Exhibit 13
ARGENTINA
AUSTRALIA
AUSTRIA
BAHRAIN
BANGLADESH
BELGIUM
BRASIL
BRUNEI
CANADA
CHILE
CHINA
COLOMBIA
CYPRUS
DENMARK
DUBAI
EGYPT
ENGLAND [TransTechnology
ECUADOR Corporation Logo]
ESTONIA
ETHIOPIA
FAROE ISLANDS
FIJI
FINLAND
FRANCE
GERMANY
GREAT BRITAIN
GREECE
GREENLAND
HOLLAND
HONG KONG
ICELAND
INDIA
INDONESIA
IRELAND
g l o b a l p a r t n e r s
ISRAEL
ITALY
JAMAICA
JAPAN
JORDAN
KUWAIT
KOREA
LITHUANIA
LUXEMBOURG
MALAYSIA
MEXICO
NETHERLANDS
NEW ZEALAND
NORWAY
PAKISTAN
PERU
POLAND
PORTUGAL
QATAR
REPUBLIC OF SOUTH AFRICA
REPUBLIC OF KOREA
SINGAPORE
SAUDI ARABIA
SCOTLAND
SLOVENIA
SOUTH AFRICA
SPAIN
SWEDEN
SWITZERLAND
TAIWAN
THAILAND
TUNISIA
TURKEY
UNITED ARAB EMIRATES
UNITED STATES
URUGUAY
ANNUAL REPORT FISCAL YEAR ENDED MARCH 31, 2002
DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS
(IN DOLLARS)
[BAR CHART]
98 = -0.01
99 = 0.66
00 = 0.40
01 = -0.98
[TransTechnology 02 = 0.12
Corporation Logo]
AFTER TAX INCOME FROM
CONTINUING OPERATIONS
($ IN MILLIONS)
[BAR CHART]
2002 NET TOTAL SALES 98 = -0.8
BY MARKET TYPE 99 = 4.2
[PIE CHART] 00 = 2.5
01 = -6.0
02 = 0.8
<Table>
Industrial/Medical..............4%
Commercial Aircraft/Airline....18%
Military/Government............78%
</Table>
CAPITAL EXPENDITURES
($ IN MILLIONS)
[BAR CHART]
98 = 0.8
99 = 1.1
00 = 0.4
2002 NET SALES 01 = 0.3
DOMESTIC VS. EXPORT 02 = 0.3
[PIE CHART]
<Table>
Domestic..................63%
Export....................37%
</Table>
NET SALES
($ IN MILLIONS)
[BAR CHART]
98 = 35.5
99 = 50.2
00 = 60.8
01 = 70.5
02 = 72.3
SELECTED FINANCIAL DATA
The following table provides selected financial data with respect to the
consolidated statements of operations of the Company for the fiscal five years
ended March 31, 2002, and the consolidated balance sheets of the Company at the
end of each such year.
SELECTED FINANCIAL DATA YEARS ENDED MARCH 31,
(In thousands, except per share amounts) 2002 2001 2000 1999 1998
Net sales $ 72,285 $ 70,481 $ 60,836 $ 50,169 $ 35,459
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 1,633 (9,630) 4,010 7,026 (122)
Provision (benefit) for income taxes 860 (3,584) 1,524 2,807 (47)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 773 (6,046) 2,486 4,219 (75)
(Loss) income from discontinued operations (72,554) (66,924) 4,649 10,370 11,142
- -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary charge (71,781) (72,970) 7,135 14,589 11,067
Extraordinary charge for refinancing of debt -- -- (541) (780) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (71,781) $ (72,970) $ 6,594 $ 13,809 $ 11,067
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Income (loss) from continuing operations $ 0.13 $ (0.98) $ 0.40 $ 0.67 (0.01)
(Loss) income from discontinued operations (11.74) (10.85) 0.76 1.66 2.01
Extraordinary charge for refinancing of debt -- -- (0.09) (0.12) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per share $ (11.61) $ (11.83) $ 1.07 $ 2.21 $ 2.00
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted:
Income (loss) from continuing operations $ 0.12 $ (0.98) $ 0.40 $ 0.66 $ (0.01)
(Loss) income from discontinued operations (11.64) (10.85) 0.76 1.64 2.01
Extraordinary charge for refinancing of debt -- -- (0.09) (0.12) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per share $ (11.52) $ (11.83) $ 1.07 $ 2.18 $ 2.00
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends declared and paid per share $ -- $ 0.195 $ 0.26 $ 0.26 $ 0.26
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 142,142 $ 393,249 $ 482,752 $ 279,720 $ 236,073
Long-term debt $ 107,564 $ 658(a) $ 194,759 $ 102,463 $ 51,350
Stockholders' equity (deficit) $ (16,207) $ 51,875 $ 128,883 $ 123,710 $ 115,832
Book value per share $ (2.62) $ 8.40 $ 20.97 $ 20.25 $ 18.47
Shares outstanding at year-end 6,191 6,172 6,145 6,108 6,272
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Excluding callable debt of $271,307.
MARKET AND DIVIDEND DATA
MARKET PRICE
QUARTER ENDED HIGH LOW DIVIDENDS
- --------------------------------------------------------------------------------
July 2, 2000 14.69 8.44 .065
October 1, 2000 11.37 6.12 .065
December 31, 2000 7.31 2.87 .065
March 31, 2001 6.75 3.75 --
- --------------------------------------------------------------------------------
June 30, 2001 9.02 5.00 --
September 29, 2001 14.79 8.60 --
December 29, 2001 13.50 9.60 --
March 31, 2002 10.20 8.90 --
- --------------------------------------------------------------------------------
1
2002 ANNUAL REPORT
FELLOW SHAREHOLDERS
[PHOTO OF MICHAEL J. BERTHELOT]
At the beginning of fiscal 2002, our Board of Directors adopted a plan of
restructuring that would significantly alter our company. We determined that
we would exit the specialty fasteners business and concentrate all of our
resources into a smaller, less leveraged company that was involved solely in the
design, manufacture, and servicing of aerospace equipment and components.
In a very difficult environment, we completed the sale of our Breeze and Pebra
hose clamp businesses in July 2001; in December 2001, we sold our
TransTechnology Engineered Components business; in February 2002 we sold our
Seeger-Orbis retaining ring business; in April 2002, we sold our Aerospace Rivet
Manufacturers Inc. subsidiary; and, in May 2002, we sold our TransTechnology
Engineered Rings USA business. While we were divesting these businesses, the
economy continued to weaken and, combined with the shocks to financial markets
due to the events of September 11th, put further downward pressure on the valua-
tions of our business units held for sale and on the buyers' ability to finance
them. We persevered, and through May 2002, we have realized over $168 million of
proceeds from these divestitures, all of which have been applied to reduce our
outstanding debt to $107.6 million at the fiscal year end from $272.5 million
one year earlier, cutting our senior debt by almost 85%. We remain committed to
completing our restructuring program, which involves the sale of two more
retaining ring businesses, our TCR cold heading business, and some surplus real
estate. By the end of the first quarter of fiscal 2003, we expect to have a new
senior credit facility in place, eliminating the forbearance agreements under
which we have operated in fiscal 2002. At the end of July we will relocate our
corporate staff, reduced from 24 people to just nine, into our Breeze-Eastern
facility in Union, New Jersey.
Fiscal 2002 was a year of many successes. Our continuing operations, made up of
Breeze-Eastern and Norco, each had record levels of new orders, sales, backlog,
and operating profit during fiscal 2002. As a result of this strong showing, and
significant reductions in corporate office expenses, our continuing operations
returned to profitability in fiscal 2002, with income from continuing operations
of $.8 million, or $.12 per diluted share. Our operating income, exclusive of
non-recurring, non-operating gains and losses, was up 97% and EBITDA was up 46%.
Our share price improved 68% during the fiscal year, and, in share price
improvement, TT was the 25th best performing company on the NYSE for calendar
year 2001. Several new programs were won in the weapons system, helicopter
rescue hoist, cargo hook, and regional jet component industries. Because of this
continuing string of new program wins, we believe that each of these units is
poised for further growth in revenue and profitability in the future.
Our strategy for the short-term is simple. As a company now solely focused on
aerospace products and components, we will focus on developing new products for
new customers and existing customers. We will concentrate on lowering our costs
through
2
TRANSTECHNOLOGY CORPORATION
productivity and efficiency improvements. We will work harder to develop our
people and improve the depth of our management and front line team members. We
will strive for more sales, lower costs, quicker cash flow cycles, and lower
debt. Our target is to grow both sales and operating income at least ten percent
in fiscal 2003.
Fiscal 2003 will be the year we work to strengthen our balance sheet and
shareholder value.
As we enter the new fiscal year, we must now work on restructuring our balance
sheet to provide the capital structure necessary to support our company with the
resources it needs to move forward and to yield our shareholders an immediate
and long-term increase in value. At the same time, we must be attentive to other
opportunities that present themselves to enhance shareholder value. As fiscal
2002 was the year we worked to strengthen our operations, so fiscal 2003 will be
the year we work to strengthen our balance sheet and shareholder value.
Fiscal 2002 brought much more attention to the importance of corporate
governance. I am pleased to report that for the past ten years our company's
Incentive and Compensation and Audit Committees have both been made up entirely
of outside directors. Our Audit Committee, comprised of individuals with
substantial experience in public and private company finance, is actively
involved in the review of our financial affairs and meets quarterly with
management, our internal audit staff, and, without management present, our
outside auditors. Our Board of Directors has been, and remains, committed to the
concepts of transparent financial reporting, openness, and independence in fact
and perception. Our outside auditors do no strategic, information technology or
other consulting for the company, limiting their work to our annual audit,
quarterly reviews, the statutory audits required for our operations around the
world, and advising us in the preparation of our income tax returns.
While our workforce is much smaller now than at the beginning of the year, the
work-load really has grown rather than diminished. I would like to express my
appreciation and gratitude to each member of the TransTechnology team for their
professionalism and support, which have proven invaluable to our company this
past year.
I would also like to thank our Board of Directors, which has remained deeply
involved throughout the year. As we see three of our long-serving directors
retire at this year's shareholders' meeting, I would like to especially thank
James A. Lawrence and Walter H. Belleville for their ten years of counsel, and
Michel Glouchevitch for his six years of service to our company. We wish them
each well as they move on to another chapter of their lives.
Most importantly, I thank you, the shareholders, who have placed your trust,
confidence, and resources in our hands. We appreciate your support and look
forward to seeing TransTechnology continue as a provider of value to its owners.
Michael J. Berthelot
/s/ Michael J. Berthelot
Chairman, President
and Chief Executive Officer
3
2002 ANNUAL REPORT
[PHOTO OF HELICOPTER UTILIZING RESCUE HOIST]
U.S. Coast Guard HH-65 Dauphin, manufactured by Eurocopter, equipped with a
Breeze-Eastern HS-10300 rescue hoist.
SINCE 1926, BREEZE-EASTERN HAS PROVIDED THE DEFENSE AND AEROSPACE MARKETS WITH
SOPHISTICATED, HIGHLY ENGINEERED, PROPRIETARY SYSTEMS.
AEROSPACE PRODUCTS
BREEZE-EASTERN is the world's leading designer and manufacturer of sophisticated
helicopter rescue hoists, cargo winches, and cargo hooks for the aerospace,
defense and space markets. Breeze-Eastern is also an acknowledged leader in the
design, development, and manufacture of weapons handling systems, motion
controls actuation systems and materiel restraint systems for the aerospace and
defense markets.
During fiscal year 2002, Breeze-Eastern was selected to design, develop and
manufacture specialized applications for major rescue hoist, cargo winch, cargo
hook, and weapons handling systems. Rescue hoists for the Eurocopter Super Puma,
the Spanish Air Force CH-47, and for two Israeli Air Force upgrade programs are
examples of new programs that have been achieved by the business. During the
year Breeze-Eastern was also selected to provide the weapons loading hoist for
Lockheed's High Mobility Artillery Rocket System (HIMARS) and the Line of Sight
Anti-Tank (LOSAT) programs, demonstrating Breeze-Eastern's strength in the
weapons handling defense market.
Since 1926, Breeze-Eastern has provided the defense and aerospace markets with
sophisticated, highly engineered, proprietary systems. A unique relationship
with prime contractors such as AugustaWestland, Alenia, Bell, Boeing, CASA,
Eurocopter, Lockheed Martin, MD Helicopters and Sikorsky has provided
Breeze-Eastern a continuous stream of opportunities over the years.
4
TRANSTECHNOLOGY CORPORATION
NORCO, INC. is the global leader in the design, manufacture, and support of
aircraft engine nacelle hold-open rods. Specializing in high performance
mechanical components and systems for the aerospace and defense markets, Norco
is also a recognized leader in the design, manufacture and support of helicopter
blade restraint systems, safety locks, and application specific mechanical
systems. Norco's power transmission product line, Flennor, is one of the most
highly regarded manufacturers of miniature rollnuts, rollnuts, ball and diamond
reversers, and oscillators for the aerospace, defense, power transmission, paper
and pulp, and medical diagnostic equipment industries.
During fiscal 2002, Norco won custom designed applications for major regional
jet engine nacelle, military and medical diagnostic equipment programs. Hold
open rods for the Canadair CRJ700/900, the Dornier 728, the Embraer 170, the
Bombardier AS907, and the British Aerospace RJX AS977 are examples of new
programs for regional jets, the fastest growing segment of the commercial
airline industry. Specialized assemblies for the Virginia Class submarine, the
Landing Platform Deck (LPD-17), and the Advanced Amphibious Assault Vehicle
(AAAV) illustrate Norco's strength in the defense and military markets. Newly
designed precision motion control devices for Luminex, Packard Instrument and
Dade Behring present an opportunity for expansion of Norco's engineering and
manufacturing prowess into new markets.
Over the more than forty years it has been in business, Norco has forged special
relationships with many of its largest customers, including airframe
manufacturers such as AugustaWestland, Airbus, Boeing, Northrop Grumman, and
Sikorsky. Norco also works closely with suppliers of aircraft engine nacelles
and cowlings such as Goodrich Aerospace, GKN-Westland Aerospace, Aermacchi and
Bombardier.
[PICTURE OF AIRCRAFT ENGINE]
Norco hold-open rods on Boeing 777 Engine Nacelle.
NORCO, INC. IS THE GLOBAL LEADER IN THE DESIGN, MANUFACTURE, AND SUPPORT OF
AIRCRAFT ENGINE NACELLE HOLD-OPEN RODS.
5
2002 ANNUAL REPORT
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of TransTechnology Corporation:
We have audited the accompanying consolidated balance sheets of TransTechnology
Corporation and subsidiaries as of March 31, 2002 and 2001, and the related
statements of consolidated operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended March 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of TransTechnology Corporation and
subsidiaries at March 31, 2002 and 2001, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
June 14, 2002
6
TRANSTECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
MARCH 31,
ASSETS 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 97 $ 2,337
Accounts receivable (net of allowance for doubtful accounts of
$391 and $30 in 2002 and 2001, respectively) 11,654 13,015
Inventories 23,695 19,957
Prepaid expenses and other current assets 1,111 891
Income tax receivable 7,600 5,600
Deferred income taxes 1,538 1,512
Assets held for sale 38,486 307,014
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 84,181 350,326
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY:
Land 2,879 3,566
Buildings 5,438 5,425
Machinery and equipment 7,185 7,077
Furniture and fixtures 3,685 3,619
Leasehold improvements 195 196
- ------------------------------------------------------------------------------------------------------------------------------------
Total 19,382 19,883
Less accumulated depreciation and amortization 11,572 10,581
- ------------------------------------------------------------------------------------------------------------------------------------
Property - net 7,810 9,302
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Costs in excess of net assets of acquired businesses (net of accumulated
amortization of $1,171 and $953 in 2002 and 2001, respectively) 10,584 10,805
Deferred income taxes 29,266 11,360
Other 10,301 11,456
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 50,151 33,621
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 142,142 $ 393,249
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Callable long-term debt $ -- $ 271,307
Current portion of long-term debt -- 88
Accounts payable - trade 6,433 5,858
Accrued compensation 2,989 3,479
Accrued income taxes 449 3,194
Liabilities of discontinued businesses 18,011 38,932
Other current liabilities 14,539 8,364
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 42,421 331,222
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT PAYABLE TO BANKS AND OTHERS 107,564 658
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 1,188 5,298
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 7,176 4,196
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - authorized, 300,000 shares; none issued
Common stock - authorized, 14,700,000 shares of $.01 par value, issued,
6,739,264 and 6,718,614 shares in 2002 and 2001, respectively 67 67
Additional paid-in capital 78,286 78,091
Notes receivable from officers (123) (191)
Accumulated deficit (82,227) (10,446)
Accumulated other comprehensive (loss) (2,888) (6,323)
Unearned compensation (236) (253)
- ------------------------------------------------------------------------------------------------------------------------------------
(7,121) 60,945
Less treasury stock, at cost - 548,186 and 546,428 shares in 2002 and
2001, respectively (9,086) (9,070)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (16,207) 51,875
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 142,142 $ 393,249
====================================================================================================================================
See notes to consolidated financial statements.
7
2002 ANNUAL REPORT
STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except share data)
YEARS ENDED MARCH 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 72,285 $ 70,481 $ 60,836
Cost of sales 39,893 40,554 35,743
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 32,392 29,927 25,093
General, administrative and selling expenses 20,030 23,679 19,126
Interest expense 8,055 4,869 2,947
Interest income (69) (95) (339)
Other income - net (1,537) (61) (651)
Forbearance fees 2,651 -- --
Corporate office restructuring charge 1,629 11,165 --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 1,633 (9,630) 4,010
Provision (benefit) for income taxes 860 (3,584) 1,524
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 773 (6,046) 2,486
Discontinued operations:
Income from sale of businesses and income (loss) from
operations of discontinued businesses (less applicable
income taxes (benefits) of $8,012, ($7,268), and $2,849
for 2002, 2001 and 2000 respectively.) 16,414 (66,924) 4,649
Loss on disposal of discontinued businesses including
provision of $5,945 for operating losses during phase out
periods (less applicable income tax (benefits) of ($42,497) (88,968) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary charge (71,781) (72,970) 7,135
Extraordinary charge for refinancing of debt (net of
applicable tax benefits of $339 for 2000) -- -- (541)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (71,781) $ (72,970) $ 6,594
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Income (Ioss) from continuing operations $ 0.13 $ (0.98) $ 0.40
(Loss) income from discontinued operations (11.74) (10.85) 0.76
Extraordinary charge for refinancing of debt -- -- (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per share $ (11.61) $ (11.83) $ 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted:
Income (loss) from continuing operations $ 0.12 $ (0.98) $ 0.40
(Loss) income from discontinued operations (11.64) $ (10.85) $ 0.76
Extraordinary charge for refinancing of debt -- -- (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per share $ (11.52) $ (11.83) $ 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted - average basic shares outstanding 6,181,000 6,167,000 6,139,000
Weighted - average diluted shares outstanding 6,233,000 6,167,000 6,150,000
See notes to consolidated financial statements.
8
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
YEARS ENDED MARCH 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income $ (71,781) $ (72,970) $ 6,594
Adjustments to reconcile (net loss) net income to net cash
provided by operating activities:
Net loss (income) from discontinued operations, including
asset impairments 89,153 66,924 (6,035)
Gain on sale of discontinued businesses, net of tax (16,599) -- --
Depreciation and amortization 3,169 4,143 3,134
Decrease in net assets of discontinued companies 16,196 20,447 13,936
Extraordinary charge for refinancing of debt -- -- 541
Gain on sale of marketable securities -- (13) --
Non-cash interest expense 2,528 1,484 --
Provision for losses on accounts and notes receivable,
and cost investments 366 9,286 82
Gain on sale or disposal of fixed assets (1,352) 5 --
Changes in assets and liabilities - excluding the effects
of acquisitions and dispositions:
Increase in accounts receivable and other receivables (1,002) (8,050) (351)
(Increase) decrease in inventories (3,738) 47 (747)
Increase in deferred taxes, net (22,041) (7,587) (3,724)
Increase in other assets (897) (616) (338)
Increase in accounts payable 575 623 1,099
(Decrease) increase in accrued compensation (490) 1,348 (348)
(Decrease) increase in income taxes payable (2,745) (2,604) 5,372
Increase in other liabilities 8,942 2,572 590
--------- --------- ---------
Net cash provided by operating activities
of continuing operations 284 15,039 19,805
--------- --------- ---------
Cash flows from investing activities:
Business acquisitions -- -- (187,086)
Capital expenditures (264) (289) (449)
Proceeds from sale of businesses 162,200 -- --
Proceeds from sale of fixed assets 2,233 6 --
Proceeds from sale of marketable securities -- 56 3
Decrease in notes and other receivables 75 196 144
--------- --------- ---------
Net cash provided by (used in) investing activities 164,244 (31) (187,388)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt (38,750) (82,500) (3,750)
Proceeds from long-term debt borrowings and bridge loan -- 75,000 125,000
Repayments on proceeds from other debt, net (128,280) 4,071 55,987
Effect of exchange rates on debt 183 (2,611) (2,408)
Debt issue costs -- (6,276) (5,679)
Exercise of stock options and other 79 -- 310
Dividends paid -- (1,198) (1,593)
--------- --------- ---------
Net cash (used in) provided by financing activities
of continuing operations (166,768) (13,514) 167,867
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (2,240) 1,494 284
Cash and cash equivalents at beginning of year 2,337 843 559
--------- --------- ---------
Cash and cash equivalents at end of year $ 97 $ 2,337 $ 843
--------- --------- ---------
Supplemental information:
Interest payments $ 24,573 $ 29,475 $ 17,959
Income tax payments $ 919 $ 2,658 $ 2,218
Increase in senior subordinated note for paid-in-kind
interest expense $ 2,316 $ 1,332 $ --
Warrants issued $ -- $ 214 $ --
--------- --------- ---------
See notes to consolidated financial statements
9
2002 ANNUAL REPORT
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
YEARS ENDED COMMON STOCK TREASURY STOCK
MARCH 31, 2002, ----------------------- -----------------------
2001 AND 2000 SHARES AMOUNT SHARES AMOUNT
-------------- --------- --------- -------- ---------
BALANCE, MARCH 31, 1999 6,653,855 $ 67 (546,213) $ (9,064)
Net income -- -- -- --
Other comprehensive income:
Currency translation
adjustment (net of taxes
of $80) -- -- -- --
Unrealized investment
holding losses (net of
taxes of $3) -- -- -- --
Cash dividends ($.26 per share) -- -- -- --
Issuance of stock under
stock option plan 29,200 -- -- --
Issuance of stock under
bonus plan 8,177 -- (181) (5)
--------- --------- -------- ---------
BALANCE, MARCH 31, 2000 6,691,232 67 (546,394) (9,069)
Net loss -- -- -- --
Other comprehensive loss:
Minimum pension liability
adjustment (net of taxes
of $685) -- -- -- --
Currency translation
adjustment (net of taxes
of $1,093) -- -- -- --
Unrealized investment
holding loss -- -- -- --
Less: reclassification
adjustment for gains
included in net loss -- -- -- --
Cash dividends ($.195 per share) -- -- -- --
Issuance of warrants under
mezzanine debt -- -- -- --
Issuance of stock under
stock option plan/other 15,000 -- -- --
Issuance of stock under
bonus plan 12,382 -- (34) (1)
--------- --------- -------- ---------
BALANCE, MARCH 31, 2001 6,718,614 67 (546,428) (9,070)
Net loss -- -- -- --
Other comprehensive loss:
Reclassification adjustment
for minimum pension
liability from sale of
business -- -- -- --
Currency translation
adjustment (net of taxes
of $349) -- -- -- --
Less: reclassification
adjustment for sale of
foreign subsidiaries -- -- -- --
Issuance of stock under
stock option plan/other 10,356 -- -- --
Issuance of stock under
bonus plan 10,294 -- (1,758) (16)
--------- --------- -------- ---------
BALANCE, MARCH 31, 2002 6,739,264 $ 67 (548,186) $ (9,086)
========= ========= ======== =========
RETAINED NOTES ACCUMULATED
YEARS ENDED ADDITIONAL EARNINGS RECEIVABLE OTHER TOTAL
MARCH 31, 2002, PAID-IN (ACCUMULATED FROM COMPREHENSIVE UNEARNED COMPREHENSIVE
2001 AND 2000 CAPITAL DEFICIT) OFFICERS INCOME (LOSS) COMPENSATION INCOME (LOSS)
-------------- --------- ----------- ----------- ------------- ------------ -------------
BALANCE, MARCH 31, 1999 $ 77,246 $ 58,721 -- $ (3,021) $ (239)
Net income -- 6,594 -- -- -- $ 6,594
Other comprehensive income:
Currency translation
adjustment (net of taxes
of $80) -- -- -- (131) -- (131)
Unrealized investment
holding losses (net of
taxes of $3) -- -- -- (5) -- (5)
Cash dividends ($.26 per share) -- (1,593) -- -- -- --
Issuance of stock under
stock option plan 189 -- -- -- -- --
Issuance of stock under
bonus plan 152 -- -- -- (28) --
--------- --------- --------- --------- --------- ---------
BALANCE, MARCH 31, 2000 77,587 63,722 -- (3,157) (267) $ 6,458
=========
Net loss -- (72,970) -- -- -- $ (72,970)
Other comprehensive loss:
Minimum pension liability
adjustment (net of taxes
of $685) -- -- -- (1,141) -- (1,141)
Currency translation
adjustment (net of taxes
of $1,093) -- -- -- (2,029) -- (2,029)
Unrealized investment
holding loss -- -- -- (6) -- (6)
Less: reclassification
adjustment for gains
included in net loss -- -- -- 10 -- 10
Cash dividends ($.195 per share) -- (1,198) -- -- -- --
Issuance of warrants under
mezzanine debt 214 -- -- -- -- --
Issuance of stock under
stock option plan/other 171 -- (191) -- -- --
Issuance of stock under
bonus plan 119 -- -- -- 14 --
--------- --------- --------- --------- --------- ---------
BALANCE, MARCH 31, 2001 78,091 (10,446) (191) (6,323) (253) $ (76,136)
=========
Net loss -- (71,781) -- -- -- $ (71,781)
Other comprehensive loss:
Reclassification adjustment
for minimum pension
liability from sale of
business -- -- -- 1,141 -- 1,141
Currency translation
adjustment (net of taxes
of $349) -- -- -- (647) -- (647)
Less: reclassification
adjustment for sale of
foreign subsidiaries -- -- -- 2,941 -- 2,941
Issuance of stock under
stock option plan/other 92 -- 68 -- -- --
Issuance of stock under
bonus plan 103 -- -- -- 17 --
--------- --------- --------- --------- --------- ---------
BALANCE, MARCH 31, 2002 $ 78,286 $ (82,227) $ (123) $ (2,888) $ (236) $ (68,346)
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
10
TRANSTECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING PRINCIPLES
BUSINESS - The fiscal year for TransTechnology Corporation (the "Company") ends
on March 31. Accordingly, all references to years in the Notes to Consolidated
Financial Statements refer to the fiscal year ended March 31 of the indicated
year unless otherwise specified.
As a result of a restructuring program adopted by the Company during 2002, the
Company has classified all of the business units that made up its Specialty
Fastener segment in prior years and its Aerospace Rivet Manufacturers business,
which had been included in its Aerospace Products segment for the first three
quarters of 2002, as discontinued operations. All references related to ongoing
operations, or the Company, refer only to continuing operations, which consist
of the Breeze-Eastern division and the Norco Inc. subsidiary.
The Company develops, manufactures, sells and services a complete line of
sophisticated lifting and restraining products, principally performance critical
helicopter rescue hoist and cargo hook systems, winches and hoists for aircraft
and weapons systems and aircraft engine compartment hold open rods, actuators
and other motion control devices. The Company has two manufacturing facilities
in the United States.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in its consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. Estimates used for
asset impairment are based upon future cash flow projections or, in the case of
assets to be sold, appraisals and fair market value estimates obtained from
investment bankers.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, which
include assets held for sale and liabilities of discontinued businesses.
Intercompany balances and transactions are eliminated in consolidation.
REVENUE RECOGNITION - Revenue is recognized at the later of 1) when products are
shipped to customers, or 2) when title passes to customers.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with a maturity at date of acquisition of three months or less to be cash
equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Cost includes material, labor
and manufacturing overhead costs.
PROPERTY AND RELATED DEPRECIATION AND AMORTIZATION - Property is recorded at
cost. Provisions for depreciation are made on a straight-line basis over the
estimated useful lives of depreciable assets ranging from three to thirty years.
The Company reviews property and equipment and assets held for sale for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Depreciation expense for the
years ended March 31, 2002, 2001 and 2000 was $1.1 million, $1.2 million and
$1.1 million, respectively.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES - The difference between
the purchase price and the fair value of the net assets of acquired businesses
is included in the accompanying Consolidated Balance Sheets under the caption
"Costs in excess of net assets of acquired businesses" and is being amortized
over 40 years. The Company periodically reviews the recoverability of such
assets to ensure that the carrying value of such goodwill has not been impaired.
EARNINGS PER SHARE ("EPS") - The computation of basic earnings per share is
based on the weighted-average number of common shares outstanding. The
computation of diluted earnings per share assumes the foregoing and, in
addition, the exercise of all dilutive stock options using the treasury stock
method.
The components of the denominator for basic earnings per common share and
diluted earnings per common share are reconciled as follows:
2002 2001 2000
--------- --------- ---------
Basic earnings per common share:
Weighted-average common
shares outstanding 6,181,000 6,167,000 6,139,000
========= ========= =========
Diluted earnings per common share:
Weighted-average common
shares outstanding 6,181,000 6,167,000 6,139,000
Stock options 52,000 -- 11,000
--------- --------- ---------
Denominator for diluted
earnings per common share 6,233,000 6,167,000 6,150,000
========= ========= =========
Options to purchase 450,183 shares of common stock at prices between $8.84 and
$27.88 were outstanding during 2002 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares. Similarly, during 2001, options to purchase
505,971 shares of common stock at prices between $8.84 and $27.88 were
outstanding but were not included in the computation of diluted EPS. During
2000, options to purchase 288,759 shares of common stock at prices between
11
2002 ANNUAL REPORT
$15.13 and $30.13 were outstanding but were not included in the computation of
diluted EPS.
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS - Research and development costs and
engineering costs, which are charged to expense when incurred, amounted to $2.4
million, $2.4 million and $1.8 million in 2002, 2001 and 2000, respectively.
Included in these amounts were expenditures of $1.2 million, $1.2 million and
$1.3 million in 2002, 2001 and 2000, respectively, which represent costs related
to research and development activities.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the Company's
international operations have been translated into U.S. dollars at year-end
exchange rates, with resulting translation gains and losses accumulated as a
separate component of Accumulated other comprehensive loss. Income and expense
items are converted into U.S. dollars at average rates of exchange prevailing
during the year. Cumulative translation adjustments related to companies which
have been sold have been reflected in the operating results from discontinued
operations.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
Company periodically assesses recoverability of deferred tax assets and
provisions for valuation allowances are made as required.
INVESTMENTS - In 2001, the Company wrote off its investment in an investee in
the amount of $3.2 million, together with a note receivable in the amount of
$3.7 million, as a result of a foreclosure on the investee's outstanding loans
by its senior lenders.
FINANCIAL INSTRUMENTS - The Company does not hold or issue financial instruments
for trading purposes. The estimated liability relating to interest rate swap
agreements has been accrued during 2002. See Note 9 for further discussion.
NEW ACCOUNTING STANDARDS - In June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 138, "Accounting for Certain Derivative Financial
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133". This statement amends the accounting and reporting standards of SFAS 133
for certain derivative instruments and for certain hedging activities. The
Company adopted SFAS 133 and SFAS 138 on April 1, 2001. The effect of the
adoption of these pronouncements was a charge of approximately $3.6 million
($2.0 million after tax) to other comprehensive income attributable to the net
liability to be recorded which was subsequently included as a component of loss
on disposal of discontinued businesses.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement, which apply to good-will
and intangible assets acquired prior to June 30, 2001, will be adopted by the
Company on April 1, 2002. The Company expects the adoption of these accounting
standards will have the impact of reducing amortization of goodwill and
intangibles commencing April 1, 2002; however, impairment reviews may result in
future periodic write-downs. Goodwill amortization for the years ended March 31,
2002, 2001 and 2000 was $0.2 million in each of the three years.
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement to be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for years beginning after June
15, 2002. In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which requires all long-lived
assets classified as held for sale to be valued at the lower of their carrying
amount or fair value less cost to sell and which broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 144 is
effective for years beginning after December 15, 2001. The Company is currently
evaluating the effect, if any, that the adoption of SFAS 143 will have on the
Company's consolidated financial position, results of operations and cash flows.
The Company has adopted SFAS 144 in connection with the sale of Aerospace Rivet
Manufacturers Corporation, which has been recorded as part of discontinued
operations in the accompanying financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company, in the event that circumstances
arise that indicate that its long-lived assets may be impaired, performs
evaluations of asset impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The assets' carrying values are compared to the estimated future
undiscounted cash flows of the assets, or expected sale proceeds for assets
anticipated to be sold, to determine if a write-down is required. The Company
reported an impairment of long-lived assets in 2001, as discussed in Note 2.
SEGMENT INFORMATION - The Company operates in only one business segment, the
design, manufacture and sale of equipment for use in the aerospace industry.
12
TRANSTECHNOLOGY CORPORATION
2. DISCONTINUED OPERATIONS AND RESTRUCTURING
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,
excluding ARM for 2002, have previously been classified as the "Specialty
Fasteners Segment." The Company has reclassified these business units as
discontinued operations for all periods presented.
A portion of the Company's interest expense has been allocated to discontinued
operations based upon the net asset balances attributable to those operations.
Interest expense allocated to discontinued operations was $17.0 million, $29.6
million and $17.0 million, in 2002, 2001 and 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, 2001, 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. In a related transaction,
the Company sold the real estate occupied by Breeze Industrial to a
quasi-governmental organization for $2.0 million. Proceeds from the sales were
used to repay borrowings outstanding under the Credit Facility.
On December 5, 2001, the Company sold its TransTechnology Engineered Components
("TTEC") businesses to a company formed by affiliates of Kohlberg & Company,
L.L.C. for $98.5 million, of which $96.0 million was cash and the balance the
assumption of certain liabilities related to the purchased businesses. The cash
proceeds of the sale were used to repay borrowings outstanding under the Credit
Facility. In the fiscal quarter ended September 30, 2001, as part of its
restructuring program, the Company reported a pre-tax asset impairment charge
for TTEC in the amount of $85.8 million to reduce the carrying value of these
businesses to estimated fair market value. This non-cash charge was specifically
related to the write-down of goodwill. The sale proceeds of TTEC approximated
its adjusted carrying value.
On February 21, 2002, the Company sold its Seeger-Orbis retaining ring business
in Germany to Barnes Group Inc. for $20.0 million cash. The net proceeds of the
sale were used to repay borrowings outstanding under the Credit Facility. The
balance sheet of the Company contains a non-current asset and a non-current
liability in the amount of $3.1 million relating to the pension plan of
Seeger-Orbis. These amounts represent the legal liability of the Company under
German law and the indemnification received from the buyer of the business for
that liability.
On April 16, 2002, the Company sold its Aerospace Rivet Manufacturers
Corporation subsidiary to Allfast Fastening Systems, Inc. for $3.2 million cash.
The net proceeds of the sale were used to repay borrowings outstanding under the
Credit Facility.
On May 30, 2002, the Company completed the sale of substantially all of the net
assets of its U.S. retaining ring business for $2.9 million of cash, a
promissory note of $0.8 million and warrants for 5% of the equity of the
purchaser.
Net sales and losses from the discontinued operations were as follows (in
thousands):
2002 2001 2000
--------- --------- ---------
Net sales $ 161,389 $ 257,590 $ 238,416
--------- --------- ---------
Loss on disposal of
discontinued businesses
including provision for
operating losses during
phase out period $(131,465) $ -- $ --
Income from sale of
businesses and income
(loss) from operations
of discontinued
businesses prior to
phase out period 24,426 (74,192) 7,498
Income tax (benefit)
provision (34,485) (7,268) 2,849
--------- --------- ---------
Net (loss) income from
discontinued operations $ (72,554) $ (66,924) $ 4,649
========= ========= =========
The 2002 loss was comprised of $110.3 million of impairment charges related to
reducing the carrying values of the discontinued businesses to their estimated
net realizable values; $3.7 million of actual operating income of the
discontinued businesses through their expected divestiture dates; $17.0 million
of allocated interest expense; $8.4 million from the write-off of capitalized
loan fees and the mark to market of interest rate swaps required under the terms
of the Company's credit agreements; $24.7 million of gains recognized on the
sale of certain business units; and, $0.2 million of other income or credits
associated with the discontinued operations. These gains and losses, which
aggregated $107.1 million, were reduced by a tax benefit of $34.5 million. The
fiscal 2001 loss from discontinued operations consisted of $67.9 million of
impairment charges; $23.2 million of operating income of the discontinued
businesses; and $29.6 million of allocated interest expense. These fiscal 2001
losses, which aggregated $74.2 million, were reduced by a tax benefit of $7.3
million. The fiscal 2000 income from discontinued operations included $24.5
million of operating income from the discontinued businesses and $17.0 million
of allocated interest expense, the net of which was reduced by an income tax
provision of $2.8 million.
13
2002 ANNUAL REPORT
Assets and liabilities of the discontinued businesses were as follows (in
thousands):
2002 2001
-------- --------
Current assets $ 23,458 $ 87,533
Property, plant and equipment 6,904 71,952
Other assets 8,124 147,529
-------- --------
Assets held for sale $ 38,486 $307,014
======== ========
Current liabilities $ 16,752 $ 29,396
Long-term liabilities 1,259 9,536
-------- --------
Liabilities of
discontinued businesses $ 18,011 $ 38,932
======== ========
3. INVENTORIES
Inventories at March 31, consisted of the following (in thousands):
2002 2001
------- -------
Finished goods $ 209 $ 5
Work in process 5,034 6,155
Purchased and manufactured parts 18,452 13,797
------- -------
Total $23,695 $19,957
======= =======
4. OTHER CURRENT LIABILITIES
Other current liabilities at March 31, consisted of the following (in
thousands):
2002 2001
------- -------
Interest rate swap obligation $ 3,827 $ 90
Accrued interest 2,606 3,293
Other 8,106 4,981
------- -------
Total $14,539 $ 8,364
======= =======
5. INCOME TAXES
The components of total income (loss) from operations (including continuing and
discontinued operations and extraordinary items) before income taxes were (in
thousands):
2002 2001 2000
--------- --------- ---------
Domestic $ (86,453) $ (51,288) $ 16,008
Foreign (18,952) (32,534) (5,378)
--------- --------- ---------
Total $(105,405) $ 83,822 $ 10,630
========= ========= =========
The (benefit) provision for income taxes is summarized below (in thousands):
2002 2001 2000
-------- -------- ---------
Currently (receivable)
payable:
Federal $ (9,372) $ (5,600) $ 3,285
Foreign 46 105 1,318
State 400 452 419
-------- -------- ---------
(8,926) (5,043) 5,022
-------- -------- ---------
Deferred (29,556) (15,455) (988)
Valuation allowance 4,857 9,646 --
-------- -------- ---------
(24,699) (5,809) (988)
-------- -------- ---------
Total $(33,625) $(10,852) $ 4,034
======== ======== =========
The provision (benefit) for income taxes is allocated between continuing and
discontinued operations and extraordinary items as summarized below (in
thousands):
2002 2001 2000
-------- -------- --------
Continuing $ 860 $ (3,584) $ 1,524
Extraordinary -- -- (339)
Discontinued (34,485) (7,268) 2,849
-------- -------- --------
Total $(33,625) $(10,852) $ 4,034
======== ======== ========
The consolidated effective tax rates for continuing operations differ from the
federal statutory rates as follows:
2002 2001 2000
---- ----- ----
Statutory federal rate 35.0% (35.0%) 35.0%
State income taxes after
federal income tax 15.9 (4.6) 3.1
Earnings of the foreign
sales corporation -- -- (14.5)
Amortization of purchase
price of businesses not
deductible for tax purposes 0.9 1.8 10.0
AMT credit -- (0.5) --
Other 0.6 1.1 (4.4)
---- ----- ----
Consolidated effective tax rate 52.4% (37.2%) 38.0%
==== ===== ====
The following is an analysis of accumulated deferred income taxes (in
thousands):
2002 2001
-------- --------
Assets:
Current:
Bad debts $ 243 $ 408
Employee benefit accruals 638 884
Inventory 1,111 680
Net operating loss carryforward -- 100
Other (454) (560)
-------- --------
Total current 1,538 1,512
-------- --------
Noncurrent:
Employee benefit accruals (795) 754
Environmental 1,329 389
Accrued liabilities 1,836 984
AMT credit -- 453
Net operating loss carryforward 43,101 16,818
Other (1,702) 1,608
Valuation allowance (14,503) (9,646)
-------- --------
Total noncurrent 29,266 11,360
-------- --------
Total assets $ 30,804 $ 12,872
======== ========
Liabilities:
Property $ 1,188 $ 5,298
======== ========
Total liabilities $ 1,188 $ 5,298
======== ========
The cumulative amount of undistributed earnings of international subsidiaries
for which U.S. income taxes have not been provided was approximately $2.2
million at March 31, 2002. It is not practical to estimate the amount of
unrecognized deferred U.S. taxes on these undistributed earnings.
The valuation allowance required under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income
14
TRANSTECHNOLOGY CORPORATION
Taxes," has been established for deferred income tax benefits related to certain
foreign subsidiary loss carryforwards that may not be realized.
The Company has federal, state and foreign net operating loss carryforwards of
$53.8 million, $75.0 million and $40.0 million, respectively, which will be
available to offset taxable income during the carryforward period. The tax
benefits of these items are reflected in the above analysis of deferred tax
assets and liabilities. If not used, some of these carryforwards begin to expire
in 2004 through 2022.
6. LONG-TERM DEBT PAYABLE TO BANKS AND OTHERS
Long-term debt payable to banks and others, including current maturities, at
March 31 consisted of the following (in thousands):
2002 2001
-------- --------
Credit agreement - 7.25% $ 17,000 $ --
Credit agreement - 8.0% 9,562 --
Credit agreement - 25.0% 2,500 --
Credit agreement - 10.5% -- 2,900
Credit agreement - 9.95% -- 153,368
Term loan - 9.06% -- 38,750
Senior Subordinated Notes - 16% 78,648 76,332
Other -- 892
-------- --------
107,710 272,242
Less current maturities and
amounts callable by lenders -- 271,395
Less unamortized discount 146 189
-------- --------
Total long-term debt $107,564 $ 658
======== ========
CREDIT FACILITIES - Effective December 31, 2000, the Company was not able to
meet certain financial ratio requirements of the senior 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 agreed not to exercise certain of their rights
and remedies under the Credit Facility. The Company, accordingly, classified its
bank debt as "current" at March 31, 2001, to reflect the fact that the
forbearance period was 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 were met and certain fees and increased interest charges
were paid.
Effective December 5, 2001, the Company sold its Engineered Components division
for $98.5 million including cash of $93.1 million, which was used to retire
senior debt. An additional $2.9 million in cash was received on January 17,
2002. In anticipation of this debt reduction, a further extension to the
forbearance termination date was granted effective December 4, 2001 until March
27, 2002 provided certain conditions were met. This forbearance agreement
extension retained a provision that $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. This agreement was further amended on January 31, 2002, to modify
certain provisions with respect to borrowing limits and on March 27, 2002, was
extended until April 4, 2002. On April 3, 2002, a further extension to the
forbearance termination date was granted until September 25, 2002, provided
certain conditions are met. The current forbearance agreement retains a
provision that an additional $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 April 4, 2002. This current forbearance agreement also
requires the achievement of minimum levels of EBITDA (earnings before interest,
taxes, depreciation and amortization), adherence to borrowing limits as adjusted
based on anticipated debt reduction, restrictions on the level of spending for
capital expenditures as well as an agreement with the subordinated debt holders
to refinance the obligation to the senior debt holders. Other terms of the
forbearance agreement include certain fees, reporting and consulting
requirements.
The Company has taken action to reduce its debt by selling its
Breeze-Industrial, Pebra, Engineered Components, Seeger-Orbis and Aerospace
Rivet Manufacturers business as well as taking action to arrange for the sale of
the other businesses in its discontinued Specialty Fastener Segment so as 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.
15
2002 ANNUAL REPORT
The Company has unused borrowing capacity for both domestic and international
operations of $7.2 million as of March 31, 2002, including letters of credit.
The Credit Facility is secured by all of the Company's assets. As of March 31,
2002, the Company had total borrowings of $107.6 million, which have a current
weighted-average interest rate of 14.1% excluding the impact of interest rate
swaps. The impact of interest rate swaps as further discussed below was provided
for as a charge to discontinued operations in the three month period ended
September 30, 2001. The interest rate swap contracts provide for a fixed rate of
interest on $125 million notional amount of debt, which currently exceeds the
Company's outstanding variable rate based debt by approximately $96 million.
Borrowings under the Credit Facility as of March 31, 2002, were $29.1 million.
Interest on the Revolver is tied to the primary bank's prime rate, or at the
Company's option, the London Interbank Offered Rate ("LIBOR"), plus a margin
that varies depending upon the Company's achievement of certain operating
results. As of March 31, 2002, $9.6 million of the Company's outstanding
borrowings utilized LIBOR, all of which were payable in Pounds sterling. The
remainder of the Company's outstanding borrowings under the Credit Facility
utilized the prime rate.
Effective July 10, 2001, the Term Loan of $38.8 million was repaid in full from
the proceeds of the sale of Breeze Industrial and Pebra.
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 fair value of the agreements has become unfavorable to the
Company. At 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. The Company increased
this charge by $0.6 million at December 30, 2001. This pre-tax charge to
terminate these interest rate swap agreements is accordingly included with the
loss on disposal of the discontinued businesses.
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 contains other customary financial covenants, including the
requirement to maintain certain financial ratios relating to performance,
interest expense and debt levels.
On June 13, 2002, the Company received a commitment to refinance its senior debt
for a period of three years and a commitment from the note holders to amend the
financial covenants to bring the company into compliance. Management expects to
complete the proposed refinancing by the end of June 2002 and has, accordingly,
classified its senior debt, as well as its senior subordinated notes, as long
term. Under the commitment, $8.4 million is due in 2004, $3.4 million is due in
2005 and the remainder, including all subordinated debt is due in 2006.
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.
7. STOCKHOLDERS' EQUITY
AND EMPLOYEE/DIRECTOR STOCK OPTIONS
The Company maintains the amended and restated 1992 long-term incentive plan
(the "1992 Plan"), the 1998 non-employee directors stock option plan (the "1998
Plan") and the 1999 long-term incentive plan (the "1999 Plan").
Under the terms of the 1992 Plan, 800,000 of the Company's common shares may be
granted as stock options or awarded as restricted stock to officers, directors
and certain employees of the Company through September 2002. Under the terms of
the 1999 plan, 300,000 of the Company's common shares may
16
TRANSTECHNOLOGY CORPORATION
be granted as stock options or awarded as restricted stock to officers,
directors and certain employees of the Company through July 2009. Under both
plans, option exercise prices equal the fair market value of the common shares
at their grant dates. For grants made prior to May 1999, options expire not
later than five years after the date of the grant. Options granted beginning in
May 1999 to officers and employees expire not later than 10 years after the date
of the grant. Options granted to directors and to officers and employees with
the annual cash bonus vest ratably over three years beginning one year after the
date of the grant. Restricted stock is payable in equivalent number of common
shares. The shares are distributable in a single installment and, with respect
to officers and employees, restrictions lapse ratably over a three-year period
from the date of the award, and with respect to directors, the restrictions
lapse after one year.
Under the terms of the 1998 Plan, non-employee directors are entitled to receive
matching options for a) each share of the Company's common stock which they hold
at the end of a 60-day period following initial election as a director, but not
to exceed 25,000 shares, with the strike price of the option being the fair
market value of the shares at their grant dates, and b) thereafter, for each
share of the Company's common stock that they purchase on the open market, with
the strike price of the option being the purchase price of the share, up to a
maximum of 5,000 options in any twelve month period or 15,000 options over a
three-year period. Options granted under the 1998 Plan vest on the first
anniversary of the grant. Options expire not later than five years after the
date of the grant.
The Company continues to apply the accounting standards set forth in APB No. 25.
However, disclosures are required of pro forma net income and earnings per share
as if the Company had adopted the accounting provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Based on Black-Scholes values, pro
forma net income for 2002, 2001 and 2000 would be $(72.4) million, $(73.3)
million and $6.2 million, respectively; pro forma earnings per common share for
2002, 2001 and 2000 would be $(11.62), $(11.89) and $1.00, respectively.
The following table summarizes stock option activity over the past three years
under the plan:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Outstanding at March 31, 1999 438,046 17.66
Granted 155,715 18.90
Exercised (29,200) 14.53
Canceled or expired (75,521) 15.47
-------
Outstanding at March 31, 2000 489,040 19.56
Granted 151,737 9.74
Exercised (15,000) 11.38
Canceled or expired (83,606) 20.19
-------
Outstanding at March 31, 2001 542,171 18.25
Granted 159,000 7.63
Exercised (10,356) 8.84
Canceled or expired (150,268) 18.86
-------
Outstanding at March 31, 2002 540,547 16.30
=======
Options exercisable at March 31, 2000 183,829 19.13
Options exercisable at March 31, 2001 247,119 20.92
Options exercisable at March 31, 2002 318,189 19.00
In 2002, 2001 and 2000 the Company awarded restricted stock totaling 10,294
shares, 12,382 shares and 8,177 shares, respectively. The weighted-average fair
value of this restricted stock was $10.12, $9.63 and $18.60 in 2002, 2001 and
2000, respectively. The expense recorded in 2002, 2001 and 2000 for restricted
stock was $25,000, $133,000 and $124,000, respectively.
The weighted-average Black-Scholes value per option granted in 2002, 2001 and
2000 was $4.22, $3.00 and $4.74, respectively. The following weighted-average
assumptions were used in the Black-Scholes option pricing model for options
granted in 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Dividend yield 0.0% 0.9% 1.3%
Volatility 75.6% 38.4% 25.0%
Risk-free interest rate 3.3% 6.3% 5.5%
Expected term of options
(in years) 4.0 4.0 4.0
17
2002 ANNUAL REPORT
For options outstanding and exercisable at March 31, 2002, the exercise price
ranges and average remaining lives were:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------
RANGE OF NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT MARCH 31, 2002 REMAINING LIFE EXERCISE PRICE AT MARCH 31, 2002 EXERCISE PRICE
- --------------- ----------------- -------------- -------------- ----------------- --------------
$ 3-10 242,995 4 $ 7.61 62,185 $ 6.53
10-15 8,285 3 $ 11.43 2,857 $ 11.52
15-21 186,499 2 $ 18.97 144,740 $ 19.07
21-28 102,768 1 $ 27.11 102,768 $ 27.11
------- -------- ------- -------
540,547 2 $ 15.30 312,550 $ 19.15
======= ======== ======= =======
NOTES RECEIVABLE FROM OFFICERS - Notes receivable from an officer result from
the exercise of stock options in exchange for notes. The notes are full recourse
promissory notes bearing interest at 5% and are collateralized by the stock
issued upon exercise of the stock options. Principal and interest are due in May
2003.
8. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan covering all eligible employees.
Contributions are based on certain percentages of an employee's eligible
compensation. Expenses related to this plan were $1.0 million, $0.9 million and
$0.9 million in 2002, 2001 and 2000, respectively.
The Company provides postretirement benefits to union employees at one of the
Company's divisions. The Company funds these benefits on a pay-as-you-go basis.
(In thousands)
POSTRETIREMENT BENEFITS
-----------------------
YEAR ENDED MARCH 31,
--------------------
2002 2001 2000
---- ---- ----
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Service cost $ -- $ -- $ --
Interest cost 86 88 87
Amortization of
net loss 53 19 28
---- ---- ----
Net periodic
benefit cost $139 $107 $115
==== ==== ====
WEIGHTED-AVERAGE
ASSUMPTION AS OF
MARCH 31:
Discount rate 7.25% 7.25% 7.75%
POSTRETIREMENT BENEFITS
-----------------------
YEAR ENDED MARCH 31,
--------------------
2002 2001
------- -------
CHANGE IN BENEFIT
OBLIGATION:
Benefit obligation at
beginning of year $ 1,258 $ 1,204
Service cost -- --
Interest cost 86 88
Actuarial gain -- 88
Benefits paid (139) (122)
------- -------
Benefit obligation at
end of year $ 1,205 $ 1,258
======= =======
POSTRETIREMENT BENEFITS
-----------------------
YEAR ENDED MARCH 31,
--------------------
2002 2001
------- -------
RECONCILIATION OF
FUNDED STATUS:
Funded status $(1,205) $(1,258)
Unrecognized actuarial
loss 259 312
------- -------
Accrued liability $ (946) $ (946)
======= =======
18
TRANSTECHNOLOGY CORPORATION
For measurement purposes, a 9.5% and 10.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2002 and 2001,
respectively. The rate was assumed to decrease gradually to 5.0% by 2011 and
remain at that level thereafter. Under the Plan, the actuarially determined
effect of a one-percentage point change in the assumed health case cost trend
would have the following effects.
ONE ONE
PERCENTAGE PERCENTAGE
POINT POINT
INCREASE DECREASE
Effect on total of service -------- ---------
and interest cost components $ 6 $ (6)
Effect on accumulated
postretirement benefit obligation 87 (76)
The balance sheet of the Company contains a non-current asset and a non-current
liability in the amount of $3.1 million relating to the pension plan of a
divested company. These amounts represent the legal liability of the company
under German law and the indemnification received from the buyer of the business
for that liability.
9. FINANCIAL INSTRUMENTS
INTEREST RATE SWAP AGREEMENTS - Under the terms of its Credit Facility, the
Company is required to maintain certain levels of interest rate protection
through interest rate swap agreements. As a result, the Company has entered
into interest rate swap agreements to effectively convert all or a portion of
its floating-rate debt to fixed-rate debt in order to reduce the Company's risk
to movements in interest rates. Such agreements involve the exchange of fixed
and floating interest rate payments over the life of the agreement without the
exchange of the underlying principal amounts. Accordingly, the impact of fluc-
tuations in interest rates on these interest rate swap agreements is fully
offset by the opposite impact on the related debt. Swap agreements are only
entered into with strong creditworthy counterparties. The swap agreements in
effect were as follows:
NOTIONAL
AMOUNT RECEIVE PAY
(IN THOUSANDS) MATURITIES RATE(1) RATE
------------- ---------- -------- ----
March 31, 2002 $25,000 5/02 1.88% 5.48%
25,000 5/02 1.88 5.48
37,500 3/03 1.90 6.58
37,500 3/03 1.90 6.58
(1) Based on three-month LIBOR
FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions were
used by the Company in estimating the fair value of each class of financial
instruments:
CASH AND CASH EQUIVALENTS - The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
ACCOUNTS RECEIVABLE, DEBT, ACCOUNTS PAYABLE AND OTHER LIABILITIES - The carrying
amounts of these items approximates their fair value.
CONCENTRATION OF CREDIT RISK - The Company is subject to a concentration of
credit risk primarily with its trade and notes receivable. The Company grants
credit to certain customers who meet pre-established credit requirements, and
generally requires no collateral from its customers. Estimates of potential
credit losses are provided for in the Company's consolidated financial
statements and are within management's expectations and industry averages. As of
March 31, 2002, the Company had no other significant concentrations of credit
risk.
INTEREST RATE SWAPS - The fair value of the Company's interest rate swaps
are the estimated amounts the Company would pay or receive to terminate the
agreements at March 31, 2002 and 2001 based upon quoted market prices as
provided by financial institutions which are counterparties to the agreements
and were as follows (in thousands):
2002 2001
(PAY) (PAY)
-------- --------
Interest rate swap agreements $(3,353) $(3,207)
The impact of interest rate swaps as discussed above was provided for as a
charge to discontinued operations in the three-month period ended September 30,
2001. The interest rate swap contracts provide for a fixed rate of interest on
$125 million notional amount of debt, which currently exceeds the Company's
outstanding variable rate based debt by approximately $98 million.
10. EXTRAORDINARY ITEM
In 2000, the Company refinanced its credit facilities. Due to the termination of
the prior credit agreement, the Company recognized an extraordinary charge of
$0.5 million, net of tax, to write-off the unamortized portion of loan
origination fees associated with the prior agreement.
11. COMMITMENTS
Rent expense under operating leases for the years ended March 31, 2002, 2001,
and 2000 was $1.1 million, $0.6 million and $0.6 million, respectively.
19
2002 ANNUAL REPORT
The Company and its subsidiaries have minimum rental commitments under
noncancelable operating leases, primarily leased buildings, as follows (in
thousands):
2003 $901
2004 403
2005 96
2006 50
2007 25
Beyond 2007 -
-------
Total $ 1,475
-------
12. CONTINGENCIES
ENVIRONMENTAL MATTERS. During the fourth quarter of fiscal 2000, the Company
presented an environmental cleanup plan for a portion of a site in Pennsylvania
which continues to be owned although the related business has been sold. This
plan was submitted pursuant to the Consent Order and Agreement with the
Pennsylvania Department of Environmental Protection ("PaDEP") concluded in
fiscal 1999. Pursuant to the Consent Order, upon its execution the Company paid
$0.2 million for past costs, future oversight expenses and in full settlement of
claims made by PaDEP related to the environmental remediation of the site with
an additional $0.2 million paid in fiscal 2001. A second Consent Order was
concluded with PaDEP in the third quarter of fiscal 2001 for another portion of
the site, and a third Consent Order for the remainder of the site is
contemplated by October 1, 2002. The Company is also administering an agreed
settlement with the Federal government under which the government pays 50% of
the direct and internal environmental response costs associated with a portion
of the site. The Company has also reached an agreement in principle with the
Federal government and is in the process of finalizing the necessary
documentation under which the Federal government will pay 45% of the direct and
internal environmental response costs associated with another portion of the
site. At March 31, 2002, the Company's cleanup reserve was $1.8 million based on
the net present value of future expected cleanup costs. The Company expects that
remediation at the Pennsylvania site will not be completed for several years.
The Company also continues to participate in environmental assessments and
remediation work at nine other locations, which include operating facilities,
facilities for sale, and previously owned facilities. The Company estimates
that its potential cost for implementing corrective action at these sites will
not exceed $0.4 million payable over the next several years, and has provided
for the estimated costs in its accrual for environmental liabilities.
In addition, the Company has been named as a potentially responsible party in
eight environmental proceedings pending in several other states in which it is
alleged that the Company was a generator of waste that was sent to landfills and
other treatment facilities and, as to several sites, it is alleged that the
Company was an owner or operator. Such properties generally relate to businesses
which have been sold or discontinued. The Company estimates that its expected
future costs, and its estimated proportional share of remedial work to be
performed, associated with these proceedings will not exceed $0.1 million and
has provided for these estimated costs in its accrual for environmental
liabilities.
LITIGATION. The Company is also engaged in various other legal proceedings
incidental to its business. It is the opinion of management that, after taking
into consideration information furnished by its counsel, the above matters will
have no material effect on the Company's consolidated financial position or
the results of the Company's operations in future periods.
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in only one business segment, the design, manufacture and
sale of equipment for use in the aerospace industry. Approximately 43%, 40%
and 37% of sales in 2002, 2001 and 2000 were derived from sales to the United
States Government and its prime contractors.
Net sales below show the geographic location of customers (in thousands):
LOCATION 2002 2001 2000
------- ------- -------
United States $45,426 $45,576 $36,874
Europe 16,619 17,888 12,680
Other non-U.S. 10,240 7,017 11,282
------- ------- -------
Total $72,285 $70,481 $60,836
------- ------- -------
14. SUBSEQUENT EVENT
On April 16, 2002, the Company completed the sale of all of the shares of its
Aerospace Rivet Manufacturers Corporation Inc. subsidiary for $3.2 million of
cash consideration plus the assumption of certain liabilities.
On May 30, 2002, the Company completed the sale of substantially all of the net
assets of its U.S. retaining ring business for $2.9 million of cash, a
promissory note of $0.8 million and warrants for 5% of the equity of the
purchaser.
20
2002 ANNUAL REPORT
15. UNAUDITED QUARTERLY FINANCIAL DATA
(In thousands except per share amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2002
Net sales $18,602 $ 16,293 $ 18,895 $ 18,495 $ 72,285
Gross profit 7,446 6,535 8,325 10,086(1) 32,392
Income (loss) from continuing operations 28 (1,266) 575 1,436 773
Income (loss) from discontinued operations 778 (53,340) (6,790) (13,202) (72,554)
------- ----------- ----------- ----------- -----------
Net income (loss) $ 806 $ (54,606) $ (6,215) $ (11,766) $ (71,781)
------- ----------- ----------- ----------- -----------
Basic (loss) earnings per share:
(Loss) earnings from continuing operations -- $ (0.21) $ 0.09 $ 0.23 $ 0.13
Earnings (loss) from discontinued operations $ 0.13 (8.63) (1.10) (2.13) (11.74)
------- ----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.13 $ (8.84) $ (1.01) $ (1.90) $ (11.61)
------- ----------- ----------- ----------- -----------
Diluted (loss) earnings per share:
(Loss) income from continuing operations -- $ (0.21) $ 0.09 $ 0.23 $ 0.12
Income (loss) from discontinued operations $ 0.13 (8.63) (1.09) (2.12) (11.64)
------- ----------- ----------- ----------- -----------
Diluted income (loss) per share $ 0.13 $ (8.84) $ (1.00) $ (1.89) $ (11.52)
------- ----------- ----------- ----------- -----------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2001
Net sales $ 15,428 $ 15,544 $ 18,650 $ 20,859 $ 70,481
Gross profit 6,135 5,970 7,491 10,331 29,927
(Loss) income from continuing operations (732) 423 455 (6,192) (6,046)
Loss from discontinued operations (20) (2,178) (1,705) (63,021) (66,924)
------- ----------- ----------- ----------- -----------
Net loss $ (752) $ (1,755) $ (1,250) $ (69,213) $ (72,970)
------- ----------- ----------- ----------- -----------
Basic (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.12) $ 0.07 $ 0.07 $ (1.00) $ (0.98)
Loss from discontinued operations -- (0.35) (0.27) (10.21) (10.85)
------- ----------- ----------- ----------- -----------
Basic loss per share $ (0.12) $ (0.28) $ (0.20) $ (11.21) $ (11.83)
------- ----------- ----------- ----------- -----------
Diluted (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.12) $ 0.07 $ 0.07 $ (1.00) $ (0.98)
Loss from discontinued operations -- (0.35) (0.27) (10.21) (10.85)
------- ----------- ----------- ----------- -----------
Diluted loss per share $ (0.12) $ (0.28) $ (0.20) $ (11.21) $ (11.83)
------- ----------- ----------- ----------- -----------
(1) The fourth quarter gross margin of 54.5% includes 6.9% relating to
adjustments to product costing allowances and the year-end reconciliation
of fixed cost absorption rates, as well as a favorable mix of higher
margin products.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As a result of a restructuring program undertaken by the Corporation during
fiscal 2002, the Corporation has classified all of the business units that made
up its Specialty Fastener segment in prior years and its Aerospace Rivet
Manufacturers business, which had been included in its Aerospace Products
segment in fiscal 2002 quarterly reports but in the Specialty Fasteners segment
in prior fiscal years' annual reports, as discontinued operations. All
discussions related to ongoing operations, or the Corporation, refer only to
continuing operations, which consist of the Breeze-Eastern division and the
Norco Inc. subsidiary. Discontinued operations are discussed separately in this
report.
TransTechnology Corporation reported consolidated net sales of $72.3 million and
income from continuing operations of $0.8 million, or $0.12 per diluted share,
for the year ended March 31, 2002. Sales for the current fiscal year increased
3% from fiscal year 2001 sales of $70.5 million and 18.9% over fiscal 2000 sales
of $60.8 million. During fiscal 2002 the Corporation reported a loss from
discontinued operations of $72.6 million, or $11.64 per diluted share compared
to a loss from discontinued operations of $66.9 million in the 2001 fiscal
year and income from discontinued operations of $4.6 million in fiscal 2000. The
net loss reported for fiscal 2002 decreased to $71.8 million from a net loss of
$73.0 million in 2001 but was worse than the net income of $6.6 million reported
in fiscal 2000. The net losses for fiscal 2002 and 2001 include several
nonrecurring items, which impact a year-to-year comparison. The following table
depicts the Corporation's "normalized" results, which should present a clearer
picture of after-tax performance:
Normalized Net Earnings (In thousands, except per share amounts):
2002 2001 2000
Income (loss)
from continuing
operations $ 773 $(6,046) $ 2,486
Gain on sale of real property (660) -- --
Corporate office restructuring 782 7,034 --
Forbearance fees 1,272 -- --
------- ------- -------
Normalized net earnings $ 2,167 $ 988 $ 2,486
------- ------- -------
Normalized net earnings
per diluted share $ 0.35 $ 0.16 $ 0.40
------- ------- -------
SALE OF REAL PROPERTY - In March 2002, the Corporation sold approximately ten
acres of unused land located at its Breeze-Eastern facility in Union, New
Jersey, for $2.3 million, which resulted in an after tax gain of $0.7 million.
CORPORATE OFFICE RESTRUCTURING COSTS - As part of its restructuring plan, in
fiscal 2002 the Corporation began a program of reducing the size of its
corporate office staff. In fiscal 2002 the Corporation recognized severance and
other costs associated with its corporate office downsizing of $1.6 million and
in fiscal 2001 $11.2 million before taxes, which included the write-down of the
value of certain real estate and the write-off of a note receivable and equity
relative to a business divested in a prior fiscal year.
FORBEARANCE FEES AND COSTS - During fiscal 2002 the Corporation incurred $2.7
million of costs related to forbearance fees paid to its banks in association
with their agreement not to pursue any actions against the Corporation for its
violation of certain financial covenants in the Corporation's senior credit
agreement. There were no such fees recognized in fiscal 2001 or 2000. Further
information on the status of the Corporation's credit agreements is included
later in this discussion under Liquidity and Capital Resources.
Excluding these nonrecurring items, "normalized" income from continuing
operations for fiscal 2002 of $2.2 million, or $0.35 per diluted share, was a
substantial improvement from the "normalized" earnings from continuing
operations of $1.0 million, or $0.16 per diluted share, for fiscal 2001 although
down 13% from normalized net earnings of $2.5 million or $.40 per diluted
share for fiscal 2000. Excluding the above mentioned non-operating and
non-recurring items, "normalized" operating income, before interest and taxes,
from the Corporation's continuing operations totaled $12.6 million for fiscal
2002, a 103% improvement over "normalized" operating income of $6.2 million in
fiscal 2001 and 110% above fiscal 2000's $6.0 million.
The improvement in financial results comparing fiscal 2002 to fiscal 2001
largely reflects higher sales of aerospace OEM products, weapons system
products, repair, overhaul and spare parts products provided to military and
search and rescue agencies, and motion control devices. These increases were
offset by a decrease in sales of new equipment to large airframe manufacturers
and of repairs and spare parts to airlines.
New orders received in fiscal 2002 totaled $77.8 million which represents a
17.0% increase over fiscal 2001 new orders of $66.5 million and a 25.9% increase
over $61.8 million of new orders received in fiscal 2000. Backlog at March 31,
2002 stands at $43.7 million compared with $40.2 million at March 31, 2001 and
$44.2 million at March 31, 2000. Both Breeze-Eastern and Norco saw increases in
new orders and backlog in fiscal 2002 compared to fiscal 2001. A significant
portion of fiscal 2002 sales is derived from long-term contracts. Generally, new
equip-
22
ment sales are the subject of long-term contracts while repair, overhaul and
spare parts sales have much shorter lead times.
Sales for the Corporation increased to $72.3 million for fiscal 2002, a 3%
increase over fiscal 2001 sales of $70.5 million. Both Breeze-Eastern and Norco
saw fiscal 2002 revenues increase over fiscal 2001. The Corporation's Norco
subsidiary saw a drop in orders received and sales of products to airframe
manufacturers as a result of an expected reduction in the build rate of large
commercial airliners in fiscal 2002. The anticipated decline in aircraft build
rates was accelerated and exacerbated by the impact of the events of September
11th. Lower utilization rates of the existing commercial airline fleet as a
result of the slowing economy and the post-September 11th reduction in travel
resulted in lower order rates and sales of hold-open rod spare parts and
replacement parts which are sold directly to the airlines as maintenance items.
This decline was offset by increased sales of Norco's developing product line of
motion control products for use in medical testing equipment and increased sales
of new equipment and spare parts to military agencies. Higher orders and
shipments of Breeze-Eastern rescue hoists and cargo hooks for military and
civilian rescue agencies as well as increases in spare parts, repair and
overhaul of equipment already in the field provided further sales increases.
Operating income, before corporate office expenses, increased 11.1% in fiscal
2002 to $21.1 million over the prior year's $18.9 million. This increase was due
mainly to a favorable mix of repair, overhaul and spare parts business and the
realization of the benefit of spreading a fixed cost base over a larger sales
volume. Generally, repair and overhaul services and spare parts sales have
higher gross margins than sales of new equipment or engineering services. These
improvements in product mix and fixed cost absorption led to an increase in
gross margin to 44.8% in fiscal 2002 from 42.5% in fiscal 2001. Both Breeze-
Eastern and Norco realized improvements in gross margin during fiscal 2002.
Sales for fiscal 2001 of $70.5 million were 16% above fiscal 2000 sales of $60.8
million. This sales increase was due primarily to strong product demand across
all Breeze-Eastern and Norco product lines and increased sales of repair and
overhaul services and spare parts, and, to a lesser degree, improved product
pricing. The Corporation's Norco division also saw increased revenues from its
developing product line of motion control products for use in medical testing
equipment. Fiscal 2001 operating income of $18.9 million, before corporate
expenses, showed a 22.7% improvement over fiscal 2000's operating income of
$15.4 million.
CORPORATE AND OTHER EXPENSES -Corporate office expenses, exclusive of
restructuring charges, amounted to $8.5 million in fiscal 2002, a decrease of
32.5% from the $12.6 million of such expenses in fiscal 2001. Restructuring
charges of $1.6 million and $11.2 million were also recognized in fiscal 2002
and 2001, respectively, and included in corporate office expenses. Restructuring
charges in fiscal 2002 included the costs of severance and other items
associated with the 50% reduction in headcount included in the restructuring
plan. Restructuring charges in fiscal 2001 included costs associated with the
elimination of certain positions as well as write-offs associated with notes
receivable and investments in companies that had been divested in previous
fiscal years and the write-down to net realizable value of certain parcels of
real estate.
OTHER INCOME/EXPENSE -The Corporation recorded other non-operating
income for fiscal 2002 aggregating $1.6 million compared with $0.2 million in
fiscal 2001 and $0.7 million in fiscal 2000. Of the $1.6 million generated in
fiscal 2002, $1.4 million relates to the pre-tax gain resulting from the sale of
ten acres of unused land at the Corporation's Union, New Jersey facility for
$2.3 million in March 2002. Interest income of $0.1 million was essentially
unchanged from the prior year's level. In fiscal 2000 the Corporation recognized
an extraordinary expense of $0.5 million as the result of the write-off of
capitalized financing costs when the Corporation's debt was refinanced in August
1999.
DISCONTINUED OPERATIONS -During fiscal 2002, the Corporation determined that it
would enter into a plan of restructuring so as to focus its resources and
capital on its aerospace products business and exit the Specialty Fastener
segment. As a result, this report includes in discontinued operations all of the
operations that formerly made up the Specialty Fastener segment of the
Corporation, which included TransTechnology Engineered Components (sold in
December 2001), Breeze Industrial Products and Pebra (sold in July 2001),
TransTechnology Engineered Rings (of which Seeger Orbis was sold in February
2002 and TTERUSA was sold in May 2002), Aerospace Rivet Manufacturers'
Corporation Inc. (sold in April 2002) and TCR Corporation. Of the operations
included in fiscal 2002 discontinued operations, only the US, UK and Brazilian
retaining ring operations, the aerospace rivet business, and TCR were carried
into fiscal 2003. As noted, the aerospace rivet and U.S. retaining ring
businesses were sold early in fiscal 2003. The Corporation expects that the
divestitures of the remaining retaining ring operations will be concluded during
its first fiscal quarter and that TCR will be divested during its second fiscal
quarter.
The Corporation reported losses from discontinued operations of $72.6 million in
fiscal 2002 and $66.9 million in fiscal 2001, compared to income from
discontinued operations of $4.6 million in fiscal 2000. The fiscal 2002 loss was
composed of $110.3 million of impairment charges related to reducing the
carrying values of the discontinued businesses to their
23
2002 Annual Report
estimated net realizable values; $3.7 million of actual operating income of the
discontinued businesses through their expected divestiture dates; $17.0 million
of allocated interest expense; $8.4 million from the write-off of capitalized
loan fees and the mark to market of interest rate swaps required under the terms
of the Corporation's credit agreements; $24.7 million of gains recognized on the
sale of certain business units; and, $0.2 million of other income or credits
associated with the discontinued operations. These gains and losses, which
aggregated $107.1 million, were reduced by a tax benefit of $34.5 million. The
fiscal 2001 loss from discontinued operations consisted of $67.9 million of
impairment charges; $23.3 million of actual operating income of the discontinued
businesses; and $29.6 million of allocated interest expense. This fiscal 2001
loss, which aggregated $74.2 million, was reduced by a tax benefit of $7.3
million. The fiscal 2000 income from discontinued operations included $24.5
million of operating income from the discontinued businesses and $17.0 million
of allocated interest expense, the net of which was reduced by an income tax
provision of $2.9 million.
CHANGES IN FINANCIAL POSITION
LIQUIDITY AND CAPITAL RESOURCES -The restructuring and divestiture program of
the Corporation has had a substantial impact upon its financial condition at
March 31, 2002. During the fiscal year, the Corporation sold its hose clamp
operations in Germany and the US, its engineered components businesses, and its
German retaining ring operation for aggregate cash proceeds of $162 million.
All of these proceeds, after payment of transaction fees and expenses, were used
to reduce the Corporation's senior credit facility. At March 31, 2002 the senior
facility was $29.1 million compared to $195.0 million at the end of the prior
fiscal year. In addition to the cash generated from the divestiture program,
the Corporation realized $2.2 million of net proceeds from the sale of unused
real estate in New Jersey and $5.5 million through federal income tax refunds
obtained by carrying back the fiscal 2001 operating loss to prior years.
The Corporation is in the process of divesting its US, UK and Brazilian
retaining ring operations and its TCR Corporation subsidiary in separate
transactions expected to aggregate $22 million. The Corporation hopes to
complete these transactions during the first and second quarters of fiscal year
2003 and anticipates applying all of the proceeds to the reduction of its credit
facilities. The assets and liabilities of these business units are presented on
the March 31, 2002 balance sheet in Assets Held for Sale and Liabilities of
Discontinued Businesses at their estimated net realizable values.
WORKING CAPITAL- The Corporation's working capital at the end of fiscal 2002 was
$41.8 million compared to $19.1 million at the end of the prior fiscal year.
Excluding the effect of the classification of assets held for sale and
liabilities of discontinued businesses, and, with respect to March 31, 2001
only, all callable debt as current assets and liabilities, respectively, work-
ing capital at March 31, 2002 was $25.3 million as compared to $22.3 million at
the end of fiscal 2001. The ratio of current assets to current liabilities
improved to 1.98 to 1 at March 31, 2002 compared with 1.06 to 1 at the end of
fiscal 2001. Excluding the impact of the reclassification of all callable debt
and liabilities of discontinued businesses as current liabilities and assets
held for sale as current assets, the current ratio would have been 2.04 at March
31, 2002 compared to 1.94 at March 31, 2001.
Working capital changes, exclusive of changes in callable debt, liabilities of
discontinued businesses, and assets held for sale, were generated by a decrease
in accounts receivable of $1.4 million and an increase in inventories of $3.7
million.The decrease in accounts receivable was due to the improvement in
collections during the fiscal year and the increase in inventory was largely due
to the advance purchase of long lead-time materials needed to fulfill
customers' long-term purchase orders. Days sales outstanding in accounts
receivable at March 31, 2002 decreased to 58 days from 66 days at March 31, 2001
while inventory turnover decreased to 1.7 turns versus 2.0 turns at March 31,
2001. Current liabilities, without regard to changes in callable debt and
liabilities of discontinued businesses increased $3.4 million, primarily the
result of the receipt of a $1.8 million advance payment by a customer in
January, 2002 which has been included in current liabilities as a customer
deposit at March 31, 2002 and $3.8 million of liabilities associated with the
cost of closing out certain interest rate swap obligations which are discussed
further elsewhere in this report. These increases offset reductions in accounts
payable and other accrued expenses. Callable long-term debt decreased to zero
during 2002 because it was reclassified to long term effective March 31, 2002
due to the receipt of a commitment to refinance the existing debt for a
three-year period. Assets held for sale and liabilities of discontinued
businesses were reduced during 2002 primarily as a result of the sale of some
of the businesses treated as discontinued, changes in the estimate of net
realizable value in others, and operating profits, losses and allocated
expenses recognized during the year.
CREDIT FACILITIES - At March 31, 2002, the Corporation had two credit agreements
in effect aggregating $107.6 million. The first, a Revolving Credit Agreement
(the "Credit Agreement") with a group of eight banks (the "Lenders"), commits a
maximum of $36.3 million to the Corporation for
24
TransTechnology Corporation
cash borrowings and letters of credit. The second credit facility consists of
Senior Subordinated Notes in the amount of $78.6 million.
Effective December 31, 2000, the Corporation was not able to meet certain
financial ratio requirements of the Credit Agreement, as amended. Pursuant to
discussions with the Lenders, the Corporation and the Lenders agreed to an
amendment to the Credit Agreement to include a forbearance agreement, the
payment of certain other fees by the Corporation and imposition of certain
conditions on the Corporation including the suspension of dividend payments.
During the forbearance period the Lenders agree not to exercise certain of their
rights and remedies under the Credit Agreement. The Corporation 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 through addi-
tional amendments to September 25, 2002. These additional amendments also
reduced the amount of the Revolving Credit facility of the Credit Agreement (the
"Revolver") from $200 million to $36.3 million at March 31, 2002. The extension
of the forbearance through September 25, 2002 is conditioned on certain
performance and debt reduction requirements, including a reduction in the
Revolver commitment to $28 million and the borrowing sub-limit to $24.5 million
by June 25, 2002. The forbearance agreement also requires the achievement of
minimum levels of EBITDA (earnings before interest, taxes, depreciation, and
amortization), and the adherence to borrowing limits as adjusted based on the
scheduled debt reduction. Other terms of the forbearance agreement include the
payment of certain fees, reporting and consulting requirements. The Corporation
has made all of its scheduled interest and principal payments on a timely basis
and, as previously noted, during fiscal 2002 the Corporation paid $165.1 million
towards its outstanding debt under the Credit Agreement, which included the
retirement of a $38.8 million term loan outstanding to the same group of
Lenders.
The Corporation has unused borrowing capacity for both domestic and
international operations of $7.2 million as of March 31, 2002, including letters
of credit of $5.0 million. Borrowings under the Revolver as of March 31, 2002,
were $29.1 million. Interest on the Revolver is tied to the primary bank's prime
rate, or at the Corporation's option, the London Interbank Offered Rate
("LIBOR"), plus a margin that varies depending upon the Corporation's
achievement of certain operating results. As of March 31, 2002, $9.6 million of
the Corporation's outstanding borrowings utilized LIBOR, all of which were
payable in Pounds sterling. One $2.5 million tranche of the Revolver, the
proceeds of which were used to pay interest on the Corporation's Senior
Subordinated Notes during fiscal 2002, carries an interest rate of 25% and
cannot be repaid until all other amounts outstanding under the Revolver have
been repaid. The weighted average interest rate on all outstanding borrowings
under the revolver at March 31, 2002 was 14.1%.
The Credit Agreement requires the Corporation to maintain interest rate
protection on a minimum of 50% of its variable rate debt. The Corporation has,
accordingly, provided sufficiently 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. Under the Credit Agreement, the base
interest rate is added to the applicable interest rate margin to determine the
total interest rate in effect. The Revolver, as amended by the forbearance
agreements, restricts annual capital expenditures to $2.0 million in fiscal 2003
and contains other customary financial covenants, including the requirement to
maintain certain financial ratios relating to performance, interest expense and
debt levels. As noted above, the Corporation is currently operating under a
forbearance arrangement and is in the process of reducing its debt through the
sale of certain of its businesses in order to either comply with the
requirements of the existing agreement or to be in an improved financial
position to negotiate further amendments or borrowing alternatives.
On August 30, 2000, the Corporation completed a private placement of $75 million
in senior subordinated notes (the "Notes") and certain warrants to purchase
shares of the Corporation's common stock (the "Warrants") to a group of
institutional investors (collectively, the "Purchasers"). The Corporation used
the proceeds of the private placement to retire, in full, a $75 million Bridge
Loan held by a group of lenders led by Fleet National Bank. The Notes are due on
August 29, 2005 and bear 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 Corporation's Credit Agreement. At March 31, 2002 the principal balance
outstanding on the notes amounted to $78.6 million, which includes the
original principal amount plus the "payment-in-kind" notes.
The Warrants entitle the Purchasers to acquire, in the aggregate, 427,602
shares, or 6.5%, of the common stock of the Corporation at an exercise price of
$9.93 a share, which represents the average daily closing price of the
Corporation's
25
2002 Annual Report
common stock on the New York Stock Exchange for the thirty (30) days preceding
the completion of the private placement. The Warrants must be exercised by
August 29, 2010. These Warrants have been valued at an appraised amount of $0.2
million and have been recorded in paid in capital. In connection with the
transaction, the Corporation and certain of its subsidiaries signed a Consent
and Amendment Agreement with its senior debt lenders (the "Lenders") under the
Corporation's $250 million Credit Facility existing at that time, in which the
Lenders consented to the private placement and amended certain financial
covenants associated with the Credit Facility.
As a result of the violation of certain financial covenants under the Credit
Agreement, the Corporation is also in violation of the covenants of the Notes.
The Purchasers of the Notes have entered into a letter agreement with the
Corporation under which they agree to forbear from taking any action relative to
such violations. This forbearance extends through September 29, 2002 and is
conditioned upon the Corporation's continued compliance with the terms of its
forbearance agreement with the Lenders under the Credit Agreement.
On June 13, 2002, the Company received a commitment to refinance its senior debt
for a period of three years and a commitment from the note holders to amend the
financial covenants to bring the company into compliance. Management expects to
complete the proposed refinancing by the end of June 2002 and has, accordingly,
classified its senior debt, as well as its subordinated notes, as long term.
CAPITAL EXPENDITURES - Capital expenditures were $0.3 million in fiscal 2002,
as compared to $0.3 million spent in fiscal 2001 and $0.5 million in fiscal
2000. Principal expenditures were for the modernization of facilities and new
machinery, equipment and information systems equipment. Capital expenditures
in fiscal 2001 included the purchase and installation of a company-wide virtual
private network and modernization of facilities and new production machinery and
equipment. Capital expenditures in fiscal 2000 included the replacement of the
roof and windows at the Breeze Eastern facility.
In fiscal 2003, capital expenditures are expected to be in a range of $1.0 - 1.5
million. Projects budgeted in fiscal 2003 include refurbishment of the Breeze
Eastern offices, the purchase of new production machinery at the Norco facility,
and the initial phase of installing a new ERP system at Breeze Eastern.
The Corporation has divested or made plans to divest nine businesses since March
31, 2001. Under the terms of the agreements associated with the sales of those
businesses, the Corporation has agreed to indemnify the purchasers for certain
damages that might arise in the event a representation of the Corporation has
been materially misstated. Additionally, the terms of such divestiture
agreements generally require the calculation of purchase price adjustments
based upon the amount of working capital or net assets transferred at the
closing date.
INFLATION - While neither inflation nor deflation has had, and the Corporation
does not expect it to have, a material impact upon operating results, there can
be no assurance that its business will not be affected by inflation or
deflation in the future.
ENVIRONMENTAL MATTERS - During the fourth quarter of fiscal 2000, the
Corporation presented an environmental cleanup plan for a portion of a site in
Pennsylvania which the Corporation continues to own although the related
business has been sold. This plan was submitted pursuant to the Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
("PaDEP") concluded in fiscal 1999. Pursuant to the Consent Order, upon its
execution the Corporation paid $0.2 million for past costs, future oversight
expenses and in full settlement of claims made by PaDEP related to the
environmental remediation of the site with an additional $0.2 million paid in
fiscal 2001. A second Consent Order was concluded with PaDEP in the third
quarter of fiscal 2001 for another portion of the site, and a third Consent
Order for the remainder of the site is contemplated by October 1, 2002. The
Corporation is also administering an agreed settlement with the Federal
government under which the government pays 50% of the environmental response
costs associated with a portion of the site. The Corporation has also reached an
agreement in principle with the Federal government and is in the process of
finalizing the necessary documentation under which the Federal government will
pay 45% of the environmental response costs associated with another portion of
the site. At March 31, 2002, the Corporation's cleanup reserve was $1.8 million
based on the net present value of future expected cleanup costs. The Corporation
expects that remediation at the Pennsylvania site will not be completed for
several years.
The Corporation also continues to participate in environmental
assessments and remediation work at nine other locations, which include
operating facilities, facilities for sale, and previously owned facilities.
The Corporation estimates that its potential cost for implementing corrective
action at these sites will not exceed $0.4 million payable over the next several
years, and has provided for the estimated costs in its accrual for environ-
mental liabilities.
In addition, the Corporation has been named as a potentially responsible party
in eight environmental proceedings pending in several other states in which it
is alleged that the Corporation was a generator of waste that was sent to
landfills and other
26
treatment facilities and, as to several sites, it is alleged that the
Corporation was an owner or operator. Such properties generally relate to
businesses which have been sold or discontinued. The Corporation estimates that
its expected future costs, and its estimated proportional share of remedial work
to be performed, associated with these proceedings will not exceed $0.1 million
and has provided for these estimated costs in its accrual for environmental
liabilities.
LITIGATION - The Corporation is also engaged in various other legal proceedings
incidental to its business. It is the opinion of management that, after taking
into consideration information furnished by its counsel, the above matters will
have no material effect on the Corporation's consolidated financial position
or the results of the Corporation's operations in future periods.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION - The Corporation uses the completed contract method for
recognizing revenue. This method recognizes revenue when the contract is
completed, i.e., the later of when the products are shipped and accepted by the
customer, if such acceptance is required under the contract, or when title
passes to the purchaser.
INVENTORY - The Corporation purchases materials for the manufacture of
components for use in its products and for use by its engineering, repair and
overhaul businesses. The decision to purchase a set quantity of a particular
item is influenced by several factors including: current and projected cost;
future estimated availability; lead time for production of the materials;
existing and projected contracts to produce certain items; and the estimated
needs for its repair and overhaul business. The Corporation values its
inventories using the lower of cost or market on a first in first out basis
(FIFO) and establishes reserves to reduce the carrying amount of these
inventories as necessary to net realizable value.
ENVIRONMENTAL RESERVES - The Corporation provides for environmental reserves
when, in conjunction with its internal and external counsel, it determines that
a liability is both probable and estimable. In many cases, the liability is not
fixed or capped when the Corporation first records a liability for a particular
site. Factors that affect the recorded amount of the liability in future years
include: the Corporation's participation percentage due to a settlement by or
bankruptcy of other Potentially Responsible Parties; a change in the
environmental laws requiring more stringent requirements; a change in the
estimate of future costs that will be incurred to remediate the site; and
changes in technology related to environmental remediation. Current estimated
exposure to environmental claims is discussed above in Liquidity and Capital
Resources.
GOODWILL AND OTHER INTANGIBLE ASSETS - At March 31, 2002, the Corporation has
recorded $10.8 million in net goodwill and other intangible assets related to
acquisitions made in prior years. The recoverability of these assets is subject
to an impairment test based on the estimated fair value of the underlying
businesses. Under SFAS 121 these estimated fair values are based on estimates of
future cash flows of the businesses. Factors affecting these future cash flows
include: the continued market acceptance of the products and services offered by
the businesses; the development of new products and services by the businesses
and the underlying cost of development; the future cost structure of the
businesses; and future technological changes. Effective April 1, 2002, the
Corporation implemented SFAS 142, as discussed below, relative to the
non-recognition of goodwill amortization and will no longer reflect such charges
in its results.
FINANCIAL DERIVATIVES - As noted previously, the Corporation has outstanding
interest rate swaps in association with its Credit Agreement. These swaps are
valued using certain estimates and the amount the Corporation is required to pay
is significantly impacted by changes in interest rates. The Corporation esti-
mates that a .67% change in interest rates changes its exposure under these
instruments by $.5 million.
VALUATION OF ASSETS HELD FOR SALE - The Corporation reflects significant amounts
of Assets held for sale and Liabilities of discontinued businesses on its
balance sheet. In the event the net realizable values of the businesses being
divested are less than that estimated, or the length of time required to
complete the divestiture is longer than estimated, the amounts realized from
these accounts may be impacted.
DEFERRED TAX ASSETS - The Company maintains a significant asset on its balance
which represents the value of income tax benefits expected to be realized in the
future, primarily as a result of the use of a net operating loss carry-forward.
In the event the company did not generate adequate amounts of taxable income
prior to the expiry of the tax loss carry-forwards, the amount of this asset may
not be realized. Additionally, changes to the federal and state income tax laws
could also impact the Corporation's ability to utilize this asset.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141, which requires
all business combinations to be accounted for under the purchase method of
accounting, was effective for business combinations initiated after June 30,
2001. Under the new rules of SFAS
27
No. 142, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statement. Other intangible assets will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Accordingly, the Corporation
will apply the new rules on accounting for goodwill and other intangible assets
beginning in 2002. Application of the "no-amortization" provisions of the
statement is expected to increase operating income in 2003 by approximately $0.2
million.
In August, 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
defines the accounting for long-lived assets to be held and used, assets held
for sale, and assets to be disposed of by other than sale, and is effective for
fiscal years beginning after December 15, 2001. The Corporation has adopted SFAS
No. 144 in connection with the sale of Aerospace Rivet Manufacturers
Corporation, which has been recorded as part of Discontinued Operations.
RECENT DEVELOPMENTS
On April 16, 2002 the Corporation completed the sale of all of the shares of its
Aerospace Rivet Manufacturers Corporation Inc. subsidiary for $3.2 million of
cash consideration.
On May 30, 2002 the Corporation completed the sale of substantially all of the
assets of its US retaining ring business for $3.7 million. The consideration was
paid $2.9 million in cash and $0.8 million in the form of a promissory note. The
Corporation also received warrants for 5% of the equity of the purchaser, a
newly formed, privately held company controlled by SeaView Capital LLC of
Providence, Rhode Island.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to various market risks, primarily changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange rates and interest rates.
The Company enters into interest rate swap agreements to manage a portion of its
exposure to interest rate changes as a result of requirements under its Credit
Agreement. 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 March
31, 2002, the Company had outstanding interest rate swap agreements to convert
$125 million of floating rate debt to fixed rate debt. The fair value of these
swaps was approximately ($3.4) million at March 31, 2002.
NOTIONAL
AMOUNT RECEIVE PAY
(IN THOUSANDS) MATURITIES RATE(1) RATE
March 31, 2002 $25,000 5/02 1.88% 5.48%
25,000 5/02 1.88 5.48
37,500 3/03 1.90 6.58
37,500 3/03 1.90 6.58
(1) Based on three-month LIBOR
Financial instruments expose the Corporation to counter-party credit risk for
nonperformance and to market risk for changes in interest and currency rates.
The Corporation manages exposure to counter-party credit risk through specific
minimum credit standards, diversification of counter-parties and procedures to
monitor concentrations of credit risk. The Corporation monitors the impact of
market risk on the fair value and cash flows of its investments by considering
reasonably possible changes in interest rates and by limiting the amount of
potential interest and currency rate exposures to amounts that are not material
to the Corporation's consolidated results of operations and cash flows.
<Table>
<Caption>
AEROSPACE PRODUCTS INVESTOR RELATIONS DIRECTORS
Robert L. G. White, President
INVESTOR RELATIONS CONTACT DANIEL H. ABRAMOWITZ
BREEZE-EASTERN Michael J. Berthelot President, Hillson Financial
Lifting and restraint products Chairman of the Board, President and Management, Inc.
700 Liberty Avenue Chief Executive Officer
Union, NJ 07083-8198 TransTechnology Corporation * GIDEON ARGOV
908/686-4000 150 Allen Road Special Limited Partner
908/686-9292 Fax Liberty Corner, New Jersey 07938 Parthenon Capital
Robert L. G. White - President 908/903-1600
908/903-1616 Fax o WALTER BELLEVILLE
NORCO, INC. www.transtechology.com Chairman of the Board
Hold open rods and mechanical systems ATI Machinery, Inc.
139 Ethan Allen Highway ANNUAL MEETING
Ridgefield, CT 06877-6294 The Annual Shareholders' Meeting will be o MICHAEL J. BERTHELOT
203/544-8301 held on Thursday, July 18, 2002 at the Chairman of the Board, President
203/544-7121 Fax Somerset Hills Hotel, 200 Liberty Corner and Chief Executive Officer
Surin M. Malhotra - President Road, Warren, New Jersey 07059. TransTechnology Corporation
FORM 10-K AND ADDITIONAL INFORMATION + THOMAS V. CHEMA
CORPORATE OFFICERS The Company, upon request to the Partner, Arter & Hadden, LLP
Investor Relations department, will provide President, Gateway Consultants
MICHAEL J. BERTHELOT to any shareholder a copy of the Form 10-K Group, Inc.
Chairman of the Board, President required to be filed with the Securities and
and Chief Executive Officer Exchange Commission and any other + JOHN H. DALTON
available information. President, IPG Photonics
JOSEPH F. SPANIER Former Secretary of the Navy
Vice President, Chief Financial Officer
and Treasurer * MICHEL GLOUCHEVITCH
General Partner, Westar Capital LLC
GERALD C. HARVEY
Vice President, Secretary and JAMES A. LAWRENCE
General Counsel Executive Vice President and
Chief Executive Officer
ROBERT L. G. WHITE General Mills, Inc.
President Aerospace Products Group
+o JAN NAYLOR COPE
MONICA AGUIRRE President
Assistant to the Chairman Jan Naylor Cope Company
and Corporate Assistant Secretary
* WILLIAM J. RECKER
Chairman of the Board
COUNSEL Gretag Imaging Holding AG
Hahn, Loeser & Parks
Cleveland, Ohio -----------------------
AUDITORS
Deloitte & Touche LLP * Audit Committee
Parsippany, New Jersey o Nominating Committee
+ Incentives & Compensation
TRANSFER AGENT AND Committee
REGISTRAR
EquiServe
Boston, EquiServe Division
Canton, Massachusetts
</Table>
ENGINEERED PRODUCTS FOR
150 Allen Road, Liberty Corner, New Jersey 07938 - Phone 908.903.1600 - Fax
908.903.1616 - www.transtechology.com