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, 1997
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[ X ] NO[ ]
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, 1997
$1.00 par value 1,000
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996 1
Consolidated Statement of Earnings -
Three Months Ended March 31, 1997 and 1996 2
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statement of Changes in Stockholder's
Equity - Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis 6-10
Part II Other Information
Legal Proceedings 11
Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Balance Sheet
(thousands)
March 31, December 31,
1997 1996
--------- -----------
ASSETS
Cash and cash equivalents $ 40,954 $ 39,450
Accounts receivable, net of allowance
for doubtful accounts of $919
at March 31, 1997 and $925
at December 31, 1996 53,034 53,048
Inventories, net 62,556 64,684
Deferred income taxes 3,400 3,660
Prepaid expenses 6,346 6,100
-------- --------
Current assets 166,290 166,942
Long-term receivables 6,709 6,359
Property, plant and equipment, net 51,386 49,324
Intangibles 41,626 41,965
Deferred charges and other assets 6,085 6,287
-------- --------
Total assets $272,096 $270,877
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt $ 3,081 $ 3,094
Accounts payable 21,649 18,754
Accrued expenses 32,703 35,006
-------- --------
Current liabilities 57,433 56,854
Long-term debt 122,421 123,185
Deferred income taxes 1,762 2,179
Other liabilities 8,722 8,948
Stockholder's equity:
Preferred stock, $1 par value,
authorized 100 shares:
Series A, issued 6 shares - 1997;
6 shares - 1996 - -
Common stock, $1 par value,
authorized 1,000 shares 1 1
Capital in excess of par value 79,984 79,273
Foreign currency translation adjustment (640) (562)
Retained earnings 2,413 999
-------- --------
Total stockholder's equity 81,758 79,711
-------- --------
Total liabilities and
stockholder's equity $272,096 $270,877
======== ========
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)
Three Months
Ended
March 31,
-------------------
1997 1996
------- -------
Sales $66,933 $71,449
Services 21,191 14,920
Royalties 207 7,465
------- -------
88,331 93,834
------- -------
Cost of sales 49,070 54,106
Cost of services 19,000 13,021
Selling, general, and administrative
expenses 14,932 15,929
------- -------
83,002 83,056
------- -------
Earnings from operations 5,329 10,778
Other income (expense), net 471 (91)
Interest expense (3,562) (4,122)
------- -------
Earnings before income taxes 2,238 6,565
Income tax provision 824 2,727
------- -------
Net earnings $ 1,414 $ 3,838
======= =======
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,
-------------------
1997 1996
-------- --------
Cash and cash equivalents at beginning of year $ 39,450 $ 3,461
-------- --------
Cash flows from operating activities:
Net earnings 1,414 3,838
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (157) 1,201
Depreciation and amortization 2,200 2,197
Gain on sale of property and equipment (1) (38)
Other (51) 600
Changes in assets and liabilities, net of
effects from acquired businesses:
Increase in accounts receivable (2,455) (1,267)
Increase in inventories (1,695) (7,061)
Increase in prepaid expenses (301) (449)
Increase in accounts payable 2,895 6,190
Decrease in accrued expenses (1,801) (1,144)
Increase (decrease) in other liabilities 1,334 (434)
Other, net - (16)
-------- --------
Cash flows from operating activities 1,382 3,617
-------- --------
Cash flows from investing activities:
Proceeds from sale of subsidiary 4,097 -
Purchase of assets of acquired business - (3,876)
Purchases of property and equipment (3,916) (1,466)
Proceeds from sale of property and equipment 7 52
-------- --------
Cash flows from investing activities 188 (5,290)
-------- --------
Cash flows from financing activities:
Increase in investment by Parent 711 2,167
Dividends paid - (1,300)
Repayment of long term-debt (777) (120,774)
Proceeds from new long-term debt - 120,285
-------- --------
Cash flows from financing activities (66) 378
-------- --------
Net decrease in cash and cash equivalents 1,504 (1,295)
-------- --------
Total cash and cash equivalents at March 31, $ 40,954 $ 2,166
======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Changes in Stockholder's Equity
For the Three Months Ended March 31, 1997 and 1996
(thousands)
Capital in
Common Excess of Retained
Stock Par Value Earnings
------- --------- --------
BALANCE AT DECEMBER 31, 1995 $ 1 $23,494 $29,872
Net earnings 3,838
Contribution from Parent 2,167
Dividends (1,300)
------- ------- -------
BALANCE AT MARCH 31, 1996 $ 1 $25,661 $32,410
======= ======= =======
BALANCE AT DECEMBER 31, 1996 $ 1 $79,273 $ 999
Net earnings 1,414
Contribution from Parent 711
------- ------- -------
BALANCE AT MARCH 31, 1997 $ 1 $79,984 $ 2,413
======= ======= =======
The accompanying notes are an integral part of the financial statements.
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
Note 1 - General
- ----------------
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, 1997 and December 31, 1996 and the
results of operations for the three-month periods ended March 31, 1997
and 1996, and cash flows and changes in stockholder's equity for the
three-month periods ended March 31, 1997 and 1996. Such results,
however, may not be indicative of the results for the full year.
For additional information regarding significant accounting
policies, and accounting matters applicable to the Company, reference
should be made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
Note 2 - Inventories
- --------------------
Inventories are summarized as follows (in thousands):
March 31, December 31,
1997 1996
--------- -----------
Raw materials and supplies $11,605 $10,995
Work-in-process 11,865 11,564
Finished goods 23,854 26,158
Inventories applicable to
government contracts 15,232 15,967
------- -------
$62,556 $64,684
======= =======
Note 3 - Earnings Per Share
- ---------------------------
The Company is a wholly owned subsidiary of Talley Industries, Inc.
("Talley"); accordingly, earnings per share information is not
presented.
Note 4 - Acquisition and Dispositions
- -------------------------------------
In March 1997, the Company sold the assets of its Canadian
steel distributor. Cash proceeds from the sale were $4.1
million. The purchaser assumed $2.3 million of liabilities.
In January 1996, a subsidiary of the Company acquired certain
assets of a manufacturer of a silicone wire product line. The final
cash purchase price of this product line was approximately $4.3
million.
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<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the Company. A summary of
period-to-period changes in the consolidated statement of earnings is
shown below (in thousands):
Three Months
Ended
March 31,
-------------------
1997 1996
REVENUES: -------- -------
Government Products and Services $40,774 $31,619
Airbag Royalties - 7,250
Stainless Steel Products 30,263 38,935
Industrial Products 17,294 16,030
------- -------
$88,331 $93,834
======= =======
OPERATING INCOME:
Government Products and Services $ 4,251 $ 2,037
Airbag Royalties - 7,250
Stainless Steel Products 2,629 4,945
Industrial Products 987 632
------- -------
Total operating income 7,867 14,864
Corporate expense (2,533) (4,204)
Non-segment interest income 466 27
Interest expense (3,562) (4,122)
------- -------
Earnings before income taxes $ 2,238 $ 6,565
======= =======
Revenues for the three-month period ended March 31, 1997 decreased
$5.5 million from $93.8 million to $88.3 million, when compared with
the corresponding period in the prior year. Royalties from automotive
airbags ceased with the mid-1996 conclusion of the airbag royalties
litigation. Airbag royalties recorded in the first quarter of 1996
were $7.3 million. Revenue increases from the Company's Government
Products and Services segment, primarily from the Company's naval
architectural and engineering unit, were offset by decreases in
stainless steel products, resulting from lower steel prices, as
competitive pressures from domestic and foreign suppliers affected the
sales volume and sales prices.
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<PAGE>
Operating income from the Government Products and Services segment
increased from $2.0 million to $4.3 million. Automotive airbag
royalties in the Airbag Royalty segment in the first quarter of 1996
were $7.3 million. There were no royalties in 1997, following the mid-
1996 conclusion of the airbag royalties litigation. Operating income
from the Stainless Steel Products segment for the three months ended
March 31, 1997, when compared with the first three months of 1996, was
$2.3 million lower, while operating income from the Company's
Industrial Products segment increased $.4 million.
The gross profit percentage, excluding airbag royalties, of
22.9%, for the three months ended March 31, 1997 was up slightly
from the gross profit percentage of 22.5% for the comparable
period in 1996. The slight increase from the prior year is
primarily due to higher margins on certain government contracts
and an improvement in the margin on industrial products,
partially offset by a lower margin on stainless steel products.
Earnings before income taxes for the three months ended March 31, 1997
were $2.2 million compared with $6.6 million in the first three months
of the previous year. Net earnings for the three months ended March
31, 1997 and 1996 were $1.4 million and $3.8 million, respectively.
GOVERNMENT PRODUCTS AND SERVICES. Revenue and operating income for
the three months ended March 31, 1997 increased by $9.2 million and
$2.2 million, respectively, when compared with the same period in the
prior year, primarily the result of an increase in service revenues
from the Company's naval architectural and engineering unit and
favorable results upon conclusion, or the timing of completion, of
certain other contracts.
AIRBAG ROYALTIES. As described in the Notes to the Consolidated
Financial Statements for the year ended December 31, 1996, the
quarterly royalty payments ceased with the settlement payments received
from TRW in the third quarter of 1996. Airbag royalties in the first
quarter of 1996 were $7.3 million.
STAINLESS STEEL PRODUCTS. During the first three months of 1997,
sales for the Stainless Steel Products segment decreased $8.7 million,
while operating income decreased $2.3 million, when compared with the
same period in 1996. Revenue and earnings were affected by lower
prices, as competitive pressures from domestic and foreign suppliers
affected the sales volume and sales prices.
INDUSTRIAL PRODUCTS. In the three-month period ended March 31,
1997, Industrial Products sales increased $1.3 million while operating
income increased $.4 million, when compared with the same period in
1996. Increases in sales and operating income resulted primarily from
increased orders for insecticides and air fresheners.
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<PAGE>
OTHER. Interest expense for the three months ended March 31, 1997
decreased to $3.6 million, from $4.1 million in the comparable period
in 1996, the result of paying down the Company's revolving credit line
in the second half of 1996. The overhead expenses decreased in the
first three months of 1997 from $4.2 million to $2.5 million when
compared with the comparable period in 1996. Corporate overhead for
1996 was above historical levels primarily due to high costs incurred
in connection with the TRW litigation. The income tax provision for
the first three months of 1997 was $.8 million, compared to $2.7
million in the comparable period in 1996.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At March 31, 1997, the Company had $41.0 million in cash and cash
equivalents and net working capital of $108.9 million. Cash generated
from operating activities for the three months ended March 31, 1997 was
$1.4 million. The amount primarily reflects cash generated from
earnings and an increase in accounts payable, offset in part by cash
used to increase inventories, an increase in accounts receivable and
a decrease in accrued expenses. Cash generated from operations during
the first three months of 1996 was $3.6 million. Cash generated from
investing activities during the quarter ended March 31, 1997 was $.2
million, consisting primarily of the sale of assets of a subsidiary,
offset by capital expenditures. Cash used in financing activities of
$.1 million reflects the increase in investment by the parent company,
offset by a decrease in the Company's long-term debt.
In October 1993, the Company and its parent Talley 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. In connection with this
refinancing, the Company obtained a secured credit facility with
institutional lenders.
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
$40.0 million and a five-year $20.0 million term loan facility. At
March 31, 1997 availability under the total facility was approximately
$50.5 million, of which approximately $10.5 million was borrowed.
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 $10.0
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 amounts are required to be used and have been used to
redeem the Senior Discount Debentures issued by Talley, and an annual
-8-
<PAGE>
distribution of up to $1.3 million through 1998, to fund certain
carrying and other costs associated with Talley's real estate
operations. As no further royalties will be received by the Company,
the Company made a calculation in April 1997 and disbursed the
undistributed balance of $22.2 million to Talley at that time. 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 anticipates that the present capital structure will
support the long-term growth of the Company and that cash flow from
operations, available cash, and funds available under the credit
facility described above (or any successor facility), will provide
sufficient liquidity to meet its working capital, debt service and
other capital requirements and to meet its ongoing business needs.
Other Matters
-------------
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0 million
was entered against TRW Inc. (TRW) by the United States District Court
for the District of Arizona in June 1995 following a jury verdict
that TRW had repudiated and breached the April 1989 Airbag Royalty
Agreement with the Company. The $138.0 million damages amount
represented the jury's calculation of the present value of the
remaining stream of Airbag Royalties which would have been payable
by TRW through the April 2001 scheduled expiration date of the Airbag
Royalty Agreement had TRW not breached the Agreement. TRW appealed the
judgment, and, during the pendency of the appeal, was ordered by the
District Court to continue making quarterly payments to the Company
in the same amounts as if the Airbag Royalty Agreement had not been
terminated and repudiated by TRW. On June 19, 1996, the United States
Court of Appeal for the Ninth Circuit rejected TRW's appeal and
affirmed the $138.0 million judgment. A petition for rehearing filed
by TRW with the Court of Appeals was denied on July 30, 1996.
In August 1996 TRW made payments aggregating approximately $133.1
million to the Company on account of TRW's obligations under the
judgment. The payments represented the $138.0 million face amount of
the judgment award, plus interest at the default rate specified by
the Airbag Royalty Agreement (prime plus 5%), less the quarterly
payments made by TRW pursuant to the District Court's order during the
pendency of the appeal. A further payment was made by TRW at the same
time in the amount of approximately $6.7 million as that portion of a
court-ordered reimbursement of litigation fees and costs (and interest
on the reimbursement amount at the same default rate).
During September 1996, claims between the Company and TRW
(which had been scheduled for trial) and all other matters in dispute
with TRW were settled by the parties pursuant to a global settlement
agreement. Under that settlement, TRW made a further cash payment to
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<PAGE>
the Company on September 3, 1996 in the aggregate amount of $16.6
million. Accordingly, all claims between the parties have now been
resolved, and cash payments have been made by TRW aggregating $156.4
million.
The litigation in which this judgment was entered arose out of the
Asset Purchase Agreement dated February 4, 1989 and the License
Agreement dated April 21, 1989, between TRW and the Company pursuant
to which TRW acquired the Company's airbag business. The court
dismissed TRW's claims that the Company had breached a non-compete
provision contained in the Asset Purchase Agreement, thereby entitling
TRW to terminate airbag royalty payments to the Company under the
License Agreement (which it purported to do in February 1994) and
obtain a paid-up license to use the Company's airbag technology. The
jury found in fact that TRW had improperly terminated and repudiated
the License Agreement.
Forward-Looking Statements
--------------------------
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Quarterly Report
contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which
the Company operates. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely and cost effective
basis; the mix of products/services; the achievement of lower costs and
expenses; domestic and foreign governmental and public policy changes
including environmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
the cyclical nature of certain of the Company's businesses; the outcome
of pending and future litigation and governmental proceedings and
continued availability of financing, and financial resources in the
amounts, at the times and on the terms required to support future
business. In addition, such statements could be affected by general
industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency
exchange rate fluctuations and other factors.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Litigation - TRW Inc.
---------------------
For a description of legal proceedings involving the Company,
including environmental claims, see "Other Matters" within Management's
Discussion and Analysis.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
27* Financial Data Schedule for Talley Manufacturing and
Technology, Inc., March 31, 1997.
10.1* Consent and Sixth Amendment to the Loan and Security
Agreement dated March 24, 1997 by and among Talley
Manufacturing and Technology, Inc., Talley Canada,
Inc. and Transamerica Business Credit Corporation, as
agent.
* Documents marked with an asterisk are filed with this report.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three
months ended March 31, 1997.
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<PAGE>
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 13, 1997 By Kenneth May
----------------------- --------------------------
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: May 13, 1997 By Mark S. Dickerson
----------------------- --------------------------
Mark S. Dickerson
Vice President
and Secretary
-12-
EXHIBIT 10.1
CONSENT AND SIXTH AMENDMENT
This CONSENT AND SIXTH AMENDMENT (this "Consent") is
entered into as of March 24, 1997, by and among TALLEY
MANUFACTURING AND TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), TALLEY CANADA INC., an Ontario, Canada corporation
("Talley Canada"), the lenders parties to the Loan Agreement
referred to below (the "Lenders"), and TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation, as agent (the "Agent") for the
Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have
heretofore entered into a Loan and Security Agreement dated October
22, 1993, as amended (the "Loan Agreement");
WHEREAS, pursuant to a Continuing Guaranty and Security
Agreement, dated October 22, 1993, as amended (the "Talley Canada
Guaranty") executed by Talley Canada in favor of the Agent, Talley
Canada has guaranteed to the Agent and the Lenders under the Loan
Agreement certain indebtedness, obligations and liabilities of the
Borrower;
WHEREAS, Talley Canada and the Borrower have heretofore
entered into a Subsidiary Loan and Security Agreement dated October
22, 1993, as amended (the "Talley Canada Loan Agreement") pursuant
to which Talley Canada has executed in favor of the Borrower a
Revolving Note (as defined in the Talley Canada Loan Agreement and
hereinafter referred to as the "Talley Canada Revolving Note") and
has granted to the Borrower a Lien upon all of Talley Canada's
Collateral (as defined in the Talley Canada Loan Agreement and
hereinafter referred to as the "Talley Canada Collateral");
WHEREAS, pursuant to the Collateral Assignment Agreement, the
Borrower has collaterally assigned to the Agent and the Lenders all
of the Borrower's rights and Liens under or relating to the Talley
Canada Loan Agreement;
<PAGE>
WHEREAS, Talley Canada owns and operates a service center
specializing in stainless steel sheet, bar, plate and angle iron
(collectively, the "Business");
WHEREAS, the Borrower, Talley Canada, Ulbrich of Canada, Inc.
(the "Buyer") and Ulbrich Stainless Steels and Special Metals, Inc.
propose to enter into an Assets Purchase Agreement (the "Purchase
Agreement") pursuant to which Talley Canada agrees to sell and the
Buyer agrees to purchase all of the assets of the Business, both
tangible and intangible, as more fully set forth in the Purchase
Agreement (but excluding the Excluded Assets, as defined in the
Purchase Agreement) (the "Purchase and Sale Transaction");
WHEREAS, in connection with the Purchase and Sale Transaction,
the Borrower and Talley Canada have requested that the Agent and
the Lenders agree to release the Talley Canada Guaranty (the
"Talley Canada Guaranty Release");
WHEREAS, the Borrower desires to terminate the Talley Canada
Loan Agreement (the "Talley Canada Loan Termination") and all Loan
Documents (as defined therein and hereinafter referred to as the
"Talley Canada Loan Documents") and to release the Talley Canada
Collateral (the "Talley Canada Collateral Release");
WHEREAS, the Purchase and Sale Transaction, the Talley Canada
Guaranty Release, the Talley Canada Loan Termination and the Talley
Canada Collateral Release (each, individually, a "Proposed
Transaction" and, collectively, the "Proposed Transactions")
require the written consent of the Agent and the Lenders, and the
Borrower and Talley Canada have requested that the Agent and
Lenders so consent; and
WHEREAS, the Agent and the Lenders are willing to consent to
the Proposed Transactions on the terms and conditions herein set
forth;
2
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in
the Loan Agreement.
2. Consent to Proposed Transactions.
2.1. Consent. The Agent and the Lenders hereby consent
to the Proposed Transactions; provided, however, that such consent
is subject to conditions set forth in Section 2.2 of this Consent.
2.2. Conditions to Consent. The consent provided for in
Section 2.1 of this Consent is subject to the following conditions:
(a) Each Proposed Transaction shall be consummated and
become effective simultaneously with the consummation and
effectiveness of all of the other Proposed Transactions (the
date of the consummation of the Proposed Transactions being
hereinafter referred to as the "Transaction Closing Date");
(b) No Term Loan (as defined in the Talley Canada Loan
Agreement) has been made by the Borrower to Talley Canada
pursuant to the Talley Canada Loan Agreement and, as of the
date hereof, the outstanding principal balance of the Talley
Canada Revolving Note is zero;
(c) The Agent shall have reviewed and approved all
documents and instruments to be executed and delivered in
connection with the Talley Canada Loan Termination, and such
Proposed Transactions shall be consummated in accordance
therewith;
(d) The Purchase and Sale Transaction shall be
consummated strictly in accordance with the terms of the
Purchase and Sale Agreement substantially in the form
transmitted from Brenda L. Bolt, under cover of letter dated
March 12, 1997, to Alan M. Christenfeld, with material changes
to such form as may have been approved by the Lenders;
3
<PAGE>
(e) The Agent shall have received a copy of the
resolutions of the Board of Directors of the Borrower and the
resolutions of the sole shareholder of Talley Canada (each in
form and substance reasonably satisfactory to the Agent)
authorizing (i) the execution, delivery and performance of
this Consent, the documents referred to herein, and the other
Loan Documents contemplated hereby and thereby, and (ii) the
consummation of the Proposed Transactions and the other
transactions contemplated hereby and thereby, all certified by
the Secretary or an Assistant Secretary of each of the
Borrower and Talley Canada on the date hereof. Such
certificates shall state that the resolutions set forth
therein have not been amended, modified, revoked or rescinded
as of the date of such certificate;
(f) No Default, Event of Default or Subsidiary Event of
Default shall have occurred and be existing either on the date
hereof, immediately after giving effect to this Consent, or on
the Transaction Closing Date;
(g) The representations and warranties contained herein,
in the Loan Agreement and in all other Loan Documents (other
than representations and warranties that expressly speak only
as of a specified different date) shall be true and correct as
of the date hereof, immediately after giving effect to this
Consent, and on the Transaction Closing Date;
(h) The Agent shall have received a certificate, in form
and substance satisfactory to the Agent, dated the date of the
effectiveness of this Consent and signed by the President or
a Vice President and the Treasurer or Controller of the
Borrower certifying that the conditions set forth in this
Section 2.2 have been fulfilled and as to such other matters
as the Agent shall reasonably require;
(i) The Agent shall have received such other agreements,
opinions, certificates, representations, instruments and other
documents as it may reasonably require, all in form and
substance satisfactory to the Agent;
(j) Such consent is strictly limited to the facts set
forth herein; and
(k) All other conditions set forth in Section 6 hereof
shall have been satisfied.
4
<PAGE>
3. Representations and Warranties. The Borrower and Talley
Canada hereby represent and warrant to the Agent and the Lenders
that (a) the execution, delivery and performance of the this
Consent, and the other documents and instruments to be executed and
delivered in connection herewith by the Borrower and Talley Canada
are within their respective corporate powers and have been duly
authorized by all necessary corporate action, (b) no consent,
approval, authorization of, or declaration or filing with, any
governmental or public authority, and no consent of any other
Person, is required in connection with the execution, delivery and
performance of the this Consent and the other documents and
instruments to be executed and delivered in connection herewith by
the Borrower and Talley Canada, except for this Consent and those
others already duly obtained, (c) this Consent has been duly
executed by the Borrower and Talley Canada and constitutes the
legal, valid and binding obligation of the Borrower and Talley
Canada, enforceable against them in accordance with its terms, (d)
the execution, delivery and performance by the Borrower and Talley
Canada of this Consent and the other documents and instruments to
be executed and delivered in connection herewith by the Borrower
and Talley Canada do not and will not conflict with, or constitute
a violation or breach of, or constitute a default under, or result
in the creation or imposition of any Lien upon the property of the
Borrower or Talley Canada (other than Liens the creation of which
are expressly contemplated hereunder) by reason of the terms of (i)
any contract, mortgage, Lien, lease, agreement, indenture, or
instrument to which the Borrower or Talley Canada is a party or
which is binding upon it, (ii) any requirement of law applicable to
the Borrower or Talley Canada or (iii) the Certificate or Articles
of Incorporation or By-Laws of the Borrower or Talley Canada, (e)
no event has occurred and is continuing which constitutes a
Default, an Event of Default or a Subsidiary Event of Default, and
(f) after giving effect to the Proposed Transactions, Talley Canada
will have no material assets other than the Excluded Assets and no
material liabilities.
4. Covenants by Borrower and Talley Canada.
(a) The Borrower hereby covenants that, from and after
the Transaction Closing Date, it will not allow Talley Canada to,
and Talley Canada hereby covenants that, from and after the
Transaction Closing Date, it will not, possess or acquire any
material assets other than the Excluded Assets, have or incur any
material liabilities or conduct any material business.
5
<PAGE>
(b) The Borrower and Talley Canada each hereby covenant
that, within 10 Business Days after the Transaction Closing Date,
they shall deliver to the Agent a true and correct copy of the
Purchase Agreement certified as such by the President or a Vice
President and the Secretary or an Assistant Secretary of each of
the Borrower and Talley Canada.
5. Amendments to Loan Agreement. Effective as of the
Transaction Closing Date immediately after the consummation of the
Proposed Transactions, the Loan Agreement shall be amended in the
following respects:
5.1. The definition of the term "Non-Operating
Subsidiaries" set forth in Section 1.1 of the Loan Agreement shall
be amended in its entirety to read as follows:
"Non-Operating Subsidiaries" shall mean individually
and in the aggregate Merrick Corporation, Stencel Aero
Engineering Corporation, The Waterbury Button Company,
Talley International Investment Corporation, Talley
Automotive Products, Inc., McMullen Industries, Inc.,
Dimetrics International Inc., WDC, Inc. and Talley Canada
Inc.
5.2. The words "Talley Canada, Inc., an Ontario, Canada
corporation" set forth in Schedule 1.3 of the Loan Agreement shall
be deleted.
5.3. The row beginning with the words "Talley Canada,
Inc." in the column entitled "Name of Sub," and all information in
such row, shall be deleted from Schedule 2.1 of the Loan Agreement.
6. Conditions to Effectiveness. This Consent shall be
effective as of the date first above written upon satisfaction of
the following conditions precedent:
6.1. Execution of this Consent. The Agent shall have
received a copy of this Consent duly executed by the Borrower,
Talley Canada and the Lenders.
6.2. Confirmation of Loan Documents. Each Subsidiary
shall have executed the Confirmation of Loan Documents set forth
below.
6
<PAGE>
7. Authorization to Sign Releases and Other Documents. By
their signatures below, the Lenders hereby authorize Transamerica
Business Credit Corporation, as Agent (a) to execute and deliver
such documents and instruments as are necessary or appropriate, in
the Agent's judgment, to effectuate, on and after the Transaction
Closing Date, the Talley Canada Guaranty Release, the Talley Canada
Loan Termination and the Talley Canada Collateral Release; (b) to
consent to the delivery of such other documents and instruments in
connection with the Proposed Transactions as the Agent shall
require, each in form and substance satisfactory to the Agent; and
(c) to execute and deliver such written consents, releases,
terminations and other documents and instruments, and to take such
other action, in connection with the Proposed Transactions as the
Agent shall deem appropriate.
8. Reference to and Effect on Loan Documents.
8.1. Except as specifically modified herein, all of the
terms of the Loan Agreement and the Talley Canada Loan Agreement
shall remain unchanged and in full force and effect.
8.2. Except as expressly set forth herein, the execution,
delivery and effectiveness of this Consent shall not operate as a
waiver of any right, power or remedy of any Lender or the Agent
under the Loan Agreement, the Talley Canada Loan Agreement or any
of the other Loan Documents, nor constitute a waiver of any
Default, Event of Default or Subsidiary Event of Default, or a
consent to any noncompliance with any provision of the Loan
Agreement, the Talley Canada Loan Agreement or any of the other
Loan Documents.
9. Execution in Counterparts. This Consent may be executed
in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered
(including delivery by telecopier) shall be deemed to be an
original and all of which taken together shall constitute one and
the same instrument.
7
<PAGE>
10. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
11. Headings. Section headings in this Consent are included
herein for convenience of reference only and shall not constitute
a part of this Consent or be given any substantive effect.
[Rest of page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Consent to be executed and delivered by their proper and duly
authorized officers as of the date set forth above.
BORROWER:
--------
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
By: Mark S. Dickerson
------------------------------
Name: Mark S. Dickerson
Title: Vice President
TALLEY CANADA:
-------------
TALLEY CANADA, INC.
By: Mark S. Dickerson
------------------------------
Name: Mark S. Dickerson
Title: Vice President
AGENT:
-----
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Michael Burns
------------------------------
Name: Michael Burns
Title: Vice President
9
<PAGE>
LENDERS:
-------
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Michael Burns
------------------------------
Name: Michael Burns
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
By: Donald A. Tomlinson
------------------------------
Name: Donald A. Tomlinson
Title: Vice President
NATIONAL BANK OF CANADA
By: Thomas H. Hopkins
------------------------------
Name: Thomas H. Hopkins
Title: Vice President
By: Beth Pease
------------------------------
Name: Beth Pease
Title: Vice President
10
<PAGE>
CONFIRMATION OF LOAN DOCUMENTS
Each of the undersigned hereby consents to the execution
and delivery of the foregoing Consent and the consummation of the
Proposed Transactions. Each of the undersigned hereby confirms
that each of the Loan Documents to which it is a party shall remain
in full force and effect on the terms provided therein and that
each reference in the Loan Documents to the "Loan Agreement" shall
be a reference to the Loan Agreement as modified by the Consent.
Each of the undersigned further confirms that there exists no
Default or Event of Default (as defined in the Subsidiary Loan
Agreement to which it is a party) and that all representations and
warranties made by it in the Loan Documents to which it is a party
are true and correct as though made on and as of the date hereof
(other than representations and warranties that expressly speak
only as of a specified different date).
Dated: As of March 24, 1997
AMCAN SPECIALTY STEELS, INC.;
DIMETRICS, INC.; ELECTRODYNAMICS,
INC.; JOHN J. McMULLEN ASSOCIATES,
INC.; PORCELAIN PRODUCTS CO.; ROWE
INDUSTRIES, INC.; TALLEY AUTOMOTIVE
PRODUCTS, INC.; TALLEY CANADA,
INC.; TALLEY DEFENSE SYSTEMS, INC.;
TALLEY INTERNATIONAL INVESTMENT
CORPORATION; TALLEY METALS
TECHNOLOGY, INC.; TALLEY
TECHNOLOGY, INC.; UNIVERSAL
PROPULSION COMPANY; WATERBURY
COMPANIES, INC.; WDC, INC.;
By: Mark S. Dickerson
---------------------------
Name: Mark S. Dickerson
Title: Secretary
11
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 40,954,000
<SECURITIES> 0
<RECEIVABLES> 53,953,000
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<INVENTORY> 62,556,000
<CURRENT-ASSETS> 166,290,000
<PP&E> 150,174,000
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<CURRENT-LIABILITIES> 57,433,000
<BONDS> 122,421,000
0
0
<COMMON> 1,000
<OTHER-SE> 81,757,000
<TOTAL-LIABILITY-AND-EQUITY> 272,096,000
<SALES> 66,933,000
<TOTAL-REVENUES> 88,331,000
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