10-Q 1 y55186e10-q.txt TRANSTECHNOLOGY CORPORATION FORM 10-Q -------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-7872 ------------------------- TRANSTECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-4062211 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 150 Allen Road 07938 Liberty Corner, New Jersey (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (908) 903-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 8, 2001, the total number of outstanding shares of registrant's one class of common stock was 6,183,968. TRANSTECHNOLOGY CORPORATION INDEX
PART I. Financial Information Page No. -------- Item 1. Financial Statements...................................... 2 Statements of Consolidated Operations-- Three and Six Month Periods Ended September 30, 2001 and October 1, 2000....................................... 3 Consolidated Balance Sheets-- September 30, 2001 and March 31, 2001..................... 4 Statements of Consolidated Cash Flows-- Six Month Periods Ended September 30, 2001 and October 1, 2000........................................... 5 Notes to Consolidated Financial Statements................ 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II. Other Information Item 1. Legal Proceedings......................................... 20 Item 4. Submission of Matters to a Vote of Security Holders....... 20 Item 6. Exhibits and Reports on Form 8-K.......................... 20 SIGNATURES............................................................. 21 EXHIBIT 10.45.......................................................... 22-37
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following unaudited Statements of Consolidated Operations, Consolidated Balance Sheets, and Consolidated Cash Flows are of TransTechnology Corporation and its consolidated subsidiaries (collectively, the "Company"). These reports reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods reflected therein. The results reflected in the unaudited Statement of Consolidated Operations for the period ended September 30, 2001, are not necessarily indicative of the results to be expected for the entire year. The following unaudited Consolidated Financial Statements should be read in conjunction with the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, as well as the audited financial statements and related notes thereto contained in the Company's Annual Report on Form 10-K filed for the fiscal year ended March 31, 2001. Information provided herein as of March 31, 2001 and for the three and six month periods ended October 1, 2000 has been restated to give effect to the reporting of the Company's Specialty Fasteners Business Segment as discontinued operations as discussed in Note 4 to the Financial Statements. [THIS PAGE INTENTIONALLY LEFT BLANK] 2 STATEMENTS OF CONSOLIDATED OPERATIONS UNAUDITED (In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------------- ----------------------------------- SEPTEMBER 30, 2001 OCTOBER 1, 2000 SEPTEMBER 30, 2001 OCTOBER 1, 2000 ------------------ --------------- ------------------ --------------- (Restated) (Restated) Net sales $ 19,250 $ 18,105 $ 41,046 $ 35,837 Cost of sales 12,476 11,693 26,472 23,442 ----------- ----------- ----------- ----------- Gross profit 6,774 6,412 14,574 12,395 ----------- ----------- ----------- ----------- General, administrative and selling expenses 5,089 5,804 10,485 11,859 Interest expense 2,555 1,758 3,985 3,481 Interest income (17) (23) (45) (74) Other income - net (46) 40 (50) (318) Forbearance fees 1,103 -- 2,162 -- Corporate office restructuring charge 1,229 -- 1,229 -- ----------- ----------- ----------- ----------- Loss from continuing operations before income tax benefit (3,139) (1,167) (3,192) (2,553) Provision for income tax benefit (1,138) (443) (1,158) (970) ----------- ----------- ----------- ----------- Net loss from continuing operations (2,001) (724) (2,034) (1,583) Discontinued operations: Income from sale of businesses and (loss) from operations of discontinued Fasteners Segment (less applicable income taxes (benefits) of $7,486 and ($632) for the three month periods ended September 30, 2001 and October 1, 2000, respectively, and $7,999 and ($566) for the six month periods ended September 30, 2001 and October 1, 2000, respectively) 15,575 (1,031) 16,414 (924) Loss on disposal of discontinued Fasteners Segment, including provision of $96 for operating losses during phase out period (less applicable income tax (benefits) of ($36,787) for the three and six month periods ended September 30, 2001) (68,180) -- (68,180) -- ----------- ----------- ----------- ----------- Net loss $ (54,606) $ (1,755) $ (53,800) $ (2,507) =========== =========== =========== =========== Basic loss per share: Loss from continuing operations $ (0.32) $ (0.12) $ (0.33) $ (0.26) Loss from discontinued operations (8.51) (0.17) (8.38) (0.15) ----------- ----------- ----------- ----------- Net loss $ (8.83) $ (0.29) $ (8.71) $ (0.41) =========== =========== =========== =========== Diluted loss per share: Loss from continuing operations $ (0.32) $ (0.12) $ (0.33) $ (0.26) Loss from discontinued operations (8.51) (0.17) (8.38) (0.15) ----------- ----------- ----------- ----------- Net loss $ (8.83) $ (0.29) $ (8.71) $ (0.41) =========== =========== =========== =========== Numbers of shares used in computation of per share information: (Note 1) Basic 6,178,000 6,171,000 6,177,000 6,162,000 Diluted 6,178,000 6,171,000 6,177,000 6,162,000
See accompanying notes to unaudited consolidated financial statements. 3 CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Data)
(UNAUDITED) SEPTEMBER 30, 2001 MARCH 31, 2001 ------------------ -------------- ASSETS (Restated) Current assets: Cash and cash equivalents $ 1,924 $ 2,048 Accounts receivable (net of allowance for doubtful accounts of $85 at September 30, 2001 and $58 at March 31, 2001) 13,931 20,309 Inventories 21,039 21,778 Prepaid expenses and other current assets 1,407 951 Deferred income taxes 1,543 1,512 Assets held for sale 137,771 263,771 --------- --------- Total current assets 177,615 310,369 --------- --------- Property, plant and equipment 25,274 25,128 Less accumulated depreciation and amortization 13,037 12,625 --------- --------- Property, plant and equipment - net 12,237 12,503 --------- --------- Other assets: Notes receivable -- 61 Costs in excess of net assets of acquired businesses (net of accumulated amortization: September 30, 2001, $1,064; March 31, 2001, $953) 10,715 10,805 Patents and trademarks (net of accumulated amortization: September 30, 2001, $47; March 31, 2001, $38) 181 191 Deferred income taxes 39,958 11,360 Other 8,373 11,342 --------- --------- Total other assets 59,227 33,759 --------- --------- Total $ 249,079 $ 356,631 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Callable long-term debt $ 222,462 $ 271,307 Current portion of long-term debt -- 88 Accounts payable - trade 5,113 6,707 Accrued compensation 2,033 3,859 Accrued income taxes 384 3,193 Other current liabilities 9,294 9,028 --------- --------- Total current liabilities 239,286 294,182 --------- --------- Long-term debt payable to banks and others 272 1,055 --------- --------- Deferred income taxes 5,374 5,298 --------- --------- Other long-term liabilities 5,614 4,221 --------- --------- Stockholders' equity: Preferred stock - authorized, 300,000 shares; none issued -- -- Common stock - authorized, 14,700,000 shares of $.01 par value; issued 6,730,908 at September 30, 2001, and 6,718,614 at March 31, 2001 67 67 Additional paid-in capital 78,212 78,091 Notes receivable from officers (123) (191) Accumulated deficit (64,246) (10,446) Accumulated other comprehensive loss (5,999) (6,323) Unearned compensation (304) (253) --------- --------- 7,607 60,945 Less treasury stock, at cost - (546,940 shares at September 30, 2001 and 546,428 at March 31, 2001) (9,074) (9,070) --------- --------- Total stockholders' equity (1,467) 51,875 --------- --------- Total $ 249,079 $ 356,631 ========= =========
See accompanying notes to unaudited consolidated financial statements. 4 STATEMENTS OF CONSOLIDATED CASH FLOWS UNAUDITED (In Thousands of Dollars)
SIX MONTHS ENDED --------------------------------------- SEPTEMBER 30, 2001 OCTOBER 1, 2000 ------------------ --------------- (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(53,800) $ (2,507) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Gain on sale of marketable securities -- (7) Depreciation and amortization 1,938 2,900 Non-cash interest expense 1,256 200 Provision for losses on accounts receivable 128 -- Change in assets and liabilities: Decrease (increase) in accounts and other receivables 6,250 (2,125) Decrease in inventories 739 751 (Increase) decrease in deferred taxes (28,629) 1,654 Decrease (increase) in other assets 1,387 (3,662) Decrease in net assets of discontinued businesses 80,030 4,999 Decrease in accounts payable (1,594) (747) (Decrease) increase in accrued compensation (1,826) 50 Decrease in income tax payable (2,809) (3,127) Increase (decrease) in other liabilities 1,628 (1,268) -------- -------- Net cash provided by (used in) operating activities in continued operations 4,698 (2,889) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (146) (538) Proceeds from sale of business 46,203 -- Proceeds from sale of fixed assets -- 6 Proceeds from sale of marketable securities -- 11 Decrease in notes and other receivables -- 46 -------- -------- Net cash used in investing activities in continued operations 46,057 (475) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Reduction) increase in revolving credit, net (11,153) 7,840 Repayments on term loan (38,750) (3,750) Repayments on other debt (984) (39) Proceeds from subordinated debt -- 75,000 Repayment on bridge loan -- (75,000) Exercise of stock options and other 8 -- Dividends paid -- (799) -------- -------- Net cash (used in) provided by financing activities in continued operations (50,879) 3,252 -------- -------- Decrease in cash and cash equivalents (124) (112) Cash and cash equivalents at beginning of period 2,048 773 -------- -------- Cash and cash equivalents at end of period $ 1,924 $ 661 ======== ======== Supplemental Information: Interest payments $ 13,372 $ 14,359 Income tax payments $ 532 $ 892 Increase in senior subordinated notes for paid-in-kind interest expense $ 1,149 $ 200
---------- See accompanying notes to unaudited consolidated financial statements. 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) NOTE 1. Loss Per Share Basic loss per share is computed by dividing net loss by the weighted-average number of shares outstanding. Diluted loss per share is computed by dividing net income by the sum of the weighted-average number of shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options. The components of the denominator for basic loss per common share and diluted loss per common share are reconciled as follows:
Three Months Ended Six Months Ended -------------------------------- --------------------------------- September 30, October 1, September 30, October 1, 2001 2000 2001 2000 ------------- ---------- ------------- ---------- Basic Loss per Share: Weighted-average common stock outstanding for basic loss per share calculation 6,178 6,171 6,177 6,162 ============ ========== ============= ========== Diluted Loss per Common Share: Weighted-average common shares outstanding 6,178 6,171 6,177 6,162 Stock options* -- -- -- -- ------------- ---------- ------------- ---------- Weighted-average common stock outstanding for diluted loss per share calculation 6,178 6,171 6,177 6,162 ============= ========== ============= ==========
* Not including anti-dilutive stock options totaling 330 and 447 for the three and six month periods ended September 30, 2001, respectively, and 537 and 466 for the three and six month periods ended October 1, 2000, respectively. Also excludes anti-dilutive warrants totaling 428 for the three and six month periods ended September 30, 2001, and October 1, 2000. 6 NOTE 2. Comprehensive (Loss) Income Comprehensive (loss) income for the three and six month periods ended September 30, 2001 and October 1, 2000 is summarized below.
Three Months Ended Six Months Ended -------------------------------- -------------------------------- September 30, October 1, September 30, October 1, 2001 2000 2001 2000 ------------- ---------- ------------- ---------- Net loss $(54,606) $ (1,755) $(53,800) $ (2,507) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment arising during period (1,451) (668) (960) (1,486) Reclassification adjust- ment for sale of invest- ment in foreign entity 1,284 -- 1,284 -- Fair value of financial instruments 2,041 -- -- -- Unrealized investment holding loss -- (1) -- (6) ------------- ---------- ------------- ---------- Total comprehensive loss $(52,732) $ (2,424) $(53,476) $ (3,999) ============= ========== ============= =========
NOTE 3. Inventories Inventories are summarized as follows:
September 30, 2001 March 31, 2001 ------------------ -------------- Finished goods $ 707 $ 683 Work in process 6,682 6,664 Purchased and manufactured parts 13,650 14,431 ------------------ -------------- Total $21,039 $21,778 ================== ==============
7 NOTE 4. Discontinued Operations/Restructuring Activities On January 19, 2001, the Company announced its intention to restructure and divest its cold-headed products (TCR), retaining ring (Seeger-Orbis, TransTechnology (GB), TT Brasil, and TransTechnology Engineered Rings USA), hose clamp (Breeze Industrial and Pebra) and aerospace rivet (Aerospace Rivet Manufacturers Corp.) operations. In addition, on April 12, 2001, the Company announced that it would divest TransTechnology Engineered Components (TTEC), a manufacturer of spring steel engineered fasteners and headlight adjusters. For business segment reporting purposes, these above-mentioned business units have been previously classified as the segment "Specialty Fasteners." The Company has reclassified these remaining business units as discontinued operations with the exception of Aerospace Rivet Manufacturing Corporation. The accompanying financial statements have been restated to conform to discontinued operations treatment for all historical periods presented. A portion of the Company's interest expense has been allocated to discontinued operations based upon the net asset balances attributable to those operations. Interest expense allocated to discontinued operations was $4.4 million and $11.1 million for the three and six month periods ended September 30, 2001, respectively, and $7.1 million and $14.3 million for the three and six month periods ended October 1, 2000, respectively. Income taxes have been allocated to discontinued operations based on the estimated tax attributes of the income and assets of the underlying discontinued businesses. On July 10, the Company sold its Breeze Industrial and Pebra hose clamp businesses to Industrial Growth Partners and members of Breeze Industrial's management for $46.2 million, which was paid in cash. Proceeds from the sale were used to repay borrowings outstanding under the Credit Facility (Note 5). On November 16, 2001 the Company entered into an amended and restated definitive agreement (the "TTEC Agreement") for the sale of its Engineered Components division. The Company had previously disclosed in its press release dated October 18, 2001 that its net loss for the three months ended September 30, 2001 was $43.0 million, compared to a net loss of $1.8 million for the same period of the prior year, and that its net loss for the six months ended September 30, 2001 was $42.2 million, compared to a net loss of $2.5 million for the same period of the prior year. The results for the prior year and the six months ended September 30, 2001 as set forth in the release, had been recast to conform to discontinued operations treatment taking into account the expected sale price for the Company's Engineered Components division. Based on the sale price set forth in the TTEC Agreement, the Company has adjusted its accounting for its discontinued operations and is reporting a net loss for the three months ended September 30, 2001 of $54.6 million compared to $1.8 million for the same period of the prior year and a net loss for the six months ended September 30, 2001 of $53.8 million compared to a net loss of $2.5 million for the same period of the prior year.] 8 Net sales and income from the discontinued operations were as follows:
Three Months Ended Six Months Ended ----------------------------------- ----------------------------------- September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000 ------------------ --------------- ------------------ --------------- Net sales $ 43,054 $ 61,031 $ 100,263 $ 127,664 Pre-tax (loss) from discontinued operations (106,608) (1,663) (105,255) (1,490) Pre-tax gain on disposal of Breeze Industrial/Pebra 24,701 -- 24,701 -- Income tax benefit 29,302 632 28,788 566 --------- --------- --------- --------- Net (loss) from discontinued operations $ (52,605) $ (1,031) $ (51,766) $ (924) ========= ========= ========= =========
The pre-tax loss from discontinued operations for the three and six month periods ended September 30, 2001, includes asset impairment charges of $94.4 million associated with writing down goodwill and property, plant and equipment to estimated realizable value. The loss also includes the write-off of capitalized bank loan fees of $2.7 million, the accrual for interest rate swap closeout costs of $5.0 million, and phase out costs associated with the dispositions of discontinued businesses. The Company anticipates that the sales of remaining discontinued businesses will be consummated by the second quarter of calendar year 2002. Assets and liabilities of the discontinued businesses were as follows:
September 30, 2001 March 31, 2001 ------------------ -------------- Current assets $ 70,125 $ 84,247 Property, plant and equipment 48,523 68,751 Other assets 58,180 147,390 Current liabilities 30,349 27,502 Long-term liabilities 8,708 9,115 -------- -------- Net assets of discontinued operations $137,771 $263,771 ======== ========
Net assets associated with discontinued operations have been classified as "assets held for sale" in the Consolidated Balance Sheets. 9 NOTE 5. Long-term Debt Payable to Banks and Others Long-term debt payable to banks and others, including current maturities, consisted of the following:
September 30, 2001 March 31, 2001 ------------------ -------------- Credit agreement - 11.10% $ 145,023 $ -- Credit agreement - 10.50% -- 2,900 Credit agreement - 9.95% -- 153,368 Term loan - 9.06% -- 38,750 Senior Subordinated Notes - 16.00% 77,482 76,332 Other - 5.00% 397 1,289 --------- ------- 222,902 272,639 Less current maturities and amounts callable by lenders 222,462 271,395 Less unamortized discount 168 189 --------- ------- Total long-term debt $ 272 $ 1,055 ========= =======
CREDIT FACILITIES - Effective December 31, 2000, the Company was not able to meet certain financial ratio requirements of the credit facility (the "Credit Facility") as amended. Pursuant to discussions with the senior debt lenders (the "Lenders"), the Company and the Lenders agreed to an amendment to the Credit Facility to include a forbearance agreement as well as certain other fees and conditions, including the suspension of dividend payments. During the forbearance period the Lenders agree not to exercise certain of their rights and remedies under the Credit Facility. The Company has, accordingly, classified its bank debt as "current" to reflect the fact that the forbearance period is less than one year. The term of the forbearance period, initially scheduled to expire on January 31, 2001, was subsequently extended by an additional amendment to March 29, 2001. This additional amendment also reduced the Revolver from $200 million to $175 million with an additional sub-limit on usage at $162 million. Prior to the March 29, 2001 expiration date, the Lenders agreed to extend the termination date until June 27, 2001, provided that certain performance and debt reduction requirements occurred in which case the forbearance termination date could be further extended under similar terms and conditions until September 27, 2001. The debt reduction requirements of the forbearance agreement stipulated that $50 million was to be repaid prior to June 27, 2001, which was deemed satisfied by the Lenders, because of the impending sale of the Company's Breeze Industrial and Pebra divisions in July 2001. Effective as of September 27, 2001, a further extension to the forbearance termination date was granted until December 21, 2001, provided that certain performance conditions are met and certain fees and increased interest charges are paid. Based on a signed sale agreement for its Engineered Components division entered into in August 2001, the Company had expected to repay the majority of the senior debt outstanding under the Credit Facility with proceeds from the expected sale of its Engineered Components business prior to September 27, 2001 and the Company entered into a new forbearance agreement with the lenders. The Engineered Components sale was not consummated as planned on September 27, 2001. However, the Company signed a revised agreement to sell this business on November 16, 2001 for $98.5 million, of which $96 million is cash. 10 The current forbearance agreement, expiring on December 21, 2001, provides for an interest rate margin increase of one-half percent for so long as the Credit Facility exceeds $45 million. Additionally, $2.5 million of the outstanding revolver bears an interest rate of 25% per annum. This amount relates to the subordinated debt interest payment made on its scheduled due date of October 1, 2001. Under the forbearance agreement, the $2.5 million will be the last piece of the revolver paid. The forbearance agreement also requires the achievement of minimum levels of EBITDA (earnings before interest, taxes, depreciation, and amortization), and adherence to borrowing limits as adjusted based on anticipated debt reduction. Other terms of the forbearance agreement include certain fees and reporting and consulting requirements. The Company has taken action to reduce its debt by preparing to sell its Engineered Components business as well as the other businesses in its Specialty Fasteners Products Segment in order to be in an improved financial position to negotiate further amendments or borrowing alternatives. The Company has made all of its scheduled interest and principal payments on a timely basis. Various factors, including changes in business conditions, anticipated proceeds from the sale of operations and economic conditions in domestic and international markets in which the Company competes, will impact the restructuring results and may affect the ability of the Company to restore compliance with the financial ratios specified in the existing Credit Facility. The Company has unused borrowing capacity for both domestic and international operations of $8.0 million as of September 30, 2001, including letters of credit. The Credit Facility is secured by the Company's assets. As of September 30, 2001, the Company had total borrowings of $222.7 million which have a current weighted-average interest rate of 12.8%. Borrowings under the Credit Facility as of September 30, 2001, were $145.0 million. Interest on the Revolver is tied to the primary bank's prime rate, or at the Company's option, the London Interbank Offered Rate ("LIBOR"), plus a margin that varies depending upon the Company's achievement of certain operating results. As of September 30, 2001, none of the Company's outstanding borrowings utilized LIBOR because the terms of the forbearance agreement precluded the Company's option to borrow at LIBOR until certain debt reduction levels are reached based on a sale of the Engineered Components business. Effective July 10, 2001 the Term Loan of $31.3 million was repaid in full with the Breeze Industrial and Pebra sale proceeds. The Credit Facility requires the Company to maintain interest rate protection on a minimum of 50% of its variable rate debt. The Company has, accordingly, provided for this protection by means of interest rate swap agreements which have fixed the rate of interest on $50.0 million of debt at a base rate of 5.48% through May 4, 2002, and $75.0 million of debt at a base rate of 6.58% through March 3, 2003. Due to a decline in interest rates since the inception of these swap agreements, the value of the agreements has become unfavorable to the Company as discussed under Item 3 - Quantitative and Qualitative Disclosures about Market Risk. As of September 30, 2001, the Company recorded a charge and a liability in the amount of $5.1 million before tax to recognize the liability based on the expected retirement of the associated Credit Facility with the proceeds from the sale of the discontinued business units this fiscal year. This pre-tax charge to terminate these interest rate swap agreements is accordingly included with the loss on disposal of the discontinued Specialty Fasteners Segment. Under the Credit Facility agreement, the base interest rate is added to the applicable interest rate margin to determine the total interest rate in effect. The Credit Facility restricts annual capital expenditures to $13.0 million in 2002 and $15.0 million thereafter, and contains other customary financial covenants, including the requirement to maintain certain financial ratios relating to performance, interest expense and debt levels. 11 SENIOR SUBORDINATED NOTES - On August 30, 2000, the Company completed a private placement of $75 million in senior subordinated notes (the "Notes") and certain warrants to purchase shares of the Company's common stock (the "Warrants") to a group of institutional investors (collectively, the "Purchasers"). The Notes are due on August 29, 2005 and bear interest at a rate of 16% per annum, consisting of 13% cash interest on principal, payable quarterly, and 3% interest on principal, payable quarterly in "payment-in-kind" promissory notes. Prepayment of the Notes is permitted after August 29, 2001 at a premium initially of 9% declining to 5%, 3%, and 1% annually, respectively, thereafter. The Notes contain customary financial covenants and events of default, including a cross-default provision to the Company's Credit Facility. The Warrants entitle the Purchasers to acquire in the aggregate 427,602 shares, or 6.5%, of the common stock of the Company at an exercise price of $9.93 a share, which represents the average daily closing price of the Company's common stock on the New York Stock Exchange for the thirty (30) days preceding the completion of the private placement. The Warrants must be exercised by August 29, 2010. These Warrants have been valued at an appraised amount of $0.2 million and have been recorded in paid in capital. In connection with the transaction, the Company and certain of its subsidiaries signed a Consent and Amendment Agreement with the Lenders under the Company's $250 million Credit Facility existing at that time, in which the Lenders consented to the private placement and amended certain financial covenants associated with the Credit Facility. OTHER - As of September 30, 2001, the Company had $0.4 million of other long-term debt consisting of life insurance policies owned by the Company with a fixed interest rate of 5%. NOTE 6. Change in Accounting for Derivative Financial Instruments In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amends certain provisions of SFAS No. 133. The Company adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 on April 1, 2001. The Company reported, within Discontinued Operations, a pre-tax charge of $5.0 million associated with the termination of interest rate swap agreements that will no longer be required when the Company repays its floating rate debt, which is anticipated with the sale of "discontinued" assets of the Company being held for sale. NOTE 7. New Accounting Standards In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS No. 142 on its financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 requires, among other things, the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company is currently assessing, but has not yet determined, the impact of SFAS No. 144 on its financial position and results of operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to three and six month periods in this Management's Discussion refer to the three and six month periods ended September 30, 2001 for fiscal year 2002 and the three and six month periods ended October 1, 2001 for fiscal year 2001. Also, when referred to herein, operating profit means net sales less operating expenses, without deduction for general corporate expenses, interest and income taxes. MANAGEMENT INITIATIVES AND RESTRUCTURING On January 19, 2001, the Company announced its intention to restructure and divest its cold-headed products (TCR), aerospace rivet (Aerospace Rivet Manufacturers Corp), retaining ring (Seeger-Orbis, TransTechnology (GB), TT Brasil, and TransTechnology Engineered Rings USA) and hose clamp operations (Breeze Industrial and Pebra). The Company also announced that it had retained an investment banking firm to consider further strategic and business initiatives following these actions. In association with the restructuring, the Company stated it would suspend the payment of its quarterly dividend and recognize a non-recurring charge in the fourth fiscal quarter of 2001 related to anticipated losses on the sale of several of these businesses as well as the provision for severance and other costs associated with these divestitures. Proceeds from the sales of the businesses will be used to repay debt and to refocus the Company's efforts on the design, manufacture and marketing of specialized aerospace equipment. On April 12, 2001, the Company announced that it would divest TransTechnology Engineered Components (TTEC), a manufacturer of spring steel engineered fasteners and headlight adjusters. For business segment reporting purposes, these above-mentioned business units have been previously classified as the segment "Specialty Fasteners." With the exception of the aerospace rivet business, which has been subsequently taken off the market effective August 26, the Company has reclassified these remaining business units as discontinued operations in the quarter ended September 30, 2001. The Company entered into amendments of its existing credit agreement under which the Company's senior lenders have agreed to forbearance with respect to the Company's continuing violations of certain covenants in the credit facility through December 21, 2001, subject to the Company meeting certain interim debt reduction and EBITDA targets. The Company's subordinated lenders also entered into a forbearance agreement with respect to the Company's expected violation of its net worth covenant as the result of write-offs as part of its restructuring plan. The Company reported, on a pre-tax basis, asset impairment charges in the fourth fiscal quarter of 2001 of $67.9 million related to estimated losses on businesses to be sold, primarily related to the write-off of intangible assets and property. On July 10, consistent with the aforementioned actions, the Company completed the previously announced sale of its Breeze Industrial and Pebra hose clamp businesses in the U.S. and Germany, respectively, to Industrial Growth Partners and the current management team of these divested companies for $46.2 million in cash. Proceeds were used to repay debt. Breeze Industrial's land and building was sold in the second fiscal quarter of 2002 for proceeds of $1.1 million (net of associated debt). 13 In the second fiscal quarter of 2002, as part of its restructuring program and included within the "discontinued operations" component of income, the Company reported an asset impairment pre-tax charge for its Engineered Components business of $85.8 million to reduce the carrying value of these businesses to estimated fair market value. This non-cash charge was specifically related to a write-down of goodwill. In addition, a pre-tax charge was recorded in the amount of $8.6 million to reduce the carrying values of its Engineered Rings businesses to reflect revised estimates of expected net sales proceeds for these businesses. This charge resulted in a non-cash write-down of property, plant and equipment. Offsetting these charges was a pre-tax gain on the sale of its hose clamp businesses of $24.7 million. Consistent with accounting rules for discontinued businesses, the Company accrued future losses related to discontinued businesses of $4.0 million which include future interest expense associated with discontinued operations, offset by projected income from operations from these businesses through the expected disposal dates of the underlying assets. Also, in the second fiscal quarter, the Company recorded pre-tax charges of $7.7 million related to writing off capitalized bank loan origination fees under its Credit Agreement and the cost of closing out interest rate swap agreements (fair values) that have been required to convert floating rate debt to fixed rates. The estimated costs of closing out interest rate swap agreements had been recorded in other comprehensive income through the end of the first fiscal quarter of 2002. The Company expects to complete the sale of its discontinued businesses by the second quarter of calendar year 2002. Income from operations that have been discontinued was $3.9 million and $11.9 million for the three and six month periods ended September 30, 2001, respectively. Income from operations that have been discontinued was $5.4 million and $12.8 million for the three and six month periods ended October 1, 2000, respectively. A portion of the Company's interest expense was allocated to discontinued operations based upon the average net assets of continuing and discontinued operations. Interest expense allocated to discontinued operations was $4.4 million and $11.1 million for the three and six month periods ended September 30, 2001, respectively, and $7.1 million and $14.3 million for the three and six month periods ended October 1, 2000, respectively. Following the divestiture of the fastener business units, the Company expects to have retired its senior bank debt and expects to reduce its corporate overhead by more than $4 million from its present $8.7 million level. Additionally, for tax purposes, the Company expects to have significant operating loss carry-forwards which will shelter future earnings from taxes for several years. The Company expects, when repositioned as an aerospace products manufacturer with revenues from new equipment sales, maintenance and service of existing equipment, and spare parts sales, to be significantly more profitable and less leveraged, with substantial growth opportunities. Management believes that the Company will present substantially more value to its shareholders after the restructuring than in its present form. On November 16, 2001 the Company entered into an amended and restated definitive agreement (the "TTEC Agreement") for the sale of its Engineered Components division. The Company had previously disclosed in its press release dated October 18, 2001 that its net loss for the three months ended September 30, 2001 was $43.0 million, compared to a net loss of $1.8 million for the same period of the prior year, and that its net loss for the six months ended September 30, 2001 was $42.2 million, compared to a net loss of $2.5 million for the same period of the prior year. The results for the prior year and the six months ended September 30, 2001 as set forth in the release, had been recast to conform to discontinued operations treatment taking into account the expected sale price for the Company's Engineered Components division. Based on the sale price set forth in the TTEC Agreement, the Company has adjusted its accounting for its discontinued operations and is reporting a net loss for the three months ended September 30, 2001 of $54.6 million compared to $1.8 million for the same period of the prior year and a net loss for the six months ended September 30, 2001 of $53.8 million compared to a net loss of $2.5 million for the same period of the prior year. 14 a net loss for the six months ended September 30, 2001 of $53.8 million compared to a net loss of $2.5 million for the same period of the prior year. RESULTS OF CONTINUING OPERATIONS Effective August 26, 2001, the Company discontinued its Specialty Fasteners businesses with the exception of its Aerospace Rivet Manufacturers business. The discontinued businesses are expected to be sold by the second quarter of calendar year 2002. Continuing operations will be comprised of the Company's Breeze-Eastern, Norco and Aerospace Rivet Manufacturers (ARM) business units, formerly referred to as the Aerospace Segment. Three month period, 2002 versus 2001 Net sales for the second quarter were $19.3 million in 2002 versus $18.1 million in 2001. The sales increase is related to strong demand. Gross margin rates for the three business units were basically flat for the two periods. General, sales and administrative expenses, as a percentage of sales, dropped from 32.1% in 2001 to 26.4% in 2002 reflecting higher sales levels and reduced expenses at all business units. Interest expense for the period is based on allocations of interest expense to both continuing and discontinued operations based on underlying net asset values. Bookings for the periods were $18.3 million in 2002 versus $23.2 million in 2001. Backlog at September 30, 2001 was $55.1 million. During the 2002 period, the Company recorded forbearance fees associated with the Credit Agreement of $1.1 million. In addition, the $1.2 million of estimated costs associated with downsizing the Corporate office were recorded. The loss from operations before income tax benefits was $3.1 million for the 2002 period versus $1.2 million in 2001. Six month period, 2002 versus 2001 Net sales for the first six months of 2002 were $41.0 million versus $35.8 million in 2001. The sales increase is due to strong demand and, to a lesser extent, change in the sales mix of products sold. Gross margin rates for the three business units rose from 34.6% to 35.6% resulting from moderate improvements at one of the business units. General, sales and administrative expenses, as a percentage of sales, dropped from 33.1% in 2001 to 25.6% in 2002 reflecting higher sales levels and flat expenses at all business units. Interest expense for the period is based on allocations of interest expense to both continuing and discontinued operations based on underlying net asset values. 15 Bookings for the periods were $51.2 million in 2002 versus $34.3 million in 2001. During the 2002 period, the Company recorded forbearance fees of $2.2 million. In addition, as discussed above, the estimated cost of Corporate downsizing was recorded in the amount of $1.2 million. The loss from operations before income tax benefits was $3.2 million in 2002 versus $2.6 million in 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's credit facilities are classified as short term and reflect the terms of the forbearance agreement with its lenders (the "Lenders"). The Company reduced debt with the proceeds of $46.2 million from the sale of its Breeze Industrial and Pebra hose clamp businesses on July 10, 2001. The Company plans to sell its remaining Specialty Fasteners businesses in order to further reduce its debt during fiscal year 2002, and, accordingly, has classified the Specialty Fasteners business as Discontinued Operations in the Statement of Consolidated Operations and as Assets Held for Sale in the Consolidated Balance Sheets. The terms of sale of each business unit are subject to the approval of the Lenders. The Company's debt-to-capitalization ratio was 100.7% as of September 30, 2001, which is 16.7% higher than March 31, 2001. The higher ratio is mainly due to the reduction of equity resulting from the loss on disposal of the discontinued Specialty Fasteners Segment. The current ratio as of September 30, 2001 was 0.74 compared to 1.06 as of March 31, 2001. Working capital was ($61.7) million at September 30, 2001, compared to $16.2 million from March 31, 2001. The change in working capital for the six months ended September 30, 2001 was mainly due to the debt reduction made possible by the sale of the Breeze Industrial and Pebra businesses for $46.2 million on July 10, 2001, as well as the reclassification of the Specialty Fasteners Segment assets and liabilities to Assets Held for Sale. Total debt as of September 30, 2001 was $222.7 million or $49.7 million less than the March 31, 2001 amount. Effective December 31, 2000, the Company was not able to meet certain financial ratio requirements of the credit facility (the "Credit Facility") as amended. Pursuant to discussions with the senior debt lenders (the "Lenders"), the Company and the Lenders agreed to an amendment to the Credit Facility to include a forbearance agreement as well as certain other fees and conditions, including the suspension of dividend payments. During the forbearance period the Lenders agree not to exercise certain of their rights and remedies under the Credit Agreement. The Company has, accordingly, classified its bank debt as "current" to reflect the fact that the forbearance period is less than one year. The term of the forbearance period, initially scheduled to expire on January 31, 2001, was subsequently extended by an additional amendment to March 29, 2001. This additional amendment also reduced the Revolver from $200 million to $175 million with an additional sub-limit on usage at $162 million. Prior to the March 29, 2001 expiration date, the Lenders agreed to extend the termination date until June 27, 2001, provided that certain performance and debt reduction requirements occurred in which case the forbearance termination date could be further extended under similar terms and conditions until September 27, 2001. The debt reduction requirements of the forbearance agreement stipulated that $50 million was to be repaid prior to June 27, 2001, which was deemed satisfied by the Lenders, because of the impending sale of the Company's Breeze Industrial and Pebra divisions in July 2001. Effective as of September 27, 2001, a further extension to the forbearance termination date until December 21, 2001, was agreed to provided that certain performance conditions are met and certain fees and increased interest charges are paid. 16 Based on a signed sale agreement for its Engineered Components division entered into in August 2001,the Company had expected to repay the majority of the senior debt outstanding under the Credit Facility with proceeds from the expected sale of its Engineered Components business prior to September 27, 2001 and the Company entered into a new forbearance agreement with the lenders. The Engineered Components sale was not consummated as planned on September 27, 2001. However, the Company signed a revised agreement to sell this business on November 16, 2001 for $98.5 million, of which $96 million is cash. The current forbearance agreement, expiring on December 21, 2001, provides for an interest rate margin increase of one-half percent for so long as the Credit Facility exceeds $45 million. Additionally, $2.5 million of the outstanding revolver bears an interest rate of 25% per annum. This amount relates to the subordinated debt interest payment made on its scheduled due date of October 1, 2001. Under the forbearance agreement, the $2.5 million will be the last piece of the revolver paid. The forbearance agreement also requires the achievement of minimum levels of EBITDA (earnings before interest, taxes, depreciation, and amortization), and adherence to borrowing limits as adjusted based on anticipated debt reduction. Other terms of the forbearance agreement include certain fees, reporting and consulting requirements. The Company has taken action to reduce its debt by preparing to sell its Engineered Components business as well as the other businesses in its Specialty Fasteners Products Segment in order to be in an improved financial position to negotiate further amendments or borrowing alternatives. The Company has made all of its scheduled interest and principal payments on a timely basis. Various factors, including changes in business conditions, anticipated proceeds from the sale of operations and economic conditions in domestic and international markets in which the Company competes, will impact the restructuring results and may affect the ability of the Company to restore compliance with the financial ratios specified in the existing Credit Facility. The Company has unused borrowing capacity for both domestic and international operations of $8.0 million as of September 30, 2001, including letters of credit. The Credit Facility is secured by the Company's assets. As of September 30, 2001, the Company had total borrowings of $222.7 million which have a current weighted-average interest rate of 12.8%. Borrowings under the Credit Facility as of September 30, 2001, were $145.0 million. Interest on the Revolver is tied to the primary bank's prime rate, or at the Company's option, the London Interbank Offered Rate ("LIBOR"), plus a margin that varies depending upon the Company's achievement of certain operating results. As of September 30, 2001, none of the Company's outstanding borrowings utilized LIBOR because the terms of the forbearance agreement precluded the Company's option to borrow at LIBOR until certain debt reduction levels are reached based on a sale of the Engineered Components business. Effective July 10, 2001 the Term Loan of $31.3 million was repaid in full with the Breeze Industrial and Pebra sale proceeds. Management believes that the Company's plan to divest its Specialty Fasteners Segment businesses in order to reduce debt, along with the anticipated cash flow from its retained business operations, will be sufficient to support working capital, capital expenditure, and debt service costs. The amount and timing of proceeds from such sales are subject to market and other conditions which the Company cannot control. Capital expenditures, including those related to discontinued operations, were $1.5 million for the six month period and $0.8 million in the three month period ended September 30, 2001, compared to $3.5 million and $1.7 million in the periods ended October 1, 2000. The Company expects capital 17 expenditures in 2002 to be lower than the 2001 amount due to its planned lower capital spending levels and planned business unit dispositions. EURO CURRENCY Effective January 1, 1999, eleven countries comprising the European Union established fixed foreign currency exchange rates and adopted a common currency unit designated as the "Euro." The Euro has since become publicly traded and is currently used in commerce during the present transition period which is scheduled to end January 1, 2002, at which time a Euro denominated currency is scheduled to be issued and is intended to replace those currencies of the eleven member countries. The transition to the Euro has not resulted in problems for the Company to date, and is not expected to have any material adverse impact on the Company's future operations. INFORMATION ABOUT FORWARD-LOOKING STATEMENTS Certain statements in this document constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Acts"). Any statements contained herein that are not statements of historical fact are deemed to be forward-looking statements. The forward-looking statements in this document are based on current beliefs, estimates and assumptions concerning the operations, future results, and prospects of the Company. As actual operations and results may materially differ from those assumed in forward-looking statements, there is no assurance that forward-looking statements will prove to be accurate. Forward-looking statements are subject to the safe harbors created in the Acts. Any number of factors could affect future operations and results, including, without limitation, the Company's ability to dispose of some or all of the business operations proposed for divestiture for the consideration currently estimated to be received by the Company or within the timeframe anticipated by the Company; the Company's ability to arrive at a mutually satisfactory amendment of its credit facilities with its lenders, if required; in the event of divestiture, the Company's ability to be profitable with a smaller and less diverse base of operations that will generate less revenue; the value of replacement operations, if any; general industry and economic conditions; interest rate trends; capital requirements; competition from other companies; changes in applicable laws, rules and regulations affecting the Company in the locations in which it conducts its business; the availability of equity and/or debt financing in the amounts and on the terms necessary to support the Company's future business and/or to provide adequate financing for parties interested in purchasing operations identified for divestiture; and those specific risks that are discussed in the Company's previously filed Annual Report on Form 10-K for the fiscal year ended March 31, 2001. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information or future events. IMPACT OF INFLATION The Company's primary costs, inventory and labor, increase with inflation. Recovery of the costs has to come from improved operating efficiencies and, to the extent permitted by our competition, through improved gross profit margins. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and interest rates. The counter parties are major financial institutions. The Company has used forward exchange contracts to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. The principal transactions hedged have been intercompany loans, intercompany purchases and trade flows. Gains and losses on forward foreign exchange contracts and the offsetting gains and losses on hedged transactions are reflected in the Statement of Consolidated Operations. As of September 30, 2001, the Company has no outstanding forward currency contracts. The Company has entered into interest rate swap agreements to manage its exposure to interest rate changes. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. Payments or receipts on the swap agreements are recorded as adjustments to interest expense. At September 30, 2001, the Company had entered into interest rate swap agreements to convert $125.0 million of floating interest rate debt to fixed rate. At September 30, 2001, the fair value of these swap agreements was approximately ($5.0) million. The Company has reported the impact of these swaps as a component of its reported loss on discontinued operations. It is assumed that the floating rate debt will be repaid at the conclusion of the disposition of its net assets of discontinued operations. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is engaged in various legal proceedings incidental to its business. It is the opinion of management that, after taking into consideration information furnished by its counsel, these matters will not have a material effect on the Company's consolidated financial position or the results of the Company's operations in future periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of the Company, held on September 13, 2001, all ten directors of the Company nominated for reelection were elected for a term of one year. The results of the voting on the election of directors were as follows:
VOTES FOR ABSTENTIONS --------- ----------- Daniel Abramowitz 4,678,712 579,776 Gideon Argov 4,670,351 588,137 Walter Belleville 4,671,411 587,077 Michael J. Berthelot 4,672,566 585,923 Thomas V. Chema 4,671,272 587,216 Jan Naylor Cope 4,670,414 588,074 John Dalton 4,671,385 587,103 Michel Glouchevitch 4,670,351 588,137 James A. Lawrence 4,673,411 585,077 William Recker 4,670,422 588,066
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.45 Consent and Amendment No. 2 to Forbearance Agreement dated as of September 27, 2001, of Fleet National Bank and the other Lenders referred to therein. (b) A report on Form 8-K/A dated September 24, 2001, was filed amending the Form 8-K filed on July 25, 2001, to report the July 10, 2001 sale by the Company of substantially all the assets of its Breeze Industrial and Pebra hose clamp businesses. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSTECHNOLOGY CORPORATION (Registrant) Dated: November 19, 2001 By: /s/Joseph F. Spanier -------------------------------------- JOSEPH F. SPANIER, Vice President Treasurer and Chief Financial Officer* *On behalf of the Registrant and as Principal Financial and Accounting Officer. 21