SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Amendment No. #1
Amendment to Current Report on Form 8-K dated
December 5, 1997, and filed December 15, 1997.
CARPENTER TECHNOLOGY CORPORATION
----------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 1-5828 23-0458500
- ------------------------- ------------ -------------------
(State or other juris- (Commission (I.R.S. Employer
diction of incorporation) File Number) Identification No.)
101 West Bern Street, Reading, Pennsylvania 19612-4662
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610)208-2000
<PAGE>
The undersigned registrant hereby amends the following item of its
Current Report on Form 8-K dated December 5, 1997, and filed
December 15, 1997, as set forth in the pages attached hereto:
Item 7. Financial Statements and Exhibits
Page
In This
Report
-------
(a) Financial Statements of Talley Industries, Inc.
as of and for the year ended December 31, 1996:
(1) Report of Independent Accountants.......... F-3
(2) Consolidated Statement of Earnings -
Years ended December 31, 1996,
1995 and 1994.............................. F-4
(3) Consolidated Balance Sheet -
December 31, 1996 and 1995.............. F-5 - F-6
(4) Consolidated Statement of Changes in
Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994........... F-7
(5) Consolidated Statement of Cash Flows -
Years ended December 31, 1996, 1995 and
1994....................................... F-8
(6) Notes to Consolidated Financial
Statements, including Summary of
Segment Operations...................... F-9 - F-43
(b) Unaudited Financial Statements of Talley
Industries, Inc. as of and for the three
and nine months ended September 30, 1997:
(1) Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996... F-44
(2) Consolidated Statement of Earningss -
Three Months and Nine Months Ended
September 30, 1997 and 1996................ F-45
(3) Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997
and 1996................................... F-46
(4) Consolidated Statement of Changes in
Stockholders' Equity - Nine Months
Ended September 30, 1997 and 1996.......... F-47
(5) Notes to Consolidated Financial
Statements............................. F-48 - F-51
(c) Unaudited Pro Forma Financial Information to
reflect the registrant's acquisition of
Talley Industries, Inc.:
(1) Unaudited Pro Forma Condensed Combined
Balance Sheet as of September 30, 1997.... PF-3
(2) Unaudited Pro Forma Condensed Combined
Statements of Income for the Year
Ended June 30, 1997 and the Three
Months Ended September 30, 1997........ PF-4 - PF-5
(3) Notes to Pro Forma Condensed Combined
Financial Statements................... PF-6 - PF-7
(d) Exhibits
--------
Number Exhibit
------ -------
23 Consent of Independent Accountants
F-1<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.
CARPENTER TECHNOLOGY CORPORATION
By s/G. Walton Cottrell
------------------------------
G. Walton Cottrell
Sr. Vice President - Finance &
Chief Financial Officer
Date: January 22, 1998
F-2<PAGE>
Report of Independent Accountants
---------------------------------
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF TALLEY INDUSTRIES, INC.
In our opinion, the consolidated financial statements listed in
Item 7 (a) in the index appearing on page F-1 present fairly,
in all material respects, the financial position of Talley Industries,
Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 17, 1997
F-3
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
<CAPTION>
Years Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------- ------------ ------------ -------------
Sales $309,169,000 $301,296,000 $249,201,000
Services 70,315,000 58,821,000 59,989,000
Royalties 123,214,000 25,169,000 18,570,000
- -------------------------------------------- ------------ ------------ -------------
502,698,000 385,286,000 327,760,000
- -------------------------------------------- ------------ ------------ -------------
Cost of sales 249,307,000 224,236,000 182,415,000
Cost of services 62,258,000 51,485,000 52,314,000
Selling, general and administrative expenses 64,393,000 63,297,000 62,763,000
Provision for reserve on realty assets 85,000,000 7,000,000 -
- -------------------------------------------- ------------ ------------ -------------
460,958,000 346,018,000 297,492,000
- -------------------------------------------- ------------ ------------ -------------
Earnings from operations 41,740,000 39,268,000 30,268,000
Other income (expense), net 16,295,000 (3,629,000) (2,978,000)
- -------------------------------------------- ------------ ------------ -------------
58,035,000 35,639,000 27,290,000
Interest expense 25,406,000 28,666,000 28,089,000
- -------------------------------------------- ------------ ------------ -------------
Earnings (loss) before income taxes and
extraordinary gains (loss) 32,629,000 6,973,000 (799,000)
Income tax provision (benefit) 1,836,000 3,418,000 (4,305,000)
- -------------------------------------------- ------------ ------------ -------------
Earnings before extraordinary gains (loss) 30,793,000 3,555,000 3,506,000
Extraordinary gains (loss), net of
income taxes (12,052,000) 14,409,000 -
- -------------------------------------------- ------------ ------------ -------------
Net earnings $ 18,741,000 $ 17,964,000 $ 3,506,000
============================================ ============ ============ =============
Earnings applicable to common shares
(after deduction of preferred stock
dividends and value of induced conversion) $ 5,608,000 $ 15,801,000 $ 1,339,000
============================================ ============ ============ =============
Earnings per share of common stock
and common stock equivalents:
Before extraordinary gains (loss) $ 2.13 $ .25 $ .13
Extraordinary gains (loss) (.87) 1.03 -
Value of induced conversion (.86) - -
- -------------------------------------------- ------------ ------------ -------------
Net earnings $ .40 $ 1.28 $ .13
============================================ ============ ============ =============
Weighted average shares outstanding 13,913,000 14,001,000 10,412,000
============================================ ============ ============ =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-4<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996 1995
- --------------------------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 48,758,000 $ 10,475,000
Accounts receivable, net of
allowance for doubtful accounts
of $925,000 in 1996 and
$1,275,000 in 1995 53,090,000 69,453,000
Inventories 64,684,000 67,191,000
Deferred income taxes 3,660,000 1,200,000
Prepaid expenses 6,100,000 8,296,000
- --------------------------------- ------------ ------------
Total current assets 176,292,000 156,615,000
Realty assets - 104,964,000
Long-term receivables, net 6,517,000 10,113,000
Property, plant and equipment,
at cost, net of accumulated
depreciation of $98,588,000
in 1996 and $92,395,000 in 1995 49,324,000 48,760,000
Intangibles, at cost, net of
accumulated amortization of
$18,313,000 in 1996 and
$16,985,000 in 1995 41,965,000 43,969,000
Deferred charges and other assets 6,287,000 8,178,000
- --------------------------------- ------------ ------------
Total assets $280,385,000 $372,599,000
================================= ============ ============
F-5<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 1996 1995
- ------------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 5,160,000 $ 3,734,000
Current maturities of realty debt 362,000 2,155,000
Accounts payable 20,116,000 22,473,000
Accrued expenses 44,189,000 32,851,000
- ------------------------------------------- ------------ ------------
Total current liabilities 69,827,000 61,213,000
Long-term debt 123,185,000 227,736,000
Long-term realty debt - 7,980,000
Deferred income taxes 2,179,000 7,437,000
Other liabilities 10,708,000 9,899,000
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000; shares issued:
Series A - 14,000 shares
(67,000 in 1995) ($345,000
involuntary liquidation preference) 14,000 67,000
Series B - 750,000 shares
(1,548,000 in 1995)
($14,992,000 involuntary
liquidation preference) 750,000 1,548,000
Series D - 0 shares (120,000 in 1995) - 120,000
Common stock, $1 par value, authorized
20,000,000; shares issued:
14,618,000 shares (10,053,000 in 1995) 14,618,000 10,053,000
Capital in excess of par value 79,884,000 86,035,000
Foreign currency translation adjustments (562,000) (530,000)
Accumulated deficit (20,218,000) (38,959,000)
- -------------------------------------------- ------------ ------------
Total stockholders' equity 74,486,000 58,334,000
- -------------------------------------------- ------------ ------------
Total liabilities and stockholders' equity $280,385,000 $372,599,000
============================================ ============ ============
The accompanying notes are an integral part of the financial
statements.
F-6<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
<CAPTION>
Capital in Retained
Preferred Stock Common Excess of Treasury Earnings
Series A Series B Series D Stock Par Value Stock (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
-------- ---------- -------- ----------- ----------- ---------- ------------
Balance at December 31, 1993 $71,000 $1,548,000 $120,000 $10,047,000 $86,026,000 $(471,000) $(60,429,000)
Net earnings 3,506,000
Treasury stock issued 471,000
- ------------------------------ -------- ---------- -------- ----------- ----------- --------- ------------
Balance at December 31, 1994 71,000 1,548,000 120,000 10,047,000 86,026,000 -0- (56,923,000)
Conversion to Common stock (4,000) 4,000
Exercised stock options 2,000 9,000
Net earnings 17,964,000
- ------------------------------ ------- ---------- -------- ----------- ----------- --------- ------------
Balance at December 31, 1995 67,000 1,548,000 120,000 10,053,000 86,035,000 -0- (38,959,000)
Dividends - Preferred stock (4,398,000)
Common stock retirements (277,000) (1,791,000)
Stock options exercised 612,000 2,857,000
Conversion to Common stock (53,000) (798,000) (120,000) 4,008,000 (3,438,000)
Common stock issued 222,000 619,000
Net earnings 18,741,000
- ------------------------------ ------- ---------- -------- ----------- ----------- --------- ------------
Balance at December 31, 1996 $14,000 $ 750,000 $ -0- $14,618,000 $79,884,000 $ -0- $(20,218,000)
============================== ======= ========== ======== =========== =========== ========= ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-7<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<CAPTION>
Years Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------
Cash and cash equivalents at beginning of year $ 10,475,000 $ 13,002,000 $ 12,194,000
- ----------------------------------------------- ------------ ------------ ------------
Cash flows from operating activities:
Net earnings 18,741,000 17,964,000 3,506,000
Adjustments to reconcile net income to cash
flows from operating activities:
Extraordinary items 12,052,000 (14,409,000) -
Change in deferred income taxes (7,718,000) 382,000 (5,565,000)
Depreciation and amortization 8,878,000 8,443,000 9,557,000
(Gain) loss on sale of property and
equipment 147,000 (62,000) (173,000)
Original discount amortization 8,639,000 10,187,000 9,024,000
Provision reserve for realty assets 85,000,000 7,000,000 -
Other 9,154,000 (7,000) 4,801,000
Changes in assets and liabilities, net of
effects of acquisitions and
divestitures:
(Increase) decrease in accounts receivable 16,569,000 (13,379,000) 2,935,000
(Increase) decrease in inventories 2,507,000 (1,122,000) (93,000)
(Increase) decrease in prepaid expenses 1,941,000 (401,000) 1,769,000
Decrease in realty assets 16,030,000 5,947,000 6,036,000
Increase in other assets (3,000,000) (240,000) (587,000)
Increase (decrease) in accounts payable (2,357,000) (3,501,000) 2,353,000
Increase (decrease) in accrued expenses 5,054,000 (277,000) (1,154,000)
Decrease in other liabilities (2,124,000) (1,714,000) (722,000)
Other, net 3,151,000 (314,000) 471,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from operating activities 172,664,000 14,497,000 32,158,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of assets of acquired business (4,337,000) (287,000) (5,688,000)
Purchases of property and equipment (6,752,000) (8,931,000) (3,932,000)
Reduction of long-term receivables 1,890,000 1,020,000 237,000
New long-term receivables (1,418,000) - (551,000)
Proceeds from sale of property and
equipment 347,000 772,000 302,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from investing activities (10,270,000) (7,426,000) (9,632,000)
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 3,524,000 11,000 -
Payment of cash dividends (4,398,000) - -
Issuance of common stock 384,000 - -
Purchase of common stock (2,068,000) - -
Redemption of Discount Debentures (97,451,000) - -
Reduction in borrowings under line
of credit (385,792,000) (490,361,000) (399,918,000)
Other reductions in debt (3,734,000) (4,215,000) (2,209,000)
Repayment of realty debt (9,790,000) (6,593,000) (2,145,000)
Proceeds from borrowings under line
of credit 375,214,000 491,560,000 382,554,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from financing activities (124,111,000) (9,598,000) (21,718,000)
- ------------------------------------------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 38,283,000 (2,527,000) 808,000
- ------------------------------------------------ ------------ ------------ ------------
Total cash and cash equivalents at end of year $ 48,758,000 $ 10,475,000 $ 13,002,000
================================================ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-8<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of
the Company and its majority-owned domestic and foreign
subsidiaries. Real estate joint ventures that are majority owned
and under the control of the Company are also included in the
consolidated accounts of the Company. All unconsolidated companies
are reflected in the financial statements on the equity basis. All
material intercompany transactions have been eliminated.
Nature of Operations:
Talley Industries, Inc. is a diversified manufacturer of a wide
range of proprietary and other specialized products for defense,
industrial and commercial applications. Through its Government
Products and Services segment, the Company manufactures an
extensive array of propellant devices and electronic components for
defense systems and commercial applications and provides naval
architectural and marine engineering services. The vast majority
of the Government Products and Services are for U.S. Defense and
are smaller components of larger units and systems that are
generally designed to enhance safety or improve performance. The
Company participates in the expanding market for automotive
airbags, historically through a royalty agreement and currently
through developing new airbag technologies. The Company's
Stainless Steel Products segment manufactures and distributes
stainless steel rods and bars and other stainless steel products.
The Company's Industrial Products segment manufactures and sells
high-voltage ceramic insulators used in power transmission and
distribution systems, and specialized welding equipment and
systems, aerosol insecticides, air fresheners and sanitizers, and
custom designed metal buttons. During 1996, the Company sold all
but one of its real estate properties which were a part of the
Realty segment. Substantially all of the Company's facilities are
located in and provide sales and services to the United States and
Canada.
F-9<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Accounting Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
Cash equivalents, which consist primarily of commercial paper and
money market funds, are stated at cost plus accrued interest, which
approximates market.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method for substantially all
commercial inventories. Costs accumulated under government
contracts are stated at actual cost, net of progress payments, not
in excess of estimated realizable value.
Revenue Recognition:
Sales are generally recorded by the Company when products are
shipped or services performed. Sales under government contracts
are recorded when the units are shipped and accepted by the
government or as costs are incurred on the percentage-of-completion
method. Applicable earnings are recorded pro rata based upon total
estimated earnings at completion of the contracts. Anticipated
future losses on contracts are charged to income when identified.
Airbag royalties are recognized on an accrual basis, based on
production of airbag units by the licensee and production and sales
of automobiles for airbag units not produced by the licensee.
F-10<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Property and Depreciation:
Property, plant and equipment are recorded at cost and
include expenditures which substantially extend their useful lives.
Expenditures for maintenance and repairs are charged to earnings as
incurred. With the exception of items being depreciated under
composite lives, profit or loss on items retired or otherwise
disposed of is reflected in earnings. When items being depreciated
under composite lives are retired or otherwise disposed of,
accumulated depreciation is charged with the asset cost and
credited with any proceeds with no effect on earnings; however,
abnormal dispositions of these assets are reflected in earnings.
Depreciation of plant and equipment, other than buildings and
improvements on leased land, is computed primarily by the
straight-line method over the estimated useful lives of the assets.
Depreciation of buildings on leased land and amortization of
leasehold improvements and equipment are computed on the
straight-line method over the shorter of the terms of the related
leases or the estimated useful lives of the buildings or
improvements. The principal estimated useful lives are: building
and improvement 10-40 years, machinery and equipment 5-10 years.
Income Taxes:
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Deferred tax liabilities and assets are determined based on
differences between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse. United States income taxes are provided on the portion of
earnings remitted or expected to be remitted from foreign
subsidiaries.
F-11<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Earnings Per Share:
Net earnings per share of Common stock and Common stock
equivalents has been computed on the basis of the average number of
Common shares outstanding during each year. The average number of
shares has been adjusted for assumed exercise at the beginning of
the year (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 year, 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.
Intangibles:
The excess cost of investments in subsidiaries over the equity
in net assets at acquisition date is being amortized using the
straight-line method over periods not in excess of 40 years. The
majority of the Company's intangibles consist of goodwill, which is
the excess of cost over tangible and identifiable intangible assets
acquired. The carrying value of intangibles is evaluated
periodically in relation to the operating performance and future
cash flow of the underlying businesses.
Earnings or Loss Applicable to Common Shares:
Earnings or loss applicable to Common shares is computed by
reducing the net earnings or loss by dividends, including
undeclared or unpaid dividends, of the Company's Preferred A, B and
D stocks.
F-12<PAGE>
Notes to Consolidated Financial Statements
Inventories
Inventories are summarized as follows:
(balances in thousands) 1996 1995
- --------------------------------------- ------- -------
Raw material and supplies $10,995 $11,878
Work-in-process 11,564 11,222
Finished goods 26,158 28,955
Inventories substantially applicable to
fixed-price government contracts in
process, reduced by progress payments
of $7,924,000 and $5,870,000 in 1996
and 1995, respectively 15,967 15,136
- --------------------------------------- ------- -------
$64,684 $67,191
======= =======
Realty Assets
In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
resolution of the airbag royalty dispute with TRW and after
receiving payments in connection therewith in the third quarter of
1996, and also in view of the slower than expected improvement in
the market conditions for real estate assets, the Company
re-evaluated and changed its strategy for exiting the real estate
business. The Company adjusted its strategy of selling properties
to end users in an orderly process over time, to a strategy of
liquidation sales through pricing adjustments and/or joint
development arrangements. This change in strategy resulted in an
$85,000,000 writedown in real estate assets for financial reporting
purposes. In December of 1996 all real estate properties, except
for one, were sold for cash and assumption of certain liabilities.
The Company plans to dispose of the single property not included in
this bulk sale.
Realty assets are stated at the lower of historical cost or
estimated net realizable value and include land held for sale
together with related development and carrying costs (interest and
F-13<PAGE>
Notes to Consolidated Financial Statements
Realty Assets, (continued)
property taxes during development), and equity investments in
realty joint ventures. For financial reporting purposes, realty
assets must be carried at the lower of historical cost or estimated
net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business less estimated
costs of completion (to the stage of completion assumed in
determining the selling price), holding and disposal. The Company
accounts for and reports the value of foreclosed realty assets at
fair value less the estimated costs to sell the assets.
In 1995, non-cash Realty asset transactions included an
increase in both Realty assets and Realty debt in the amount of
$4,038,000 and $3,649,000, respectively, upon the consolidation of
a previously unconsolidated joint venture. Non-cash Realty items
in 1995 also included reductions of $4,677,000 due to forfeitures
of properties and other transactions. The value of foreclosed
assets at December 31, 1995 was $29,773,000. There were no
foreclosed assets at December 31, 1996.
Long-Term Receivables
Long-term receivables consist of the following:
(balances in thousands) 1996 1995
- ------------------------------------- -------- --------
Notes receivable, including accrued
interest and income tax refunds $ 6,640 $ 10,584
Amounts due within one year, included
in accounts receivable (123) (471)
-------- --------
$ 6,517 $ 10,113
======== ========
Long-term receivables include income tax receivables of
$5,431,000, which must be approved by the Congressional Joint
Committee on Taxation before payment will be received, and
accordingly are classified as non-current. The remaining notes
F-14<PAGE>
Notes to Consolidated Financial Statements
Long-Term Receivables, continued
range in length from one to fourteen years and bear interest at
December 31, 1996 at rates ranging from 8% to 10%. Payment terms
vary by note, but generally require monthly, quarterly or annual
interest and principal payments. The notes receivable balance is
net of reserves of $4,086,000 and $1,260,000 at December 31, 1996
and 1995, respectively.
Property, Plant and Equipment
Property, plant and equipment, is summarized as follows:
(balances in thousands) 1996 1995
- ----------------------------------- -------- --------
Machinery and equipment $114,020 $107,576
Buildings and improvements 31,338 30,791
Land 2,554 2,788
- ----------------------------------- -------- --------
$147,912 $141,155
======== ========
Depreciation of property, plant and equipment was $7,278,000,
$6,834,000, and $7,735,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Long-Term Debt
Long-term debt consists of the following:
(balances in thousands) 1996 1995
- --------------------------------------- -------- --------
10-3/4% Senior Notes, due 2003 $115,000 $115,000
12-1/4% Senior Discount Debentures,
due 2005 (face amount $2,553,000) 2,066 90,878
Notes, interest based on prime or
other variable market rates, due 1998 11,263 14,341
Revolving credit facilities - 10,579
Capitalized leases and other 16 672
- --------------------------------------- -------- --------
128,345 231,470
Less current maturities 5,160 3,734
- --------------------------------------- -------- --------
Long-term debt $123,185 $227,736
======================================= ======== ========
F-15<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
On October 22, 1993 the Company completed a major debt
refinancing program. The Company received gross proceeds of
$70,000,000 from the issuance of Senior Discount Debentures, due
2005, which were issued to yield 12.25% (face amount of
$126,555,000). In addition, Talley Manufacturing and Technology,
Inc., ("Talley Manufacturing") a wholly owned subsidiary of the
Company, which owns all of the Company's subsidiaries (except for
the subsidiaries holding the Company's real estate operations),
issued $115,000,000 of Senior Notes, due 2003, with an interest
rate of 10.75%. Talley Manufacturing also completed a $60,000,000
secured credit facility with two institutional lenders. The gross
proceeds of the public offerings, plus an initial borrowing under
the secured credit facility, after payment of underwriting and
other fees and expenses associated with these financings, were used
to repay substantially all of the Company's previously outstanding
non-real estate related debt.
The indentures for the Senior Notes and the Senior Discount
Debentures and the loan agreement relating to the secured credit
facility contain covenants requiring specified fixed charge
coverage ratios, working capital levels, capital expenditure
limits, net worth levels, cash flow levels and certain other
restrictions including limitations on dividends and other payments
and incurrence of debt. 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 is dependent primarily upon distributions
from these subsidiaries to meet its debt service and other
obligations. Payments from the subsidiaries are generally limited
by the debt covenants of Talley Manufacturing.
Substantially all of the receivables, inventory and property,
plant and equipment of Talley Manufacturing and its subsidiaries
are pledged as collateral in connection with the secured credit
facility. In addition, the subsidiaries of Talley Manufacturing
have guaranteed Talley Manufacturing's obligations under the Senior
Notes and the secured credit facility and the Company has
guaranteed the Senior Notes on a subordinated basis. The capital
stock of Talley Manufacturing has been pledged by the Company to
secure the Senior Discount Debentures.
F-16<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
The Senior Notes mature on October 15, 2003 and Talley
Manufacturing is required to make mandatory sinking fund payments
of $11,500,000 on October 15, in each of 2000, 2001 and 2002.
Interest is payable semi-annually, having commenced April 15, 1994.
The Senior Discount Debentures mature on October 15, 2005. No
interest on the Senior Discount Debentures will be payable until
April 15, 1999, when interest will be payable semi-annually on
April 15 and October 15 of each year. In the event that certain
financial and other conditions are satisfied, the Senior Discount
Debentures require prepayments based on defined levels of airbag
royalties received and proceeds from real estate sales.
During 1996, the Company repurchased a substantial portion of
the Senior Discount Debentures through several offers and open
market purchases. Total aggregate principal amount of the
repurchased debentures was $124,002,000 with an accreted value of
$97,451,000. The Company paid a total of $105,968,000 including
accrued interest and prepayment premiums to repurchase the tendered
debentures. The Company recognized a $12,052,000 extraordinary
loss in connection with the debt extinguishment, which consists of
prepayment premiums and deferred debt cost on the extinguished
debt. During the fourth quarter of 1996, the Company reclassified
approximately $1,642,000 from interest expense to extraordinary
loss. This amount consists of prepayment premiums and deferred
debt cost incurred in the second quarter of 1996 in connection with
the repurchase of the Senior Discount Debentures.
The secured credit facility consists of a five year revolving
credit facility of up to $40,000,000 and a five year $20,000,000
term loan facility. At December 31, 1996 availability under the
facility, based on inventory and receivable levels and certain
plant and equipment, was approximately $52,000,000, of which
approximately $12,000,000 was borrowed. The five-year term
facility requires monthly amortization payments based on a seven
year amortization schedule, with the balance due upon expiration in
October 1998. The credit facility interest rate is prime plus one
half of one percent or LIBOR plus 2-3/4%, with an additional fee of
one-quarter of one percent on unused amounts under the revolving
facility.
F-17<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
Aggregate maturities of long-term debt for the years ending
December 31, 1997 through December 31, 2001, are $5,160,000,
$8,185,000, $-0-, $11,500,000 and $11,500,000, respectively.
Maturities for 1997 include the balance of Senior Discount
Debentures due in 2005, since the Company plans to redeem the
balance outstanding in the coming year. Cash payments for total
interest, net of amounts capitalized, during 1996, 1995 and 1994
were $45,175,000, $16,132,000 and $16,758,000, respectively.
Accrued interest expense at December 31, 1996, 1995 and 1994 was
$2,748,000, $3,626,000 and $11,855,000, respectively. Unamortized
deferred debt issue costs at December 31, 1996, 1995 and 1994 were
$3,748,000, $8,509,000 and $9,922,000, respectively. Deferred debt
issue costs are amortized over the life of the respective debt
instruments using the straight line method. Amortization of debt
expense, including amounts related to debt reductions, in 1996,
1995 and 1994 was $4,761,000, $1,413,000 and $1,413,000,
respectively. Total capitalized lease obligations on buildings and
equipment included in long-term debt at December 31, 1996 is
$16,000, all of which is due within one year.
Realty Debt
At December 31, 1996 Realty debt consists primarily of amounts
payable in connection with the single remaining property held by
the Company's real estate operations. Of the two remaining notes,
one has no stated interest rate and the second note bears interest
at the rate of 9%, with all amounts due in 1997. Realty debt at
December 31, 1996 and 1995 was $362,000 and $10,135,000,
respectively. During 1995, the Company recognized $14,409,000 in
extraordinary gains in connection with the settlement of certain
real estate debt for less than book value.
Benefit Plans
Stock Option Plans
------------------
In April 1996, the Company's shareholders approved the "1996
Comprehensive Stock Plan of Talley Industries, Inc." (the Plan)
effective as of January 1, 1996 for key employees of the Company.
Under the Plan, 1,200,000 shares of Common stock are available for
F-18<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
issuance in connection with incentive stock options, non-qualified
stock options, stock appreciation rights, bonus stock, awards in
lieu of cash obligations and other stock-based awards. The Plan
also permits cash payments either as a separate award or as a
supplement to a stock-based award. Options may be granted at an
exercise price, in the case of an incentive stock option, of not
less than the fair market value of the shares on the date of grant,
and in the case of an option other than an incentive stock option,
of not less than 50% of the fair market value of the shares on the
date of grant. The Plan replaces the Company's 1983 Restricted
Stock Plan, the 1983 Long-Term Incentive Plan (both of which plans
have terminated) and the 1978 and 1990 Stock Option Plans. As a
result of the approval of the Plan, no further grants of options
will be made under either the 1978 or 1990 Stock Options Plans. As
of December 31, 1996 no options have been granted under the 1996
Comprehensive Stock Plan. As of December 31, 1996, outstanding
options under the 1990 and 1978 plans were 56,000 and 199,050,
respectively. The 1990 and 1978 plans require incentive stock
option prices to be no less than the market value at the date of
the grant and that all options, incentive and non-qualified, become
exercisable generally in five years, but in no case greater than
ten years from the date of grant, as specified in the individual
grants.
Information regarding these option plans for 1996, 1995 and
1994 is as follows:
1996 1995 1994
------------------- -------------------- --------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
-------- -------- -------- -------- --------
Options outstanding,
beginning of year 878,300 $5.46 933,925 $5.97 855,925
Options exercised (612,500) 4.36 - - -
Options forfeited (10,750) 8.00 (192,675) 9.73 (22,000)
Options granted - - 137,050 8.00 100,000
-------- ------ -------- ------ --------
Options outstanding,
end of year 255,050 $8.00 878,300 $5.46 933,925
======== ====== ======== ====== ========
F-19<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
1996 1995 1994
Shares Shares Shares
----------- ----------- -----------
Option price range at
end of year $5.38-$9.75 $4.25-$9.75 $4.25-$9.75
----------- ----------- -----------
Option price range for
exercised shares $4.25-$8.00 - $4.25-$9.75
----------- ----------- -----------
Options available for
grant at end of year 1,200,000 360,986 200,186
----------- ----------- -----------
Weighted average fair
value of options
granted during the year - $2.61
----------- -----------
Information on the Company's fixed price stock options
outstanding at December 31, 1996 is as follows:
Remaining
Options Options Contractual Number
Outstanding Price Life Exercisable
----------- ------- ----------- -----------
83,750 $9.75 4 Years 83,750
56,000 5.38 3 Years 2,000
115,300 8.00 4 Years 16,260
------- -------
255,050 102,010
======= =======
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" at December 31, 1996. Accordingly,
no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for
awards in 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
F-20<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
(balance in thousands, except per share amounts) 1996 1995
- -----------------------------------------------------------------
Net earnings - as reported $18,741 $17,964
Net earnings - pro forma $18,673 $17,858
Earnings per share - as reported $ .40 $ 1.28
Earnings per share - pro forma $ .40 $ 1.27
- -----------------------------------------------------------------
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995:
dividend yield of 0%; risk-free interest rate of 6.21%; expected
volatility of 43 %, and expected lives of 5.0 years. There were no
grants of options during 1996.
In April 1996, the Company's shareholders approved the "1996
Non-Employee Director Stock Plan of Talley Industries, Inc." (the
Director Plan) effective as of January 1, 1996 for non-employee
directors of the Company. Under the Director Plan, 200,000 shares
of Common stock are available for issuance in connection with the
Annual Restricted Stock Grants or the Annual Option Grants. The
exercise price under an option will be equal to the fair market
value of the Common stock on the date of grant. At December 31,
1996, a total of 10,000 options for shares of Common stock had
been granted under the Director Plan with an option price of $7.88.
Retirement Plans
The Company and its subsidiaries have pension plans covering
a majority of its employees. Normal retirement age is 65, but
provisions are made for early retirement. For subsidiaries with
defined benefit plans, benefits are generally based on years of
service and salary levels. Contributions to the respective defined
contribution plans are based on each participant's annual pay and
age. The Company also has a retirement plan for its Board of
Directors. Benefits are payable under the plan after five years of
service upon reaching age 68, or retirement if later. Net pension
cost in 1996, 1995 and 1994 was $3,695,000, $4,132,000 and
$4,837,000, respectively.
F-21<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Retirement Plans, continued
The Company generally contributes the greater of the amounts
expensed or the minimum statutory funding requirements.
Pension costs for defined benefit plans include the following
components:
(balances in thousands) 1996 1995 1994
- ----------------------------- -------- -------- --------
Service cost-benefits earned
during the year $ 1,542 $ 1,138 $ 1,377
Interest cost on projected
benefit obligation 2,785 2,781 2,360
Actual return on assets (6,731) (11,377) 643
Net amortization and deferral 2,602 8,035 (3,493)
- ----------------------------- -------- -------- --------
Net pension cost $ 198 $ 577 $ 887
============================= ======== ======== ========
<TABLE>
The following table sets forth the aggregate funded status of
defined benefit plans at December 31, 1996 and 1995:
<CAPTION>
1996 1995
------------- ------------------------------
Assets Exceed Assets Exceed Accumulated
Accumulated Accumulated Benefits
(balances in thousands) Benefits Benefits Exceed Assets
<S> <C> <C> <C>
- ---------------------------- ------------- ------------- -------------
Fair value of plan assets $ 52,471 $ 45,857 $ 1,852
Projected benefit obligation (42,439) (41,955) (1,998)
- ---------------------------- -------- -------- --------
Projected benefit obligation
(in excess of) less than
plan assets 10,032 3,902 (146)
Unrecognized net loss (gain) (11,356) (5,008) (175)
Unrecognized prior service
cost (234) (252) 4
Unrecognized net liability 692 520 344
Unfunded accumulated benefit
obligation - - (173)
- ---------------------------- -------- -------- --------
Pension liability $ (866) $ (838) $ (146)
============================ ======== ======== ========
Accumulated benefits $ 38,035 $ 37,046 $ 1,998
Vested benefits $ 36,336 $ 35,094 $ 1,955
</TABLE>
F-22<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Retirement Plans, continued
---------------------------
The Directors' Pension plan was unfunded with a projected
benefit obligation of $1,009,000 and $897,000 at December 31, 1996
and 1995, respectively. The net pension cost f 1996 and 1995
were $247,000 and $234,000, respectively.
Assumptions used in 1996, 1995 and 1994 to determine the
actuarial present value of plan benefit obligations were:
1996 1995 1994
---- ---- ----
Assumed discount rate 7.25% 6.5% 8.5%
Assumed rate of compensation increase 4.5% 4.5% 5.0%
Expected rate of return on plan assets 9.0% 9.0% 9.0%
Net periodic pension cost is determined using the assumptions
as of the beginning of the year. The funded status is determined
using the assumptions as of the end of the year. Assets of the
Company's pension plans consist of marketable equity securities,
guaranteed investment contracts and corporate and government debt
securities. At December 31, 1996 the total value of defined
benefit plan assets exceed total vested benefits by $16,135,000.
Effective January 1, 1984, the Company established an employee
stock purchase plan for eligible U.S. employees. Each eligible
employee who elects to participate may contribute 1% to 5% of his
or her pretax compensation from the Company. The Company
contributes an amount equal to 50% of the employee contributions.
Total Company contributions during 1996 and 1995 were $535,000 and
$502,000, respectively.
Other Postemployment Benefits
-----------------------------
Health care and life insurance benefits are presently provided
to a small number of retired employees of one of the Company's
subsidiaries. The cost of retiree health care and life insurance
benefits are minor in amount and are recognized as benefits
are paid. The Company adopted Statement of Financial Accounting
F-23<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Other Postemployment Benefits, continued
----------------------------------------
Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pension" in the first quarter of 1993, as
required by the pronouncement. The transition obligation of
approximately $1,474,000 is being amortized over a 20 year period.
The amortization of the unrecognized transition obligation for the
single subsidiary affected by the new pronouncement was $72,000 in
1996. Current service costs and interest costs for 1996 were
approximately $10,000 and $99,000, respectively.
Accrued Compensation
--------------------
Accrued Compensation was $14,427,000, $10,751,000 and
$8,981,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Accrued Compensation includes accruals for vacation
pay and corporate incentives.
Capital Stock
Each share of Series A Convertible Preferred stock entitles
its holder to receive an annual cash dividend of $1.10 per share;
to convert it into .95 of a share of Common stock, as adjusted in
the event of future dilution; to receive up to $25.00 per share in
the event of involuntary or voluntary liquidation; and, subject to
certain conditions in loan agreements, may be redeemed at the
option of the Company at a price of $25.00 per share plus accrued
and unpaid dividends.
Each share of Series B $1.00 Cumulative Convertible Preferred
stock entitles its holder to receive an annual cash dividend of
$1.00 per share; to convert it into 1.31 shares of Common stock, as
adjusted in the event of future dilution; to receive up to $20.00
per share plus accrued and unpaid dividends in the event of
involuntary liquidation; to receive up to $52.50 plus accrued and
unpaid dividends per share in the event of voluntary liquidation
and, subject to certain conditions in loan agreements, may be
redeemed at the option of the Company at a price of $52.50 per
share plus accrued and unpaid dividends. Dividends on the shares
F-24
<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
of Series A and Series B Preferred stock are cumulative and must be
paid in the event of liquidation and before any distribution to
holders of Common stock.
Each share of Common stock has a preferred stock purchase
right attached, allowing the holder, upon the occurrence of a
change in control, as defined in a Rights agreement (as amended and
restated on February 2, 1996), to buy one one-hundredth of a share
of Series C Junior Participating Preferred stock at an exercise
price of $32. The Series C stock, which may be purchased upon
exercise of the Rights, is nonredeemable and junior to other series
of the Company's preferred stock. No shares of Series C stock have
been issued as of December 31, 1996.
On February 16, 1996, the Company issued 1,905,849 shares of
Talley Common stock in connection with the conversion of all of the
Company's Series D Preferred stock at December 31, 1995. The
conversion automatically extinguished all unpaid dividends on that
stock, totaling approximately $2,600,000. The Series D Preferred
stock had been held in a voting trust agreement since its issuance
in connection with a 1988 acquisition by the Company. The Common
stock will continue to be held in the voting trust, which has been
extended under the agreement until March 2001.
On April 22, 1996, pursuant to a conversion offer with respect
to the Company's Series B and Series A Preferred stock,
approximately 798,000 shares or approximately 52% of the
outstanding shares of Series B and approximately 53,000 shares or
approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock
for each outstanding Series B share. Series A holders who
converted received 2.0 shares of Common stock for each outstanding
Series A share. Common stock of approximately 1,995,000 shares
were issued in connection with the conversion of the Series B
Preferred stock and approximately 106,000 shares were issued in
connection with the conversion of the Series A Preferred stock.
Prior to the conversion there were approximately 1,548,000 shares
of Series B outstanding and 67,000 shares of Series A outstanding.
The conversion automatically extinguished all unpaid dividends on
the Series B and Series A shares that were converted totaling
approximately $4,000,000 ($5 per share) on the Series B Preferred
stock and totaling approximately $300,000 ($5.50 per share) on the
F-25<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
Series A Preferred stock at March 31, 1996. The Company has
resumed quarterly dividend payments on the Series A and Series B
Preferred stock. The ability to pay dividends in the future is
limited by the provisions of the Company's debt requirements.
The conversion transactions do not impact the net earnings of
the Company in 1996, but "earnings applicable to common shares
(after deduction of preferred stock dividends)," as supplementally
disclosed by the Company, and the "earnings per share of common
stock and common equivalent share" have been reduced. The excess
of the fair value of the common shares transferred in the
transactions by the Company over the fair value of the common
shares issuable pursuant to the original conversion terms have been
subtracted from net earnings in the calculations of net earnings
available to common shareholders and earnings per share.
In late 1996 and early 1997, the Board of Directors approved
the repurchase of up to 950,000 shares of the Company's common
stock, in the open market or in negotiated transactions, from time
to time, at prices deemed appropriate by the Company's officers,
with such shares to be retired as authorized but unissued shares.
At December 31, 1996, total number of common shares repurchased was
277,300 shares, for a total cost of approximately $2,082,000.
At December 31, 1996 there were 3,753,000 shares of Common
stock reserved for conversion of preferred stock, for exercise of
stock options, for issuance of shares under the Employee 401(k)
Plan and for the payment of a portion of the purchase price of a
business acquisition completed in 1994.
Leases
Rental expense (reduced by rental income from subleases of
$373,000 in 1996, $441,000 in 1995 and $329,000 in 1994) amounted
to $5,142,000 in 1996, $4,770,000 in 1995 and $5,179,000 in 1994.
Aggregate future minimum rental payments required under operating
leases having an initial lease term in excess of one year for years
ending December 31, 1997 through December 31, 2001 are $4,084,000,
$3,508,000 $1,784,000, $780,000 and $524,000, respectively, with
$1,015,000 payable in future years. Minimum operating lease
payments have not been reduced by future minimum sublease rentals
of $283,000.
F-26<PAGE>
Notes to Consolidated Financial Statements
Leases, (continued)
Aggregate future minimum payment under capital leases for the
year ending December 31, 1997 is $18,000, with no payments in later
years. The present value of net minimum lease payments is $16,000
after deduction of $2,000, representing interest and estimated
executory costs. The net book value of leased buildings and
equipment under capital leases at December 31, 1996 and 1995
amounted to $-0- and $656,000, respectively.
Income Taxes
Earnings before income taxes and extraordinary items and the
provision (credit) for income taxes consists of the following:
(balances in thousands) 1996 1995 1994
- ------------------------------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary items:
United States $ 31,899 $ 4,541 $ (2,341)
Foreign 730 2,432 1,542
- ------------------------------- -------- -------- --------
$ 32,629 $ 6,973 $ (799)
======== ======== ========
Current tax expense:
United States $ 3,768 $ 728 $ -
Foreign 350 1,154 731
State and local 5,436 1,154 530
- ------------------------------- -------- -------- --------
9,554 3,036 1,261
-------- -------- --------
Deferred tax expense (credit):
United States (3,754) (701) -
Foreign 14 25 15
State and local (3,978) 1,058 (5,581)
(7,718) 382 (5,566)
- ------------------------------- -------- -------- --------
$ 1,836 $ 3,418 $ (4,305)
======== ======== ========
F-27
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities for 1996
and 1995 are as follows:
(balances in thousands) 1996 1995
- ------------------------------ -------- --------
Gross deferred tax assets:
Net operating losses and tax
credit carryforward $ - $ 1,484
Reserves on realty assets 10,165 7,883
Accrued expenses 8,211 11,356
Other 3,106 2,498
Valuation allowance for
deferred tax assets (10,368) (17,664)
- ------------------------------ -------- --------
Net deferred tax assets 11,114 5,557
- ------------------------------ -------- --------
Gross deferred tax liabilities:
Depreciation 5,703 5,957
Accrued expenses 1,954 4,604
Other 1,976 1,233
-------- --------
Gross deferred tax liabilities 9,633 11,794
- -------------------------------- -------- --------
Net deferred tax asset (liability) $ 1,481 $ (6,237)
================================== ======== ========
During the year ended December 31, 1996 the valuation
allowance for deferred tax assets decreased $7,296,000.
Approximately $6,900,000 of the reduction was related to the
deferred tax asset associated with the Company's Senior Discount
Debentures, which were substantially all redeemed in 1996,
including the amortized original issue discount, which accordingly
reduced income taxes in 1996.
Reasons for the differences between the amount of income tax
determined by applying the applicable statutory federal income tax
rate to pretax income are:
(balances in thousands) 1996 1995 1994
- --------------------------------- -------- -------- --------
Computed tax at statutory U.S.
tax rates $ 11,095 $ 2,371 $ (272)
Effect of loss carryforwards
and valuation allowance (13,289) (1,476) (1,751)
Goodwill and other non-deductible
items 3,202 519 574
State and local taxes 1,458 2,212 (5,051)
Other (630) (208) 2,195
- --------------------------------- -------- -------- --------
$ 1,836 $ 3,418 $ (4,305)
======== ======== ========
F-28
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
United States income taxes have not been provided on
approximately $1,000,000 of undistributed earnings of subsidiaries
incorporated outside the United States, since it is the Company's
intent to reinvest such earnings. Net cash payments for income
taxes during 1996, 1995 and 1994 were $8,526,000, $2,676,000 and
$569,000, respectively.
Commitments and Contingencies
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0
million 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 $138.0 million
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 Appeal for the
Ninth Circuit rejected TRW's appeal and affirmed the $138.0 million
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
$133.1 million to the Company on account of TRW's obligations under
the judgment. The payments represented the $138.0 million face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%), less 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 $6.7
million as that portion of a court-ordered reimbursement of
litigation fees and costs (and interest on the reimbursement amount
at the same default rate).
F-29<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Litigation - TRW Inc., continued
--------------------------------
During September 1996, claims between the Company and TRW
(which had been scheduled for trial) 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 $16.6 million. Accordingly, all claims between the
parties have now been resolved, and cash payments have been made by
TRW aggregating $156.4 million.
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,
thereby entitling TRW to terminate airbag royalty payments to the
Company under the License Agreement (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 License Agreement.
Litigation - Arizona Department of Revenue
------------------------------------------
The Arizona Department of Revenue issued Notices of Correction
of Income Tax dated March 17, 1986 to the Company for the fiscal
year ending March 31, 1983. These Notices pertain to whether
subsidiaries of the Company must file separate income tax returns
in Arizona rather than allowing the Company 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 the Company and against the
Department on all claims asserted against the Company. In October
1992 the Tax Court entered judgment in favor of the Company
awarding the Company approximately $600,000 for the Arizona income
taxes the Company overpaid for its fiscal year ending March 31,
1983 together with interest and attorneys' fees.
F-30<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Litigation - Arizona Department of Revenue, continued
-----------------------------------------------------
In September 1994, the Arizona Court of Appeals reversed the
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
$1,300,000 in taxes and interest for the period ending March 31,
1983. On October 15, 1996, the Company made a payment of
$4,842,000 to resolve the related dispute for the period 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, and on December 8, 1994
the Arizona Department of Revenue withdrew its assessments against
the Company for 1986 and subsequent years.
Environmental
-------------
A subsidiary of the Company has been named as a potentially
responsible party by the Environmental Protection Agency ("EPA")
under the Comprehensive Environmental Response Compensation and
Liability Act in connection with the remediation of the Beacon
Heights Landfill in Beacon Falls, Connecticut. Management's review
indicates that the Company sent ordinary rubbish and off-specification
plastic parts to this landfill and did not send any
hazardous wastes to the site. A coalition of potentially
responsible parties has entered into consent decrees with
the EPA to remediate the site. The coalition has in turn brought
an action against other potentially responsible parties, including
a subsidiary of the Company, to contribute to the cleanup costs.
The federal district court hearing the case dismissed claims
against the subsidiary. However, in November 1996 the Second
Circuit Court of Appeals reversed the district court's ruling and
remanded the case for trial. Based upon management's review and
the status of the proceedings, with respect to this matter,
management believes that any reasonably anticipated losses from
this claim will not result in a material adverse impact on the
results of operations or the financial position of the Company.
F-31<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Environmental, continued
------------------------
The current owner of a site in Athens, Georgia is conducting
an informal investigation of alleged groundwater contamination. A
subsidiary of the Company was an owner of the site until March
1988, and is cooperating with the investigation. The Georgia
Environmental Protection Division made a determination in 1995 that
the site should be listed on its Hazardous Site Inventory. No
lawsuit or administrative enforcement proceedings have been
initiated in this matter. Based on remediation estimates received,
management believes that any reasonably anticipated losses from the
alleged contamination will not result in a material adverse impact
on the results of operations or the financial position of the
Company.
Fair Value of Financial Instruments
The following table presents the carrying amounts and fair
values of the Company's financial instruments for which it is
practicable to estimate. Financial Accounting Standards Board
Statement No. 107 "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a force or
liquidation sale.
(balances in thousands) 1996 1995
- ----------------------- ------------------ -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash & cash equivalents $ 48,758 $ 48,758 $ 10,475 $ 10,475
Non-trade receivables 6,644 6,644 10,584 10,584
Realty debt 362 362 10,135 10,135
Other debt 128,345 131,978 231,470 238,881
F-32<PAGE>
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments, (continued)
The following notes summarize the major methods and
assumptions used by the Company in estimating the fair values of
financial instruments.
Cash and cash equivalents
- -------------------------
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments.
Non-trade receivables
- ---------------------
Interest rates on non-trade receivables, including the current
portion, are generally at current market rates. Accordingly the
carrying value and fair value of the receivables are equal after
considering allowances for the carrying value of certain notes.
Debt
- ----
The fair value of the Company's debt, including the current
portion, at December 31, 1996 and 1995 is based on quoted market
prices or recent market activity.
Research and Development Costs
Company-sponsored research and development costs were
$8,694,000, $4,227,000 and $4,304,000 for the years ended December
31, 1996, 1995, and 1994, respectively. The large increase in 1996
expenditures is related to the development of automotive airbag
components and a continued higher level of expenditures is
anticipated in the near future. For the same periods, customer-sponsored
research and development expenditures were $8,796,000,
$10,093,000 and $8,231,000, respectively.
Extraordinary Gains (Loss)
During 1996, the Company realized a net loss of $12,052,000
from the early paydown of the 12.25% Senior Discount Debentures.
The loss consists of prepayment premiums and deferred debt cost on
the extinguished portion of the debt. Due to the consolidated tax
position of the Company, there was no tax benefit recognized in
connection with this loss.
F-33<PAGE>
Notes to Consolidated Financial Statements
Extraordinary Gains (Loss), (continued)
During 1995 the Company realized a net gain of $14,409,000
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 obligation. Due to the Company's net operating tax loss
position, there is no tax provision in connection with the gain.
Acquisitions and Dispositions
In January 1996, a subsidiary of the Company acquired certain
assets of Markel, a manufacturer of a silicone wire product line.
The purchase price was approximately $4.3 million.
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 $4,800,000, including cash of $2,100,000, 323,232
shares of the Company's Common stock scheduled for issuance two
years after closing and certain liabilities assumed and acquisition
costs incurred.
The excess of cost over tangible and identifiable intangible
assets acquired, net of amortization at December 31, 1996, 1995,
and 1994 was $41,819,000, $43,392,000, and $45,716,000,
respectively.
Related Party Transactions
In each of the last three years the Company and its
subsidiaries incurred legal fees payable to the law firm of one of
the Company's directors. During 1996, 1995 and 1994 total billings
for the firm were $479,000, $249,000 and $610,000, respectively,
and were for foreign and domestic services relating to litigation
and general corporate matters. In 1996, the Company also paid
$189,000 in consulting fees and related expenses to one of the
Company's directors.
Recently Issued Accounting Standards
In October 1994 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123
F-34<PAGE>
Notes to Consolidated Financial Statements
Recently Issued Accounting Standards, (continued)
"Accounting for Stock-Based Compensation," which is effective for
transactions entered into in fiscal years that begin after December
15, 1995. Under the provisions of this new pronouncement, the
Company is required to account for such transactions under the
"fair value" based method or the "intrinsic value" based method.
Under the "fair value" based method, compensation cost is measured
at the grant date, based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Under the "intrinsic value" based method, (present
accounting), compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date,
over the amount an employee must pay to acquire the stock. For
stock options, fair value is determined using an option-pricing
model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividend on it, and the
risk-free interest rate over the expected life of the option.
Certain pro-forma disclosures are required when a Company uses the
"intrinsic value" based method instead of the "fair value" based
method. The Company presently accounts for stock based
compensation in accordance with APB Opinion No. 25 "Accounting for
Stock Issued to Employees", and will continue to apply APB No. 25
for purposes of determining net income, as provided for in the
recent pronouncement. The Company has presented in the notes to
the financial statements the pro forma and other disclosures
required by SFAS No. 123. (Also see "Stock Option Plans" under the
caption "Benefit Plans" in the Notes to Consolidated Financial
Statements).
Other pronouncements issued by the Financial Accounting
Standards Board with future effective dates are either not
applicable or not material to the consolidated financial statements
of the Company.
Segment Operations
The disposition of the assets of the Realty segment, the
settlement of the dispute with TRW regarding, among other matters,
royalties from the Airbag Royalty segment, and the cessation of
such royalties along with the significant increase during the last
F-35<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
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.
The Company is a diversified manufacturer of a wide range of
proprietary and other specialized products for defense, industrial
and commercial applications. Through its Government Products and
Services segment, the Company manufactures an extensive array of
propellant devices and electronic components for defense systems
and commercial applications and provides naval architectural and
marine engineering services. The Company has participated in the
rapidly expanding market for automotive airbags through its royalty
agreement with TRW, which provided the Company with a quarterly
royalty payment for any airbag manufactured and sold by TRW
worldwide and for any other airbag installed in a vehicle
manufactured or sold in North America. The royalties ceased upon
receipt of a settlement from TRW Inc. (See Commitments and
Contingencies Footnote.)
The Company is currently developing new airbag technologies -
including an improved inflator and a ceramic initiator with initial
sales for both airbag components expected in 1998.
The Company's Stainless Steel Products segment manufactures
and distributes stainless steel products, including a variety of
grades, sizes, and shapes of hot rolled and cold finished bars and
rods.
The Company's Industrial Products segment manufactures and
sells high-voltage ceramic insulators used in the power
transmission and distribution systems, specialized welding
equipment and systems, aerosol insecticides, air fresheners and
sanitizers, and custom designed metal buttons.
F-36<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Government Products and Services
The Company's Government Products and Services segment
provides a wide range of products and services for government
programs. The vast majority of the Company's products are smaller
components of larger units and systems and are generally designed
to enhance safety or improve performance. The Company manufactures
proprietary propellant products which, when ignited, produce a
specified thrust or volume of gas within a desired time period.
Propellant products manufactured include ballistic devices for
aircraft ejection systems, rocket motors, extended range munitions
components and dispersion systems.
The Company's propellant devices are currently used on
ejection seats on high performance domestic and foreign military
aircraft. Rocket motors manufactured by the Company include a
complete line of rocket boosters and propulsion systems used for
reconnaissance, surveillance, and target acquisition. The
Company's extended range munitions components utilize propellant
technologies to significantly extend the range of existing U.S.
artillery. Other electronic products include sub-miniature elapsed
time indicators, events counters, fault annunciators, and lighting
products used in aerospace and military applications to monitor
equipment performance. Naval architecture and marine engineering
services provided by the Company include detail design and
engineering services for new military and commercial construction
as well as a significant amount of maintenance and retrofit work
for existing ships.
The Company's Government Products and Services segment also
manufactures specialized electronic display and monitoring devices
and high performance cable connection assemblies.
Direct sales to the U.S. Government and its agencies,
primarily from the Government Products and Services segment
accounted for approximately 15%, 17% and 23% of the Company's sales
for the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995 the amount billed but not paid by
customers under retainage provisions in long-term contracts was
$1,205,000 and $1,212,000, respectively. The $1,205,000 receivable
F-37<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Government Products and Services, continued
under retainage provisions is expected to be collected in 1997
through 2002 in the amounts of $208,000, $174,000, $308,000,
$73,000, $172,000 and $270,000, respectively. Amounts in process
but unbilled at December 31, 1996 and 1995 were $7,305,000 and
$5,976,000, respectively.
Airbag Royalties
The Company has participated in the rapidly expanding market
for automotive airbags through its royalty agreement with TRW,
which provided the Company with a quarterly royalty payment for
any airbag manufactured and sold by TRW worldwide and for any other
airbag installed in a vehicle manufactured or sold in North
America. The royalties ceased upon receipt of a settlement from
TRW Inc. (See "Litigation-TRW Inc." in Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The Company is currently developing new airbag technologies -
including an improved inflator and a ceramic initiator with initial
sales for both airbag components expected in 1998.
Stainless Steel Products
The Company's Stainless Steel Products segment produces and
distributes stainless steel bars and rods. Demand for these
products is directly related to the level of general economic
activity.
The Company operates a mini-mill which converts purchased
stainless steel billets into a variety of sizes of both hot rolled
and cold finished bar and rod. The Company's stainless steel
mini-mill has utilized advanced computer automation, strict quality
controls, and strong engineering and technical capabilities to
maintain its position as a low cost, high quality producer. In
addition to its stainless steel manufacturing operation, the
Company distributes stainless steel and other specialty steel
products through seven locations in the U.S. and Canada.
F-38<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Industrial Products
The Industrial Products segment manufactures and distributes
high-voltage ceramic insulators for electric utilities,
municipalities and other governmental units, as well as for
electrical contractors and original equipment manufacturers.
Products include a wide array of transformer bushings and
accessories, special and standard porcelain for high and low-voltage
applications, apparatus bushing assemblies, and
transmission and distribution class insulators which are
manufactured for both domestic and international markets. In
addition, the Company manufactures specialized advanced-technology
welding systems, power supply systems and humidistats for the
utility, pipeline and original equipment manufacturer markets.
Welding equipment manufactured by the Company includes systems that
are specially designed to operate in hostile environments such as
nuclear radiation. The Company also produces aerosol insecticides,
air fresheners and sanitizers servicing the industrial maintenance
supply, pest control and agricultural markets, and custom designed
metal buttons for the military and commercial uniform and upscale
fashion markets. The majority of the Company's aerosol insecticides
are proprietary formulations of natural active ingredients.
Realty
In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
resolution of the airbag royalty dispute and after receiving
payments in connection therewith in the third quarter of 1996, and
also in view of the slower than expected improvement in the market
conditions for real estate assets, the Company re-evaluated and
changed its strategy for exiting the real estate business. The
Company adjusted its strategy of selling properties to end users in
an orderly process over time, to a strategy of liquidation sales
through pricing adjustments and/or joint development arrangements.
This change in strategy resulted in an $85,000,000 writedown in
real estate assets for financial reporting purposes. In December
of 1996 all real estate properties, except for one, were sold for
cash and assumption of certain liabilities. The Company plans to
dispose of the single property not included in this bulk sale.
F-39<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Other Matters
The Company's U.S. operations had export sales of $24,058,000,
$20,354,000 and $15,932,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Substantially all facilities and operations of the Company's
operations are located within the United States. The Company
operates a steel distribution system located in Canada with sales
for the year ended December 31, 1996 and total assets at December
31, 1996 of $15,208,000 and $9,300,000, respectively.
Foreign exchange losses included in earnings for the years
ended December 31, 1996, 1995 and 1994 were not material. The
foreign currency translation adjustment included in stockholders'
equity decreased from $(530,000) at December 31, 1995 to $(562,000)
at December 31, 1996.
Sales between segments are not significant and have been
eliminated. Operating income is total revenue less operating
expenses and excludes general Corporate expenses, non-segment
interest income and interest expense. Interest income associated
with segment assets is included in segment operations income.
Corporate assets consist principally of cash and cash equivalents,
notes receivable, income taxes receivable and a building.
The government funded components and firm industrial contracts
at December 31, 1996 and 1995 totaled $137,100,000 and
$133,500,000, respectively. The Company's total backlog, including
funded and unfunded components, was approximately $447,700,000 as
of December 31, 1996 and $503,300,000 as of December 31, 1995.
Approximately $107,133,000 of the government funded and firm
industrial backlog and $144,627,000 of the total backlog
outstanding at December 31, 1996 is expected to be completed or
shipped during 1997.
The term "funded" used herein refers to the aggregate revenue
remaining to be earned at a given time under (a) contracts held by
the Company (excluding renewals or extensions thereof, which are at
the discretion of the customer) to the extent of the funded (i.e.,
appropriated by Congress and allotted to the contract by the
procuring Government agency) amounts thereunder, and (b) "task
orders" or "delivery orders" issued to the Company under contracts
F-40<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Other Matters, continued
which provide that the customer is obligated to pay only for
services rendered pursuant to specific (funded) task orders and is
not obligated to issue additional task orders or to pay the
estimated total contract price. The term "unfunded" used herein
refers to the portion of the Company's total backlog that
represents the excess of the stated value of the Company's executed
contracts over the amounts funded by the customer for such
contracts including unexercised options.
The tables which follow show assets, depreciation and
amortization and capital expenditures by segment:
(in thousands) 1996 1995 1994
- ---------------------------------------- -------- -------- --------
Assets by Segment
Government Products and Services $104,480 $100,226 $ 98,424
Airbag Royalties - 5,434 4,700
Stainless Steel Products 67,331 75,082 65,397
Industrial Products 47,345 58,351 55,884
Realty 673 106,540 114,642
- ---------------------------------------- -------- -------- --------
219,829 345,633 339,047
Corporate 60,556 26,966 30,856
- ---------------------------------------- -------- -------- --------
$280,385 $372,599 $369,903
======== ======== ========
Depreciation and Amortization by Segment
Government Products and Services $ 3,779 $ 3,143 $ 3,306
Airbag Royalties - - -
Stainless Steel Products 2,589 2,608 3,354
Industrial Products 2,196 2,373 2,557
Realty 14 15 15
- ---------------------------------------- -------- -------- --------
8,578 8,139 9,232
Corporate 300 304 325
- ---------------------------------------- -------- -------- --------
$ 8,878 $ 8,443 $ 9,557
======== ======== ========
Capital Expenditures by Segment
Government Products and Services $ 2,393 $ 2,532 $ 1,820
Airbag Royalties - - -
Stainless Steel Products 2,491 3,821 999
Industrial Products 1,823 2,469 982
Realty 2 1 -
- ---------------------------------------- -------- -------- --------
6,709 8,823 3,801
Corporate 43 108 131
- ---------------------------------------- -------- -------- --------
$ 6,752 $ 8,931 $ 3,932
======== ======== ========
F-41<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Summary of Segment Operations
(in thousands)
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------- -------- -------- -------- -------- --------
Revenue by segment:
Government Products and Services $147,694 $139,600 $141,074 $170,323 $183,162
Airbag Royalties 121,913 23,977 17,292 9,606 5,566
Stainless Steel Products 136,343 145,760 97,916 73,819 60,151
Industrial Products 73,954 73,723 64,321 64,380 70,684
Realty 22,794 2,226 7,157 6,072 1,155
- ----------------------------------- -------- -------- -------- -------- --------
$502,698 $385,286 $327,760 $324,200 $320,718
======== ======== ======== ======== ========
Operating income by segment:
Government Products and Services $ 7,068 $ 10,225 $ 18,194 $ 24,354 $ 26,101
Airbag Royalties 148,760 23,977 17,292 9,606 5,566
Stainless Steel Products 10,981 19,693 6,686 1,236 499
Industrial Products (3,706) 8,058 5,632 6,203 4,511
Realty (88,546) (11,436) (3,677) (4,416) (16,449)
- ------------------------------------ -------- -------- -------- -------- --------
74,557 50,517 44,127 36,983 20,228
Corporate expenses (18,771) (15,468) (17,163) (14,846) (9,672)
Non-segment interest income 2,249 590 326 381 1,923
Interest expense (25,406) (28,666) (28,089) (25,744) (31,630)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary gains (loss) $ 32,629 $ 6,973 $ (799) $ (3,226) $(19,151)
- ----------------------------------- ======== ======== ======== ======== ========
</TABLE>
F-42
<PAGE>
Notes to Consolidated Financial Statements
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Summary of Segment Operations, (continued)
Operating income in 1996 includes receipt of $156,449,000 from
TRW Inc. to settle the airbag royalties litigation and other
matters, a pretax provision for a reserve on real estate assets of
$85,000,000 and non-recurring writedowns of inventory and goodwill
totaling approximately $11,019,000. Operating income in 1995
includes a pretax provision for a reserve on real estate assets of
$7,000,000.
F-43<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
<S> <C> <C>
- -------------------------------------------- --------- ---------
Cash and cash equivalents $ 40,957 $ 48,758
Accounts receivable, net of allowance for
doubtful accounts of $1,228 at September
30, 1997 and $925 at December 31, 1996 50,609 53,090
Inventories, net 67,207 64,684
Deferred income taxes 3,800 3,660
Prepaid expenses 7,361 6,100
--------- ---------
Current assets 169,934 176,292
Property, plant and equipment, net 53,298 49,324
Intangibles 38,296 41,965
Deferred charges and other assets 17,114 12,804
--------- ---------
Total assets $ 278,642 $ 280,385
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,010 $ 5,522
Accounts payable 24,016 20,116
Accrued expenses 37,251 44,189
--------- ---------
Current liabilities 64,277 69,827
Long-term debt 122,946 123,185
Deferred income taxes 3,650 2,179
Other liabilities 10,686 10,708
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 14 14
Series B 749 750
Common stock, $1 par value,
authorized 20,000,000 shares 14,114 14,618
Capital in excess of par value 75,534 79,884
Foreign currency translation adjustment (34) (562)
Accumulated deficit (13,294) (20,218)
--------- ---------
Total stockholders' equity 77,083 74,486
--------- ---------
Total liabilities and
stockholders' equity $ 278,642 $ 280,385
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE> F-44<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 67,184 $ 76,667 $200,389 $219,256
Services 20,627 17,082 62,896 49,904
Royalties 179 109,023 891 122,709
-------- -------- -------- --------
87,990 202,772 264,176 391,869
-------- -------- -------- --------
Cost of sales 48,364 70,115 146,267 177,808
Cost of services 18,481 15,168 56,316 44,036
Selling, general,
and administrative expenses 14,547 12,761 49,910 47,574
Provision (reversal) of
reserves on realty assets - 85,000 (6,300) 85,000
-------- -------- -------- --------
81,392 183,044 246,193 354,418
-------- -------- -------- --------
Earnings from operations 6,598 19,728 17,983 37,451
Other income (expense), net (435) 16,780 320 14,587
-------- -------- -------- --------
6,163 36,508 18,303 52,038
Interest expense 3,589 6,694 10,910 21,066
-------- -------- -------- --------
Earnings before income taxes
and extraordinary loss 2,574 29,814 7,393 30,972
Income tax provision 219 502 469 1,575
-------- -------- -------- --------
Earnings before
extraordinary loss 2,355 29,312 6,924 29,397
Extraordinary loss - - - (1,642)
-------- -------- -------- --------
Net earnings $ 2,355 $ 29,312 $ 6,924 $ 27,755
======== ======== ======== ========
Earnings applicable
to common shares $ 2,164 $ 29,121 $ 6,351 $ 14,813
======== ======== ======== ========
Earnings (loss) per
share of common stock and
common stock equivalents:
Earnings before
extraordinary loss $ .15 $ 1.85 $ .45 $ 1.93
Extraordinary loss - - - (.11)
-------- -------- -------- --------
Net earnings before
consideration for
induced conversion of
preferred stock .15 1.85 .45 1.82
Assumed value of conversion
inducement - - - (.79)
-------- -------- -------- --------
Earnings applicable
to common shares $ .15 $ 1.85 $ .45 $ 1.03
======== ======== ======== ========
Weighted average shares
outstanding 14,156 15,855 15,246 15,202
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE> F-45<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents at beginning of year $ 48,758 $ 10,475
-------- --------
Cash flows from operating activities:
Net earnings 6,924 27,755
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes 1,331 (3,099)
Depreciation and amortization 6,684 6,628
Original discount amortization - 7,929
Loss on sale of subsidiary and product line 1,325 -
Provision (reversal) of reserve on
realty assets (6,300) 85,000
Other 1,318 15,425
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase)decrease in accounts receivable (533) 17,028
Increase in inventories (6,910) (329)
(Increase) decrease in prepaid expenses (6,431) 476
Decrease in realty assets - 3,967
Increase in accounts payable 3,900 3,289
Increase in accrued expenses 1,053 8,172
Increase (decrease) in other liabilities 493 (588)
Other, net (186) 2,863
-------- --------
Cash flows from operating activities 2,668 174,516
Cash flows from investing activities:
Proceeds from sale of subsidiary and product line 6,162 -
Investment in joint-venture (3,510) -
Purchase of assets of acquired business - (4,327)
Purchases of property and equipment (9,921) (4,675)
Reduction of income tax receivables 4,400 -
Reduction in other assets 97 370
Proceeds from sale of property and equipment 78 150
-------- --------
Cash flows from investing activities (2,694) (8,482)
Cash flows from financing activities:
Preferred stock conversion cost - 3,637
Payment of dividends (573) -
Purchase of common stock (4,339) -
Common stock issued 57 -
Repayment of long-term debt (2,920) (18,694)
Proceeds from borrowings under line of credit - 375,213
Reduction in borrowings under line of credit - (385,792)
-------- --------
Cash flows from financing activities (7,775) (25,636)
Net decrease in cash and cash equivalents (7,801) 140,398
-------- --------
Total cash and cash equivalents at September 30, $ 40,957 $150,873
======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE> F-46<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(THOUSANDS)
<CAPTION>
PREFERRED STOCK CAPITAL IN RETAINED
-------------------------------------- COMMON EXCESS OF EARNINGS
SERIES A SERIES B SERIES D STOCK PAR VALUE (DEFICIT)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 67 $ 1,548 $ 120 $ 10,053 $ 86,035 $(38,959)
Net earnings 27,755
Conversion to common stock (53) (798) (120) 4,007 (3,438)
Common stock issued 792 3,247
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1996 $ 14 $ 750 $ -- $ 14,852 $ 85,844 $(11,204)
======== ======== ======== ======== ======== ========
BALANCE AT DECEMBER 31, 1996 $ 14 $ 750 $ -- $ 14,618 $ 79,884 $(20,218)
Net earnings 6,924
Dividends - preferred stock (573)
Stock grant 6 51
Conversion to common stock (1) 1
Common stock retirements (511) (3,828)
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1997 $ 14 $ 749 $ -- $ 14,114 $ 75,534 $(13,294)
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE> F-47<PAGE>
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, 1997 and December 31, 1996 and the results of operations for the
three-month and nine-month periods ended September 30, 1997 and 1996, and cash
flows and changes in stockholders' equity for the nine-month periods ended
September 30, 1997 and 1996. 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,
1996.
NOTE 2 - INVENTORIES
<TABLE>
Inventories are summarized as follows (in thousands):
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
<S> <C> <C>
------------ ------------
Raw materials and supplies $12,710 $10,995
Work-in-process 11,311 11,564
Finished goods 26,784 26,158
Inventories applicable to
government contracts 16,402 15,967
------- -------
$67,207 $64,684
======= =======
NOTE 3 - EARNINGS PER SHARE
Earnings per share of Common stock and Common stock equivalents has 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
F-48<PAGE>
NOTE 3 - EARNINGS PER SHARE, CONTINUED
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.
NOTE 4 - ACQUISITION AND DISPOSITIONS
In May 1997, a subsidiary of the Company sold certain assets of the
connector product line. Proceeds include a note receivable for $1.9 million and
cash of $.2 million.
In March 1997, the Company sold the assets of its Canadian steel
distributor. Cash proceeds from the sale were $4.1 million. The purchaser
assumed $2.3 million of liabilities.
In January 1996, a subsidiary of the Company acquired certain assets of
a manufacturer of a silicone wire product line. The purchase price was
approximately $4.3 million.
NOTE 5 - PREFERRED STOCK CONVERSIONS
On February 16, 1996, the Company issued 1,905,849 shares of Talley
Common stock in connection with the conversion of all of the Company's Series D
Preferred stock, 702,919 more shares than originally designated. The conversion
automatically extinguished all unpaid dividends on that stock, totaling
approximately $2.6 million as of December 31, 1995.
On April 22, 1996, pursuant to a conversion offer with respect to the
Company's Series B and Series A Preferred stock, approximately 798,000 shares or
approximately 52% of the outstanding shares of Series B and approximately 53,000
shares or approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock for each
outstanding Series B share. Series A holders who converted received 2.0 shares
of Common stock for each outstanding Series A share. Common stock issued of
approximately 1,995,000 shares in connection with the conversion of Series B
Preferred stock and approximately 106,000 in connection with the conversion of
Series A Preferred stock was approximately 948,000 and 56,000 more shares than
issuable under the stated conversion terms of the respective series of preferred
stock. Prior to the conversion there were approximately 1,548,000 shares of
Series B outstanding and 67,000 shares of Series A outstanding. The conversion
automatically extinguished all unpaid dividends on the Series B and Series A
shares that were converted totaling approximately $4.0 million ($5 per share) on
the Series B Preferred stock and totaling approximately $0.3 million ($5.50 per
share) on the Series A Preferred stock at March 31, 1996.
F-49<PAGE>
NOTE 5 - PREFERRED STOCK CONVERSIONS, CONTINUED
The transactions did not impact the net earnings of the Company in 1996,
but "earnings applicable to common shares (after deduction of preferred stock
dividends)," as supplementally disclosed by the Company, and the "earnings per
share of common stock and common stock equivalent share" were reduced. The
excess of the fair value of the common shares transferred in the transactions by
the Company, over the fair value of the common shares issuable pursuant to the
stated conversion terms of the preferred stock, were subtracted from net
earnings in the calculations of net earnings available to common shareholders
and earnings per share.
NOTE 6 - BONDS REPURCHASED AND COVENANT DEFEASANCE
During 1996, the Company repurchased $124.0 million aggregate principal
amount of the Senior Discount Debentures with an accreted value of $97.4 million
at the repurchase dates. The purchase price of the debentures was $106.0
million, including accrued interest and prepayment premiums. The Company
recognized $12.1 million in extraordinary losses in connection with the
repurchases of the Senior Discount Debentures. This amount represents the
prepayment premium and deferred debt cost on the extinguished debt. During the
nine months ended September 30, 1997, the Company repurchased an additional $.3
million aggregate principal amount of the Senior Discount Debentures.
An investment was made in U.S. Treasury obligations and placed in trust
in June 1997 to effect a covenant defeasance of the remaining $1.9 million
principal amount of outstanding debentures. For financial reporting purposes,
the assets held in trust are included in the assets of the Company and the
outstanding debentures continue to be reflected as outstanding debt. The
debentures will be redeemed on October 15, 1998, which is the earliest optional
redemption date.
NOTE 7 - REPURCHASE OF COMMON STOCK
In late 1996 and early 1997, the Board of Directors approved the
repurchase of up to 950,000 shares of the Company's Common stock, on the open
market or in negotiated transactions, from time to time, at prices deemed
appropriate by the Company's officers, with such shares to be retired as
authorized but unissued shares. At December 31, 1996, the total number of shares
of common stock repurchased was 277,300 shares for a total cost of approximately
$2.1 million. During the first half of 1997, another 510,367 shares were
repurchased for a total cost of approximately $4.3 million.
F-50<PAGE>
NOTE 8 - AGREEMENT AND PLAN OF MERGER
On September 26, 1997, the Company announced that it had entered into a
definitive Agreement and Plan of Merger (Agreement) with Carpenter Technology
Corporation (Carpenter) to be acquired for cash.
Under the terms of the Agreement, Carpenter commenced an all-cash tender
offer on October 2, 1997 for all outstanding shares of Talley stock at a price
of $12 per share of Talley Common stock, $16 per share of Talley Series B
Preferred stock, and $11.70 per share of Talley Series A Preferred stock.
Assuming a majority (measured by aggregate voting power) of Talley's stock is
duly tendered under the tender offer and not withdrawn before the expiration
date of the offer (December 4, 1997, unless extended), Carpenter is obligated
under the terms of the Agreement to purchase all shares of Talley stock tendered
and not withdrawn, and is further obligated to complete as soon as possible an
all-cash merger whereby all Talley shares remaining outstanding will be acquired
for cash at the same per-share prices as under the tender offer. The tender
offer is also subject to other customary conditions, including expiration of the
Hart-Scott-Rodino (HSR) waiting period. The U.S. Department of Justice,
Antitrust Division (DOJ) has requested that the Company and Carpenter provide
DOJ certain additional information, which has the effect of automatically
extending the HSR waiting period. The Company and Carpenter have advised DOJ
that they intend to provide the requested information as soon as possible.
In connection with the tender offer and proposed merger, Carpenter, the
Company and certain of its present and former directors were named as defendants
in various purported class action complaints filed on behalf of the stockholders
of the Company. The complaints alleged, among other things, breach of fiduciary
duty on the part of the Board of Directors arising out of the Merger Agreement
and failure to disclose material information. On October 16, 1997 a Memorandum
of Understanding was entered into by counsels for the plaintiffs and defendants
requiring the Company to amend and supplement the disclosure contained in its
filings with the Securities and Exchange Commission-Schedule 14D-9. In exchange,
the plaintiffs agreed to dismiss the actions. The settlement is subject to
various conditions, including Court approval.
The foregoing summary of certain provisions of the Agreement is general
in nature and is qualified in its entirety by reference to the definitive
Agreement, which is an Exhibit to this Report. No assurance can be given that
the conditions to the consummation of the tender offer and the merger under the
Agreement will be fulfilled or as to the timing for consummation of the tender
offer or the merger.
F-51<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial
Statements reflect the acquisition of Talley Industries, Inc.
("Talley") by Carpenter Technology Corporation ("Carpenter"). On
December 5, 1997, Score Acquisition Corp. ("Score"), a wholly-owned
subsidiary of Carpenter, accepted approximately 75% of the
voting stock of Talley for payment pursuant to the Agreement and
Plan of Merger dated September 25, 1997 and upon the terms and
subject to the conditions set forth in Score's Offer to Purchase
dated October 2, 1997. Upon consummation of the merger,
scheduled for February, 1998, Talley will become a wholly-owned
subsidiary of Carpenter. Accordingly, the Unaudited Pro Forma
Condensed Combined Financial Statements reflect the 100%
acquisition of Talley (the "Talley Merger"). The Unaudited Pro
Forma Condensed Combined Statement of Income for the year ended
June 30, 1997 also reflects the acquisitions by Carpenter of
Dynamet Incorporated in February, 1997 and Rathbone Precision
Metals, Inc. in June, 1997 (the "Other Acquisitions").
The following Unaudited Pro Forma Financial Statements are filed
with this report:
Page
----
Unaudited Pro Forma Condensed Combined Balance Sheet
at September 30, 1997...................................... PF-3
Unaudited Pro Forma Condensed Combined Statement of
Income for the year ended June 30, 1997.................... PF-4
Unaudited Pro Forma Condensed Combined Statement of
Income for the three months ended September 30, 1997....... PF-5
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements....................................... PF-6
The Unaudited Pro Forma Condensed Combined Balance Sheet reflects
the Talley Merger as if it had occurred on September 30, 1997.
The unaudited Pro Forma Condensed Combined Statements of Income
for the year ended June 30, 1997 and for the three months ended
September 30, 1997 reflect the Talley Merger and the Other
Acquisitions as if they had occurred at the beginning of the year
ended June 30, 1997. The pro forma information is based on the
historical financial statements of Carpenter and Talley after
giving effect to the Talley Merger and the Other Acquisitions
using the purchase method of accounting. Under this method of
PF-1<PAGE>
accounting, the aggregate purchase price is allocated to assets
acquired and liabilities assumed based on their estimated fair
values. For purposes of the Unaudited Pro Forma Condensed
Combined Financial Statements, the purchase price for Talley has
been allocated based primarily on preliminary information. The
final allocation of the purchase price will be determined within
a reasonable time after consummation of such transaction and will
be based on a complete evaluation of the assets acquired,
including net assets held for sale, and liabilities assumed.
Accordingly, the information presented herein may differ from the
final purchase price allocation. The Unaudited Pro Forma
Condensed Combined Financial Statements also reflect assumptions
and adjustments deemed appropriate by Carpenter, which are
described in the accompanying notes to the Unaudited Pro Forma
Condensed Combined Financial Statements.
The unaudited pro forma condensed combined information does not
purport to be indicative of Carpenter's financial position or
results of operations had the Talley Merger and the Other
Acquisitions actually occurred on the dates presented nor is it
necessarily indicative of Carpenter's future financial position
or future operating results. The Unaudited Pro Forma Condensed
Combined Financial Statements should be read in conjunction with
the separate audited historical consolidated financial statements
of Carpenter and the notes thereto set forth in Carpenter's 1997
Annual Report on Form 10-K, and the historical consolidated
financial statements of Talley and the notes thereto set forth in
Item 7(a) of this Form 8-K/A.
In the opinion of Carpenter's management, all adjustments have
been made that are necessary to present fairly the pro forma
data.
PF-2<PAGE>
</TABLE>
<TABLE>
Carpenter Technology Corporation
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 1997
(in thousands)
<CAPTION>
Adjustments
To Reclassify
Carpenter Talley Net Assets Held Pro Forma Pro Forma
Historical Historical For Sale (B) Adjustments Combined
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,639 $ 40,957 $ (343) $ $ 56,253
Accounts receivable, net of
allowance for doubtful accounts 145,614 50,609 (35,870) (808)C 159,545
Inventories 238,235 67,207 (38,860) 3,900 A 270,482
Deferred income taxes - 3,800 (3,800)A 0
Other current assets 16,257 7,361 (6,130) 17,488
Net assets held for sale - - 103,108 58,371 A 161,479
---------------------------------------------------------------------
Total current assets 415,745 169,934 21,905 57,663 665,247
Property, plant, and equipment, net 532,507 53,298 (30,069) 37,000 A 592,736
Prepaid pension cost 105,270 - 105,270
Goodwill, net 108,219 37,325 (36,934) 65,167 A 173,777
Investment in Subsidiaries - 3,510 (3,510) 0
Other assets 104,397 14,575 (792) 1,887 A 120,067
---------------------------------------------------------------------
TOTAL ASSETS $1,266,138 $ 278,642 $(49,400) $ 161,717 $1,657,097
=====================================================================
LIABILITIES
Current Liabilities:
Short-term debt 82,217 - 86,700 A 168,917
Accounts payable 80,833 24,016 (12,219) (808)C 91,822
Accrued compensation 18,922 14,111 (12,601) 20,432
Accrued income taxes 19,062 - 32 19,094
Deferred income taxes 7,137 - 16,142 A 23,279
Other accrued liabilities 40,558 23,140 (20,885) 14,500 A 57,313
Current portion of long-term debt 3,245 3,010 133,946 A 140,201
---------------------------------------------------------------------
Total current liabilities 251,974 64,277 (45,673) 250,480 521,058
Long-term debt, net of current portion 284,734 122,946 (22,946)A 384,734
Accrued postretirement benefits 134,693 236 (236) 134,693
Deferred income taxes 110,689 3,650 11,300 A 125,639
Other liabilities 23,314 10,450 (3,525) 30,239
SHAREHOLDERS' EQUITY 460,734 77,083 34 (77,117)A 460,734
---------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,266,138 $ 278,642 $(49,400) $ 161,717 $1,657,097
=====================================================================
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
</TABLE>
PF-3<PAGE>
<TABLE>
Carpenter Technology Corporation
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended June 30, 1997
(in thousands) Adjustments
<CAPTION> Talley to Present
Historical Talley Talley
Pro Forma For The Historical Historical
Carpenter Year For The 12 For The 12
Carpenter Other and Other Ended Mo. Ended Months Ended Pro Forma Pro Forma
Historical Acquisitions Acquisitions 12/31/96 6/30/97 (I) 6/30/97 Adjustments Combined
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $939,000 $83,771 $1,022,771 $502,698 $(12,911) $489,787 $(365,606)(G) $1,132,461
(14,491)(H)
_______________________________________________________________________________________________________
Cost of sales 697,892 51,059 748,951 311,565 (823) 310,742 1,494 (D) 841,789
(204,907)(G)
(14,491)(H)
Selling and administrative
expenses 126,357 17,144 143,501 64,393 550 64,943 1,928 (D) 155,902
(54,470)(G)
Interest expense 19,930 3,484 23,414 25,406 (8,693) 16,713 8,600 (E) 32,014
(16,713)(G)
Equity in loss of joint
venture 1,188 - 1,188 - - - - 1,188
Provision (reversal) for
reserve on realty assets - - - 85,000 (6,300) 78,700 (78,700)(G) 0
Other (income) expense, net (4,238) (230) (4,468) (16,295) (2,948) (19,243) 18,539 (G) (5,172)
_______________________________________________________________________________________________________
841,129 71,457 912,586 470,069 (18,214) 451,855 (338,720) 1,025,721
Income from continuing
operations before income
taxes 97,871 12,314 110,185 32,629 5,303 37,932 (41,377) 106,740
Income tax expense (benefit) 37,878 5,611 43,489 1,836 (823) 1,013 (1,865)(F) 42,776
139 (G)
_______________________________________________________________________________________________________
Income from continuing
operations $ 59,993 $ 6,703 $ 66,696 $ 30,793 $ 6,126 $ 36,919 $ (39,651) $ 63,964
=======================================================================================================
Primary earnings per common
share from continuing
operations* $ 3.30 $ 3.29 $ 3.15
Fully diluted earnings per
common share from
continuing operations* $ 3.16 $ 3.17 $ 3.04
Average common shares
outstanding - primary* 17,703 19,782 19,782
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
* The Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share," which became effective for periods ending after
December 15, 1997. Carpenter will adopt this statement effective with the quarter ending December 31, 1997. SFAS 128 specifies
the computation, presentation and disclosure requirements for earnings per share. The adoption of SFAS 128 would not have had
a material effect on these pro forma financial statements.
</TABLE>
PF-4<PAGE>
<TABLE>
Carpenter Technology Corporation
Unaudited Pro Forma Condensed Combined Statement of Income
for the three months ended September 30, 1997
(in thousands)
<CAPTION>
Carpenter Talley Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
Net sales $249,495 $87,990 $(58,652)(G) $277,307
(1,526)(H)
_______________________________________________
Cost of sales 179,419 66,845 242 (D) 202,591
(42,389)(G)
(1,526)(H)
Selling and administrative expenses 36,209 14,547 459 (D) 39,274
(11,941)(G)
Interest expense 5,848 3,589 2,100 (E) 7,948
(3,589)(G)
Other expense (income), net 78 435 140 (G) 653
_______________________________________________
221,554 85,416 (56,504) 250,466
Income from continuing operations
before income taxes 27,941 2,574 (3,674) 26,841
Income tax expense (benefit) 10,857 219 (717)(F) 10,583
224 (G)
_______________________________________________
Income from continuing operations $ 17,084 $ 2,355 $ (3,181) $ 16,258
===============================================
Primary earnings per common share
from continuing operations* $ 0.85 $ 0.80
Fully diluted earnings per common
share from continuing operations* $ 0.82 $ 0.78
Average common shares
outstanding-primary* 19,737 19,737
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
* The Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share," which became
effective for periods ending after December 15, 1997. Carpenter will adopt this statement effective with the
quarter ending December 31, 1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. The adoption of SFAS 128 would not have had a material effect on
these pro forma financial statements.
</TABLE>
PF-5<PAGE>
Carpenter Technology Corporation
Notes to Unaudited Pro Forma
Condensed Combined Financial Statements
(in thousands)
BALANCE SHEET ADJUSTMENTS:
A) The aggregate purchase price for Talley is summarized below:
Total cash to be paid to Talley shareholders $183,200*
Debt assumed at fair value 136,956
Acquisition costs 3,500
________
Aggregate Purchase Price $323,656
========
* Includes $137,400 paid in December 1997 and $45,800 to be paid upon
completion of the Talley Merger.
<TABLE>
The allocation of the aggregate purchase price and adjustments to Talley
historical balances follow:
<CAPTION>
Talley
Purchase Historical
Price Balances As Acquisition
Allocation Adjusted(1) Financing Adjustments
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 40,614 $ 40,614 $ - $ -
Accounts Receivable, net of
allowance for doubtful accounts 14,739 14,739 - -
Inventories 32,247 28,347 - 3,900
Deferred Income Taxes - Current - 3,800 - (3,800)
Other Current Assets 1,231 1,231 - -
Net assets held for sale 161,479 103,108 - 58,371
Property, Plant and Equipment, net 60,229 23,229 - 37,000
Goodwill, net 65,558 391 - 65,167
Other Assets 15,670 13,783 - 1,887
Short-Term Debt - - (86,700)(2) (86,700)
Accounts Payable (11,797) (11,797) - -
Accrued Compensation (1,510) (1,510) - -
Accrued Income Taxes (32) (32) - -
Deferred Income Taxes - Current (16,142) - - (16,142)
Other Accrued Liabilities (16,755) (2,255) - (14,500)
Current Portion of Long-Term Debt - (3,010) (136,956)(2) (133,946)
Long-Term Debt, net of
current portion - (122,946) (100,000)(2) 22,946
Deferred Income Taxes - Non-Current (14,950) (3,650) - (11,300)
Other Liabilities (6,925) (6,925) - -
Shareholders' Equity - (77,117) - 77,117
____________________________________________________
$323,656 $ 0 $(323,656) $ 0
====================================================
(1) As adjusted for reclassification of assets held for sale (see
note B).
(2) Reflects the adjustment to record the debt assumed and incurred by
Carpenter including 1) Talley's debt with fair value of $136,956
and 2) additional borrowings under revolving credit agreement of
$186,700 to finance purchase of outstanding Talley stock,
including acquisition costs. The Talley debt was classified as
current because Carpenter intends to repay it within one year. Of
the $186,700 of Carpenter borrowings in the form of short-term
debt, $100,000 was classified as long-term debt because Carpenter
has the ability and intent to refinance this portion on a long-term
basis under the revolving credit agreement.
</TABLE>
PF-6<PAGE>
Carpenter Technology Corporation
Notes to Unaudited Pro Forma
Condensed Combined Financial Statements
BALANCE SHEET ADJUSTMENTS CONTINUED:
Carpenter plans to retain the Stainless Steel Products segments of Talley
and divest of the Government Products and Services and Industrial
Products segments of Talley. Adjustment B is to reclassify the assets
and liabilities related to Talley's business segments to be disposed of
by Carpenter as net assets held for sale. The classification as a
current asset reflects management's plan to dispose of the net assets
within one year of the acquisition. Generally, any difference between
the amount of the purchase price allocated to the net assets held for
sale and the amount realized upon their dispositions will be reflected
in Carpenter's consolidated balance sheet as an adjustment to goodwill,
and will not be reflected in Carpenter's consolidated statement of income.
C) Adjustment to eliminate trade receivables and payables between Carpenter
and Talley.
INCOME STATEMENT ADJUSTMENTS:
D) Adjustments to provisions for depreciation and amortization for
estimated fair value adjustments related to property, plant and
equipment, depreciated over 15 years on a straight-line basis, goodwill,
amortized over 40 years on a straight-line basis, and other intangible
assets (trademarks and tradenames), amortized over 30 years on a
straight-line basis.
E) Additional interest expense on borrowings resulting from the purchase of
Talley. Interest is assumed at an average rate of 6.1%, the approximate
current short-term borrowing rate of Carpenter.
F) Reflects the income tax effects related to pro forma adjustments. The
adjustment to income taxes reflects the application of the estimated
effective tax rate on a pro forma basis to income (loss) before income
taxes for historical and pro forma adjustment amounts.
G) Adjustments to eliminate revenues and expenses related to net assets
held for sale.
H) Adjustment to eliminate sales and cost of sales between Carpenter and
Talley.
I) Adjustments to present Talley's consolidated statement of earnings for
the year ended June 30, 1997. The adjustments reflect the net
differences between the amounts for the six months ended June 30, 1997
and amounts for the six months ended June 30, 1996.
J) Cost savings benefits from synergies to be derived from the acquisition
of the Stainless Steel Products segment of Talley, which may be
significant, are not reflected in the Unaudited Pro Forma Condensed
Combined Financial Statements. There can be no assurance, however, as
to the amount of cost savings benefits, if any, that will be realized
as a result of such acquisition.
PF-7<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 2-83780, 2-81019,
2-60469, 33-42536, 33-65077, 33-54045, 33-40991) and Form S-3
(No. 33-51613) of Carpenter Technology Corporation of our report
dated February 17, 1997 relating to the financial statements of
Talley Industries, Inc., which appears in the Current Report on
Form 8-K/A of Carpenter Technology Corporation dated January 22,
1998.
PRICE WATERHOUSE LLP
Phoenix, Arizona
January 21, 1998
<PAGE>
