SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 19, 1996
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 33-49869-01 86-0739329
(State or other jurisdiction (Commission (IRS Employer Identi-
of incorporation) File Number) fication No.)
2702 North 44th Street (Ste.100A), Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 602/957-7711
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
On June 19, 1996 the United States Court of Appeals for the
Ninth Circuit affirmed the $138 million judgment previously
entered by the Federal District trial court in Phoenix in favor
of Talley Industries, Inc. (Talley), parent of the Registrant,
and the Registrant and against TRW Inc. (TRW Inc. v. Talley
Industries, Inc. et al.) That judgment, entered on June 27,
1995, was appealed by TRW to the Ninth Circuit Court of Appeals.
A copy of the Memorandum decision issued by the Court of Appeals
is attached to this Report as an Exhibit. On June 21, 1996,
following receipt of a copy of the Court of Appeals decision,
Talley issued a press release announcing the decision, a copy of
which is also attached to this Report as an Exhibit.
Whether TRW will seek further appellate review, and the date
on which any judgment proceeds would actually be received by the
Registrant, cannot be predicted with certainty; but, the
Registrant believes it likely that all appeals will be exhausted
and the money payable before December 31, 1996. As previously
reported, TRW has been ordered by the trial court (pending final
resolution of this matter) to continue to make quarterly payments
to the Registrant in the same amount as the royalties that would
otherwise be due under the 1989 License Agreement at issue in the
litigation. To discharge the judgment, TRW would be obligated to
pay the $138 million face amount of the judgment plus interest
(which the trial court ruled is accruing from June 27, 1995 at
the rate specified by the 1989 License Agreement--i.e., prime
plus five percent), offset by the continued quarterly payments
made by TRW subsequent to June 27, 1995 pursuant to the trial
court's order.
Also, and as previously reported, TRW was ordered by the
trial court on January 26, 1996 to pay the Registrant a further
$7.1 million in attorneys' fees and recoverable costs in
connection with this litigation. TRW has filed a notice that it
will appeal that award, which has not yet been paid by TRW. The
Registrant will seek a further award of the Registrant's fees and
costs in connection with TRW's unsuccessful appeal of the June
27, 1995 judgment, as well as additional fees and costs incurred
before the District Court after June 30, 1995. The exact amounts
and timing of any such further recoveries from TRW are difficult
to predict with certainty.
-2-
<PAGE>
As previously reported, certain other claims asserted by TRW
and the Registrant against each other are the subject of a
separate action, which remains pending. In that action, TRW has
asserted that the airbag manufacturing plant included in the
assets sold to TRW by the Registrant in 1989 failed to meet
certain government requirements and "industry standards," and
that the associated real estate was insufficient to permit
expansion of certain manufacturing and assembly floor space, in
violation of the 1989 Asset Purchase Agreement. The Registrant's
claims against TRW include claims that TRW breached an implied
contractual duty to exploit the exclusive technology license
granted to TRW by the Registrant in 1989 and denied the
Registrant certain contractually provided audit rights.
The trial on these remaining claims has now been scheduled
to commence September 24, 1996, also in the same Federal District
Court in Phoenix. Management anticipates that these claims and
counter-claims will be resolved without any material adverse
impact on the results of operations or financial position of the
Registrant.
The bulk of any such recoveries from TRW, when received,
would be applied by Talley and the Registrant to reduce
outstanding debt. In view of the anticipated receipt of the cash
award from TRW Inc., Talley and the Registrant plan to explore
options in a number of areas, including, but not limited to, its
capital and debt structure and alternatives to the present real
estate strategy of selling properties to end users in an orderly
process over time.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
99.1 Memorandum decision from the United States Court
of Appeals for the Ninth Circuit, filed June 19,
1996.
99.2 Press Release issued by the Registrant on June 21,
1996.
-3-
<PAGE>
"Safe harbor" statement under the Private Securities
Litigation Reform Act of 1995 and any applicable state laws:
Certain statements in this Report (and in other
communications by the Registrant) that are not historical
statements are forward-looking statements. Such forward-
looking statements are subject to a number of risks and
uncertainties that could cause actual results to be
materially different, including the results and timing of
the litigation pending with TRW Inc., changes in future
economic conditions, the future values of real estate assets
being disposed of and possible changes in Talley's
strategy for completing such dispositions, the Registrant's
anticipated results of operations and financial position,
available and appropriate tax-planning measures, and a
number of other factors and assumptions.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report on Form 8-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
Dated: June 26, 1996 By Mark S. Dickerson
Mark S. Dickerson,
Secretary
-4-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
99.1 Memorandum decision from the United
States Court of Appeals for the
Ninth Circuit, filed June 19, 1996.
99.2 Press Release issued by Talley on June 21,
1996.
-5-
EXHIBIT 99.1
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
)
TRW, INC., ) No. 95-16387
)
Plaintiff-counter- ) D.C. No. CV-94-00350-PGR
defendant-Appellant, )
)
TRANSAMERICA BUSINESS CREDIT )
CORPORATION, )
)
Intervenor-Plaintiff, )
)
v. )
)
TALLEY INDUSTRIES, INC.; )
TALLEY DEFENSE SYSTEMS, INC.; )
TALLEY AUTOMOTIVE PRODUCTS, )
INC.; TALLEY MANUFACTURING )
AND TECHNOLOGY, INC.; TALLEY )
TECHNOLOGY, INC.; UNIVERSAL )
PROPULSION COMPANY, INC., )
)
Defendants-counter- )
claimants-Appellees, )
)
AMERICAN NATIONAL BANK AND )
TRUST COMPANY OF CHICAGO; )
BANK ONE COLUMBUS, )
)
Defendant-Intervenors- )
Appellees. )
)
<PAGE>
)
TRW, INC., ) No. 95-16667
)
Plaintiff-counter- ) D.C. No. CV-94-00350-PGR
defendant-Appellant/ )
Cross-Appellee, )
) MEMORANDUM*
TRANSAMERICA BUSINESS CREDIT )
CORPORATION, )
)
Plaintiff-Intervenor. )
)
v. )
)
TALLEY INDUSTRIES, INC.; )
TALLEY DEFENSE SYSTEMS, INC.; )
TALLEY AUTOMOTIVE PRODUCTS, )
INC.; TALLEY MANUFACTURING )
AND TECHNOLOGY, INC.; TALLEY )
TECHNOLOGY, INC.; UNIVERSAL )
PROPULSION COMPANY, INC., )
)
Defendants-counter- )
claimants-Appellees/ )
Cross-Appellants, )
)
AMERICAN NATIONAL BANK AND )
TRUST COMPANY OF CHICAGO; )
BANK ONE COLUMBUS, )
)
Defendant-Intervenors. )
)
)
Appeal from the United States District Court
for the District of Arizona
Paul G. Rosenblatt, District Judge, Presiding
Argued and Submitted February 14, 1996
San Francisco, California
Before: REINHARDT, THOMPSON, and O'SCANNLAIN, Circuit Judges.
TRW, INC. (TRW) appeals the district court's grant of
judgment as a matter of law in favor of Talley Industries, Inc.
and several Talley subsidiaries (collectively, Talley) in TRW's
* This disposition is not appropriate for publication and may
not be cited to or by the courts of this circuit except as
provided by Ninth Circuit Rule 36-3.
2
<PAGE>
breach of contract action. TRW also appeals various evidentiary
and legal rulings by the district court arising out of the
litigation. We have jurisdiction pursuant to 28 U.S.C. Section 1291,
and we affirm.
In April 1989, Talley sold its automotive air bag business
and licensed its air bag technology to TRW for approximately $98
million. Under the implementing agreements (1989 Agreements),
Talley was also to receive continuing quarterly royalties from
TRW based on TRW's worldwide sale of air bags and the total sales
of air bags by all other manufacturers in North America. At the
time of closing, TRW anticipated paying Talley between $40-60
million in royalties.
The 1989 Agreements included a noncompetition clause in
which Talley promised not to "direct or indirectly . . .
participate in, manage, operate, control, or otherwise render
services to" a TRW competitor. The 1989 Agreements also
specified that Arizona law would govern any contractual disputes
that might arise.
By 1994, the air bag industry had witnessed incredible
growth. TRW had paid more than $18 million in royalties to
Talley, and estimated that it might have to pay close to $200
million more over the life of the 1989 Agreements.
In February 1994, two months before the expiration of the
noncompetition covenant, TRW sent Talley a notice of termination,
tendered a $26.5 million option payment required under the 1989
Agreements, and filed suit in district court. TRW alleged Talley
violated the noncompetition clause by selling air bag propellant
3
<PAGE>
- --the substance which causes air bags to inflate--and rendering
services to TRW's competitors. TRW sought declaratory relief
that its termination was proper and no future royalties need be
paid. TRW also sought compensatory damages for Talley's breaches.
Talley counterclaimed for anticipatory repudiation and sought
damages in the form of accelerated royalty payments due under the
1989 Agreements.
After an eight-week trial, the district court granted
judgment as a matter of law in favor of Talley on TRW's claim for
breach of the noncompetition covenant. Applying Arizona law, the
district court held that Talley's sale of air bag propellant was
not prohibited by the covenant not to compete, nor were Talley's
other actions sufficiently material, injurious breaches of the
covenant. Talley's counterclaims went to the jury, which
returned a verdict in Talley's favor for $138 million.
We review de novo the district court's judgment as a matter
of law under Rule 50 of the Federal Rules of Civil Procedure.
Berry v. Bunnell, 39 F.3d 1056, 1057 (9th Cir. 1994). A judgment
as a matter of law is appropriate when the evidence, viewed in
the light most favorable to the nonmoving party, permits only one
reasonable conclusion. Id.
The district court was correct in holding that Talley's sale
of air bag propellant to TRW competitors was not a violation of
the noncompetition covenant. Although TRW contents the 1989
Agreements required Talley to cease all activities in the air bag
industry, TRW's own conduct belies this. See United California
Bank v. Prudential Ins. Co. of America, 681 P.2d 390, 417 (Ariz.
App. 1984) (contract's meaning as evidenced by parties' conduct
4
<PAGE>
will be enforced). In 1991, TRW and one of its subsidiaries
entered into two agreements (1991 Agreements) with a Talley
subsidiary under which the Talley subsidiary was to develop and
produce air bag propellant. Clearly, TRW did not believe Talley
was out of the air bag business entirely, at least with respect
to air bag propellant.
The noncompetition covenant prohibited Talley from rendering
services, not from selling goods such as propellant. The words
of the covenant reflect this: Talley is not allowed to
"participate in, manage, operate, control or otherwise render
services." Each of these words represents service-type work.
Nowhere is sale of goods mentioned or referred to. Yet,
elsewhere in the same 1989 Agreements, the distinction between
"goods" and "services" is carefully drawn.
The circumstances surrounding the 1991 Agreements for
propellant also show that the parties did not understand the 1989
Agreements to prohibit Talley from selling air bag propellant.
During negotiations with TRW, Talley repeatedly informed TRW that
Talley was producing and selling propellant to TRW competitors.
TRW did not object. Furthermore, the 1991 Agreements explicitly
state that Talley can sell air bag propellant to third parties.
Such facts confirm that the parties understood the 1989
Agreements to allow Talley to produce and sell air bag
propellant. No reasonable person could conclude otherwise. See
Berry, 39 F.3d at 1057.
From the evidence presented at trial, the only possible
breach of the noncompetition covenant by Talley was a safety
consultation given by a Talley employee to a TRW competitor.
5
<PAGE>
But this conduct was not a material breach of the covenant
entitling TRW to terminate the 1989 Agreements and cancel royalty
payments.
Arizona law is not clear on whether a breach of a
noncompetition covenant must be material. We hold, however, that
based on the available precedents and principles of law, Arizona
would require a breach of a noncompetition covenant to be
material in these circumstances.
Covenants against competition are disfavored in the law.
Amex Distributing Co. Inc. v. Mascari, 724 P.2d 596, 600 (Ariz.
App. 1986). The courts are more lenient to restrictive covenants
given in connection with the sale of a business than to those
between an employee and his employer. Id. In either case,
Arizona requires the court to determine as a matter of law
whether the particular covenant is reasonable. Gann v. Morris,
596 P.2d 43, 44 (Ariz. App. 1979). A noncompetition covenant
will be held to be unreasonable and unenforceable if it is
broader than necessary to protect the legitimate interests of the
covenantee. Id. at 45; Amex Distributing Co., Inc., 724 P.2d at
601; see also, Restatement (Second) of Contracts Section 188 (1)(a)
(1981).
If the covenant not to compete between Talley and TRW were
read to allow termination in the event of a nonmaterial, trifling
breach, the covenant would be far broader than necessary to
protect TRW's legitimate interests. The facts of Talley's breach
make clear why this is so.
The Talley employee's safety consultation exemplifies a
nonmaterial breach. In accordance with standard industry
6
<PAGE>
practice, the Talley employee attended a post-accident
presentation by a TRW competitor to assess the causes of an
equipment fire suffered by the competitor. The Talley employee
prepared a short written report agreeing with the TRW
competitor's accident assessment.
The evidence at trial showed that the Talley employee added
nothing new to the competitor's knowledge and understanding of
the accident. In addition, TRW offered no evidence of any injury
to it as a result of the safety consultation. TRW did not show
how the competitor used the safety evaluation to compete with
Talley, nor if the equipment was ever even repaired. In short,
TRW failed to offer a scintilla of evidence suggesting the Talley
employee contributed to competition against TRW.
Any covenant so broad as to be breached by such immaterial
conduct is unreasonable as a matter of law. TRW has no
legitimate interest in preventing such trifling departures from
the requirements of the covenant. See Amex Distributing Co.,
Inc.,724 P.2d at 603 (noncompetition covenant overbroad because
covenantee had no legitimate interest in denying covenantor right
to compete with customer covenantee had not serviced for three
years).
Even if Talley breached the covenant, TRW has no available
remedies. Where a covenantor breaches a restrictive covenant by
assisting third parties compete with the covenantee, Arizona law
apparently requires the covenantee to show actual injury from the
breach. Diagnostic Laboratory, Inc. v. PBL Consultants, 666 p.2d
515, 519 (Ariz. App. 1983) (breach determined by "weighing the
effect of such assistance on the business of the
7
<PAGE>
covenantee"). Arizona also limits damages available for a breach
of a noncompetition covenant to the covenantee's lost profits.
Gann, 596 P.2d at 45. TRW has failed to show any injury or lost
profits from Talley's breach.
Nor does Talley's trifling breach entitle TRW to terminate
the contract and cause Talley to forfeit the future royalties due
under the agreements. Aztec Film Productions, Inc. v. Quinn, 569
P.2d 1366 (Ariz. App. 1977), is on point. In Aztec Film
Productions, Inc., Quinn covenanted not to compete with Aztec as
part of a sale of a partnership. Id. at 1367. The purchase
price was to be paid over the course of ten years. In the event
of breach, the contract required Quinn to forfeit the remainder
of the purchase price. When Quinn breached the covenant, Aztec
withheld the remaining $40,000 of the purchase price as forfeited
under the contract's liquidated damages provision. Id. at 1368.
The Arizona Court of Appeals held that Aztec could not
require the $40,000 purchase price to be forfeited. Id. The
court affirmed the trial court's judgment that because Quinn had
only profited less than $2,000 by his breach, forfeiture of
$40,000 was grossly disproportionate to Aztec's damages from the
breach. Because the contract allowed forfeiture no matter how
significant the breach, the court held the provision was in fact
a "penalty" for breach, and not a legitimate pre-estimate of
damages likely to be suffered by the covenantee as required for a
valid liquidated damages provision. Id. Consequently, the
forfeiture was inappropriate and Aztec could only recover "the
actual damages proved to have resulted from the breach." Id.
8
<PAGE>
TRW similarly attempts to require forfeiture of an amount
grossly disproportionate to its lost profits. Although TRW can
point to no tangible lost profits from Talley's breach, TRW seeks
to deny Talley well over $100 million in royalties. Even if the
agreements allow termination and forfeiture in the event of a
nonmaterial breach, they would constitute unenforceable
"penalties" because the royalties are forfeited irrespective of
the damage sustained by TRW. Like Aztec, TRW is limited to
recovering actual damages, which TRW has not shown it has
suffered.
With regard to TRW's appeal of the district court's rulings
on the admissibility of certain evidence, waiver of the attorney-
client privilege, election of remedies, breach of the implied
covenant of good faith, and payment of royalties pending
resolution of the appeal, we affirm essentially for the reasons
stated by the district court. Because we rule in Talley's favor
on TRW's appeal, we decline to rule on Talley's contingent cross-
appeal.
The decision of the district court is AFFIRMED.
9
<PAGE>
REINHARDT, Circuit Judge, dissenting:
TRW v. Talley, No. 95-16387
I dissent.
Notwithstanding the contrary conclusions of the district
court and the assurances of the majority, a reasonable jury,
viewing the evidence in the light most favorable to TRW, could
have ruled in favor of TRW. Section 7.2 of the Asset Purchase
Agreement (APA), in a portion of the non-competition provision
not cited by the majority, prohibited Talley from "transacting
business" with a TRW competitor if the business to be transacted
was in the field of occupant restraints. Thus, the majority's
theory that the non-competition clause covers only services and
not the production and sale of "goods" is incorrect. Moreover,
the majority's theory is inconsistent with the fundamental
realities of the underlying business transaction between TRW and
Talley. TRW acquired Talley, which was in the business of
manufacturing and selling occupant restraints. TRW took over
that business but did so only on condition that Talley would not
compete in that field. That Talley recognized this rather
elementary fact is clear from Talley's summary of the transaction
provided to the Board of Directors and its description of the
transaction to the Securities and Exchange Commission. In those
documents, Talley stated that it "agree[d] not to compete in the
occupant restraint business" and, more specifically, that it
"agreed . . . not to compete with TRW in the business of
manufacturing and selling occupant restraints for use in
transportation applications." No one disputes that propellant is
10
<PAGE>
one of the principal components, or at least an essential
ingredient, of the finished product: occupant restraints.
This was not a case to be decided by the court as a matter
of law. A reasonable jury could well have found that Talley's
business transactions with Morton were impermissible under the
APA, notwithstanding the subsequent 1991 Agreements relied on so
heavily by the majority. Talley argued that the subsequent
agreements either expressly authorized it to sell propellant to
Morton or reflected the understanding that such business
activities were permitted under the APA. TRW argued that the
1991 Agreements, consistent with the APA, merely permitted Talley
to sell propellant to third parties not in the automobile
occupant restraint business. Both parties introduced evidence
relevant to this question. The witnesses were not always in
agreement. For example, the evidence presented at trial appears
to have been in direct conflict as to whether Talley informed TRW
that it had sold propellant to Morton prior to the 1991
Agreements and that it would continue to do so. Nor is the
language of the agreements clear. The 1991 Agreements may have
permitted Talley to make sales to third parties, but it did not,
contrary to the majority's implication, explicitly authorize
sales to third parties who are competitors, and thus override the
specific prohibition contained in the APA. There was more than
one reasonable conclusion that could be reached from reviewing
the agreements and from the evidence introduced by the parties.
Accordingly, the dispute should have been resolved by the jury.
11
<PAGE>
Because the alleged breach of the APA was material, I need
not reach any of the other issues considered by the majority. I
conclude that the district court erred in entering judgment
against TRW.
12
EXHIBIT 99.2
FOR IMMEDIATE RELEASE Contact: Daniel R. Mullen
V.P. and Treasurer
Mark S. Dickerson
V.P./General Counsel
(602) 957-7711
TALLEY'S $138 MILLION VERDICT AFFIRMED
PHOENIX, Ariz. (June 21, 1996)(TAL:NYSE) -- On June 19, 1996, the
federal appellate court of San Francisco affirmed a $138 million judgment
awarded to Talley Industries, Inc., following a jury trial against TRW
Inc. in 1995. The litigation arose out of TRW's decision to stop paying
royalties to Talley on sales of airbags made with Talley technology. The
District Court rejected TRW's claims that Talley had breached a
contractual promise, made when Talley sold TRW its airbag business in
1989. The jury verdict awarded Talley the current value of royalties due
to Talley under a license agreement extending through 2001.
The Ninth Circuit Court of Appeals, finding that the evidence at
the eight-week trial "permits only one conclusion," upheld the trial
court's ruling that Talley did not violate any obligation of TRW.
William H. Mallender, Chairman and Chief Executive Officer of
Talley said, "We are extremely pleased with the Court's decision. We
were confident from the beginning that TRW's unfounded accusations would
ultimately be rejected. This ruling should allow us to finally receive
what the jury required TRW to pay us. We intend to utilize the funds to
pay down company debt and pursue our goal of returning to the airbag
business."
- MORE -
<PAGE>
- -2- TALLEY'S $138 MILLION VERDICT AFFIRMED -2-
The appellate victory should also mean that Talley will be entitled
to receive an additional payment from TRW in the amount of $7.1 million,
which the District Court separately awarded to Talley for its attorneys'
fees and expenses.
Mr. Mallender also pointed out Talley is seeking additional
damages, in excess of $40 million, in a separate trial scheduled to
commence September 24, 1996.
Talley Industries, Inc. designs, manufactures, and supplies
specialized industrial, commercial, and aerospace products and services,
including stainless steel rods and bars, and high reliability electronic
components. The Company was a pioneer in the automotive airbag industry
and is currently developing new airbag technologies.
-30-
