10-Q 1 y91654e10vq.txt TRANSTECHNOLOGY CORP. 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 28, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 1-7872 ------------------------- TRANSTECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-4062211 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 700 Liberty Avenue 07083 Union, New Jersey (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (908) 688-2440 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- As of November 10, 2003, the total number of outstanding shares of registrant's one class of common stock was 6,498,143. 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 28, 2003 and September 29, 2002...................................... 3 Consolidated Balance Sheets-- September 28, 2003 and March 31, 2003....................... 4 Statements of Consolidated Cash Flows-- Six Month Periods Ended September 28, 2003 and September 29, 2002.......................................... 5 Notes to Consolidated Financial Statements.................. 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 11-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 19 Item 4. Controls and Procedures..................................... 19-20 PART II. Other Information Item 1. Legal Proceedings........................................... 21 Item 4. Submission of Matters to a Vote of Security Holders......... 21 Item 6. Exhibits and Reports on Form 8-K............................ 21 SIGNATURES.............................................................. 22 EXHIBIT 31.1............................................................ 23 EXHIBIT 31.2............................................................ 24 EXHIBIT 32 ............................................................ 25
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The Company's independent public accountants have not completed their review of the condensed consolidated financial statements included herein prior to the deadline for filing this Form 10-Q as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities and Exchange Act of 1934, as amended. The following unaudited Statements of Consolidated Operations, Consolidated Balance Sheets, and Statements of Consolidated Cash Flows are of TransTechnology Corporation and its consolidated subsidiaries (collectively, the "Company"). These reports reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods reflected therein. The results reflected in the unaudited Statements of Consolidated Operations for the period ended September 28, 2003, 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, 2003. Information provided herein for the three and six month periods ended September 29, 2002, has been reclassified to give effect to the reporting of the Company's former wholly-owned subsidiary, Norco, Inc., as discontinued operations as discussed in Note 5 to the Financial Statements. [THIS PAGE INTENTIONALLY LEFT BLANK] 2 STATEMENTS OF CONSOLIDATED OPERATIONS UNAUDITED (In Thousands of Dollar, Except Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------------- -------------------------------------- SEPTEMBER 28, 2003 SEPTEMBER 29, 2002 SEPTEMBER 28, 2003 SEPTEMBER 29, 2002 ------------------ ------------------ ------------------ ------------------ Net sales $ 16,333 $ 11,854 $ 32,452 $ 25,741 Cost of sales 9,575 6,380 18,347 14,056 ---------------- ---------------- ---------------- ---------------- Gross profit 6,758 5,474 14,105 11,685 General, administrative and selling expenses 3,531 4,266 7,302 7,868 Interest expense 2,568 2,004 5,071 4,120 Interest and other (income) expense - net (159) 10 (206) (27) Unrealized loss on warrants -- 1,219 -- 1,219 Forbearance fees -- -- -- 764 ---------------- ---------------- ---------------- ---------------- Income (loss) from continuing operations before income taxes 818 (2,025) 1,938 (2,259) Provision for income taxes (benefit) 310 (315) 736 (406) ---------------- ---------------- ---------------- ---------------- Income (loss) from continuing operations 508 (1,710) 1,202 (1,853) Discontinued operations: Loss on disposal of discontinued businesses (less applicable income tax benefit of $1,587 and $1,975 for the three and six month periods ended September 29, 2002, respectively) -- (3,523) -- (4,130) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 508 $ (5,233) $ 1,202 $ (5,983) ================ ================ ================ ================ Basic earnings (loss) per share: Income (loss) from continuing operations $ 0.08 $ (0.28) $ 0.18 $ (0.30) Loss from discontinued operations -- (0.57) -- (0.67) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 0.08 $ (0.85) $ 0.18 $ (0.97) ================ ================ ================ ================ Diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.08 $ (0.28) $ 0.18 $ (0.30) Loss from discontinued operations -- (0.57) -- (0.67) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 0.08 $ (0.85) $ 0.18 $ (0.97) ================ ================ ================ ================ Number of shares used in computation of per share information: (Note 1) Basic 6,647,000 6,197,000 6,647,000 6,194,000 Diluted 6,676,000 6,197,000 6,662,000 6,194,000
See accompanying notes to unaudited consolidated financial statements. 3 CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Data)
(UNAUDITED) SEPTEMBER 28, 2003 MARCH 31, 2003 ------------------ ---------------- ASSETS Current assets: Cash and cash equivalents $ 757 $ 7,104 Accounts receivable (net of allowance for doubtful accounts of $71 at September 28, 2003 and $65 at March 31, 2003) 9,777 6,701 Inventories 19,332 19,683 Prepaid expenses and other current assets 898 1,364 Income tax receivable 226 363 Deferred income taxes 1,289 1,289 ---------------- ---------------- Total current assets 32,279 36,504 ---------------- ---------------- Property, plant and equipment 12,869 12,721 Less accumulated depreciation 10,583 10,372 ---------------- ---------------- Property, plant and equipment - net 2,286 2,349 ---------------- ---------------- Other assets: Deferred income taxes 30,053 30,712 Other 14,848 15,558 ---------------- ---------------- Total other assets 44,901 46,270 ---------------- ---------------- Total $ 79,466 $ 85,123 ================ ================ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of long-term debt $ 79 $ 79 Accounts payable - trade 4,628 4,954 Accrued compensation 1,813 2,847 Accrued income taxes 174 2,460 Other current liabilities 10,219 15,003 ---------------- ---------------- Total current liabilities 16,913 25,343 ---------------- ---------------- Long-term debt payable to banks and others 54,930 53,487 ---------------- ---------------- Deferred income taxes 1,598 1,332 ---------------- ---------------- Other long-term liabilities 10,478 11,601 ---------------- ---------------- 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 7,059,107 at September 28, 2003, and 7,018,299 at March 31, 2003 71 70 Additional paid-in capital 76,728 74,283 Accumulated deficit (71,791) (72,993) Unearned compensation (221) (43) ---------------- ---------------- 4,787 1,317 Less treasury stock, at cost - (560,964 shares at September 28, 2003 and March 31, 2003) (9,240) (9,240) ---------------- ---------------- Total stockholders' deficit (4,453) (7,923) ---------------- ---------------- Total $ 79,466 $ 85,123 ================ ================
See accompanying notes to unaudited consolidated financial statements. 4 STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (In Thousands of Dollars)
SIX MONTHS ENDED --------------------------------------- SEPTEMBER 28, 2003 SEPTEMBER 29, 2002 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,202 $ (5,983) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss from discontinued operations -- 4,130 Depreciation and amortization 1,009 873 Net change in assets of discontinued companies -- 753 Warrant mark to market adjustment -- 1,219 Noncash interest expense 1,537 1,358 Increase (decrease) in provision for bad debt 6 (198) Changes in assets and liabilities: (Increase) decrease in accounts receivable and other receivables (2,938) 7,032 Decrease (increase) in inventories 351 (1,270) Decrease (increase) in deferred taxes net 659 (2,509) Decrease (increase) in other assets 428 (4,153) (Decrease) increase in accounts payable (326) 110 Decrease in accrued compensation (1,034) (462) Decrease in income taxes payable (2,020) (449) Decrease in other liabilities (5,100) (580) ---------------- ---------------- Net cash used in operating activities (6,226) (129) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (159) (437) Proceeds from sales of businesses -- 6,425 Decrease in notes and other receivables -- (223) ---------------- ---------------- Net cash (used in) provided by investing activities (159) 5,765 ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments on debt, net -- (4,414) Exercise of stock options and other 38 (95) ---------------- ---------------- Net cash provided by (used in) financing activities 38 (4,509) ---------------- ---------------- (Decrease) increase in cash and cash equivalents (6,347) 1,127 Cash and cash equivalents at beginning of period 7,104 97 ---------------- ---------------- Cash and cash equivalents at end of period $ 757 $ 1,224 ================ ================ Supplemental information: Interest payments $ 3,480 $ 10,283 Income tax payments $ 2,098 $ 188 Increase in senior subordinated note for paid-in-kind interest expense $ 1,443 $ 1,263 Increase in additional paid-in capital from warrant put expiration $ 2,184 $ -- Noncash charge to equity from classification of warrants as financial derivatives $ -- $ 4,550
See accompanying notes to unaudited consolidated financial statements. 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) NOTE 1. Earnings (Loss) Per Share Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted-average number of shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options and warrants. The components of the denominator for basic earnings (loss) per common share and diluted earnings (loss) per common share are reconciled as follows:
Three Months Ended Six Months Ended ---------------------------- ---------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Basic Earnings (Loss) per Common Share: Weighted-average common stock out- standing for basic earnings (loss) per share calculation 6,647 6,197 6,647 6,194 ========== ========== ========== ========== Diluted Earnings (Loss) per Common Share: Weighted-average common shares outstanding 6,647 6,197 6,647 6,194 Stock options and warrants* 29 -- 15 -- ---------- ---------- ---------- ---------- Weighted-average common stock outstanding for diluted earnings (loss) per share calculation 6,676 6,197 6,662 6,194 ========== ========== ========== ==========
* Not including anti-dilutive stock options totaling 194 and 606 for the three and six month periods ended September 28, 2003, respectively and 53 and 135 for the three and six month periods ended September 29, 2002, respectively. Also excluding anti-dilutive warrants totaling 428 for the three and six month periods ended September 29, 2002. 6 NOTE 2. Comprehensive Income (Loss) Comprehensive income (loss) for the three and six month periods ended September 28, 2003 and September 29, 2002 is summarized below.
Three Months Ended Six Months Ended ---------------------------- ---------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss) $ 508 $ (5,235) $ 1,202 $ (5,983) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment arising during period -- 77 -- (86) Reclassification adjustment for sale of investment in foreign entity -- 3,306 -- 3,306 ------------ ------------ ------------ ------------ Total comprehensive income (loss) $ 508 $ (1,852) $ 1,202 $ (2,763) ============ ============ ============ ============
NOTE 3. Stock Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, the Company records expense in an amount equal to the excess, if any, of the quoted market price on the grant date over the option price. The following table includes as reported and proforma information required by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure. Proforma information is based on the fair value method under SFAS No. 123. 7
Three Months Ended Six Months Ended ----------------------------- ----------------------------- September 28, September 29, September 28, September 29, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss) as reported $ 508 $ (5,235) $ 1,202 $ (5,983) Deduct: Total stock-based compensation expense determined under fair value based method, net of taxes (47) (56) (86) (112) ------------ ------------ ------------ ------------ Proforma net income (loss) $ 461 $ (5,291) $ 1,116 $ (6,095) ============ ============ ============ ============ Basic earnings (loss) per share: As reported $ 0.08 $ (0.85) $ 0.18 $ (0.97) Proforma $ 0.07 $ (0.85) $ 0.17 $ (0.98) Diluted earnings (loss) per share: As reported $ 0.08 $ (0.85) $ 0.18 $ (0.97) Proforma $ 0.07 $ (0.85) $ 0.17 $ (0.98)
NOTE 4. Inventories Inventories are summarized as follows:
September 28, 2003 March 31, 2003 ------------------ ---------------- Finished goods $ 1 $ 2 Work in process 5,822 6,105 Purchased and manufactured parts 13,509 13,576 ---------------- ---------------- Total $ 19,332 $ 19,683 ================ ================
8 NOTE 5. Discontinued Operations During fiscal 2001, the Company implemented a restructuring plan to focus its resources and capital on the aerospace and defense products business and exit the specialty fastener segment. As a result, discontinued operations include all of the remaining operations related to its specialty fastener segment and Norco, Inc., the net assets of which were sold on February 24, 2003. There were no operating results from discontinued operations in fiscal 2004. Net sales and losses from the discontinued operations for the comparable periods in fiscal 2003 were as follows:
Three Months Six Months Ended Ended September 29, 2002 September 29, 2002 ------------------ ------------------ Net sales $ 11,876 $ 31,482 ================ ================ Loss from discontinued operations before income taxes (5,110) (6,105) Income tax benefits 1,587 1,975 ---------------- ---------------- Loss from discontinued operations $ (3,523) $ (4,130) ================ ================
The $4.1 million loss from discontinued operations for the six months ended September 29, 2002 included actual operating income of $4.5 million from discontinued operations, allocated interest expense of $3.6 million, a $1.9 million charge to reflect the amounts ultimately realized from sales of discontinued business units, a noncash charge of $4.9 million associated with the recognition of accumulated currency translation losses from the sale of our Brazilian operation, a cash charge of $0.2 million from the final settlement of our interest rate swap contracts, and a tax benefit of $2.0 million. NOTE 6. Long-Term Debt Payable to Banks and Others Long-term debt payable to banks and others, including current maturities, consisted of the following:
September 29, March 31, 2003 2003 ------------ ------------ Senior Subordinated Notes 18.5% $ 54,772 $ 53,329 Other 237 237 ------------ ------------ 55,009 53,566 Less current maturities 79 79 ------------ ------------ Total long-term debt $ 54,930 $ 53,487 ============ ============
9 SENIOR CREDIT FACILITY At September 28, 2003, the Company had a senior credit facility consisting of an $8.0 million asset based revolving credit facility which was established in August 2002 (the "New Senior Credit Facility") to refinance all remaining obligations outstanding under our prior senior credit facility. The New Senior Credit Facility was amended on August 5, 2003. The maturity date of this facility is January 31, 2004. The current interest rate is approximately 5.0%. The New Senior Credit Facility is secured by all of the Company's assets. The Company is in compliance with the provisions of the facility. There were no borrowings outstanding under the facility at September 28, 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 consisting of 13% cash interest on principal, payable quarterly, and 5% interest on principal, payable quarterly in "payment-in-kind" ("PIK") promissory notes. The PIK portion of the interest rate increases 0.25% each quarter until we retire the 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 our senior debt obligations. The Company is in compliance with the provisions of the Notes. At September 28, 2003, the principal balance outstanding on the notes amounted to $54.8 million, which included the original principal amount plus the PIK notes. At March 31, 2003, the Company reported redeemable common stock in the amount of $1.3 million representing the per share put right (257,000 shares at $5.00 per share) held by certain Purchasers who had exercised their Warrants. The put right on approximately 211,000 shares expired on June 24, 2003 and, accordingly, the Company reclassified $1.1 million from redeemable common stock to additional paid-in capital with the remainder of the redeemable common stock being reclassified to long-term debt to reflect the exercise of the put by a Purchaser. Subsequent to the end of the first quarter of fiscal 2004, the Purchaser in question revoked its put exercise and that portion was reclassified to additional paid in capital in the second quarter. In addition, the put right on 171,041 Warrants expired and, accordingly, $0.9 million representing the cash value of the put right on these Warrants was reclassified from a liability account to additional paid-in capital in the first quarter of fiscal 2004. At September 28, 2003, there were 171,041 Warrants outstanding which are each convertible into common stock at the price $.01 per warrant. All of the Warrants were considered to be common stock equivalents for the purpose of calculating earnings per share at September 28, 2003. The Company has long-term debt maturities of $0.1 million, $54.9 million and $0.1 million in 2004, 2005 and 2006, respectively. NOTE 7. New Accounting Standards 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 Company has adopted the disclosure requirements and expects that the adoption of this statement will not have a material effect on the Company's financial position or results of operations. 10 NOTE 8. Contingencies As previously reported, the Company is subject to an investigation being conducted by the Newark, New Jersey office of the United States Attorney with respect to the Company's overhaul and repair operations. The Company has to date and will continue to cooperate fully with the government's investigation. In addition, the Board of Directors has retained a fact finding and forensic accounting firm, The Bradlau Group, Morristown, New Jersey, to perform an independent process review and evaluation of the overhaul and repair operations the Company's Breeze-Eastern business. The Board of Directors has indicated that it intends to share the findings of this independent process review and evaluation with the United States Attorney's office. The findings of The Bradlau Group were not complete as of the date of this filing. The investigation has had no impact, and the Company does not expect an impact, on its ability to manufacture and ship products and meet customer delivery schedules. As of this date, the US Attorney's investigation is continuing and the Company has not been made aware of any specific violations resulting from that investigation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We design, develop, and manufacture sophisticated lifting equipment for specialty aerospace and defense applications. With over 50% of the global market, we have long been recognized as the world's largest designer and leading supplier of performance-critical rescue hoists and cargo-hook systems. We also manufacture weapons-handling systems, cargo winches, tie-down equipment, and tow-hook assemblies. Marketed under the trade name "Breeze-Eastern", our products are designed to be efficient and reliable in extreme operating conditions. Our equipment is used to complete rescue operations and military insertion/extraction operations, move and transport cargo, and load weapons onto aircraft and ground-based launching systems. Beginning in fiscal 2001, we implemented a restructuring plan to focus our resources and capital on our specialty aerospace and defense products business and exit the specialty fastener segment. On February 24, 2003, we completed the sale of the business and substantially all of the assets of our subsidiary, Norco, Inc., 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 for the three and six month periods ended September 29, 2002 includes Norco and all of the operations related to our Specialty Fastener segment, including the TransTechnology Engineered Rings retaining rings businesses, Aerospace Rivet Manufacturers Corp. and TCR Corporation. Of the operations included in discontinued operations prior to fiscal 2003, only TransTechnology Engineered Rings USA, Inc., TransTechnology (GB), TransTechnology Brasil, Aerospace Rivet Manufacturers Corp., TCR Corporation and Norco, Inc. were carried into fiscal 2003. 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 business. We discuss our discontinued operations separately under the heading " -- Divestitures and Discontinued Operations." All references to fiscal 2004 in this Management's Discussion and Analysis of Financial Condition and Results of Operations refer to the fiscal year ending March 31, 2004, and all references to fiscal 2003, 2002, and 2001 refer to the fiscal years ended March 31. As previously reported, we are subject to an investigation being conducted by the Newark, New Jersey office of the United States Attorney with respect to the Company's overhaul and repair operations. We have to date and will continue to cooperate fully with the government's investigation. In addition, the Board of Directors has retained a fact finding and forensic accounting firm, The Bradlau Group, Morristown, New Jersey, to perform an independent process review and evaluation of the overhaul and repair operations of our Breeze-Eastern business. The Board of Directors has indicated that it intends to share the findings of this independent process review and evaluation with the United States Attorney's office. The findings of The Bradlau Group were not complete as of the date of this filing. Once the Board of Directors has received and evaluated the report we expect that our independent accountants will be able to complete their review of this form 10-Q. The investigation has had no impact, and we do not expect an impact, on our ability to manufacture and ship products and meet customer delivery schedules. As of this date, the US Attorney's investigation is continuing and we have not been made aware of any specific violations resulting from that investigation. 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 include all of the operations related to our specialty fastener segment. Our discontinued operations also include Norco, Inc., which we previously included in our aerospace and defense products segment. 11 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, Inc., 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 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 under the Notes. For the first six months of fiscal 2003 the $4.1 million loss from discontinued operations included actual operating income of $4.5 million from discontinued operations, allocated interest expense of $3.6 million, a $1.9 million charge to reflect the amounts ultimately realized from sales of discontinued business units, a noncash charge of $4.9 million associated with the recognition of accumulated currency translation losses from the sale of our Brazilian operation, a cash charge of $0.2 million from the final settlement of our interest rate swap contracts, and a tax benefit of $2.0 million. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 28, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 29, 2002 Net sales. Our net sales increased to $16.3 million for the second quarter of fiscal 2004, a 38% increase over sales of $11.9 million for the second quarter of fiscal 2003. This increase in sales is the result of higher shipments of hoists and weapons handling equipment for military agencies. Gross profit. Gross profit increased 23% to $6.8 million for the second quarter of fiscal 2004 from $5.5 million for the second quarter of fiscal 2003. Generally, repair and overhaul services and spare parts sales have higher gross margins than sales of new equipment or engineering services. As a 12 result of a sales mix that was more heavily weighted in favor of new equipment sales due to the timing of shipments to meet customer demands, we recorded gross margins for the second quarter of fiscal 2004 which are more in line with our-long term targeted gross margin. 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 decreased 17% to $3.5 million in the second quarter of fiscal 2004 from $4.3 million in the second quarter of fiscal 2003. This decrease was primarily due to lower corporate office expenses during fiscal 2004 which was mostly due to the restructuring of the corporate office that began in the fourth quarter of fiscal 2001. Operating income. Operating income (gross profit less general, administrative and selling expenses) increased 167% to $3.2 million in the second quarter of fiscal 2004 from $1.2 million in the second quarter of fiscal 2003. This increase was mainly due to 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 $0.6 million to $2.6 million in the second quarter of fiscal 2004 from $2.0 million in the second quarter of fiscal 2003, as a result of the allocation formula we are required to use under GAAP 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 the second quarter of fiscal 2004 decreased $1.3 million to $2.6 million from $3.9 million for the second quarter of fiscal 2003 due to the retirement of debt with the proceeds from divestitures and other internally generated sources of cash. Net income. We earned net income of $0.5 million in the second quarter of fiscal 2004, versus a loss of $5.2 million in the second quarter of fiscal 2003, which primarily resulted from the reasons discussed above. New orders. New orders received in the second quarter of fiscal 2004 totaled $8.3 million, which represents a 33% decrease from new orders of $12.4 million in the second quarter of fiscal 2003. Backlog. Backlog at September 28, 2003 was $43.8 million, down $2.4 million from $46.2 million at March 31, 2003. 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. Because we shipped a substantial amount of HLU-196 bomb hoists during the quarter, our book-to-bill ratio for the second quarter of fiscal 2004 was 0.51, compared to 1.05 for the second quarter of fiscal 2003. Cancellations of purchase orders or reductions of product quantities in existing contracts, although seldom occurring, could substantially and materially reduce our backlog. Therefore, our backlog may not represent the actual amount of shipments or sales for any future period. SIX MONTHS ENDED SEPTEMBER 28, 2003 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 29, 2002 Net sales. Our net sales increased to $32.5 million for the first six months of fiscal 2004, a 26% increase over sales of $25.7 million for the first six months of fiscal 2003. This increase in sales is the result of higher shipments of hoists and weapons handling equipment for military agencies. Gross profit. Gross profit increased 21% to $14.1 million for the first six months of fiscal 2004 from $11.7 million for the first six months of fiscal 2003. The increase in gross profit is due to the 13 increase in sales. The gross margin for the first six months of fiscal 2004 at 43% was down slightly from the prior period's margin of 45% due mainly to a significant amount of HLU-196 bomb hoists, which carry a lower gross margin than other new equipment, being shipped in fiscal 2004. 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 decreased 7% to $7.3 million in the first six months of fiscal 2004 from $7.9 million in the first six months of fiscal 2003. This decrease was mainly due to lower corporate office expenses during fiscal 2004 which was primarily due to the restructuring of the corporate office that began in the fourth quarter of fiscal 2001. Operating income. Operating income (gross profit less general, administrative and selling expenses) increased 78% to $6.8 million in the first six months of fiscal 2004 from $3.8 million in the first six months of fiscal 2003. This increase mainly was due to 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 $1.0 million to $5.1 million in the first six months of fiscal 2004 from $4.1 million in the first six months of fiscal 2003, as a result of the allocation formula we are required to use under GAAP 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 the first six months of fiscal 2004 decreased $2.7 million to $5.1 million from $7.8 million for the first six months of fiscal 2003 due to the retirement of debt with the proceeds from divestitures and other internally generated sources of cash. Net income. We earned net income of $1.2 million in the first six months of fiscal 2004, versus a loss of $6.0 million in the first six months of fiscal 2003, which primarily resulted from the reasons discussed above. New orders. New orders received in the first six months of fiscal 2004 totaled $30.0 million, which is slightly above the new orders of $29.8 million in the first six months of fiscal 2003. Backlog. Backlog at September 28, 2003 was $43.8 million, down $2.4 million from $46.2 million at March 31, 2003. We measure backlog by the amount of products or services that our customers have committed by contract to purchase from us as of a given date. Our book-to-bill ratio for the first six months of fiscal 2004 was 0.93, compared to 1.16 for the first six months of fiscal 2003. Cancellations of purchase orders or reductions of product quantities in existing contracts, although seldom occurring, could substantially and materially reduce our backlog. Therefore, our backlog may not represent the actual amount of shipments or sales for any future period. LIQUIDITY AND CAPITAL RESOURCES Our liquidity requirements depend on a number of factors, many of which are beyond our control, including the timing of production under our long-term contracts with the U.S. Government. Although we have infrequently received payments on these government contracts based on performance milestones, as 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 14 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 September 28, 2003, as we reduced debt with the proceeds of the divestitures and lowered costs as a result of the corporate office restructuring. At September 28, 2003, there was no indebtedness outstanding under our New Senior Credit Facility. As previously reported, the New York Stock Exchange (NYSE) notified us that the company had 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 submitted to the NYSE a plan to comply with the listing standards, and announced on July 7, 2003 that the NYSE has accepted the company's proposed plan. WORKING CAPITAL Our working capital at September 28, 2003, was $15.4 million, compared to $11.2 million at March 31, 2003. The ratio of current assets to current liabilities was 1.9 to 1.0 at September 28, 2003, compared to 1.4 to 1.0 at March 31, 2003. Working capital changes during the first six months of fiscal 2004, resulted from a decrease in cash of $6.3 million, an increase in accounts receivable of $3.1 million, a decrease in inventories of $0.4 million, a decrease in prepaid expenses and other current assets of $0.6 million, a decrease in accrued income taxes of $2.3 million and a decrease in other current liabilities of $4.8 million. The increase in accounts receivable was due to strong sales at the end of the second quarter fiscal 2004. The decrease in inventory was largely due to increased sales and the decrease in prepaid expenses and other current assets was due primarily to receipt of a cash payment related to a divestiture. The decrease in accrued income taxes was due to the payment of taxes related to the sale of Norco and the decrease in other current liabilities of $4.8 million was due mainly to the shipment of the HLU-196 bomb hoists against customer advances and payment of obligations related to divestitures. The number of days that sales were outstanding in accounts receivable increased to 39.2 days at September 28, 2003, from 31.8 days at March 31, 2003. Inventory turnover increased to 1.90 turns from 1.55 turns for fiscal 2003. CAPITAL EXPENDITURES Our capital expenditures were $159 thousand for the first six months of fiscal 2004, compared to $437 thousand for the first six months of fiscal 2003. Projects budgeted in fiscal 2004 include refurbishment of the offices and the initial phase of installing a new ERP system. In fiscal 2004, capital expenditures are expected to be in a range of $1.1 - 1.4 million. 15 SENIOR CREDIT FACILITY At September 28, 2003, our New Senior Credit Facility consisted of an $8.0 million asset based revolving credit facility which was established in August 2002 to refinance all remaining obligations outstanding under our prior senior credit facility. The New Senior Credit Facility was amended on august 5, 2003. The maturity date of this facility is January 31, 2004. The current interest rate is approximately 5.0%. The New Senior Credit Facility is secured by all of our assets. We are in compliance with the provisions of the facility. There were no borrowings outstanding under the facility at September 28, 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 consisting of 13% cash interest on principal, payable quarterly, and 5% interest on principal, payable quarterly in "payment-in-kind" ("PIK") promissory notes. The PIK portion of the interest rate increases 0.25% each quarter until we retire the 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. The Company is in compliance with the provisions of the Notes. At September 28, 2003, the principal balance outstanding on the notes amounted to $54.8 million, which included the original principal amount plus the PIK notes. At March 31, 2003 we reported redeemable common stock in the amount of $1.3 million representing the per share put right (257,000 shares at $5.00 per share) held by certain Purchasers who had exercised their warrants. The put right on approximately 211,000 shares expired on June 24, 2003 and, accordingly, we reclassified $1.1 million from redeemable common stock to additional paid-in capital with the remainder of the redeemable common stock being reclassified to long-term debt to reflect the exercise of the put by a Purchaser. Subsequent to the end of the first quarter of fiscal 2004, the Purchaser revoked the put exercise and that portion was reclassified to additional paid in capital in the second quarter of fiscal 2004. In addition, the put right on 171,041 warrants expired and, accordingly, $0.9 million representing the cash value of the put right on these warrants was reclassified from a liability account to additional paid-in capital in the first quarter of fiscal 2004. At September 28, 2003, there were 171,041 Warrants outstanding which are each convertible into common stock at the price $.01 per warrant. All of the Warrants were considered to be common stock equivalents for the purpose of calculating earnings per share at September 28, 2003. We have long-term debt maturities of $0.1 million, $54.9 million and $0.1 million 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 our New 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 the New Senior Credit Facility upon its expiration on terms that are favorable to us. In addition, a number of factors could affect our ability to access debt or equity 16 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. The Company was in the process of securing a refinancing of its debt through various financial institutions. As previously reported, representatives of the financial institutions participating in such refinancing have been made aware of the investigation by the United States Attorney, as well as the independent review and audit by the forensic accounting firm. Those financial institutions have advised the Company that the refinancing process would not be completed until after a report of the forensic accounting firm is issued. There can be no assurance as to when the refinancing process will begin again or that such refinancing can be successfully completed on terms and conditions acceptable to the Company. Even if available, additional financing could be costly or have adverse consequences. If we raise additional funds by issuing stock, dilution to stockholders may result. If we raise additional funds by incurring debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we were not successful in obtaining sufficient capital, it could reduce our sales and earnings and adversely impact our financial position and we may not be able to expand or operate our business as planned. TAX BENEFITS FROM NET OPERATING LOSSES At September 28, 2003, we had federal and state net operating loss carryforwards, or NOLs, of approximately $50.4 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 our 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) 2008 AND 2004 2005 2006 2007 THEREAFTER TOTAL -------- -------- -------- -------- ---------- -------- Long-Term Debt $ 79 $ 54,851 $ 79 $ -- $ -- $ 55,009 Operating Leases 128 116 114 61 22 441 -------- -------- -------- -------- -------- -------- Total $ 207 $ 54,967 $ 193 $ 61 $ 22 $ 55,450 ======== ======== ======== ======== ======== ========
17 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 no unresolved claims for indemnification with respect to these divested businesses. Additionally, the terms of these divestiture agreements generally require the calculation of purchase price adjustments based upon the amount of working capital or net assets transferred at the closing date. In the case of each divestiture completed as of the filing date, 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. ENVIRONMENTAL MATTERS - During the fourth quarter of fiscal 2000, we presented an environmental cleanup plan for a portion of a site in Pennsylvania which the Company 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 we paid $0.2 million for past costs, future oversight expenses and in full settlement of claims made by PaDEP related to the environmental remediation of the site with an additional $0.2 million paid in fiscal 2001. A second Consent Order was concluded with PaDEP in the third quarter of fiscal 2001 for another portion of the site, and a third Consent Order for the remainder of the site was concluded in the third quarter of fiscal 2003. We are 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. We have also reached an agreement in principle with the Federal government and are in the process of finalizing the necessary documentation under which the Federal government will pay 45% of the environmental response costs associated with another portion of the site. At September 28, 2003, our cleanup reserve was $2.0 million based on the net present value of future expected cleanup costs. We expect that remediation at the Pennsylvania site will not be completed for several years. We also continue to participate in environmental assessments and remediation work at nine other locations, including former facilities of the company. We estimate that the potential cost for implementing corrective action at these sites will not exceed $0.5 million payable over the next several years, and have provided for the estimated costs in our accrual for environmental liabilities. In addition, in the first quarter of fiscal 2003, we entered into a consent order for a former facility in New York pursuant to which we are developing a remediation plan for review and approval by the New York Department of Environmental Conservation. We have established a reserve of $2.5 million for this site which we believe is adequate. In addition, we have been named as a potentially responsible party in eight environmental proceedings pending in several other states in which it is alleged that we were a generator of waste that was sent to landfills and other treatment facilities and, as to several sites, it is alleged that we were an owner or operator. Such properties generally relate to businesses which have been sold or discontinued. We estimate that the expected future costs, and our estimated proportional share of 18 remedial work to be performed, associated with these proceedings will not exceed $0.2 million and we have provided for these estimated costs in our accrual for environmental liabilities. LITIGATION - We are also engaged in various other legal proceedings incidental to our business. It is our opinion that, after taking into consideration information furnished by our counsel, the above matters will have no material effect on our consolidated financial position or the results of our operations in future periods. RECENTLY ISSUED ACCOUNTING STANDARDS In December 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. Our company has adopted the disclosure requirements and expects that the adoption of this statement will not have a material effect on our Company's financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various market risks that primarily consist of changes in interest rates associated with the New Senior Credit Facility. There are no borrowings under the New Senior Credit Facility at September 28, 2003. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company`s management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are engaged in various legal proceedings incidental to our business. It is the opinion of management that, after taking into consideration information furnished by our counsel, these matters will not have a material effect on our consolidated financial position or the results of our operations in future periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our annual stockholders' meeting, held on July 17, 2003, as seven of our directors nominated for reelection were reelected for a term of one year. The results of the voting on the election of directors were as follows:
FOR WITHHELD Gideon Argov 6,024,784 77,962 Michael J. Berthelot 6,070,412 32,334 Thomas V. Chema 6,086,934 15,812 Jan Naylor Cope 6,085,834 16,912 John H. Dalton 6,087,934 14,812 William J. Recker 6,024,484 78,262 Robert L.G. White 6,075,384 27,362
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Form 8-K On July 23, 2003 the Registrant filed an 8-K which furnished the July 16, 2003 press release announcing its financial results for the first quarter of fiscal year ending March 31, 2004. 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 12, 2003 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