Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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 No. 33-49869-01
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0739329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2702 North 44th Street, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
(Former name, former address and former fiscal year, if changed since
last report)
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, and (2) has been
subject to such filing requirement for the past 90 days.
YES[ ] NO[ X ] *
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock March 31, 1994
$1.00 par value 1,000
* The Company has only been subject to filing requirements since
registration effective date of October 15, 1993.
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
March 31, 1994 and December 31, 1993 1
Consolidated Statement of Earnings -
Three Months Ended March 31, 1994 and 1993 2
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1994 and 1993 3
Consolidated Statement of Changes in Stockholder's
Equity - Three Months Ended March 31, 1994
and 1993 4
Notes to Consolidated Financial Statements 5-6
Management's Discussion and Analysis 7-11
Part II Other Information
Legal Proceedings 12
Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Balance Sheet
(thousands)
March 31, December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 3,993 $ 6,417
Accounts receivable, net of allowance
for doubtful accounts of $1,074,000
at March 31, 1994 and $1,091,000
at December 31, 1993 52,361 60,376
Inventories, net 63,816 64,808
Deferred income taxes 1,400 900
Prepaid expenses 9,117 9,367
Current assets 130,687 141,868
Long-term receivables 9,577 7,093
Property, plant and equipment, net 48,366 49,489
Intangibles 44,388 44,928
Other assets 8,404 8,465
Total assets $241,422 $251,843
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt $ 3,187 $ 2,176
Accounts payable 21,411 23,095
Accrued expenses 35,942 31,652
Current liabilities 60,540 56,923
Long-term debt 147,399 160,002
Deferred income taxes 7,216 12,320
Other liabilities 4,054 4,196
Stockholder's equity:
Preferred stock, $1 par value,
authorized 100 shares:
Series A, issued 8 shares - -
Common stock, $1 par value,
authorized 1,000 shares 1 1
Capital in excess of par 17,261 15,753
Foreign currency translation (660) (370)
Retained earnings 5,611 3,018
Total stockholder's equity 22,213 18,402
Total liabilities & stockholder's
equity $241,422 $251,843
The accompanying notes are an integral part of the financial
statements.
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Earnings
(thousands, except per share amounts)
Three Months
Ended
March 31,
1994 1993
Sales $55,616 $57,504
Services 15,521 15,119
Royalties 3,979 1,794
75,116 74,417
Cost of sales 41,369 42,249
Cost of services 13,523 13,024
Selling, general, and administrative
expenses 17,256 13,465
72,148 68,738
2,968 5,679
Other income, net (124) 120
2,844 5,799
Interest expense 4,215 4,049
Earnings (loss) before income taxes (1,371) 1,750
Income tax benefit (provision) 3,964 (957)
Net earnings $ 2,593 $ 793
The accompanying notes are an integral part of the financial
statements.
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Cash Flows
(thousands)
Three Months Ended
March 31,
1994 1993
Cash and cash equivalents at beginning
of period $ 6,417 $10,118
Cash flows from operating activities:
Net earnings 2,593 793
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (5,604) 87
Depreciation and amortization 2,397 2,593
Gain on sale of property and
equipment (4) (77)
Other (17) 321
Changes in assets and liabilities,
net of effects from acquired businesses:
(Increase) decrease in accounts
receivable 5,550 (3,497)
Decrease in inventories 973 2,084
(Increase) decrease in prepaids 250 (301)
Decrease in accounts payable (1,684) (2,646)
Increase in accrued expenses 4,290 763
Other, net (217) 1,022
Cash flows from operating activities 8,527 1,142
Cash flows from investing activities:
Purchases of property and equipment (875) (773)
Proceeds from sale of property and
equipment 8 101
Cash flows from investing activities (867) (672)
Cash flows from financing activities:
Decrease in investment by Parent - (2,677)
Increase in investment by Parent 1,508 4,389
Repayment of long term-debt (96,649) (25,982)
Proceeds from new long-term debt 85,057 25,756
Cash flows from financing activities (10,084) 1,486
Net increase (decrease) in cash and cash
equivalents (2,424) 1,956
Total cash and cash equivalents at March 31, $ 3,993 $12,074
The accompanying notes are an integral part of the financial
statements.
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<TABLE>
<CAPTION>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Changes in Stockholder's Equity
For the Three Months Ended March 31, 1994 and 1993
(thousands)
Capital in
Preferred Common Excess of Retained
Stock Stock Par Value Earnings
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $ - $ - $10,948 $ -
Net earnings 793
Amounts from Parent 1,628
Decrease in guaranteed debt of ESOP 84
BALANCE AT MARCH 31, 1993 $ - $ - $13,453 $ -
BALANCE AT DECEMBER 31, 1993 $ - $ 1 $15,753 $ 3,018
Net earnings 2,593
Contribution from Parent 1,508
BALANCE AT MARCH 31, 1994 $ - $ 1 $17,261 $ 5,611
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Note 1 - General
In July 1993, Talley Manufacturing and Technology, Inc. (the
Company), a wholly owned subsidiary of Talley Industries, Inc.,
("Talley") was formed with the issuance of 1,000 shares of common
stock. The formation of the Company was in anticipation of an
offering, in October, 1993, of Senior Notes by the Company and
Senior Discount Debentures by Talley. The Senior Notes are
guaranteed by substantially all of the Company's subsidiaries (the
"Subsidiary Guarantors"). Concurrently with the issuance of these
securities, Talley contributed the capital stock of its operating
subsidiaries (other than its real estate subsidiaries) to the
Company, which also assumed a substantial portion of Talley's
indebtedness and liabilities. At the same time, the Company
entered into a new credit facility with certain institutional
lenders which is also guaranteed by the Subsidiary Guarantors. The
net proceeds from the Senior Notes, the Senior Discount Debentures
and the new credit facility were used to repay substantially all of
the indebtedness of the Company and its subsidiaries, including the
indebtedness assumed from Talley, and substantially all of the
indebtedness remaining with Talley.
Upon completion of the reorganization of entities under the common
control of Talley described above and the new financing, the
Company is a holding company which owns all of the capital stock of
the operating subsidiaries of Talley (other than the real estate
subsidiaries). Accordingly, all corporate costs, assets and
liabilities are included in the Company's financial statements and
interest expense includes the interest on indebtedness of the
operating subsidiaries and all indebtedness assumed by the Company
in connection with the reorganization. In connection with the
reorganization, Talley and the Company entered into a tax sharing
agreement and a cost sharing agreement which require the Company to
reimburse Talley for certain ongoing general and administrative
expenses which will be incurred by Talley and to make certain tax
payments to Talley.
The financial statements of the Company have been prepared using
the historical amounts included in the Talley Industries, Inc. and
subsidiaries consolidated financial statements giving effect to the
reorganization described above. Although the Subsidiary Guarantors
guaranteed the Senior Notes, separate financial statements of the
Subsidiary Guarantors are not included because the Subsidiary
Guarantors are jointly and severally liable with the Company under
the Senior Notes, the aggregate assets, liabilities, earnings and
equity of the Subsidiary Guarantors are substantially equivalent to
the assets, liabilities, earnings and equity of the Company on a
consolidated basis, and separate financial statements and other
disclosures concerning the Subsidiary Guarantors would not be
material to investors. In addition, with the exception of the net
assets of the real estate operations and certain debt and related
interest expense, the consolidated financial statements of Talley
are substantially identical to those of the Company.
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Although the financial statements of the Company separately report
its assets, liabilities (including contingent liabilities) and
stockholder's equity, legal title to such assets and legal
responsibility for such liabilities was not affected by such
attribution during periods prior to the reorganization.
Accordingly, the Talley consolidated financial statements and
related notes should be read in connection with these financial
statements.
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of March 31, 1994 and December 31,
1993 and the results of operations for the three-month periods
ended March 31, 1994 and 1993, and cash flows and changes in
stockholder's equity for the three-month periods ended March 31,
1994 and 1993. Such results, however, may not be indicative of the
results for the full year.
Note 2 - Inventories
Inventories are summarized as follows (in thousands):
March 31, December 31,
1994 1993
Raw materials and supplies $11,778 $10,293
Work-in-process 8,695 9,584
Finished goods 26,542 26,470
Inventories applicable to
government contracts 16,801 18,461
$63,816 $64,808
Note 3 - Earnings Per Share
Talley Manufacturing and Technology, Inc. is a wholly owned
subsidiary of Talley Industries, Inc.; accordingly, earnings per
share information is not presented.
Note 4 - Sale of Subsidiaries
In July 1993 the Company completed the sale of the net assets of
its precision potentiometer business for a cash purchase price of
$2.8 million, which approximated the book value of the net assets
sold. Sales and pretax earnings of the business sold for the six
months ended June 30, 1993 were $2.3 million and $.4 million,
respectively.
Note 5 - Income Tax Benefit
Pursuant to recent legislation passed in the State of Arizona
regarding the rules for filing consolidated state income tax
returns, the Company has reversed $5.6 million of state income tax
accruals to reflect the change in the law. The new law is
retroactive to the beginning of 1986.
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following table summarizes the Company's consolidated revenue
and earnings (loss), by segment for the periods shown:
Three Months
Ended
(Dollars in Thousands) March 31,
1994 1993
REVENUES:
Government Products and Services $36,258 $39,426
Airbag Royalty 3,896 1,722
Industrial Products 29,200 26,089
Specialty Products 5,762 7,180
$75,116 $74,417
OPERATING INCOME:
Government Products and Services $ 4,186 $ 5,684
Airbag Royalty 3,896 1,722
Industrial Products 720 537
Specialty Products 610 773
Total operating income 9,412 8,716
Corporate expense (6,584) (3,036)
Non-segment interest income 16 119
Interest expense (4,215) (4,049)
Earnings (loss) before income taxes $(1,371) $ 1,750
Revenues for the three-month period ended March 31, 1994
increased $.7 million from $74.4 million to $75.1 million,
compared with the corresponding period in the prior year. The
slight increase in the three-month comparison is primarily the
result of increasing revenue in the Airbag Royalties segment and
the Steel Operations, offset by decreased revenue in the
Government Products and Services segment due to scheduled price
reductions under certain extended range munitions contracts and
the timing of completion and shipments under other contracts.
The pretax loss for the three months ended March 31, 1994 was
$1.4 million compared with $1.8 million pretax earnings in the
first three months of the previous year. The loss in the first
quarter of 1994 includes a $4.5 million provision for litigation
costs related to resolution of claims in connection with the
airbag royalties being received from the licensee. Net income
was $2.6 million for the first quarter of 1994, which reflects a
tax benefit resulting from reversal of state income tax accruals
of $5.6 million, pursuant to a retroactive change in tax laws in
the State of Arizona.
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<PAGE>
Earnings from both the Airbag Royalty segment and the Industrial
Products segment improved compared with the prior year.
Royalties in the Airbag Royalty segment increased by $2.2 million
from $1.7 million in the first three months of 1993 to $3.9
million for the first three months of 1994, while earnings from
the Industrial segment improved $.2 million. Earnings from the
Government Products and Services segment and the Specialty
Products segment for the first three months of 1994, when
compared with the first three months of 1993, were $1.5 million
and $.2 million lower, respectively.
The gross profit percentage, excluding airbag royalties, of
22.8%, for the three months ended March 31, 1994 was down from
the gross profit percentage of 24.0% for the comparable period in
1993. The decrease from the prior year is due to the mix of
contracts.
Government Products and Services. Revenue and earnings in the
first quarter of 1994 decreased $3.2 million and $1.5 million,
respectively, when compared with the same period in the prior
year. These decreases are primarily due to a scheduled pricing
reduction under the extended range munitions program following
the recovery of the Company's investment in a new production
facility, and also due to the timing of completion and shipments
under other contracts. Revenue and earnings from the Company's
architectural and engineering services company are approximately
equal to the comparable period in the prior year.
Airbag Royalties. Revenue from airbag royalties increased from
$1.7 million in the first three months of 1993 to $3.9 million in
the first three months of 1994. This increase was due to an
increase in airbags manufactured and sold. (Also see "Other
Matters" as a separate caption within Management's Discussion and
Analysis of Financial Condition and Results of Operations)
Industrial Products. In the first three months of 1994
Industrial Products sales and earnings increased $3.1 million and
$.2 million, respectively, when compared with the first three
months of 1993. Increases in sales resulted from improvement in
orders for stainless steel bars and rods and increased demand for
ceramic insulators products due to harsh winter weather
conditions and improved market share. The improvement in
earnings resulted from the sales increases and cost reduction and
streamlining efforts at the Company's steel and ceramic insulator
operations. These increases partially were offset by lower
welder products sales and earnings.
Specialty Products. During the first three months of 1994,
sales for the Specialty Products segment decreased 19.7%, from
$7.2 million to $5.8 million, while earnings decreased slightly
from $.8 million to $.6 million, when compared with the same
period in 1993. The decrease in sales and earnings when compared
to the prior year is a result of the timing of sales, which are
expected to improve during the remainder of 1994.
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<PAGE>
Other. Interest expense in the first three months of 1994
increased to $4.2 million, from $4.0 million in the comparable
period in 1993, mainly due to a major portion of the Company's
debt being refinanced from variable rates to higher fixed rates.
Corporate overhead increased from $3.0 million to $6.6 million
over the comparable period in 1993 due to a $4.5 million
provision for litigation costs related to resolution of claims in
connection with airbag royalties being received from the
licensee. Income tax benefit for the first three months of 1994
was $4.0 million compared to a tax provision of $1.0 million in
the comparable period in 1993. The net income tax benefit in
1994 is the result of a favorable state tax legislation which
resulted in a $5.6 million reversal of taxes previously accrued.
Financial Condition, Liquidity and Capital Resources
At March 31, 1994, the Company had $4.0 million in cash and cash
equivalents and net working capital of $70.1 million. Cash flow
from operating activities for the three months ended March 31,
1994 was $8.5 million, generally the result of the Company's
successful efforts toward collection of trade receivables. Cash
generated from operations during the first three months of 1993
was $1.1 million. Cash used for investing activities during the
three months ended March 31, 1994 was $.9 million for capital
expenditures. Cash used in financing activities of $10.1 million
reflects a reduction in debt from cash generated from operations
and from cash available at the beginning of the year.
The Company, along with its parent, Talley Industries, Inc.
("Talley"), in October 1993, completed a major refinancing
program. This refinancing program included an offering of $185
million of debt securities, consisting of $70 million gross
proceeds of senior discount debentures due 2005, issued by Talley
to yield 12.25% and $115 million of senior notes due 2003, with
an interest rate of 10.75% issued by the Company, which was newly
formed to hold the stock of all the operating subsidiaries of
Talley (except for the subsidiaries holding Talley's real estate
operations). In connection with this refinancing, the Company
obtained a secured credit facility with institutional lenders, of
which approximately $48 million was initially borrowed in
connection with the refinancing discussed above. Borrowings
under the secured credit facility may not exceed the collateral
base as defined in the governing credit agreement. The facility
consists of a five-year revolving credit facility of up to $40
million and a five-year $20 million term loan facility. At March
31, 1994 availability under the facility, based primarily on
inventory and receivable levels, was $54.6 million, of which
$36.8 million was borrowed. Upon the occurrence of certain
specified events, at any time following the third anniversary of
the secured credit facility, the agent thereunder may elect to
terminate the facility.
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<PAGE>
The proceeds from the offerings described above and the initial
borrowings under the secured credit facility refinanced
substantially all of the debt of the Company and Talley. The
Company anticipates that the new capital structure will support
the long-term growth of its core businesses and permit the
implementation of its strategy to use the portion of airbag
royalties retained by the Company (after certain permitted
distributions to Talley) and other available cash flow to reduce
its total indebtedness.
The Company is permitted (and intends) to distribute cash to its
parent, Talley, for specified purposes and under certain other
circumstances. These distributions will be made using funds
available from operations and the secured credit facility. The
payments include (but are not limited to) certain airbag
royalties in excess of $10 million in any year (or in excess of
such greater amount as would be required for the Company to meet
a specified fixed charge coverage ratio) which will be used to
redeem the Senior Discount Debentures issued by Talley and an
annual distribution of up to $1.3 million ($1.7 million for the
period from the issue date of the new indebtedness through
December 31, 1994) for a period of five years to fund certain
carrying and other costs associated with Talley's real estate
operations. The Company may also redeem $8.0 million in
preferred stock of the Company purchased by Talley from proceeds
of the recent refinancing. In addition, the Company is a party
to a cost sharing agreement and a tax sharing agreement which
will require the Company to reimburse Talley for certain ongoing
general and administrative expenses and to make certain tax
payments to Talley.
The Company believes that the combination of cash flow from
operations, funds available under the credit facility described
above (or any successor facility) and increasing revenue from
airbag royalties (to the extent retained by the Company as
described above) will provide sufficient liquidity to meet its
working capital, debt service and other capital requirements and
to meet its other ongoing business needs over the next five
years.
Other Matters
As more fully explained in the Commitments and Contingencies note
to the December 31, 1993 Consolidated Financial Statements,
litigation between the Company and TRW, Inc. (TRW), the buyer of
the Company's airbag business and licensee of the Company's
technology related thereto, has been pending since 1989. In mid-
February 1994 TRW filed a new declaratory judgment action
asserting claims already made in the existing action and further
claiming the Company, through the actions of a subsidiary,
breached a non-compete provision of the Asset Purchase Agreement
by rendering services to competitors of TRW, and requesting among
other things a court order that a contemporaneous notice and
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<PAGE>
a $26.5 million one-time payment that TRW sent to the Company was
valid, entitling it to terminate that airbag royalty and obtain
a paid up license to use the Company's airbag technology. On
March 1, the Company answered TRW's complaint and also filed
counterclaims alleging that TRW had wrongfully terminated the
license agreement, had intentionally interfered with Talley's
business relationships and had failed to exert reasonable efforts
to exploit the exclusive license granted to TRW by the Company.
On March 14, 1994 the Company filed a Motion for an Order
requiring TRW to make payment of all quarterly royalties until
the lawsuit is finally resolved. The Company sought the Order to
avoid the potential harm from cash flow interruption and/or
potential loan covenant defaults caused by TRW's failure to pay
scheduled royalty payments. A three day hearing on the Company's
Motion was completed on May 3, 1994. The Company expects a
ruling from the Court on this Motion in the near future. Without
regard to how the Court rules on the Motion, the Company intends
to ask the Court for an early hearing on the merits of TRW's
attempted termination of royalty payments. The Company believes
that a final hearing will show that TRW's claims are without
merit and that the Court will enter a final Order confirming the
Company's right to continue receiving royalty payments.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As more fully explained in the Commitments and Contingencies note
to the December 31, 1993 Consolidated Financial Statements,
litigation between the Company and TRW, Inc. (TRW), the buyer of
the Company's airbag business and licensee of the Company's
technology related thereto, has been pending since 1989. In mid-
February 1994 TRW filed a new declaratory judgment action
asserting claims already made in the existing action and further
claiming the Company, through the actions of a subsidiary,
breached a non-compete provision of the Asset Purchase Agreement
by rendering services to competitors of TRW, and requesting among
other things a court order that a contemporaneous notice and a
$26.5 million one-time payment that TRW sent to the Company was
valid, entitling it to terminate that airbag royalty and obtain
a paid up license to use the Company's airbag technology. On
March 1, the Company answered TRW's complaint and also filed
counterclaims alleging that TRW had wrongfully terminated the
license agreement, had intentionally interfered with Talley's
business relationships and had failed to exert reasonable efforts
to exploit the exclusive license granted to TRW by the Company.
On March 14, 1994 the Company filed a Motion for an Order
requiring TRW to make payment of all quarterly royalties until
the lawsuit is finally resolved. The Company sought the Order to
avoid the potential harm from cash flow interruption and/or
potential loan covenant defaults caused by TRW's failure to pay
scheduled royalty payments. A three day hearing on the Company's
Motion was completed on May 3, 1994. The Company expects a
ruling from the Court on this Motion in the near future. Without
regard to how the Court rules on the Motion, the Company intends
to ask the Court for an early hearing on the merits of TRW's
attempted termination of royalty payments. The Company believes
that a final hearing will show that TRW's claims are without
merit and that the Court will enter a final Order confirming the
Company's right to continue receiving royalty payments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three
months ended March 31, 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
(Registrant)
Date: May 12, 1994 By Kenneth May
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: May 12, 1994 By Mark S. Dickerson
Mark S. Dickerson
Vice President, General
Counsel and Secretary
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