EXHIBIT 13
[TRANSTECHNOLOGY LOGO] TransTechnology
corporation
engineered products for global partners(TM)
[PHOTO OF HELICOPTER]
RESCUE HOISTS ARE IN USE IN APPROXIMATELY
ONE IN FOUR GOVERNMENT OWNED HELICOPTERS
THROUGHOUT THE WORLD TO RAISE OR
LOWER PERSONNEL IN A RESCUE,
INSERTION, OR EXTRACTION OPERATION.
TRANSTECHNOLOGY CORPORATION IS THE WORLD'S
LEADING DESIGNER, MANUFACTURER, AND
SERVICE PROVIDER FOR HELICOPTER RESCUE
HOISTS, CARGO HOOKS AND CARGO WINCHES.
ANNUAL REPORT
FISCAL YEAR ENDED MARCH 31, 2003
[TRANSTECHNOLOGY LOGO] TransTechnology
corporation
engineered products for global partners(TM)
2003 DOMESTIC VS. EXPORT SALES
DOMESTIC 60%
EXPORT 40%
DILUTED INCOME PER SHARE
(IN DOLLARS)
99 .09
00 -.12
01 -1.42
02 -.36
03 -.61
AFTER TAX INCOME FROM
CONTINUING OPERATIONS
($ IN MILLIONS)
99 .6
00 -.7
01 -8.8
02 -2.2
03 -3.9
CAPITAL EXPENDITURES
($ IN MILLIONS)
99 .9
00 .2
01 .2
02 .2
03 .6
NET SALES
($ IN MILLIONS)
99 36.4
00 40.8
01 47.8
02 47.8
03 55.0
On the front cover: A Sikorsky S-76 operated by the Hong Kong Government Flying
Service performs a rescue with Breeze-Eastern HS-30600 rescue hoist system.
Photograph taken by Sikorsky Aircraft photographer Richard C. Zellner and
provided courtesy of Sikorsky Aircraft Corporation.
Design: Simon Does, LLC
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, 2003, and the consolidated balance sheets of the Company at the
end of each such year.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
YEARS ENDED MARCH 31,
2003 2002 2001 2000 1999
Net sales $ 54,996 $ 47,786 $ 47,775 $ 40,818 $ 36,366
- -----------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations
before income taxes (7,439) (3,596) (13,947) (1,204) 975
(Benefit) provision for income taxes (3,574) (1,366) (5,191) (456) 379
- -----------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (3,865) (2,230) (8,756) (748) 596
Income (loss) from discontinued operations 13,099 (69,551) (64,214) 7,342 13,213
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,234 $ (71,781) $ (72,970) $ 6,594 $ 13,809
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
(Loss) income from continuing operations $ (0.61) $ (0.36) $ (1.42) $ (0.12) $ 0.10
Income (loss) from discontinued operations 2.08 (11.25) (10.41) 1.19 2.11
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 1.47 $ (11.61) $ (11.83) $ 1.07 $ 2.21
- -----------------------------------------------------------------------------------------------------------------------
Diluted:
(Loss) income from continuing operations $ (0.61) $ (0.36) $ (1.42) $ (0.12) $ 0.09
Income (loss) from discontinued operations 2.08 (11.25) (10.41) 1.19 2.08
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 1.47 $ (11.61) $ (11.83) $ 1.07 $ 2.17
- -----------------------------------------------------------------------------------------------------------------------
Dividends declared and paid per share $ - $ - $ 0.195 $ 0.26 $ 0.26
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 85,123 $ 144,746 $ 395,852 $ 482,752 $ 279,720
Long-term debt $ 53,487 $ 107,564 $ 658(a) $ 194,759 $ 102,463
Redeemable common stock $ 1,283 - - - -
Stockholders' equity (deficit) $ (7,923) $ (16,207) $ 51,875 $ 128,882 $ 123,711
Book value per share $ (1.23) $ (2.62) $ 8.40 $ 20.97 $ 20.25
Shares outstanding at year-end 6,457 6,191 6,172 6,145 6,108
- -----------------------------------------------------------------------------------------------------------------------
(a) Excluding callable debt of $271,307.
MARKET AND DIVIDEND DATA
MARKET PRICE
QUARTER ENDED HIGH LOW DIVIDENDS
- ----------------------------------------------------------------------------------------------------
July 1, 2001 $ 9.02 $5.00 -
September 30, 2001 14.79 8.60 -
December 30, 2001 13.50 9.60 -
March 31, 2002 10.20 8.90 -
- ------------------------------------------------------------------------------------------------
June 30, 2002 11.39 8.70 -
September 29, 2002 13.59 9.98 -
December 29, 2002 13.50 9.95 -
March 31, 2003 10.48 5.30 -
- ------------------------------------------------------------------------------------------------
2003 ANNUAL REPORT 1
FELLOW SHAREHOLDERS
As our company enters the new fiscal year, our restructuring and associated
divestitures are complete, our management team has been reconfigured, and our
outlook for the future is bright. While smaller, we believe that our highly
focused company is now positioned to grow, prosper, and create value for its
owners, rewarding careers for its employees, and leading-edge products and
services for its customers.
[PHOTO OF MICHAEL J. BERTHELOT AND ROBERT L. G. WHITE]
Michael J. Berthelot, Chairman (left) Robert L. G. White, President and CEO
(right)
Our business is now composed solely of Breeze-Eastern, the world's leading
designer, manufacturer, and servicer of helicopter rescue hoists, cargo winches
and cargo hooks. As such, 95% of our revenues are derived as the sole-source to
government agencies, both military and civil, for our products and services
across the globe.
The fiscal 2003 financial statements are difficult to follow as they reflect the
impact of the divestiture of several business units, the refinancing of senior
debt, the change in terms of subordinated debt, and the elimination of most
positions in our corporate office. Breeze-Eastern, which is our sole continuing
operation, had record levels of new orders, sales, backlog, and operating profit
during fiscal 2003. These solid results, however, were more than offset by
expenses associated with our restructuring activities, resulting in a loss from
continuing operations of $3.9 million, or $.61 per share. Sales for fiscal 2003
were up 15% to $55.0 million versus fiscal 2002. Operating income from
continuing operations, exclusive of nonrecurring, non-operating gains and losses
and gains from financial derivatives, was up 84%. Net income for fiscal 2003,
including a $13.1 million gain from discontinued operations attributable to our
divestitures, was $1.47 per share.
Our vision for the future is to have TransTechnology recognized as the
pre-eminent designer, manufacturer and servicer of sophisticated lifting
equipment for the aerospace and defense markets. Our business plan is to command
market leadership through design, engineering, and superior customer service. We
will strive to maintain operating agility and to keep our high-quality people
challenged as to personal growth and sustained performance while also
maintaining a focus on cash generation. Our ability to double sales and
operating income over the next five years - initially solely through organic
growth, and, in later years, supplemented by acquisitions of niche products and
technologies - will be our measure of success.
Our effort to remain at the forefront of our industry is illustrated by our
annual engineering budget. Last year, engineering and development spending
amounted to $4.1 million, or 7.5% of sales. This spending level has been
maintained for several years, even in those years when cash flow was tightest.
It was this devotion to engineering expertise that allowed us not only to
introduce new rescue hoist and cargo winch products this past year, but also to
expand our efforts into weapons handling systems. Our extended product line has
already seen several new introductions, including the HLU-196 Bomb Hoist, which
went from concept to delivery in only two years. Almost $5.8 million of these
bomb hoists were shipped in fiscal 2003, with a remaining backlog of $11.2
million to be shipped in fiscal 2004. Weapons loading hoists for the Line of
Sight Anti-Tank Weapon, the High Mobility Artillery Rocket System, and the
Unmanned Combat Air Vehicle represent substantial opportunities for future
growth.
2 TRANSTECHNOLOGY CORPORATION
[PHOTO OF HELICOPTER]
OUR VISION FOR THE FUTURE IS THAT TRANSTECHNOLOGY WILL BE RECOGNIZED AS THE
PRE-EMINENT DESIGNER, MANUFACTURER AND SERVICE PROVIDER OF SOPHISTICATED LIFTING
EQUIPMENT FOR THE AEROSPACE AND DEFENSE MARKETS.
In addition to the development of the weapons handling product line, this past
year saw us win the largest single rescue hoist contract awarded by the U.S.
Navy in recent memory. The award, for 102 BL-27100-85 rescue hoists for the Sea
Hawk helicopter made by Sikorsky, will begin to ship in fiscal 2004 and run into
fiscal 2005. The receipt of such large orders provides a solid base for future
sales of aftermarket products in the form of spare parts, repairs, and overhaul
services.
Our biggest challenge remains the restructuring of our balance sheet. The $53.3
million of very high-rate subordinated debt outstanding at the end of fiscal
2003 is our single most pressing challenge, and, at the same time, opportunity.
Our forecast for fiscal 2004 is that this debt could result in pre-tax interest
and amortization costs of almost $1.70 per share, and anything we can do to
reduce this high level of interest will be immediately beneficial to our
company, its customers, employees, and shareholders. We are dedicated to
completing this last piece of our restructuring effort as quickly as possible.
It is our belief that, at this point in time, there is nothing else we can do
that would create more value for all of our stakeholders.
Our workforce is one of the most productive in the industry. Highly skilled,
well trained, and motivated by producing products that help save lives in any
number of ways, each and every one of our employees makes a valuable
contribution to our company and our nation daily. We are very proud of them and
their commitment to customer service, product quality, and excellence. We were
saddened this past year to lose one of our most valued and committed
customer-service representatives, Nadine Schumann-Mahoney, who passed away in
February. An example to us all, Nadine was completely dedicated to her
customers, and would move mountains to help them in any way she could. She will
be missed by all those whose paths she crossed.
We would also like to thank our entire Board of Directors, which has dedicated
itself to the hard work and effort required to guide our company through the
difficulties of the past two years. Unselfish of their time, counsel, and
assistance, our Board members are one of our company's hidden strengths.
Finally, we thank you, the shareholders, who have placed your trust, confidence,
and resources in our hands. We appreciate your support and are making every
effort to see that TransTechnology regains its position of leadership in the
creation of value for all of its stakeholders.
/s/ Robert L. G. White /s/ Michael J. Berthelot
Robert L. G. White Michael J. Berthelot
President and Chairman
Chief Executive Officer
[PHOTO OF RESCUED INJURED MAN]
2003 ANNUAL REPORT 3
BREEZE-EASTERN
TransTechnology Corporation's Breeze-Eastern unit is the world's leading
designer, manufacturer, and service provider of rescue hoists and cargo hooks
for helicopters as well as cargo winches for both helicopters and fixed wing
aircraft. Breeze-Eastern has been the industry standard almost since the
origination of helicopters, having worked with Igor Sikorsky in the 1940s to
develop a rudimentary hoist for use on his first search and rescue aircraft.
Breeze-Eastern has provided more than 20,000 rescue hoists, cargo winches, and
cargo hooks used by government agencies, both military and civil, around the
world. Rapid inroads are now being made by Breeze-Eastern into an additional
niche market for its sophisticated lifting technology - weapons handling
systems.
RESCUE HOISTS AND CARGO WINCHES
The largest product line within the company, these products are high
performance, highly engineered, and built to exacting standards. Rescue hoists,
which are mission-specific equipment, are in use in approximately one in four
medium- and heavy-lift government-owned helicopters throughout the world. They
are used to raise or lower personnel in a rescue, insertion, or extraction
operation. Our newest product, the HS-29900 electric hoist, has an unlimited
duty cycle and, using a 290-foot cable, can operate at speeds of 350 feet per
minute in hostile environments. The HS-29900 hoists are currently in use on the
most popular and widely used utility helicopters in the world, such as the
Sikorsky H60 Black Hawk, Boeing CH47 Chinook, AgustaWestland EH101, Eurocopter
AS332 Super Puma, and the Russian MIL171.
[PHOTO OF HELICOPTER]
The Agusta A109K2 helicopters used by the Swiss Government Rescue Agency REGA
are all equipped with the Breeze-Eastern 450 lb. electric hoist.
Recently, Breeze-Eastern was the first to offer a double rescue hoist. This new
unit, in use by the Canadian Maritime Authority on its fleet of EH-101
helicopters, allows redundancy for rescue operations, ensuring that the mission
can be accomplished even if one of the hoists becomes entangled or otherwise
disabled. Breeze-Eastern's engineering department has also developed several
product enhancements for existing hoists, including lighted hooks, cable-foul
sensors, slip clutches, and crushable bumpers, each of which adds to the safety
and ease of operating the equipment.
[PHOTO OF HELICOPTER]
The Norwegian Sea King MK43 Search and Rescue helicopters are equipped with a
double rescue hoist system produced by Breeze-Eastern. Photograph courtesy of
The Shephard Press Limited/The Norwegian Defense Mediacentre.
Breeze-Eastern cargo winches are used to move cargo horizontally within either
fixed wing aircraft or helicopters. They generally have a less than 3,000-pound
capacity and are used in aircraft such as the Boeing C-17 and EADS-CASA 235 for
parachute line retrieval and for moving small loads within the aircraft. The
V-22 Osprey, currently in operational evaluation by the U.S. Marine Corps, the
AgustaWestland EH101, Lockheed Martin Alenia C27J Spartan, and EADS-CASA C295
are some of the new platforms that will use Breeze-Eastern cargo winches.
CARGO HOOKS
Breeze-Eastern is the world leader in medium- and heavy-lift cargo hooks. These
fixed devices, found on the bottom exterior along the centerline of the
helicopter, are used for lift or delivery using pendants that attach to the
load. Typical loads range from pallets of ammunition, food and supplies, to
aircraft,
4 TRANSTECHNOLOGY CORPORATION
vehicles, or artillery pieces. Capable of carrying loads of up to 36,000 pounds
- - the largest capacity in the industry - Breeze-Eastern cargo hooks can be found
on all of the world's heavy-lift helicopters, including the Boeing CH-47 and
Sikorsky SH-53 Super Stallion, and all Sikorsky H-60 Hawk series helicopters,
the workhorses of the U.S. Army, Navy and Marine Corps for delivering material
and equipment to troops in the field. Breeze-Eastern cargo hooks can also be
found on the Agusta Bell AB139, Agusta Bell AB412, and Eurocopter AS350 series.
[PHOTO OF HELICOPTER]
U.S. Marine CH-53E Super Stallion, manufactured by Sikorsky, equipped with
Breeze-Eastern cargo hook system which provides heavy-lift operations up to 16
tons.
WEAPONS HANDLING EQUIPMENT
Breeze-Eastern's newest and fastest growing product line is weapons handling
systems. For the past 20 years, Breeze-Eastern has been the sole-source supplier
of more than $100 million of loading equipment for Lockheed Martin's Multiple
Launch Rocket System ("MLRS"), widely used during the 1991 Gulf War and
Operation Iraqi Freedom in 2003. Building upon the basic technology used in
rescue hoists and cargo winches, i.e., a motor, cable, drum and transmission,
Breeze-Eastern has developed loading systems for several newly introduced
weapons platforms. The High Mobility Artillery Rocket System that is a smaller
version of the MLRS; the Line of Sight Anti-Tank Weapon, a HumVee mounted
kinetic energy missile system; and the Unmanned Combat Air Vehicle, expected to
be a primary combat bomber in the future, all use Breeze-Eastern weapon loading
devices. Breeze-Eastern's HLU-196 Bomb Hoist, developed from concept to
delivered product in less than two years, will become standard equipment on all
U.S. Navy aircraft carriers. The first $5.8 million of these units were shipped
during fiscal 2003 and Breeze-Eastern has received a total of $18.3 million of
orders for this new product. Although already considered a market leader,
Breeze-Eastern currently has less than 10% market share in this highly
fragmented market and has targeted its new weapons handling product line for
substantial growth in the future.
[PHOTO OF HELICOPTER]
The U.S. Air Force and Defense Advanced Research Projects Agency (DARPA)
Unmanned Combat Aerial Vehicle (UCAV-A) X-45A, manufactured by the Boeing
Company is equipped with the Breeze-Eastern Integral Weapon Bay Hoist.
[PHOTO OF HELICOPTER]
Canada's new Search and Rescue helicopter CH-149 Cormorant, manufactured by
AgustaWestland, conducting a training mission with a rescue litter is equipped
with a dual Breeze-Eastern HS-29900 rescue hoist system. Photo courtesy of Air
Force Public Affairs Team/Department of National Defence.
PRODUCT SUPPORT
Breeze-Eastern's commitment to product support is widely recognized as the best
in the business. From the daily quality meeting that is open to customer calls
and participation, to the user conferences that bring together front-line
operators of Breeze-Eastern equipment around the world, Breeze-Eastern focuses
on meeting the current and future needs of its customers while surpassing
expectations. Product support and after-market equipment sales generated more
than 50% of revenues in fiscal 2003. Product support is a highly visible segment
of the Breeze-Eastern business, and one that receives substantial resources from
marketing, engineering, manufacturing, quality and finance.
2003 ANNUAL REPORT 5
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Parsippany, New Jersey
May 1, 2003 (June 2, 2003 as to the second paragraph of Note 6)
6 TRANSTECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
MARCH 31,
ASSETS 2003 2002
==========================================================================================================
CURRENT ASSETS:
Cash and cash equivalents $ 7,104 $ 97
Accounts receivable (net of allowance for doubtful accounts of
$65 and $341 in 2003 and 2002, respectively) 6,701 7,840
Inventories 19,683 16,869
Prepaid expenses and other current assets 1,364 1,003
Income tax receivable 363 7,600
Deferred income taxes 1,289 1,538
Assets held for sale - 64,977
- ----------------------------------------------------------------------------------------------------------
Total current assets 36,504 99,924
- ----------------------------------------------------------------------------------------------------------
PROPERTY:
Land 534 534
Buildings 4,004 3,919
Machinery and equipment 4,544 4,548
Furniture and fixtures 3,639 3,521
- ----------------------------------------------------------------------------------------------------------
Total 12,721 12,522
Less accumulated depreciation and amortization 10,372 10,215
- ----------------------------------------------------------------------------------------------------------
Property - net 2,349 2,307
- ----------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred income taxes 30,712 29,266
Other 15,558 13,249
- ----------------------------------------------------------------------------------------------------------
Total other assets 46,270 42,515
- ----------------------------------------------------------------------------------------------------------
TOTAL $ 85,123 $ 144,746
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
==========================================================================================================
CURRENT LIABILITIES:
Current portion of long-term debt $ 79 $ -
Accounts payable - trade 4,954 4,503
Accrued compensation 2,847 2,231
Accrued income taxes 2,460 449
Liabilities of discontinued businesses - 21,142
Other current liabilities 15,003 14,096
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 25,343 42,421
- ----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT PAYABLE TO BANKS AND OTHERS 53,487 107,564
- ----------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 1,332 1,188
- ----------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 11,601 9,780
- ----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
- ----------------------------------------------------------------------------------------------------------
REDEEMABLE COMMON STOCK 1,283 -
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT:
Preferred stock - authorized, 300,000 shares; none issued - -
Common stock - authorized, 14,700,000 shares of $.01 par value, issued,
7,018,299 and 6,739,264 shares in 2003 and 2002, respectively 70 67
Additional paid-in capital 74,283 78,286
Notes receivable from officer - (123)
Accumulated deficit (72,993) (82,227)
Accumulated other comprehensive loss - (2,888)
Unearned compensation (43) (236)
- ----------------------------------------------------------------------------------------------------------
1,317 (7,121)
Less treasury stock, at cost - 560,964 and 548,186 shares in 2003 and
2002, respectively (9,240) (9,086)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' deficit (7,923) (16,207)
- ----------------------------------------------------------------------------------------------------------
TOTAL $ 85,123 $ 144,746
==========================================================================================================
See notes to consolidated financial statements.
2003 ANNUAL REPORT 7
STATEMENTS OF CONSOLIDATED OPERATIONS
(In thousands, except share data)
YEARS ENDED MARCH 31,
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net sales $ 54,996 $ 47,786 $ 47,775
Cost of sales 30,426 26,900 27,770
- -----------------------------------------------------------------------------------------------------------
Gross profit 24,570 20,886 20,005
General, administrative and selling expenses 17,605 16,807 20,154
Interest expense 9,158 4,931 2,789
Interest and other expense (income) - net 18 (1,536) (156)
Unrealized gain on warrants (1,967) - -
Forbearance fees 764 2,651 -
Charges related to debt reduction 3,735 - -
Corporate office restructuring charge 2,696 1,629 11,165
- -----------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes (7,439) (3,596) (13,947)
Income tax benefit (3,574) (1,366) (5,191)
- -----------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,865) (2,230) (8,756)
Discontinued operations:
Income from sale of businesses and income (loss) from
operations of discontinued businesses (less applicable
income taxes (benefit) of $8,012 and ($5,661)
for 2002 and 2001, respectively). - 16,414 (64,214)
Income (loss) on disposal of discontinued businesses including
provision for operating losses during phase out periods (less
applicable income taxes (benefit) of $3,083 and ($40,271)
for 2003 and 2002, respectively). 13,099 (85,965) -
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,234 $ (71,781) $ (72,970)
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Loss from continuing operations $ (0.61) $ (0.36) $ (1.42)
Income (loss) from discontinued operations 2.08 (11.25) (10.41)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 1.47 $ (11.61) $ (11.83)
- -----------------------------------------------------------------------------------------------------------
Diluted:
Loss from continuing operations $ (0.61) $ (0.36) $ (1.42)
Income (loss) from discontinued operations 2.08 (11.25) (10.41)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) per share $ 1.47 $ (11.61) $ (11.83)
- -----------------------------------------------------------------------------------------------------------
Weighted - average basic shares outstanding 6,303,000 6,181,000 6,167,000
Weighted - average diluted shares outstanding 6,303,000 6,181,000 6,167,000
See notes to consolidated financial statements.
8 TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
YEARS ENDED MARCH 31,
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 9,234 $ (71,781) $ (72,970)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Net (income) loss from discontinued operations, including
asset impairments (13,099) 85,965 64,214
Gain on sale of discontinued businesses, net of tax - (16,414) -
Depreciation and amortization 2,367 2,546 3,533
Change in net assets of discontinued companies (5,857) 17,463 23,751
Write-off of unamortized loan fees 2,199 - -
Warrant mark-to-market adjustment 1,967 - -
Noncash interest expense 3,263 2,528 1,484
(Reduction of) provision for losses on accounts and notes
receivable, and cost investments (276) 321 9,271
Loss (gain) on sale or disposal of fixed assets 7 (1,352) 5
Changes in assets and liabilities - excluding the effects
of acquisitions and dispositions:
Decrease (increase) in accounts receivable
and other receivables 8,602 (816) (6,983)
(Increase) decrease in inventories (2,814) (1,923) 1
Increase in deferred taxes, net (2,608) (22,041) (7,602)
Increase in other assets (4,524) (849) (3,121)
Increase in accounts payable 451 463 159
Increase (decrease) in accrued compensation 616 (38) 663
Increase (decrease) in income taxes payable 2,011 (2,745) (2,604)
(Decrease) increase in other liabilities (2,263) 8,877 5,158
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (724) 204 14,959
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (588) (184) (203)
Proceeds from sale of businesses 67,425 162,200 -
Proceeds from sale of fixed assets 1 2,233 -
(Increase) decrease in notes and other receivables (980) 75 252
- --------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 65,858 164,324 49
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on long-term debt (49,729) (38,750) (82,500)
Proceeds from long-term debt and bridge loan 20,500 - 75,000
Proceeds from (repayments on) other debt, net (28,819) (128,097) 1,460
Debt issue costs - - (6,276)
Exercise of stock options and other (79) 79 -
Dividends paid - - (1,198)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (58,127) (166,768) (13,514)
Increase (decrease) in cash and cash equivalents 7,007 (2,240) 1,494
Cash and cash equivalents at beginning of year 97 2,337 843
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 7,104 $ 97 $ 2,337
- --------------------------------------------------------------------------------------------------------------
Supplemental information:
Interest payments $ 16,975 $ 24,573 $ 29,475
Income tax payments $ 266 $ 919 $ 2,658
Increase in senior subordinated note for paid-in-kind
interest expense $ 2,672 $ 2,316 $ 1,332
Warrants issued $ - $ - $ 214
- --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
2003 ANNUAL REPORT 9
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
RETAINED NOTES ACCUMULATED
YEARS ENDED ADDITIONAL EARNINGS RECEIVABLE OTHER UNEARNED TOTAL
MARCH 31, 2003, COMMON STOCK TREASURY STOCK PAID-IN (ACCUMULATED FROM COMPREHENSIVE COMPEN- COMPREHENSIVE
2002 AND 2001 SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) OFFICERS INCOME (LOSS) SATION INCOME (LOSS)
==================================================================================================================================
BALANCE,
MARCH 31,
2000 6,691,232 $67 (546,394) $(9,069) $ 77,587 $ 63,722 - $ (3,157) $(267)
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 15,000 - - - 171 - (191) - - -
Issuance of
stock under
bonus plan 12,382 - (34) (1) 119 - - - 14 -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
MARCH 31,
2001 6,718,614 67 (546,428) (9,070) 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 10,356 - - - 92 - 68 - - -
Issuance of
stock under
bonus plan 10,294 - (1,758) (16) 103 - - - 17 -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
MARCH 31,
2002 6,739,264 67 (548,186) (9,086) 78,286 (82,227) (123) (2,888) (236) $(68,346)
========
Net income - - - - - 9,234 - - - $ 9,234
Other
comprehensive
income:
Currency
translation
adjustment - - - - - - - (86) - (86)
Less:
reclassification
adjustment on
deferred
tax on currency
translation
adjustment - - - - - - - (1,555) - (1,555)
Less:
reclassification
adjustment for
sale of foreign
subsidiaries - - - - - - - 4,529 - 4,529
Loan repayment by
officer - - - - - - 123 - - -
Warrant adjustment - - - - (4,547)
Issuance of stock
from warrant
exercise 256,561 3 - - 393 - - - - -
Issuance of stock
under stock
option
plan/other 14,066 - (5,138) (56) 63 - - - - -
Issuance of
stock under
bonus plan 8,408 - (7,640) (98) 88 - - - 193 -
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE,
MARCH 31,
2003 7,018,299 $70 (560,964) $(9,240) $ 74,283 $ (72,993) $ - $ - $ (43) $ 12,122
==================================================================================================================================
See notes to consolidated financial statements.
10 TRANSTECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING PRINCIPLES
BUSINESS - The fiscal year of 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 completed by the Company during 2003, the
Company has reclassified all of the business units that made up its Specialty
Fastener segment in prior years and its Aerospace Rivet Manufacturers
Corporation and Norco Inc. businesses, which had been included in its Aerospace
Products segment, as discontinued operations. All references related to ongoing
operations, or the Company, refer only to continuing operations, which consists
of the Breeze-Eastern division.
The company, which has one manufacturing facility in the United States,
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.
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.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
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.
Depreciation expense for the years ended March 31, 2003, 2002 and 2001 was $0.5
million, $0.6 million and $0.8 million, respectively. During 2002 the Company
sold excess real estate realizing a gain of $1.3 million that is included in
other income.
EARNINGS PER SHARE ("EPS") - The computation of basis 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:
2003 2002 2001
Basic earnings per
common share:
Weighted-average common
shares outstanding 6,303,000 6,181,000 6,167,000
-------------------------------------
Diluted earnings per
common share:
Weighted-average common
shares outstanding 6,303,000 6,181,000 6,167,000
Stock options - - -
-------------------------------------
Denominator for diluted
earnings per common share 6,303,000 6,181,000 6,167,000
-------------------------------------
Options to purchase 311,411 shares of common stock at prices between $8.84 and
$27.88 were outstanding during 2003 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 2002 options to purchase
450,183 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
2001, options to purchase 505,971 shares of common stock at price between $8.84
and $27.88 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 $2.3
million, $1.7 million and $1.5 million in 2003, 2002 and 2001, respectively.
Included in these amounts were expenditures of $1.7 million, $1.2 million and
$1.2 million in 2003, 2002 and 2001, 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 or exchange prevailing
during the year. Cumulative translation adjustments related to businesses which
have been sold have been reflected in the operating results from discontinued
operations.
2003 ANNUAL REPORT 11
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.
FINANCIAL INSTRUMENTS - The Company does not hold or issue financial instruments
for trading purposes. The estimated liability relating to interest rate swap
agreements was accrued during 2002. These agreements were terminated and settled
in 2003.
STOCK-BASED COMPENSATION - In December 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148") which amends SFAS No. 123. This
statement provides alternative methods of transition for a voluntary change to
the fair value-based method of accounting for stock-based employee compensation
and amends the disclosure requirements of SFAS No. 123. The transition guidance
and disclosure requirements are effective for fiscal years ending after December
15, 2002. The adoption of this statement will not have a material effect on the
Company's financial position or results of operations.
Following is a summary of the proforma effect on earnings under SFAS 123 (in
thousands except per share amounts):
2003 2002 2001
Net income (loss) applicable to common shares,
as reported $ 9,234 $(71,781) $ (72,970)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (224) (660) (351)
----------------------------------
$ 9,010 $(72,441) $ (73,321)
==================================
Net loss per share:
Basic and diluted - as reported $ 1.47 $ (11.61) $ (11.83)
==================================
Basic and diluted - proforma $ 1.43 $ (11.72) $ (11.89)
==================================
NEW ACCOUNTING STANDARDS - In May 2003 FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," that improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS 150 requires
that those instruments be classified as liabilities in statement of financial
position. This statement is effective for the Company's fiscal quarter beginning
June 30, 2003. Management does not believe adoption of this standard will have a
material impact on the Company's financial position or results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" that amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133.
With certain exceptions, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designed after June
30, 2003. Management does not believe adoption of this standard will have a
material impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,2003.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1,2003. The adoption of this statement is not expected
to have a material effect on the Company's financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation requires a guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also enhances guarantor's
disclosure requirements to be made in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31,2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15,2002. In the
normal course of business, the Company does not issue guarantees to third
parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities. " SFAS 146 requires the recognition of a liability for costs
associated with an exit plan or disposal activity when incurred and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," which allowed recognition at the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. The adoption of this statement is not anticipated to
have a material effect on the Company's financial position or results of
operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was approved by
the FASB. Among other things, this statement requires that gains or losses on
the extinguishment of debt will generally be required to be reported as a
component of income from continuing operations and will no longer be classified
as an
12 TRANSTECHNOLOGY CORPORATION
extraordinary item. The Company's financial statements for the periods prior to
March 31, 2001, have been reclassified to include losses previously recorded as
an extraordinary item as a component of income from continuing operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15, 2002. This
statement addresses the diverse accounting practices for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The adoption of this statement will not have a material effect
on the Company's financial position or results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets (excluding financial
instruments and deferred tax assets) and certain identifiable intangibles to be
held and used are reviewed by the Company for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Such circumstances include, but are not limited to, a
significant decrease in the market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant physical change
in an asset, a significant adverse change in legal factors or in the business
climate that could affect the value of an asset, or an adverse action or
assessment by a regulator. If a review for recoverability is necessary, the
Company estimates the future cash flows expected to result from the use of the
asset. In performing these estimates, the Company groups its assets at the
lowest level for which there are identifiable cash flows. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Any impairment loss recognized
is measured as the excess of the carrying amount of the asset over the fair
value of the asset.
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 $6.3 million, $20.1
million and $31.6 million, in 2003, 2002 and 2001, 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 which the Company may, under
certain circumstances, be required to repurchase for $1 million in fiscal 2006.
Proceeds from the sales were used to repay borrowings outstanding under the
Company's then current Credit Facility (the Fleet 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 Fleet
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 noncash 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 Fleet Credit Facility.
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
Fleet 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 to SeaView Capital LLC for $2.9
million of cash, a promissory note of $0.8 million and warrants for 5% of the
equity of the purchaser. The net proceeds of the sale were used to repay
borrowings outstanding under the Fleet Credit Facility.
On January 3, 2003, the Company completed the sale of TCR Corporation for cash
consideration of $10.0 million, plus the assumption of certain liabilities, to
an affiliate of MidMark Capital LLC. The net proceeds of the sale were used to
repay borrowings outstanding under the New Senior Credit Facility.
On February 24, 2003, the Company sold Norco Inc. for $51.0 million cash and a
$1.0 million reimbursement for certain income taxes payable as a result of the
transaction to a wholly-owned subsidiary of TransDigm Inc. The net cash proceeds
were used to retire senior debt under the New Senior Credit Facility and
partially repay subordinated debt.
2003 ANNUAL REPORT 13
Net sales and losses from the discontinued operations were as follows (in
thousands):
2003 2002 2001
Net sales $ 48,146 $ 185,888 $ 280,296
--------------------------------------
Loss on disposal of
discontinued businesses
including provision for
operating losses during
phase out period $ - $(126,236) $ -
Income from sale of
businesses and income
(loss) from operations
of discontinued
businesses prior to
phase out period 16,182 24,426 (69,875)
Income tax provision
(benefit) 3,038 (32,259) (5,661)
--------------------------------------
Net income (loss) from
discontinued operations $ 13,099 $ (69,551) $ (64,214)
--------------------------------------
The 2003 gain was comprised of $8.2 million of charges to reflect the amounts
ultimately realized from the sales of discontinued businesses; $7.0 million of
actual operating income of the discontinued businesses; a gain of $28.5 million
from the sale of Norco, Inc.; $6.3 million of allocated interest expense; $0.2
million for the final settlement of interest rate swap contracts; and a noncash
charge of $4.6 million associated with the recognition of accumulated currency
translation losses from the sale of the Brazilian operation. These gains and
losses, which aggregated a net gain of $16.2 million, were reduced by a tax
provision of $3.1 million. 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; $12.0 million of actual
operating income of the discontinued businesses through their expected
divestiture dates; $20.1 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; $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 a net loss of
$101.9 million, were reduced by a tax benefit of $32.3 million. The fiscal 2001
loss from discontinued operations consisted of $67.9 million of impairment
charges; $29.6 million of operating income of the discontinued businesses; and
$31.6 million of allocated interest expense. These fiscal 2001 losses, which
aggregated $69.9 million, were reduced by a tax benefit of $5.7 million.
Assets and liabilities of discontinued businesses at March 2002 were comprised
of current assets of $34,206, property of $12,407 and other assets of $18,364,
offset by current liabilities of $19,883 and $1,259 of long-term liabilities.
In fiscal 2003 and 2002, the Company recognized charges of $2.7 million and $1.6
million, respectively, for severance and other costs related to the corporate
office restructuring. In fiscal 2001, the charge of $11.2 million included costs
associated with the corporate office restructuring as well as write offs of
notes receivable and worthless investments in companies that had been divested
in prior fiscal years.
3. INVENTORIES
Inventories at March 31, consisted of the following (in thousands):
2003 2002
Finished goods $ 2 $ 4
Work in process 6,105 4,525
Purchased and manufactured parts 13,576 12,340
-------------------
Total $19,683 $16,869
-------------------
4. OTHER CURRENT LIABILITIES
Other current liabilities at March 31, consisted of the following (in
thousands):
2003 2002
Interest rate swap obligation $ - $ 3,827
Accrued interest 1,749 2,606
Other 13,254 7,663
-------------------
Total $15,003 $14,096
-------------------
5. INCOME TAXES
The components of total income (loss) from operations (including continuing and
discontinued operations) before income taxes were (in thousands):
2003 2002 2001
Domestic $ 7,011 $ (86,453) $ (51,288)
Foreign 1,732 (18,952) (32,534)
--------------------------------------
Total $ 8,743 $(105,405) $ (83,822)
--------------------------------------
The (benefit) provision for income taxes is summarized below(in thousands):
2003 2002 2001
Currently (receivable)
payable:
Federal $ (1,038) $ (9,372) $ (5,600)
Foreign - 46 105
State 1,599 400 452
------------------------------------
561 (8,926) (5,043)
------------------------------------
Deferred (1,052) (29,556) (15,455)
Valuation allowance - 4,857 9,646
------------------------------------
(1,052) (24,699) (5,809)
------------------------------------
Total $ (491) $(33,625) $(10,852)
14 TRANSTECHNOLOGY CORPORATION
The provision (benefit) for income taxes is allocated between continuing and
discontinued operations as summarized below (in thousands):
2003 2002 2001
Continuing $ (3,574) $ (1,366) $ (5,191)
Discontinued 3,083 (32,259) (5,661)
--------------------------------
Total $ (491) $(33,625) $(10,852)
================================
The consolidated effective tax rates for continuing operations differ from the
federal statutory rates as follows:
2003 2002 2001
Statutory federal rate (35.0%) (35.0%) (35.0%)
State income taxes after
federal income tax - 0.6 (0.9)
Earnings of the foreign
sales corporation (0.9) - -
Gain on warrants (9.4) - -
Amortization of purchase
price and impairment not
deductible for tax purposes 3.0 (0.3) 1.8
AMT credit - - (3.3)
Other (5.7) (3.3) 0.2
------------------------
Consolidated effective tax rate (48.0%) (38.0%) (37.2%)
========================
The following is an analysis of accumulated deferred income taxes (in
thousands):
2003 2002
Assets:
Current:
Bad debts $ 25 $ 243
Employee benefit accruals 569 638
Inventory 524 1,111
Other 171 (454)
--------------------
Total current 1,289 1,538
--------------------
Noncurrent:
Employee benefit accruals (961) (795)
Environmental 1,363 1,329
Accrued liabilities (1,225) 1,836
Net operating loss carryforward 30,537 43,101
Other 998 (1,702)
Valuation allowance - (14,503)
--------------------
Total noncurrent 30,712 29,266
--------------------
Total assets $ 32,001 $ 30,804
====================
Liabilities:
Property $ 1,332 $ 1,188
--------------------
Total liabilities $ 1,332 $ 1,188
====================
Net deferred tax asset $ 30,669 $ 29,616
====================
The Company has federal and state net operating loss carryforwards of $52.3
million and $73.9 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 2023.
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):
2003 2002
Credit agreement - 7.25% $ - $ 17,000
Credit agreement - 8.0% - 9,562
Credit agreement - 25.0% - 2,500
Senior Subordinated Notes - 18% 53,329 78,648
Other 237 -
--------------------------
53,566 107,710
Less current maturities 79 -
Less unamortized discount - 146
==========================
Total long-term debt $53,487 $107,567
==========================
CREDIT FACILITIES - At March 31,2003, the Company has a senior credit facility
consisting of a $13.5 million, asset based, revolving credit facility which was
established in August 2002 to refinance all remaining obligations outstanding
under the Fleet Credit Facility (the "New Senior Credit Facility"). The New
Senior Credit Facility, as amended June 2,2003 and which matures August 7,2005,
is secured by all of the Company's assets, carries an interest rate of 5.25% and
contains customary financial covenants and events of default. The Company was in
compliance with the provisions of the facility. Subject to limitations relating
to levels of certain assets and reserves for future interest payments, the
Company has unused borrowing capacity on the facility of $13.5 million as there
were no borrowings outstanding under the facility at March 31,2003.
SENIOR SUBORDINATED NOTES - On August 30,2000, the Company completed a private
placement of $75 million of senior subordinated notes (the "Notes") and warrants
to purchase shares of the Company's common stock (the "Warrants") to a group of
institutional investors (collectively, the "Purchasers"). The Company used the
proceeds of the private placement to retire, in full, a $75 million bridge loan
held by a group of lenders led by Fleet National Bank. The Notes, as amended in
August 2002, are due on August 29, 2005 and bear interest at a rate of 18% per
annum subject to adjustments described below, consisting of 13% cash interest on
principal, payable quarterly, and 5% interest on principal, payable quarterly in
"payment-in-kind" ("PIK") promissory notes. The Company may prepay the Notes
after August 29,2001, at a premium initially of 9%, declining to 5%, 3%, and 1%
on each of the next succeeding anniversaries of that date. The Notes contain
customary financial covenants and events of default, including a cross-default
provision to the
2003 ANNUAL REPORT 15
Company's senior debt obligations. At March 31, 2003, the principal balance
outstanding on the notes amounted to $53.3 million, which included the original
principal amount plus the "payment-in-kind" notes less approximately $28.6
million paid off at the time of the sale of Norco, Inc. At March 31, 2003, the
Company was in compliance with the provisions of the Notes.
At issuance, the Warrants entitled the Purchasers to acquire, in the aggregate,
427,602 shares, or approximately 7%, of the common stock of the Company at an
exercise price of $9.93 a share. This exercise price represents the average
daily closing price of the Company's common stock on the New York Stock Exchange
for the thirty (30) days preceding the completion of the private placement. The
Warrants must be exercised by August 29, 2010.
Effective with the refinancing of the Company's prior senior credit agreement
with the New Senior Credit Facility on August 7, 2002, the purchasers of the
senior subordinated notes agreed to amend the notes. Under the amended senior
subordinated notes, the Company paid an amendment fee equal to 1% of the
outstanding balance of the notes by issuing additional notes and agreed to
increase the PIK interest rate on the notes to 5% effective January 1, 2003,
with such rate increasing 0.25% each quarter until we retire the notes.
Additionally, the Company amended the terms of the warrants to reduce the
exercise price of each warrant to provide the holders with a minimum profit on
the exercise of the warrants equal to $5.00 per share if the warrants were
exercised and sold prior to December 31, 2002. Because the Company did not
redeem the warrants prior to December 31, 2002, their exercise price was reduced
to $0.01 per share as of that date. In addition, the amended warrants contain a
"put" right that allows the holders to cause the Company to purchase the
warrants at a price of $5.00 per underlying share up to 120 days following the
occurrence of certain "liquidity events." The sale of the Norco, Inc. subsidiary
constituted a liquidity event and, accordingly, under the terms of the warrants,
as amended, through June 24, 2003, the holders have the right to require the
Company to redeem the warrants or repurchase the stock acquired through the
exercise of the warrants at a price equal to $5.00 per share. The maximum cash
exposure related to these warrants and their put rights, if any, is the $2.1
million that would be required to redeem the unexercised warrants or the
underlying shares. The $1.3 million of redeemable common stock reflected on the
balance sheet, represents the $5.00 per share put price on that portion of the
warrants (approximately 257,000 shares of common stock) which have been
exercised by the holders of the warrants. Upon the expiration of the put right,
any amount of redeemable common stock for which the put right was not exercised
will be used to increase additional paid in capital.
At March 31, 2003, the Company recorded a $2.0 million noncash, non-taxable gain
relating to the mark-to-market accounting of the warrants as a derivative. Since
the put right attached to the warrants will expire during the first quarter of
fiscal 2004, no further gains or losses relating to the warrants will be
recorded.
The Company has maturities of long-term debt of $79 thousand, $53.4 million and
$79 thousand in 2004, 2005 and 2006, respectively.
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 1999 plan, 300,000 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 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.
16
TRANSTECHNOLOGY CORPORATION
The following table summarizes stock option activity over the past three years
under the plans:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
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
Granted - -
Exercised (14,066) 4.45
Canceled or expired (130,540) 18.68
-------
Outstanding at march 31, 2003 395,941 14.42
-------
Options exercisable at March 31, 2001 247,119 20.92
Options exercisable at March 31, 2001 318,189 19.00
Options exercisable at March 31, 2001 286,446 16.88
In 2003, 2002 and 2001 the company awarded restricted stock totaling 8,408
shares, 10,294 shares and 12,382 shares, respectively. The weighted-average fair
value of this restricted stock was $10.15, $10.12 and $9.63 in 2003, 2002 and
2001, respectively. The expense recorded in 2003, 2002 and 2001 for restricted
stock was $88,000, $98,000 and $120,000 respectively.
No options were granted in 2003.
The weighted-average Black-Scholes value per option granted in 2002 and 2001 was
$4.22 and $3.00, respectively. The following weighted-average assumptions were
used in the Black-Scholes option pricing model for options granted in 2002 and
2001:
2002 2001
Dividend yield 0.0% 0.9%
volatility 75.6% 38.4%
Risk-free interest rate 3.3% 6.3%
Expected term of options (in years) 4.0 4.0
For options outstanding and exercisable at March 31, 2003, 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, 2003 REMAINING LIFE EXERCISE PRICE AT MARCH 31, 2003 EXERCISE PRICE
$ 6-10 207,880 4 $ 7.93 98,708 $ 7.90
10-15 - - - - -
15-21 119,398 2 18.48 119,075 18.48
21-28 68,663 1 27.02 68,663 27.02
------- ------ ------- ------
395,941 2 $14.42 286,446 $16.88
2003 ANNUAL REPORT 17
NOTES RECEIVABLE FROM OFFICER - Notes receivable from an officer resulted from
the exercise of stock options in exchange for notes. Principal and interest were
paid in full in February 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 $0.6 million, $0.6 million and
$0.7 million in 2003, 2002 and 2001, respectively.
The Company provides postretirement benefits to certain union employees. The
Company funds these benefits on a pay-as-you-go basis.
(In thousands)
POSTRETIREMENT BENEFITS
-------------------------
YEAR ENDED MARCH 31,
-------------------------
2003 2002 2001
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost $ -- $ -- $ --
Interest cost 114 86 88
Amortization of net loss 51 53 19
------------------------
Net periodic benefit cost $165 $139 $107
========================
WEIGHTED-AVERAGE
ASSUMPTION AS OF MARCH 31:
Discount rate 5.75% 7.25% 7.25%
POSTRETIREMENT BENEFITS
-----------------------
YEAR ENDED MARCH 31,
-----------------------
2003 2002
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of
year $ 1,205 $ 1,258
Service cost -- --
Interest cost 114 86
Actuarial loss 440 --
Benefits paid (131) (139)
--------------------
Benefit obligation at end of year $ 1,628 $ 1,205
====================
POSTRETIREMENT BENEFITS
-----------------------
YEAR ENDED MARCH 31,
-----------------------
2003 2002
RECONCILIATION OF FUNDED STATUS:
Funded status $(1,628) $(1,205)
Unrecognized actuarial loss 648 259
--------------------
Accrued liability $ (980) $ (946)
====================
For measurement purposes, a 13.5% and 10.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2003 and 2002,
respectively. The rate was assumed to decrease gradually to 5.25% 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 care cost trend
would be as follows:
ONE ONE
PERCENTAGE PERCENTAGE
POINT POINT
INCREASE DECREASE
Effect on interest cost component $ 9 $ (8)
Effect on accumulated
postretirement benefit obligation 138 (121)
The balance sheet of the Company contains a non-current asset and a non-current
liability in the amount of $3.7 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 - The Company had no swap agreements in effect at
March 31,2003. The following agreements were in effect at March 31,2002:
NOTIONAL
AMOUNT RECEIVE PAY
(IN THOUSANDS) MATURITIES RATE (1) RATE
March 31,2002 $25,000 May 2002 1.88% 5.48%
25,000 May 2002 1.88% 5.48%
37,500 March 2003 1.90% 6.58%
37,500 March 2003 1.90% 6.58%
(1) Based on three-month LIBOR
The company recorded the fair value of these swaps in accrued liabilities at
March 31,2002. During 2003, these agreements were terminated and settled as the
debt was repaid resulting in a charge of $0.2 million to discounted operations.
18 TRANSTECHNOLOGY CORPORATION
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 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, 2003,
the Company had no other significant concentrations of risk.
10. COMMITMENTS
The Company and its subsidiaries have minimum rental commitments under
noncancelable operating leases, primarily leased equipment, as follows (in
thousands):
2004 $ 423
2005 116
2006 114
2007 61
2008 22
-----
Total $ 736
=====
Rent expense under operating leases for the years ended March 31, 2003, 2002,
and 2001 was $419 thousand, $589 thousand and $515 thousand, respectively.
11. 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 was concluded
in the third quarter of fiscal 2003. 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, 2003, the Company's cleanup reserve was $2.0 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, including former facilities of the
Company. The Company estimates that its potential cost for implementing
corrective action at these sites will not exceed $0.5 million payable over the
next several years, and has provided for the estimated costs in its accrual for
environmental liabilities. In addition, in the first quarter of fiscal 2003, the
Company entered into a consent order for a former facility in New York pursuant
to which it is developing a remediation plan for review and approval by the New
York Department of Environmental Conservation. The Company has established a
reserve of $2.5 million which it believes is adequate.
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 $0.2 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.
12. 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 55.1%, 47.3%
and 45.3% of sales in 2003, 2002 and 2001 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 2003 2002 2001
United States $33,110 $26,264 $28,518
Europe 9,238 13,367 14,294
Pacific and Far East 8,406 5,523 2,950
Other non-United States 4,242 2,632 2,013
------- ------- -------
Total $54,996 $47,786 $47,775
======= ======= =======
2003 ANNUAL REPORT 19
13. UNAUDITED QUARTERLY FINANCIAL DATA
(In thousands except per share amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2003
Net Sales $13,887 $11,854 $15,562 $13,693 $54,996
Gross Profit 6,211 5,474 7,486 5,399 24,570
(Loss) income from continuing operations (143) (1,710) 1,437 (3,449) (3,865)
Income (loss) from discontinued operations (607) (3,523) (3,126) 20,355 13,099
---------------------------------------------------
Net income (loss) $ (750) $(5,233) $(1,689) $16,906 $ 9,234
---------------------------------------------------
Basic (loss) earning per share:
(Loss) income from continuing operations $ (0.02) $ (0.28) $ 0.23 $ (0.52) $ (0.61)
Income (loss) from discontinued operations (0.10) (0.57) (0.51) 3.23 2.08
---------------------------------------------------
Net income (loss) per share $ (0.12) $ (0.85) $ (0.28) $ 2.71 $ 1.47
---------------------------------------------------
Diluted (loss) earnings per share:
(Loss) income from continuing operations $ (0.02) $ (0.28) $ 0.23 $ (0.52) $ (0.61)
Income (Loss) from discontinued operations (0.10) (0.57) (0.50) 3.23 2.08
---------------------------------------------------
Net income (loss) per share $ (0.12) $ (0.85) $ (0.27) $ 2.71 $ 1.47
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2002
Net Sales $12,672 $ 10,162 $12,686 $ 12,266 $ 47,786
Gross Profit 4,900 3,764 5,502 6,720(1) 20,886
(Loss) income from continuing operations (601) (2,655) (677) 1,703 (2,230)
(loss) income from discontinued operations 1,407 (51,951) (5,538) (13,469) (69,551)
-----------------------------------------------------------
Net (loss) income $ 806 $(54,606) $(6,215) $(11,766) $(71,781)
-----------------------------------------------------------
Basic (loss) earning per share:
(Loss) income from continuing operations $ (0.10) $ (0.43) $ (0.11) $ 0.27 $ (0.36)
(loss) income from discontinued operations (0.23) (8.41) (0.90) (2.17) (11.25)
-----------------------------------------------------------
Net (loss) income per share $ 0.13 $ (8.84) $ (1.01) $ (1.90) $ (11.61)
-----------------------------------------------------------
Diluted (loss) earnings per share:
(Loss) income from continuing operations $ (0.10) $ (0.43) $ (0.11) $ 0.27 $ (0.36)
(Loss) income from discontinued operations 0.23 (8.41) (0.90) (2.16) (11.25)
-----------------------------------------------------------
Net (loss) income per share $ 0.13 $ (8.84) $ (1.01) $ (1.89) $ (11.61)
-----------------------------------------------------------
(1) The Forth quarter gross profit of 54.8% 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.
20 TRANSTECHNOLOGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
We design, develop and manufacture sophisticated lifting equipment for specialty
aerospace and defense applications. With over 50% of the market, we have long
been recognized as the world's largest designer and leading supplier of
performance-critical rescue hoists and cargo-hook systems. We also manufacture
weapons-handling systems, cargo winches, tie-down equipment and tow-hook
assemblies. Marketed under the trade name "Breeze-Eastern," our products are
designed to be efficient and reliable in extreme operating conditions. Our
equipment is used to complete rescue operations and military
insertion/extraction operations, move and transport cargo,and load weapons onto
aircraft and ground-based launching systems.
Beginning in fiscal 2001, we implemented a restructuring plan to focus our
resources and capital on our specialty aerospace and defense products business
and exit the specialty fastener segment. On February 24, 2003, we completed the
sale of the business and substantially all of the assets of our subsidiary,
Norco to Marathon Power Technologies Company, a division of TransDigm Inc., for
cash consideration of $51.0 million, subject to post-closing adjustments. This
transaction completed our divestiture program. As a result, our discontinued
operations include Norco and all of the operations related to our Specialty
Fastener segment, including TransTechnology Engineered Components LLC, the
Breeze Industrial Products and Pebra hose clamp businesses, the TransTechnology
Engineered Rings retaining rings businesses, Aerospace Rivet Manufacturers Corp.
and TCR Corporation. Of the operations included in discontinued operations for
fiscal 2002, only TransTechnology Engineered Rings USA, TransTechnology(GB),
TransTechnology Brasil, Aerospace Rivet Manufactures Corp., TCR Corporation and
Norco, Inc. were carried into fiscal 2003.
The net proceeds from our sale of Norco, of approximately $49.0 million, were
used to pay off all senior debt and redeem $28.6 million of our outstanding
senior subordinated notes due 2005. We believe that the divestiture of Norco,
while providing a source of funds to reduce our high rate subordinated debt,
will also simultaneously reduce our exposure to the commercial aircraft OEM and
aftermarket industries and allow us to focus all of our efforts on the military
and governmental aerospace and defense markets. The sale resulted in the
recognition of a pre-tax gain of approximately $28.5 million. Because our
federal income tax net operating loss carryforward is available to offset the
taxable gain from this sale, we do not anticipate paying any federal income
taxes on the sale, although we do expect to pay state income taxes of
approximately $2.2 million.
On January 3, 2003, we sold the business and substantially all of the assets of
our wholly owned subsidiary, TCR Corporation, for $10.0 million. We applied the
net proceeds of approximately $9.0 million from the sale of TCR Corporation to
reduce senior debt.
Under the terms of our existing warrants, the Norco sale constituted a
"liquidity event, " entitling our warrant holders to a put right, pursuant to
which they may require us to purchase their warrants during the 120-day period
following the closing date of the sale. Accordingly, through June 24,2003, the
company has a maximum cash exposure related to these warrants of $2.1 million.
All discussions related to our ongoing operations, or to TransTechnology
Corporation, which include our results of operations, refer only to continuing
operations, which consists of our Breeze-Eastern division. We discuss our
discontinued operations separately under the heading "-Divestitures and
Discontinued Operations."
All references to fiscal 2003 in this Management's Discussion and Analysis of
Financial Condition and Results of Operations refer to the fiscal year ended
March 31,2003, and all references to fiscal 2002 and fiscal 2001 refer to the
fiscal year ended March 31.
DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal 2001, we implemented a restructuring plan to focus our resources
and capital on our aerospace and defense products business and exit the
specialty fastener segment. As a result, our discontinued operations includes
all of the operations related to our specialty fastener segment, which includes
all of the divested operations we describe below and TCR Corporation, which was
sold in the fourth quarter of fiscal 2003. Our discontinued operations also
include Norco, Inc., which we previously included in our aerospace and defense
products segment.
On July 10,2001, we sold our Breeze Industrial and Pebra hose clamp businesses
to Industrial Growth Partners and members of Breeze Industrial's management for
$46.2 million in cash. In a related transaction, we sold the real estate
occupied by Breeze Industrial to a quasi-governmental organization for $2.0
million which we may, under certain circumstances, be required to repurchase for
$1 million in fiscal 2006. We used the proceeds from these sales to repay
borrowings outstanding under our prior senior credit agreement.
On December 5, 2001, we sold TransTechnology Engineered Components to a company
formed by affiliates of Kohlberg & Company, L.L.C. for $98.5 million, of which
$96.0 million was cash and the balance the assumption of certain liabilities
related to the purchased businesses. We used the cash proceeds of the sale to
repay borrowings outstanding under our prior senior credit agreement. In the
fiscal quarter ended September 30, 2001, as part of our restructuring program,
we reported a pre-tax asset impairment charge for TransTechnology Engineered
Components, Inc. in the amount of $85.8 million to reduce the carrying value of
these businesses to estimated fair market value. This non-cash charge was
related specifically to the write-down of goodwill. The sale proceeds of
2003 ANNUAL REPORT 21
TransTechnology Engineered Components approximated our adjusted carrying value.
On February 21, 2002, we sold Seeger-Orbis to Barnes Group Inc. for $20.0
million cash. We used the net proceeds of the sale to repay borrowings
outstanding under our prior senior credit agreement. Our balance sheet contains
a non-current asset and a non-current liability in the amount of $3.7 million
relating to the pension plan of Seeger-Orbis. These amounts represent our legal
liability under German law and the indemnification we received from the buyer of
the business for that liability.
On April 16, 2002, we sold Aerospace Rivet Manufacturers Corporation to Allfast
Fastening Systems, Inc. for $3.2 million in cash. We used the net proceeds of
the sale to repay borrowings outstanding under our prior senior credit
agreement.
On May 30, 2002, we completed the sale of substantially all of the net assets of
TransTechnology Engineered Rings (USA) to a newly formed affiliate of Sea View
Capital LLC for $2.9 million in cash, a promissory note of $0.8 million and
warrants for 5% of the equity of the purchaser. We used the net proceeds of the
sale to repay borrowings outstanding under our prior senior credit agreement.
On July 16, 2002, we completed the recapitalization of our TransTechnology (GB)
Ltd. subsidiary, now known as Cirteq, Ltd., by selling 81% of its shares to a
new entity controlled by local management for $121 (one hundred twenty-one
dollars). We also converted $2.0 million of unsecured intercompany debt into a
$2.0 million loan secured by a first lien on Cirteq's real property in Glusburn,
England.
On August 6, 2002, we completed the sale of all of the shares of TransTechnology
Brasil, Ltda. for $742,000, of which $325,000 was paid in cash and the balance
in installment payments. We also will be paid $258,000 of intracompany debt due
from the Brazilian unit. We used the net proceeds of the sale to repay
borrowings outstanding under our prior senior credit agreement.
On January 3, 2003, we completed the sale of the business and substantially all
of the assets of our wholly owned subsidiary, TCR Corporation, to a newly formed
affiliate of Mid-Mark Capital LLC for $10.0 million in cash. We used the net
proceeds of the sale to repay borrowings outstanding under our new senior credit
agreement.
On February 24, 2003, the Company sold Norco Inc. for $51.0 million cash and a
$1.0 million reimbursement for certain income taxes payable as a result of the
transaction to a wholly owned subsidiary of TransDigm Inc. The net cash proceeds
were used to retire senior debt under the new credit facility and partially
repay subordinated debt.
For fiscal 2003, the $13.1 million gain from discontinued operations included
actual operating income of $7.0 million from discontinued operations, a gain of
$28.5 million from the sale of our Norco subsidiary, allocated interest expense
of $6.3 million, an $8.2 million charge to reflect the amounts ultimately
realized from sales of discontinued business units, a cash charge of $0.2
million from the final settlement of our interest rate swap contracts, a
non-cash charge of $4.6 million associated with the recognition of accumulated
currency translation losses from the sale of our Brazilian operation and a tax
provision of $3.1 million.
For fiscal 2002, the $69.6 million loss from discontinued operations included
$110.3 million of impairment charges related to reducing the carrying values of
the discontinued businesses to their estimated net realizable values, $12.0
million of actual operating income of the discontinued businesses through their
expected divestiture dates, $20.1 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 our 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 $101.9 million, were reduced by a tax
benefit of $32.3 million.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenue at the later of (1) when products are
shipped to customers or (2) when title passes to customers.
INVENTORY. We purchase materials to manufacture components for use in our
products and for use by our engineering, repair and overhaul business. Our
decision to purchase a set quantity of a particular item is influenced by
several factors including current and projected cost, future estimated
availability, lead time for production of the materials, existing and projected
contracts to produce certain items and the estimated needs for its repair and
overhaul business.
We value our inventories using the lower of cost or market on a first-in
first-out (FIFO) basis and establish reserves as necessary to reduce the
carrying amount of these inventories to net realizable value.
ENVIRONMENTAL RESERVES. We provide for environmental reserves when, after
consultation with our internal and external counsel and other environmental
consultants, we determine that a liability is both probable and estimable. In
many cases, we do not fix or cap the liability for a particular site when we
first record it. Factors that affect the recorded amount of the liability in
future years include our participation percentage due to a settlement by, or
bankruptcy of, other potentially responsible parties, a change in the
environmental laws requiring more stringent requirements, a change in the
estimate of future costs that will be incurred to remediate the site and changes
in technology related to environmental remediation.
We discuss current estimated exposure to environmental claims under the caption
"--Environmental Matters."
FINANCIAL DERIVATIVES. Until July 5, 2002, we had outstanding interest rate
swaps in association with our prior senior credit agreement. We valued these
swaps using estimates based on then-prevailing interest rates and the amount we
were required to pay was impacted significantly by changes in interest rates.
Additionally, we are required to treat our outstanding warrants as financial
derivatives and mark these securities to market at
22 TRANSTECHNOLOGY CORPORATION
the end of each accounting period, resulting in the recognition of a gain or
loss in each period. We determine the amount of this gain or loss by measuring
the difference in the market value of a share of our common stock over a given
period. A $1.00 change in our share price will result in a gain or loss of $0.4
million during the period in which the price change is realized. This
mark-to-market requirement will terminate at the end of the first quarter of
fiscal 2004 as the put feature causing the warrants to be treated as derivatives
will expire.
DEFERRED TAX ASSETS. This asset represents income tax benefits expected to be
realized in the future, primarily as a result of the use of net operating loss
carry-forwards. If we do not generate adequate amounts of taxable income prior
to the expiration of the tax loss carry-forwards, the amount of this asset may
not be realized. Additionally, changes to the federal and state income tax laws
also could impact our ability to use them. The State of New Jersey, in response
to a budget crisis, has suspended for two years the ability of a corporation to
use a net operating loss carryforward against taxable income earned in the
state. As a result, we will be required to pay New Jersey income taxes (if any)
for fiscal years 2003 and 2004 in spite of losses being carried forward.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets (excluding financial
instruments and deferred tax assets) and certain identifiable intangibles to be
held and used are reviewed by us for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Such circumstances include, but are not limited to, a significant
decrease in the market value of an asset, a significant change in the extent or
manner in which an asset is used or a significant physical change in an asset,
a significant adverse change in legal factors or in the business climate that
could affect the value of an asset, or an adverse action or assessment by a
regulator. If a review for recoverability is necessary, we estimate the future
cash flows expected to result from the use of the asset. In performing these
estimates, we group our assets at the lowest level for which there are
identifiable cash flows. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is not recognized. Otherwise, an impairment loss
is not recognized. Any impairment loss recognized is measured as excess of
carrying amount of the asset over the fair value of the asset.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
Net sales. Our sales increased to $55.0 million for fiscal 2003, a 15% increase
over sales of $47.8 million for fiscal 2002. This increase in sales is the
result of higher shipments of cargo hooks and weapons handling equipment for
military and civil agencies, as well as increases in sales of spare parts,
repair and overhaul of equipment already in the field and the initial shipments
of our HLU-196 Bomb Hoist to the U.S. Navy. The HLU-196 Bomb Hoist is a newly
developed product for which we are under contract to the U.S. Navy to deliver
approximately 550 units through fiscal 2004.
Gross profit. Gross profit increased 18% to $24.6 million for fiscal 2003 from
$20.9 million for fiscal 2002. Generally, repair and overhaul services and spare
parts sales have higher gross margins than sales of new equipment or engineering
services. As a result of a sales mix that was more heavily weighted in favor of
aftermarket sales due to the timing of customer orders, we recorded slightly
higher gross margins for fiscal 2003. These improvements in product mix,
combined with fixed-cost absorption on a generally higher sales volume led to an
increase in gross margin to 44.7% in fiscal 2003 from 43.7% in fiscal 2002.
These margin improvements from product mix, however, were partially offset by
lower than normal gross margins on the HLU-196 Bomb Hoist, a product that was
shipped for the first time during the third quater of fiscal 2003. While the
gross margins recognized on the initial shipments of the HLU-196 were lower than
historical gross margins, they were higher than the budgeted gross margins due
to the realization of manufacturing efficiencies not originally expected in the
initial production lots. As a result of the lower gross margins experienced on
the HLU-196, we expect future gross margins to be lower than those historically
reported. Generally, we cannot predict changes in our product mix between
aftermarket sales and new equipment sales for any given period because the
changes result primarily from the timing of our customers' orders, over which we
have little control.
General, administrative and selling expenses. General, administrative and
selling expenses increased 4.7% to $17.6 million in fiscal 2003 from $16.8
million in fiscal 2002. This increase was primarily due to higher general,
administrative and selling expenses due to our higher sales volume and a
significant increase in the cost of aircraft product liability insurance, the
write-off of $0.7 million of costs associated with our efforts to restructure
the balance sheet, and a provision of $0.4 million associated with a product
liability claim from a business sold several years ago offset by $1.2 million on
a 14% reduction in corporate office expense. The decrease in corporate office
expenses during fiscal 2003 was primarily due to the restructuring of the
corporate office that began in the fourth quarter of fiscal 2001.
Operating income. Operating income increased 71% to $7.0 million in fiscal 2003
from $4.1 million in fiscal 2002. This increase mainly was due to a more
favorable mix of repair, overhaul and spare parts business, a higher sales
volume, the benefit of spreading fixed costs over a larger sales volume, and the
reduction in corporate office expenses.
Interest expense. Interest expense increased $4.2 million to $9.2 million in
fiscal 2003 from $4.9 million in fiscal 2002 as a result of the allocation
formula we use to apportion interest expense between continuing and discontinued
operations. We base this allocation formula upon the net asset balances
attributable to continuing and discontinued operations. Total interest expense
for fiscal 2003 decreased $9.6 million to $15.4 million from $25.1 million for
fiscal 2002 due to the retirement of debt with the proceeds from divestitures
and other internally generated sources of cash. Assets held for sale also were
reduced substantially, however, causing a higher percentage of assets to be
allocated to continuing operations in fiscal 2003 compared to fiscal 2002, which
resulted in an increased allocation of interest expense to continuing operations
in fiscal
2003 ANNUAL REPORT 23
2003. The sale of our Norco subsidiary in February 2003 completed our
divestiture program and, accordingly, all interest expense will be charged to
continuing operations in the futures.
Forbearance fees. During fiscal 2003, we incurred an expense of $0.8 million for
forbearance fees we paid to our lenders under our prior senior credit agreement
in exchange for their agreement not to pursue any actions against us for
violating certain financial covenants. In fiscal 2002, we incurred $2.7 million
of such expenses. The reduction in these expenses was the result of lower
overall levels of debt during the current fiscal year and the refinancing of our
prior senior credit agreement in August 2002, which cured all defaults and ended
the forbearance agreements.
Corporate office restructuring charge. In fiscal 2003 we recognized a $2.7
million charge associated with severance and other costs related to the
elimination of several positions and restructuring in our corporate office, 90%
of which will be paid by the end of the first quarter of 2004. In fiscal 2002,
we recognized a $1.6 million charge associated with the restructuring of our
corporate office, related primarily to severance costs following the elimination
of several positions, all of which amounts have been paid.
Unrealized gain on warrants. As we discuss in note 6 to the financial statements
included in this report, the warrants associated with our senior subordinated
notes due 2005 are now deemed to be derivative financial instruments for
purposes of U.S. generally accepted accounting principles. As required by those
principles, changes in the value of our share price between August 7, 2002 and
the end of fiscal 2003 resulted in our recognizing a non-cash, non-taxable gain
of $2.0 million during fiscal 2003. We recognized no similar gain or loss in
fiscal 2002. As the put feature of the warrants will expire during the first
quarter of fiscal 2004, no future gains or losses on the warrants will be
recognized.
Net income. We earned net income of $9.2 million in fiscal 2003, versus a loss
of $71.8 million in fiscal 2002, which primarily resulted from the reasons
discussed above.
New orders. New orders received in fiscal 2003 totaled $67.3 million, which
represents a 28% increase from new orders of $52.4 million in fiscal 2002. The
rescue hoist and cargo winch product line were particularly strong accounting
for $14.3 million of the increase. We derived a significant portion of fiscal
2003 orders from long-term contracts. Generally, new equipment sales are the
subject of high-value, long-term contracts, while repair, overhaul and spare
parts sales have much shorter lead times and a less predictable order pattern.
Backlog. Backlog at March 31,2003 was $46.2 million, up $12.4 million from $33.8
million at March 31,2002. We measure backlog by the amount of products or
services that our customers have committed by contract to purchase from us as of
a given date. Out book to bill ratio for fiscal 2003 was 1.22, compared to 1.10
for fiscal 2002. Cancellations of purchase orders or reductions of product
quantities in existing contracts could substantially and materially reduce our
backlog. Therefore, our backlog may not represent the actual amount of shipments
or sales for any future period.
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales. Our sales of $47.8 million for fiscal 2002 were essentially unchanged
from our sales of $47.8 million in fiscal 2001. Although sales remained constant
during the two fiscal years, there was a substantial change in product mix as
sales of new hoist and winches declined during the period and sales of weapons
handling equipment spares increased.
Gross profit. Gross profit increased 4.4% to $20.9 million for fiscal 2002 from
$20.0 million for fiscal 2001. Generally, repair and overhaul services and spare
parts sales have higher gross margins than sales of new equipment or engineering
services. Due to the timing of customer orders, our sales mix was more heavily
weighted in favor of aftermarket and spare parts sales in fiscal 2002, which
resulted in a 44.4% gross margin during fiscal 2002, compared to 40.7% in fiscal
2001.
General, administrative and selling expenses. General, administrative and
selling expenses decreased 16.6% to $16.8 million in fiscal 2002 from $20.2
million in fiscal 2001. This decrease was primarily due to a 32.5% decrease in
corporate office expenses to $8.5 million in fiscal 2002 from $12.6 million in
fiscal 2001. The decrease in corporate office expenses during fiscal 2002 was
primarily due to the restructuring of our corporate office during fiscal 2002.
Income from operations. Income from operations increased $4.2 million to $4.1
million in fiscal 2002 from a loss from operations of $0.1 million in fiscal
2001. This increase was mainly due to the $4.1 million reduction in corporate
office expenses during the period and a more favorable mix of repair, overhaul
and spare parts business that resulted in higher gross margins in fiscal 2002.
Interest expense. Interest expense increased $2.1 million in fiscal 2002 from
the prior year as a result of the allocation formula we use to apportion
interest expense between continuing and discontinued operations. This formula is
based upon the net asset balances attributable to continuing and discontinued
operations. Total interest expense for fiscal 2002 decreased $9.3 million due to
the retirement of debt with the proceeds from divestitures and other internally
generated sources of cash. Assets held for sale also were substantially reduced,
however, causing a higher percentage of assets to be allocated to continuing
operations in fiscal 2002 compared to fiscal 2001, which resulted in an
increased allocation of interest expense to fiscal 2002.
Interest and other income. In March 2002, we sold excess real estate and
recorded a pre-tax gain of $1.3 million.
Forbearance fees. During fiscal 2002, we incurred $2.7 million of costs related
to forbearance fees we paid to our lenders under our prior senior credit
agreement in association with their agreement not to pursue any actions against
us for violating certain financial covenants. In fiscal 2001, we incurred no
such charges.
Corporate office restructuring. In fiscal year 2002, we recognized a $1.6
million charge associated with the restructuring of our corporate office,
primarily due to severance costs resulting from the reduction of our corporate
office staff from twenty four to nine. In fiscal 2001 we recognized a corporate
office
24 TRANSTECHNOLOGY CORPORATION
restructuring charge of $11.2 million, which included costs associated with the
elimination of certain positions as well as write-offs associated with
uncollectible notes receivable and worthless 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.
Net loss. Net loss decreased 1.6% to $71.8 million in fiscal 2002 from $73.0
million in fiscal 2001, primarily as a result of the reasons discussed above.
New orders. New orders received in fiscal 2002 totaled $52.4 million, which
represents a 23.3% increase in new orders from $42.5 million in fiscal 2001. We
experienced this significant increase in new orders due to an increase in orders
for spare parts for our hoist and winch product line and initial orders for our
newly developed HLU-196 Bomb Hoist. A significant portion of fiscal 2002 new
orders were from long-term contracts. Generally, new equipment sales are the
subject of high-value, long-term contracts, while repair, overhaul and spare
parts sales have much shorter lead times and a less predictable order pattern.
Backlog. Backlog at March 31, 2002 was $33.8 million, compared to $29.2 million
at March 31, 2001. The backlog increased as a result of the significant increase
in new orders received during fiscal 2002, most of which were scheduled for
shipment in fiscal 2003 and beyond. Our book to bill ratio for fiscal 2002 was
1.10 compared to 0.89 for fiscal 2001. The book to bill ratio increased in
fiscal 2002 as a result of the increase in new orders received as discussed in
the paragraph immediately above. Cancellations of purchase orders or reductions
of product quantities in existing contracts could substantially and materially
reduce our backlog. Therefore, our backlog may not represent the actual amount
of shipments or sales for any future period.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements depend on a number of factors, many of which are
beyond our control, including the timing of production under our long-term
contracts with the U.S. Government. Although we have infrequently received
payments on these government contracts based on performance milestones, as is
the case with our contract with the U.S. Navy for the HLU-196 Bomb Hoist, our
working capital needs fluctuate between periods as a result of changes in
program status and the timing of payments by program. Additionally, as our sales
are generally made on the basis of individual purchase orders, our liquidity
requirements vary based on the timing and volume of these orders.
Our restructuring and divestiture program has had a substantial impact upon our
financial condition through March 31, 2003, as we reduced debt with the proceeds
from the divestitures and lowered costs as a result of the corporate office
restructuring. At March 31, 2003, there was no indebtedness outstanding under
our Senior Credit Facility, as compared to $29.1 million outstanding under our
prior senior credit agreement at the beginning of fiscal 2003.
On January 3, 2003, we completed the sale of the business and substantially all
of the assets of our wholly-owned subsidiary, TCR Corporation, for $10.0 million
in cash. We used the net proceeds of the sale to repay borrowings outstanding
under our new senior credit agreement. In addition, on February 24, 2003, we
completed the sale of the business and substantially all of the assets of our
subsidiary, Norco Inc., for $51.0 million in cash which was used to reduce the
senior debt to zero and partially repay the subordinated debt.
The New York Stock Exchange (NYSE) has notified us that the company has fallen
below the NYSE continued listing standards requiring total market capitalization
of not less than $50 million over a 30-day trading period and total
stockholders' equity of not less than $50 million. We will be submitting to the
NYSE a plan to comply with the listing standards. If the NYSE accepts the plan,
we will be subject to quarterly monitoring for compliance with the plan goals
and targets. If the NYSE does not accept the plan, we will be subject to
delisting from the NYSE. In the event of delisting from the NYSE, we believe an
alternate trading venue would be available.
WORKING CAPITAL
Our working capital at March 31, 2003, was $11.2 million, compared to $13.8
million (excluding assets and liabilities of business units to be sold) at the
beginning of fiscal 2003. The ratio of current assets to current liabilities was
1.4 to 1.0 at March 31, 2003, compared to 1.6 to 1.0 at the beginning of fiscal
2003.
Working capital changes during fiscal 2003, exclusive of assets held for sale,
resulted from a decrease in accounts receivable of $1.1 million, an increase in
inventories of $2.8 million, an increase in prepaid expenses of $0.4 million,
and a reduction in income tax refunds receivable of $7.2 million. The decrease
in accounts receivable was due to strong collection efforts in the fourth
quarter of fiscal 2003. The increase in inventory was largely due to the
purchase of long lead time materials and the manufacture of work in progress
needed to fulfill customers' long-term purchase orders, in particular with
regard the HLU-196 Bomb Hoist. The increase in prepaid expenses was due
primarily to the payment of deposits and other advance payments that will be
utilized in less than twelve months. The income tax receivable was reduced as a
result of the receipt of federal and state income tax refunds associated with
the carrying back of our fiscal 2002 operating loss. The number of days that
sales were outstanding in accounts receivable decreased to 31.8 days at March
31, 2003, from 42.8 days at March 31, 2002. Inventory turnover changed only
slightly, to 1.55 turns from 1.59 turns over the same time period. Current
liabilities, exclusive of liabilities associated with discontinued operations,
increased $4.1 million, primarily due to accrued state income taxes relating to
the sale of Norco Inc., and payments due to the corporate office restructuring.
CAPITAL EXPENDITURES
Our capital expenditures were $0.6 million for fiscal 2003, compared to $0.2
million for fiscal 2002. Projects budgeted in fiscal 2003 include refurbishment
of the offices and the initial phase of installing a new ERP system.
2003 ANNUAL REPORT 25
In fiscal 2004, capital expenditures are expected to be in a range of $1.1-1.4
million.
SENIOR CREDIT FACILITY
At March 31, 2003, we had a senior credit facility consisting of a $13.5
million, asset-based, revolving credit facility which was established in August
2002 to refinance all remaining obligations outstanding under the Fleet Credit
Facility (the "New Senior Credit Facility"). The New Senior Credit Facility, as
amended June 2, 2003 and which matures August 7, 2005, is secured by all of our
assets, carries an interest rate of 5.25% and contains customary financial
covenants and events of default. We are in compliance with the provisions of the
facility. Subject to limitations relating to levels of certain assets and
reserves for future interest payments, we have unused borrowing capacity on the
facility of $13.5 million as there were no borrowings outstanding under the
facility at March 31, 2003.
SENIOR SUBORDINATED NOTES
On August 30, 2000, we completed a private placement of $75 million of senior
subordinated notes (the "Notes") and warrants to purchase shares of our common
stock (the "Warrants") to a group of institutional investors (collectively, the
"Purchasers"). We used the proceeds of the private placement to retire, in full,
a $75 million bridge loan held by a group of lenders led by Fleet National Bank.
The Notes, as amended in August 2002, are due on August 29, 2005 and bear
interest at a rate of 18% per annum subject to adjustments described below,
consisting of 13% cash interest on principal, payable quarterly, and 5% interest
on principal, payable quarterly in "payment-in-kind" ("PIK") promissory notes.
We may prepay the Notes after August 29, 2001, at a premium initially of 9%,
declining to 5%, 3%, and 1% on each of the next succeeding anniversaries of that
date. The Notes contain customary financial covenants and events of default,
including a cross-default provision to our senior debt obligations. At March 31,
2003, the principal balance outstanding on the notes amounted to $53.3 million,
which included the original principal amount plus the "payment-in-kind" notes
less approximately $28.0 million paid off at the time of the sale of Norco, Inc.
At March 31, 2003, we were in compliance with the provisions of the Notes.
At issuance, the Warrants entitled the Purchasers to acquire, in the aggregate,
427, 602 shares, or approximately 7%, of our common stock at an exercise price
of $9.93 a share. This exercise price represents the average daily closing price
of our common stock on the New York Stock Exchange for the thirty (30) days
preceding the completion of the private placement. The Warrants must be
exercised by August 29, 2010.
Effective with the refinancing of our prior senior credit agreement with the New
Senior Credit Facility on August 7, 2002, the purchasers of the senior
subordinated notes agreed to amend the notes. Under the amended senior
subordinated notes, we paid an amendment fee equal to 1% of the outstanding
balance of the notes by issuing additional notes and agreed to increase the PIK
interest rate on the notes to 5% effective January 1, 2003, with such rate
increasing 0.25% each quarter until we retire the notes. Additionally, we
amended the terms of the warrants to reduce the exercise price of each warrant
to provide the holders with a minimum profit on the exercise of the warrants
equal to $5.00 per share if the warrants were exercised and sold prior to
December 31, 2002. Because we did not redeem the warrants prior to December 31,
2002, their exercise price was reduced to $0.01 per share as of that date. In
addition, the amended warrants contain a "put" right that allows the holders to
cause us to purchase the warrants at a price of $5.00 per underlying share up to
120 days following the occurrence of certain "liquidity events." The sale of the
Norco, Inc. subsidiary constituted a liquidity event and, accordingly, under the
terms of the warrants, as amended, through June 24, 2003, the holders have the
right to require us to redeem the warrants or repurchase the stock acquired
through the exercise of the warrants at a price equal to $5.00 per share. The
maximum cash exposure related to these warrants and their put rights, if any, is
the $2.1 million that would be required to redeem the unexercised warrants or
the underlying shares. The $1.3 million of redeemable common stock reflected on
the balance sheet, represents the $5.00 per share put price on that portion of
the warrants (approximately 257,000 shares of common stock) which have been
exercised by the holders of the warrants. Upon the expiration of the put right,
any amount of redeemable common stock for which the put right was not exercised
will be used to increase additional paid in capital.
At March 31, 2003, we recorded a $2.0 million non-cash, non-taxable gain
relating to the mark-to-market accounting of the warrants as a derivative. Since
the put right attached to the warrants will expire during the first quarter of
fiscal 2004, no further gains or losses relating to the warrants will be
recorded.
We have long-term debt maturities of $79 thousand, $53.4 million and $79
thousand in 2004, 2005 and 2006, respectively.
Our operations require significant amounts of cash, and we may be required to
seek additional capital, whether from selling equity or borrowing money, for the
future growth and development of our business or to fund our operations and
inventory, particularly in the event of a market downturn. Although currently we
have the ability to borrow additional sums under the revolving portion of our
senior credit facility, this facility contains a borrowing base provision and
financial covenants which may limit the amount we can borrow under our senior
credit facility or from other sources. Also, we may not be able to replace or
renew our senior credit facility upon its expiration on terms that are favorable
to us. In addition, a number of factors could affect our ability to access debt
or equity financing, including our financial strength and credit rating, the
financial market's confidence in our management team and financial reporting,
general economic conditions, the conditions in the defense and aerospace
industries and overall capital market conditions.
Even if available, additional financing could be costly or have adverse
consequences. If we raise additional funds by issuing stock, dilution to
stockholders may result. If we raise additional funds by incurring debt, we will
incur increased debt servicing costs and may become subject to additional
restrictive financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. If we were not successful in
obtaining sufficient capital, it could reduce
26 TRANSTECHNOLOGY CORPORATION
our sales and earnings and adversely impact our financial position and we may
not be able to expand or operate our business as planned.
TAX BENEFITS FROM NET OPERATING LOSSES
At March 31,2003, we had federal and state net operating loss carryforwards, or
NOLs, of approximately $52.3 million and $73.9 million, respectively, which are
due to expire in 2004 through 2023.These NOLs may be used to offset future
taxable income through their respective expiration dates and thereby reduce or
eliminate our federal and state income taxes otherwise payable. The internal
Revenue Code of 1986,as amended (the "Code") imposes significant limitations on
the utilization of NOLs in the event of an "ownership change" as defined under
section 382 of the Code (the "Section 382 Limitation").The Section 382
Limitation is an annual limitation on the amount of pre-ownership NOLs that a
corporation may use to offset its post-ownership change income. The section 382
Limitation is calculated by multiplying the value of a corporation's stock
immediately before an ownership change by the long-term tax-exempt rate (as
published by the Internal Revenue Service). Generally, an ownership change
occurs with respect to a corporation if the aggregate increase in the percentage
of stock ownership by value of that corporation by one or more 5% shareholders
(including specified groups of shareholders who in the aggregate own at least 5%
of that corporation's stock) exceeds 50 percentage points over a three-year
testing period. We believe that we have not gone through an ownership change
that would cause out NOLs to be subject to the Section 382 Limitation.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations for
the next several years:
(Dollars in thousands)
2004 2005 2006 2007 2008 Total
------- ------- ------- ------- ------- -------
Long-Term Debt $ 79 $53,408 $ 79 $ -- $ -- $53,566
Operating Leases 423 116 114 61 22 736
------- ------- ------- ------- ------- -------
Total $ 502 $53,524 $ 193 $ 61 $ 22 $54,302
------- ------- ------- ------- ------- -------
In addition, we have divested ten businesses since March 31, 2001. Under the
terms of the agreements associated with the sales of those businesses, we have
agreed to indemnify the purchasers for certain damages that might arise in the
event that a representation we made with respect to the divested business is
found to have contained a material misstatement, subject in each case to a
customary cap on the indemnification amount and customary limitations on the
survivability of the representations made. As of the date of this report, we
have unresolved claims for indemnification with respect to these divested
business that aggregate less than $0.5 million. Additionally, the terms of these
divestiture agreements generally require the calculation of purchase price
adjustments based upon the amount of working capital or net assets transferred
at the closing date. In the case of each divestiture completed as of the filling
date, with the exception of the divestiture of Norco, Inc., all purchase price
adjustments have been agreed and paid.
INFLATION
While neither inflation nor deflation has had, and we do not expect it to have,
a material impact upon operating results, we cannot assure you that our business
will not be affected by inflation or deflation in the future.
CONTINGENCIES
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 reminder of the site was concluded in the third quarter of fiscal
2003. 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 31,2003, the Corporation's cleanup reserve
was $2.0 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, including former facilities of the
company. The Corporation estimates that its potential cost for implementing
corrective action at these sites will not exceed $0.5 million payable over the
next several years, and has provided for the estimated costs in its accrual for
environmental liabilities. In addition, in the first quarter of fiscal 2003, the
Corporation entered into a consent order for a former facility in New York
pursuant to which it is developing a remediation plan for review and approval by
the New York Department of Environmental Conservation. The Corporation has
established a reserve of $2.5 million which it believes is adequate.
In addition, the Corporation has been named as a potentially responsible party
in eight environmental proceedings pending in several other states in which it
is alleged that the Corporation was a generator of waste that was sent to
landfills and other treatment facilities and, as to several sites, it is alleged
that the Corporation was an owner or operator. Such
2003 ANNUAL REPORT 27
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 $0.2 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003 FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," that improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in statement of financial position. This statement is
effective for the Company's fiscal quarter beginning June 30, 2003. We do not
believe adoption of this standard will have a material impact on our financial
position or results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" that amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133.
With certain exceptions, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designed after June
30, 2003. We do not believe adoption of this standard will have a material
impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of this statement is not expected
to have a material effect on our financial position or results of operations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148") which amends SFAS No. 123. This statement provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition guidance and disclosure
requirements are effective for fiscal years ending after December 15, 2002. The
adoption of this statement will not have a material effect on our financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation requires a guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also enhances guarantor's
disclosure requirements to be made in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. In the
normal course of business, we do not issue guarantees to third parties;
accordingly, this interpretation will not have an effect on our financial
position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS 146 requires the recognition of a liability for costs
associated with an exit plan or disposal activity when incurred and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," which allowed recognition at the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated by us after
December 31, 2002. The adoption of this statement is not anticipated to have a
material effect on the Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was approved by
the FASB. Among other things, this statement requires that gains or losses on
the extinguishment of debt will generally be required to be reported as a
component of income from continuing operations and will no longer be classified
as an extraordinary item. Our financial statements for the periods prior to
March 31, 2001 have been reclassified to include losses previously recorded as
an extraordinary item as a component of income from continuing operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for fiscal years beginning after June 15, 2002. This
statement addresses the diverse accounting practices for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The adoption of this statement will not have a material effect
on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, primarily changes in interest rates
associated with the New Senior Credit Facility under which there were no
borrowings at March 31, 2003.
28 TRANSTECHNOLOGY CORPORATION
CORPORATE OFFICERS INVESTOR RELATIONS DIRECTORS
ROBERT L.G. WHITE INVESTOR RELATIONS CONTACT * DANIEL H. ABRAMOWITZ
President and Joseph F. Spanier President, Hilson Financial
Chief Executive Officer Vice President, Chief Financial Management, Inc.
Officer and Treasurer
JOSEPH F. SPANIER TransTechnology Corporation * GIDEON ARGOV
Vice President, Chief Financial 700 Liberty Avenue Managing Director
Officer and Treasurer Union, New Jersey 07083 Parthenon Capital
908/688-2440
GERALD C. HARVEY 908/686-6991 fax MICHAEL J. BERTHELOT
Vice President, Secretary and www.transtechnology.com Chairman of the
General Counsel Board of Directors
ANNUAL MEETING TransTechnology Corporation
COUNSEL The Annual Shareholders
Hahn, Loeser & Parks Meeting will be held on # THOMAS V. CHEMA
Cleveland, Ohio Thursday, July 17, 2003 at the Partner, Arter & Hadden, LLP
Hilton Short Hills President, Gateway
AUDITORS 41 JFK Parkway Consultants, Inc.
Deloitte & Touch LLP Short Hills, New Jersey 07078
Parsippany, New Jersey #N JAN NAYLOR COPE
FORM 10-K AND ADDITIONAL President
TRANSFER AGENT AND INFORMATION J. Naylor Cope Company
REGISTRAR The Company, upon request to the
EquiServe Investor Relations department, will # JOHN H. DALTON
Boston EquiServe Division provide to any shareholder, President
Canton, Massachusetts a copy of the Form 10-K required IPG Photonics Corporation
to be filled with the Securities and Former Secretary of the Navy
Exchange Commission and any
other available information. *N WILLIAM J. RECKER
Retired, Former Chairman
Gretag Imaging Holding AG
ROBERT L.G. WHITE
President and
Chief Executive Officer
TransTechnology Corporation
- ----------------------------
* Audit Committee
N Governance & Nominating Committee
# Incentives & Compensation Committee
www.transtechnology.com
On the back cover: Canada's new Search and Rescue helicopter,
CH-149 Cormorant, manufactured by AgustaWestland, and equipped with
a dual Breeze-Eastern HS-29900 rescue hoist system, is shown conducting
a training mission off the stern of a Canadian Coast Guard cutter.
Photo courtesy of the Canadian Air Force
Public Affairs Team/Department of National Defence
[PHOTO OF RESCUE HELICOPTER]
[TRANSTECHNOLOGY CORPORATION LOGO]
engineered products for global partners(TM)
700 Liberty Avenue, Union, New Jersey 07083
Phone 908.688.2440 - Fax 908.686.7485
www.transtechnology.com