<PAGE>
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. 1-4778
TALLEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0180396
(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 10,047,181
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
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 Stockholders'
Equity - Nine Months Ended September 30, 1994
and 1993 4
Notes to Consolidated Financial Statements 5-6
Management's Discussion and Analysis 7-12
Part II Other Information
Legal Proceedings 13
Defaults Upon Senior Securities 14
Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(thousands)
September 30, December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 8,250 $ 12,194
Accounts receivable, net of allowance
for doubtful accounts of $1,212,000
at September 30, 1994 and $1,091,000
at December 31, 1993 48,028 60,579
Inventories, net 66,139 64,808
Deferred income taxes 1,000 900
Prepaid expenses 10,458 9,664
Current assets 133,875 148,145
Realty assets 111,928 117,869
Long-term receivables 13,592 9,900
Property, plant and equipment, net 46,854 49,937
Intangibles 46,864 44,928
Other assets 10,342 11,659
Total assets $363,455 $382,438
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,545 $ 2,176
Current maturities of realty debt 13,899 16,795
Accounts payable 25,154 23,621
Accrued expenses 41,338 41,775
U.S. & foreign income taxes 540 -
Current liabilities 84,476 84,367
Long-term debt 216,615 231,669
Long-term realty debt 11,459 11,446
Deferred income taxes 6,819 12,320
Other liabilities 6,103 6,094
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 71 71
Series B 1,548 1,548
Series D 120 120
Common stock, $1 par value,
authorized 20,000,000 shares 10,047 10,047
Capital in excess of par value 86,026 86,026
Foreign currency translation adjustment (440) (370)
Accumulated deficit (59,250) (60,429)
38,122 37,013
Less 9,800 shares at September 30,
1994 and 33,000 shares at December
31, 1993 of Common stock in
treasury, at cost (139) (471)
Total stockholders' equity 37,983 36,542
Total liabilities and
stockholders' equity $363,455 $382,438
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(thousands, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
Sales $62,606 $66,018 $180,642 $193,380
Services 14,459 16,284 45,383 47,025
Royalties 4,284 2,098 13,135 6,787
81,349 84,400 239,160 247,192
Cost of sales 44,980 48,365 133,922 143,760
Cost of services 12,677 13,959 39,610 40,557
Selling, general,
and administrative
expenses 15,004 16,487 45,957 44,615
72,661 78,811 219,489 228,932
Earnings from
operations 8,688 5,589 19,671 18,260
Other expenses, net (594) (845) (1,947) (2,015)
Interest expense (6,950) (5,928) (21,080) (18,117)
Earnings (loss) before
income taxes 1,144 (1,184) (3,356) (1,872)
Income tax benefit
(provision) (181) (501) 4,535 (1,408)
Net earnings (loss) $ 963 $(1,685) $ 1,179 $ (3,280)
Earnings (loss) applicable
to common stock shares
(after deduction of
preferred stock
dividends) $ 421 $(2,227) $ (447) $ (4,906)
Net earnings (loss) per
share of common stock
and common stock
equivalents $ .04 $(.23) $ (.04) $(.51)
Weighted average shares
outstanding 10,033 9,659 10,025 9,642
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(thousands)
Nine Months Ended
September 30,
1994 1993
Cash and cash equivalents at beginning
of year $ 12,194 $10,168
Cash flows from operating activities:
Net earnings (loss) 1,179 (3,280)
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (5,601) (353)
Depreciation and amortization 7,329 7,545
Original issue discount amortization on
12.25% debentures 6,636 -
Gain on sale of property and equipment (127) (174)
Other 671 2,067
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase) decrease in accounts receivable 10,950 (6,428)
(Increase) decrease in inventories (163) 4,649
Increase in prepaids (794) (2,211)
Decrease in realty assets 5,941 5,001
Increase (decrease) in accounts payable 1,533 (1,347)
Increase in accrued expenses 263 8,491
Increase in income tax payable 540 -
Increase (decrease) in other liabilities (601) 1,020
Other, net (566) (1,351)
Cash flows from operating activities 27,190 13,629
Cash flows from investing activities:
Purchase of assets of acquired business (5,425) -
Proceeds from sale of subsidiary - 2,756
Purchases of property and equipment (2,532) (3,407)
Reduction of long-term receivables 269 1,815
Increase in long-term receivables (505) (767)
Proceeds from sale of property and equipment 202 334
Cash flows from investing activities (7,991) 731
Cash flows from financing activities:
Repayment of long-term debt (294,225) (93,176)
Repayment of realty debt (2,129) (5,243)
Proceeds from new long-term debt 273,204 81,732
Proceeds from new realty debt 7 -
Cash flows from financing activities (23,143) (16,687)
Net decrease in cash and cash equivalents (3,944) (2,327)
Total cash and cash equivalents at
September 30, $ 8,250 $ 7,841
The accompanying notes are an integral part of the financial statements.
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<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1994 and 1993
(thousands)
Capital in
Preferred Stock Common Excess of Treasury Retained
Series A Series B Series D Stock Par Value Stock Earnings
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $ 71 $1,548 $ 120 $ 9,519 $83,537 $ -0- $(53,931)
Net loss (3,280)
Debt of ESOP guaranteed 251
Stock grants 140 403
BALANCE AT SEPTEMBER 30, 1993 $ 71 $1,548 $ 120 $ 9,659 $84,191 $ -0- $(57,211)
BALANCE AT DECEMBER 31, 1993 $ 71 $1,548 $ 120 $10,047 $86,026 $ (471) $(60,429)
Net earnings 1,179
Treasury stock issued 332
BALANCE AT SEPTEMBER 30, 1994 $ 71 $1,548 $ 120 $10,047 $86,026 $ (139) $(59,250)
</TABLE>
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
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, 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 stockholders' 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.
For additional information regarding significant accounting
policies, and accounting matters applicable to the Company,
reference should be made to the Company's Annual Report to
Shareholders for the year ended December 31, 1993.
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
Common stock equivalents for the nine months ended September 30,
1994 and 1993 were anti-dilutive and excluded from the
computation of earnings per share. Dividends payable on
anti-dilutive preferred stock were deducted from net earnings
before calculating the earnings per share amount for the quarter.
Earnings per common share assuming full dilution are not reported
in either of the periods because the impact would be minimal.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Sale of Subsidiary
In July 1993 the Company completed the sale of the net assets of
its precision potentiometer business for a cash purchase price of
$2.8 million, which approximated the book value of the net assets
sold. Sales and pretax earnings of the business sold for the six
months ended June 30, 1993 were $2.3 million and $.4 million,
respectively.
Note 5 - 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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<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the Company.
A summary of period-to-period changes in the consolidated
statement of earnings is shown below (in thousands):
Three Months Nine Months
Ended Ended
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
Realty 1,306 2,646 5,918 5,796
$81,349 $84,400 $239,160 $247,192
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
Realty (1,123) (1,015) (2,990) (2,401)
Total operating income 10,728 9,767 28,728 26,807
Corporate expense (2,731) (5,110) (11,238) (10,839)
Non-segment interest
income 97 87 234 277
Interest expense (6,950) (5,928) (21,080) (18,117)
Earnings (loss) before
income taxes $ 1,144 $(1,184) $ (3,356) $ (1,872)
Revenues for the nine-month period ended September 30, 1994
decreased $8 million from $247.2 million to $239.2 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 loss for the nine months ended
September 30, 1994 was $3.4 million compared with $1.9 million
pretax loss in the first nine months of the previous year. The
loss in the first nine months of 1994 includes a $4.5 million
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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 $1.2 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.
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 $6.1 million and $.4
million lower, respectively. Losses in the Realty segment
increased by $.6 million for the first nine months of 1994, when
compared with the prior year, as a result of increased property
maintenance and development costs.
The gross profit percentage, excluding airbag and other
royalties, of 23.2%, for the nine months ended September 30, 1994
was down slightly from the gross profit percentage of 23.7% for
the comparable period in 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.
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<PAGE>
Specialty Products. During the first nine months of 1994,
sales for the Specialty Products segment decreased $.1 million,
from $21.9 million to $21.8 million, while earnings also
decreased slightly 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.
Realty. Sales of real estate in the first nine months of 1994
were $5.9 million compared with $5.8 million for the comparable
period in 1993. The operating loss increased from $2.4 million
in the first nine months of 1993 to $3 million in the first nine
months of 1994, due to increased property maintenance and
development costs. On March 28, 1994, a fully consolidated real
estate joint venture, in which the Company has a $29.2 million
interest, instituted Chapter 11 proceedings in the United States
Bankruptcy Court for the District of Arizona. At the same time
the joint venture filed a proposed plan of reorganization that
would provide for the conversion of substantially all outstanding
debt of the joint venture into equity in a new company to be
formed to continue the project. A subsidiary of the Company
would own approximately two-thirds of the equity in the new
company, if the plan is accepted.
Other. Interest expense in the first nine months of 1994
increased to $21.1 million, from $18.1 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 $4.5 million compared to a tax provision
of $1.4 million in the comparable period in 1993. The tax
benefit in 1994 is 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, Talley had $8.3 million in cash and cash
equivalents and net working capital of $49.4 million. Cash flow
from operating activities for the nine months ended September 30,
1994 was $27.2 million, generally the result of the Company's
successful efforts toward collection of trade receivables and the
sale of realty assets, 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 $13.6 million. Cash used in investing
activities during the nine months ended September 30, 1994 was $8
million, consisting of purchase of the assets of the
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Ball and Socket Manufacturing Company for $5.4 million and the
balance was for capital expenditures. Cash used in financing
activities of $23.1 million reflects a reduction in debt from
cash generated from operations and from cash available at the
beginning of the year.
In October 1993, 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 the Company to
yield 12.25% and $115 million of Senior Notes due 2003, with an
interest rate of 10.75% issued by Talley Manufacturing and
Technology, Inc. ("Talley Manufacturing"). In connection with
this refinancing, Talley Manufacturing obtained a secured credit
facility with institutional lenders, of which approximately $48
million was initially borrowed.
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 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 offering and the initial borrowings under
the secured credit facility were used to repay substantially all
of the Company's previously outstanding non-real estate debt.
The Company anticipates that the new capital structure will
support the long-term growth of Talley's core businesses and
permit the implementation of its strategy to use proceeds
received from the increasing airbag royalties and from the
orderly sale of the assets of its real estate operations to
reduce its total indebtedness.
As a holding company with no significant operating or income-
producing assets beyond its stock interests in Talley
Manufacturing and the subsidiaries holding its real estate
operations, Talley will be dependent primarily upon distributions
from those subsidiaries in order to meet its debt service and
other obligations. Talley will be entitled to receive certain
distributions from Talley Manufacturing (absent certain defaults
under Talley Manufacturing indebtedness) for a period of five
years, to be used to fund certain carrying and other costs
associated with the orderly disposition of Talley's real estate
assets. Additional funding is also available for the real estate
costs from the anticipated redemption of preferred stock of
Talley Manufacturing purchased for an agreed upon amount by
Talley in connection with the October 1993 refinancing and from
a portion of the net cash proceeds from the sale of real estate
assets. Talley will be required to use certain funds received
from Talley Manufacturing and certain funds from real estate
sales to make offers to redeem certain indebtedness of Talley.
Because the cash available to Talley is required to be used for
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these specific purposes, and because certain debt covenants limit
Talley's ability to incur additional indebtedness, Talley will be
dependent upon the payment of dividends from Talley Manufacturing
(which payments will generally be limited by debt covenants of
Talley Manufacturing) and to future sales of equity securities as
its primary sources of discretionary liquidity. To the extent
such sources do not provide adequate funds, Talley may be unable
to fund expected costs and improvements associated with its real
estate holdings or to make cash interest payments on its
outstanding indebtedness when required. Nevertheless, and
particularly in light of the absence of requirements for Talley
to make cash payments of interest on outstanding indebtedness
until April 15, 1999, the Company believes that Talley will have
funds available in sufficient amounts, and at the required times,
to permit Talley to meet its obligations.
Other Matters
The Financial Accounting Standards Board has issued a Proposed
Statement of Financial Accounting Standards titled "Accounting
for the Impairment of Long-Lived Assets" (the "Proposed
Statement") which, if adopted in its present form, could have a
material impact on the results of operations and financial
position of the Company in the year of adoption.
The application of this Proposed Statement would require the
Company to carry the inventories of land and land under
development owned by its subsidiaries holding its real estate
operations at the lower of cost or fair value less cost to sell.
The Company, consistent with existing generally accepted
accounting principles, currently states the majority of its land
and land under development at the lower of cost or net realizable
value. The Company has not quantified the effect of the Proposed
Statement.
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, 1994 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.
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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. 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.
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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.
On March 28, 1994, a fully consolidated real estate joint
venture, in which the Company has a $29.2 million interest,
instituted Chapter 11 proceedings in the United States Bankruptcy
Court for the District of Arizona. At the same time the joint
venture filed a proposed plan of reorganization that would
provide for the conversion of substantially all outstanding debt
of the joint venture into equity in a new company to be formed to
continue the project. A subsidiary of the Company, if the plan
is accepted, would own approximately two-thirds of the equity in
the new company.
-13-
<PAGE>
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. 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 3. Defaults Upon Senior Securities
(b) The Company has not made any dividend payments on its
preferred and common shares since the first quarter of 1991,
and the ability to pay dividends in the future is limited
by the provisions of the Company's debt agreements.
Dividends on the shares of Series A, Series B and Series D
Preferred stock are cumulative and must be paid in the event
of liquidation and before any distribution to holders of
Common stock. These dividends are in arrears.
The Company's preferred stockholders have certain voting
rights with respect to the election of two directors which
were triggered by the dividend arrearages. The preferred
stock does not provide any other voting rights or remedies
to the preferred stockholders in the event of a dividend
arrearage. Dividends on Series D Preferred Stock currently
accrue at $4.50 per share annually. As of February 28,
1998, dividends of $15.75 per share are to be paid annually
to holders of any Series D Preferred Stock still outstanding
at that time. Annual dividends of $1.10 per share, and
$1.00 per share, accrue with respect to outstanding shares
of Series A Preferred Stock and Series B Preferred Stock,
respectively. Cumulative dividends on preferred shares that
have not been declared or paid are approximately: Series
A - $273,000 ($3.85 per share), Series B - $5,419,000
($3.50 per share) and Series D - $1,895,000 ($15.75 per
share).
-14-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11* Computation of Earnings per Common and Common
Equivalent Share.
27* Financial Data Schedule for Talley Industries,
Inc. - September 30, 1994.
* Documents marked with an asterisk are filed with this
report.
(b) Reports on Form 8-K:
On July 18, 1994 the Company filed Form 8-K/A, an
amendment to a Current Report on Form 8-K dated November
20, 1992 regarding an amended Exhibit attached thereto.
-15-
<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 INDUSTRIES, 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
-16-
<PAGE>
<PAGE>
EXHIBIT 11
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Share
(thousands, except per share amounts)
1 9 9 4 1 9 9 3
Fully Fully
Primary Diluted Primary Diluted
Three months ended
September 30:
Net earnings (loss) $ 963 $ 963 $(1,685) $(1,685)
Preferred stock dividend (542) (542) (542) (542)
Net income (loss) $ 421 $ 421 $(2,227) $(2,227)
Weighted average common
shares outstanding 10,033 10,033 9,659 9,659
Net earnings (loss) per
share $ .04 $ .04 $(.23) $(.23)
Nine months ended
September 30:
Net earnings (loss) $ 1,179 $ 1,179 $(3,280) $(3,280)
Preferred stock dividend (1,626) (1,626) (1,626) (1,626)
Net loss $ (447) $ (447) $(4,906) $(4,906)
Weighted average common
shares outstanding 10,025 10,025 9,642 9,642
Net loss per share $ (.04) $ (.04) $(.51) $(.51)
<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> 8,250,000
<SECURITIES> 0
<RECEIVABLES> 48,028,000
<ALLOWANCES> 1,212,000
<INVENTORY> 66,139,000
<CURRENT-ASSETS> 133,875,000
<PP&E> 133,955,000
<DEPRECIATION> 87,101,000
<TOTAL-ASSETS> 363,455,000
<CURRENT-LIABILITIES> 84,476,000
<BONDS> 228,074,000
<COMMON> 10,047,000
0
1,739,000
<OTHER-SE> 26,197,000
<TOTAL-LIABILITY-AND-EQUITY> 363,455,000
<SALES> 180,642,000
<TOTAL-REVENUES> 239,160,000
<CGS> 133,922,000
<TOTAL-COSTS> 173,532,000
<OTHER-EXPENSES> 47,904,000
<LOSS-PROVISION> 349,000
<INTEREST-EXPENSE> 21,080,000
<INCOME-PRETAX> (3,356,000)
<INCOME-TAX> 4,535,000
<INCOME-CONTINUING> 1,179,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,179,000
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<PAGE>
</TABLE>
