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FORM 10-Q
--------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] 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 1-7872
-------------------------
TRANSTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4062211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
700 Liberty Avenue 07938
Union, New Jersey 07083-8198 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (908) 688-2440
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
--------- --------
As of August 8, 2002, the total number of outstanding shares
of registrant's one class of common stock was 6,192,376.
TRANSTECHNOLOGY CORPORATION
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements........................................... 2
Statements of Consolidated Operations--
Three Month Periods Ended June 30, 2002
and July 1, 2001............................................... 3
Consolidated Balance Sheets--
June 30, 2002 and March 31, 2002............................... 4
Statements of Consolidated Cash Flows--
Three Month Periods Ended June 30, 2002 and
July 1, 2001................................................... 5
Notes to Consolidated Financial Statements..................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 23
PART II. Other Information
Item 1. Legal Proceedings.............................................. 24
Item 6. Exhibits and Reports on Form 8-K............................... 24
SIGNATURES................................................................. 24
EXHIBIT 21................................................................ 25
EXHIBIT 99.1............................................................. 26
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Consolidated Cash Flows are of TransTechnology Corporation
and its consolidated subsidiaries (collectively, the "Company"). These reports
reflect all adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods reflected therein. The results reflected in the
unaudited Statement of Consolidated Operations for the period ended June 30,
2002, are not necessarily indicative of the results to be expected for the
entire year. The following unaudited Consolidated Financial Statements should be
read in conjunction with the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in Item 2 of
Part I of this report, as well as the audited financial statements and related
notes thereto contained in the Company's Annual Report on Form 10-K filed for
the fiscal year ended March 31, 2002.
Information provided herein for the three month period ended July 1, 2001 has
been restated to give effect to the reporting of the Company's Specialty
Fasteners Business Segment as discontinued operations as discussed in Note 4 to
the Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
STATEMENTS OF CONSOLIDATED OPERATIONS
UNAUDITED
(In Thousands of Dollars, Except Share Data)
Three Months Ended
-----------------------------
June 30, 2002 July 1, 2001
------------- ------------
Net sales $ 19,867 $ 18,602
Cost of sales 10,923 11,156
----------- -----------
Gross profit 8,944 7,446
General, administrative
and selling expenses 4,431 4,942
Interest expense 3,078 1,432
Interest income (11) (28)
Other income - net (13) (4)
Forbearance fees 764 1,059
Income from continuing operations ----------- -----------
before income taxes 695 45
Provision for income taxes 271 17
----------- -----------
Income from continuing operations 424 28
Discontinued operations:
Income from discontinued businesses
(less applicable income taxes of $476) -- 778
Loss on disposal of discontinued businesses
including operating losses of $1,924
(less applicable tax benefits of $750) (1,174) --
----------- -----------
Net (loss) income $ (750) $ 806
=========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.07 $ 0.00
(Loss) income from discontinued operations (0.19) 0.13
----------- -----------
Net (loss) income $ (0.12) $ 0.13
=========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 0.07 $ 0.00
(Loss) income from discontinued operations (0.19) 0.13
----------- -----------
Net (loss) income $ (0.12) $ 0.13
=========== ===========
Numbers of shares used in computation
of per share information: (Note 1)
Basic 6,192,000 6,172,000
Diluted 6,240,000 6,183,000
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
June 30, 2002 March 31, 2002
------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 323 $ 97
Accounts receivable (net of allowance for doubtful accounts
of $190 at June 30, 2002 and $391 at March 31, 2002) 10,117 11,654
Inventories 22,577 23,695
Prepaid expenses and other current assets 2,124 1,111
Income tax receivable 2,089 7,600
Deferred income taxes 1,570 1,538
Assets held for sale 30,158 38,486
--------- ---------
Total current assets 68,958 84,181
--------- ---------
Property, plant and equipment : 19,414 19,382
Less accumulated depreciation and amortization 11,808 11,572
--------- ---------
Property, plant and equipment - net 7,606 7,810
--------- ---------
Other assets:
Costs in excess of net assets of acquired businesses
(net of $1,171 accumulated amortization) 10,584 10,584
Deferred income taxes 29,268 29,266
Other 10,039 10,301
--------- ---------
Total other assets 49,891 50,151
--------- ---------
Total $ 126,455 $ 142,142
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 2,200 $ --
Accounts payable - trade 4,108 6,433
Accrued compensation 2,283 2,989
Accrued income taxes 51 449
Liabilities of discontinued businesses 15,179 18,011
Other current liabilities 11,883 14,539
--------- ---------
Total current liabilities 35,704 42,421
--------- ---------
Long-term debt payable to banks and others 98,992 107,564
--------- ---------
Deferred income taxes 1,208 1,188
--------- ---------
Other long-term liabilities 7,659 7,176
--------- ---------
Stockholders' deficit:
Preferred stock - authorized, 300,000 shares; none issued -- --
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 6,742,202 at June 30, 2002, and 6,739,264 at March 31, 2002 67 67
Additional paid-in capital 78,317 78,286
Notes receivable from officer (123) (123)
Accumulated deficit (82,977) (82,227)
Accumulated other comprehensive loss (3,051) (2,888)
Unearned compensation (238) (236)
--------- ---------
(8,005) (7,121)
Less treasury stock, at cost - 549,826 shares at June 30, 2002 and
548,186 shares at March 31, 2002) (9,103) (9,086)
--------- ---------
Total stockholders' deficit (17,108) (16,207)
--------- ---------
Total $ 126,455 $ 142,142
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
Three Months Ended
------------------------------
June 30, 2002 July 1, 2001
-------------- ------------
Cash Flows from Operating Activities:
Net (loss) income $ (750) $ 806
Adjustments to reconcile (net loss) net income to net cash
provided by operating activities:
Net income from discontinued operations, including
asset impairments -- (778)
Loss on divestiture of discontinued businesses, net of tax 1,174 --
Depreciation and amortization 527 1,037
Decrease in net assets of discontinued companies (1,778) (5,530)
Noncash interest expense 636 626
(Reduction of) provision for losses on accounts and notes receivable,
and cost investments (189) 4
Changes in assets and liabilities - excluding the effects
of acquisitions and dispositions:
Decrease in accounts receivable and other receivables 7,150 12,658
Decrease in inventories 1,118 1,158
Increase in deferred taxes, net (14) (13)
Increase in other assets (918) (1,182)
Decrease in accounts payable (2,325) (590)
Decrease in accrued compensation (706) (1,615)
Decrease in income taxes payable (398) (1,386)
Decrease in other liabilities (2,225) (427)
-------- --------
Net cash provided by operating activities 1,302 4,768
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (31) (56)
Proceeds from sales of businesses 6,100 --
Decrease in notes and other receivables -- 83
-------- --------
Net cash provided by investing activities 6,069 27
-------- --------
Cash Flows from Financing Activities:
Payments on long-term debt -- (5,600)
Repayments of proceeds from other debt, net (7,680) 336
Effect of exchange rate changes on debt 550 258
Exercise of stock options and other (15) --
-------- --------
Net cash used in financing activities (7,130) (5,006)
-------- --------
Increase (decrease) in cash and cash equivalents 226 (211)
Cash and cash equivalents at beginning of period 97 2,337
-------- --------
Cash and cash equivalents at end of period $ 323 $ 2,126
======== ========
Supplemental information:
Interest payments $ 4,621 $ 6,765
Income tax payments $ 185 $ 603
Increase in senior subordinated note for paid-in-kind
interest expense $ 590 $ 572
- -------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net loss by the
weighted-average number of shares outstanding. Diluted earnings per share
is computed by dividing net income by the sum of the weighted-average
number of shares outstanding plus the dilutive effect of shares issuable
through the exercise of stock options.
The components of the denominator for basic loss per common share and
diluted loss per common share are reconciled as follows:
Three Months Ended
---------------------------------------
June 30, 2002 July 1, 2001
------------------ ----------------
Basic Earnings (Loss) per
Common Share:
Weighted-average common
stock outstanding for basic
loss per share calculation 6,192 6,172
================== ================
Diluted Earnings (Loss) per
Common Share:
Weighted-average common
shares outstanding 6,192 6,172
Stock options* 48 11
------------------ ----------------
Weighted-average common stock
outstanding for diluted earnings
(loss) per share calculation 6,240 6,183
================== ================
* Not including anti-dilutive stock options totaling 265 for the three
month period ended June 30, 2002, and 451 for the three month period
ended July 1, 2001, respectively. Also excludes anti-dilutive warrants
totaling 428 for the three month periods ended June 30, 2002 and July
1, 2001.
6
NOTE 2. Comprehensive Loss
Comprehensive loss for the three month periods ended June 30, 2002 and July
1, 2001 is summarized below.
Three Months Ended
-----------------------------
June 30, 2002 July 1, 2001
------------- -------------
Net (loss) income $(750) $ 806
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
arising during period (163) 491
------------- -------------
Total comprehensive (loss) income $ (913) $ 1,297
============= =============
NOTE 3. Inventories
Inventories are summarized as follows:
June 30, 2002 March 31, 2002
------------- --------------
Finished goods $ 2 $ 209
Work in process 5,337 5,034
Purchased and
manufactured parts 17,238 18,452
------------- -----------
Total $22,577 $23,695
============= ===========
7
NOTE 4. Discontinued Operations/Restructuring Activities
On January 19, 2001, the Company announced its intention to restructure and
divest its cold-headed products (TCR), retaining ring (Seeger-Orbis,
TransTechnology (GB), TT Brasil, and TransTechnology Engineered Rings USA),
hose clamp (Breeze Industrial and Pebra) and aerospace rivet (Aerospace
Rivet Manufacturers Corp.) operations. In addition, on April 12, 2001, the
Company announced that it would divest TransTechnology Engineered
Components (TTEC), a manufacturer of spring steel engineered fasteners and
headlight adjusters. For business segment reporting purposes, these
above-mentioned business units have been previously classified as the
segment "Specialty Fasteners." The Company has reclassified these business
units as discontinued operations.
The accompanying financial statements have been restated to conform to
discontinued operations treatment for all periods presented. A portion of
the Company's interest expense has been allocated to discontinued
operations based upon the net asset balances attributable to those
operations. Interest expense allocated to discontinued operations was $0.8
million for the three month period ended June 30, 2002, and $6.7 million
for the three month period ended July 1, 2001. Income taxes have been
allocated to discontinued operations based on the estimated tax attributes
of the income and assets of the underlying discontinued businesses.
During fiscal 2002, the Company determined that it would enter into a plan
of restructuring so as to focus its resources and capital on its aerospace
products business and exit the specialty fastener segment. As a result,
this report includes in discontinued operations all of the operations that
formerly made up the Specialty Fasteners segment of the Company, which
included TransTechnology Engineered Components (sold in December 2001),
Breeze Industrial Products and Pebra (sold in July 2001), TransTechnology
Engineered Rings (of which the German operation was sold in February 2002;
the US operation in May 2002; the UK operation in July 2002; and, the
Brazilian operation in August 2002), Aerospace Rivet Manufacturers'
Corporation (sold in April 2002) and TCR Corporation. Of the operations
included in fiscal 2002's discontinued operations, only the US, UK and
Brazilian retaining ring operations, the aerospace rivet business, and TCR
were carried into fiscal 2003. As noted, the aerospace rivet business and
US retaining ring business were sold in the first quarter of fiscal 2002,
and the UK and Brazilian retaining ring operations were sold in the second
quarter. Only TCR remains to be divested under the restructuring plan, and
the Company expects that it will be divested during its second or third
quarter of fiscal 2003.
8
Net sales and losses from the discontinued operations were as follows:
Three Months Ended
------------------------------
June 30, 2002 July 1, 2001
------------- ------------
Net sales $ 13,626 $ 60,403
============= ============
Pre-tax (loss) income from discontinued
operations (1,924) 1,254
Income tax benefit (expense) 750 (476)
------------- ------------
Net (loss) income from discontinued
operations $ (1,174) $ 778
============= ============
The company reported that the $1.2 million loss from discontinued operations
in the current quarter included operating income from discontinued businesses
of $129,000; allocated interest expense of $779,000, a $1,033,000 non-cash
charge to recognize additional charges to reflect the amounts ultimately
expected to be realized from sales; and, a cash charge of $241,000 from the
final settlement of interest rate swap contracts, which were offset by a tax
benefit of $750,000.
Pre-tax losses for the three month periods ended June 30, 2002 and July 1,
2001, include operating income/losses and allocated interest expense related
to these periods.
Assets and liabilities of the discontinued businesses were as follows:
June 30, 2002 March 31, 2002
------------- --------------
Current assets $ 16,490 $ 23,458
Property, plant and equipment 5,214 6,904
Other assets 8,454 8,124
------------- --------------
Assets held for sale $ 30,158 $ 38,486
============= ==============
Current liabilities 13,546 16,752
Long-term liabilities 1,633 1,259
------------- --------------
Liabilities of discontinued operations $ 15,179 $ 18,011
============= ==============
9
NOTE 5. Long-term Debt Payable to Banks and Others
Long-term debt payable to banks and others, including current maturities,
consisted of the following:
June 30, 2002 March 31, 2002
------------- --------------
$ 3,100 $ 17,000
Credit agreement - 7.25%
Credit agreement - 5.875% 4,000 --
Credit agreement - 8.00% 9,990 9,562
Credit agreement - 25.00% 5,000 2,500
Senior Subordinated Notes - 16.00% 79,237 78,648
------------- --------------
- 101,327 107,710
Less current maturities 2,200 --
Less unamortized discount 135 146
------------- --------------
Total long-term debt $98,992 $107,564
============= ==============
Credit Facilities - At June 30, 2002, the Company had two credit agreements in
effect aggregating $107.2 million. The first, a Senior Credit Agreement (the
"Credit Agreement") with a group of eight banks (the "Lenders"), commits a
maximum of $28.0 million to the Company for cash borrowings and letters of
credit. The second credit facility consists of Senior Subordinated Notes in the
amount of $79.2 million.
Effective December 31, 2000, the Company was not able to meet certain financial
ratio requirements of the Credit Agreement, as amended. Pursuant to discussions
with the Lenders, the Company and the Lenders agreed to an amendment to the
Credit Agreement to include a forbearance agreement, the payment of certain
other fees by the Company and imposition of certain conditions on the Company
including the suspension of dividend payments. During the forbearance period the
Lenders agreed not to exercise certain of their rights and remedies under the
Credit Agreement. The term of the forbearance period, initially scheduled to
expire on January 31, 2001, was subsequently extended through additional
amendments to September 25, 2002. These additional amendments also reduced the
amount of the Revolving Credit facility of the Credit Agreement (the "Revolver")
from $200 million to $28 million at June 30, 2002. The forbearance agreement
also required the achievement of minimum levels of EBITDA (earnings before
interest, taxes, depreciation, and amortization), and the adherence to borrowing
limits as adjusted based on the scheduled debt reduction. Other terms of the
forbearance agreement include the payment of certain fees, reporting and
consulting requirements. The Company has made all of its scheduled interest and
principal payments on a timely basis and during the first quarter of fiscal 2003
the Company paid $7.0 million towards its outstanding debt under the Credit
Agreement, using part of the $5.2 million of net proceeds from the sale of the
aerospace rivet and US retaining ring businesses and federal income tax refunds
of $5.5 million.
10
The Company had unused borrowing capacity for both domestic and international
operations of $5.9 million as of June 30, 2002, including letters of credit of
$1.5 million. Borrowings under the Revolver as of June 30, 2002, were $22.1
million. Interest on the Revolver is tied to the primary bank's prime rate, or
at the Company's option, the London Interbank Offered Rate ("LIBOR"), plus a
margin that varies depending upon the Company's achievement of certain operating
results. As of June 30, 2002, $4.0 million of the Company's outstanding
borrowings utilized LIBOR. Two tranches of the Revolver aggregating $5.0
million, the proceeds of which were used to pay interest on the Company's Senior
Subordinated Notes during fiscal 2002, carry an interest rate of 25% and cannot
be repaid until all other amounts outstanding under the Revolver have been
repaid. The weighted average interest rate on all outstanding borrowings under
the revolver at June 30, 2002 was 11.3%.
The Credit Agreement required the Company to maintain interest rate protection
on a minimum of 50% of its variable rate debt. The Company had provided
sufficiently for this protection by means of interest rate swap agreements which
had fixed the rate of interest on $50 million of debt at a base rate of 5.48%
through May 4, 2002, and $75 million of debt at a base rate of 6.58% through
March 3, 2003. Under the Credit Agreement, the base interest rate is added to
the applicable interest rate margin to determine the total interest rate in
effect. These swap agreements were terminated in connection with the
establishment of the new Senior Credit Facility as described below. The
Revolver, as amended by the forbearance agreements, restricted annual capital
expenditures to $2.0 million in fiscal 2003 and contained other customary
financial covenants, including the requirement to maintain certain financial
ratios relating to performance, interest expense and debt levels. As noted
above, the Company was, until August 7, 2002, operating under a forbearance
agreement, at which time the Credit Agreement was terminated and replaced.
On August 7, 2002, the Company entered into a new $34 million senior credit
facility (the "New Senior Credit Facility") consisting of a $13.5 million
revolving credit facility (the "New Revolver") and a $6.5 million Term Loan A
from The CIT/Business Credit Group, Inc., and a $14 million Term Loan B from
Ableco Finance LLC. The New Senior Credit Facility, which has a three-year term,
is secured by all of the Company's assets and carries a weighted average
interest rate on its full commitment of 9.76%. As a result of this refinancing,
the Company is no longer subject to a forbearance agreement and is not in
default of any of the provisions of any of its credit facilities.
Senior Subordinated Notes - On August 30, 2000, the Company completed a private
placement of $75 million in senior subordinated notes (the "Notes") and certain
warrants to purchase shares of the Company's common stock (the "Warrants") to a
group of institutional investors (collectively, the "Purchasers"). The Company
used the proceeds of the private placement to retire, in full, a $75 million
Bridge Loan held by a group of lenders led by Fleet National Bank. The Notes are
due on August 29, 2005 and bear interest at a rate of 16% per annum, consisting
of 13% cash interest on principal, payable quarterly, and 3% interest on
principal, payable quarterly in "payment-in-kind" ("PIK") promissory notes.
Prepayment of the Notes is permitted after August 29, 2001 at a premium
initially of 9% declining to 5%, 3%, and 1% annually, respectively, thereafter.
The Notes contain customary financial covenants and events of default, including
a cross-default provision to the Company's senior debt obligations. At June 30,
2002 the principal balance outstanding on the notes amounted to $79.2 million,
which includes the original principal amount plus the "payment-in-kind" notes.
The Warrants entitle the Purchasers to acquire, in the aggregate, 427,602
shares, or 6.5%, of the common stock of the Company at an exercise price of
$9.93 a share, which represents the average daily closing price of the Company's
common stock on the New York Stock Exchange for the thirty (30) days preceding
the completion of the private placement. The Warrants must be exercised by
August 29, 2010. These Warrants have been valued at an appraised amount of $0.2
million and have been recorded in paid in capital. In connection with the
transaction, the Company and certain of its subsidiaries signed a
11
Consent and Amendment Agreement with the Lenders under the Company's $250
million Credit Facility existing at that time, in which the Lenders
consented to the private placement and amended certain financial covenants
associated with the Credit Facility.
As a result of the violation of certain financial covenants under the
Credit Agreement, the Company was also in violation of the covenants of the
Notes. The Purchasers of the Notes have entered into a letter agreement
with the Company under which they agreed to forbear from taking any action
relative to such violations. This forbearance extended through September
29, 2002 and was conditioned upon the Company's continued compliance with
the terms of its forbearance agreement with the Lenders under the Credit
Agreement.
Effective with the refinancing of the Credit Agreement through the New
Senior Credit Facility on August 7, 2002, the holders of the Notes agreed
to amend the Notes so as to cure the default of certain covenants that had
existed and to amend certain of the terms of the Notes. Under the amendment
to the Notes, the Company paid an amendment fee equal to 1% of the
outstanding balance of the notes by issuing additional notes and agreed to
increase the PIK interest rate on the Notes by 2% effective January 1,
2003, with such rate increasing .25% each quarter until the Notes are
retired. Additionally, the Warrants referred to above were amended so as to
reduce the exercise price of each Warrant so as to provide the holders with
a minimum profit on the exercise of such Warrants equal to $5.00 per share
if such Warrants were exercised and sold prior to December 31, 2002 which
could result in a reduction of the Company's proceeds from the exercise of
the warrants by up to $2.1 million, or, if the Warrants remain outstanding
after that date, their exercise price will be reduced to $0.01 per share,
resulting in an adjustment.
Other - As of June 30, 2002, the Company had $0.4 million of other
long-term debt consisting of life insurance policies owned by the Company
with a fixed interest rate of 5% and which are reported in Liabilities of
Discontinued Businesses.
NOTE 6. Change in Accounting for Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". In June 2000, the FASB
issued SFAS No. 138, which amends certain provisions of SFAS No. 133. The
Company adopted SFAS No. 133 and the corresponding amendments under SFAS
No. 138 on April 1, 2001. During the three-month period ended June 30,
2002, the Company reported, within Discontinued Operations, a pre-tax
charge of $0.2 million associated with the termination of interest rate
swap agreements that were no longer required when the Company repaid its
floating rate debt, which occurred on August 7, 2002.
NOTE 7. Goodwill and Other Intangible Assets - Adoption of Statement of
Financial Accounting Standards No. 142
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible
Assets" (SFAS No. 142), in June 2001. This statement provides guidance on
how to account for existing goodwill and intangible assets from completed
acquisitions. In accordance with this statement, the Company adopted SFAS
No. 142 in the first quarter of fiscal 2003. At this time, the Company
believes that there is no impairment of goodwill.
12
The following table presents the operating results on a proforma
basis as though goodwill amortization had not been recorded in fiscal 2002.
Three Months Ended
-----------------------------
June 30, 2002 July 1, 2001
------------- -------------
Income from continuing operations $ 424 $ 28
Add back goodwill amortization -- 72
------------- -------------
Adjusted income from continuing operations 424 100
Income from discontinued businesses -- 778
Loss on disposal of discontinued businesses (1,174) --
Add back goodwill amortization -- 450
------------- -------------
Net (loss) income $ (750) $ 1,328
============= =============
Basic earnings (loss) per share:
Income from continuing operations $ 0.07 $ 0.02
(Loss) income from discontinued operations (0.19) 0.20
------------- -------------
Net (loss) income $ (0.12) $ 0.22
============= =============
Diluted earnings (loss) per share:
Income from continuing operations $ 0.07 $ 0.02
(Loss) income from discontinued operations (0.19) 0.20
------------- -------------
Net (loss) income $ (0.12) $ 0.22
============= =============
NOTE 8. New Accounting Standards
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred and the associated asset retirement to be capitalized as part of
the carrying amount of the long-lived asset. SFAS 143 is effective for
years beginning after June 15, 2002. The Company is currently evaluating
the effect, if any, that the adoption of SFAS 143 will have on the
Company's consolidated financial position, results of operations and cash
flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company is
in the process of evaluating the effect that adopting SFAS 145 will have on
its financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS
146 will be effective for the Company for disposal activities initiated
after December 31, 2002. The Company is in the process of evaluating the
effect that adopting SFAS 146 will have on its financial statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As a result of a restructuring program undertaken by the Corporation during
fiscal 2002, the Corporation has classified all of the business units that made
up its Specialty Fastener segment in prior years as discontinued operations.
All discussions related to ongoing operations, or the Corporation, refer only
to continuing operations, which consist of the Breeze-Eastern division and the
Norco Inc. subsidiary. Discontinued operations are discussed separately in this
report.
TransTechnology Corporation reported consolidated net sales of $19.9 million
and income from continuing operations of $0.4 million, or $0.07 per diluted
share, for the fiscal 2003 first quarter ended June 30, 2002. Sales for the
current quarter increased 7% from the prior year's first quarter sales of $18.6
million. During first quarter of fiscal 2003 the Corporation reported a loss
from discontinued operations of $1.2 million, or $0.19 per share compared to
income from discontinued operations of $0.8 million in the prior year's first
quarter. The Corporation reported a net loss for the first quarter of fiscal
2003 of $0.8 million or $0.12 per share compared to net income of $0.8 million
or $0.13 per share in the prior year's first quarter.
During the first quarter of fiscal 2003 the Corporation recognized $0.8 million
of costs related to forbearance fees paid to its banks in association with
their agreement not to pursue any actions against the Corporation for its
violation of certain financial covenants in the Corporation's senior credit
agreement. In the first quarter of the prior fiscal year the Corporation
recognized $1.1 million of such fees.
Corporate office expenses amounted to $1.7 million in the first quarter of
fiscal 2003, a decrease of 26% from the $2.3 million of such expenses in the
first quarter of fiscal 2002.
The improvement in fiscal 2003's first quarter financial results compared to
fiscal 2002's first quarter largely reflects higher sales of aerospace OEM
products, weapons system products, repair, overhaul and spare parts products
provided to military and search and rescue agencies, and motion control
devices. These increases were offset by a decrease in sales of new equipment to
large airframe manufacturers and of repairs and spare parts to airlines.
New orders received in the first quarter of fiscal 2003 totaled $21.3 million,
which represents a 28% decrease from first quarter fiscal 2002 new orders of
$29.9 million. Backlog at June 30, 2002 was $46.9 million compared to $43.7
million at March 31, 2002 and $51.4 million at July 1, 2001. Both
Breeze-Eastern and Norco saw decreases in new orders and backlog in the first
quarter of fiscal 2003 compared to fiscal 2002. Orders decreased at Norco
primarily because of lower orders for hold-open rods as a result of the lower
activity by commercial airframe OEM's and airline spare parts orders.
Breeze-Eastern saw a reduction in new orders primarily as the result of the
timing of the receipt of domestic and foreign military and spare parts orders.
Last year's first quarter new orders were unusually high at 38% of the full
year's order intake, while this fiscal year's first quarter order intake is at
27% of the full year target. A significant portion of first quarter fiscal 2003
sales is derived from long-term contracts. Generally, new equipment sales are
the subject of high value long-term contracts while repair, overhaul and spare
parts sales have much shorter lead times and a less predictable order pattern.
14
Sales for the Corporation increased to $19.9 million for the first quarter
of fiscal 2003, a 7% increase over first quarter fiscal 2002 sales of $18.6
million. Both Breeze Eastern and Norco saw first quarter revenues increase
over the prior year's first quarter. The Corporation's Norco subsidiary saw
a drop in orders received and sales of products to airframe manufacturers
as a result of an expected reduction in the build rate of large commercial
airliners in fiscal 2002. The anticipated decline in aircraft build rates
was accelerated and exacerbated by the impact of the events of September
11th. Lower utilization rates of the existing commercial airline fleet as a
result of the slowing economy and the post-September 11th reduction in
travel resulted in lower order rates and sales of hold-open rod spare parts
and replacement parts which are sold directly to the airlines as
maintenance items. This decline was offset by increased sales of Norco's
developing product line of motion control products for use in medical
testing equipment and increased sales of new equipment and spare parts to
military agencies. Higher orders and shipments of Breeze-Eastern rescue
hoists and cargo hooks for military and civil rescue agencies as well as
increases in spare parts, repair and overhaul of equipment already in the
field provided further sales increases.
Operating income increased 80% in the first quarter of fiscal 2003 to $4.5
million over the first quarter of the prior year's $2.5 million. This
increase was due mainly to a favorable mix of repair, overhaul and spare
parts business, the realization of the benefit of spreading a fixed costs
base over a larger sales volume, and a 26% reduction in corporate office
spending as a result of its restructuring. Generally, repair and overhaul
services and spare parts sales have higher gross margins than sales of new
equipment or engineering services. These improvements in product mix and
fixed cost absorption led to an increase in Gross Margin to 45% in the
first quarter of fiscal 2003 from 40% in the same period a year ago. Both
Breeze Eastern and Norco realized improvements in gross margin during the
first quarter of fiscal 2003.
Discontinued Operations
During fiscal 2002, the Corporation determined that it would enter into a
plan of restructuring so as to focus its resources and capital on its
aerospace products business and exit the specialty fastener segment. As a
result, this report includes in discontinued operations all of the
operations that formerly made up the Specialty Fasteners segment of the
Corporation, which included TransTechnology Engineered Components (sold in
December 2001), Breeze Industrial Products and Pebra (sold in July 2001),
TransTechnology Engineered Rings (of which the German operation was sold in
February 2002; the US operation in May 2002; the UK operation in July 2002;
and, the Brazilian operation in August 2002), Aerospace Rivet
Manufacturers' Corporation (sold in April 2002) and TCR Corporation. Of the
operations included in fiscal 2002's discontinued operations, only the US,
UK and Brazilian retaining ring operations, the aerospace rivet business,
and TCR were carried into fiscal 2003. As noted, the aerospace rivet
business and US retaining ring business were sold in the first quarter of
fiscal 2002, and the UK and Brazilian retaining ring operations were sold
in the second quarter. Only TCR remains to be divested under the
restructuring plan, and the Corporation expects that it will be divested
during its second or third quarter of fiscal 2003.
The company reported that the $1.2 million loss from discontinued
operations in the current quarter included operating income from
discontinued businesses of $129,000; allocated interest expense of
$779,000; a $1,033,000 non-cash charge to recognize additional charges to
reflect the amounts ultimately expected to be realized from sales; and, a
cash charge of $241,000 from the final settlement of interest rate swap
contracts, which were offset by a tax benefit of $750,000.
15
Changes in Financial Position:
Liquidity and Capital Resources
The restructuring and divestiture program of the Corporation has had a
substantial impact upon its financial condition through June 30, 2002. During
the first quarter of fiscal 2003, the Corporation sold its U.S. retaining ring
operation and its aerospace rivet manufacturing business for aggregate cash
proceeds of $6.1 million. All of these proceeds, after payment of transaction
fees and expenses, were used to reduce the Corporation's senior credit facility.
At June 30, 2002 the senior facility was $22.1 million compared to $29.1 million
at the beginning of the fiscal year.
The Corporation is in the process of divesting its TCR Corporation subsidiary.
The Corporation hopes to complete this transaction during the second or third
quarters of fiscal year 2003 and anticipates applying all of the proceeds to the
reduction of its credit facilities. The assets and liabilities of this business
unit is presented in Assets Held for Sale and Liabilities of Discontinued
Businesses at their estimated net realizable values on the June 30, 2002 balance
sheet.
Working capital. The Corporation's working capital at June 30, 2002 was $33.3
million compared to $41.8 million at the end of the prior fiscal year. The ratio
of current assets to current liabilities was 1.9 to 1 at June 30, 2002 compared
with 2.0 to 1 at the end of fiscal 2002.
Working capital changes, exclusive of assets held for sale, were generated by a
decrease in accounts receivable of $1.5 million and a decrease in inventories of
$1.1 million. The decrease in accounts receivable was due to a faster collection
cycle during the first quarter and lower sequential quarter sales, and the
decrease in inventory was largely due to the utilization of long lead time
materials previously purchased and needed to fulfill customers' long-term
purchase orders. Days sales outstanding in accounts receivable at June 30, 2002
decreased to 46 days from 58 days at March 31, 2002 while inventory turnover
remained unchanged at 1.9 turns over the same time period. Current liabilities
decreased $6.7 million, primarily due to decreases in accounts payable, other
accrued expenses, and liabilities of discontinued operations which were offset
by an increase in the current portion of long-term debt as a result of the
refinancing of the Company's senior credit facility which is discussed below.
Credit facilities. At June 30, 2002, the Corporation had two credit agreements
in effect aggregating $107.2 million. The first, a Senior Credit Agreement (the
"Credit Agreement") with a group of eight banks (the "Lenders"), commits a
maximum of $28.0 million to the Corporation for cash borrowings and letters of
credit. The second credit facility consists of Senior Subordinated Notes in the
amount of $79.2 million.
Effective December 31, 2000, the Corporation was not able to meet certain
financial ratio requirements of the Credit Agreement, as amended. Pursuant to
discussions with the Lenders, the Corporation and the Lenders agreed to an
amendment to the Credit Agreement to include a forbearance agreement, the
payment of certain other fees by the Corporation and imposition of certain
conditions on the Corporation including the suspension of dividend payments.
During the forbearance period the Lenders agreed not to exercise certain of
their rights and remedies under the Credit Agreement. The term of the
forbearance period, initially scheduled to expire on January 31, 2001, was
subsequently extended through additional amendments to September 25, 2002. These
additional amendments also reduced the amount of the Revolving Credit facility
of the Credit Agreement (the "Revolver") from $200 million to $28 million at
16
June 30, 2002. The forbearance agreement also required the achievement of
minimum levels of EBITDA (earnings before interest, taxes, depreciation, and
amortization), and the adherence to borrowing limits as adjusted based on the
scheduled debt reduction. Other terms of the forbearance agreement include the
payment of certain fees, reporting and consulting requirements. The Corporation
has made all of its scheduled interest and principal payments on a timely basis
and during the first quarter of fiscal 2003 the Corporation paid $6.8 million
towards its outstanding debt under the Credit Agreement, using part of the $5.2
million of net proceeds from the sale of the aerospace rivet and US retaining
ring businesses and federal income tax refunds of $5.5 million.
The Corporation had unused borrowing capacity for both domestic and
international operations of $5.9 million as of June 30, 2002, including letters
of credit of $1.5 million. Borrowings under the Revolver as of June 30, 2002,
were $22.1 million. Interest on the Revolver is tied to the primary bank's prime
rate, or at the Corporation's option, the London Interbank Offered Rate
("LIBOR"), plus a margin that varies depending upon the Corporation's
achievement of certain operating results. As of June 30, 2002, $4.0 million of
the Corporation's outstanding borrowings utilized LIBOR. Two tranches of the
Revolver aggregating $5.0 million, the proceeds of which were used to pay
interest on the Corporation's Senior Subordinated Notes during fiscal 2002,
carry an interest rate of 25% and cannot be repaid until all other amounts
outstanding under the Revolver have been repaid. The weighted average interest
rate on all outstanding borrowings under the revolver at June 30, 2002 was
11.3%.
The Credit Agreement required the Corporation to maintain interest rate
protection on a minimum of 50% of its variable rate debt. The Corporation had
provided sufficiently for this protection by means of interest rate swap
agreements which had fixed the rate of interest on $50 million of debt at a base
rate of 5.48% through May 4, 2002, and $75 million of debt at a base rate of
6.58% through March 3, 2003. Under the Credit Agreement, the base interest rate
is added to the applicable interest rate margin to determine the total interest
rate in effect. These swap agreements were terminated in connection with the
establishment of the new Senior Credit Facility as described below. The
Revolver, as amended by the forbearance agreements, restricted annual capital
expenditures to $2.0 million in fiscal 2003 and contained other customary
financial covenants, including the requirement to maintain certain financial
ratios relating to performance, interest expense and debt levels. As noted
above, the Corporation was, until August 7, 2002, operating under a forbearance
agreement, at which time the Credit Agreement was terminated and replaced.
On August 7, 2002, the Corporation entered into a new $34 million senior credit
facility (the "New Senior Credit Facility") consisting of a $13.5 million
revolving credit facility (the "New Revolver") and a $6.5 million Term Loan A
from The CIT/Business Credit Group, Inc., and a $14 million Term Loan B from
Ableco Finance LLC. The New Senior Credit Facility, which has a three-year term,
is secured by all of the Corporation's assets and carries a weighted average
interest rate on its full commitment of 9.76%. As a result of this refinancing,
the Corporation is no longer subject to a forbearance agreement and is not in
default of any of the provisions of any of its credit facilities.
On August 30, 2000, the Corporation completed a private placement of $75 million
in senior subordinated notes (the "Notes") and certain warrants to purchase
shares of the Corporation's common stock (the "Warrants") to a group of
institutional investors (collectively, the "Purchasers"). The Corporation used
the proceeds of the private placement to retire, in full, a $75 million Bridge
Loan held by a group of lenders led by Fleet National Bank. The Notes are due on
August 29, 2005 and bear
17
interest at a rate of 16% per annum, consisting of 13% cash interest on
principal, payable quarterly, and 3% interest on principal, payable quarterly in
"payment-in-kind" ("PIK") promissory notes. Prepayment of the Notes is permitted
after August 29, 2001 at a premium initially of 9% declining to 5%, 3%, and 1%
annually, respectively, thereafter. The Notes contain customary financial
covenants and events of default, including a cross-default provision to the
Corporation's senior debt obligations. At June 30, 2002 the principal balance
outstanding on the notes amounted to $79.2 million, which includes the original
principal amount plus the "payment-in-kind" notes.
The Warrants entitle the Purchasers to acquire, in the aggregate, 427,602
shares, or 6.5%, of the common stock of the Corporation at an exercise price of
$9.93 a share, which represents the average daily closing price of the
Corporation's common stock on the New York Stock Exchange for the thirty (30)
days preceding the completion of the private placement. The Warrants must be
exercised by August 29, 2010. These Warrants have been valued at an appraised
amount of $0.2 million and have been recorded in paid in capital. In connection
with the transaction, the Corporation and certain of its subsidiaries signed a
Consent and Amendment Agreement with the Lenders under the Corporation's $250
million Credit Facility existing at that time, in which the Lenders consented to
the private placement and amended certain financial covenants associated with
the Credit Facility.
As a result of the violation of certain financial covenants under the Credit
Agreement, the Corporation was also in violation of the covenants of the Notes.
The Purchasers of the Notes have entered into a letter agreement with the
Corporation under which they agreed to forbear from taking any action relative
to such violations. This forbearance extended through September 29, 2002 and was
conditioned upon the Corporation's continued compliance with the terms of its
forbearance agreement with the Lenders under the Credit Agreement.
Effective with the refinancing of the Credit Agreement through the New Senior
Credit Facility on August 7, 2002, the holders of the Notes agreed to amend the
Notes so as to cure the default of certain covenants that had existed and to
amend certain of the terms of the Notes. Under the amendment to the Notes, the
Corporation paid an amendment fee equal to 1% of the outstanding balance of the
notes by issuing additional notes and agreed to increase the PIK interest rate
on the Notes by 2% effective January 1, 2003, with such rate increasing .25%
each quarter until the Notes are retired. Additionally, the Warrants referred to
above were amended so as to reduce the exercise price of each Warrant so as to
provide the holders with a minimum profit on the exercise of such Warrants equal
to $5.00 per share if such Warrants were exercised and sold prior to December
31, 2002 which could result in a reduction of the Company's proceeds from the
exercise of the warrants by up to $2.1 million, or, if the Warrants remain
outstanding after that date, their exercise price will be reduced to $0.01 per
share, resulting in an adjustment.
Capital expenditures were $31,000 in the first quarter of fiscal 2003, as
compared to $56,000 spent in the same period last year.
In fiscal 2003, capital expenditures are expected to be less than $1 million.
Projects budgeted in fiscal 2003 include refurbishment of the Breeze Eastern
offices, the purchase of new production machinery at the Norco facility, and the
initial phase of installing a new ERP system at Breeze Eastern.
The Corporation has divested or plans to divest nine businesses since March 31,
2001. Under the terms of the agreements associated with the sales of those
businesses, the Corporation has agreed to indemnify
18
the purchasers for certain damages that might arise in the event a
representation of the Corporation has been materially misstated. Additionally,
the terms of such divestiture agreements generally require the calculation of
purchase price adjustments based upon the amount of working capital or net
assets transferred at the closing date. In the case of each divestiture
completed as of the filing date, all purchase price adjustments have been agreed
and paid, with the exception of the sale of one business where the disputed
closing balance sheet is subject to an arbitration hearing and is expected to be
resolved in the second or third quarter of fiscal 2003.
Inflation. While neither inflation nor deflation has had, and the Corporation
does not expect it to have, a material impact upon operating results, there can
be no assurance that its business will not be affected by inflation or deflation
in the future.
Environmental Matters. During the fourth quarter of fiscal 2000, the Corporation
presented an environmental cleanup plan for a portion of a site in Pennsylvania
which continues to be owned although the related business has been sold. This
plan was submitted pursuant to the Consent Order and Agreement with the
Pennsylvania Department of Environmental Protection ("PaDEP") concluded in
fiscal 1999. Pursuant to the Consent Order, upon its execution the Corporation
paid $0.2 million for past costs, future oversight expenses and in full
settlement of claims made by PaDEP related to the environmental remediation of
the site with an additional $0.2 million paid in fiscal 2001. A second Consent
Order was concluded with PaDEP in the third quarter of fiscal 2001 for another
portion of the site, and a third Consent Order for the remainder of the site is
contemplated by October 1, 2002. The Corporation is also administering an agreed
settlement with the Federal government under which the government pays 50% of
the environmental response costs associated with a portion of the site. The
Corporation has also reached an agreement in principle with the Federal
government and is in the process of finalizing the necessary documentation under
which the Federal government will pay 45% of the environmental response costs
associated with another portion of the site. At June 30, 2002, the Corporation's
cleanup reserve was $1.8 million based on the net present value of future
expected cleanup costs. The Corporation expects that remediation at the
Pennsylvania site will not be completed for several years.
The Corporation also continues to participate in environmental assessments and
remediation work at nine other locations, which include operating facilities,
facilities for sale, and previously owned facilities. The Corporation estimates
that its potential cost for implementing corrective action at these sites will
not exceed $0.4 million payable over the next several years, and has provided
for the estimated costs in its accrual for environmental liabilities.
In addition, the Corporation has been named as a potentially responsible party
in eight environmental proceedings pending in several other states in which it
is alleged that the Corporation was a generator of waste that was sent to
landfills and other treatment facilities and, as to several sites, it is alleged
that the Corporation was an owner or operator. Such properties generally relate
to businesses that have been sold or discontinued. The Corporation estimates
that its expected future costs, and its estimated proportional share of remedial
work to be performed, associated with these proceedings will not exceed $0.1
million and has provided for these estimated costs in its accrual for
environmental liabilities.
Litigation. The Corporation is also engaged in various other legal proceedings
incidental to its business. It is the opinion of management that, after taking
into consideration information furnished by its counsel,
19
the above matters will have no material effect on the Corporation's consolidated
financial position or the results of the Corporation's operations in future
periods.
Critical Accounting Policies
Revenue recognition. Revenue is recognized at the later of 1) when products are
shipped to customers, or 2) when title passes to customers.
Inventory. The Corporation purchases materials for the manufacture of components
for use in its products and for use by its engineering, repair and overhaul
businesses. The decision to purchase a set quantity of a particular item is
influenced by several factors including: current and projected cost; future
estimated availability; lead time for production of the materials; existing and
projected contracts to produce certain items; and the estimated needs for its
repair and overhaul business. The Corporation values its inventories using the
lower of cost or market on a first in first out basis (FIFO) and establishes
reserves to reduce the carrying amount of these inventories as necessary to net
realizable value.
Environmental reserves. The Corporation provides for environmental reserves
when, in conjunction with its internal and external counsel, it determines that
a liability is both probable and estimable. In many cases, the liability is not
fixed or capped when the Corporation first records a liability for a particular
site. Factors that affect the recorded amount of the liability in future years
include: the Corporation's participation percentage due to a settlement by or
bankruptcy of other Potentially Responsible Parties; a change in the
environmental laws requiring more stringent requirements; a change in the
estimate of future costs that will be incurred to remediate the site; and
changes in technology related to environmental remediation. Current estimated
exposure to environmental claims is discussed above in Liquidity and Capital
Resources.
Goodwill and other intangible assets. At June 30, 2002, the Corporation has
recorded $10.8 million in net goodwill and other intangible assets related to
acquisitions made in prior years. The recoverability of these assets is subject
to an impairment test based on the estimated fair value of the underlying
businesses. Factors affecting these future cash flows include: the continued
market acceptance of the products and services offered by the businesses; the
development of new products and services by the businesses and the underlying
cost of development; the future cost structure of the businesses; and future
technological changes. Effective April 1, 2002, the Corporation implemented SFAS
142 relative to the non-recognition of goodwill amortization and no longer
reflects such charges in its results as the Corporation believes that there is
no impairment of goodwill as of June 30, 2002.
Financial derivatives. As noted previously, the Corporation had, until July 5,
2002, outstanding interest rate swaps in association with its Credit Agreement.
These swaps were valued using certain estimates and the amount the Corporation
was required to pay was significantly impacted by changes in interest rates.
Valuation of assets held for sale. The Corporation reflects significant amounts
of Assets Held for Sale and Liabilities of Discontinued Businesses on its
balance sheet. In the event the net realizable values of the businesses being
divested is less than that estimated, or the length of time required to complete
the divestiture is longer than estimated, the amounts realized from these
accounts may be impacted.
20
Deferred tax assets. The Company maintains a significant asset on its balance
which represents the value of income tax benefits expected to be realized in the
future, primarily as a result of the use of a net operating loss carry-forward.
In the event the company does not generate adequate amounts of taxable income
prior to the expiry of the tax loss carry-forwards, the amount of this asset may
not be realized. Additionally, changes to the federal and state income tax laws
could also impact the Corporation's ability to utilize them. The state of New
Jersey, in response to a budget crisis, has suspended for two years the ability
of a corporation to use a net operating loss carryforward against taxable income
earned in the state. As a result, the Corporation will be required to pay New
Jersey income taxes for fiscal years 2003 and 2004 in spite of it the losses it
is carrying forward.
Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement to be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for years beginning after June
15, 2002. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 143 will have on the Company's consolidated financial position,
results of operations and cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company is in
the process of evaluating the effect that adopting SFAS 145 will have on its
financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be
effective for the Company for disposal activities initiated after December 31,
2002. The Company is in the process of evaluating the effect that adopting SFAS
146 will have on its financial statements.
Recent Developments
On July 17, 2002, the Corporation completed the recapitalization of its
TransTechnology (GB) Ltd. ("TTGB") retaining ring business in the U.K. Under the
terms of the recapitalization, the Corporation sold 81% of the equity in TTGB
for $121 and converted $2 million of unsecured inter-company debt into a $2
million loan secured by a first lien on TTGB's real property in Glusburn,
England. The Corporation continues to own 19% of TTGB's equity.
On August 6, 2002, the Corporation completed the sale of all of the shares of
TransTechnology Brazil, Ltda., its Brazilian retaining ring operation, for
$742,000, of which $325,000 was paid in cash and the balance in installment
payments. The Corporation will also be repaid $258,000 of inter-company debt
over time.
On August 7, 2002, the Corporation established a new $34 million senior credit
facility (the "New Senior Credit Facility") consisting of a $13.5 million
revolving credit facility (the "New Revolver") and a $6.5 million Term Loan A
from CIT/Business Credit Group, Inc., and a $14 million Term Loan B from
21
Ableco Finance LLC, the proceeds of which were used to retire the existing
Credit Agreement. The New Senior Credit Facility, which has a three-year term,
is secured by all of the Corporation's assets and carries a weighted average
interest rate on its full commitment of 9.76%. As a result of this refinancing,
the Corporation is no longer subject to a forbearance agreement and is not in
default of any of the provisions of any of its credit facilities.
Also on August 7, 2002, effective with the refinancing of the Credit Agreement
through the New Senior Credit Facility, the holders of the Notes agreed to amend
the Notes so as to cure the default of certain covenants that had existed and to
amend certain of the terms of the Notes. Under the amendment to the Notes, the
Corporation paid an amendment fee equal to 1% of the outstanding balance of the
notes by issuing additional notes and agreed to increase the PIK interest rate
on the Notes by 2% effective January 1, 2003, with such rate increasing 0.25%
each quarter until the Notes are retired. Additionally, the Warrants referred to
above were amended so as to reduce the exercise price of each Warrant so as to
provide the holders with a minimum profit on the exercise of such Warrants equal
to $5.00 per share if such Warrants were exercised and sold prior to December
31, 2002 which could result in a reduction of the Corporation's proceeds from
the exercise of the warrants by up to $2.1 million, or, if the Warrants remain
outstanding after that date, their exercise price will be reduced to $0.01 per
share, resulting in an adjustment.
22
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, primarily changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange rates and interest rates.
Financial instruments expose the Corporation to counter-party credit risk for
nonperformance and to market risk for changes in interest and currency rates.
The Corporation manages exposure to counter-party credit risk through specific
minimum credit standards, diversification of counter-parties and procedures to
monitor concentrations of credit risk. The Corporation monitors the impact of
market risk on the fair value and cash flows of its investments by considering
reasonably possible changes in interest rates and by limiting the amount of
potential interest and currency rate exposures to amounts that are not material
to the Corporation's consolidated results of operations and cash flows.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is engaged in various legal proceedings incidental to its
business. It is the opinion of management that, after taking into
consideration information furnished by its counsel, these matters will not
have a material effect on the Company's consolidated financial position or
the results of the Company's operations in future periods.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
21 Subsidiaries of the Company
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTECHNOLOGY CORPORATION
(Registrant)
Dated: August 12, 2002 By: /s/Joseph F. Spanier
--------------------------------------------
JOSEPH F. SPANIER, Vice President
Treasurer and Chief Financial Officer*
*On behalf of the Registrant and as Principal Financial and Accounting Officer.
24