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, 1996
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, 1996
- --------------------- ------------------
$1.00 par value 1,000
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995 1
Consolidated Statement of Earnings -
Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 3
Consolidated Statement of Changes in Stockholder's
Equity - Nine Months Ended September 30, 1996
and 1995 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis 8-14
Part II Other Information
Legal Proceedings 15-16
Exhibits and Reports on Form 8-K 16-17
Signatures 18
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Balance Sheet
(thousands)
September 30, December 31,
------------- ------------
1996 1995
ASSETS ------------- ------------
Cash and cash equivalents $141,981 $ 3,461
Accounts receivable, net of allowance
for doubtful accounts of $1,334
at September 30, 1996 and $1,275
at December 31, 1995 50,831 69,065
Inventories, net 67,520 67,191
Deferred income taxes 2,200 1,200
Prepaid expenses 7,500 7,899
-------- --------
Current assets 270,032 148,816
Long-term receivables 8,451 9,732
Property, plant and equipment, net 49,092 48,341
Intangibles, net 42,658 43,969
Deferred charges and other assets 4,547 5,498
-------- --------
Total assets $374,780 $256,356
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt $ 3,133 $ 3,734
Accounts payable 24,902 21,709
Accrued expenses 55,310 29,498
-------- --------
Current liabilities 83,345 54,941
Long-term debt 123,955 136,858
Deferred income taxes 5,338 7,437
Other liabilities 9,720 4,283
Stockholder's equity:
Preferred stock, $1 par value,
authorized 100 shares:
Series A, issued 93 shares-1996;
0 shares - 1995 - -
Common stock, $1 par value,
authorized 1,000 shares 1 1
Capital in excess of par value 152,938 23,494
Foreign currency translation adjustment (517) (530)
Retained earnings - 29,872
-------- --------
Total stockholder's equity 152,422 52,837
-------- --------
Total liabilities and
stockholder's equity $374,780 $256,356
======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Earnings
(thousands)
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Sales $ 73,816 $ 69,207 $214,908 $213,394
Services 17,082 14,706 49,904 44,241
Royalties 109,023 6,658 122,709 20,871
-------- -------- -------- --------
199,921 90,571 387,521 278,506
-------- -------- -------- --------
Cost of sales 67,264 52,908 173,481 159,193
Cost of services 15,168 12,938 44,036 38,724
Selling, general,
and administrative expenses 12,545 12,839 46,978 44,206
-------- --------- -------- --------
94,977 78,685 264,495 242,123
-------- --------- -------- --------
Earnings from operations 104,944 11,886 123,026 36,383
Other income (expense), net 17,495 (802) 17,273 (1,019)
-------- --------- -------- --------
122,439 11,084 140,299 35,364
-------- --------- -------- --------
Interest expense 3,912 4,227 12,166 13,090
-------- --------- -------- --------
Earnings before income taxes 118,527 6,857 128,133 22,274
Income tax provision 52,108 2,796 56,284 9,330
-------- --------- -------- --------
Net earnings $ 66,419 $ 4,061 $ 71,849 $ 12,944
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Cash Flows
(thousands)
Nine Months Ended
September 30,
------------------
1996 1995
-------- --------
Cash and cash equivalents at beginning
of year $ 3,461 $ 2,756
Cash flows from operating activities:
Net earnings 71,849 12,944
Adjustments to reconcile net earnings
to cash flows from operating activities:
Change in deferred income taxes (3,099) 7
Depreciation and amortization 6,619 6,558
Gain on sale of property and equipment (67) (123)
Other 14,479 2,690
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase) decrease in accounts receivable 16,686 (3,421)
Increase in inventories (329) (11,816)
(Increase) decrease in prepaid expenses 294 (1,371)
Increase in accounts payable 3,193 5,066
Increase in accrued expenses 21,168 5,163
Decrease in other liabilities (503) (1,099)
Other, net 2,863 (177)
-------- --------
Cash flows from operating activities 133,153 14,421
Cash flows from investing activities:
Purchase of assets of acquired business (4,327) -
Purchases of property and equipment (4,675) (5,078)
Proceeds from sale of property and equipment 150 797
-------- --------
Cash flows from investing activities (8,852) (4,281)
Cash flows from financing activities:
Dividends paid (106,849) (1,300)
Increase in investment by Parent 41,572 6,481
Issuance of preferred stock 105,000 -
Redemption of preferred stock (12,000) (4,000)
Long-term debt repayments (388,717) (364,170)
Long-term debt borrowings 375,213 352,647
-------- --------
Cash flows from financing activities 14,219 (10,342)
Net decrease in cash and cash equivalents 138,520 (202)
-------- --------
Total cash and cash equivalents at September 30 $141,981 $ 2,554
======== ========
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
Consolidated Statement of Changes in Stockholder's Equity
For the Nine Months Ended September 30, 1996 and 1995
(thousands)
Capital in
Common Excess of Retained
Stock Par Value Earnings
------- ---------- --------
BALANCE AT DECEMBER 31, 1994 $ 1 $ 18,366 $ 14,233
Net earnings - - 12,944
Contribution from Parent - 6,481 -
Dividends - - (1,300)
Redemption of 4 shares of
Series A Preferred Stock - (4,000) -
------- -------- --------
BALANCE AT SEPTEMBER 30, 1995 $ 1 $ 20,847 $ 25,877
======= ======== ========
BALANCE AT DECEMBER 31, 1995 $ 1 $ 23,494 $ 29,872
Net earnings - - 71,849
Issuance of preferred stock - 105,000 -
Redemption of preferred stock - (12,000) -
Contribution from Parent - 41,572 -
Dividends (5,128) (101,721)
------- -------- --------
BALANCE AT SEPTEMBER 30, 1996 $ 1 $152,938 $ -
======= ======== ========
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
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 September 30, 1996 and December
31, 1995 and the results of operations for the three-month and
nine-month periods ended September 30, 1996 and 1995, and cash
flows and changes in stockholder's equity for the nine-month
periods ended September 30, 1996 and 1995. 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, 1995.
Note 2 - Inventories
- --------------------
Inventories are summarized as follows (in thousands):
September 30, December 31,
1996 1995
------------ ------------
Raw materials and supplies $11,726 $11,878
Work-in-process 10,350 11,222
Finished goods 29,723 28,955
Inventories applicable to
government contracts 15,721 15,136
------- -------
$67,520 $67,191
======= =======
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
- --------------------
In January 1996, a subsidiary of the Company acquired certain
assets of a manufacturer of a silicone wire product line. The
cash purchase price of this product line was approximately $4.3
million.
-5-
<PAGE>
Note 5 - Litigation - TRW Inc.
- ------------------------------
As previously reported, a judgment in the Company's favor in the
amount of $138,000,000 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
$138,000,000 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
Appeals for the Ninth Circuit rejected TRW's appeal and affirmed
the $138,000,000 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
$133,144,000 to the Company on account of TRW's obligations under
the judgment. The payments represented the $138,000,000 face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%, or 13.25%
for the last several months), minus 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 $6,704,000 as that portion of a court-
ordered reimbursement of litigation fees and costs (and interest on
the reimbursement amount at the same default rate) from which TRW
had not taken an appeal.
During September 1996 the other claims between the Company and TRW
(which had been scheduled for trial later in the month) 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 the Company on September 3, 1996
in the aggregate amount of $16,601,000. Accordingly, all claims
between the parties have now been resolved, and cash payments have
been made by TRW to the Company during August and September 1996
aggregating $156,449,000.
Note 6 - Litigation - Arizona Department of Revenue
- ---------------------------------------------------
As previously reported, the Arizona Department of Revenue issued
Notices of Correction of Income Tax dated March 17, 1986 to Talley,
the Company's parent for the fiscal year ending March 31, 1983.
-6-
<PAGE>
These Notices pertain to whether subsidiaries of Talley must file
separate income tax returns in Arizona rather than allowing Talley
to file on a consolidated basis. The amount of additional Arizona
income tax alleged to be due as a result of the Notices of
Correction was approximately $400,000 plus interest. In May 1992
the Arizona Tax Court granted judgment in favor of Talley and
against the Department on all claims asserted against the company.
In October 1992 the Tax Court entered judgment in favor of Talley
awarding the company approximately $600,000 for the Arizona income
taxes Talley overpaid for its fiscal year ending March 31, 1983
together with interest and attorneys' fees.
In September 1994, the Arizona Court of Appeals reversed the 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, and in April 1995, the Supreme Court of the State of
Arizona denied Talley's Petition for Review. Based on the
appellate court decision, Talley, in 1995, paid approximately
$1,300,000 in taxes and interest for the period ending March 31,
1983. On October 15, 1996 Talley made a payment of $4,842,000 to
resolve the related dispute for the periods ending December 31,
1984 and 1985. Legislation adopted in 1994 in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986.
Note 7 - Segment Operations
- ---------------------------
The settlement of litigation regarding royalties from the Airbag
Royalty Segment, and the cessation of such royalties along with the
significant increase during the last several years in the volume
and profitability of the Company's stainless steel operations has
prompted a reclassification of the Company's segments of
operations. The steel operations have been segregated into a
separate Stainless Steel Products Segment and removed from the
Industrial Products Segment. The Specialty Products Segment has
been combined with those operations remaining in the Industrial
Products Segment. All prior periods have been restated to reflect
the reclassifications.
-7-
<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. (As described
in the notes to the financial statements, certain reclassifications
have been made in the Company's segments of operations).
A summary of period-to-period changes in the consolidated statement
of earnings is shown below (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
REVENUES: -------- -------- -------- --------
Government Products
and Services $ 36,906 $ 30,494 $105,877 $ 99,097
Airbag Royalties 108,520 6,401 121,913 19,977
Stainless Steel Products 34,418 36,148 105,954 107,602
Industrial Products 20,077 17,528 53,777 51,830
-------- -------- -------- --------
$199,921 $ 90,571 $387,521 $278,506
======== ======== ======== ========
OPERATING INCOME:
Government Products
and Services $ (1,421) $ 1,901 $ 3,372 $ 6,577
Airbag Royalties 135,367 6,401 148,760 19,977
Stainless Steel Products (509) 4,802 9,351 16,157
Industrial Products (7,082) 1,426 (5,996) 4,135
Total operating income 126,355 14,530 155,487 46,846
Corporate expense (4,889) (3,497) (16,202) (11,625)
Non-segment interest
income 973 51 1,014 143
Interest expense (3,912) (4,227) (12,166) (13,090)
-------- -------- -------- --------
Earnings before
income taxes $118,527 $ 6,857 $128,133 $ 22,274
======== ======== ======== ========
Revenue for the nine-month period ended September 30, 1996 of
$387.5 million were $109.0 million higher than the $278.5 million
recorded in the prior year. Earnings before income taxes and
extraordinary gain for the nine months ended September 30, 1996
were $128.1 million compared with earnings of $22.3 million for the
-8-
<PAGE>
nine-month period of the previous year. Included in the results
for the three months and nine months ended September 30, 1996 are
payments received from TRW Inc. of $156.5 million, which represent
a settlement for airbag royalties and certain other matters,
reimbursement of litigation costs and interest from the date of the
award until paid.
Net earnings for the nine months ended September 30, 1996 were
$71.8 million, while net earnings for the comparable period in 1995
were $12.9 million.
The end of the long term dispute with TRW during the third quarter
of 1996 has presented the Company an opportunity to improve its
capital structure and take advantage of potential growth
opportunities through consolidation and/or disposition of existing
businesses. The streamlining efforts related to the Company's
businesses through consolidation or disposition resulted in various
writedowns and reserves, primarily associated with goodwill and
inventories.
The gross profit percentage, excluding airbag royalties of 18.1%
for the nine months ended September 30, 1996 was down from the
gross profit percentage of 23.4% for the comparable period in 1995.
The decrease from the prior year is primarily due to the non-
recurring inventory and goodwill writedowns and is also due to
lower margins on sales in the Stainless Steel Products Segment, as
prices moderated following the substantial increases experienced in
the prior year.
Government Products and Services. Revenue for the nine months
ended September 30, 1996 increased by $6.8 million, while operating
income decreased $3.2 million, when compared with the same period
in the prior year. Non-recurring charges in the third quarter
regarding defense contract costs and claims along with increased
levels of research and development were the major factors for the
decrease.
Airbag Royalties. Revenue from airbag royalties for the nine-
month period of 1996 is $121.9 million, compared to revenue of
$20.0 million recorded in the comparable nine months of 1995.
Revenue in the current year includes a portion of the payments
received from TRW Inc. in the third quarter of 1996 to settle the
airbag royalties litigation. Remaining portions of the $156.5
million TRW payments represent reimbursement of litigation costs
and interest from the date of the award until paid, and the
settlement of certain other claims between the Company and TRW.
(Also see "Other Matters - Litigation" as a separate caption within
Management's Discussion and Analysis of Financial Condition and
Results of Operations).
-9-
<PAGE>
Stainless Steel Products. In the nine-month period ended
September 30, 1996, Stainless Steel Products sales decreased $1.6
million as selling prices decreased, while operating income
decreased $6.8 million, when compared with the same period in 1995.
The decrease in operating income is due primarily to a third
quarter writedown in goodwill and to lower selling prices. Lower
selling prices and consequently lower margins for stainless steel
are a result of competitive pressures from domestic and foreign
suppliers.
Industrial Products. During the nine months of 1996, sales for
the Industrial Products segment increased $2.0 million, from $51.8
million to $53.8 million, while operating income decreased $10.1
million when compared to the same period in 1995. The decrease in
operating income is primarily a result of third quarter inventory
and goodwill writedowns and large shipments made late in 1995,
which reduced 1996 volume. Also contributing to the decrease is a
general slow-down in the apparel industry, which decreased button
sales, and the effects of the prolonged winter on insecticide
sales.
Other. Interest expense for the nine months ended September 30,
1996 decreased to $12.2 million, from $13.1 million in the
comparable period in 1995. The decrease is primarily due to the
reduction of the revolving credit facility in the third quarter
1996. "Other income (expense), net" in the Company's Statement of
Earnings includes interest income from the airbag royalty award
discussed above, interest income on a higher balance of unused
funds, amortization of intangibles and certain other non-operating
expenses. The corporate overhead expenses increased in the nine-
month period of 1996 from $11.6 million to $16.2 million when
compared with the comparable period in 1995. Corporate overhead
increases are due to an increase in employee benefit costs. The
income tax provision for the nine months ended September 30, 1996
was increased to $56.3 million from $9.3 million in the comparable
period in 1995 due primarily to the airbag royalties litigation
settlement payments received from TRW Inc.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At September 30, 1996, the Company had $142.0 million in cash and
cash equivalents and net working capital of $186.7 million. Cash
generated from operating activities for the nine months ended
September 30, 1996 was $133.2 million. Cash generated from
operations during the nine months of 1995 was $14.4 million.
The higher than normal cash generation in 1996 primarily reflects
-10-
<PAGE>
payments of $156.5 million from TRW Inc., a decrease in accounts
receivable, an increase in accounts payable and accrued expenses.
Cash used in investing activities during the nine months ended
September 30, 1996 was $8.9 million, consisting primarily of
purchase of assets of a product line and capital expenditures.
Cash generated from financing activities of $14.2 million reflects
the issuance of preferred stock, net of dividends of excess airbag
royalties to the Company's parent, and a reduction in the Company's
revolving debt facility during the third quarter of 1996.
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 September 30, 1996 availability under the total facility was
approximately $45.4 million, of which approximately $12.0 million
was borrowed. The Company anticipates that the present capital
structure will support the long-term growth of the Company's core
businesses.
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 will be used to redeem
the Senior Discount Debentures issued by Talley and an annual
distribution of up to $1.3 million for a period of five years to
fund certain carrying and other costs associated with Talley's
real estate operations. In September 1996, the Company distributed
to Talley certain airbag royalties which were used by Talley to
make the offer to repurchase its Senior Discount Debentures
described below. As no further airbag royalties will be received
by the Company, the Company will make a final calculation in early
1997 of the payments due to Talley with respect to airbag royalties
and disburse the undistributed balance to Talley at that time.
-11-
<PAGE>
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.
On June 11, 1996, Talley (the Company's parent) repurchased
$17,330,000 aggregate principal amount of the 12.25% Senior
Discount Debentures. The purchase price of the debentures was
$14,381,000 or $829.83 per $1,000 principal amount of the
debentures.
On September 19, 1996, an offer was made by Talley to repurchase
all of the outstanding 12.25% Senior Discount Debentures. At the
time of the offer, $109,225,000 aggregate principal amount of the
debentures were outstanding with an accreted value at the expected
payment date of approximately $86,283,000. The aggregate principal
amount of the debentures tendered were $101,947,000, with an
accreted value of $80,533,000. On October 21, 1996 Talley paid
$87,425,000, including accrued interest and prepayment premiums, to
repurchase the tendered debentures. In the fourth quarter, Talley
will recognize approximately $10,000,000 in extraordinary losses in
connection with the debt extinguishment, which represents a
prepayment premium and deferred debt cost on the extinguished debt.
The Company believes that the combination of cash flow from
operations, funds available under the credit facility described
above (or any successor facility) and cash received in connection
with the airbag royalty litigation settlement (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
- -------------
Litigation - TRW Inc.
- ---------------------
As previously reported, a judgment in the Company's favor in the
amount of $138,000,000 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.
-12-
<PAGE>
The $138,000,000 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
Appeals for the Ninth Circuit rejected TRW's appeal and affirmed
the $138,000,000 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
$133,144,000 to the Company on account of TRW's obligations under
the judgment. The payments represented the $138,000,000 face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%, or 13.25%
for the last several months), minus 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 $6,704,000 as that portion of a court-
ordered reimbursement of litigation fees and costs (and interest on
the reimbursement amount at the same default rate) from which TRW
had not taken an appeal.
During September 1996 the other claims between the Company and TRW
(which had been scheduled for trial later in the month) 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 the Company on September 3, 1996
in the aggregate amount of $16,601,000. Accordingly, all claims
between the parties have now been resolved, and cash payments have
been made by TRW to the Company during August and September 1996
aggregating $156,449,000.
Litigation - Arizona Department of Revenue
- ------------------------------------------
As previously reported, the Arizona Department of Revenue issued
Notices of Correction of Income Tax dated March 17, 1986 to Talley
Industries, Inc. (Talley) the Company's parent, for the fiscal year
ending March 31, 1983. These Notices pertain to whether
subsidiaries of Talley must file separate income tax returns in
Arizona rather than allowing Talley to file on a consolidated
basis. The amount of additional Arizona income tax alleged to be
-13-
<PAGE>
due as a result of the Notices of Correction was approximately
$400,000 plus interest. In May 1992 the Arizona Tax Court granted
judgment in favor of Talley and against the Department on all
claims asserted against the company.
In October 1992 the Tax Court entered judgment in favor of Talley
awarding the company approximately $600,000 for the Arizona income
taxes Talley overpaid for its fiscal year ending March 31, 1983
together with interest and attorneys' fees.
In September 1994, the Arizona Court of Appeals reversed the 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, and in April 1995, the Supreme Court of the State of
Arizona denied Talley's Petition for Review. Based on the
appellate court decision, Talley, in 1995, paid approximately
$1,300,000 in taxes and interest for the period ending March 31,
1983. On October 15, 1996 Talley made a payment of $4,842,000 to
resolve the related dispute for the periods ending December 31,
1984 and 1985. Legislation adopted in 1994 in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
TRW Inc. As previously reported, a judgment in the Company's
favor in the amount of $138,000,000 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 $138,000,000 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 Appeals for the Ninth Circuit rejected TRW's appeal
and affirmed the $138,000,000 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
$133,144,000 to the Company on account of TRW's obligations under
the judgment. The payments represented the $138,000,000 face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%, or 13.25%
for the last several months), minus 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 $6,704,000 as that portion of a court-
ordered reimbursement of litigation fees and costs (and interest on
the reimbursement amount at the same default rate) from which TRW
had not taken an appeal.
During September 1996 the other claims between the Company and TRW
(which had been scheduled for trial later in the month) 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 the Company on September 3, 1996
in the aggregate amount of $16,601,000. Accordingly, all claims
between the parties have now been resolved, and cash payments have
been made by TRW to the Company during August and September 1996
aggregating $156,449,000.
-15-
<PAGE>
Litigation - Arizona Department of Revenue. As previously
reported, the Arizona Department of Revenue issued Notices of
Correction of Income Tax dated March 17, 1986 to Talley Industries,
Inc. (Talley) the Company's parent, for the fiscal year ending
March 31, 1983. These Notices pertain to whether subsidiaries of
Talley must file separate income tax returns in Arizona rather than
allowing Talley to file on a consolidated basis. The amount of
additional Arizona income tax alleged to be due as a result of the
Notices of Correction was approximately $400,000 plus interest. In
May 1992 the Arizona Tax Court granted judgment in favor of Talley
and against the Department on all claims asserted against the
company.
In October 1992 the Tax Court entered judgment in favor of Talley
awarding the company approximately $600,000 for the Arizona income
taxes Talley overpaid for its fiscal year ending March 31, 1983
together with interest and attorneys' fees.
In September 1994, the Arizona Court of Appeals reversed the 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, and in April 1995, the Supreme Court of the State of
Arizona denied Talley's Petition for Review. Based on the
appellate court decision, Talley, in 1995, paid approximately
$1,300,000 in taxes and interest for the period ending March 31,
1983. On October 15, 1996 Talley made a payment of $4,842,000 to
resolve the related dispute for the periods ending December 31,
1984 and 1985. Legislation adopted in 1994 in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
27* Financial Data Schedule for Talley Manufacturing and
Technology, Inc., September 30, 1996.
4.1* Certificate of Increase of Series A Preferred Stock of
Talley Manufacturing and Technology, Inc. dated
September 12, 1996.
* Documents marked with an asterisk are filed with this report.
-16-
<PAGE>
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months
ended September 30, 1996.
"Safe harbor" statement under the Private Securities Litigation
Reform Act of 1995 and any applicable state laws:
Certain of the statements in the Management's Discussion and
Analysis and elsewhere in this report are not historical facts
and are "forward looking statements" that involve risks and
uncertainties, including, but not limited to, future economic
conditions, the impact of competitive products, services and
pricing, research and development, commercialization and
technological difficulties, government contracting risks, the
availability and cost of financing, environmental matters, the
effect of the Company's accounting policies, the course and
results of litigation affecting the Company and a number of
other risks described in this report.
-17-
<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 12, 1996 By Kenneth May
---------------------- -------------------------------
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: November 12, 1996 By Mark S. Dickerson
---------------------- -------------------------------
Mark S. Dickerson
Vice President
and Secretary
-18-
EXHIBIT 4.1
CERTIFICATE OF INCREASE
OF
SERIES A PREFERRED STOCK
OF
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Pursuant to Section 151(g) of the
Delaware General Corporation Law)
Talley Manufacturing and Technology, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware
(the "Corporation") does hereby certify:
FIRST: In a Certificate of Designation filed with
the Secretary of State of the State of Delaware on
October 18, 1993, pursuant to Section 151 of the General
Corporation Law of the State of Delaware, the Corporation
was authorized to issue twenty (20) shares of Series A
Preferred Stock, as a series of the Corporation's
authorized Preferred Stock, par value $1.00 per share;
SECOND: The board of directors of the Corporation
by resolution adopted as of September 12, 1996, duly
authorized and directed that the number of authorized
shares of the Corporation's Series A Preferred Stock be
increased to one hundred (100) shares.
In witness whereof, the Corporation has caused this Certificate to be
signed by its duly authorized officer as of the 12th day of September, 1996.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
By: Mark S. Dickerson
---------------------------------
Name: Mark S. Dickerson
Title: Secretary
<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-31-1996<F1>
<PERIOD-END> SEP-30-1996
<CASH> 141,981,000
<SECURITIES> 0
<RECEIVABLES> 52,165,000
<ALLOWANCES> 1,334,000
<INVENTORY> 67,520,000
<CURRENT-ASSETS> 270,032,000
<PP&E> 146,091,000
<DEPRECIATION> 96,999,000
<TOTAL-ASSETS> 374,780,000
<CURRENT-LIABILITIES> 83,345,000
<BONDS> 123,955,000
0
0
<COMMON> 1,000
<OTHER-SE> 152,421,000
<TOTAL-LIABILITY-AND-EQUITY> 374,780,000
<SALES> 214,908,000
<TOTAL-REVENUES> 387,521,000
<CGS> 173,481,000
<TOTAL-COSTS> 217,517,000
<OTHER-EXPENSES> 46,978,000
<LOSS-PROVISION> 262,000
<INTEREST-EXPENSE> 12,166,000
<INCOME-PRETAX> 128,133,000
<INCOME-TAX> 56,284,000
<INCOME-CONTINUING> 71,849,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,849,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1> Total revenues include amounts from airbag royalties litigation settlement.
</FN>
</TABLE>
