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FORM 10-Q
--------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2004
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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 6, 2004, the total number of outstanding shares of
registrant's one class of common stock was 6,505,427.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements............................................................ 2
Statements of Consolidated Operations
Three Month Periods Ended June 27, 2004
and June 29, 2003............................................................... 3
Consolidated Balance Sheets
June 27, 2004 and March 31, 2004................................................ 4
Statements of Consolidated Cash Flows
Three Month Periods Ended June 27, 2004 and
June 29, 2003................................................................... 5
Notes to Consolidated Financial Statements...................................... 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 9-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................... 16
Item 4. Controls and Procedures......................................................... 16
PART II. Other Information
Item 1. Legal Proceedings............................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................ 17
SIGNATURES..................................................................................... 17
EXHIBIT 31.1................................................................................... 18
EXHIBIT 31.2................................................................................... 19
EXHIBIT 32..................................................................................... 20
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 June
27, 2004, 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, 2004.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
2
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED
---------------------------------
JUNE 27, 2004 JUNE 29, 2003
------------- -------------
Net sales $ 14,548 $ 16,119
Cost of sales 8,711 8,772
----------- -----------
Gross profit 5,837 7,347
General, administrative and selling expenses 4,023 3,771
Interest expense 2,796 2,503
Interest and other expense (income) - net 13 (47)
----------- -----------
(Loss) income before income taxes (995) 1,120
(Benefit) provision for income taxes (378) 426
----------- -----------
Net (loss) income $ (617) $ 694
=========== ===========
Basic (loss) earnings per share:
Net (loss) income $ (0.09) $ 0.10
=========== ===========
Diluted (loss) earnings per share:
Net (loss) income $ (0.09) $ 0.10
=========== ===========
Number of shares used in computation
of per share information: (Note 1)
Basic 6,669,000 6,631,000
Diluted 6,669,000 6,631,000
See accompanying notes to unaudited consolidated financial statements.
3
TRANSTECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
JUNE 27, 2004 MARCH 31, 2004
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,971 $ 960
Accounts receivable (net of allowance for doubtful accounts
of $13 at June 27, 2004 and $10 at March 31, 2004) 8,836 8,720
Inventories 19,948 20,449
Prepaid expenses and other current assets 1,256 842
Income tax receivable 376 395
Deferred income taxes 3,334 3,334
Real estate held for sale - 1,432
-------- --------
Total current assets 35,721 36,132
-------- --------
Property, plant and equipment 13,934 13,222
Less accumulated depreciation 10,909 10,794
-------- --------
Property, plant and equipment - net 3,025 2,428
-------- --------
Other assets:
Deferred income taxes 27,374 27,035
Other 10,950 11,614
-------- --------
Total other assets 38,324 38,649
-------- --------
Total $ 77,070 $ 77,209
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and short term borrowings $ 1,671 $ 79
Accounts payable-trade 3,427 5,224
Accrued compensation 3,118 2,890
Accrued income taxes 1,498 1,566
Accrued interest 1,845 1,813
Other current liabilities 1,945 2,387
-------- --------
Total current liabilities 13,504 13,959
-------- --------
Long-term debt payable to banks and others 57,353 56,472
-------- --------
Other long-term liabilities 10,566 10,565
-------- --------
Stockholders' deficit:
Preferred stock - authorized, 300,000 shares; none issued
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 7,059,107 at June 27, 2004 and March 31, 2004 71 71
Additional paid-in capital 76,728 76,728
Accumulated deficit (71,866) (71,249)
Unearned compensation (46) (97)
-------- --------
4,887 5,453
Less treasury stock, at cost - 560,964 shares at June 27, 2004
and March 31, 2004 (9,240) (9,240)
-------- --------
Total stockholders' deficit (4,353) (3,787)
-------- --------
Total $ 77,070 $ 77,209
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
THREE MONTHS ENDED
-----------------------------
JUNE 27, 2004 JUNE 29, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (617) $ 694
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 410 412
Noncash interest expense 928 749
Increase in provision for bad debt 3 3
Changes in assets and liabilities:
Increase in accounts receivable and other receivables (156) (1,408)
Decrease in inventories 501 239
(Increase) decrease in deferred taxes net (338) 370
Decrease in other assets 162 686
Decrease in accounts payable (1,797) (1,124)
Increase (decrease) in accrued compensation 228 (1,019)
Decrease in income taxes payable (68) (973)
Decrease in other liabilities (456) (1,633)
------- -------
Net cash used in operating activities (1,200) (3,004)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (712) (43)
Proceeds from sale of real estate 1,331 -
------- -------
Net cash provided by (used in) investing activities 619 (43)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt and other short term borrowings - net 1,592 -
Exercise of stock options and other - 1
------- -------
Net cash provided by financing activities 1,592 1
------- -------
Increase (decrease) in cash and cash equivalents 1,011 (3,046)
Cash and cash equivalents at beginning of period 960 7,104
------- -------
Cash and cash equivalents at end of period $ 1,971 $ 4,058
======= =======
Supplemental information:
Interest payments $ 1,835 $ 1,727
Income tax payments $ 28 $ 1,029
Increase in senior subordinated note for paid-in-kind
interest expense $ 881 $ 700
Increase in additional paid-in-capital from warrant put expiration $ - $ 1,954
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted-average number of shares outstanding. Diluted earnings
(loss) per share is computed by dividing net income (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 earnings (loss) per common
share and diluted earnings (loss) per common share are reconciled as
follows:
Three Months Ended
-----------------------
June 27, June 29,
2004 2003
-------- --------
Basic Earnings (Loss) per
Common Share:
Weighted-average
common stock out-
standing for basic earnings
(loss) per share calculation 6,669 6,631
----- -----
Diluted Earnings (Loss) per
Common Share:
Weighted-average
common shares
outstanding 6,669 6,631
Stock options and
warrants* -- --
----- -----
Weighted-average common
stock outstanding for
diluted earnings (loss) per
share calculation 6,669 6,631
===== =====
* Not including anti-dilutive stock options totaling 157 for the three month
period ended June 27, 2004, and 415 for the three month period ended June
29, 2003.
6
NOTE 2. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, the Company records expense in an amount equal to the excess, if
any, of the quoted market price on the grant date over the option price.
The following table includes as reported and proforma information required by
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". Proforma information is based on the
fair value method under SFAS No. 123.
Three Months Ended
------------------------
June 27, June 29,
2004 2003
-------- --------
Net (loss) income as reported $ (617) $ 694
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (22) (39)
------ ------
Proforma (loss) net income $ (639) $ 655
====== ======
Net (loss) income per share:
Basic and diluted - as reported $(0.09) $ 0.10
Basic and diluted - proforma $(0.10) $ 0.10
NOTE 3. Inventories
Inventories, net of valuation allowances, are summarized as follows:
June 27, 2004 March 31, 2004
------------- --------------
Finished goods $ 1 $ 1
Work in process 6,010 7,037
Purchased and
manufactured parts 13,937 13,411
------- -------
Total $19,948 $20,449
======= =======
7
NOTE 4. Long-term Debt Payable to Banks and Others
Long-term debt payable to banks and others, including current maturities,
consisted of the following:
June 27, 2004 March 31, 2004
------------- --------------
Credit Agreement 5% $ 1,592 $ -
Senior Subordinated Notes 19.25% 57,274 56,393
Other 158 158
------- -------
59,024 56,551
Less current maturities 1,671 79
------- -------
Total long-term debt $57,353 $56,472
======= =======
Senior Credit Facilities - At June 27, 2004, the Company had a senior credit
facility consisting of an $8.0 million asset-based revolving credit facility,
which was established in August 2002 (the "New Senior Credit Facility") to
refinance all remaining obligations outstanding under the prior senior credit
facility. The New Senior Credit Facility was amended on August 5, 2003 and was
subsequently amended on January 30, 2004 and July 30, 2004. The maturity date of
this facility, as amended, is January 31, 2005. The current interest rate is
approximately 5.25%. The New Senior Credit Facility is secured by all of the
Company's assets. The Company is in compliance with the provisions of the
facility. At June 27, 2004, there was $1.6 million outstanding under this
facility.
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, as amended in
August 2002, are due on August 29, 2005 and bear interest at a rate of 18% per
annum consisting of 13% cash interest on principal, payable quarterly, and 5%
interest on principal, payable quarterly in "payment-in-kind" ("PIK") promissory
notes. The PIK portion of the interest rate increases 0.25% each quarter,
commencing December 31, 2002 until the Notes are retired. 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. The Company is
in compliance with the provisions of the Notes. At June 27, 2004, the principal
balance outstanding on the Notes amounted to $57.3 million, which included the
original principal amount plus the PIK notes. At June 27, 2004, there were
171,041 Warrants outstanding which are each convertible into common stock at the
price of $.01 per warrant. These Warrants are considered to be common stock
equivalents for the purpose of calculating basic earnings per share at June 27,
2004, and June 29, 2003.
The Company has long-term debt maturities of $1.7 million, and $57.3 million in
fiscal 2005 and 2006, respectively.
8
NOTE 5. New Accounting Standards
In December 2003, the FASB issued Interpretation No. 46R, a revision to
Interpretation No. 46, "Consolidation of Variable Interest Entities", which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. Interpretation No. 46R clarifies some
of the provisions of Interpretation No. 46 and exempts certain entities from its
requirements. Interpretation No. 46R is effective at the end of the first
interim period ending March 15, 2004. The adoption of this statement did not
have a material impact on the Company's financial position or results of
operations.
NOTE 6. Contingencies
As previously reported, the Company is subject to an investigation being
conducted by the Newark, New Jersey office of the United States Attorney with
respect to Breeze-Eastern's overhaul and repair operations. The Company has, to
date, cooperated fully and will continue to cooperate fully with the
government's investigation. In addition, the Board of Directors retained a fact
finding and forensic accounting firm, The Bradlau Group of Morristown, New
Jersey, to perform an independent review of the overhaul and repair operations
of the Company's Breeze-Eastern business. The Board of Directors has shared the
preliminary and follow-on reports of the findings of this independent review
with the United States Attorney's office. The investigation has had no direct
impact, and the Company does not expect a direct impact, on the Company's
ability to manufacture and ship products and meet customer delivery schedules.
As of this date, the United States Attorney's investigation is continuing and
the Company has not been made aware of any specific statutory or regulatory
violations resulting from that investigation.
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 global
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 February 24, 2003, we completed our
divestiture program.
All references to fiscal 2005 and beyond in this Management's Discussion and
Analysis of Financial Condition and Results of Operations refer to the fiscal
year ending March 31, 2005 and beyond, and all references to all other fiscal
years refer to the fiscal years ended March 31.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 27, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 29, 2003
Net sales. Our sales decreased to $14.5 million for the first quarter of fiscal
2005, a 10% decrease from sales of $16.1 million for the first quarter of fiscal
2004. This decrease in sales is the result of lower shipments in our aftermarket
overhaul and repair operation (See Gross profit below). New equipment sales were
approximately the same as last year with an increase in hoist and winch sales
and a decrease in weapons handling equipment as the HLU-196 Bomb Hoist program
is essentially completed.
Gross profit. Gross profit decreased 21% to $5.8 million for the first quarter
of fiscal 2005 from $7.3 million for the first quarter of fiscal 2004.
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 new equipment sales, we
recorded lower gross margins for the first quarter of fiscal 2005. We have
implemented changes in our operating procedures and added new personnel to our
overhaul and repair operation, all of which has had an impact on the results for
the quarter. These changes were made as a result of the process and procedures
review of that operation over the past nine months. We have instituted
additional levels of verification and are assuring that all personnel are
appropriately trained. This situation produced higher labor and material costs
than we had planned. As a result, our overhaul and repair throughput was impeded
resulting in reduced gross margins in the first quarter. The combination of the
lower sales in the overhaul and repair operation together with inefficiencies
experienced as we implement improvements in that area accounted for
approximately $0.8 million of the decrease in gross profit with the remaining
$0.7 million being related to a higher percentage of aftermarket products with
an above-normal margin in the same period last year.
General, administrative and selling expenses. General, administrative and
selling expenses increased 7% to $4.0 million in the first quarter of fiscal
2005 from $3.8 million in the first quarter of fiscal 2004. The increase was
primarily due to approximately $0.5 million of legal and other costs associated
with the ongoing investigation by the Newark, New Jersey office of the United
States Attorney of our overhaul and repair operation and increased spending in
engineering. This increase was offset by a reduction in our corporate office
expense of $0.4 million which was principally the result of the recognition of a
non-recurring settlement charge of the same amount in the first quarter of
fiscal 2004.
Interest expense. Interest expense increased $0.3 million to $2.8 million in the
first quarter of fiscal 2005 from $2.5 million in the first quarter of fiscal
2004 primarily as the result of the increased interest rate on our subordinated
debt and the increased debt level due to payment-in-kind interest.
Net income. We incurred a net loss of $0.6 million in the first quarter of
fiscal 2005, versus net income of $0.7 million in the first quarter of fiscal
2004, which primarily resulted from the reasons discussed above.
New orders. New orders received in the first quarter of fiscal 2005 totaled $9.2
million, which represents a 58% decrease from new orders of $21.7 million in the
first quarter of fiscal 2004. New orders received in the first quarter of fiscal
2005 were lower than anticipated and was the result of delays in the receipt of
orders on three specific programs, all of which are expected to be received
during the next two quarters.
10
Backlog. Backlog at June 27, 2004 was $35.6 million, down $5.4 million from
$41.0 million at March 31, 2004. The reduction in the backlog is due to the
order pattern mentioned above as well as completion of the HLU-196 Bomb Hoist
program. We measure backlog by the amount of 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 first quarter of fiscal 2005 was .63, compared to
1.35 for the first quarter of fiscal 2004. The decrease in the backlog and the
deterioration in the book-to-bill ratio are directly related to the delay in
receipt of orders on three specific programs discussed in "New Orders" above.
Cancellations of purchase orders or reductions of product quantities in existing
contracts, although seldom occurring, could substantially and materially reduce
our backlog. Therefore, our backlog may not represent the actual amount of
shipments or sales for any future period.
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 was
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.
Efforts to refinance our subordinated debt, which would lower our overall cost
of financing and provide additional liquidity, are continuing although they are
dependent, to some degree, on lessening the continuing uncertainty resulting
from the investigation by the United States Attorney of our overhaul and repair
operations.
As previously reported, the New York Stock Exchange (NYSE) has notified us that
we have fallen below the NYSE continued listing standards requiring total market
capitalization of not less than $50 million over a 30-day trading period and
total stockholders' equity of not less than $50 million. We have submitted to
the NYSE a plan to comply with the listing standards, which was accepted by the
NYSE on July 7, 2003. The Company periodically updates the NYSE on developments
with respect to the plan. In the event of delisting from the NYSE, we believe an
alternate trading venue would be available.
WORKING CAPITAL
Our working capital at June 27, 2004, was $22.2 million, essentially equal to
the level at March 31, 2004. The ratio of current assets to current liabilities
was 2.6 to 1.0 at June 27, 2004, and March 31, 2004.
Changes in the components of working capital during the first quarter of fiscal
2005, resulted from an increase in cash of $1.0 million, a decrease in
inventories of $0.5 million, an increase in prepaid expenses and other current
assets of $0.4 million and a decrease in real estate held for sale of $1.4
million. The increase in cash was due to a borrowing against the senior credit
facility at the end of the quarter to pay the interest on subordinated debt. The
decrease in inventory was largely due to control over purchasing. The increase
in prepaid and other current assets is due mainly to prepaid insurance. The
decrease in real estate held for sale was due to the completion of the sale of
the land and building retained from a previous divestiture. The number of days
that sales were in accounts
11
receivable increased to 39.5 days at June 27, 2004 from 35.2 days at March 31,
2004. The increase in days was attributable to June sales representing 48% of
the fiscal 2005 first quarter's sales versus 28% for the same period in fiscal
2004. Inventory turnover decreased slightly to 1.75 turns for the first quarter
of fiscal 2005 versus 1.79 turns for fiscal 2004. The slight decrease in
inventory turns is reflective of normal inventory and production patterns.
Accounts payable decreased $1.8 million due to payments coming due for purchases
in the fourth quarter.
CAPITAL EXPENDITURES
Our additions to property, plant and equipment were $712 thousand for the first
quarter of fiscal 2005, compared to $43 thousand for the first quarter of fiscal
2004. Projects budgeted in fiscal 2005, are expected to be in a range of
$2.6-3.3 million and include the installation of a new enterprise resource
planning (ERP) system.
SENIOR CREDIT FACILITY
At June 27, 2004, we had a senior credit facility consisting of an $8.0 million
asset based revolving credit facility, which was established in August 2002 (the
"New Senior Credit Facility") to refinance all remaining obligations outstanding
under our prior senior credit facility. The New Senior Credit Facility was
amended on August 5, 2003 and was subsequently amended on January 30, 2004 and
July 30, 2004. The maturity date of this facility, as amended, is January 31,
2005. The current interest rate is approximately 5.0%. The New Senior Credit
Facility is secured by all of our assets. We are in compliance with the
provisions of the facility. At June 27, 2004, there was $1.6 million outstanding
under this facility.
SENIOR SUBORDINATED NOTES
On August 30, 2000, we completed a private placement of $75 million of senior
subordinated notes (the "Notes") and warrants to purchase shares of our common
stock (the "Warrants") to a group of institutional investors (collectively, the
"Purchasers"). We 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, as amended in August 2002, are due on August 29, 2005 and bear
interest at a rate of 18% per annum consisting of 13% cash interest on
principal, payable quarterly, and 5% interest on principal, payable quarterly in
"payment-in-kind" ("PIK") promissory notes. The PIK portion of the interest rate
increases 0.25% each quarter, commencing December 31, 2002 until the notes are
retired. We 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 our senior debt obligations. At
June 27, 2004, the principal balance outstanding on the Notes amounted to $57.3
million, which included the original principal amount plus the PIK notes. At
June 27, 2004, there were 171,041 Warrants outstanding which are each
convertible into common stock at the price of $.01 per warrant. All of the
Warrants were considered to be common stock equivalents for the purpose of
calculating earnings per share at June 27, 2004, and June 29, 2003.
We have long-term debt maturities of $1.7 million, and $57.3 million in fiscal
2005 and 2006, respectively. As discussed above, the Notes are due August 29,
2005 and will be classified as current debt at the end of the fiscal second
quarter unless refinanced for a period longer than one year after the fiscal
second quarter.
12
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 New Senior Credit Facility,
this facility contains a borrowing base provision and financial covenants which
may limit the amount we can borrow. Also, while we continue to have on-going
discussions with prospective lenders, we may not be able to replace or renew the
New 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 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 June 27, 2004, we had federal and state net operating loss carryforwards, or
NOLs, of approximately $57.0 million and $76.9 million, respectively, which are
due to expire in fiscal 2006 through fiscal 2024. These NOLs may be used to
offset future taxable income through their respective expiration dates and
thereby reduce or eliminate our federal and state 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.
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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)
2005 2006 2007 2008 2009 TOTAL
------ ------- ---- ---- ---- -------
Long-term debt $1,671 $57,353 $ - $ - $- $59,024
Operating leases 86 115 102 35 $- 338
------ ------- ---- --- ---- -------
Total $1,757 $57,468 $102 $35 $- $59,362
====== ======= ==== === ==== =======
In addition, we have divested 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 $0.1 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 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.
ENVIRONMENTAL MATTERS
In assessing the necessity and extent of any environmental reserve, we review
with outside counsel and independent environmental consultants the existence of
risk issues in terms of likelihood, consequences, duration and costs. Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amounts of the liability can be reasonably estimated,
based on current law and existing technologies. 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, changes in technology related to
environmental remediation and appropriate discount factors to reflect the net
present value of expected expenditures. As the ultimate costs of environmental
matters may vary from the recorded accruals, they are adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities are
included in the consolidated balance sheets as other current liabilities and
other long-term liabilities. Accruals for related insurance or other third party
recoveries for environmental liabilities are recorded when it is probable that a
recovery will be
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realized and are included in the consolidated balance sheets in prepaid expenses
and other current assets and other assets.
The environmental cleanup plan we presented during the fourth quarter of fiscal
2000 for a portion of a site in Pennsylvania which continues to be owned
although the related business has been sold was approved during the third
quarter of fiscal 2004. This plan was submitted pursuant to the Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
("PaDEP") concluded in fiscal 1999. Pursuant to the Consent Order, upon its
execution 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 for the remainder of the
site was concluded in the third quarter of fiscal 2003. An environmental cleanup
plan for the portion of the site covered by the 2003 Consent Order was presented
by us during the second quarter of fiscal 2004. We are also administering an
agreed settlement with the Federal government under which the government pays
50% of the direct and indirect environmental response costs associated with a
portion of the site. We have also reached an agreement in principle with the
Federal government and are in the process of finalizing the necessary
documentation under which the Federal government will pay 45% of the direct and
indirect environmental response costs associated with another portion of the
site. At June 27, 2004, our cleanup reserve was $2.0 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, including some of our former facilities. We
estimate that the potential cost for implementing corrective action at these
sites will not exceed $0.5 million payable over the next several years, and have
provided for the estimated costs in the accrual for environmental liabilities.
In addition, in the first quarter of fiscal 2003, we entered into a consent
order for a former facility in New York pursuant to which we are developing a
remediation plan for review and approval by the New York Department of
Environmental Conservation. We have established a reserve of $2.4 million which
we believe is adequate.
In addition, we have been named as a potentially responsible party in five
environmental proceedings pending in several states in which it is alleged that
we were was a generator of waste that was sent to landfills and other treatment
facilities and, as to one site, it is alleged that we were an owner or operator.
Such properties generally relate to businesses which have been sold or
discontinued. We estimate that the expected future costs, and our estimated
proportional share of remedial work to be performed, associated with these
proceedings will not exceed $0.2 million and have provided for these estimated
costs in the accrual for environmental liabilities.
LITIGATION
We are also engaged in various other legal proceedings incidental to our
business. It is our opinion 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 December 2003, the FASB issued Interpretation No. 46R, a revision to
Interpretation No. 46, "Consolidation of Variable Interest Entities", which
addresses how a business enterprise should
15
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
Interpretation No. 46R clarifies some of the provisions of Interpretation No. 46
and exempts certain entities from its requirements. Interpretation No. 46R is
effective at the end of the first interim period ending March 15, 2004. The
adoption of this statement did not have a material impact on our financial
position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, primarily changes in interest rates
associated with the New Senior Credit Facility under which there were borrowings
of $1.6 million at June 27, 2004.
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 recognizes 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 is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
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.
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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
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Form 8-K
On June 24, 2004 the Registrant filed an 8-K which furnished the June 17,
2004 press release announcing its financial results for the year ended
March 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTECHNOLOGY CORPORATION
(Registrant)
Dated: August 13, 2004 By: /s/ Joseph F. Spanier
----------------------------------------------
Joseph F. Spanier, Vice President,
Chief Financial Officer and Treasurer*
*On behalf of the Registrant and as Principal Financial and Accounting Officer.
17