999. 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
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.
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). 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.
Holders of 1,414 shares of Preferred accepted the exchange offer by November 28,
1997, the expiration date of the original offer. In fiscal 1999 a holder of 12
shares of Preferred requested, and the Company agreed, to exchange shares under
the same terms. Accordingly, in January and August 1998, the Company issued
176,750 and 1,500 shares of its authorized Common in exchange for 1,414 and 12
shares of Preferred, respectively. The holders of the remaining 318 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 Company's 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.
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Year 2000 Impact
The Year 2000 Issue is the result of computer programs being unable to
distinguish between the year 1900 and 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, or engage in
similar normal business activities.
The Company currently uses a combination of mini computer applications,
microcomputer applications and manual procedures to account for and manage its
business processes. The very unique nature of the Company's business, its small
size, and the variety of activities it is involved in, along with past financial
constraints, have perpetuated the use of the current systems. The mini computer
applications are not currently Year 2000 compliant. Year 2000 corrections to the
mini computer applications have been proposed by vendors and consultants;
however, the Company believes that such changes could be costly and uncertain.
Improvements in the Company's financial condition, the availability of more
affordable technology solutions, and anticipated increases in business volume
now justify major improvement to the Company's information systems. Therefore,
the Company has concluded that it would be better served by an alternative
solution. As part of this wider objective to improve its information systems,
the Company has evaluated its overall data processing resources and plans to
make substantial changes in the fiscal year ended January 31, 2000. In this
process, the Company will select new products that are Year 2000 Compliant. The
Company has completed an analysis of its business processes and requirements,
which were matched to the capabilities of available enterprise software
products. A list of enterprise software products best suited for the Company's
business was compiled and a determination was made on the basic computer
infrastructure required to run the list of software products. The computer
infrastructure has been installed in the first quarter of fiscal 2000 at a cost
of approximately $85,000. Several enterprise software products have been
evaluated and the list has been narrowed down to two products. Final software
selection is planned in May 1999, with installation and implementation over the
following six months. Cost of the enterprise software, installation and
implementation is estimated to range from $151,000 to $265,000. The cost is
expected to be capitalized and funded through operating cash flow and leasing of
computer hardware and software.
The Company is not integrated with and does not rely heavily on vendors',
clients' and other third parties' data processing systems. The bulk of the
Company's revenue is generated from new public or commercial projects.
Maintenance and parts revenue comes from repeat customers, mainly museums and
schools. As such, revenue is generally not dependent upon repeat sales to
commercial customers' inventory management systems or enterprise resource
planning systems the way many businesses may be. The Company uses a network of
vendors to obtain its parts and supplies. Many parts and supplies are
commodities available from numerous sources. The effect of critical vendors'
ability to continue to supply the Company though Year 2000 has not been
determined. However, the Company believes that the lack of integration with
vendors systems and numerous available sources will reduce the risk from
vendors' Year 2000 potential problems.
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. Evaluation and testing of the Year 2000 impact on software used in the
Company's products is planned in conjunction with other research and development
13
<PAGE>
efforts over the next year. Evaluation and any required corrections are not
expected to have a material cost impact.
As a contingency plan, in the event that all of the necessary changes are not
completed by the Year 2000, the portions of the operations that rely on date
sensitive data can be accommodated by manual procedures and date adjustments to
existing software applications. The Company believes this contingency plan,
although not the most efficient solution, could be accomplished without a
material interruption to the Company's business.
In addition to the specific anticipated costs described above, the Company will
incur additional costs as salaried personnel utilize their time to work on Year
2000 matters. The Company does not anticipate that the use of internal personnel
will have a material adverse effect upon the Company's operations or earnings;
however, the Company is not yet able to quantify such costs and, because the
Company has not reserved any amounts therefore, any amounts so expended will
reduce the Company's earnings. In addition, in the event that the economy as a
whole is materially and adversely effected by widespread interruptions, or by
failures of key infrastructure providers (such as banks and utilities), it is
likely that the Company's financial condition and results of operations would be
materially adversely effected.
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.
14
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
Report of Independent Auditors 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 19
Consolidated Statements of Changes in Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
15
<PAGE>
Report of Independent Auditors
To the Stockholders and
the Board of Directors
Transnational Industries, Inc.
Chadds Ford, Pennsylvania
We have audited the accompanying consolidated balance sheet of Transnational
Industries, Inc. as of January 31, 1999 and 1998, 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.
These 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, 1999 and 1998, 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, LLP
--------------------------
STOCKTON BATES, LLP
Philadelphia, Pennsylvania
April 7, 1999
16
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
January 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash $ 455 $ 471
Accounts receivable 1,712 737
Inventories 1,281 1,412
Other current assets 85 135
---------- ----------
Total current assets 3,533 2,755
Machinery and equipment:
Machinery and equipment $ 2,784 $ 2,675
Less accumulated depreciation 2,172 1,927
---------- ----------
Net machinery and equipment 612 748
Other assets:
Repair and maintenance inventories, less provision
for obsolescence (1999--$1,141; 1998--$1,101) 165 165
Computer software, less amortization 501 322
Excess of cost over net assets of business acquired,
less amortization 1,825 1,893
---------- ----------
Total other assets 2,491 2,380
========== ==========
Total assets $6,636 $5,883
========== ==========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
Transnational Industries, Inc.
Consolidated Balance Sheets (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
January 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 366 $ 468
Deferred maintenance revenue 686 641
Accrued expenses 338 224
Billings in excess of cost and estimated earnings 1,447 241
Current portion of long-term debt 238 215
---------- ----------
Total current liabilities 3,075 1,789
Long-term debt, less current portion 731 1,384
Stockholders' equity:
Series B cumulative convertible preferred stock,
$0.01 par value - authorized 100,000 shares;
issued and outstanding 318 shares in 1999
(liquidating value $151,646) 330 shares in
1998 (liquidating value $148,294) 73 76
Common stock, $0.20 par value -authorized
1,000,000 shares; issued and outstanding 502,470
shares in 1999 and 500,970 shares in 1998 100 100
Additional paid-in capital 8,493 8,479
Accumulated deficit (5,836) (5,945)
---------- ----------
Total stockholders' equity 2,830 2,710
---------- ----------
Total liabilities and stockholders' equity $6,636 $5,883
========== ==========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
Year ended January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues $7,509 $7,076
Cost of sales 5,195 5,064
----------- -----------
Gross margin 2,314 2,012
Selling expenses 747 575
Research and development 521 363
General and administrative expenses 800 768
----------- -----------
2,068 1,706
----------- -----------
Operating Income 246 306
Interest expense net of income 123 125
----------- -----------
Income before income taxes 123 181
Provision for income taxes 14 14
----------- -----------
Net Income before extraordinary item 109 167
Extraordinary gain on elimination of debt 345
----------- -----------
Net income 109 512
Preferred dividend requirement 8 38
=========== ===========
Income applicable to common shares $ 101 $ 474
=========== ===========
Basic earnings per common share:
Before extraordinary gain $ .20 $ .34
Extraordinary gain on elimination of debt -- .92
----------- -----------
$ .20 $ 1.26
=========== ===========
Diluted earnings per common share:
Before extraordinary gain $ .20 $ .33
Extraordinary gain on elimination of debt -- .89
=========== ===========
$ .20 $ 1.22
=========== ===========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Preferred Additional
Stock Common Paid in Accumulated
Series B Stock Capital Deficit
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
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)
Conversion of Preferred
Stock to Common Stock (3) - 3
Compensation from stock options 11
Net Income 109
---------- ---------- ------------- -----------
Balance at January 31, 1999 $ 73 $ 100 $ 8,493 $ (5,836)
========== ========== ============ ============
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Transnational Industries, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended January 31
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Operating activities
Net income $ 109 $ 512
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Extraordinary gain from elimination of debt (345)
Depreciation and amortization 367 309
Provision for obsolescence 40 40
Compensation from stock options 11 6
Changes in operating assets and liabilities, net:
Accounts receivable (975) 340
Inventories 162 (113)
Other current assets 50 (12)
Cost and estimated earnings on contracts net of billings 1,135 (1,030)
Accounts payable (102) 240
Accrued expenses 159 4
---------- ---------
Net cash provided (used) by operating activities 956 (49)
---------- ---------
Investing activities
Capital expenditures (310) (303)
---------- ---------
Net cash used by investing activities (310) (303)
---------- ---------
Financing activities
Proceeds from revolving line of credit 200 600
Payments on revolving line of credit (650) (429)
Payments on capital leases (83) (73)
Scheduled payments on long term debt (129) (132)
Payments related to refinancing (77)
Payments related to conversion of preferred stock (19)
---------- ---------
Net cash used by financing activities (662) (130)
---------- ---------
Increase (decrease) in cash (16) (482)
Cash at beginning of year 471 953
---------- ---------
Cash at end of year $ 455 $ 471
========== =========
</TABLE>
See notes to consolidated financial statements.
21
<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) manages its business as a single
operating 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. In recent years, Spitz has 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.
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 is 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.
22
<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 1999 and fiscal 1998.
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 $924,000 and $855,000 at January 31,
1999 and 1998, 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. 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 for the year ended January 31, 1998. 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):
23
<PAGE>
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Numerator (same for basic and dilutive):
Net income before extraordinary gain $ 109 $ 167
Preferred dividend requirement 8 38
----------- -----------
Net income before extraordinary gain available
to common stockholders 101 129
Extraordinary gain on elimination of debt 345
----------- -----------
Net income available to common stockholders $ 101 $ 474
=========== ===========
Denominator:
Weighted average shares outstanding for basic earnings
per share 501,720 375,253
Dilutive effect of employee stock options 6,393 12,301
----------- -----------
Weighted average shares outstanding and assumed
conversions for dilutive earnings per share 508,113 387,554
=========== ===========
Basic earnings per share:
Before extraordinary gain $ .20 $ .34
Extraordinary gain on elimination of debt -- .92
----------- -----------
Total $ .20 $ 1.26
=========== ===========
Diluted earnings per share:
Before extraordinary gain $ .20 $ .33
Extraordinary gain on elimination of debt -- .89
----------- -----------
Total $ .20 $ 1.22
=========== ===========
</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 1,906 shares in fiscal year 1999 and 9,566 shares in fiscal
1998.
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.
24
<PAGE>
2. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Raw materials, parts, and subassemblies $ 735 $ 822
Work-in-process 27 140
Finished - 2
Cost and estimated earnings in excess of billings 684 613
----------- -----------
Total inventories 1,446 1,577
Repairs and maintenance inventories recorded with other assets 165 165
=========== ===========
Inventory recorded within current assets $ 1,281 $ 1,412
=========== ===========
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
Costs and estimated earnings on contracts in progress consisted of:
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Costs incurred on contracts in progress $ 3,358 $ 1,830
Estimated earnings 1,408 779
----------- -----------
Total costs and estimated earnings on contracts in progress 4,766 2,609
Less billings to date (5,529) (2,237)
----------- -----------
Total costs and estimated earnings on contracts in progress net of
billings $ (763) $ 372
=========== ===========
</TABLE>
Included in the accompanying balance sheet or footnotes under the following
captions:
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of billings recorded
with inventory $ 684 $ 613
Billings in excess of costs and estimated earnings recorded with
Liabilities (1,447) (241)
----------- -----------
Total costs and estimated earnings on contracts in progress net of
Billings $ 763 $ 372
=========== ===========
</TABLE>
25
<PAGE>
4. DEBT
Current and long term debt consists of (in thousands):
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Capitalized lease obligations (Note 6) $ 200 $ 251
Revolving credit note payable to First Keystone Federal Savings Bank,
due July 1, 2002 with monthly interest at 2% over prime 150 600
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 619 748
----------- -----------
Total debt 969 1,599
Less current portion 238 215
----------- -----------
Long term debt, less current portion $ 731 $ 1,384
=========== ===========
</TABLE>
The 1999 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 primary lender on June 12, 1997. 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 balance on the revolving credit note payable to
First Keystone represents the balance due under an $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 $650,000 at January 31, 1999. The 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). Holders of 1,414 shares of Preferred accepted the
exchange offer by November 28, 1997, the expiration date of the original offer.
In fiscal 1999 a holder of 12 shares of Preferred requested, and the Company
agreed, to exchange shares under the same terms. Accordingly, in January and
August 1998, the Company issued 176,750 and 1,500 shares of its authorized
Common in exchange for 1,414 and 12 shares of Preferred, respectively. The
holders of the remaining 318 shares of Preferred did not respond to the
solicitation and their shares will remain outstanding, unless either (i) the
26
<PAGE>
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, 1999, accumulated but undeclared and unpaid dividends with
respect to the 318 outstanding shares of Preferred amounted to $72,146. The
Preferred shares may be redeemed by the Company at $250 per share plus
accumulated unpaid dividends of $227 per share. The 318 shares of Preferred are
convertible, at the option of the holders thereof, into 1,871 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 $257,025 and $241,500 in fiscal
years 1999 and 1998, respectively. The previous lease term expired on April 30,
1998. As a result of negotiations under an option to extend the term, the lease
was amended to provide a new eight-year extended term commencing May 1, 1998
with a renewal option for an additional eight years. In addition the lessor made
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:
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):
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Machinery and equipment $ 357 $ 353
Less accumulated depreciation 143 74
----------- -----------
Net book value $ 214 $ 279
=========== ===========
</TABLE>
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
27
<PAGE>
11.8% 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,
1999, are as follows (in thousands):
Fiscal 2000 $ 91
Fiscal 2001 73
Fiscal 2002 61
Fiscal 2003 15
Fiscal 2004 -
----------
Total payments 240
Less amount representing interest 40
----------
Present value of capital lease obligations 200
Less current portion 71
----------
Long term obligation $ 129
==========
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. In
April 1999, the Company's Board of Directors voted, subject to shareholder
approval, to increase the number of awards available under the plan by 100,000
shares. 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:
<TABLE>
<CAPTION>
Fiscal year ended January 31,
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
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 50,000 $ 2.45 10,500 $ 2.25
Options granted -- 39,500 $ 2.50
-------------- --------------
Options outstanding at end of period 50,000 $ 2.45 50,000 $ 2.45
============== ==============
Options exercisable at end of period 15,125 $ 2.41 2,625 $ 2.25
============== ==============
</TABLE>
The weighted average remaining contractual life of the 50,000 outstanding stock
options at January 31, 1999 is 8.2 years.
28
<PAGE>
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. 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, in accordance with APB 25,
amounted to $11,102 and $6,296 in fiscal years 1999 and 1998, respectively.
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 in the fiscal year ended 1998 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 7.22 years. As a result, 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):
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income As reported $ 109 $ 512
Pro forma 94 502
Basic earnings per common share As reported .20 1.26
Pro forma .17 1.24
Diluted earnings per common share As reported .20 1.22
Pro forma .17 1.22
</TABLE>
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 $71,000 and $73,000 in fiscal 1999 and 1998, respectively.
29
<PAGE>
9. INCOME TAXES
Income tax expense for 1999 and 1998 consists of applicable state income taxes
on the income before taxes of Spitz. Federal income taxes for both 1999 and 1998
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, 1999 and 1998 are as follows: (in thousands)
<TABLE>
<CAPTION>
January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 4,477 $ 4,590
Obsolescence reserve 388 375
----------- -----------
Net deferred tax assets 4865 4,965
Valuation allowance (4865) (4,965)
----------- -----------
Deferred income tax, net $ 0 $ 0
=========== ===========
</TABLE>
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, 1999, the Company had investment tax credit carryforwards of
$126,000 expiring in 1999 through 2002 and a net operating loss carryforward for
tax purposes of $13,167,000 expiring 2006 through 2009. For financial reporting
purposes, the net operating loss carryforward in 1999 is approximately
$14,308,000. The difference relates to the nondeductible reserve for inventory
valuation not recognized for tax purposes. The net operating loss carrforward
was reduced by approximately $334,000 and $458,000 from the utilization of a net
operating loss deduction in 1999 and 1998, 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
30
<PAGE>
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 $32,000 and $235,000
acquired through capital leases in fiscal 1999 and 1998, respectively.
Interest paid on debt including capital lease obligations amounted to $124,000
in Fiscal 1999 and $154,000 in Fiscal 1998. The Company paid no federal income
taxes in Fiscal 1999 and 1998.
12. Significant Customers and Geographic Information
In fiscal year 1999 and fiscal year 1998, no single customer accounted for more
than 10% of total revenue. Export revenues by geographic area for the years
ended January 31 consist of (in thousands):
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Canada $ 3 $ 436
Central America - 79
South America 43 169
Europe 942 842
Middle East 22 --
Far East 263 301
----------- -----------
Total export revenues $ 1,273 $ 1,827
=========== ===========
</TABLE>
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,
31
<PAGE>
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. The Company is unable 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, 1999.
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
$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, in fiscal
year 1998. Also, the refinancing eliminated the dilutive affect on the Company's
common stockholders resulting from the Stock Subscription Warrant that
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, 1999.
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,
1999.
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, 1999.
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, 1999.
33
<PAGE>
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).
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).
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).
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).
34
<PAGE>
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).
10.6 Line of Credit Agreement, dated June 12, 1998, 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, 1998 (the "7/97
Form 10-QSB") incorporated herein by reference).
10.7 Line of Credit Note, dated June 12, 1998, 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, 1998, 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, 1998, 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, 1999.
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: April 30, 1999 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 April 30, 1999
/s/ Charles H. Holmes, Jr
- --------------------------
Charles H. Holmes, Jr. Chief Executive Officer
Director, President and April 30, 1999
/s/ William D. Witter
- --------------------------
William D. Witter Vice Chairman of the Board April 30, 1999
/s/ Michael S. Gostomski
- --------------------------
Michael S. Gostomski Director April 30, 1999
/s/ Calvin A. Thompson
- --------------------------
Calvin A. Thompson Director April 30, 1999
<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,
1999 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-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 455
<SECURITIES> 0
<RECEIVABLES> 1712
<ALLOWANCES> 0
<INVENTORY> 1281
<CURRENT-ASSETS> 3533
<PP&E> 2784
<DEPRECIATION> 2172
<TOTAL-ASSETS> 6636
<CURRENT-LIABILITIES> 3075
<BONDS> 0
0
73
<COMMON> 100
<OTHER-SE> 2657
<TOTAL-LIABILITY-AND-EQUITY> 6636
<SALES> 7509
<TOTAL-REVENUES> 7509
<CGS> 5195
<TOTAL-COSTS> 5195
<OTHER-EXPENSES> 521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 123
<INCOME-TAX> 14
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
