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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 December 29, 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 07083
Union, New Jersey (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 January 27, 2003, the total number of outstanding shares of
registrant's one class of common stock was 6,200,774.
TRANSTECHNOLOGY CORPORATION
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements........................................ 2
Statements of Consolidated Operations--
Three and Nine Month Periods Ended December 29, 2002
and December 30, 2001....................................... 3
Consolidated Balance Sheets--
December 29, 2002 and March 31, 2002........................ 4
Statements of Consolidated Cash Flows--
Nine Month Periods Ended December 29, 2002 and
December 30, 2001........................................... 5
Notes to Consolidated Financial Statements.................. 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 28
Item 4. Controls and Procedures..................................... 28
PART II. Other Information
Item 1. Legal Proceedings........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURES.............................................................. 29
CERTIFICATIONS ................................................... 30-31
EXHIBIT 99.1............................................................ 32
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Statements of 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
December 29, 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 as of March 31, 2002 and for the three and nine
month periods ended December 30, 2001 and the nine months ended December 29,
2002, has been reclassified to give effect to the reporting of the Company's
specialty fasteners business segment and its wholly owned subsidiary, Norco,
Inc., 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 NINE MONTHS ENDED
------------------------------------ ------------------------------------
DECEMBER 29, 2002 DECEMBER 30, 2001 DECEMBER 29, 2002 DECEMBER 30, 2001
----------------- ----------------- ----------------- -----------------
Net sales $ 15,562 $ 12,686 $ 41,303 $ 35,520
Cost of sales 8,076 7,184 22,132 21,354
----------- ----------- ----------- -----------
Gross profit 7,486 5,502 19,171 14,166
----------- ----------- ----------- -----------
General, administrative
and selling expenses 4,012 4,033 11,885 12,488
Interest expense 2,418 1,726 6,538 4,205
Interest and other expense (income) - net 151 (72) 118 (154)
Unrealized gain on warrants (1,228) -- (9) --
Forbearance fees -- 473 764 2,635
Corporate office restructuring charge 515 400 515 1,629
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 1,618 (1,058) (640) (6,637)
Provision for income taxes (benefit) 181 (381) (225) (2,409)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 1,437 (677) (415) (4,228)
Discontinued operations:
Income from sale of businesses and income
from operations of discontinued
businesses (less applicable income
taxes of $8,012 for the nine month
period ended December 30, 2001). -- -- -- 16,414
Loss on disposal of discontinued businesses
(less applicable income tax benefits of
$1,930 and $3,908 for the three and nine
month periods ended December 29, 2002 and
$2,350 and $37,816 for the three and nine month
periods ended December 30, 2001, respectively). (3,126) (5,538) (7,256) (72,201)
----------- ----------- ----------- -----------
Net loss $ (1,689) $ (6,215) $ (7,671) $ (60,015)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.23 $ (0.11) $ (0.07) $ (0.68)
Loss from discontinued operations (0.51) (0.90) (1.17) (9.03)
----------- ----------- ----------- -----------
Net loss $ (0.28) $ (1.01) $ (1.24) $ (9.71)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.23 $ (0.11) $ (0.07) $ (0.68)
Loss from discontinued operations (0.50) (0.90) (1.17) (9.03)
----------- ----------- ----------- -----------
Net loss $ (0.27) $ (1.01) $ (1.24) $ (9.71)
=========== =========== =========== ===========
Numbers of shares used in computation
of per share information: (Note 1)
Basic 6,199,000 6,178,000 6,196,000 6,177,000
Diluted 6,295,000 6,178,000 6,196,000 6,177,000
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
DECEMBER 29, 2002 MARCH 31, 2002
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,203 $ 97
Accounts receivable (net of allowance for doubtful accounts
of $146 at December 29, 2002 and $341 at March 31, 2002) 8,308 7,840
Inventories 17,968 16,869
Prepaid expenses and other current assets 2,054 1,003
Income tax receivable 83 7,600
Deferred income taxes 1,106 1,538
Assets held for sale 33,712 64,977
--------- ---------
Total current assets 65,434 99,924
Property, plant and equipment 12,729 12,522
Less accumulated depreciation and amortization 10,325 10,215
--------- ---------
Property, plant and equipment - net 2,404 2,307
--------- ---------
Other assets:
Costs in excess of net assets of acquired businesses
(net of $450 accumulated amortization) 402 402
Deferred income taxes 31,682 29,266
Other 14,603 12,847
--------- ---------
Total other assets 46,687 42,515
--------- ---------
Total $ 114,525 $ 144,746
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 7,850 $ --
Accounts payable - trade 3,362 4,503
Accrued compensation 2,362 2,231
Accrued income taxes -- 449
Liabilities of discontinued operations 2,918 21,142
Other current liabilities 12,666 14,096
--------- ---------
Total current liabilities 29,158 42,421
--------- ---------
Long-term debt payable to banks and others 95,086 107,564
--------- ---------
Deferred income taxes 664 1,188
--------- ---------
Other long-term liabilities 15,153 9,780
--------- ---------
Stockholders' deficit:
Preferred stock - authorized, 300,000 shares; none issued -- --
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 6,748,338 at December 29, 2002, and 6,739,264 at March 31, 2002. 67 67
Additional paid-in capital 73,830 78,286
Note receivable from officer (103) (123)
Accumulated deficit (89,898) (82,227)
Accumulated other comprehensive loss -- (2,888)
Unearned compensation (248) (236)
--------- ---------
(16,352) (7,121)
Less treasury stock, at cost - (555,826 shares at December 29, 2002
and 548,186 shares at March 31, 2002) (9,184) (9,086)
--------- ---------
Total stockholders' deficit (25,536) (16,207)
--------- ---------
Total $ 114,525 $ 144,746
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
NINE MONTHS ENDED
--------------------------------------
December 29, 2002 December 30, 2001
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,671) $ (60,015)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on divestiture of discontinued businesses, net of tax 7,256 72,386
Gain on sale of discontinued businesses, net of tax -- (16,599)
Depreciation and amortization 1,671 2,060
Decrease in net assets of discontinued companies 3,807 29,800
Warrant mark to market adjustment 9 --
Noncash interest expense 2,265 1,890
Deferred taxes (4,063) (32,980)
(Reduction of) provision for losses on accounts and notes receivable (195) 196
Changes in assets and liabilities - excluding the effects
of acquisitions and dispositions:
Decrease in accounts receivable and other receivables 7,395 4,686
(Increase) decrease in inventories (1,099) 1,582
(Increase) decrease in other assets (3,188) 4,464
Decrease in accounts payable (1,141) (1,264)
Increase (decrease) in accrued compensation 131 (335)
(Decrease) increase in income taxes payable (449) 142
Decrease in other liabilities (769) (2,851)
-------- ---------
Net cash provided by operating activities 3,959 3,162
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (501) (137)
Proceeds from sales of businesses 6,425 139,325
(Increase) decrease in notes and other receivables (208) 155
-------- ---------
Net cash provided by investing activities 5,716 139,343
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) term loan 20,500 (38,750)
Repayments of other debt (28,067) (105,862)
Exercise of stock options and other (2) 32
-------- ---------
Net cash used in financing activities (7,569) (144,580)
Increase (decrease) in cash and cash equivalents 2,106 (2,075)
Cash and cash equivalents at beginning of period 97 2,337
-------- ---------
Cash and cash equivalents at end of period $ 2,203 $ 262
======== =========
Supplemental information:
Interest payments $ 13,409 $ 10,309
Income tax payments $ 215 $ 1,418
Increase in senior subordinated note for paid-in-kind
interest expense $ 2,118 $ 775
Noncash charge to equity from classification of warrants
as financial derivatives $ 4,550 $ --
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 income (loss) by
the weighted-average number of shares outstanding. Diluted earnings per
share is computed by dividing net loss by the sum of the weighted-average
number of shares outstanding plus the dilutive effect of shares issuable
through the exercise of stock options and warrants.
The components of the denominator for basic loss per common share and
diluted loss per common share are reconciled as follows:
Three Months Ended Nine Months Ended
---------------------------------- ---------------------------------
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
----- ----- ----- -----
Basic Earnings (Loss)
per Common Share:
Weighted-average
common stock outstanding for
basic loss per share
calculation 6,199 6,178 6,196 6,177
===== ===== ===== =====
Diluted Earnings (Loss)
per Common Share:
Weighted-average
common shares
outstanding 6,199 6,178 6,196 6,177
Stock options and
warrants* 96 -- -- --
----- ----- ----- -----
Weighted-average common stock
outstanding for diluted loss
per share calculation 6,295 6,178 6,196 6,177
===== ===== ===== =====
* Not including anti-dilutive stock options totaling 265 for the three and nine
month periods ended December 29, 2002, and 330 and 447 for the three and nine
month periods ended December 30, 2001, respectively. Also excluding warrants
totaling 428 for the three month period ended December 30, 2001 and the nine
month periods ended December 29, 2002 and December 30, 2001.
6
NOTE 2. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine month periods ended
December 29, 2002 and December 30, 2001 is summarized below.
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
------- ------- ------- --------
Net loss $(1,689) $(6,215) $(7,671) $(60,015)
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation adjustment
arising during period -- (328) (86) (1,288)
Reclassification adjustment
for sale of investment in
foreign entity
-- 1,258 2,974 2,542
Reclassification adjustment
for minimum pension
liability due to sale of
business -- 1,155 -- 1,155
------- ------- ------- --------
Total comprehensive
loss $(1,689) $(4,130) $(4,783) $(57,606)
======= ======= ======= ========
NOTE 3. Inventories
Inventories are summarized as follows:
December 29, 2002 March 31, 2002
----------------- --------------
Finished goods $ 2 $ 4
Work in process 4,932 4,098
Purchased and
manufactured parts 13,034 12,767
------- -------
Total $17,968 $16,869
======= =======
7
NOTE 4. Discontinued Operations/Restructuring Activities
At the end of fiscal 2001, the Company implemented a plan of restructuring
to focus its resources and capital on its aerospace products business and
exit the specialty fastener segment. On January 19, 2001, the Company
announced its intention to restructure and divest its cold-headed products
(TCR Corporation), retaining ring (Seeger-Orbis, TransTechnology (GB), TT
Brasil, and TransTechnology Engineered Rings USA), hose clamp (Breeze
Industrial Products 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 had previously been classified as the
"Specialty Fasteners" segment. Upon announcing its intentions to divest
this segment the Company reclassified these business units as discontinued
operations.
On December 23, 2002, the Board of Directors of the Company authorized the
sale of Norco, Inc. (Norco). As a result of this decision, the balance
sheets and income statements have been reclassified to reflect Norco as a
discontinued operation. On January 24, 2003, the Company entered into a
definitive agreement to sell the business and substantially all of the
assets of Norco for cash consideration of $52.0 million, subject to
closing and post-closing adjustments. The transaction is expected to close
in February 2003.
Charges for the termination of corporate office employees were $0.5
million for the three and nine months ended December 29, 2002 and $0.4
million and $1.6 million for the three and nine months ended December 30,
2001, respectively. These charges were for salaries and benefits directly
related to the individuals being terminated. Except for the amounts
recorded in the three month period ended December 29, 2002, all other
amounts have been paid as of December 29, 2002.
Breeze Industrial Products and Pebra were sold in July 2001; TTEC was sold
in December 2001; Seeger-Orbis was sold in February 2002; Aerospace Rivet
Manufacturers Corp. was sold in April 2002; TransTechnology Engineered
Rings USA was sold in May 2002; an 81% controlling interest in
TransTechnology (GB) was sold in July 2002; and TT Brasil was sold in
August 2002. As a result of these divestitures, of the operations included
in fiscal 2002's discontinued operations, only TransTechnology Engineered
Rings USA, TransTechnology (GB), TT Brasil, Aerospace Rivet Manufacturers
Corp. and TCR Corporation were carried into fiscal 2003. As of December
29, 2002, only TCR Corporation remained to be divested under the
restructuring plan, and the Company completed the divestiture on January
3, 2003. Net proceeds of approximately $9.0 million from the sale were
used to reduce senior debt.
The accompanying financial statements have been reclassified 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 $1.7
million and $5.3 million for the three and nine month periods ended
December 29, 2002, and $3.9 million and $16.6 million for the three and
nine month periods ended December 30, 2001. Income taxes have been
allocated to discontinued operations based on the estimated tax attributes
of the income, assets and liabilities of the underlying discontinued
businesses.
8
Net sales and losses from the discontinued operations were as follows:
Three Months Ended Nine Months Ended
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
------- -------- -------- ---------
Net sales $ 9,370 $ 41,972 $ 40,852 $ 160,447
======= ======== ======== =========
Pre-tax loss from
discontinued operations $(5,056) $ (7,888) $(11,164) $(110,017)
Pre-tax gain on disposal
of Breeze Industrial/Pebra -- -- -- 24,426
Income tax benefit 1,930 2,350 3,908 29,804
------- -------- -------- ---------
Net loss from discontinued
operations $(3,126) $ (5,538) $ (7,256) $ (55,787)
======= ======== ======== =========
The Company reported that the $3.1 million loss from discontinued
operations in the current quarter included operating income from
discontinued businesses of $1.8 million; allocated interest expense of
$1.7 million, a $5.1 million non-cash charge to recognize additional
charges to reflect the amounts ultimately expected to be received from
sales, which were offset by a tax benefit of $1.9 million. On January 15,
2003, the Company reported in a press release a net loss from discontinued
operations of $3.5 million and $7.6 million for the three and nine months
ended December 29, 2002. Subsequent to the press release the Company
recorded an adjustment related to the disposition of certain foreign
subsidiaries which reduced the reported losses to the amounts indicated
above. The adjustment had no effect on the balance sheet information
reported in the press release.
Pre-tax losses for the three and nine month periods ended December 29,
2002 and December 30, 2001, include operating income/losses and allocated
interest expense related to these periods.
Assets and liabilities of the discontinued businesses were as follows:
December 29, March 31,
2002 2002
------- -------
Current assets $18,172 $34,206
Property, plant and equipment 5,304 12,407
Other assets 10,236 18,364
------- -------
Assets held for sale $33,712 $64,977
======= =======
Current liabilities $ 2,915 $19,883
Long-term liabilities 3 1,259
------- -------
Liabilities of discontinued operations $ 2,918 $21,142
======= =======
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:
December 29, March 31,
2002 2002
-------- --------
Old credit agreement - 7.25% -- $ 17,000
New Revolver - 5.75% $ 1,589 --
Term Loan A - 6.25% 5,900 --
Old credit agreement - 8.00% -- 9,562
Term Loan B - 15.75% 14,318 --
Old credit agreement - 25.00% -- 2,500
Senior Subordinated
Notes - 16.00% 81,243 78,648
-------- --------
103,050 107,710
Less current maturities 7,850 --
Less unamortized discount 114 146
-------- --------
Total long-term debt $ 95,086 $107,564
======== ========
CREDIT FACILITIES - On August 7, 2002, the Company entered into a $34.0
million senior credit facility, consisting of a $13.5 million, asset
based, revolving credit facility (the "New Revolver"), and a $6.5 million
Term Loan A from The CIT/Business Credit Group, Inc., and a $14.1 million
Term Loan B from Ableco Finance LLC (collectively, the "New Senior Credit
Facility"). The New Senior Credit Facility, which has a three-year term,
is secured by all of the Company's assets, carries a weighted average
interest rate on its full commitment of 9.76% and contains customary
financial covenants and events of default. Borrowings under the New Senior
Credit Facility were initially used by the Company to refinance its prior
senior credit agreement. As of the date of this report, the Company is not
in default on any of the provisions of the New Senior Credit Facility.
Subject to limitations relating to levels of certain assets and reserves
for future interest payments, as of December 29, 2002, the Company has
unused borrowing capacity on the New Revolver of $11.9 million.
SENIOR SUBORDINATED NOTES - On August 30, 2000, the Company completed a
private placement of $75 million of senior subordinated notes (the
"Notes") and 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. The Company may
prepay the Notes after August 29, 2001, at a premium initially of 9%,
declining to 5%, 3%, and 1% on each of the next succeeding anniversaries
of that date. The Notes contain customary financial covenants and events
of default, including a cross-default provision to the Company's senior
debt obligations. At December 29, 2002, the principal balance outstanding
on the notes amounted to $81.2 million, which included the original
principal
10
amount plus the "payment-in-kind" Notes. As of the date of this report,
the Company is not in default of any of the provisions of the Notes.
At issuance, the Warrants entitled the Purchasers to acquire, in the
aggregate, 427,602 shares, or approximately 7%, of the common stock of the
Company at an exercise price of $9.93 a share. This exercise price
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. Effective with the refinancing of the Company's prior
senior credit agreement with the Senior Credit Facility on August 7, 2002,
the purchasers of our senior subordinated notes agreed to amend the notes.
Under the amended senior subordinated 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
to 5% effective January 1, 2003, with such rate increasing 0.25% each
quarter until we retire the notes. Additionally, the Company amended the
terms of the warrants to reduce the exercise price of each warrant to
provide the holders with a minimum profit on the exercise of the warrants
equal to $5.00 per share if the warrants were exercised and sold prior to
December 31, 2002. Because the warrants remained outstanding after
December 31, 2002, their exercise price was reduced to $0.01 per share as
of that date. In addition, the amended warrants contain a "put" right that
allows the holders to cause the Company to purchase the warrants at a
price of $5.00 per underlying share upon the occurrence of certain
"liquidity events," including the sale of the Company or either of the
aerospace units. The Norco sale will constitute a liquidity event.
Since the warrants are now considered derivative financial instruments
under generally accepted accounting principles, during the quarter ended
September 29, 2002, the Company recorded the value of the warrants as a
charge to shareholders' equity of $4.6 million with a corresponding credit
to a long-term liability. The amount of the charge was determined by
measuring the difference between the $0.01 per share potential exercise
price and the market value of a share of common stock on August 7, 2002.
By September 29, 2002, the share price of the Company's common stock had
risen to $13.46, compared to $10.64 on August 7, which resulted in a
second quarter mark-to-market charge to operating results of $1.2 million.
At December 27, 2002, the share price of the Company's common stock had
fallen to $10.60 compared to $13.46 on September 29, 2002, which resulted
in a mark to market gain of $1.2 million. For the nine months ended
December 29, 2002, the mark to market gain or loss from the warrants
aggregated zero. Until the provisions of the amended warrants that enable
their holders to "put" the warrants to the Company for $5.00 per share are
extinguished, the Company will mark the warrants to market and will
recognize the corresponding income or loss in the Statement of
Consolidated Operations. Upon the termination of the put rights, the
original amount of the liability and the adjustment to paid in capital, as
increased or decreased by the amounts of any income or expense recognized
from the quarterly mark-to-market adjustments, will be reversed out of
both the liability and equity portions of the balance sheet.
Because the Company did not retire the senior subordinated notes and
repurchase the warrants by December 31, 2002, 427,602 additional shares
will be considered outstanding as of that date in computing earnings per
share, a dilution factor of approximately 7%. The maximum cash exposure
related to these warrants and their put rights, if any, is the $2.1
million that would be required to redeem the warrants or the underlying
shares if there were a sale of the entire company or either of the
aerospace units, which includes the Norco sale.
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
11
SFAS No. 138 on April 1, 2001. During the nine-month period ended December
29, 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 under its prior senior credit agreement on August 7,
2002. In conjunction with this, as described in Note 5, the warrants
issued with the Notes were modified, as described in Note 5, so that the
warrants are now considered to be derivative financial instruments and are
being accounted for accordingly.
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. The Company adopted
SFAS No. 142 in the first quarter of fiscal 2003. Upon adoption, there
was no impairment of goodwill.
12
Had the provisions of SFAS 142 been in effect during fiscal 2002, goodwill
amortization would have been eliminated, decreasing net loss and loss per
share as follows:
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
December 29, December 30, December 29, December 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Income (loss) from
continuing operations $ 1,437 $ (677) $ (415) $ (4,228)
Add back goodwill
amortization -- 7 -- 16
--------- --------- --------- ---------
Adjusted income (loss) from
continuing operations 1,437 (670) (415) (4,212)
Income from discontinued
businesses -- -- -- 16,414
Loss on disposal of
discontinued businesses (3,126) (5,538) (7,256) (72,201)
Add back goodwill
amortization -- 49 -- 1,587
--------- --------- --------- ---------
Net loss $ (1,689) $ (6,159) $ (7,671) $ (58,412)
========= ========= ========= =========
Basic earnings (loss) per
share:
Earnings (loss) from
continuing operations $ 0.23 $ (0.11) $ (0.07) $ (0.68)
Loss from discontinued
operations (0.51) (0.89) (1.17) (8.77)
--------- --------- --------- ---------
Net loss $ (0.28) $ (1.00) $ (1.24) $ (9.45)
========= ========= ========= =========
Diluted earnings (loss) per
share:
Earnings (loss) from
continuing operations $ 0.23 $ (0.11) $ (0.07) $ (0.68)
Loss from discontinued
operations (0.50) (0.89) (1.17) (8.77)
--------- --------- --------- ---------
Net loss $ (0.27) $ (1.00) $ (1.24) $ (9.45)
========= ========= ========= =========
13
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 disposal activities the Company initiates after
December 31, 2002. The Company is in the process of evaluating the effect
that adopting SFAS 146 will have on its financial statements.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123" ("SFAS 148"). This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. SFAS 148 is effective
for the Company's fiscal year ended March 31, 2003. The Company is in the
process of evaluating the effect that adopting SFAS 148 will have on its
financial statements.
NOTE 9. Subsequent Event
On January 16, 2003, the Company announced its intention to reorganize the
management structure following the completion of the sale of Norco, Inc.
As a result of these management changes, the Company expects to reduce
corporate office costs by up to $1.0 million per year. The Company
anticipates recognizing a pre-tax charge of approximately $2.2 million in
the fourth quarter of fiscal 2003 for costs associated with these
management changes.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We design, develop and manufacture sophisticated lifting equipment for specialty
aerospace and defense applications. With over 50% of the market, we have long
been recognized as the world's largest designer and leading supplier of
performance-critical rescue hoists and cargo-hook systems. We also manufacture
weapons-handling systems, cargo winches, tie-down equipment and tow-hook
assemblies. Marketed under the trade name "Breeze-Eastern," our products are
designed to be efficient and reliable in extreme operating conditions. Our
equipment is used to complete rescue operations and military
insertion/extraction operations, move and transport cargo, and load weapons onto
aircraft and ground-based launching systems.
Beginning in fiscal 2001, we implemented a restructuring plan to focus our
resources and capital on our specialty aerospace and defense products business
and exit the specialty fastener segment. On January 24, 2003, we entered into a
definitive agreement to sell the business and substantially all of the assets of
our subsidiary, Norco, to Marathon Power Technologies Company, a division of
TransDigm Inc., for cash consideration of $52.0 million, subject to closing and
post-closing adjustments. As a result, our discontinued operations include Norco
and all of the operations related to our specialty fastener segment, including
TransTechnology Engineered Components LLC, the Breeze Industrial Products and
Pebra hose clamp businesses, the TransTechnology Engineered Rings retaining
rings businesses, Aerospace Rivet Manufacturers Corp. and TCR Corporation. To
date, we have completed our divestment of all of these businesses, except Norco.
We expect to complete the sale of Norco during the fourth quarter of fiscal
2003. Of the operations included in discontinued operations for fiscal 2002,
only TransTechnology Engineered Rings USA, TransTechnology (GB), TransTechnology
Brasil, Aerospace Rivet Manufacturers Corp., TCR Corporation and Norco, Inc.
were carried into fiscal 2003.
We intend to apply the net proceeds from our sale of Norco, which we expect to
be approximately $50.0 million, to reduce senior debt and redeem a portion of
our outstanding senior subordinated notes due 2005. We believe that the
divestiture of Norco will provide a source of funds to reduce our high rate
senior debt as well as our subordinated notes, while simultaneously reducing our
exposure to the commercial aircraft OEM and aftermarket industries and allowing
us to focus all of our efforts on the military and governmental aerospace and
defense markets. We expect the sale to result in the recognition of pre-tax gain
of approximately $28.0 million. Because our federal income tax net operating
loss carryforward is available to offset the taxable gain from this sale, we do
not anticipate paying any federal income taxes on the sale, although we do
expect to pay state income taxes of approximately $2.5 million as its result.
Consummation of the Norco sale is subject to certain conditions, including
attaining Hart-Scott-Rodino clearance and experiencing no material adverse
change in the Norco business. Consequently, we cannot assure you that we will be
able to complete the Norco sale and use the proceeds to repay indebtedness.
On January 3, 2003, we sold the business and substantially all of the assets of
our wholly owned subsidiary, TCR Corporation, for $10.0 million. We applied the
net proceeds of approximately $9.0 million from the sale of TCR Corporation to
reduce senior debt.
Under the terms of our existing warrants, the Norco sale will constitute a
"liquidity event," entitling our warrant holders to a put right, pursuant to
which they may require us to purchase their warrants during the 120-day period
following the closing date of the sale. Assuming the Norco sale were consummated
on September 29, 2002, the exercise price of our warrants would have been
reduced from $9.93 per underlying share through December 31, 2002 to $4.93 per
share, and the holders of our warrants could have required us to repurchase
their warrants at a price per underlying warrant share equal to $5.00.
15
All discussions related to our ongoing operations, or to TransTechnology
Corporation, which include our results of operations, refer only to continuing
operations, which consists of our Breeze-Eastern division. We discuss our
discontinued operations separately under the heading " -- Divestitures and
Discontinued Operations."
All references to the first nine months of fiscal 2003 in this Management's
Discussion and Analysis of Financial Condition and Results of Operations refer
to the nine months ended December 29, 2002, and all references to the first nine
months of fiscal 2002 refer to the nine months ended December 30, 2001.
DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal 2001, we implemented a restructuring plan to focus our resources
and capital on our aerospace and defense products business and exit the
specialty fastener segment. As a result, our discontinued operations includes
all of the operations related to our specialty fastener segment, which includes
all of the divested operations we describe below and TCR Corporation, which was
sold in the fourth quarter of fiscal 2003. Our discontinued operations also
include Norco, Inc., which we previously included in our aerospace and defense
products segment.
On July 10, 2001, we sold our Breeze Industrial and Pebra hose clamp businesses
to Industrial Growth Partners and members of Breeze Industrial's management for
$46.2 million in cash. In a related transaction, we sold the real estate
occupied by Breeze Industrial to a quasi-governmental organization for $2.0
million. We used the proceeds from these sales to repay borrowings outstanding
under our prior senior credit agreement.
On December 5, 2001, we sold TransTechnology Engineered Components to a company
formed by affiliates of Kohlberg & Company, L.L.C. for $98.5 million, of which
$96.0 million was cash and the balance the assumption of certain liabilities
related to the purchased businesses. We used the cash proceeds of the sale to
repay borrowings outstanding under our prior senior credit agreement. In the
fiscal quarter ended September 30, 2001, as part of our restructuring program,
we reported a pre-tax asset impairment charge for TransTechnology Engineered
Components, Inc. in the amount of $85.8 million to reduce the carrying value of
these businesses to estimated fair market value. This non-cash charge was
related specifically to the write-down of goodwill. The sale proceeds of
TransTechnology Engineered Components approximated our adjusted carrying value.
On February 21, 2002, we sold Seeger-Orbis to Barnes Group Inc. for $20.0
million cash. We used the net proceeds of the sale to repay borrowings
outstanding under our prior senior credit agreement. Our balance sheet contains
a non-current asset and a non-current liability in the amount of $3.1 million
relating to the pension plan of Seeger-Orbis. These amounts represent our legal
liability under German law and the indemnification we received from the buyer of
the business for that liability.
On April 16, 2002, we sold Aerospace Rivet Manufacturers Corp. to Allfast
Fastening Systems, Inc. for $3.2 million in cash. We used the net proceeds
of the sale to repay borrowings outstanding under our prior senior credit
agreement.
On May 30, 2002, we completed the sale of substantially all of the net assets of
TransTechnology Engineered Rings (USA) to a newly formed affiliate of Sea View
Capital LLC for $2.9 million in cash, a promissory note of $0.8 million and
warrants for 5% of the equity of the purchaser. We used the net proceeds of the
sale to repay borrowings outstanding under our prior senior credit agreement.
16
On July 16, 2002, we completed the recapitalization of our TransTechnology (GB)
Ltd. subsidiary, now known as Cirteq, Ltd., by selling 81% of its shares to a
new entity controlled by local management for $121 (one hundred twenty-one
dollars). We also converted $2.0 million of unsecured intercompany debt into a
$2.0 million loan secured by a first lien on Cirteq's real property in Glusburn,
England.
On August 6, 2002, we completed the sale of all of the shares of TransTechnology
Brasil, Ltda. for $742,000, of which $325,000 was paid in cash and the balance
in installment payments. We also will be paid $258,000 of intracompany debt due
from the Brazilian unit. We used the net proceeds of the sale to repay
borrowings outstanding under our prior senior credit agreement.
On January 3, 2003, we completed the sale of the business and substantially all
of the assets of our wholly owned subsidiary, TCR Corporation, to a newly formed
affiliate of Mid-Mark Capital LLC for $10.0 million in cash. We used the net
proceeds of the sale to repay borrowings outstanding under our new senior credit
agreement.
For the first nine months of fiscal 2003, the $7.3 million loss from
discontinued operations included:
- actual operating income of $6.3 million from discontinued operations
- allocated interest expense of $5.3 million;
- a $7.4 million non-cash charge to reflect the amounts ultimately
expected to be realized from sales;
- a cash charge of $0.2 million from the final settlement of our
interest rate swap contracts;
- a non-cash charge of $4.6 million associated with the recognition of
accumulated currency translation losses from the sale of our
Brazilian operation; and
- a tax benefit of $3.9 million.
For the first nine months of fiscal 2002, the $55.8 million loss from
discontinued operations included:
- an $85.8 million anticipated loss on the sale of the engineered
components business (which was pending at the end of the second
quarter of fiscal 2002 but closed in the third quarter of fiscal
2002);
- increases of $17.0 million in the losses anticipated upon the sale
of our various retaining ring businesses (the last of which we sold
in the second quarter of fiscal 2003) and the forecasted and actual
operating income associated with the specialty fastener segment and
Norco through the anticipated closing dates of the divestitures of
those units;
- allocated interest expense of $7.2 million;
- a tax benefit of $37.8 million associated with the above items; and
- an after-tax gain of $16.4 million from the sale and operations
(including allocated interest of $9.4 million) of our Breeze
Industrial Products and Pebra hose clamp businesses.
17
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenue at the later of (1) when products
are shipped to customers and (2) when title passes to customers.
INVENTORY. We purchase materials to manufacture components for use in our
products and for use by our engineering, repair and overhaul businesses. Our
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.
We value our inventories using the lower of cost or market on a first-in
first-out (FIFO) basis and establish reserves as necessary to reduce the
carrying amount of these inventories to net realizable value.
ENVIRONMENTAL RESERVES. We provide for environmental reserves when, after
consultation with our internal and external counsel and other environmental
consultants, we determine that a liability is both probable and estimable. In
many cases, we do not fix or cap the liability for a particular site when we
first record it. Factors that affect the recorded amount of the liability in
future years include:
- our 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.
We discuss current estimated exposure to environmental claims below under the
caption " -- Environmental Matters."
GOODWILL AND OTHER INTANGIBLE ASSETS. At December 29, 2002, we had recorded $0.4
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 fair values 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, we implemented Statement of Financial Accounting
Standards (SFAS) No. 142, "Accounting for Goodwill and Other Intangible Assets,"
relative to the non-recognition of goodwill amortization and no longer reflect
these charges in our results of operations from and including that effective
date. Also, we believe there is no impairment of goodwill as of December 29,
2002.
FINANCIAL DERIVATIVES. As noted previously, until July 5, 2002, we had
outstanding interest rate swaps in association with our prior senior credit
agreement. We valued these swaps using estimates based on then-prevailing
interest rates and the amount we were required to pay was impacted significantly
by changes in
18
interest rates. Additionally, we are required to treat our outstanding warrants
as financial derivatives and mark these securities to market at the end of each
accounting period, resulting in the recognition of gain or loss in each period.
We determine the amount of this gain or loss by measuring the difference in the
market value of a share of our common stock over a given period. A $1.00 change
in our share price will result in a gain or loss of $0.4 million during the
period in which the price change is realized.
VALUATION OF ASSETS HELD FOR SALE. We reflect Assets Held for Sale and
Liabilities of Discontinued Businesses on our balance sheet. In the event the
net realizable values of the businesses being divested is less than we estimate,
or the length of time required to complete the divestiture is longer we
estimate, the amounts we realize from these accounts may be impacted. See " --
Divestitures and Discontinued Operations."
DEFERRED TAX ASSETS. This asset represents income tax benefits expected to be
realized in the future, primarily as a result of the use of net operating loss
carry-forwards. If we do 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 also
could impact our ability to use 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, we will be required to pay New Jersey income taxes for fiscal years 2003
and 2004 in spite of losses being carried forward.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 30,
2001
Net sales. Our sales increased to $15.6 million for the three months of fiscal
2003, a 23% increase over sales of $12.7 million for the three months of fiscal
2002. This increase in sales is the result of higher sales of spare parts,
repair and overhaul of equipment in the field as well as the commencement of
shipments of the HLU-196 Bomb Hoist to the U.S. Navy. The HLU-196 Bomb Hoist is
a newly developed product for which we are under contract to the Navy to deliver
almost 400 units during fiscal 2003 - 2004.
Gross profit. Gross profit increased 36% to $7.5 million for the third quarter
of fiscal 2003 from $5.5 million for the third quarter of fiscal 2002.
Generally, repair and overhaul services and spare parts sales have higher gross
margins than sales of new equipment or engineering services. As a result of a
sales mix that was more heavily weighted in favor of aftermarket sales due to
the timing of customer orders, we recorded higher gross margins for the third
quarter of fiscal 2003. These margin improvements from product mix, however,
were partially offset by lower than normal gross margins on the HLU-196 Bomb
Hoist, a product that was shipped for the first time during the third quarter of
fiscal 2003. While the gross margins recognized on the initial shipments of the
HLU-196 were lower than historical gross margins, they were higher than the
budgeted gross margins due to the realization of manufacturing efficiencies not
originally expected in the initial production lots. As a result of the lower
gross margins experienced on the HLU-196, we expect future gross margins to be
lower than those historically reported. Generally, we cannot predict changes in
our product mix between aftermarket sales and new equipment sales for any given
period because the changes result primarily from the timing of our customers'
orders, over which we have little control.
General, administrative and selling expenses. General, administrative and
selling expenses were unchanged for the three months of fiscal 2003 compared to
the three months of fiscal 2002, remaining at $4.0 million. Corporate office
expenses decreased 9.2% to $1.7 million in the three months of fiscal 2003 from
$1.9 million in the three months of fiscal 2002, which was offset by our higher
general, administrative and selling expenses due to our higher sales volume and
a significant increase in the cost of aircraft product liability insurance. The
decrease in corporate office expenses during the three months of fiscal 2003 was
primarily due to the restructuring of the corporate office that began in the
fourth quarter of fiscal 2002.
19
Operating income. Operating income increased 137% to $3.5 million in the three
months of fiscal 2003 from $1.5 million in the three months of fiscal 2002. This
increase mainly was due to a more favorable mix of repair, overhaul and spare
parts business, a higher sales volume, the benefit of spreading fixed costs over
a larger sales volume, and the reduction in corporate office expenses.
Interest expense. Interest expense increased $0.7 million to $2.4 million in the
three months of fiscal 2003 from $1.7 million in the three months of fiscal 2002
as a result of the allocation formula we use to apportion interest expense
between continuing and discontinued operations. We base this allocation formula
upon the net asset balances attributable to continuing and discontinued
operations. Total interest expense for the three months of fiscal 2003 decreased
$1.6 million to $4.1 million from $5.7 million in the three months of fiscal
2002 due to the retirement of debt with the proceeds from divestitures and other
internally generated sources of cash. Assets held for sale also were reduced
substantially, however, causing a higher percentage of assets to be allocated to
continuing operations in the three months of fiscal 2003 compared to the three
months of fiscal 2002, which resulted in an increased allocation of interest
expense to continuing operations in the three months of fiscal 2003.
Forbearance fees. In the three months of fiscal 2002, we incurred $0.5 million
of forbearance fees we paid to our lenders under our prior senior credit
agreement in exchange for their agreement not to pursue any actions against us
for violating certain financial covenants. During the three months of fiscal
2003, we incurred no such expenses. The reduction in these expenses was the
result of lower overall levels of debt during the current fiscal year and the
refinancing of our prior senior credit agreement in August 2002, which cured all
defaults and ended the forbearance agreements.
Corporate office restructuring charge. In the three months of fiscal 2003 we
recognized a $0.5 million charge associated with severance costs related to the
elimination of several positions in our corporate office. In the three months of
fiscal 2002, we recognized $0.4 million of such charges.
Unrealized loss on warrants. As we note in note 7 to the financial statements
included in this report, the warrants associated with our senior subordinated
notes due 2005 are now deemed to be derivative financial instruments for
purposes of U.S. generally accepted accounting principles. As required by those
principles, changes in the value of our share price during the three months of
fiscal 2003 resulted in our recognizing a non-cash, non-taxable gain of $1.2
million during the period. We recognized no similar gain or loss in the three
months of fiscal 2002. If the warrants are not exercised or otherwise retired,
we may continue to experience similar losses, or gains, in the future.
Net loss. Net loss decreased to $1.7 million in the three months of fiscal 2003
from $6.2 million in the three months of fiscal 2002, primarily as a result of
the reasons discussed above.
EBITDA. EBITDA, or earnings before interest, taxes, depreciation and
amortization, increased 124% to $4.3 million in the three months of fiscal 2003
from $1.9 million in the three months of fiscal 2002. Depreciation and
amortization increased to $0.8 million in the three months of fiscal 2003 from
$0.4 million in the three months of fiscal 2002 primarily due to the inclusion
of amortization of bank fees and costs associated with the refinancing of our
senior debt in the second quarter of fiscal 2003. You should not construe EBITDA
as an alternative to operating income as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with U.S. generally accepted
accounting principles. We may calculate EBITDA differently than other companies.
New orders. New orders received in the three months of fiscal 2003 totaled $20.4
million, which represents a 71% increase from new orders of $11.9 million in the
three months of fiscal 2002. We experienced an increase in new orders primarily
as the result of the timing of the receipt of domestic and foreign military and
spare parts orders. Three months fiscal 2003 new orders were unusually high at
39% of the full year's order
20
intake budget, while three months fiscal 2003 order intake was at 23% of the
full year's actual. We derived a significant portion of three months fiscal 2003
orders 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.
Backlog. Backlog at December 29, 2002 was $42.7 million, an increase of $5.7
million from $37.0 million at December 30, 2001. We measure backlog by the
amount products or services that our customers have committed by contract to
purchase from us as of a given date. Our book to bill ratio for the three months
of fiscal 2003 was 1.31, compared to 0.93 for the three months of fiscal 2002.
The book to bill ratio was higher in the three months of fiscal 2003 than in the
three months of fiscal 2002 because of the unusually high percentage of total
orders for fiscal 2003 that were received in the three months of fiscal 2003, as
discussed in the paragraph above. Cancellations of purchase orders or reductions
of product quantities in existing contracts could substantially and materially
reduce our backlog. Therefore, our backlog may not represent the actual amount
of shipments or sales for any future period.
NINE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO NINE MONTHS ENDED DECEMBER 30,
2001
Net sales. Our sales increased to $41.3 million for the nine months of fiscal
2003, a 16% increase over sales of $35.5 million for the nine months of fiscal
2002. This increase in sales is the result of higher shipments of rescue hoists
and cargo hooks for military and civil rescue agencies, as well as increases in
sales of spare parts, repair and overhaul of equipment already in the field and
the initial shipments of our HLU-196 Bomb Hoist to the U.S. Navy.
Gross profit. Gross profit increased 35% to $19.2 million for the nine months of
fiscal 2003 from $14.2 million for the nine months of fiscal 2002. Generally,
repair and overhaul services and spare parts sales have higher gross margins
than sales of new equipment or engineering services. As a result of a sales mix
that was more heavily weighted in favor of aftermarket sales due to the timing
of customer orders, we recorded higher gross margins for the nine months of
fiscal 2003. These improvements in product mix, combined with fixed-cost
absorption on a generally higher sales volume, and a mid-year adjustment to
accumulated manufacturing costs, led to an increase in gross margin to 46.4% in
the nine months of fiscal 2003 from 39.9% in the comparable fiscal 2002 period.
These margin improvements from product mix, however, were partially offset by
lower than normal gross margins on the HLU-196 Bomb Hoist, a product that was
shipped for the first time during the third quarter of fiscal 2003. While the
gross margins recognized on the initial shipments of the HLU-196 were lower than
historical gross margins, they were higher than the budgeted gross margins due
to the realization of manufacturing efficiencies not originally expected in the
initial production lots. As a result of the lower gross margins experienced on
the HLU-196, we expect future gross margins to be lower than those historically
reported. Generally, we cannot predict changes in our product mix between
aftermarket sales and new equipment sales for any given period because the
changes result primarily from the timing of our customers' orders, over which we
have little control.
General, administrative and selling expenses. General, administrative and
selling expenses decreased 4.8% to $11.9 million in the nine months of fiscal
2003 from $12.5 million in the nine months of fiscal 2002. This decrease was
primarily due to a 19.1% decrease in corporate office expenses to $5.3 million
in the nine months of fiscal 2003 from $6.5 million in the nine months of fiscal
2002, which was offset by our higher general, administrative and selling
expenses due to our higher sales volume and a significant increase in the cost
of aircraft product liability insurance. The decrease in corporate office
expenses during the nine months of fiscal 2003 was primarily due to the
restructuring of the corporate office that began in the fourth quarter of fiscal
2002.
Operating income. Operating income increased 334% to $7.3 million in the nine
months of fiscal 2003 from $1.7 million in the nine months of fiscal 2002. This
increase mainly was due to a more favorable mix of
21
repair, overhaul and spare parts business, a higher sales volume, the benefit of
spreading fixed costs over a larger sales volume, and the reduction in corporate
office expenses.
Interest expense. Interest expense increased $2.3 million to $6.5 million in the
nine months of fiscal 2003 from $4.2 million in the nine months of fiscal 2002
as a result of the allocation formula we use to apportion interest expense
between continuing and discontinued operations. We base this allocation formula
upon the net asset balances attributable to continuing and discontinued
operations. Total interest expense for the nine months of fiscal 2003 decreased
$8.9 million to $11.9 million from $20.8 million for the nine months of fiscal
2002 due to the retirement of debt with the proceeds from divestitures and other
internally generated sources of cash. Assets held for sale also were reduced
substantially, however, causing a higher percentage of assets to be allocated to
continuing operations in the nine months of fiscal 2003 compared to the nine
months of fiscal 2002, which resulted in an increased allocation of interest
expense to continuing operations in the nine months of fiscal 2003.
Forbearance fees. During the nine months of fiscal 2003, we incurred an expense
of $0.8 million for forbearance fees we paid to our lenders under our prior
senior credit agreement in exchange for their agreement not to pursue any
actions against us for violating certain financial covenants. In the nine months
of fiscal 2002, we incurred $2.6 million of such expenses. The reduction in
these expenses was the result of lower overall levels of debt during the current
fiscal year and the refinancing of our prior senior credit agreement in August
2002, which cured all defaults and ended the forbearance agreements.
Corporate office restructuring charge. In the nine months of fiscal 2003 we
recognized a $0.5 million charge associated with severance costs related to the
elimination of several positions in our corporate office which will be paid by
the end of calendar year 2003. In the nine months of fiscal 2002, we recognized
a $1.6 million charge associated with the restructuring of our corporate office,
related primarily to severance costs following the elimination of several
positions, all of which amounts have been paid.
Unrealized loss on warrants. As we note in note 7 to the financial statements
included in this report, the warrants associated with our senior subordinated
notes due 2005 are now deemed to be derivative financial instruments for
purposes of U.S. generally accepted accounting principles. As required by those
principles, changes in the value of our share price between August 7, 2002 and
the end of the nine months of fiscal 2003 resulted in our recognizing a
non-cash, non-tax deductible loss of less than $0.1 million during the nine
months of fiscal 2003. We recognized no similar gain or loss in the nine months
of fiscal 2002. If the warrants are not exercised or otherwise retired, we may
continue to experience similar losses, or gains, in the future.
Net loss. Net loss decreased to $7.7 million in the nine months of fiscal 2003
from $60.0 million in the nine months of fiscal 2002, primarily as a result of
the reasons discussed above.
EBITDA. EBITDA, or earnings before interest, taxes, depreciation and
amortization, increased 139% to $9.0 million in the nine months of fiscal 2003
from $3.7 million in the nine months of fiscal 2002. Depreciation and
amortization decreased to $1.7 million in the nine months of fiscal 2003 from
$2.1 million in the nine months of fiscal 2002. You should not construe EBITDA
as an alternative to operating income as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with U.S. generally accepted
accounting principles. We may calculate EBITDA differently than other companies.
New orders. New orders received in the nine months of fiscal 2003 totaled $50.2
million, which represents a 16% increase from new orders of $43.4 million in the
nine months of fiscal 2002. We experienced a reduction in new orders primarily
as the result of the timing of the receipt of domestic and foreign military and
spare parts orders. Nine months fiscal 2003 new orders were unusually high at
95% of the full year's order intake budget, while nine months fiscal 2002 order
intake was at 83% of the full year actual. We
22
derived a significant portion of nine months fiscal 2003 orders 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.
Backlog. Backlog at December 29, 2002 was $42.7 million, up $5.7 million from
$37.0 million at December 30, 2001. We measure backlog by the amount products or
services that our customers have committed by contract to purchase from us as of
a given date. Our book to bill ratio for the nine months of fiscal 2003 was
1.22, compared to 1.05 for the nine months of fiscal 2002. The book to bill
ratio was higher in the nine months of fiscal 2003 than in the nine months of
fiscal 2002 because of the unusually high percentage of total orders for fiscal
2003 that were received in the nine months of fiscal 2003, as discussed in the
paragraph above. Cancellations of purchase orders or reductions of product
quantities in existing contracts could substantially and materially reduce our
backlog. Therefore, our backlog may not represent the actual amount of shipments
or sales for any future period.
On January 16, 2003, we announced our intention to reorganize our management
structure following the completion of the sale of Norco. As a result of these
management changes we expect to reduce our corporate office costs by up to $1.0
million per year. We anticipate recognizing a pre-tax charge of approximately
$2.2 million in the fourth quarter of fiscal 2003 for costs associated with
these management changes.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements depend on a number of factors, many of which are
beyond our control, including the timing of production under our long-term
contracts with the U.S. government. Although we have infrequently received
payments on these government contracts based on performance milestones as is the
case with our contract with the U.S. Navy for the HLU-196 Bomb Hoist, our
working capital needs fluctuate between periods as a result of changes in
program status and the timing of payments by program. Additionally, as our sales
are generally made on the basis of individual purchase orders, our liquidity
requirements vary based on the timing and volume of these orders.
Our restructuring and divestiture program has had a substantial impact upon our
financial condition through December 29, 2002, as we reduced debt with the
proceeds of the divestitures and lowered costs as a result of the corporate
office restructuring. At December 29, 2002, indebtedness outstanding under our
senior credit facility was $21.7 million, compared to $24.6 million at the end
of the second quarter and $29.1 million of indebtedness outstanding under our
prior senior credit agreement at the beginning of fiscal 2003.
On January 3, 2003, we completed the sale of the business and substantially all
of the assets of our wholly owned subsidiary, TCR Corporation, for $10.0 million
in cash. We used the net proceeds of the sale to repay borrowings outstanding
under our new senior credit agreement. We are in the process of divesting the
business and substantially all of the assets of our subsidiary, Norco, Inc. We
expect to complete this transaction during the fourth quarter of fiscal 2003,
and we anticipate applying all of the proceeds to the repayment of our
outstanding debt. The assets and liabilities of these business units are
presented in Assets Held for Sale and Liabilities of Discontinued Businesses on
the December 29, 2002 balance sheet at their estimated net realizable values.
WORKING CAPITAL
Our working capital at December 29, 2002 was $36.3 million, compared to $57.5
million at the beginning of fiscal 2003. Excluding the impact of assets and
liabilities of businesses held for sale, working capital at December 29, 2002
was $5.5 million compared to $13.7 million at the beginning of fiscal 2003. The
ratio of current assets to current liabilities was 2.2 to 1.0 at December 29,
2002, compared to 2.4 to 1.0 at the beginning of fiscal 2003.
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Working capital changes during the nine months of fiscal 2003, exclusive of
assets held for sale, resulted from increases in accounts receivable of $0.5
million, inventories of $1.1 million and prepaid expenses of $1.1 million,
offset by a reduction in income tax refunds receivable of $7.5 million. The
increase in accounts receivable was due to the overall higher level of shipments
during the third quarter of the current fiscal year. The increase in inventory
was largely due to the purchase of long lead time materials and the manufacture
of work in progress needed to fulfill customers' long-term purchase orders,
especially with regard the HLU-196 Bomb Hoist. The increase in prepaid expenses
was due primarily to the payment of deposits and other advance payments that
will be utilized in less than twelve months. The income tax receivable was
reduced as a result of the receipt of federal income tax refunds associated with
the carrying back of our fiscal 2002 operating loss. The number of days that
sales were outstanding in accounts receivable decreased to 38.1 days at December
29, 2002, from 42.7 days at March 31, 2002, primarily due to the application of
customer prepayments against receivables due from the shipment of HLU-196
Munitions Hoists to the Navy. Inventory turnover changed only slightly, to 1.64
turns from 1.59 turns over the same time period. Current liabilities, exclusive
of liabilities associated with discontinued operations, increased $5.0 million,
primarily due to the classification of $7.9 million of long-term debt as current
and increases in accrued compensation, which were offset by decreases in
accounts payable, accrued income taxes and other accrued expenses.
CAPITAL EXPENDITURES
Our capital expenditures were $0.5 million for the nine months of fiscal 2003,
compared to $0.1 million for the nine months of fiscal 2002. In fiscal 2003, we
expect total capital expenditures to be less than $0.7 million. Projects
budgeted in fiscal 2003 include refurbishment of the offices and the initial
phase of installing a new ERP system.
SENIOR CREDIT FACILITY
On August 7, 2002, we entered into a $34.0 million senior credit facility,
consisting of a $13.5 million asset based revolving credit facility and a $6.5
million Term Loan A from The CIT/Business Credit Group, Inc. and a $14.0 million
Term Loan B from Ableco Finance LLC. At December 29, 2002, we had the full
amount of each of the term loans outstanding and $1.6 million outstanding under
the revolving credit facility. This new three-year senior credit facility is
secured by all of our assets, carries a weighted average interest rate on its
full commitment of 9.76% and contains customary financial covenants and events
of default. Initial borrowings under the senior credit facility were used to
refinance our prior senior credit agreement. As of the date of this report, we
are not in default on any of the provisions of the senior credit facility.
Subject to limitations relating to levels of certain assets and reserves for
future interest payments, as of December 29, 2002, we had unused borrowing
capacity on the revolving credit facility of $11.9 million.
SENIOR SUBORDINATED NOTES
On August 30, 2000, we completed a private placement of $75 million of senior
subordinated notes and warrants to purchase shares of our common stock to a
group of institutional investors. We used the proceeds of the private placement
to retire in full a $75.0 million bridge loan held by a group of lenders led by
Fleet National Bank. The senior subordinated 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. We may prepay the senior
subordinated notes after August 29, 2001 at a premium initially of 9%, declining
to 5%, 3%, and 1% on each of the next succeeding anniversaries of that date. The
senior subordinated notes contain customary financial covenants and events of
default, including a cross-default provision to our senior debt obligations. At
December 29, 2002 the principal balance outstanding on the notes amounted to
$81.2 million, which included the original principal amount plus the PIK notes.
At issuance, the warrants entitled their holders to acquire, in the aggregate,
427,602 shares, or approximately 7%, of our common stock at an exercise price of
$9.93 a share. This exercise price represents the average
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daily closing price of our common stock on the New York Stock Exchange for the
30 days preceding the completion of the private placement. The warrants must be
exercised by August 29, 2010.
Effective with the refinancing of our prior senior credit agreement with our
senior credit facility on August 7, 2002, the holders of our senior subordinated
notes agreed to amend the notes. Under the amended senior subordinated notes, we
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 to 5% effective January 1, 2003, with such rate increasing 0.25% each
quarter until we retire the notes. Additionally, we amended the terms of the
warrants to reduce the exercise price of each warrant to provide the holders
with a minimum profit on the exercise of the warrants equal to $5.00 per share
if the warrants were exercised and sold prior to December 31, 2002. Because the
warrants remained outstanding after December 31, 2002, their exercise price has
been reduced to $0.01 per share. In addition, the amended warrants contain a
"put" right that allows the holders to cause us to purchase the warrants at a
price of $5.00 per underlying share upon the occurrence of certain "liquidity
events," including the sale of our company or either of our aerospace units. The
Norco sale will constitute a liquidity event.
Since the warrants are now considered derivative financial instruments for
purposes of generally accepted accounting principles, during the quarter ended
September 29, 2002, we recorded the value of the warrants as a charge to
shareholders' equity of $4.6 million with a corresponding credit to a long-term
liability. The amount of the charge was determined by measuring the difference
between the $0.01 per share potential exercise price and the market value of a
share of common stock on August 7, 2002. By September 29, 2002, the share price
of our common stock had risen to $13.46, compared to $10.64 on August 7, which
resulted in a second quarter mark-to-market charge to operating results of $1.2
million. At December 27, 2002, the share price of our common stock had fallen to
$10.60 compared to $13.46 on September 29, 2002, which resulted in a mark to
market gain of $1.2 million. For the nine months ended December 29, 2002, the
mark to market gain or loss from the warrants aggregated less than $0.1 million.
Until the provisions of the amended warrants that enable their holders to "put"
the warrants to us for $5.00 per share are extinguished, we will mark the
warrants to market and will recognize the corresponding income or loss in our
Statement of Consolidated Operations. Upon the termination of the put rights,
the original amount of the liability and the adjustment to paid in capital, as
increased or decreased by the amounts of any income or expense recognized from
the quarterly mark-to-market adjustments, will be reversed out of both the
liability and equity portions of the balance sheet.
Because we did not retire our senior subordinated notes and repurchase the
warrants by December 31, 2002, we will have 427,602 additional shares
outstanding in computing earnings per share, a dilution factor of approximately
7%. Our maximum cash exposure related to these warrants and their put rights, if
any, is the $2.1 million that would be required to redeem the warrants or the
underlying shares if there were a sale of our entire company or either of our
aerospace units, which includes the Norco sale.
Our operations require significant amounts of cash, and we may be required to
seek additional capital, whether from selling equity or borrowing money, for the
future growth and development of our business or to fund our operations and
inventory, particularly in the event of a market downturn. Although currently we
have the ability to borrow additional sums under the revolving portion of our
senior credit facility, this facility contains a borrowing base provision and
financial covenants which may limit the amount we can borrow under our senior
credit facility or from other sources. Also, we may not be able to replace or
renew our senior credit facility upon its expiration on terms that are favorable
to us. In addition, a number of factors could affect our ability to access debt
or equity financing, including our financial strength and credit rating, the
financial market's confidence in our management team and financial reporting,
general economic conditions, the conditions in the defense and aerospace
industries and overall capital market conditions.
Even if available, additional financing could be costly or have adverse
consequences. If we raise additional funds by issuing stock, dilution to
stockholders may result. If we raise additional funds by incurring debt, we
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will incur increased debt servicing costs and may become subject to additional
restrictive financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. If we were not successful in
obtaining sufficient capital, it could reduce our sales and earnings and
adversely impact our financial position and we may not be able to expand or
operate our business as planned.
TAX BENEFITS FROM NET OPERATING LOSSES
At March 31, 2002, we had federal, state, and foreign net operating loss
carryforwards, or NOLs, of approximately $53.8 million, $75.0 million, and $40.0
million, respectively, which are due to expire in the years 2004 through 2022.
These NOLs may be used to offset future taxable income through their respective
expiration dates and thereby reduce or eliminate our federal, state, and foreign
income taxes otherwise payable. The Internal Revenue Code of 1986, as amended
(the "Code") imposes significant limitations on the utilization of NOLs in the
event of an "ownership change" as defined under section 382 of the Code (the
"Section 382 Limitation"). The Section 382 Limitation is an annual limitation on
the amount of pre-ownership NOLs that a corporation may use to offset its
post-ownership change income. The Section 382 Limitation is calculated by
multiplying the value of a corporation's stock immediately before an ownership
change by the long-term tax-exempt rate (as published by the Internal Revenue
Service). Generally, an ownership change occurs with respect to a corporation if
the aggregate increase in the percentage of stock ownership by value of that
corporation by one or more 5% shareholders (including specified groups of
shareholders who in the aggregate own at least 5% of that corporation's stock)
exceeds 50 percentage points over a three-year testing period. We believe that
we have not gone through an ownership change that would cause our NOLs to be
subject to the Section 382 Limitation.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations for
the next several years:
(DOLLARS IN THOUSANDS) 2008 AND
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Long-Term Debt $ -- $10,050 $8,800 $84,200 $-- -- $103,050
Operating Leases 888 392 95 50 25 -- 1,450
---- ------- ------ ------- --- --------- --------
Total $888 $10,442 $8,895 $84,250 $25 -- $104,500
In addition, we have divested or plan to divest ten businesses since March 31,
2001. Under the terms of the agreements associated with the sales of those
businesses, we have agreed to indemnify the purchasers for certain damages that
might arise in the event that a representation we made with respect to the
divested business is found to have contained a material misstatement, subject in
each case to a customary cap on the indemnification amount and customary
limitations on the survivability of the representations made. As of the date of
this report, we have unresolved claims for indemnification with respect to these
divested businesses that aggregate less than $0.5 million. Additionally, the
terms of these 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, with the exception of the divestiture of TCR,
all purchase price adjustments have been agreed and paid.
INFLATION
While neither inflation nor deflation has had, and we do not expect it to have,
a material impact upon operating results, we cannot assure you that our business
will not be affected by inflation or deflation in the future.
26
ENVIRONMENTAL MATTERS
During the fourth quarter of fiscal 2000, we presented an environmental cleanup
plan for a portion of a site in Pennsylvania, which we continue to own, although
the related business has been sold. We submitted this plan pursuant to a Consent
Order and Agreement with the Pennsylvania Department of Environmental
Protection, or PaDEP, concluded in fiscal 1999. Pursuant to the Consent Order,
we 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 was concluded with the PaDEP in
the third quarter of fiscal 2002 for the remainder of the site. We are also
administering an agreed settlement with the U.S. government under which the
government pays 50% of the environmental response costs associated with a
portion of the site. We have also reached an agreement in principle with the
U.S. government, and are in the process of finalizing the necessary
documentation, under which the U.S. government will pay 45% of the environmental
response costs associated with another portion of the site. At December 29,
2002, our cleanup reserve was $1.8 million based on the net present value of
future expected cleanup costs. We expect that remediation at the Pennsylvania
site will not be completed for several years.
We also continue to participate in environmental assessments and remediation
work at nine other locations, which include operating facilities, facilities for
sale, and previously owned facilities. We estimate that our potential costs for
implementing corrective action at these sites will not exceed $0.4 million
payable over the next several years, and have provided for the estimated costs
in the accrual for environmental liabilities.
In addition, we have been named as a potentially responsible party in eight
environmental proceedings pending in several other states. Each of these
proceedings alleges that we were a generator of waste that was sent to landfills
and other treatment facilities. As to several sites, it is also alleged we were
an owner or operator. These properties generally relate to businesses that have
been sold or discontinued. We estimate that our future costs and our
proportional share of remedial work to be performed associated with these
proceedings will not exceed $0.1 million and have provided for these estimated
costs as an accrual for environmental liabilities.
LITIGATION
We are engaged in various other legal proceedings incidental to our business. It
is the opinion of management that, after taking into consideration information
furnished by our counsel, the above matters will have no material effect on our
consolidated financial position or the results of our operations in future
periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (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 be
capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is
effective for years beginning after June 15, 2002. We are currently evaluating
the effect, if any, that the adoption of SFAS 143 will have on our 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"). We are in the
process of evaluating the effect that adopting SFAS 145 will have on our
financial statements.
27
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 disposal activities we initiate after December 31, 2002. We are in
the process of evaluating the effect that adopting SFAS 146 will have on our
financial statements.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123" ("SFAS 148"). This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS 148 is effective for our fiscal year ended March 31, 2003. We are in the
process of evaluating the effect that adopting SFAS 148 will have on its
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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.
Because the warrants we issued in conjunction with our senior subordinated notes
are now considered, for purposes of generally accepted accounting principles, to
be financial derivatives, we are exposed to changes in our share price. While
this exposure has no cash consideration or exposure associated with it, changes
in our share price may result in material mark-to-market losses or gains in our
consolidated results of operations and balance sheet accounts.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect
to its consolidated subsidiaries.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the forgoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are engaged in various legal proceedings incidental to our business. It
is the opinion of management that, after taking into consideration
information furnished by our counsel, these matters will not have a
material effect on our consolidated financial position or the results of
our operations in future periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: January 31, 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.
29
CERTIFICATION
I, Michael J. Berthelot, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTechnology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 31, 2002 /s/ Michael J. Berthelot
---------------------------------
Michael J. Berthelot
Chairman of the Board, President
and Chief Executive Officer
30
CERTIFICATION
I, Joseph F. Spanier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTechnology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 31, 2002 /s/ Joseph F. Spanier
-------------------------------
Joseph F. Spanier
Chief Financial Officer
31