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, 1995
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, 1995
$1.00 par value 10,050,904
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994 1
Consolidated Statement of Earnings -
Three Months and Nine Months Ended
September 30, 1995 and 1994 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 3
Consolidated Statement of Changes in Stockholders'
Equity - Nine Months Ended September 30, 1995
and 1994 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis 8-14
Part II Other Information
Legal Proceedings 15-17
Defaults Upon Senior Securities 17
Exhibits and Reports on Form 8-K 17
Signatures 18
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PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(thousands)
September 30, December 31,
1995 1994
ASSETS
Cash and cash equivalents $ 8,901 $ 13,002
Accounts receivable, net of allowance
for doubtful accounts of $1,268,000
at September 30, 1995 and $994,000
at December 31, 1994 59,298 55,257
Inventories 77,983 66,069
Deferred income taxes 799 800
Prepaid expenses 9,158 7,895
Current assets 156,139 143,023
Realty assets 107,180 110,899
Long-term receivables 10,900 13,277
Property, plant and equipment, net 46,431 46,353
Intangibles 44,187 46,288
Other assets 8,661 10,063
Total assets $373,498 $369,903
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,788 $ 3,549
Current maturities of realty debt 2,477 19,575
Accounts payable 31,318 25,974
Accrued expenses 37,864 39,696
U.S. & foreign income taxes 414 -
Current liabilities 75,861 88,794
Long-term debt 216,814 220,447
Long-term realty debt 12,395 5,564
Deferred income taxes 6,661 6,655
Other liabilities 6,063 8,277
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 67 71
Series B 1,548 1,548
Series D 120 120
Common stock, $1 par value,
authorized 20,000,000 shares 10,051 10,047
Capital in excess of par value 86,026 86,026
Foreign currency translation adjustment (411) (723)
Accumulated deficit (41,697) (56,923)
Total stockholders' equity 55,704 40,166
Total liabilities and
stockholders' equity $373,498 $369,903
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(thousands, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
1995 1994 1995 1994
Sales $ 69,484 $62,606 $214,751 $180,642
Services 14,706 14,459 44,241 45,383
Royalties 6,658 4,284 20,871 13,135
90,848 81,349 279,863 239,160
Cost of sales 53,188 44,980 160,376 133,922
Cost of services 12,938 12,677 38,724 39,610
Selling, general,
and administrative expenses 13,110 15,004 45,065 45,957
Provision for reserve on
realty assets - - 7,000 -
79,236 72,661 251,165 219,489
Earnings from operations 11,612 8,688 28,698 19,671
Other income (expense), net (1,404) (594) (3,121) (1,947)
10,208 8,094 25,577 17,724
Interest expense 7,146 6,950 21,549 21,080
Earnings (loss) before
income taxes and
extraordinary gain 3,062 1,144 4,028 (3,356)
Income tax provision
(benefit) 783 181 2,849 (4,535)
Earnings before extraordinary
gain 2,279 963 1,179 1,179
Extraordinary gain 6,244 - 14,047 -
Net earnings $ 8,523 $ 963 $ 15,226 $ 1,179
Earnings (loss) applicable
to common stock shares
(after deduction of
preferred stock dividends) $ 7,983 $ 421 $ 13,604 $ (447)
Net earnings (loss) per
share of common stock and
common stock equivalents:
Earnings (loss) before
extraordinary gain $ .16 $ .04 $ .09 $ (.04)
Extraordinary gain .45 - 1.00 -
Net earnings (loss) $ .61 $ .04 $ 1.09 $ (.04)
Weighted average shares
outstanding 13,997 10,033 14,003 10,025
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,
1995 1994
Cash and cash equivalents at beginning
of year $ 13,002 $ 12,194
Cash flows from operating activities:
Net earnings 15,226 1,179
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes 7 (5,601)
Depreciation and amortization 6,570 7,329
Original issue discount amortization on
debentures 7,499 6,636
Gain on sale of property and equipment (123) (127)
Extraordinary gain (14,047) -
Provision reserve for realty assets 7,000 -
Other (900) 671
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase) decrease in accounts receivable (3,863) 10,950
Increase in inventories (11,816) (163)
Increase in prepaid expenses (1,482) (794)
Decrease in realty assets 4,013 5,941
Increase in accounts payable 5,344 1,533
Increase in accrued expenses 4,485 263
Increase (decrease) in income tax payable (196) 540
Decrease in other liabilities (1,177) (601)
Other, net (177) (566)
Cash flows from operating activities 16,363 27,190
Cash flows from investing activities:
Purchase of assets of acquired business - (5,425)
Purchases of property and equipment (5,079) (2,532)
Reduction of long-term receivables 1,580 269
Increase in long-term receivables (92) (505)
Proceeds from sale of property and equipment 797 202
Cash flows from investing activities (2,794) (7,991)
Cash flows from financing activities:
Repayment of long-term debt (364,170) (294,225)
Repayment of realty debt (6,147) (2,129)
Proceeds from new long-term debt 352,647 273,204
Proceeds from new realty debt - 7
Cash flows from financing activities (17,670) (23,143)
Net decrease in cash and cash equivalents (4,101) (3,944)
Total cash and cash equivalents at September 30 $ 8,901 $ 8,250
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, 1995 and 1994
(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, 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)
BALANCE AT DECEMBER 31, 1994 $ 71 $1,548 $ 120 $10,047 $86,026 $ - $(56,923)
Net earnings 15,226
Conversion to Common Stock (4) 4
BALANCE AT SEPTEMBER 30, 1995 $ 67 $1,548 $ 120 $10,051 $86,026 $ - $(41,697)
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, 1995
and December 31, 1994 and the results of operations for the
three-month and nine-month periods ended September 30, 1995 and
1994, and cash flows and changes in stockholders' equity for the
nine-month periods ended September 30, 1995 and 1994. 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, 1994.
Note 2 - Inventories
Inventories are summarized as follows (in thousands):
September 30, December 31,
1995 1994
Raw materials and supplies $16,392 $11,757
Work-in-process 14,312 11,733
Finished goods 27,140 24,616
Inventories applicable to
government contracts 20,139 17,963
$77,983 $66,069
Note 3 - Earnings Per Share
Earnings per share of Common stock and Common stock equivalents
have been computed on the basis of the average number of Common
shares outstanding during each period. The average number of
shares has been adjusted for assumed exercise at the beginning of
the period (or date of grant, if later) for any dilutive stock
options, with funds obtained thereby used to purchase shares of
the Company's Common stock at the average price during the
period, and assumed conversion of all dilutive convertible
preferred stock. Common stock equivalents that are anti-dilutive
are excluded from the computation of earnings per share and
earnings are reduced by the dividend requirements on such
equivalents.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Income Taxes
In September 1994, the Arizona Court of Appeals reversed a 1992
Arizona Tax Court ruling that entitled the Company 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 the Company's Petition for Review. Based
on the appellate court decision, the Company paid approximately
$1.3 million in taxes and interest for the period ending March
31, 1983. The Company believes the appellate court erred in its
decision; however, the Company held discussions with state
authorities in an effort to resolve the dispute for the periods
ending on December 31, 1984 and 1985. The tax and related
interest assessment in dispute is approximately $5.0 million. If
the Company is unsuccessful in reaching an agreement with the
state, it intends to vigorously litigate these tax and interest
assessments. Legislation adopted in 1994 in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986, and on December 8, 1994 the Arizona
Department of Revenue withdrew its assessments against the
Company for 1986 and subsequent years. Management believes that
the final resolution of the above matter will not result in a
material adverse impact on the results of operations or financial
position of the Company.
Note 5 - Acquisition
In July 1994, a subsidiary of the Company acquired certain assets
of a manufacturer of metal buttons. The final purchase price was
approximately $4.8 million, including cash of $2.1 million,
323,232 shares of the Company's Common stock scheduled for
issuance two years after closing, and certain liabilities assumed
and acquisition costs incurred.
Note 6 - Depreciation of Plant and Equipment
During the first quarter of 1995, the Company completed a review
of the fixed asset lives at its stainless steel production
facility. The Company determined that as a result of actions
taken to increase its preventive maintenance and programs
initiated with its suppliers to increase the quality of their
products, actual lives for certain asset categories were
generally longer than the useful lives used for depreciation
purposes. Therefore, the Company extended the estimated useful
lives of certain categories of plant and equipment at its
stainless steel production facility, effective January 1, 1995.
The effect of this change in estimated useful lives reduced
depreciation expense for the nine months ended September 30, 1995
by approximately $1.2 million, and accordingly increased earnings
before income taxes by the same amount.
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Note 7 - Extraordinary Gain
During the nine months of 1995 the Company realized a net gain of
$14,047,000 from the retirement of realty debt. The gain
represents the difference between the value of the debt recorded
on the books of the Company and the consideration given and costs
incurred to settle the obligations. Due to the Company's net
operating tax loss position, there is no tax provision in
connection with the gain.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following table summarizes the Company's consolidated revenue
and earnings (loss), by segment for the period shown (in
thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
1995 1994 1995 1994
REVENUES:
Government Products
and Services $30,494 $33,909 $ 99,097 $105,621
Airbag Royalty 6,401 4,168 19,977 11,973
Industrial Products 45,593 33,825 135,534 93,860
Specialty Products 8,083 8,141 23,898 21,788
Realty 277 1,306 1,357 5,918
$90,848 $81,349 $279,863 $239,160
OPERATING INCOME:
Government Products
and Services $ 1,901 $ 4,662 $ 6,577 $ 12,079
Airbag Royalty 6,401 4,168 19,977 11,973
Industrial Products 5,419 2,079 17,749 5,122
Specialty Products 809 942 2,543 2,544
Realty (607) (1,123) (10,123) (2,990)
Total operating income 13,923 10,728 36,723 28,728
Corporate expense (3,497) (2,731) (11,625) (11,238)
Non-segment interest
income 151 97 479 234
Interest expense (7,515) (6,950) (21,549) (21,080)
Earnings (loss) before
income taxes $ 3,062 $ 1,144 $ 4,028 $ (3,356)
Revenues for the nine-month period ended September 30, 1995
increased $40.7 million from $239.2 million to $279.9 million,
compared with the corresponding period in the prior year. The
increase is primarily the result of continued improvement in the
stainless steel market along with increased airbag royalties
received as a result of the expanding demand for automotive
airbags. These increases were partially offset by decreasing
revenue in the Government Products and Services and Realty
segments. The pretax earnings for the nine months ended
September 30, 1995 were $4 million compared with $3.4 million
pretax loss in the first nine months of the previous year. The
earnings in the first nine months of 1995 were reduced by a $7.0
million provision for reserve on realty assets resulting from the
decision to sell a property over the short term in bulk rather
than to pursue parcel sales over the next several years.
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Net earnings for the nine months ended September 30, 1995 were
$15.2 million, which reflects an extraordinary gain of $14
million, resulting from the retirement of real estate debt for
less than book value.
Earnings from both the Industrial Products segment and the Airbag
Royalty segment improved compared with the prior year. Earnings
from the Industrial Products segment increased $12.6 million from
$5.1 million to $17.7 million, while royalties in the Airbag
Royalty segment increased by $8.0 million from $12.0 million in
the first nine months of 1994 to $20.0 million for the first nine
months of 1995. Earnings from the Government Products and
Services segment for the nine months ended September 30, 1995,
when compared with the first nine months of 1994, were $5.5
million lower, while earnings from the Company's Specialty
Products segment are comparable to prior year. Losses in the
Realty segment increased by $7.1 million for the first nine
months of 1995, when compared with the prior year, mainly due to
a $7 million provision for reserve on realty assets.
The gross profit percentage, excluding airbag royalties and the
provision for reserve on realty assets, of 23.4%, for the nine
months ended September 30, 1995 was down slightly from the gross
profit percentage of 23.6% for the comparable period in 1994.
The slight decrease from the prior year is primarily due to the
change in the mix of government contracts and revenues from other
operations.
Government Products and Services. Revenue and earnings for the
nine months ended September 30, 1995 decreased $6.5 million and
$5.5 million, respectively, when compared with the same period in
the prior year. These decreases reflect the continuing reduction
in U.S. Defense spending along with the timing of completion and
shipments under certain other contracts.
Airbag Royalties. Revenue from airbag royalties increased from
$12.0 million in the first nine months of 1994 to $20.0 million
in the comparable nine months of 1995. The increased royalty is
primarily the result of increasing airbag implementation rates,
both in terms of the number of vehicles containing airbags and
the number of airbags installed in a given vehicle. (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 nine-month period ended September
30, 1995, Industrial Products sales and earnings increased $41.7
million and $12.6 million, respectively, when compared with the
comparable period in 1994. Increases in sales resulted from
increased orders and higher selling prices for stainless steel
bars and rods and increased demand for ceramic insulator
products, along with an increase in market share.
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Specialty Products. During the first nine months of 1995, sales
for the Specialty Products segment increased 9.6%, from $21.8
million to $23.9 million, while earnings are comparable to the
same period in 1994. The increase in sales when compared with
the prior year is primarily a result of the acquisition of a
manufacturer of metal buttons in July 1994.
Realty. Sales of real estate during the nine months ended
September 30, 1995 were $1.4 million compared with $5.9 million
for the comparable period in 1994. The operating loss increased
from $3 million in the first nine months of 1994 to $10.1 million
in the first nine months of 1995, due primarily to a $7 million
provision for reserve on realty assets resulting from the
decision to sell a property over the short term in bulk rather
than to pursue parcel sales over the next several years.
On March 28, 1994, a fully consolidated real estate joint
venture, in which the Company had 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 provided 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. On April 28, 1995, the Court approved the plan, subject
to the consummation of certain settlement agreements with several
creditors of the joint venture. These conditions were satisfied
and the plan became effective on July 18, 1995. A subsidiary of
the Company, pursuant to the provisions of the plan, now owns
approximately 90% of the equity in the new company.
Other. Interest expense for the nine months ended September 30,
1995 increased slightly to $21.5 million, from $21.1 million in
the comparable period in 1994. Corporate overhead for 1995 and
1994 is above historical levels due to high litigation costs
incurred in connection with the airbag Asset Purchase Agreement
and License Agreement. The overhead expenses increased slightly
in the first nine months of 1995 from $11.2 million to $11.6
million when compared with the comparable period in 1994. The
income tax provision for the first nine months of 1995 was $2.8
million compared to a tax benefit of $4.5 million in the
comparable period in 1994. The tax benefit in 1994 is the result
of favorable state tax legislation which resulted in a $5.6
million reversal of state income taxes previously accrued. Due
to unrecognized federal tax carryforward benefits, primarily the
result of losses in the Company's real estate segment, the
Company has no Federal tax provision in 1994 or 1995. The tax
provision in 1995 is provided for foreign and state
jurisdictions.
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Financial Condition, Liquidity and Capital Resources
At September 30, 1995, the Company had $8.9 million in cash and
cash equivalents and net working capital of $80.3 million. Cash
generated from operating activities for the nine months ended
September 30, 1995 was $16.4 million, primarily the result of
increased earnings which were partially offset by increases in
trade receivables, inventories and prepaid expenses, net of
increases in accounts payable and accrued expenses. Cash
generated from operations during the nine months of 1994 was
$27.2 million. Cash used in investing activities during the nine
months ended September 30, 1995 was $2.8 million, consisting
primarily of capital expenditures. Cash used in financing
activities of $17.7 million reflects a reduction in realty debt
and a decrease in the Company's revolving debt facility.
In October 1993, the Company 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 a wholly owned
subsidiary of the Company, Talley Manufacturing and Technology,
Inc. ("Talley Manufacturing"). In connection with this
refinancing, Talley Manufacturing 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, 1995 availability under the total
facility was approximately $48.6 million, of which approximately
$19.5 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 Company anticipates that the present capital structure will
support the long-term growth of the Company's core businesses and
permit the implementation of its strategy to use proceeds
received from 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, the Company will be dependent primarily upon
distributions from those subsidiaries in order to meet its debt
service and other obligations. The Company 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 the
Company's real estate assets. The Company will be required to
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use certain funds received from Talley Manufacturing and certain
funds from real estate sales to make offers to redeem certain
indebtedness of the Company. Because the cash available to the
Company is required to be used for these specific purposes, and
because certain debt covenants limit the Company's ability to
incur additional indebtedness, the Company 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, the Company 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 the
Company to make cash payments of interest on its Discount
Debentures until April 15, 1999, the Company believes that funds
will be available in sufficient amounts, and at the required
times, to permit the Company to meet its obligations.
Other Matters
Litigation
On June 27, 1995, the federal district court for the District of
Arizona entered judgment against TRW Inc. in favor of the Company
in TRW Inc. vs. Talley Industries, Inc. et al. The court
dismissed, in their entirety, TRW's claims against the Company
while the jury reached a verdict in favor of the Company on its
counterclaims against TRW, awarding the Company a total of $138
million. The award (which is in addition to (i) royalty payments
of $24.4 million paid prior to the judgment and during the
pendency of this action pursuant to an earlier preliminary
injunction order, and (ii) attorneys' fees and recoverable costs
relating to this litigation which the Company will seek to
recover under the governing 1989 agreements) represents the
jury's determination of the present value of the royalties that
would otherwise have been paid to the Company by TRW for the
period April 1, 1995 through April 2001.
The litigation in which this judgment was entered arose out of
the Asset Purchase Agreement dated February 4, 1989 and the
License Agreement dated April 21, 1989, between TRW and the
Company pursuant to which TRW acquired the Company's airbag
business. The court dismissed TRW's claims that the Company had
breached a non-compete provision contained in the Asset Purchase
Agreement, by rendering services to competitors of TRW, and that
TRW thereby became entitled to terminate airbag royalty payments
to the Company (which it purported to do in February 1994) and
obtain a paid-up license to use the Company's airbag technology.
The jury found in fact that TRW had improperly terminated and
repudiated the 1989 license agreement.
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TRW has filed its notice to appeal the judgment to the Ninth
Circuit Court of Appeals, and on July 26, 1995 the federal
district court for the District of Arizona granted a stay of
enforcement of the judgment pending appeal upon the posting of a
$175 million bond and the continuation of quarterly payments in
the amount of royalties that would be due under the License
Agreement. Upon affirmation of the judgment on appeal, TRW would
be required to pay the judgment plus interest (which the court
ruled will accrue from June 27, 1995 at the rate specified by the
1989 license agreement - prime rate plus five percent), offset by
the continued royalty payments ordered by the court. TRW has
sought and the Ninth Circuit Court has denied emergency review of
the court's order requiring the continued payment of the
quarterly payments pending appeal. The denial of emergency
relief by the Ninth Circuit Court of Appeals is without prejudice
to an appeal by TRW from the district court's order.
Certain other claims asserted by TRW and the Company against each
other are the subject of a separate action which remains pending.
In that action, TRW has challenged certain representations by the
Company that the airbag manufacturing plant sold to TRW by the
Company in 1989 met applicable government requirements, and that
the associated real estate was sufficient to permit construction
of certain additional facilities. The Company's claims against
TRW include claims that TRW failed to exert reasonable efforts to
exploit the exclusive technology license granted to TRW by the
Company in 1989 and denied the Company certain contractually
provided audit rights. It is currently anticipated that these
remaining claims will come to trial early in 1996. Management
anticipates that the above-described claims will be resolved
without any material adverse impact on the results of operations
or financial position of the Company.
As previously reported, the Company had been identified as a
potentially responsible party by another company in connection
with the Laurel Park Landfill in Naugatuck, Connecticut.
Management's review indicated that the Company sent ordinary
rubbish and off-specification plastic parts to this landfill and
did not send any hazardous waste to the site. In October 1995
the Company settled the matter, including a payment by the
Company that was not material to the results of operations or
financial position of the Company.
Recently Issued Accounting Standards
In late March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," which is effective for fiscal
years beginning after December 15, 1995. The application of this
Statement will require the Company to carry real estate projects
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that are substantially complete and ready for their intended use
at the lower of cost or fair value, less cost to sell. If the
sum of the expected future net cash flow (undiscounted and
without interest charges) is less than the carrying amount of
projects that are not substantially complete and ready for their
intended use, an impairment loss would be recognized. 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 effect of implementing this new accounting pronouncement has
not yet been quantified.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 1995, the federal district court for the District of
Arizona entered judgment against TRW Inc. in favor of the Company
in TRW Inc. vs. Talley Industries, Inc. et al. The court
dismissed, in their entirety, TRW's claims against the Company
while the jury reached a verdict in favor of the Company on its
counterclaims against TRW, awarding the Company a total of $138
million. The award (which is in addition to (i) royalty payments
of $24.4 million paid prior to the judgment and during the
pendency of this action pursuant to an earlier preliminary
injunction order, and (ii) attorneys' fees and recoverable costs
relating to this litigation which the Company will seek to
recover under the governing 1989 agreements) represents the
jury's determination of the present value of the royalties that
would otherwise have been paid to the Company by TRW for the
period April 1, 1995 through April 2001.
The litigation in which this judgment was entered arose out of
the Asset Purchase Agreement dated February 4, 1989 and the
License Agreement dated April 21, 1989, between TRW and the
Company pursuant to which TRW acquired the Company's airbag
business. The court dismissed TRW's claims that the Company had
breached a non-compete provision contained in the Asset Purchase
Agreement, by rendering services to competitors of TRW, and that
TRW thereby became entitled to terminate airbag royalty payments
to the Company (which it purported to do in February 1994) and
obtain a paid-up license to use the Company's airbag technology.
The jury found in fact that TRW had improperly terminated and
repudiated the 1989 license agreement.
TRW has filed its notice to appeal the judgment to the Ninth
Circuit Court of Appeals, and on July 26, 1995 the federal
district court for the District of Arizona granted a stay of
enforcement of the judgment pending appeal upon the posting of a
$175 million bond and the continuation of quarterly payments in
the amount of royalties that would be due under the License
Agreement. Upon affirmation of the judgment on appeal, TRW would
be required to pay the judgment plus interest (which the court
ruled will accrue from June 27, 1995 at the rate specified by the
1989 license agreement - prime rate plus five percent), offset by
the continued royalty payments ordered by the court. TRW has
sought and the Ninth Circuit Court has denied emergency review of
the court's order requiring the continued payment of the
quarterly payments pending appeal. The denial of emergency
relief by the Ninth Circuit Court of Appeals is without prejudice
to an appeal by TRW from the district court's order.
-15-
<PAGE>
Certain other claims asserted by TRW and the Company against each
other are the subject of a separate action which remains pending.
In that action, TRW has challenged certain representations by the
Company that the airbag manufacturing plant sold to TRW by the
Company in 1989 met applicable government requirements, and that
the associated real estate was sufficient to permit construction
of certain additional facilities. The Company's claims against
TRW include claims that TRW failed to exert reasonable efforts to
exploit the exclusive technology license granted to TRW by the
Company in 1989 and denied the Company certain contractually
provided audit rights. It is currently anticipated that these
remaining claims will come to trial in January 1996. Management
anticipates that the above-described claims will be resolved
without any material adverse impact on the results of operations
or financial position of the Company.
On March 28, 1994, a fully consolidated real estate joint
venture, in which the Company had 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 provided 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. On April 28, 1995, the court approved the plan, subject
to the consummation of certain settlement agreements with several
creditors of the joint venture. These conditions were satisfied
and the plan became effective on July 18, 1995. A subsidiary of
the Company, pursuant to the provisions of the plan, now owns
approximately 90% of the equity in the new company.
In September 1994, the Arizona Court of Appeals reversed a 1992
Arizona Tax Court ruling that entitled the Company 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 the Company's Petition for Review. Based
on the appellate court decision, the Company paid approximately
$1.3 million in taxes and interest for the period ending March
31, 1983. The Company believes the appellate court erred in its
decision; however, the Company held discussions with state
authorities in an effort to resolve the dispute for the periods
ending on December 31, 1984 and 1985. The tax and related
interest assessment in dispute is approximately $5.0 million. If
the Company is unsuccessful in reaching an agreement with the
state, it intends to vigorously litigate these tax and interest
assessments. Legislation adopted in 1994 in Arizona specifically
allows companies to file combined tax returns in Arizona for
periods from January 1, 1986, and on December 8, 1994 the Arizona
Department of Revenue withdrew its assessments against the
Company for 1986 and subsequent years. Management believes that
the final resolution of the above matter will not result in a
material adverse impact on the results of operations or financial
position of the Company.
-16-
<PAGE>
As previously reported, the Company had been identified as a
potentially responsible party by another company in connection
with the Laurel Park Landfill in Naugatuck, Connecticut.
Management's review indicated that the Company sent ordinary
rubbish and off-specification plastic parts to this landfill and
did not send any hazardous waste to the site. In October 1995
the Company settled the matter, including a payment by the
Company that was not material to the results of operations or
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. 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 - $332,000 ($4.95 per share), Series B - $6,967,000 ($4.50
per share) and Series D - $2,436,000 ($20.25 per share).
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.
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, 1995.
* Documents marked with an asterisk are filed with this report.
(b) Reports on Form 8-K:
A report dated June 27, 1995 related to the judgment in the
case of TRW Inc. v. Talley Industries, Inc., et al, was
filed on July 12, 1995.
-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 INDUSTRIES, INC.
(Registrant)
Date: November 8, 1995 By Kenneth May
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: November 8, 1995 By Mark S. Dickerson
Mark S. Dickerson
Vice President
and Secretary
-18-
<PAGE>
</TABLE>
EXHIBIT 11
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Share
(thousands, except per share amounts)
1 9 9 5 1 9 9 4
Fully Fully
Primary Diluted Primary Diluted
THREE MONTHS ENDED September 30:
Earnings before
extraordinary gain $ 2,279 $ 2,279 $ 963 $ 963
Preferred stock dividend - - (542) (542)
Earnings before
extraordinary gain $ 2,279 $ 2,279 $ - $ -
Extraordinary gain 6,244 6,244 - -
Net earnings $ 8,523 $ 8,523 $ 421 $ 421
Average common shares
outstanding during period 10,051 10,051 10,033 10,033
Common stock equivalents:
Convertible preferred stock 3,299 3,299 - -
Stock options 324 352 - -
Shares issuable in connection
with acquired company 323 323 - -
Shares for computation 13,997 14,025 10,033 10,033
Earnings per share:
Before extraordinary gain $ .16 $ .16 $ .04 $ .04
Extraordinary gain .45 .45 - -
Net earnings $ .61 $ .61 $ .04 $ .04
NINE MONTHS ENDED September 30:
Earnings (loss) before
extraordinary gain $ 1,179 $ 1,179 $ 1,179 $ 1,179
Preferred stock dividend - - (1,626) (1,626)
Loss before extraordinary gain $ 1,179 $ 1,179 $ (447) $ (447)
Extraordinary gain 14,047 14,047 - -
Net earnings (loss) $15,226 $15,226 $ (447) $ (447)
Average common shares
outstanding during period 10,050 10,050 10,025 10,025
Common stock equivalents:
Convertible preferred stock 3,300 3,300 - -
Stock options 330 352 - -
Shares issuable in connection
with acquired company 323 323 - -
Shares for computation 14,003 14,025 10,025 10,025
Earnings (loss) per share:
Before extraordinary gain $ .09 $ .09 $ (.04) $ (.04)
Extraordinary gain 1.00 1.00 - -
Net earnings (loss) $ 1.09 $ 1.09 $ (.04) $ (.04)
<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-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,901,000
<SECURITIES> 0
<RECEIVABLES> 60,566,000
<ALLOWANCES> 1,268,000
<INVENTORY> 77,983,000
<CURRENT-ASSETS> 156,139,000
<PP&E> 137,672,000
<DEPRECIATION> 91,241,000
<TOTAL-ASSETS> 373,498,000
<CURRENT-LIABILITIES> 75,861,000
<BONDS> 229,209,000
<COMMON> 10,051,000
0
1,735,000
<OTHER-SE> 43,918,000
<TOTAL-LIABILITY-AND-EQUITY> 373,498,000
<SALES> 214,751,000
<TOTAL-REVENUES> 279,863,000
<CGS> 160,376,000
<TOTAL-COSTS> 199,100,000
<OTHER-EXPENSES> 55,186,000
<LOSS-PROVISION> 335,000
<INTEREST-EXPENSE> 21,549,000
<INCOME-PRETAX> 4,028,000
<INCOME-TAX> 2,849,000
<INCOME-CONTINUING> 1,179,000
<DISCONTINUED> 0
<EXTRAORDINARY> 14,047,000
<CHANGES> 0
<NET-INCOME> 15,226,000
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
</TABLE>
