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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 September 30, 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[ 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 September 30, 1994
$1.00 par value 1,000
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TALLEY MANUFACTURING AND TECHNOLOGY, INC.
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
September 30, 1994 and December 31, 1993 1
Consolidated Statement of Earnings -
Three Months and Nine Months Ended
September 30, 1994 and 1993 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1994 and 1993 3
Consolidated Statement of Changes in Stockholder's
Equity - Nine Months Ended September 30, 1994
and 1993 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis 8-12
Part II Other Information
Legal Proceedings 13
Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I - FINANCIAL INFORMATION
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Balance Sheet
(thousands)
September 30, December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 2,484 $ 6,417
Accounts receivable, net of allowance
for doubtful accounts of $1,212,000
at September 30, 1994 and $1,091,000
at December 31, 1993 48,161 60,376
Inventories, net 66,139 64,808
Deferred income taxes 1,000 900
Prepaid expenses 10,087 9,367
Current assets 127,871 141,868
Long-term receivables 10,506 7,093
Property, plant and equipment, net 46,417 49,489
Intangibles 46,864 44,928
Other assets 7,364 8,465
Total assets $239,022 $251,843
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt $ 3,545 $ 2,176
Accounts payable 24,740 23,095
Accrued expenses 30,274 31,652
U.S. & foreign income taxes 540 -
Current liabilities 59,099 56,923
Long-term debt 138,312 160,002
Deferred income taxes 6,819 12,320
Other liabilities 4,284 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 20,032 15,753
Foreign currency translation (440) (370)
Retained earnings 10,915 3,018
Total stockholder's equity 30,508 18,402
Total liabilities & stockholder's
equity $239,022 $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 Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
Sales $61,300 $63,372 $174,724 $187,584
Services 14,459 16,284 45,383 47,025
Royalties 4,284 2,098 13,135 6,787
80,043 81,754 233,242 241,396
Cost of sales 43,673 45,505 128,492 138,414
Cost of services 12,677 14,170 39,610 40,557
Selling, general,
and administrative
expenses 14,702 16,211 45,162 43,810
71,052 75,886 213,264 222,781
8,991 5,868 19,978 18,615
Other income (expenses),
net 149 (109) 551 31
Interest expense (4,294) (3,874) (12,888) (11,828)
Earnings (loss)
before income taxes 4,846 1,885 7,641 6,818
Income tax benefit
(provision) (1,859) (1,082) 256 (3,562)
Net earnings $ 2,987 $ 803 $ 7,897 $ 3,256
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)
Nine Months Ended
September 30,
1994 1993
Cash and cash equivalents at beginning
of period $ 6,417 $10,118
Cash flows from operating activities:
Net earnings 7,897 3,256
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (5,601) (353)
Depreciation and amortization 7,318 7,534
Gain on sale of property and
equipment (127) (174)
Other 1,813 1,374
Changes in assets and liabilities,
net of effects from acquired businesses:
(Increase) decrease in accounts
receivable 9,603 (6,428)
(Increase) decrease in inventories (163) 4,649
Increase in prepaids (720) (2,227)
Increase (decrease) in accounts payable 1,645 (1,311)
Increase (decrease) in accrued expenses (678) 7,383
Increase in U.S. & foreign income taxes 540 1,138
Other, net (963) (1,395)
Cash flows from operating activities 20,564 13,446
Cash flows from investing activities:
Proceeds from sale of subsidiary - 2,756
Purchase of assets of acquired business (5,425) -
Purchases of property and equipment (2,532) (3,406)
Proceeds from sale of property and
equipment 202 334
Cash flows from investing activities (7,755) (316)
Cash flows from financing activities:
Decrease in investment by Parent - (7,376)
Increase in investment by Parent 4,279 3,367
Repayment of long term-debt (294,225) (93,176)
Proceeds from new long-term debt 273,204 81,732
Cash flows from financing activities (16,742) (15,453)
Net decrease in cash and cash equivalents (3,933) (2,323)
Total cash and cash equivalents at
September 30, $ 2,484 $ 7,795
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 Nine Months Ended September 30, 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 3,256
Amounts to Parent (978)
Issuance of 1,000 shares 1
Decrease in guaranteed debt of ESOP 251
BALANCE AT SEPTEMBER 30, 1993 $ - $ 1 $13,477 $ -
BALANCE AT DECEMBER 31, 1993 $ - $ 1 $15,753 $ 3,018
Net earnings 7,897
Contribution from Parent 4,279
BALANCE AT SEPTEMBER 30, 1994 $ - $ 1 $20,032 $10,915
</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 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 September 30, 1994 and December
31, 1993 and the results of operations for the three-month and
nine-month periods ended September 30, 1994 and 1993, and cash
flows and changes in stockholder's equity for the nine-month
periods ended September 30, 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):
September 30, December 31,
1994 1993
Raw materials and supplies $12,301 $10,293
Work-in-process 9,612 9,584
Finished goods 27,437 26,470
Inventories applicable to
government contracts 16,789 18,461
$66,139 $64,808
Note 3 - Earnings Per Share
The Company is a wholly owned subsidiary of Talley; 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.
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Note 5 - Business Acquisition
In July 1994, a subsidiary of the Company acquired certain assets
of the Ball and Socket Manufacturing Company, Inc., a manufacturer
of metal buttons. The purchase price was approximately $5.4
million, including liabilities assumed of $2.8 million and 323,232
shares of Talley Common stock scheduled for issuance two years
after closing.
Note 6 - State Income Taxes
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. (See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Other Matters" concerning state income tax liability
for years prior to 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 Nine Months
Ended Ended
(Dollars in Thousands) September 30, September 30,
1994 1993 1994 1993
REVENUES:
Government Products
and Services $33,909 $43,940 $105,621 $131,646
Airbag Royalty 4,168 2,111 11,973 5,767
Industrial Products 33,825 28,085 93,860 82,086
Specialty Products 8,141 7,618 21,788 21,897
$80,043 $81,754 $233,242 $241,396
OPERATING INCOME:
Government Products
and Services $ 4,662 $ 6,575 $ 12,079 $ 18,168
Airbag Royalty 4,168 2,111 11,973 5,767
Industrial Products 2,079 993 5,122 2,357
Specialty Products 942 1,103 2,544 2,916
Total operating income 11,851 10,782 31,718 29,208
Corporate expense (2,711) (5,110) (11,238) (10,839)
Non-segment interest
income - 87 49 277
Interest expense (4,294) (3,874) (12,888) (11,828)
Earnings (loss) before
income taxes $ 4,846 $ 1,885 $ 7,641 $ 6,818
Revenues for the nine-month period ended September 30, 1994
decreased $8.2 million from $241.4 million to $233.2 million,
compared with the corresponding period in the prior year. The
decrease in the nine-month comparison is primarily the result of
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, offset by increasing revenue in the Airbag
Royalties segment and the Steel Operations in the Industrial
Products segment. The pretax earnings for the nine months ended
September 30, 1994 was $7.6 million compared with $6.8 million
pretax earnings in the first nine months of the previous year.
The earnings in the first nine months 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, partially offset by a $1.0 million pretax gain
on reversion of surplus funds from two previously terminated
pension plans. Net earnings for the nine months ended September
30, 1994 was $7.9 million, 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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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 $6.2 million
from $5.8 million in the first nine months of 1993 to $12
million for the first nine months of 1994, while earnings from
the Industrial Products segment improved $2.8 million. Earnings
from the Government Products and Services segment and the
Specialty Products segment for the first nine months of 1994,
when compared with the first nine months of 1993, were lower by
$6.1 million and $.4 million, respectively.
The gross profit percentage, excluding airbag and other
royalties, of 23.6% for the nine months ended September 30, 1994
was down slightly from the gross percentage of 24% for the
comparable period for 1993. The decrease from the prior year is
primarily due to the mix of contracts.
Government Products and Services. Revenue and earnings in the
first nine months of 1994 decreased $26 million and $6.1 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.
Airbag Royalties. Revenue from airbag royalties increased from
$5.8 million in the first nine months of 1993 to $12 million in
the first nine months of 1994. The increased royalty is the
result of the recovering automobile and light truck industry and
increasing airbag implementation rates. (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 nine months of 1994
Industrial Products sales and earnings increased $11.8 million
and $2.8 million, respectively, when compared with the first nine
months of 1993. Increases in sales and earnings resulted from
improvement in orders for stainless steel bars and rods and
increased demand for ceramic insulator products due to increased
construction activity and improved market share. These increases
partially were offset by lower welder products sales and
earnings.
Specialty Products. During the first nine months of 1994,
sales for the Specialty Products segment decreased slightly, from
$21.9 million to $21.8 million, while earnings decreased from
$2.9 million to $2.5 million, when compared with the same period
in 1993. The decrease in sales and earnings when compared with
the prior year is primarily a result of a decrease in demand for
certain consumer products.
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Other. Interest expense in the first nine months of 1994
increased to $12.9 million, from $11.8 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 $10.8 million to $11.2 million
over the comparable period in 1993. While the Corporate overhead
expenses are comparable in the two periods, the amounts are above
normal levels due to a provision for litigation costs in 1994 of
$4.5 million related to resolution of claims in connection with
airbag royalties being received from the licensee and due to
increases in period costs associated with the Company's
refinancing efforts in 1993. Income tax benefit for the first
nine months of 1994 was $.3 million compared to a tax provision
of $3.6 million in the comparable period in 1993. The tax
benefit in 1994 is primarily the result of a favorable state tax
legislation which resulted in a $5.6 million reversal of state
income taxes previously accrued.
Financial Condition, Liquidity and Capital Resources
At September 30, 1994, the Company had $2.5 million in cash and
cash equivalents and net working capital of $68.8 million. Cash
flow from operating activities for the nine months ended
September 30, 1994 was $20.6 million, generally the result of the
Company's successful efforts toward collection of trade
receivables, offset in part by increases in inventories and
prepaid expenses. The receivable balance at September 30, 1994
is down from the balance at December 31, 1993 and more in line
with historical levels after collections were received on major
contracts. Cash generated from operations during the first nine
months of 1993 was $13.4 million. Cash used for investing
activities during the nine months ended September 30, 1994 was
$7.8 million, of which $5.4 was for the purchase of assets of the
Ball and Socket Manufacturing company, and the balance was for
capital expenditures. Cash used in financing activities of $16.7
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, 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 September 30,
1994 availability under the facility, based primarily on
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inventory and receivable levels, was approximately $49.0 million,
of which approximately $29.0 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.
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.
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
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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 and on May 23, 1994 the Court
granted the Company's motion for a preliminary injunction. The
Court ordered TRW to continue paying royalties to the Company
pending conclusion of the lawsuit. On August 25, 1994 the Court
refused TRW's motion to suspend the injunction. A trial in this
matter is currently scheduled to commence in March 1995. 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. Therefore no losses are anticipated under the above
described action.
In September 1994, the Arizona Court of Appeals reversed a 1992
Arizona Tax Court ruling that entitled Talley to file a combined
tax return in the State of Arizona for the fiscal year ended
March 31, 1983. The Company has filed a petition for review with
the Arizona Supreme Court. The Company believes the appellate
court erred in its decision, but cannot assess the likelihood of
the Arizona Supreme Court granting the petition for review. The
Company anticipates that the Supreme Court will rule on the
petition for review in approximately six months and if the
petition is granted, the Supreme Court will require an additional
18 months to rule on the issues. If the appellate court decision
stands, the Company would be liable for approximately $1.2
million in taxes and interest for 1983. If the Company is
unsuccessful in its attempts to have the Arizona Supreme Court
overturn the appellate court decision related to the 1983
fiscal year, the Company intends to vigorously litigate the
Arizona Department of Revenue tax and interest assessments
totalling approximately $5.0 million for 1984 and 1985 periods,
and the Company does not anticipate a final resolution of the
1984 and 1985 these periods for several a number of years.
Legislation adopted earlier this year in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986. Management believes that the final
resolution of the above matter will not result in a material
adverse impact on the results of operations or the financial
position of the Company.
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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 and on May 23, 1994 the Court
granted the Company's motion for a preliminary injunction. The
Court ordered TRW to continue paying royalties to the Company
pending conclusion of the lawsuit. On August 25, 1994 the Court
refused TRW's motion to suspend the injunction. A trial in this
matter is currently scheduled to commence in March 1995. 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. Therefore no losses are anticipated under the above
described action.
In September 1994, the Arizona Court of Appeals reversed a 1992
Arizona Tax Court ruling that entitled Talley to file a combined
tax return in the State of Arizona for the fiscal year ended
March 31, 1983. The Company has filed a petition for review with
the Arizona Supreme Court. The Company believes the appellate
court erred in its decision, but cannot assess the likelihood of
the Arizona Supreme Court granting the petition for review. The
Company anticipates that the Supreme Court will rule on the
petition for review in approximately six months and if the
petition is granted, the Supreme Court will require an additional
18 months to rule on the issues. If the appellate court decision
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stands, the Company would be liable for approximately $1.2
million in taxes and interest for 1983. If the Company is
unsuccessful in its attempts to have the Arizona Supreme Court
overturn the appellate court decision related to the 1983 fiscal
year, the Company intends to vigorously litigate the Arizona
Department of Revenue tax and interest assessments totalling
approximately $5.0 million for 1984 and 1985 periods. The
Company does not anticipate a final resolution of the 1984 and
1985 periods for a number of years. Legislation adopted earlier
this year in Arizona specifically allows companies to file
combined tax returns in Arizona for periods from January 1, 1986.
Management believes that the final resolution of the above matter
will not result in a material adverse impact on the results of
operations or the financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27* Financial Data Schedule for Talley Manufacturing
and Technology, Inc. - September 30, 1994.
* Documents marked with an asterisk are filed with this
report.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three
months ended September 30, 1994.
-14-
<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: November 4, 1994 By Kenneth May
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: November 4, 1994 By Mark S. Dickerson
Mark S. Dickerson
Vice President, General
Counsel and Secretary
-15-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 2,484,000
<SECURITIES> 0
<RECEIVABLES> 48,161,000
<ALLOWANCES> 1,212,000
<INVENTORY> 66,139,000
<CURRENT-ASSETS> 127,871,000
<PP&E> 133,447,000
<DEPRECIATION> 87,030,000
<TOTAL-ASSETS> 239,022,000
<CURRENT-LIABILITIES> 59,099,000
<BONDS> 138,312,000
<COMMON> 1,000
0
8
<OTHER-SE> 30,507,000
<TOTAL-LIABILITY-AND-EQUITY> 239,022,000
<SALES> 174,724,000
<TOTAL-REVENUES> 233,242,000
<CGS> 128,492,000
<TOTAL-COSTS> 168,102,000
<OTHER-EXPENSES> 44,611,000
<LOSS-PROVISION> 349,000
<INTEREST-EXPENSE> 12,888,000
<INCOME-PRETAX> 7,641,000
<INCOME-TAX> 256,000
<INCOME-CONTINUING> 7,897,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,897,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<PAGE>
</TABLE>
