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 September 30, 2001
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.)
150 Allen Road 07938
Liberty Corner, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (908) 903-1600
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 November 8, 2001, the total number of outstanding shares
of registrant's one class of common stock was 6,183,968.
TRANSTECHNOLOGY CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements...................................... 2
Statements of Consolidated Operations--
Three and Six Month Periods Ended September 30, 2001
and October 1, 2000....................................... 3
Consolidated Balance Sheets--
September 30, 2001 and March 31, 2001..................... 4
Statements of Consolidated Cash Flows--
Six Month Periods Ended September 30, 2001 and
October 1, 2000........................................... 5
Notes to Consolidated Financial Statements................ 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. Other Information
Item 1. Legal Proceedings......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders....... 20
Item 6. Exhibits and Reports on Form 8-K.......................... 20
SIGNATURES............................................................. 21
EXHIBIT 10.45.......................................................... 22-37
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Consolidated Cash Flows are of TransTechnology Corporation
and its consolidated subsidiaries (collectively, the "Company"). These reports
reflect all adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods reflected therein. The results reflected in the
unaudited Statement of Consolidated Operations for the period ended September
30, 2001, 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, 2001.
Information provided herein as of March 31, 2001 and for the three and six month
periods ended October 1, 2000 has been restated to give effect to the reporting
of the Company's Specialty Fasteners Business Segment as discontinued operations
as discussed in Note 4 to the Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
STATEMENTS OF CONSOLIDATED OPERATIONS
UNAUDITED
(In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- -----------------------------------
SEPTEMBER 30, 2001 OCTOBER 1, 2000 SEPTEMBER 30, 2001 OCTOBER 1, 2000
------------------ --------------- ------------------ ---------------
(Restated) (Restated)
Net sales $ 19,250 $ 18,105 $ 41,046 $ 35,837
Cost of sales 12,476 11,693 26,472 23,442
----------- ----------- ----------- -----------
Gross profit 6,774 6,412 14,574 12,395
----------- ----------- ----------- -----------
General, administrative
and selling expenses 5,089 5,804 10,485 11,859
Interest expense 2,555 1,758 3,985 3,481
Interest income (17) (23) (45) (74)
Other income - net (46) 40 (50) (318)
Forbearance fees 1,103 -- 2,162 --
Corporate office restructuring charge 1,229 -- 1,229 --
----------- ----------- ----------- -----------
Loss from continuing operations
before income tax benefit (3,139) (1,167) (3,192) (2,553)
Provision for income tax benefit (1,138) (443) (1,158) (970)
----------- ----------- ----------- -----------
Net loss from continuing operations (2,001) (724) (2,034) (1,583)
Discontinued operations:
Income from sale of businesses and (loss) from
operations of discontinued Fasteners Segment
(less applicable income taxes (benefits) of
$7,486 and ($632) for the three month
periods ended September 30, 2001 and October
1, 2000, respectively, and $7,999 and ($566)
for the six month periods ended September
30, 2001 and October 1, 2000, respectively) 15,575 (1,031) 16,414 (924)
Loss on disposal of discontinued Fasteners
Segment, including provision of $96 for
operating losses during phase out period
(less applicable income tax (benefits) of
($36,787) for the three and six month
periods ended September 30, 2001) (68,180) -- (68,180) --
----------- ----------- ----------- -----------
Net loss $ (54,606) $ (1,755) $ (53,800) $ (2,507)
=========== =========== =========== ===========
Basic loss per share:
Loss from continuing operations $ (0.32) $ (0.12) $ (0.33) $ (0.26)
Loss from discontinued operations (8.51) (0.17) (8.38) (0.15)
----------- ----------- ----------- -----------
Net loss $ (8.83) $ (0.29) $ (8.71) $ (0.41)
=========== =========== =========== ===========
Diluted loss per share:
Loss from continuing operations $ (0.32) $ (0.12) $ (0.33) $ (0.26)
Loss from discontinued operations (8.51) (0.17) (8.38) (0.15)
----------- ----------- ----------- -----------
Net loss $ (8.83) $ (0.29) $ (8.71) $ (0.41)
=========== =========== =========== ===========
Numbers of shares used in computation
of per share information: (Note 1)
Basic 6,178,000 6,171,000 6,177,000 6,162,000
Diluted 6,178,000 6,171,000 6,177,000 6,162,000
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
SEPTEMBER 30, 2001 MARCH 31, 2001
------------------ --------------
ASSETS (Restated)
Current assets:
Cash and cash equivalents $ 1,924 $ 2,048
Accounts receivable (net of allowance for doubtful accounts
of $85 at September 30, 2001 and $58 at March 31, 2001) 13,931 20,309
Inventories 21,039 21,778
Prepaid expenses and other current assets 1,407 951
Deferred income taxes 1,543 1,512
Assets held for sale 137,771 263,771
--------- ---------
Total current assets 177,615 310,369
--------- ---------
Property, plant and equipment 25,274 25,128
Less accumulated depreciation and amortization 13,037 12,625
--------- ---------
Property, plant and equipment - net 12,237 12,503
--------- ---------
Other assets:
Notes receivable -- 61
Costs in excess of net assets of acquired businesses (net of accumulated amortization:
September 30, 2001, $1,064; March 31, 2001, $953) 10,715 10,805
Patents and trademarks (net of accumulated amortization:
September 30, 2001, $47; March 31, 2001, $38) 181 191
Deferred income taxes 39,958 11,360
Other 8,373 11,342
--------- ---------
Total other assets 59,227 33,759
--------- ---------
Total $ 249,079 $ 356,631
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Callable long-term debt $ 222,462 $ 271,307
Current portion of long-term debt -- 88
Accounts payable - trade 5,113 6,707
Accrued compensation 2,033 3,859
Accrued income taxes 384 3,193
Other current liabilities 9,294 9,028
--------- ---------
Total current liabilities 239,286 294,182
--------- ---------
Long-term debt payable to banks and others 272 1,055
--------- ---------
Deferred income taxes 5,374 5,298
--------- ---------
Other long-term liabilities 5,614 4,221
--------- ---------
Stockholders' equity:
Preferred stock - authorized, 300,000 shares; none issued -- --
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 6,730,908 at September 30, 2001, and 6,718,614 at March 31, 2001 67 67
Additional paid-in capital 78,212 78,091
Notes receivable from officers (123) (191)
Accumulated deficit (64,246) (10,446)
Accumulated other comprehensive loss (5,999) (6,323)
Unearned compensation (304) (253)
--------- ---------
7,607 60,945
Less treasury stock, at cost - (546,940 shares at September 30, 2001 and
546,428 at March 31, 2001) (9,074) (9,070)
--------- ---------
Total stockholders' equity (1,467) 51,875
--------- ---------
Total $ 249,079 $ 356,631
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
UNAUDITED
(In Thousands of Dollars)
SIX MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2001 OCTOBER 1, 2000
------------------ ---------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(53,800) $ (2,507)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of marketable securities -- (7)
Depreciation and amortization 1,938 2,900
Non-cash interest expense 1,256 200
Provision for losses on accounts receivable 128 --
Change in assets and liabilities:
Decrease (increase) in accounts and other receivables 6,250 (2,125)
Decrease in inventories 739 751
(Increase) decrease in deferred taxes (28,629) 1,654
Decrease (increase) in other assets 1,387 (3,662)
Decrease in net assets of discontinued businesses 80,030 4,999
Decrease in accounts payable (1,594) (747)
(Decrease) increase in accrued compensation (1,826) 50
Decrease in income tax payable (2,809) (3,127)
Increase (decrease) in other liabilities 1,628 (1,268)
-------- --------
Net cash provided by (used in) operating activities
in continued operations 4,698 (2,889)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (146) (538)
Proceeds from sale of business 46,203 --
Proceeds from sale of fixed assets -- 6
Proceeds from sale of marketable securities -- 11
Decrease in notes and other receivables -- 46
-------- --------
Net cash used in investing activities in continued operations 46,057 (475)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Reduction) increase in revolving credit, net (11,153) 7,840
Repayments on term loan (38,750) (3,750)
Repayments on other debt (984) (39)
Proceeds from subordinated debt -- 75,000
Repayment on bridge loan -- (75,000)
Exercise of stock options and other 8 --
Dividends paid -- (799)
-------- --------
Net cash (used in) provided by financing activities in
continued operations (50,879) 3,252
-------- --------
Decrease in cash and cash equivalents (124) (112)
Cash and cash equivalents at beginning of period 2,048 773
-------- --------
Cash and cash equivalents at end of period $ 1,924 $ 661
======== ========
Supplemental Information:
Interest payments $ 13,372 $ 14,359
Income tax payments $ 532 $ 892
Increase in senior subordinated notes for paid-in-kind interest expense $ 1,149 $ 200
- ----------
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1. Loss Per Share
Basic loss per share is computed by dividing net loss by the
weighted-average number of shares outstanding. Diluted loss per share
is computed by dividing net income by the sum of the weighted-average
number of shares outstanding plus the dilutive effect of shares
issuable through the exercise of stock options.
The components of the denominator for basic loss per common share and
diluted loss per common share are reconciled as follows:
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
Basic Loss per Share:
Weighted-average common
stock outstanding for basic
loss per share calculation 6,178 6,171 6,177 6,162
============ ========== ============= ==========
Diluted Loss per Common
Share:
Weighted-average common
shares outstanding 6,178 6,171 6,177 6,162
Stock options* -- -- -- --
------------- ---------- ------------- ----------
Weighted-average common
stock outstanding for diluted
loss per share calculation 6,178 6,171 6,177 6,162
============= ========== ============= ==========
* Not including anti-dilutive stock options totaling 330 and 447 for the
three and six month periods ended September 30, 2001, respectively, and
537 and 466 for the three and six month periods ended October 1, 2000,
respectively. Also excludes anti-dilutive warrants totaling 428 for the
three and six month periods ended September 30, 2001, and October 1,
2000.
6
NOTE 2. Comprehensive (Loss) Income
Comprehensive (loss) income for the three and six month periods ended
September 30, 2001 and October 1, 2000 is summarized below.
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
Net loss $(54,606) $ (1,755) $(53,800) $ (2,507)
Other comprehensive
(loss) income, net
of tax:
Foreign currency
translation adjustment
arising during period (1,451) (668) (960) (1,486)
Reclassification adjust-
ment for sale of invest-
ment in foreign entity 1,284 -- 1,284 --
Fair value of financial
instruments 2,041 -- -- --
Unrealized investment
holding loss -- (1) -- (6)
------------- ---------- ------------- ----------
Total comprehensive
loss $(52,732) $ (2,424) $(53,476) $ (3,999)
============= ========== ============= =========
NOTE 3. Inventories
Inventories are summarized as follows:
September 30, 2001 March 31, 2001
------------------ --------------
Finished goods $ 707 $ 683
Work in process 6,682 6,664
Purchased and
manufactured parts 13,650 14,431
------------------ --------------
Total $21,039 $21,778
================== ==============
7
NOTE 4. Discontinued Operations/Restructuring Activities
On January 19, 2001, the Company announced its intention to restructure
and divest its cold-headed products (TCR), retaining ring
(Seeger-Orbis, TransTechnology (GB), TT Brasil, and TransTechnology
Engineered Rings USA), hose clamp (Breeze Industrial and Pebra) and
aerospace rivet (Aerospace Rivet Manufacturers Corp.) operations. In
addition, on April 12, 2001, the Company announced that it would divest
TransTechnology Engineered Components (TTEC), a manufacturer of spring
steel engineered fasteners and headlight adjusters. For business
segment reporting purposes, these above-mentioned business units have
been previously classified as the segment "Specialty Fasteners." The
Company has reclassified these remaining business units as discontinued
operations with the exception of Aerospace Rivet Manufacturing
Corporation.
The accompanying financial statements have been restated to conform to
discontinued operations treatment for all historical 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 $4.4 million and $11.1 million for the three and six
month periods ended September 30, 2001, respectively, and $7.1 million
and $14.3 million for the three and six month periods ended October 1,
2000, respectively. Income taxes have been allocated to discontinued
operations based on the estimated tax attributes of the income and
assets of the underlying discontinued businesses.
On July 10, the Company sold its Breeze Industrial and Pebra hose clamp
businesses to Industrial Growth Partners and members of Breeze
Industrial's management for $46.2 million, which was paid in cash.
Proceeds from the sale were used to repay borrowings outstanding under
the Credit Facility (Note 5).
On November 16, 2001 the Company entered into an amended and restated
definitive agreement (the "TTEC Agreement") for the sale of its
Engineered Components division. The Company had previously disclosed
in its press release dated October 18, 2001 that its net loss for the
three months ended September 30, 2001 was $43.0 million, compared to a
net loss of $1.8 million for the same period of the prior year, and
that its net loss for the six months ended September 30, 2001 was
$42.2 million, compared to a net loss of $2.5 million for the same
period of the prior year. The results for the prior year and the six
months ended September 30, 2001 as set forth in the release, had been
recast to conform to discontinued operations treatment taking into
account the expected sale price for the Company's Engineered
Components division. Based on the sale price set forth in the TTEC
Agreement, the Company has adjusted its accounting for its
discontinued operations and is reporting a net loss for the three
months ended September 30, 2001 of $54.6 million compared to $1.8
million for the same period of the prior year and a net loss for the
six months ended September 30, 2001 of $53.8 million compared to a net
loss of $2.5 million for the same period of the prior year.]
8
Net sales and income from the discontinued operations were as follows:
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000
------------------ --------------- ------------------ ---------------
Net sales $ 43,054 $ 61,031 $ 100,263 $ 127,664
Pre-tax (loss) from
discontinued operations (106,608) (1,663) (105,255) (1,490)
Pre-tax gain on disposal
of Breeze Industrial/Pebra 24,701 -- 24,701 --
Income tax benefit 29,302 632 28,788 566
--------- --------- --------- ---------
Net (loss) from
discontinued operations $ (52,605) $ (1,031) $ (51,766) $ (924)
========= ========= ========= =========
The pre-tax loss from discontinued operations for the three and six
month periods ended September 30, 2001, includes asset impairment
charges of $94.4 million associated with writing down goodwill and
property, plant and equipment to estimated realizable value. The loss
also includes the write-off of capitalized bank loan fees of $2.7
million, the accrual for interest rate swap closeout costs of $5.0
million, and phase out costs associated with the dispositions of
discontinued businesses. The Company anticipates that the sales of
remaining discontinued businesses will be consummated by the second
quarter of calendar year 2002.
Assets and liabilities of the discontinued businesses were as follows:
September 30, 2001 March 31, 2001
------------------ --------------
Current assets $ 70,125 $ 84,247
Property, plant and equipment 48,523 68,751
Other assets 58,180 147,390
Current liabilities 30,349 27,502
Long-term liabilities 8,708 9,115
-------- --------
Net assets of discontinued operations $137,771 $263,771
======== ========
Net assets associated with discontinued operations have been classified
as "assets held for sale" in the Consolidated Balance Sheets.
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:
September 30, 2001 March 31, 2001
------------------ --------------
Credit agreement - 11.10% $ 145,023 $ --
Credit agreement - 10.50% -- 2,900
Credit agreement - 9.95% -- 153,368
Term loan - 9.06% -- 38,750
Senior Subordinated Notes - 16.00% 77,482 76,332
Other - 5.00% 397 1,289
--------- -------
222,902 272,639
Less current maturities and
amounts callable by lenders 222,462 271,395
Less unamortized discount 168 189
--------- -------
Total long-term debt $ 272 $ 1,055
========= =======
CREDIT FACILITIES - Effective December 31, 2000, the Company was not
able to meet certain financial ratio requirements of the credit
facility (the "Credit Facility") as amended. Pursuant to discussions
with the senior debt lenders (the "Lenders"), the Company and the
Lenders agreed to an amendment to the Credit Facility to include a
forbearance agreement as well as certain other fees and conditions,
including the suspension of dividend payments. During the forbearance
period the Lenders agree not to exercise certain of their rights and
remedies under the Credit Facility. The Company has, accordingly,
classified its bank debt as "current" to reflect the fact that the
forbearance period is less than one year. The term of the forbearance
period, initially scheduled to expire on January 31, 2001, was
subsequently extended by an additional amendment to March 29, 2001.
This additional amendment also reduced the Revolver from $200 million
to $175 million with an additional sub-limit on usage at $162 million.
Prior to the March 29, 2001 expiration date, the Lenders agreed to
extend the termination date until June 27, 2001, provided that certain
performance and debt reduction requirements occurred in which case the
forbearance termination date could be further extended under similar
terms and conditions until September 27, 2001. The debt reduction
requirements of the forbearance agreement stipulated that $50 million
was to be repaid prior to June 27, 2001, which was deemed satisfied by
the Lenders, because of the impending sale of the Company's Breeze
Industrial and Pebra divisions in July 2001. Effective as of September
27, 2001, a further extension to the forbearance termination date was
granted until December 21, 2001, provided that certain performance
conditions are met and certain fees and increased interest charges are
paid.
Based on a signed sale agreement for its Engineered Components division
entered into in August 2001, the Company had expected to repay the
majority of the senior debt outstanding under the Credit Facility with
proceeds from the expected sale of its Engineered Components business
prior to September 27, 2001 and the Company entered into a new
forbearance agreement with the lenders. The Engineered Components sale
was not consummated as planned on September 27, 2001. However, the
Company signed a revised agreement to sell this business on November
16, 2001 for $98.5 million, of which $96 million is cash.
10
The current forbearance agreement, expiring on December 21, 2001,
provides for an interest rate margin increase of one-half percent for
so long as the Credit Facility exceeds $45 million. Additionally, $2.5
million of the outstanding revolver bears an interest rate of 25% per
annum. This amount relates to the subordinated debt interest payment
made on its scheduled due date of October 1, 2001. Under the
forbearance agreement, the $2.5 million will be the last piece of the
revolver paid.
The forbearance agreement also requires the achievement of minimum
levels of EBITDA (earnings before interest, taxes, depreciation, and
amortization), and adherence to borrowing limits as adjusted based on
anticipated debt reduction. Other terms of the forbearance agreement
include certain fees and reporting and consulting requirements. The
Company has taken action to reduce its debt by preparing to sell its
Engineered Components business as well as the other businesses in its
Specialty Fasteners Products Segment in order to be in an improved
financial position to negotiate further amendments or borrowing
alternatives. The Company has made all of its scheduled interest and
principal payments on a timely basis. Various factors, including
changes in business conditions, anticipated proceeds from the sale of
operations and economic conditions in domestic and international
markets in which the Company competes, will impact the restructuring
results and may affect the ability of the Company to restore compliance
with the financial ratios specified in the existing Credit Facility.
The Company has unused borrowing capacity for both domestic and
international operations of $8.0 million as of September 30, 2001,
including letters of credit. The Credit Facility is secured by the
Company's assets. As of September 30, 2001, the Company had total
borrowings of $222.7 million which have a current weighted-average
interest rate of 12.8%.
Borrowings under the Credit Facility as of September 30, 2001, were
$145.0 million. Interest on the Revolver is tied to the primary bank's
prime rate, or at the Company's option, the London Interbank Offered
Rate ("LIBOR"), plus a margin that varies depending upon the Company's
achievement of certain operating results. As of September 30, 2001,
none of the Company's outstanding borrowings utilized LIBOR because the
terms of the forbearance agreement precluded the Company's option to
borrow at LIBOR until certain debt reduction levels are reached based
on a sale of the Engineered Components business.
Effective July 10, 2001 the Term Loan of $31.3 million was repaid in
full with the Breeze Industrial and Pebra sale proceeds.
The Credit Facility requires the Company to maintain interest rate
protection on a minimum of 50% of its variable rate debt. The Company
has, accordingly, provided for this protection by means of interest
rate swap agreements which have fixed the rate of interest on $50.0
million of debt at a base rate of 5.48% through May 4, 2002, and $75.0
million of debt at a base rate of 6.58% through March 3, 2003. Due to a
decline in interest rates since the inception of these swap agreements,
the value of the agreements has become unfavorable to the Company as
discussed under Item 3 - Quantitative and Qualitative Disclosures about
Market Risk. As of September 30, 2001, the Company recorded a charge
and a liability in the amount of $5.1 million before tax to recognize
the liability based on the expected retirement of the associated Credit
Facility with the proceeds from the sale of the discontinued business
units this fiscal year. This pre-tax charge to terminate these interest
rate swap agreements is accordingly included with the loss on disposal
of the discontinued Specialty Fasteners Segment.
Under the Credit Facility agreement, the base interest rate is added to
the applicable interest rate margin to determine the total interest
rate in effect. The Credit Facility restricts annual capital
expenditures to $13.0 million in 2002 and $15.0 million thereafter, and
contains other customary financial covenants, including the requirement
to maintain certain financial ratios relating to performance, interest
expense and debt levels.
11
SENIOR SUBORDINATED NOTES - On August 30, 2000, the Company completed a
private placement of $75 million in senior subordinated notes (the
"Notes") and certain warrants to purchase shares of the Company's
common stock (the "Warrants") to a group of institutional investors
(collectively, the "Purchasers"). The 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" promissory notes. Prepayment of
the Notes is permitted after August 29, 2001 at a premium initially of
9% declining to 5%, 3%, and 1% annually, respectively, thereafter. The
Notes contain customary financial covenants and events of default,
including a cross-default provision to the Company's Credit Facility.
The Warrants entitle the Purchasers to acquire in the aggregate 427,602
shares, or 6.5%, of the common stock of the Company at an exercise
price of $9.93 a share, which represents the average daily closing
price of the Company's common stock on the New York Stock Exchange for
the thirty (30) days preceding the completion of the private placement.
The Warrants must be exercised by August 29, 2010. These Warrants have
been valued at an appraised amount of $0.2 million and have been
recorded in paid in capital. In connection with the transaction, the
Company and certain of its subsidiaries signed a Consent and Amendment
Agreement with the Lenders under the Company's $250 million Credit
Facility existing at that time, in which the Lenders consented to the
private placement and amended certain financial covenants associated
with the Credit Facility.
OTHER - As of September 30, 2001, the Company had $0.4 million of other
long-term debt consisting of life insurance policies owned by the
Company with a fixed interest rate of 5%.
NOTE 6. Change in Accounting for Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In June
2000, the FASB issued SFAS No. 138, which amends certain provisions of
SFAS No. 133. The Company adopted SFAS No. 133 and the corresponding
amendments under SFAS No. 138 on April 1, 2001. The Company reported,
within Discontinued Operations, a pre-tax charge of $5.0 million
associated with the termination of interest rate swap agreements that
will no longer be required when the Company repays its floating rate
debt, which is anticipated with the sale of "discontinued" assets of
the Company being held for sale.
NOTE 7. New Accounting Standards
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective January 1, 2002. SFAS No. 142
requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously
reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS
No. 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is
currently assessing but has not yet determined the impact of SFAS No.
142 on its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets", which is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 requires,
among other things, the financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company is currently
assessing, but has not yet determined, the impact of SFAS No. 144 on
its financial position and results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references to three and six month periods in this Management's Discussion
refer to the three and six month periods ended September 30, 2001 for fiscal
year 2002 and the three and six month periods ended October 1, 2001 for fiscal
year 2001. Also, when referred to herein, operating profit means net sales less
operating expenses, without deduction for general corporate expenses, interest
and income taxes.
MANAGEMENT INITIATIVES AND RESTRUCTURING
On January 19, 2001, the Company announced its intention to restructure and
divest its cold-headed products (TCR), aerospace rivet (Aerospace Rivet
Manufacturers Corp), retaining ring (Seeger-Orbis, TransTechnology (GB), TT
Brasil, and TransTechnology Engineered Rings USA) and hose clamp operations
(Breeze Industrial and Pebra). The Company also announced that it had retained
an investment banking firm to consider further strategic and business
initiatives following these actions. In association with the restructuring, the
Company stated it would suspend the payment of its quarterly dividend and
recognize a non-recurring charge in the fourth fiscal quarter of 2001 related to
anticipated losses on the sale of several of these businesses as well as the
provision for severance and other costs associated with these divestitures.
Proceeds from the sales of the businesses will be used to repay debt and to
refocus the Company's efforts on the design, manufacture and marketing of
specialized aerospace equipment.
On April 12, 2001, the Company announced that it would divest TransTechnology
Engineered Components (TTEC), a manufacturer of spring steel engineered
fasteners and headlight adjusters. For business segment reporting purposes,
these above-mentioned business units have been previously classified as the
segment "Specialty Fasteners." With the exception of the aerospace rivet
business, which has been subsequently taken off the market effective August 26,
the Company has reclassified these remaining business units as discontinued
operations in the quarter ended September 30, 2001.
The Company entered into amendments of its existing credit agreement under which
the Company's senior lenders have agreed to forbearance with respect to the
Company's continuing violations of certain covenants in the credit facility
through December 21, 2001, subject to the Company meeting certain interim debt
reduction and EBITDA targets. The Company's subordinated lenders also entered
into a forbearance agreement with respect to the Company's expected violation of
its net worth covenant as the result of write-offs as part of its restructuring
plan.
The Company reported, on a pre-tax basis, asset impairment charges in the fourth
fiscal quarter of 2001 of $67.9 million related to estimated losses on
businesses to be sold, primarily related to the write-off of intangible assets
and property.
On July 10, consistent with the aforementioned actions, the Company completed
the previously announced sale of its Breeze Industrial and Pebra hose clamp
businesses in the U.S. and Germany, respectively, to Industrial Growth Partners
and the current management team of these divested companies for $46.2 million in
cash. Proceeds were used to repay debt. Breeze Industrial's land and building
was sold in the second fiscal quarter of 2002 for proceeds of $1.1 million (net
of associated debt).
13
In the second fiscal quarter of 2002, as part of its restructuring program and
included within the "discontinued operations" component of income, the Company
reported an asset impairment pre-tax charge for its Engineered Components
business of $85.8 million to reduce the carrying value of these businesses to
estimated fair market value. This non-cash charge was specifically related to a
write-down of goodwill. In addition, a pre-tax charge was recorded in the amount
of $8.6 million to reduce the carrying values of its Engineered Rings businesses
to reflect revised estimates of expected net sales proceeds for these
businesses. This charge resulted in a non-cash write-down of property, plant and
equipment. Offsetting these charges was a pre-tax gain on the sale of its hose
clamp businesses of $24.7 million. Consistent with accounting rules for
discontinued businesses, the Company accrued future losses related to
discontinued businesses of $4.0 million which include future interest expense
associated with discontinued operations, offset by projected income from
operations from these businesses through the expected disposal dates of the
underlying assets. Also, in the second fiscal quarter, the Company recorded
pre-tax charges of $7.7 million related to writing off capitalized bank loan
origination fees under its Credit Agreement and the cost of closing out interest
rate swap agreements (fair values) that have been required to convert floating
rate debt to fixed rates. The estimated costs of closing out interest rate swap
agreements had been recorded in other comprehensive income through the end of
the first fiscal quarter of 2002. The Company expects to complete the sale of
its discontinued businesses by the second quarter of calendar year 2002.
Income from operations that have been discontinued was $3.9 million and $11.9
million for the three and six month periods ended September 30, 2001,
respectively. Income from operations that have been discontinued was $5.4
million and $12.8 million for the three and six month periods ended October 1,
2000, respectively.
A portion of the Company's interest expense was allocated to discontinued
operations based upon the average net assets of continuing and discontinued
operations. Interest expense allocated to discontinued operations was $4.4
million and $11.1 million for the three and six month periods ended September
30, 2001, respectively, and $7.1 million and $14.3 million for the three and six
month periods ended October 1, 2000, respectively.
Following the divestiture of the fastener business units, the Company expects to
have retired its senior bank debt and expects to reduce its corporate overhead
by more than $4 million from its present $8.7 million level. Additionally, for
tax purposes, the Company expects to have significant operating loss
carry-forwards which will shelter future earnings from taxes for several years.
The Company expects, when repositioned as an aerospace products manufacturer
with revenues from new equipment sales, maintenance and service of existing
equipment, and spare parts sales, to be significantly more profitable and less
leveraged, with substantial growth opportunities. Management believes that the
Company will present substantially more value to its shareholders after the
restructuring than in its present form.
On November 16, 2001 the Company entered into an amended and restated definitive
agreement (the "TTEC Agreement") for the sale of its Engineered Components
division. The Company had previously disclosed in its press release dated
October 18, 2001 that its net loss for the three months ended September 30, 2001
was $43.0 million, compared to a net loss of $1.8 million for the same period of
the prior year, and that its net loss for the six months ended September 30,
2001 was $42.2 million, compared to a net loss of $2.5 million for the same
period of the prior year. The results for the prior year and the six months
ended September 30, 2001 as set forth in the release, had been recast to
conform to discontinued operations treatment taking into account the expected
sale price for the Company's Engineered Components division. Based on the sale
price set forth in the TTEC Agreement, the Company has adjusted its accounting
for its discontinued operations and is reporting a net loss for the three
months ended September 30, 2001 of $54.6 million compared to $1.8 million for
the same period of the prior year and a net loss for the six months ended
September 30, 2001 of $53.8 million compared to a net loss of $2.5 million for
the same period of the prior year.
14
a net loss for the six months ended September 30, 2001 of $53.8 million compared
to a net loss of $2.5 million for the same period of the prior year.
RESULTS OF CONTINUING OPERATIONS
Effective August 26, 2001, the Company discontinued its Specialty Fasteners
businesses with the exception of its Aerospace Rivet Manufacturers business. The
discontinued businesses are expected to be sold by the second quarter of
calendar year 2002. Continuing operations will be comprised of the Company's
Breeze-Eastern, Norco and Aerospace Rivet Manufacturers (ARM) business units,
formerly referred to as the Aerospace Segment.
Three month period, 2002 versus 2001
Net sales for the second quarter were $19.3 million in 2002 versus $18.1 million
in 2001. The sales increase is related to strong demand.
Gross margin rates for the three business units were basically flat for the two
periods.
General, sales and administrative expenses, as a percentage of sales, dropped
from 32.1% in 2001 to 26.4% in 2002 reflecting higher sales levels and reduced
expenses at all business units.
Interest expense for the period is based on allocations of interest expense to
both continuing and discontinued operations based on underlying net asset
values.
Bookings for the periods were $18.3 million in 2002 versus $23.2 million in
2001. Backlog at September 30, 2001 was $55.1 million.
During the 2002 period, the Company recorded forbearance fees associated with
the Credit Agreement of $1.1 million. In addition, the $1.2 million of estimated
costs associated with downsizing the Corporate office were recorded.
The loss from operations before income tax benefits was $3.1 million for the
2002 period versus $1.2 million in 2001.
Six month period, 2002 versus 2001
Net sales for the first six months of 2002 were $41.0 million versus $35.8
million in 2001. The sales increase is due to strong demand and, to a lesser
extent, change in the sales mix of products sold.
Gross margin rates for the three business units rose from 34.6% to 35.6%
resulting from moderate improvements at one of the business units.
General, sales and administrative expenses, as a percentage of sales, dropped
from 33.1% in 2001 to 25.6% in 2002 reflecting higher sales levels and flat
expenses at all business units.
Interest expense for the period is based on allocations of interest expense to
both continuing and discontinued operations based on underlying net asset
values.
15
Bookings for the periods were $51.2 million in 2002 versus $34.3 million in
2001.
During the 2002 period, the Company recorded forbearance fees of $2.2 million.
In addition, as discussed above, the estimated cost of Corporate downsizing was
recorded in the amount of $1.2 million.
The loss from operations before income tax benefits was $3.2 million in 2002
versus $2.6 million in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's credit facilities are classified as short term and reflect the
terms of the forbearance agreement with its lenders (the "Lenders"). The Company
reduced debt with the proceeds of $46.2 million from the sale of its Breeze
Industrial and Pebra hose clamp businesses on July 10, 2001. The Company plans
to sell its remaining Specialty Fasteners businesses in order to further reduce
its debt during fiscal year 2002, and, accordingly, has classified the Specialty
Fasteners business as Discontinued Operations in the Statement of Consolidated
Operations and as Assets Held for Sale in the Consolidated Balance Sheets. The
terms of sale of each business unit are subject to the approval of the Lenders.
The Company's debt-to-capitalization ratio was 100.7% as of September 30, 2001,
which is 16.7% higher than March 31, 2001. The higher ratio is mainly due to the
reduction of equity resulting from the loss on disposal of the discontinued
Specialty Fasteners Segment.
The current ratio as of September 30, 2001 was 0.74 compared to 1.06 as of March
31, 2001. Working capital was ($61.7) million at September 30, 2001, compared to
$16.2 million from March 31, 2001. The change in working capital for the six
months ended September 30, 2001 was mainly due to the debt reduction made
possible by the sale of the Breeze Industrial and Pebra businesses for $46.2
million on July 10, 2001, as well as the reclassification of the Specialty
Fasteners Segment assets and liabilities to Assets Held for Sale. Total debt as
of September 30, 2001 was $222.7 million or $49.7 million less than the March
31, 2001 amount.
Effective December 31, 2000, the Company was not able to meet certain financial
ratio requirements of the credit facility (the "Credit Facility") as amended.
Pursuant to discussions with the senior debt lenders (the "Lenders"), the
Company and the Lenders agreed to an amendment to the Credit Facility to include
a forbearance agreement as well as certain other fees and conditions, including
the suspension of dividend payments. During the forbearance period the Lenders
agree not to exercise certain of their rights and remedies under the Credit
Agreement. The Company has, accordingly, classified its bank debt as "current"
to reflect the fact that the forbearance period is less than one year. The term
of the forbearance period, initially scheduled to expire on January 31, 2001,
was subsequently extended by an additional amendment to March 29, 2001. This
additional amendment also reduced the Revolver from $200 million to $175 million
with an additional sub-limit on usage at $162 million. Prior to the March 29,
2001 expiration date, the Lenders agreed to extend the termination date until
June 27, 2001, provided that certain performance and debt reduction requirements
occurred in which case the forbearance termination date could be further
extended under similar terms and conditions until September 27, 2001. The debt
reduction requirements of the forbearance agreement stipulated that $50 million
was to be repaid prior to June 27, 2001, which was deemed satisfied by the
Lenders, because of the impending sale of the Company's Breeze Industrial and
Pebra divisions in July 2001. Effective as of September 27, 2001, a further
extension to the forbearance termination date until December 21, 2001, was
agreed to provided that certain performance conditions are met and certain fees
and increased interest charges are paid.
16
Based on a signed sale agreement for its Engineered Components division entered
into in August 2001,the Company had expected to repay the majority of the senior
debt outstanding under the Credit Facility with proceeds from the expected sale
of its Engineered Components business prior to September 27, 2001 and the
Company entered into a new forbearance agreement with the lenders. The
Engineered Components sale was not consummated as planned on September 27, 2001.
However, the Company signed a revised agreement to sell this business on
November 16, 2001 for $98.5 million, of which $96 million is cash.
The current forbearance agreement, expiring on December 21, 2001, provides for
an interest rate margin increase of one-half percent for so long as the Credit
Facility exceeds $45 million. Additionally, $2.5 million of the outstanding
revolver bears an interest rate of 25% per annum. This amount relates to the
subordinated debt interest payment made on its scheduled due date of October 1,
2001. Under the forbearance agreement, the $2.5 million will be the last piece
of the revolver paid.
The forbearance agreement also requires the achievement of minimum levels of
EBITDA (earnings before interest, taxes, depreciation, and amortization), and
adherence to borrowing limits as adjusted based on anticipated debt reduction.
Other terms of the forbearance agreement include certain fees, reporting and
consulting requirements. The Company has taken action to reduce its debt by
preparing to sell its Engineered Components business as well as the other
businesses in its Specialty Fasteners Products Segment in order to be in an
improved financial position to negotiate further amendments or borrowing
alternatives. The Company has made all of its scheduled interest and principal
payments on a timely basis. Various factors, including changes in business
conditions, anticipated proceeds from the sale of operations and economic
conditions in domestic and international markets in which the Company competes,
will impact the restructuring results and may affect the ability of the Company
to restore compliance with the financial ratios specified in the existing Credit
Facility.
The Company has unused borrowing capacity for both domestic and international
operations of $8.0 million as of September 30, 2001, including letters of
credit. The Credit Facility is secured by the Company's assets. As of September
30, 2001, the Company had total borrowings of $222.7 million which have a
current weighted-average interest rate of 12.8%.
Borrowings under the Credit Facility as of September 30, 2001, were $145.0
million. Interest on the Revolver is tied to the primary bank's prime rate, or
at the Company's option, the London Interbank Offered Rate ("LIBOR"), plus a
margin that varies depending upon the Company's achievement of certain operating
results. As of September 30, 2001, none of the Company's outstanding borrowings
utilized LIBOR because the terms of the forbearance agreement precluded the
Company's option to borrow at LIBOR until certain debt reduction levels are
reached based on a sale of the Engineered Components business.
Effective July 10, 2001 the Term Loan of $31.3 million was repaid in full with
the Breeze Industrial and Pebra sale proceeds.
Management believes that the Company's plan to divest its Specialty Fasteners
Segment businesses in order to reduce debt, along with the anticipated cash flow
from its retained business operations, will be sufficient to support working
capital, capital expenditure, and debt service costs. The amount and timing of
proceeds from such sales are subject to market and other conditions which the
Company cannot control. Capital expenditures, including those related to
discontinued operations, were $1.5 million for the six month period and $0.8
million in the three month period ended September 30, 2001, compared to $3.5
million and $1.7 million in the periods ended October 1, 2000. The Company
expects capital
17
expenditures in 2002 to be lower than the 2001 amount due to its planned lower
capital spending levels and planned business unit dispositions.
EURO CURRENCY
Effective January 1, 1999, eleven countries comprising the European Union
established fixed foreign currency exchange rates and adopted a common currency
unit designated as the "Euro." The Euro has since become publicly traded and is
currently used in commerce during the present transition period which is
scheduled to end January 1, 2002, at which time a Euro denominated currency is
scheduled to be issued and is intended to replace those currencies of the eleven
member countries. The transition to the Euro has not resulted in problems for
the Company to date, and is not expected to have any material adverse impact on
the Company's future operations.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Acts"). Any statements contained herein
that are not statements of historical fact are deemed to be forward-looking
statements.
The forward-looking statements in this document are based on current beliefs,
estimates and assumptions concerning the operations, future results, and
prospects of the Company. As actual operations and results may materially differ
from those assumed in forward-looking statements, there is no assurance that
forward-looking statements will prove to be accurate. Forward-looking statements
are subject to the safe harbors created in the Acts.
Any number of factors could affect future operations and results, including,
without limitation, the Company's ability to dispose of some or all of the
business operations proposed for divestiture for the consideration currently
estimated to be received by the Company or within the timeframe anticipated by
the Company; the Company's ability to arrive at a mutually satisfactory
amendment of its credit facilities with its lenders, if required; in the event
of divestiture, the Company's ability to be profitable with a smaller and less
diverse base of operations that will generate less revenue; the value of
replacement operations, if any; general industry and economic conditions;
interest rate trends; capital requirements; competition from other companies;
changes in applicable laws, rules and regulations affecting the Company in the
locations in which it conducts its business; the availability of equity and/or
debt financing in the amounts and on the terms necessary to support the
Company's future business and/or to provide adequate financing for parties
interested in purchasing operations identified for divestiture; and those
specific risks that are discussed in the Company's previously filed Annual
Report on Form 10-K for the fiscal year ended March 31, 2001.
The Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information or future events.
IMPACT OF INFLATION
The Company's primary costs, inventory and labor, increase with inflation.
Recovery of the costs has to come from improved operating efficiencies and, to
the extent permitted by our competition, through improved gross profit margins.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into financial instruments to manage and reduce the impact of
changes in foreign currency exchange rates and interest rates. The counter
parties are major financial institutions.
The Company has used forward exchange contracts to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
the Company's risk that would otherwise result from changes in exchange rates.
The principal transactions hedged have been intercompany loans, intercompany
purchases and trade flows. Gains and losses on forward foreign exchange
contracts and the offsetting gains and losses on hedged transactions are
reflected in the Statement of Consolidated Operations. As of September 30, 2001,
the Company has no outstanding forward currency contracts.
The Company has entered into interest rate swap agreements to manage its
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount. Payments or receipts on the swap agreements are recorded as adjustments
to interest expense. At September 30, 2001, the Company had entered into
interest rate swap agreements to convert $125.0 million of floating interest
rate debt to fixed rate. At September 30, 2001, the fair value of these swap
agreements was approximately ($5.0) million. The Company has reported the impact
of these swaps as a component of its reported loss on discontinued operations.
It is assumed that the floating rate debt will be repaid at the conclusion of
the disposition of its net assets of discontinued operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings incidental to its
business. It is the opinion of management that, after taking into
consideration information furnished by its counsel, these matters will
not have a material effect on the Company's consolidated financial
position or the results of the Company's operations in future periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company, held on September 13, 2001, all
ten directors of the Company nominated for reelection were elected for
a term of one year.
The results of the voting on the election of directors were as follows:
VOTES
FOR ABSTENTIONS
--------- -----------
Daniel Abramowitz 4,678,712 579,776
Gideon Argov 4,670,351 588,137
Walter Belleville 4,671,411 587,077
Michael J. Berthelot 4,672,566 585,923
Thomas V. Chema 4,671,272 587,216
Jan Naylor Cope 4,670,414 588,074
John Dalton 4,671,385 587,103
Michel Glouchevitch 4,670,351 588,137
James A. Lawrence 4,673,411 585,077
William Recker 4,670,422 588,066
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.45 Consent and Amendment No. 2 to Forbearance Agreement dated as
of September 27, 2001, of Fleet National Bank and the other Lenders
referred to therein.
(b) A report on Form 8-K/A dated September 24, 2001, was filed amending the
Form 8-K filed on July 25, 2001, to report the July 10, 2001 sale by
the Company of substantially all the assets of its Breeze Industrial
and Pebra hose clamp businesses.
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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: November 19, 2001 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.
21