UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 33-49869-01
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0739329
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2702 North 44th Street, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
<TABLE>
<S>
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirement for the past 90 days. Yes[ X ] No[ ]
<S>
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ X ]
<S>
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by court. Yes[ ] No[ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
OMISSION OF INFORMATION BY CERTAIN
WHOLLY-OWNED SUBSIDIARIES
<S>
The registrant meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K and
therefore is filing this Form with the reduced disclosure format. Items 10, 11, 12 and 13 have been omitted.
</TABLE>
<PAGE>
Table of Contents
Page
Part I
Item 1. Business
(a) Developments since January 1, 1996 I-1
(b) Financial Information About Industry Segments I-2
(c) Narrative Description of Business I-2
(d) Financial Information about Foreign and
Domestic Operations and Export Sales I-22
(e) Executive Officers of the Registrant I-22
Item 2. Properties I-22
Item 3. Legal Proceedings I-23
Item 4. Submission of Matters to a Vote of Security Holders I-23
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 8. Financial Statements and Supplementary Data II-2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-2
Part III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial
Owners and Management III-1
Item 13. Certain Relationships and Related Transactions III-1
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
<PAGE>
PART I
Item 1. Business.
- ------------------
(a) Developments since January 1, 1996.
- ----------------------------------------
Airbag Royalty Settlement
- -------------------------
On June 19, 1996, the United States Court of Appeals for the Ninth
Circuit rejected an appeal by TRW Inc. (TRW), and affirmed the previously
reported $138,000,000 judgment for the Company in TRW Inc. vs. Talley
Industries, Inc. et al. In August 1996, TRW made payments aggregating
approximately $133,144,000 to the Company on account of TRW's obligations
under the judgment. The payments represented the $138,000,000 face
amount of the judgment award, plus interest at the default rate specified
by the Airbag Royalty Agreement (prime plus 5%), 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 $6,704,000 as that portion of a
court-ordered reimbursement of litigation fees and costs (and interest
on the reimbursement amount at the same default rate) from which TRW had
not taken an appeal.
During September 1996, other 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 $16,601,000.
Accordingly, all claims between the parties have now been resolved, and
cash payments have been made by TRW to the Company aggregating
$156,449,000. The quarterly royalty payments ceased with the settlement
payments from TRW.
I-1
<PAGE>
(b) Financial Information about Industry Segments.
- ---------------------------------------------------
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
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.
A segment description along with tables showing sales and operating
income for each of the last five years, and identifiable assets for each
of the last three years attributable to each of the Company's four
business segments are incorporated herein by reference to the material
appearing in the Notes to Consolidated Financial Statements on pages
F-42 through F-50 of the Company's financial statements for the year
ended December 31, 1996, included in a separate section of this report.
For an additional discussion of segment operations, see also
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages F-2 through F-15 of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
(c) Narrative Description of Business.
- ---------------------------------------
General
- -------
In July 1993, Talley Manufacturing and Technology, Inc. ("the
Company", or "Talley Manufacturing"), a wholly owned subsidiary of Talley
Industries, Inc., ("Talley") was formed with the issuance of 1,000 shares
I-2
<PAGE>
of Common stock. The formation of the Company was in connection with an
offering, in October, 1993, of Senior Notes by the Company and Senior
Discount Debentures by Talley. Concurrently with the issuance of these
securities, Talley contributed the capital stock of its operating
subsidiaries (other than its real estate operations) to the Company,
which also assumed a substantial portion of Talley's indebtedness and
liabilities. At the same time, the Company entered into a new credit
facility with certain institutional lenders. The Senior Notes were
guaranteed by substantially all of the Company's subsidiaries. For an
additional discussion see "Basis of Presentation" on page F-21 of the
Company's financial statements for the year ended December 31, 1996,
included in a separate section of this report.
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 automotive airbag market
through its royalty agreement with TRW, which provided the Company with
a quarterly 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 with the settlement payments from
TRW in the Third quarter of 1996, which totaled $156,449,000, as a result
of the litigation involving the airbag royalty agreement and other
matters. (See also "Litigation" in the Notes to the Consolidated
Financial Statements). The Company's Stainless Steel Products segment
manufactures and distributes stainless steel products. The Company's
Industrial Products segment manufactures and sells high-voltage ceramic
I-3
<PAGE>
insulators used in power transmission and distribution systems, and
specialized welding equipment and systems; aerosol insecticides, air
fresheners and sanitizers for the commercial and agricultural markets,
and custom designed metal buttons for military and commercial uniforms
and upscale fashion apparel.
(1) Government Products and Services Segment.
-----------------------------------------
The Company's Government Products and Services segment provides a
wide range of products and services for government programs. The
majority of the Company's products are smaller components of larger units
and systems and are generally designed to enhance safety or improve
performance. Products manufactured by the Company which have significant
replacement requirements include items having finite shelf lives, such
as propellants for pilot ejection seats, as well as products regularly
consumed in training and combat situations. Many of the Company's
existing products and its new product development efforts are focused on
mobile, tactical and "smart" military weapons and systems. The Company
is developing new technologies that will enable it to re-enter the
automotive airbag market, which it pioneered prior to the sale of that
business segment to TRW, Inc. in 1989. The Company's primary efforts are
directed towards the components of the airbag system that initiates the
inflation (the initiator) and the inflator. The Company provides a
broad range of architectural and engineering design consulting services
for the U.S. Navy, commercial clients and shipyards, and has most
recently been expanding its design services into the environmental
protection market.
Solid Propellant Devices and Related Products
A majority of the products manufactured by the Company's Government
Products and Services segment are based upon the Company's core
technologies and expertise in the design and manufacture of propellants
and related products. Propellants are solid fuels which, when ignited,
I-4
<PAGE>
produce a specified thrust or volume of gas for a designated period. The
Company's propellant products are typically custom designs developed by
the Company in response to customers' technical requirements and
specifications.
The following sets forth a brief summary of several of the solid
propellant devices and related products manufactured by the Company:
- Pilot Ejection Systems. The Company manufactures ejection seats
and related propellant devices for aircraft ejection systems in
high performance military aircraft. The Company also manufactures
escape systems for a number of foreign aircraft.
- Rocket Motors. The Company manufactures a wide range of rocket
motors and rocket catapults. These products include booster
rockets for decoy missiles, as well as for unmanned vehicles. The
Company also manufactures rocket catapults and rocket motors for
its aircraft escape systems.
- Gas Generators. The Company manufactures a broad range of solid
propellant gas generators. These products provide pneumatic power
for guidance and control systems, hydraulic systems, and safe and
arming devices on a wide range of missile systems.
- Extended Range Munitions Components. The Company's extended range
munitions components utilize propellant technologies to
dramatically extend the range of U.S. artillery. The Company's
extended range munitions utilize a solid propellant to reduce drag
or rocket assist to provide thrust to extend the range of new
howitzer artillery.
- Dispersion Systems. The Company pioneered the use of airbag
technologies for modern munitions delivery systems. The Company's
dispersion systems utilize airbag assemblies to eject submunitions
from carrier missile systems.
I-5
<PAGE>
- Weapons Systems. These weapon systems include a light anti-armor
weapon for the U.S. Navy and a light-weight disposable version
of a U.S. Marine Corps shoulder-launched weapon system for the
U.S. Army.
- Ejector Racks. These ejection racks enable helicopter pilots to
discard munitions, missiles or extra fuel in emergency situations.
- Countermeasure Systems. The Company manufactures several training
and combat countermeasure systems for naval, aircraft and
submarine applications. Countermeasure systems are designed to
divert incoming weapons from their targets.
- Insensitive Munitions. The Company develops and manufactures
propellant products which are being qualified to meet certain
rigorous safety requirements. These munitions are generally
insensitive to shock, puncture, high temperatures and pressure.
- Electro Explosive Devices ("EED"). Electro-explosive devices
manufactured by the Company include rocket motor igniters,
explosive bolts and separation nuts and booster cartridges, as
well as initiators for these and other components.
- Automotive Airbag Products. New products include advanced, non-
sodium azide inflators, ceramic initiators and an inflatable seat
belt.
High Reliability Electronic Products
- ------------------------------------
The Company designs and manufactures specialized electronic display
and monitoring devices, electromechanical instruments and components, and
high performance cable assemblies which are used by the aerospace and
defense industries. The Company's products are designed to perform at
I-6
<PAGE>
a high level of reliability, conform to tight tolerance specifications
and withstand harsh operating environments. The following sets forth
a brief summary of the primary electronic products manufactured by the
Company:
- Air Traffic Control Systems. The Company has supplied electronic
displays to the Federal Aviation Administration ("FAA") for over
20 years for use in certain air traffic control applications.
- Airborne Flight Data Recorders. The Company is a manufacturer of
flight data recorders that are used on military aircraft. These
flight data recorders are used to evaluate training simulations
and record flight information, and are designed to maintain data
integrity in the event of a crash.
- Safe and Arming Devices. The Company manufactures electronic and
electromechanical devices which are used to safely control, arm
and fire warheads on torpedoes and missiles. These products are
designed to meet a high standard for safety requirements.
Electronic Safe and Arming Devices have advantages over
electromechanical devices in that they respond far quicker, can be
programmed to vary arming time, have greater precision and are
more reliable.
- Indicators. The Company is a producer of elapsed time indicators,
event counters and fault indicators, with a significant share of
the domestic aerospace market. The Company's indicator products
are capable of functioning with a high degree of accuracy and are
built to withstand the harsh operating environment present in
aerospace applications.
- Interconnect Products. The Company also designs, manufactures
and sells high quality interconnect products and accessories for
I-7
<PAGE>
military, aerospace and commercial marketplaces. These products
include high voltage silicone wire and cable, multi-pin high and
low voltage connector and cable assembly interconnection systems,
and triax and coax high voltage connections and cable assemblies.
The major applications for these products include medical
equipment, radar and CRT displays, electronic countermeasure
systems and power supplies.
Naval Architecture and Marine Engineering Services
- --------------------------------------------------
The Company's naval architecture and marine engineering business
provides a broad range of consulting services for the U.S. Navy, as well
as for commercial clients and shipyards. The Company's naval design and
engineering business has provided services for over 35 years and
possesses domestic and international experience in all phases of the
design process for military and commercial ships. These services include
initial feasibility and conceptual studies, contract design, and detail
design and engineering for new and retrofitted ships. The Company also
provides the engineering services necessary to physically integrate
combat systems and electronics into Navy ships and provides program
management and logistics support services to the Navy and commercial
customers. The Company has been expanding its design services into the
environmental protection market, and has been successful in obtaining a
prime contract in support of the U.S. Navy's Hazardous Material
Afloat program. The Company maintains separate segments to meet the
different technical, performance and administrative needs of its
customers.
Direct contracts with the U.S. Navy currently account for a majority
of the Company's naval architecture and marine engineering revenue, with
additional revenue attributable to subcontracts under Navy contracts.
I-8
<PAGE>
The remaining revenues are derived from commercial shipyards or
industrial customers for ship and other marine design services. The
majority of the Company's contracts with the U.S. Navy are cost plus a
fixed fee. Under these contracts, the Company is reimbursed for its
actual costs plus a percentage fee based on the estimated costs in the
original contract.
The demand for design services for the U.S. Navy is largely driven
by the number of new ship classes being developed or older classes being
retrofitted, versus the actual number of ships within a class being built
or operated. The majority of engineering and detail design costs are
incurred with the introduction of a new class of ship or the retrofit of
one or more ships of an existing class.
Marketing
- ---------
The Company markets its government products and services directly to
the Department of Defense, other U.S. government departments, foreign
government agencies, and other contractors. The Company's marketing
strategy focuses on those contracts and programs which are likely to be
emphasized in the current defense environment and for which the Company
has a competitive advantage in technology and expertise.
The Company's technical sales personnel are strategically located
across the country for easy access to its customers. The Company also
uses independent sales agents to market its products to various foreign
governments and to sell its electronic component products. In addition,
the Company enters into joint marketing agreements with foreign
manufacturers to provide access to markets not available direct to the
Company.
I-9
<PAGE>
Competition
- -----------
Competition for the Company's government products and services varies
widely. The markets for several of the Company's products and services
are highly competitive, and many of the Company's competitors have
greater financial resources than the Company. However, the Company also
competes in a variety of small niche markets. Production of the
products within these markets frequently requires government/product
qualification, which can be costly and time-consuming to obtain. Once
a contract has been awarded, the relatively small size of these markets
often discourages additional suppliers from pursuing qualification.
Within these markets the Company is occasionally a sole supplier.
The market for the Company's electronics components products is
highly competitive. The Company believes that it shares the market for
aerospace elapsed time indicators, fault indicators and events counters
primarily with one competitor. The Company believes that its safe and
arming devices compete with several companies.
The Company believes that its market for naval architectural and
marine engineering services is served by the Company and a small number
of other major firms. These companies actively compete with each other,
and to a lesser extent with smaller design firms, for U.S. Navy programs,
foreign contracts and subcontracts with private shipyards.
Government Contract Matters
- ---------------------------
A high percentage of the Company's government defense contracts are
fixed-price contracts. The Company's naval architecture and marine
engineering contracts are generally cost reimbursable. Although the
Company's fixed-price contracts generally permit the Company to retain
unexpected profits if costs are less than projected, the Company bears
I-10
<PAGE>
the risk that increased or unexpected costs may reduce profit or cause
the Company to sustain losses on a particular contract. From time to
time the Company accepts fixed-price contracts for products that have not
been previously developed. In such cases, the Company is subject to the
risk of delays and cost over-runs. Under U.S. Government regulations,
certain costs, including financing and interest costs and foreign
marketing expenses, are not allowable. The U.S. Government also
regulates the methods under which costs are allocated to Government
contracts. With respect to U.S. Government contracts that are obtained
pursuant to an open bid process and therefore result in a firm fixed
price, the Government has no right to renegotiate any profits earned
thereunder. In Government contracts where the price is negotiated at a
fixed price rather than on a cost-plus basis, as long as the financial
and pricing information supplied to the Government is current, accurate
and complete, the Government has no right to renegotiate any profits
earned thereunder. However, if the Government later conducts an audit
of the contractor and determines that such data was inaccurate, or
incomplete or not current, the Government may initiate an action to
recover the amount of any significantly overstated costs plus applicable
profit or fee and interest. If the submission of inaccurate, incomplete
or not current data was knowingly made, then the Government may seek to
recover an additional penalty equal to the amount of the overstated
costs; and if the submission was willful or intentional the Government
may seek additional penalties and damages. Certain cost reimbursement
contracts are also subject to review and price adjustment by the
Government.
I-11
<PAGE>
U.S. Government contracts are, by their terms, subject to termination
by the Government either for its convenience or for default by the
contractor. Fixed-price contracts provide for payment upon termination
for items delivered to and accepted by the Government. If the
termination is for convenience, fixed-price contracts provide for payment
of the contractor's costs incurred plus the costs of settling and paying
claims by terminated subcontractors, other settlement expenses and a
reasonable profit on its incurred performance costs. However, if a
fixed-price contract termination is for default, (i) the contractor is
paid such amount as may be agreed upon for completed and partially
completed products and services accepted by the Government, (ii) the
Government is not liable for the contractor's costs with respect to
unaccepted items and is entitled to repayment of advance payments and
progress payments, if any, related to the terminated portions of the
contracts and (iii) the contractor may be liable for excess costs
incurred by the Government in procuring undelivered products and services
from another source. Foreign defense contracts generally contain
comparable provisions relating to termination at the convenience of the
government.
Companies supplying defense-related products and services to the U.S.
Government are subject to certain additional business risks unique to
that industry. These risks include: the ability of the Government to
unilaterally suspend the Company from new contracts pending resolution
of alleged violations of certain procurement laws or regulations;
I-12
<PAGE>
procurements which are dependent upon appropriated funds by the
Government; changes in the Government's procurement policies (such as a
greater emphasis on competitive procurements or cancellation of programs
due to budgetary changes); the possibility of inadvertent Government
disclosure of a contractor's proprietary information to third parties;
and the possible need to bid on programs in advance of design completion.
A reduction in expenditures by the Government for the Company's products
and services, lower margins resulting from increasingly competitive
procurement policies, a reduction in the volume of contracts or
subcontracts awarded to the Company, incomplete, inaccurate or non-
current data allegations, terminations or cancellations of programs, or
substantial cost over-runs could have an adverse effect on the Company's
results of operations.
Backlog
- -------
The backlog of government funded programs and firm industrial
contracts in the Government Products and Services segment amounted to
approximately $112.0 million at December 31, 1996, $98.9 million at
December 31, 1995 and $97.3 million at December 31, 1994. The total
backlog, including unfunded programs amounted to approximately $423.0
million at December 31, 1996, $469.0 million at December 31, 1995 and
$97.0 million at December 31, 1994. The Company estimates that
approximately $82.1 million of the government funded and firm industrial
backlog and $119.5 million 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 (i) contracts held by the Company
(excluding renewals or extensions thereof, which are at the discretion
I-13
<PAGE>
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 (ii) task orders or delivery orders issued to the
Company under contracts 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.
(2) Airbag Royalties Segment.
-------------------------
This segment of the Company's business consists of the Company's
royalty entitlement under the license agreement it signed with TRW in
April 1989 in connection with the sale of the Company's automotive airbag
business to TRW at that time. Under the terms of that license agreement,
the Company was entitled to receive a royalty each quarter from TRW
measured by the level of TRW's airbag sales and the level of industry
sales.
As described in the Notes to Consolidated Financial Statements under
the heading Commitments and Contingencies of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report, on June 19, 1996, the United States Court of
Appeals for the Ninth Circuit rejected TRW's appeal and affirmed the
$138,000,000 judgment for the Company in TRW Inc. vs. Talley Industries,
Inc. et al. In August 1996, TRW made payments aggregating approximately
$133,144,000 to the Company on account of TRW's obligations under the
judgment. The payments represented the $138,000,000 face amount of the
I-14
<PAGE>
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 $6,704,000 as that portion of a court-ordered
reimbursement of litigation fees and costs (and interest on the
reimbursement amount at the same default rate) from which TRW had not
taken an appeal.
In September 1996, other 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 $16,601,000. Accordingly,
all claims between the parties have now been resolved, and cash payments
have been made by TRW to the Company aggregating $156,449,000. The
quarterly royalty payment ceased with the settlement payments from TRW.
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.
(3) Stainless Steel Products Segment.
---------------------------------
The Company operates a modern stainless steel mini-mill which
converts purchased stainless steel billets into a variety of grades,
sizes and shapes of hot rolled and cold finished bar and rod. The
facility utilizes computer automation and quality control processes that
have resulted in a high standard of product quality, service and
delivery. Located in South Carolina, the mini-mill has relatively low
operating costs and is situated close to major north-south and east-west
interstate highways. The Company has annealing, shot blasting, pickling
I-15
<PAGE>
and cold finishing capabilities, which broaden the product range, shorten
lead times, improve product quality and lower costs. The Company sells
its products to a number of steel distributors, including a master
distributor which is owned by the Company, and to a lesser extent to
industrial end-users. The Company-owned master distributor sells
stainless steel bar, angle and flats to independent distributors, and
also provides cutting, grinding and boring services. The Company's
master distributor, which resells approximately 17% of the mini-mill's
total production currently, has five distribution depots located in South
Carolina, New Jersey, Pennsylvania, Illinois and Texas. The Company also
owns a Canadian distributor, which sells primarily flat stainless steel
products (not produced by the mini-mill). This distributor has locations
in Ontario and Quebec.
Demand for the Company's products is directly related to the level
of general economic activity and the competition, and therefore, has been
impacted most recently by competitive pressures from domestic and foreign
steel suppliers. The Company's operations are technologically advanced
and its products are highly competitive in terms of quality, brand
recognition and price.
Marketing
- ---------
The Company markets its stainless steel products to distributors,
manufacturers and fabricators. These organizations vary in size,
complexity and purchasing structures. The Company's sales and marketing
efforts use a combination of direct sales and independent distributors.
Competition
- -----------
The Company's Stainless Steel Products businesses are highly
competitive, with competition typically based on price, quality, delivery
time, engineering expertise and customer service. The Company's
competitors include major domestic and international companies, many of
I-16
<PAGE>
which have financial, technical, marketing, manufacturing, distribution
and other resources substantially greater than those of the Company, as
well as smaller competitors which focus on specific market niches.
Backlog
- -------
The backlog of firm orders in the Stainless Steel Products segment
totaled approximately $17.4 million at December 31, 1996, $27.9 million
at December 31, 1995 and $26.2 million at December 31, 1994. The Company
estimates that substantially all of the orders outstanding at December
31, 1996 will be delivered by December 31, 1997.
(4) Industrial Products Segment.
----------------------------
The Company's Industrial Products segment operates in three product
areas: high-voltage ceramic insulators, specialty products, and other
industrial products.
High-Voltage Ceramic Insulators
The Company's high-voltage ceramic insulator business manufactures
and sells electrical insulators and related items for use in power
transmission and distribution systems, principally to electric utilities,
municipalities and other government units, as well as to electrical
contractors and original equipment manufacturers. High-voltage ceramic
insulators are required to perform with high levels of reliability and
typically require product certification from electric utilities to be
used for new or replacement applications. Demand for these products is
influenced by the level of economic activity, particularly housing
starts, with a fairly stable minimum demand level due to normal
replacement and repair cycles.
The Company's primary customers include original equipment
manufacturers as well as many of the major utilities throughout the U.S.
and the world.
I-17
<PAGE>
Specialty Products
- ------------------
The Company's specialty products focus on two primary markets:
insect and odor control for the industrial maintenance supply, pest
control and agricultural markets; and custom designed metal buttons for
the military and commercial uniform and fashion markets.
The Company offers a complete line of insecticides, air fresheners
and sanitizers for sale through distributors to the industrial
maintenance supply, pest control and agricultural markets. The Company's
insecticide products are sold under unique trademarks to agricultural and
pest control distributors, respectively, who sell to pest control
professionals. The Company's insecticide formulations focus on using
natural active ingredients including pyrethrin (derived from the
chrysanthemum flower), boric acid and sassafras. The Company offers a
complete line of insecticides to control the most common crawling and
flying insects. The insecticides are mixed and packaged at the Company's
Louisiana manufacturing plant and formulated into aerosol, liquid and
powder form.
Air freshening and sanitizing products are formulated and packaged
for specific air freshening and sanitizing situations, which vary based
on room size, type of odor to be treated, and desired fragrance. In
addition, the products are designed for one of four different delivery
methods: (i) metered, automatic aerosols for areas up to 6,000 cubic
feet, (ii) fan delivered solids for areas up to 1,500 cubic feet,
(iii) manual aerosols for immediate air freshening and (iv) passive
solids for small enclosed areas.
In addition to manufacturing odor and insect control formulations,
the Company also manufactures and sells metered and fan driven dispensers
I-18
<PAGE>
for these products. Metered dispensers utilize a timing mechanism to
deliver aerosol spray at programmable time intervals. Fan driven
dispensers utilize battery operated fans to distribute the scent of
selected air fresheners.
The Company designs and manufactures a wide range of custom metal
buttons for the military and commercial uniform and fashion markets. The
Company also produces insignias, cuff links, money clips, tie bars and
other accessories as a complement to its button products. The buttons
are individually stamped from custom designed steel dies.
The use of steel dies and a brass stamping process allow the Company
to produce button designs with extremely fine detail and high resolution.
The Company custom designs and produces metal buttons for the U.S.
military based on detailed military specifications. The market for
commercial uniform buttons includes local police, fire departments and
other civil servants. The Company continues to increase its presence in
the fashion apparel market by working with apparel manufacturers on
custom button designs for their manufactured garments.
Other Industrial Products
- -------------------------
The Company designs, manufactures and sells specialized advanced-
technology welding equipment and systems, power supply systems and
humidistats, and also provides contract assembly and manufacturing for
original equipment manufacturers. The Company's welding equipment and
systems are highly-engineered and advanced technologically. The
Company's product lines include patented welding systems which can be
remotely controlled for use in radioactive and other contaminated
environments. These products are sold to the utility, pipeline,
shipbuilding, aerospace and specialty construction industries.
I-19
<PAGE>
The power supply systems manufactured by the Company are principally
low-wattage systems and are sold to original equipment manufacturers in
the telecommunications, medical, computer and other industrial markets.
The power supply market is highly competitive, with numerous
manufacturers in the U.S.
The Company also manufactures and sells humidistats. Humidistats are
used to regulate humidity levels and are principally sold to home
appliance manufacturers.
Marketing
- ---------
The Company markets its industrial products to domestic and foreign
customers. The Company utilizes a network of direct sales staff,
independent distributors, manufacturers and distributors, to market its
industrial products to the various pest control and sanitary supply
companies, and agricultural market.
Competition
- -----------
Competitors in the Industrial Products segment include a wide range
of domestic and foreign manufacturers and resale distributors, and
chemical and pet care companies. Competition is based on product
efficiency, quality, price, delivery time, engineering expertise and the
ability to offer a broad range of products.
The Company maintains the strongest position in the resale market of
porcelain products, humidistats, and military and commercial uniform
button market.
Backlog
- -------
The backlog of firm orders in the Industrial Products segment
totaled approximately $7.7 million at December 31, 1996, $6.6 million at
I-20
<PAGE>
December 31, 1995 and $7.4 million at December 31, 1994. The Company
estimates that substantially all of the orders outstanding at December
31, 1996 will be delivered by December 31, 1997.
(5) Other General Information.
--------------------------
Research and Development. During the years ended December 31, 1996,
1995 and 1994, the Company's consolidated expenditures for Company-
sponsored research and development activities were approximately $8.7
million, $4.2 million and $4.3 million, respectively. For the same
reporting periods, customer-sponsored research and development
expenditures were $8.8 million, $10.1 million and $8.2 million,
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.
Environmental Protection. The Company does not anticipate that
compliance with various laws and regulations relating to the protection
of the environment will have any material effect upon its capital
expenditures, earnings or competitive position.
Employees. As of December 31, 1996, the Company had 2,494
employees, approximately 16.7% of whom are represented by unions.
Proprietary Rights. Various of the Company's businesses are
dependent in part upon unpatented know-how and technologies, including
the solid propellent businesses. While various patents, trademarks and
tradenames are held by the Company and are used in its businesses, none
of them are critical to any segment, and the Company's business is not
dependent upon them to a material extent.
I-21
<PAGE>
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
- ---------------------------------------------------------------------
Information required by this item is incorporated by reference to the
Notes to Consolidated Financial Statements appearing under the heading
"Segment Operations" on pages F-42 through F-50 of the Company's
financial statements for the year ended December 31, 1996, included in
a separate section of this report.
(e) Executive Officers of the Registrant.
- ------------------------------------------
Reference is hereby made to the information contained in Item 10(b)
of this Form 10-K.
Item 2. Properties.
- --------------------
The Company's operations are conducted at numerous manufacturing and
assembly plants, warehouses, offices and sales facilities located in 20
states, as well as warehouses, offices and sales facilities in Canada and
the Netherlands. The principal facilities of the Government Products and
Services segment include approximately 931,000 square feet of
manufacturing and assembly facilities, in addition to related warehouse,
office and sales facilities. The principal manufacturing and assembly
facilities for this segment are located in Mesa, Arizona; Phoenix,
Arizona; Rolling Meadows, Illinois; and Toledo, Ohio. The majority of
these facilities are owned by the Company. However, at the two Arizona
facilities, the Company owns the plants and equipment and leases the
underlying land from the State of Arizona. One of these locations is
leased under long-term leases, while the second location is currently
under a year-to-year lease. The Company's naval architectural and
engineering services are provided out of several offices, with the major
ones located in New York, New York; Arlington, Virginia; Newport News,
Virginia; Washington, D.C.; Pittsburgh, Pennsylvania; and Pascagoula,
Mississippi, all of which are leased.
I-22
<PAGE>
Facilities used by the Stainless Steel Products segment include
approximately 415,000 square feet of manufacturing and assembly plants
and related office, warehouse and sales space, located in Hartsville,
South Carolina; and sales and warehouse facilities in New Brunswick,
New Jersey; Hermitage, Pennsylvania; Chicago, Illinois; Houston, Texas;
Charlotte, North Carolina; Toronto and Montreal, Canada. All of the
facilities are owned by the Company with the exception of sales and
warehouse facilities consisting of 171,000 square feet.
The operations of the Industrial Products segment are conducted in
several facilities consisting of approximately 604,000 square feet of
manufacturing, warehouse and office space located in Carey, Ohio;
Knoxville, Tennessee; Waterbury, Connecticut; Randolph, Vermont;
Independence, Louisiana; Davidson, North Carolina and the Netherlands.
Most of these facilities are owned by the Company except for 24,000
square feet of warehouse facilities.
In total, over two-thirds of all the facilities (by square footage)
are owned by the Company and have been pledged as collateral to secure
a credit facility. The Company's facilities, which are continually added
to or modernized, are generally considered to be in good condition and
adequate for the business operations currently being conducted.
Item 3. Legal Proceedings.
- ---------------------------
Information required by this item is incorporated by reference to the
Notes to Consolidated Financial Statements appearing under the heading
"Commitments and Contingencies" of the Company's financial statements for
the year ended December 31, 1996, included in a separate section of this
report.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
I-23
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
- -----------------------------------------------------------------------
The Company's stock is wholly owned by its parent, Talley Industries,
Inc., and is not traded. Dividends can be and are made when necessary
by Talley Manufacturing. Subject to restrictions by debt agreements,
dividends may be declared and paid (See "Management's Discussion and
Analysis" on pages F-2 through F-15 of the Company's financial statements
for the year ended December 31, 1996, included in a separate section of
this report, for further discussion).
Item 6. Selected Financial Data.
- --------------------------------
The information required by this item is incorporated by reference
to the material under the captions "Five Year Summary of Operations" and
"Selected Financial Data" on pages F-51 and F-53 of the Company's
financial statements for the year ended December 31, 1996, included in
a separate section of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference
to the material on pages F-2 through F-15 of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
II-1
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The Consolidated Financial Statements, together with the report
thereon by Price Waterhouse LLP, are included in a separate section of
this report. (See "Index to Financial Statements and Schedules" on page
F-1). The Company's stock is wholly owned by the parent company, Talley,
and accordingly, quarterly financial results are not provided.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------
The Company's Independent Accountants during the two most recent
fiscal years have neither resigned, declined to stand for re-election nor
been dismissed.
II-2
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
Information under this item has been omitted pursuant to conditions
set forth in General Instruction (J)(1)(a) and (b) of Form 10-K.
(c) Compliance with Section 16(a) of the Exchange Act.
--------------------------------------------------
Information under this item has been omitted pursuant to conditions
set forth in General Instruction (J)(1)(a) and (b) of Form 10-K.
Item 11. Executive Compensation.
- ---------------------------------
Information under this item has been omitted pursuant to conditions
set forth in General Instruction (J)(1)(a) and (b) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
Information under this item has been omitted pursuant to conditions
set forth in General Instruction (J)(1)(a) and (b) of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
Information under this item has been omitted pursuant to conditions
set forth in General Instruction (J)(1)(a) and (b) of Form 10-K.
III-1
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a)-1 Financial Statements
--------------------
A list of the financial statements included herein is set forth
in the Index to Financial Statements and Schedules submitted as
a separate section of this Report.
(a)-2 Financial Statement Schedules
-----------------------------
A list of the financial statement schedules included herein is
contained in the accompanying Index to Financial Statements and
Schedules submitted as a separate section of this Report.
(a)-3 Exhibits
--------
Exhibits listed in the Exhibit Index on the pages preceding the
exhibits of this report are filed as a part of this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed for the three months
ended December 31, 1996.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
By Mark S. Dickerson
--------------------------------------
March 25, 1997 Mark S. Dickerson
Phoenix, Arizona Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
William H. Mallender Director, Chairman
- ----------------------- of the Board
William H. Mallender Principal Executive
Officer March 25, 1997
Jack C. Crim Director, President
- ----------------------- Chief Operating
Jack C. Crim Officer March 25, 1997
Kenneth May Vice President,
- ----------------------- Controller
Kenneth May Principal Accounting
Officer March 25, 1997
Daniel R. Mullen Vice President,
- ----------------------- Treasurer
Daniel R. Mullen Principal Financial
Officer March 25, 1997
IV-2
<PAGE>
Neil W. Benson Director March 25, 1997
- -----------------------
Neil W. Benson
Paul L. Foster Director March 25, 1997
- -----------------------
Paul L. Foster
Townsend W. Hoopes Director March 25, 1997
- -----------------------
Townsend W. Hoopes
Fred Israel Director March 25, 1997
- -----------------------
Fred Israel
Joseph A. Orlando Director March 25, 1997
- -----------------------
Joseph A. Orlando
Alex Stamatakis Director March 25, 1997
- -----------------------
Alex Stamatakis
John W. Stodder Director March 25, 1997
- -----------------------
John W. Stodder
- ----------------------- Director
Donald J. Ulrich
David Victor Director March 25, 1997
- -----------------------
David Victor
IV-3
<PAGE>
SUPPLEMENTAL INFORMATION
Supplemental information to be furnished with reports filed pursuant
to Section 15(d) of the Act by registrants which have not registered
securities pursuant to Section 12 of the Act.
No supplemental information is required.
IV-4
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
Page in
This Report
(1) Financial Statements:
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . F-2
Consolidated Statement of Earnings - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . F-16
Consolidated Balance Sheet - December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statement of Changes in Stockholder's
Equity - Years ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . F-19
Consolidated Statement of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . F-20
Notes to Consolidated Financial Statements,
including Summary of Segment Operations. . . . . . F-21
Five Year Summary of Operations. . . . . . . . . . . F-51
Report of Independent Accountants. . . . . . . . . . F-52
Selected Financial Data and Supplemental Data. . . . F-53
Financial Statement Schedules:
I - Condensed Financial Information of
Registrant. . . . . . . . . . . . . . . . F-55
II - Valuation and Qualifying Accounts. . . . . . F-61
All other schedules are omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Separate financial statements for 50% or less owned companies
accounted for by the equity method have been omitted because each
such company does not constitute a significant subsidiary.
F-1
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Introduction
- ------------
In July 1993, the Company was formed as a wholly-owned
subsidiary of Talley Industries, Inc. ("Talley"). The formation
was in connection with an offering of debt securities described
below. Concurrently with the offering, Talley contributed the
capital stock of its operating subsidiaries (other than its real
estate operations) to the Company, which also assumed a substantial
portion of Talley's debt and liabilities.
For the year ended December 31, 1996 the Company had net
earnings of $72.8 million compared to $16.9 million in 1995.
Revenue and earnings were significantly impacted in 1996 by the
receipt of $156.4 million from TRW Inc. (TRW) in satisfaction of
the court's judgment relating to the Company's airbag royalties
dispute and certain other matters. The results of operations in
1996 also includes a $.6 million extraordinary loss from the early
paydown of the Company's revolving line of credit.
Revenues in 1996 were $479.9 million, compared to $383.0
million in 1995. Increases in revenues from the Company's Airbag
Royalties segment were partially offset by decreases in revenues
from the Stainless Steel Products segment. The reduction in
Stainless Steel Products segment revenue is primarily associated
with lower selling prices as a result of competitive pressures from
domestic and foreign suppliers.
The gross profit percentage on sales and services (exclusive
of airbag and other royalties) decreased from 23.5% in 1995 to
19.0% in 1996. The decrease is primarily due to $10.7 million in
non-recurring writedowns of inventory and other cost of sales items
and is also due in part to lower margins on sales in the Stainless
Steel Products segment.
Revenue for the year ended December 31, 1995 increased $62.5
million when compared with 1994. Net earnings of $16.9 million in
1995 compares with a net earnings of $11.2 million in 1994. The
gross profit percentage decreased from 24.5% in 1994 to 23.5% in
1995, primarily due to completion in 1994 of certain non-recurring
high margin defense contracts.
F-2
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Segment Operations
- ------------------
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 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 reclassification.
Government Products and Services
- --------------------------------
Revenue from the Government Products and Services segment in
1996 increased $8.1 million or 5.8% compared with 1995. Operating
income decreased $3.2 million or 30.9%. The increase in revenue is
primarily the result of increased service revenues from the
Company's naval architectural and marine engineering services
business. The decrease in operating income resulted primarily from
a $3.9 million non-recurring charge in the third quarter regarding
defense contract costs and claims along with increased levels of
research and development. Short-term earnings in this segment are
expected to be impacted by above normal levels of airbag research
and development cost. Benefits from this effort are expected as
soon as 1998.
The Company has experienced a reduction in some defense contract
revenue and has not been fully excluded from the effects of defense
budget cuts. However, management believes that its defense
businesses are relatively well-positioned within their respective
markets and are focused on products consistent with the current
military philosophy, which emphasizes "smart", tactical weapons
F-3
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Segment Operations, (continued)
- -------------------------------
Government Products and Services, continued
- -------------------------------------------
and lighter, more mobile fighting forces. In addition, management
is emphasizing non-military products to lessen the Company's
dependency on government contracts.
Revenue and operating income for the year ended December 31,
1995 decreased by $1.5 million and $8.0 million, respectively, when
compared with 1994. The decrease in revenue and operating income
resulted primarily from the overall reduction in U.S. defense
spending and the completion of certain non-recurring contracts and
certain contract delays.
Airbag Royalty
- --------------
Revenue from airbag royalties increased from $24.0 million
in 1995 to $121.9 million in 1996. Revenue in the current year
includes a portion of the payments received from TRW Inc. to settle
the airbag royalties litigation that had been in dispute for
several years. Remaining portions of the $156.4 million TRW
payments represent reimbursement of litigation costs and interest
from the date of the award until paid, and the settlement of
certain other claims between the Company and TRW.
The third quarter payments from TRW with respect to the airbag
royalties litigation represented the jury's calculation of the
present value of the remaining stream of airbag royalties which
would have been payable by TRW through April 2001 in accordance
with the Airbag Royalty Agreement, 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. The settlement
payment resolved all claims and disputes between the Company and
TRW Inc. (See also "Litigation-TRW Inc." as a separate caption
within Management's Discussion and Analysis of Financial Condition
and Results of Operations).
Royalty income from automotive airbags increased from $17.3
million in 1994 to $24.0 million in 1995.
F-4
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Segment Operations (continued)
- ------------------------------
Stainless Steel Products
- ------------------------
The Stainless Steel Products segment had a decrease in revenue
of $9.4 million, or 6.5%, and a decrease in operating income of
$8.7 million in 1996 when compared to 1995. The decrease in
revenue and operating income is primarily related to the
competitive pressures from domestic and foreign suppliers in the
cyclical stainless steel business and accordingly, resulted in
lower selling prices and consequently lower margins. The decrease
in operating income is also due to a $1.9 million non-recurring
writedown in goodwill during 1996. Revenue and operating income,
while below 1995 results, are at a level above historical
performance levels.
In 1995, revenue and operating income for this segment
increased $47.8 million and $13.0 million, respectively, when
compared to 1994. The increases were due primarily to the
increased orders and higher selling prices for stainless steel bars
and rods resulting from an improved national economy, a reduction
in the number of competitors and improved market share.
Industrial Products
- -------------------
Revenue of $74.0 million for the Industrial Products segment
was approximately equal to revenue in 1995, however, operating
income decreased $11.8 million in 1996 when compared to 1995. The
decrease in operating income is primarily a result of a $9.1
million non-recurring inventory and goodwill writedown. Also
contributing to the decrease in operating income is a general slow-
down in the apparel industry, which decreased button sales, and the
effects of the weather which has impacted insecticide sales.
In 1995, revenue and operating income for this segment
increased $9.4 million and $2.4 million, respectively, when
compared to 1994. The increases resulted from higher sales of
ceramic insulators and the acquisition of a manufacturer of metal
buttons in mid 1994.
F-5
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters
- -------------
In 1996, other income, net of other expenses was a net income
of $18.9 million, compared to a net expense of $.6 million in 1995
and $.1 million in 1994. The $19.5 million increase in income is
primarily the result of interest income earned on the TRW Inc.
litigation proceeds, earned from the date of the award until paid,
and also earned on invested funds upon receipt. Corporate overhead
was $18.8 million in 1996, $15.5 million in 1995 and $17.2 million
in 1994. The amounts in 1995 and 1994 are above normal levels due
to litigation costs in 1995 of approximately $5.0 million, and in
1994 of approximately $6.0 million related to resolution of claims
in connection with airbag royalties. Corporate expenses in 1996
include an increase in employee benefit costs and also include
litigation cost incurred in connection with the airbag royalties
litigation. Litigation costs were fully offset by reimbursement of
these costs, which were received upon settlement of the litigation
in the third quarter.
The income tax net provision for 1996 was $57.0 million
compared to a net tax provision of $12.5 million in 1995. The
increase in net tax provision in 1996 is primarily due to TRW
litigation proceeds.
The Company's backlog of funded government contracts and firm
industrial orders was approximately $137.1 million as of December
31, 1996 and $133.5 million as of December 31, 1995. The
government backlog, including funded and unfunded components and
firm industrial contracts at December 31, 1996 and 1995 totaled
$447.7 million and $503.3 million, respectively.
The term "funded" used herein refers to the aggregate revenue
remaining to be earned at a given time under (i) 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 (ii) "task
orders" or "delivery orders" issued to the Company under contracts
F-6
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
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.
Substantially all operations of the Company are located within
the United States. The Company operates a steel distribution
system in Canada which had sales in 1996 of $15.2 million or 3.2%
of consolidated revenue and earnings before income taxes of $0.7
million.
Foreign exchange gains and losses for each of the last three
years have not been material. The general lack of inflationary
pressures in areas where the Company and its subsidiaries operate
also limited the impact of changing prices on the Company's sales
and income from operations for the three years ended December 31,
1996.
Recently Issued Accounting Standards
- ------------------------------------
In October 1994 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123
"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,
F-7
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters (continued)
- -------------------------
Recently Issued Accounting Standards, continued
- -----------------------------------------------
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.
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
F-8
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Other Matters, (continued)
- --------------------------
Litigation - TRW Inc., continued
--------------------------------
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).
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.
F-9
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters, (continued)
- --------------------------
Litigation - TRW Inc., continued
--------------------------------
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 Talley, the Company's parent
for the fiscal year ending March 31, 1983. These Notices pertain
to whether subsidiaries of Talley must file separate income tax
returns in Arizona rather than allowing Talley to file on a
consolidated basis. The amount of additional Arizona income tax
alleged to be due as a result of the Notices of Correction was
approximately $0.4 million plus interest. In May 1992 the Arizona
Tax Court granted judgment in favor of Talley and against the
Department on all claims asserted against the company. In October
1992 the Tax Court entered judgment in favor of Talley awarding the
company approximately $0.6 million for the Arizona income taxes
Talley overpaid for its fiscal year ending March 31, 1983 together
with interest and attorneys' fees.
In September 1994, the Arizona Court of Appeals reversed the
1992 Arizona Tax Court ruling that entitled Talley to file a
combined tax return in the State of Arizona for the fiscal year
ended March 31, 1983, and in April 1995, the Supreme Court of the
State of Arizona denied Talley's Petition for Review. Based on the
appellate court decision, Talley in 1995 paid approximately $1.3
million in taxes and interest for the period ending March 31,
1983. On October 15, 1996 Talley made a payment of $4.8 million to
F-10
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters, (continued)
- --------------------------
Litigation - Arizona Department of Revenue, continued
-----------------------------------------------------
resolve the dispute for the periods ending December 31, 1984 and
1985. Legislation adopted in 1994 in Arizona specifically allows
companies to file combined tax returns in Arizona for periods from
January 1, 1986.
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, 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.
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.
F-11
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters, (continued)
- --------------------------
Environmental, continued
- ------------------------
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.
Liquidity and Capital Resources
- -------------------------------
In October 1993, the Company and its parent Talley Industries,
Inc. completed a major refinancing program. This refinancing
program included an offering of $185 million of debt securities,
consisting of $70 million gross proceeds of Senior Discount
Debentures due 2005, issued by Talley Industries, Inc. to yield
12.25% and $115 million of Senior Notes due 2003, with an interest
rate of 10.75% issued by the Company. In connection with this
refinancing, the Company also obtained a secured credit facility of
$60.0 million with institutional lenders.
Borrowings under the secured credit facility may not exceed
the collateral base as defined in the governing credit agreement.
The facility consists of a five-year revolving credit facility of
up to $40.0 million and a five-year $20.0 million term loan
facility. At December 31, 1996 availability under the total
facility was approximately $52.0 million, of which approximately
$12.0 million was borrowed.
The Company anticipates that the present capital structure
will support the long-term growth of the Company's core businesses.
A substantial portion of the proceeds received from TRW, which
resulted from the recent airbag royalty litigation settlement, have
been used to reduce a portion of the Company's total indebtedness.
F-12
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
The Company is permitted (and intends) to distribute cash to
its parent, Talley, for specified purposes and under certain other
circumstances. These distributions will be made using funds
available from operations and the secured credit facility. The
payments include (but are not limited to) certain airbag royalties
in excess of $10 million in any year (or in excess of such greater
amount as would be required for the Company to meet a specified
fixed charge coverage ratio) which was to be used to redeem the
Senior Discount Debentures issued by Talley during 1996 and an
annual distribution of up to $1.3 million ($1.7 million for the
period from the issue date of the new indebtedness through December
31, 1994) for a period of five years to fund certain carrying and
other costs associated with Talley's real estate operations. The
Company may also redeem preferred stock of the Company purchased by
Talley from proceeds of the recent refinancing. In addition, the
Company is a party to a cost sharing agreement and a tax sharing
agreement which will require the Company to reimburse Talley for
certain ongoing general and administrative expenses and to make
certain tax payments to Talley.
At December 31, 1996, the Company had $39.5 million in cash
and cash equivalents and $110.1 million in working capital. During
1996 the Company generated $107.2 million of cash flow from
operating activities. The higher than normal cash generation
primarily reflects settlement proceeds of $156.4 million from TRW
Inc., offset in part by the related income tax and a $16.6
reduction in accounts receivable. Cash generated from operations
during 1995 was $8.3 million. In 1996 the Company used $10.9
million of cash for investing activities during the year, which
consisted primarily of assets purchased as a part of a product line
acquisition, and capital expenditures. Cash used in financing
activities of $60.3 million reflects dividends and stock
redemptions in excess of proceeds from stock issuances and
additional investments by the parent company. Dividends paid to
the parent company totaled $106.8 million, which represents an
F-13
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
annual distribution of $1.3 million and $105.5 million of excess
airbag royalties. The Company issued $105.0 million of preferred
stock to the Company's parent and redeemed $99.0 million of
preferred stock from the Company's parent. Borrowings and
reduction under revolving credit facilities are also included in
financing activities.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this
Annual Report contain forward-looking statements that are based
on current expectations, estimates and projections about the
industries in which the Company operates. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions
are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely, cost effective
basis; the mix of products/services; the achievement of lower costs
and expenses; domestic and foreign governmental and public policy
changes including environmental regulations; protection and
validity of patent and other intellectual property rights; reliance
on large customers; the cyclical nature of certain of the Company's
businesses; the outcome of pending and future litigation and
F-14
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Forward-Looking Statements, continued
- -------------------------------------
governmental proceedings and continued availability of financing,
and financial resources in the amounts, at the times and on the
terms required to support future business. In addition, such
statements could be affected by general industry and market
conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange
rate fluctuations and other factors.
F-15
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
Years Ended December 31, 1996 1995 1994
- ---------------------------- ------------------------------------------
Sales $286,375,000 $299,070,000 $242,044,000
Services 70,315,000 58,821,000 59,989,000
Royalties 123,214,000 25,169,000 18,570,000
------------ ------------ ------------
479,904,000 383,060,000 320,603,000
------------ ------------ ------------
Cost of sales 226,534,000 222,184,000 175,880,000
Cost of services 62,258,000 51,485,000 52,314,000
Selling, general and
administrative expenses 63,798,000 62,131,000 61,866,000
- ---------------------------- ------------ ------------ ------------
352,590,000 335,800,000 290,060,000
------------ ------------ ------------
Earnings from operations 127,314,000 47,260,000 30,543,000
Other income (expense), net 18,856,000 (602,000) 160,000
- ---------------------------- ------------ ------------ ------------
146,170,000 46,658,000 30,703,000
------------ ------------ ------------
Interest expense 15,756,000 17,173,000 17,180,000
- ----------------------------- ------------ ------------ ------------
Earnings before income taxes
and extraordinary loss 130,414,000 29,485,000 13,523,000
Income tax provision 57,009,000 12,546,000 2,308,000
- ----------------------------- ------------ ------------ ------------
Earnings before extraordinary
loss 73,405,000 16,939,000 11,215,000
Extraordinary loss, net of
income taxes (557,000) - -
- ----------------------------- ------------ ------------ ------------
Net earnings $ 72,848,000 $ 16,939,000 $ 11,215,000
============================= ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996 1995
- --------------------------------- ----------- ------------
ASSETS
Cash and cash equivalents $ 39,450,000 $ 3,461,000
Accounts receivable, net of
allowance for doubtful accounts
of $925,000 in 1996 and
$1,275,000 in 1995 53,048,000 69,065,000
Inventories 64,684,000 67,191,000
Deferred income taxes 3,660,000 1,200,000
Prepaid expenses 6,100,000 7,899,000
- --------------------------------- ------------ ------------
Total current assets 166,942,000 148,816,000
Long-term receivables, net 6,359,000 9,732,000
Property, plant and equipment,
at cost, net of accumulated
depreciation of $98,588,000
in 1996 and $92,305,000 in 1995 49,324,000 48,341,000
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 5,498,000
- --------------------------------- ------------ ------------
Total assets $270,877,000 $256,356,000
================================= ============ ============
F-17
<PAGE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
December 31, 1996 1995
- -------------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt $ 3,094,000 $ 3,734,000
Accounts payable 18,754,000 21,709,000
Accrued expenses 35,006,000 29,498,000
- -------------------------------------------- ------------ ------------
Total current liabilities 56,854,000 54,941,000
Long-term debt 123,185,000 136,858,000
Deferred income taxes 2,179,000 7,437,000
Other liabilities 8,948,000 4,283,000
Commitments and contingencies - -
Stockholder's equity:
Preferred stock, $1 par value,
authorized 100 shares;
shares issued:
6 shares in 1996 and -0-
shares in 1995 of Series A 6 -
Common stock, $1 par value,
authorized 1,000;
shares issued:
1,000 shares 1,000 1,000
Capital in excess of par value 79,272,994 23,494,000
Foreign currency translation adjustments (562,000) (530,000)
Retained earnings 999,000 29,872,000
- -------------------------------------------- ------------ ------------
Total stockholder's equity 79,711,000 52,837,000
- -------------------------------------------- ------------ ------------
Total liabilities and stockholder's equity $270,877,000 $256,356,000
============================================ ============ ============
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
<TABLE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
<CAPTION>
Consolidated Statement of Changes in Stockholder's Equity
Other
Preferred Common Common Retained
Stock Stock Stock Earnings
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 8 $ 1,000 $ 15,752,992 $ 3,018,000
Net earnings 11,215,000
Amounts from Parent 6,613,000
Redemption of 4 shares of
Series A Preferred stock (4) (3,999,996)
- ------------------------------ ----------- ----------- ------------ ------------
Balance at December 31, 1994 4 1,000 18,365,996 14,233,000
Net earnings 16,939,000
Amounts from Parent 9,128,000
Dividends (1,300,000)
Redemption of 4 shares of
Series A Preferred stock (4) (3,999,996)
- ------------------------------ ----------- ----------- ------------ ------------
Balance at December 31, 1995 - 1,000 23,494,000 29,872,000
Net earnings 72,848,000
Amounts from Parent 54,906,000
Dividends (5,127,000) (101,721,000)
Issuance of 105 shares of
Series A Preferred stock 105 104,999,895
Redemption of 99 shares of
Series A Preferred stock (99) (98,999,901)
- ------------------------------ ----------- ----------- ------------ ------------
Balance at December 31, 1996 $ 6 $ 1,000 $ 79,272,994 $ 999,000
============================== =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Cash Flows
<S> <C> <C> <C>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------ ------------ ------------ ------------
Cash and cash equivalents at beginning of year $ 3,461,000 $ 2,756,000 $ 6,417,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from operating activities:
Net earnings 72,848,000 16,939,000 11,215,000
Adjustments to reconcile net income to cash
flows from operating activities:
Change in deferred income taxes (7,718,000) 382,000 (5,565,000)
Depreciation and amortization 8,864,000 8,428,000 9,542,000
Gain on sale of property and equipment (60,000) (62,000) (173,000)
Extraordinary loss from debt
extinguishment 557,000 - -
Other 17,223,000 3,218,000 4,242,000
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase) decrease in accounts receivable 16,561,000 (12,808,000) 2,281,000
(Increase) decrease in inventories 2,507,000 (1,122,000) (93,000)
(Increase) decrease in prepaid expenses 1,840,000 (376,000) 1,844,000
Increase in other assets (3,000,000) (166,000) (587,000)
Increase (decrease)in accounts payable (2,955,000) (3,851,000) 2,465,000
Decrease in accrued expenses (772,000) (547,000) (2,100,000)
Decrease in other liabilities (1,862,000) (1,383,000) (454,000)
Other, net 3,151,000 (314,000) -
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from operating activities 107,184,000 8,338,000 22,617,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of assets of acquired business (4,337,000) (287,000) (5,688,000)
Purchases of property and equipment (6,750,000) (8,930,000) (3,932,000)
Proceeds from sale of property and
equipment 147,000 772,000 302,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from investing activities (10,940,000) (8,445,000) (9,318,000)
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from financing activities:
Increase in investment by Parent company 54,906,000 9,128,000 6,613,000
Preferred stock issued 105,000,000 - -
Redemption of preferred stock (99,000,000) (4,000,000) (4,000,000)
Dividends (106,848,000) (1,300,000) -
Repayment of long-term debt (389,526,000) (494,576,000) (402,127,000)
Proceeds from new long-term debt 375,213,000 491,560,000 382,554,000
- ------------------------------------------------ ------------ ------------ ------------
Cash flows from financing activities (60,255,000) 812,000 (16,960,000)
- ------------------------------------------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 35,989,000 705,000 (3,661,000)
- ------------------------------------------------ ------------ ------------ ------------
Total cash and cash equivalents at end of year $ 39,450,000 $ 3,461,000 $ 2,756,000
================================================ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-20
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies
- -------------------------------
Basis of Presentation
---------------------
In July 1993, Talley Manufacturing and Technology, Inc. (the
Company), a wholly-owned subsidiary of Talley Industries, Inc.
(Talley), was formed with the issuance of 1,000 shares of common
stock. The formation of the Company was in anticipation of an
offering of Senior Notes by the Company and Senior Discount Debentures
by Talley. Concurrently with the issuance of these securities, Talley
contributed the capital stock of its operating subsidiaries (other
than its real estate operations held for orderly sale) to the Company,
which also assumed a substantial portion of Talley's indebtedness and
liabilities. At the same time, the Company entered into a new credit
facility with certain lenders. The net proceeds from the Senior
Notes, the Senior Discount Debentures and the new credit facility were
used to repay substantially all of the indebtedness of the Company and
its subsidiaries, including indebtedness assumed from Talley and
certain indebtedness remaining with Talley.
With the completion of the reorganization of entities under the
common control of Talley described above and the new financing, the
Company owns all of the capital stock of the operating subsidiaries
of Talley (other than the real estate operations held for orderly
sale). Accordingly, all corporate costs, assets and liabilities are
included in the Company's financial statements and interest expense
includes the interest on indebtedness of the operating subsidiaries
and all indebtedness assumed by the Company in connection with the
reorganization. In connection with the reorganization, Talley and the
Company entered into a Tax Sharing Agreement and Cost Sharing
Agreement.
The financial statements of Talley Manufacturing and Technology,
Inc. have been prepared using the historical amounts included in the
Talley Industries, Inc. and subsidiaries consolidated financial
statements giving effect to the reorganization described above. With
the exception of the net assets of the real estate operations held for
orderly sale and certain debt and related interest expense, the
consolidated financial statements of Talley are substantially
identical to the Company. Inasmuch as the Company is a wholly-owned
subsidiary of Talley Industries, Inc., per share data has not be
included as a part of the results of operations.
F-21
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies (continued)
- -------------------------------------------
Principles of Consolidation:
---------------------------
Although the financial statements of Talley Manufacturing and
Technology, Inc. separately report its assets, liabilities (including
contingent liabilities) and stockholder's equity, legal title to such
assets and responsibilities for such liabilities was not affected by
such attribution during periods prior to the reorganization.
Accordingly, the Talley Industries, Inc. consolidated financial
statements and related notes should be read in connection with these
financial statements.
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries, all of which are wholly-owned.
All companies are consolidated in the financial statements. All
material intercompany transactions have been eliminated.
Nature of Operations:
--------------------
Talley Manufacturing and Technology, Inc., a wholly owned
subsidiary of 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.
Substantially all of the Company's facilities are located in and
provide sales and services to the United States and Canada.
F-22
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting 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-23
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting 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.
The Company is included in the consolidated U.S. income tax return
of Talley Industries, Inc. Accordingly, the provision for income
taxes is determined on a consolidated basis. The allocation of the
income tax provision for the Company has been determined on a separate
return basis.
F-24
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies (continued)
- ------------------------------------------
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.
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
======== ========
Long-Term Receivables
- ---------------------
Long-term receivables consist of the following:
(balances in thousands) 1996 1995
- -------------------------------------------- -------- --------
Notes receivable, including accrued
interest and income tax refunds $ 6,359 $ 9,732
Amounts due within one year, included
in accounts receivable - -
-------- --------
$ 6,359 $ 9,732
======== ========
F-25
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Receivables, (continued)
- ---------------------------------
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; and one note of $3,829,000. The final
maturity of the note was March 1995 with an interest rate of 9.5%;
However, payment on the note is not current and collection is not
expected during 1996. The notes receivable balance is net of reserves
of $3,829,000 and $1,003,000 at December 31, 1996 and 1995,
respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment, is summarized as follows:
(in thousands) 1996 1995
- --------------------------------------- -------- --------
Machinery and equipment $114,020 $107,574
Buildings and improvements 31,338 30,381
Land 2,554 2,691
- --------------------------------------- -------- --------
$147,912 $140,646
======== ========
Depreciation of property, plant and equipment was $7,264,000,
$6,819,000, and $7,720,000 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
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
- -------------------------------------- -------- --------
126,279 140,592
Less current maturities 3,094 3,734
- --------------------------------------- -------- --------
Long-term debt $123,185 $136,858
======================================= ======== ========
F-26
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
- --------------------------
On October 22, 1993 the Company completed a major debt
refinancing program. The Company issued $115,000,000 of Senior Notes,
due 2003, with an interest rate of 10.75% and also completed a
$60,000,000 secured credit facility with two institutional lenders.
In connection with the new debt, the Company's parent, Talley
Industries, Inc., also received gross proceeds of $70,000,000 from the
issuance of Senior Discount Debentures. The $115,000,000 gross
proceeds of the public offering, plus an initial borrowing under the
secured credit facility, and certain distribution from its parent,
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 debt.
The indenture for the Senior Notes 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. Substantially all of the
receivables, inventory and property, plant and equipment of the
Company and its subsidiaries are pledged as collateral in connection
with the secured credit facility. In addition, the subsidiaries
of the Company have guaranteed its obligations under the Senior Notes
and the secured credit facility. The Company's parent, Talley
Industries, Inc., has guaranteed the Senior Notes on a subordinated
basis. Distributions from the subsidiaries of the Company are also
limited by tangible net worth and cash flow covenants. The capital
stock of the Company has been pledged by the Company to secure the
Senior Discount Debentures.
The Senior Notes matured on October 15, 2003 and the Company
will be 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 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,
F-27
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
- --------------------------
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 percent or LIBOR plus
2-3/4%, with an additional fee of one-quarter of one half of one
percent on unused amounts under the revolving facility.
Aggregate maturities of long-term debt for the years ending
December 31, 1997 through December 31, 2001, are $3,094,000,
$8,185,000, $-0-, $11,500,000 and $11,500,000, respectively. Cash
payments for total interest, net of amounts capitalized, during 1996,
1995 and 1994 were $14,742,000, $15,972,000 and $16,063,000,
respectively. Accrued interest expense at December 31, 1996, 1995 and
1994 was $2,725,000, $2,687,000 and $2,640,000, respectively. Deferred
debt issue costs at December 31, 1996, 1995 and 1994 were $3,748,000,
$5,606,000 and $6,723,000, 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
$1,858,000, $1,117,000 and $1,117,000, 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.
Benefit Plans
- -------------
Stock Option Plans
------------------
In April 1996, the shareholders of the Company's parent (Talley)
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 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
F-28
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
- -------------------------
Stock Option Plans, continued
-----------------------------
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 Talley'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-29
<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 Talley'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 Talley'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-30
<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, Talley'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
Talley. 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-31
<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
======== ======== ========
The following table sets forth the aggregate funded status of defined
benefit plans at December 31, 1996 and 1995:
1996 1995
------------- -----------------------------
Assets Exceed Assets Exceed Accumulated
Accumulated Accumulated Benefits
(balances in thousands) Benefits Benefits Exceed Assets
- ---------------------------- ------------- ------------- -------------
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
F-32
<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 for 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-33
<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 $14,165,000, $10,552,000 and $8,875,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
Accrued Compensation includes accruals for vacation pay and corporate
incentives.
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
$5,115,000 in 1996, $4,753,000 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.
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.
F-34
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes
- ------------
Earnings before income taxes and extraordinary loss and the
provision (credit) for income taxes consists of the following:
(balances in thousands) 1996 1995 1994
- ---------------------------------- -------- -------- --------
Earnings before income taxes
and extraordinary loss:
United States $129,684 $ 27,054 $ 11,981
Foreign 730 2,431 1,542
-------- -------- --------
$130,414 $ 29,485 $ 13,523
======== ======== ========
Current tax expense:
United States $ 45,851 $ 9,855 $ 6,613
Foreign 350 1,155 731
State and local 18,526 1,154 530
-------- -------- --------
64,727 12,164 7,874
-------- -------- --------
Deferred tax expense (credit):
United States (3,754) (701) -
Foreign 14 25 16
State and local (3,978) 1,058 (5,582)
-------- -------- --------
(7,718) 382 (5,566)
-------- -------- --------
$ 57,009 $ 12,546 $ 2,308
======== ======== ========
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:
Accrued expenses $ 8,267 $ 3,648
Other 2,847 2,498
Valuation allowance for
deferred tax assets - (589)
- ---------------------------------- -------- --------
Net deferred tax asset 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 liability 9,633 11,794
-------- --------
Net deferred tax asset (liability) $ 1,481 $ (6,237)
======== ========
F-35
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
- ------------------------
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 $44,341 $ 10,025 $ 4,597
State and local taxes, net of
Federal benefit 9,602 1,460 (3,334)
Goodwill and other non-
deductible items 3,200 517 572
Other (134) 544 473
- ------------------------------ ------- --------- ---------
$57,009 $ 12,546 $ 2,308
======= ========= =========
United States income taxes have not been provided on
$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) refunds for income taxes
during 1996, 1995 and 1994 were $(8,526,000), $(2,675,000) 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
F-36
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
- ------------------------------------------
Litigation - TRW Inc., continued
--------------------------------
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).
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.
F-37
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
- -----------------------------------------
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.
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 toresolve the related dispute for the period ending
December 31, 1984and 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
F-38
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
- -----------------------------------------
Environmental, continued
------------------------
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.
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.
F-39
<PAGE>
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments, (continued)
- ------------------------------------------------
(balances in thousands) 1996 1995
- ------------------------ ------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash & cash equivalents $ 39,450 $ 39,450 $ 3,461 $ 3,461
Non-trade receivables 6,359 6,359 9,732 9,732
Debt 126,279 129,729 140,592 141,764
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 rules 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
F-40
<PAGE>
Notes to Consolidated Financial Statements
Research and Development Costs, (continued)
- ------------------------------------------
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 Loss
- ------------------
During 1996, the Company realized a net loss of $557,000, net
of a $287,000 tax benefit from the early paydown of the revolver
credit facility. The loss consists of deferred debt cost on the
extinguished debt.
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.
F-41
<PAGE>
Notes to Consolidated Financial Statements
Recently Issued Accounting Standards
- ------------------------------------
In October 1994 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123 "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 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 several years in the volume and profitability of the Company's
F-42
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- ------------------------------
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 "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.
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.
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
F-43
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- -------------------------------
Government Products and Services, continued
-------------------------------------------
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%, 18% 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 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.
F-44
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- ------------------------------
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.
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
F-45
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- ------------------------------
Industrial Products, continued
------------------------------
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.
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.
F-46
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- -------------------------------
Other Matters, continued
------------------------
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 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
- --------------------------------- -------- -------- --------
219,156 239,093 224,405
Corporate 51,721 17,263 18,100
- --------------------------------- -------- -------- --------
$270,877 $256,356 $242,505
======== ======== ========
F-47
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
- -------------------------------
Depreciation and Amortization
by Segment
(in thousands) 1996 1995 1994
- -------------------------------- -------- -------- -------
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
- -------------------------------- -------- -------- --------
8,564 8,124 9,217
Corporate 300 304 325
- -------------------------------- -------- -------- --------
$ 8,864 $ 8,428 $ 9,542
======== ======== ========
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
- -------------------------------- -------- -------- --------
6,707 8,822 3,801
Corporate 43 108 131
- -------------------------------- -------- -------- --------
$ 6,750 $ 8,930 $ 3,932
======== ======== ========
F-48
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
<CAPTION>
Summary of Segment Operations
(in thousands)
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
- ----------------------------------- -------- -------- -------- -------- --------
$479,904 $383,060 $320,603 $318,128 $319,563
======== ======== ======== ======== ========
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
- ----------------------------------- -------- -------- -------- -------- --------
163,103 61,953 47,804 41,399 36,677
Corporate expenses (18,826) (15,468) (17,163) (13,151) (9,672)
Non-segment interest income 1,893 173 62 312 1,923
Interest expense (15,756) (17,173) (17,180) (16,364) (21,945)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary loss $130,414 $ 29,485 $ 13,523 $ 12,196 $ 6,983
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
TALLEY MANUFACTURING AND TECHNOLOGY, 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 and non-recurring writedowns of inventory and goodwill
totaling approximately $11,019,000.
F-50
<PAGE>
<TABLE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
<CAPTION>
Five Year Summary of Operations
(in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $479,904 $383,060 $320,603 $318,128 $319,563
-------- -------- -------- -------- --------
Cost of sales and services 288,792 273,669 228,194 235,335 233,812
Selling, general and administrative
expenses 63,798 62,131 61,866 54,961 57,473
- --------------------------------------- -------- -------- -------- -------- --------
352,590 335,800 290,060 290,296 291,285
-------- -------- -------- -------- --------
Earnings from operations 127,314 47,260 30,543 27,832 28,278
Other income (expense), net 18,856 (602) 160 728 650
- --------------------------------------- -------- -------- -------- -------- --------
146,170 46,658 30,703 28,560 28,928
Interest expense 15,756 17,173 17,180 16,364 21,945
Earnings before income taxes -------- -------- -------- -------- --------
and extraordinary loss 130,414 29,485 13,523 12,196 6,983
Income tax provision 57,009 12,546 2,308 6,392 2,312
- --------------------------------------- -------- -------- -------- -------- --------
Earnings before extraordinary loss 73,405 16,939 11,215 5,804 4,671
Extraordinary loss, net of income tax (557) - - (1,102) -
- --------------------------------------- -------- -------- -------- --------
Net earnings $ 72,848 $ 16,939 $ 11,215 $ 4,702 $ 4,671
======================================= ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder
of Talley Manufacturing and Technology, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing on page F-1 present fairly, in all material
respects, the financial position of Talley Manufacturing and
Technology, 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-52
<PAGE>
<TABLE>
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
<CAPTION>
FINANCIAL DATA
Selected Financial Data
(in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital expenditures $ 6,750 $ 8,930 $ 3,932 $ 5,346 $ 4,564
Depreciation and amortization 8,864 8,428 9,542 10,070 10,565
Current assets 166,942 148,816 132,820 141,868 135,199
Current liabilities 56,854 54,941 57,729 56,923 58,106
Working capital 110,088 93,875 75,091 84,945 77,093
Total assets 270,877 256,356 242,505 251,843 247,758
Total debt 126,279 140,592 143,305 162,178 172,140
Long-term debt 123,185 136,858 139,756 160,002 161,283
Stockholder's equity 79,711 52,837 31,877 18,402 10,948
Current ratio 2.9 2.7 2.3 2.5 2.3
============================= ======== ======== ======== ======== ========
Supplemental Data
(in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------- -------- -------- -------- -------- --------
Taxes, other than income:
Payroll $ 7,736 $ 7,231 $ 7,181 $ 7,037 $ 7,195
Property 1,473 1,991 1,660 1,557 1,721
Other 458 412 338 328 382
- ----------------------------- -------- -------- -------- -------- --------
9,667 9,634 9,179 8,922 9,298
Maintenance and repairs 6,585 6,220 4,557 4,668 4,626
Rent 5,225 5,211 5,508 5,962 7,353
Advertising 1,171 1,053 786 648 720
Research and development $ 8,694 $ 4,227 $ 4,304 $ 3,122 $ 3,904
============================= ======== ======== ======== ======== ========
</TABLE>
<PAGE>
DIRECTORS AND CORPORATE MANAGEMENT
DIRECTORS
- ---------
William H. Mallender - Chairman of the Board and Chief Executive
Officer *
Jack C. Crim - President and Chief Operating Officer
Neil W. Benson - Chartered Accountant, Lewis Golden & Co. **
Paul L. Foster - Professor of Finance, Saint Joseph's University **
Townsend Hoopes - Retired, formerly President, Association of
American Publishers, Inc. **
Fred Israel - Retired, formerly Senior Partner Israel and Raley
Joseph A. Orlando - Independent financial consultant **
Alex Stamatakis - Chairman of the Board, Stamatakis Industries, Inc.* **
John W. Stodder - Vice Chairman Emeritus, Jostens, Inc. *
Donald J. Ulrich - Owner and Vice Chairman, Ventura Coastal Corporation
David Victor - Member, Osborn Maledon **
* Executive Committee Members
** Audit Committee
CORPORATE MANAGEMENT
- --------------------
William H. Mallender - Chairman of the Board and Chief Executive
Officer
Jack C. Crim - President and Chief Operating Officer
William E. Bonnell - Vice President - Human Resources
Mark S. Dickerson - Vice President, General Counsel and Secretary
Kenneth May - Vice President and Controller
Daniel R. Mullen - Vice President and Treasurer
George W. Poole - Vice President - Government Relations
F-54
<PAGE>
SCHEDULE I
Page 1 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
DECEMBER 31,
--------------------------
1996 1995
Assets ------------ -----------
Current assets:
Cash and cash equivalents $ 36,488,000 $ 1,414,000
Due from affiliates 6,220,000 3,064,000
Accounts receivable 4,910,000 7,822,000
Prepaid expenses 522,000 1,317,000
------------ ------------
Total current assets 48,140,000 13,617,000
Investment in and advances to
affiliates 156,737,000 154,622,000
Long-term receivables 4,860,000 3,757,000
Property, plant and equipment,
at cost, net of accumulated
depreciation of $1,717,000 in
1996 and $1,641,000 in 1995 325,000 476,000
Deferred charges and other assets 5,662,000 12,697,000
------------ ------------
Total assets $215,724,000 $185,169,000
============ ============
See accompanying notes and the notes to the consolidated financial statements.
F-55
<PAGE>
SCHEDULE I
Page 2 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
DECEMBER 31,
--------------------------
1996 1995
Liabilities and Stockholder's Equity ------------ -----------
Current liabilities:
Current maturities of long-term debt $ - $ 448,000
Accounts payable 1,154,000 1,342,000
Accrued expenses 12,600,000 9,118,000
Deferred income taxes 174,000 3,376,000
------------ ------------
Total current liabilities 13,928,000 14,284,000
Deferred income taxes - 968,000
Long-term debt 115,000,000 115,000,000
Other liabilities 7,085,000 2,080,000
Stockholder's equity:
Preferred stock, $1 par value,
authorized 100 shares
- Series A: Issued 6 shares
in 1996 and -0- shares in 1995 - -
Common stock, $1 par value,
authorized 1,000 shares 1,000 1,000
Capital in excess of par value 79,273,000 23,494,000
Foreign currency translation
adjustments (562,000) (530,000)
Retained earnings 999,000 29,872,000
------------ ------------
Total stockholder's equity 79,711,000 52,837,000
------------ ------------
Total liabilities and
stockholder's equity $215,724,000 $185,169,000
============ ============
See accompanying notes and the notes to the consolidated financial statements.
F-56
<PAGE>
SCHEDULE I
Page 3 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Cost of Revenue $ 10,504,000 $ - $ -
Selling, general and
administrative expenses 13,680,000 15,691,000 16,658,000
Administrative allocations
to subsidiaries (14,495,000) (20,236,000) (14,965,000)
------------ ------------ ------------
9,689,000 (4,545,000) 1,693,000
Other income (expense), net (9,031,000) (624,000) (588,000)
------------ ------------ ------------
18,720,000 (3,921,000) 2,281,000
------------ ------------ ------------
Interest expense 15,722,000 17,066,000 17,154,000
Interest charges to
subsidiaries, net (2,601,000) (4,287,000) (3,885,000)
------------ ------------ ------------
13,121,000 12,779,000 13,269,000
------------ ------------ ------------
(31,841,000) (8,858,000) (15,550,000)
Income tax provision 13,513,000 2,291,000 8,641,000
------------ ------------ ------------
Loss before earnings of
subsidiaries and
extraordinary loss (18,328,000) (6,567,000) (6,909,000)
Extraordinary loss,
net of taxes (557,000) - -
Earnings from subsidiaries 91,733,000 23,506,000 18,124,000
------------ ------------ ------------
Net earnings $ 72,848,000 $ 16,939,000 $ 11,215,000
============ ============ ============
See accompanying notes and the notes to the consolidated financial statements.
F-57
<PAGE>
SCHEDULE I
Page 4 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities $ 80,923,000 $ 16,776,000 $ 14,297,000
Cash flows from investing activities:
Decrease in investment in
subsidiaries, net (2,115,000) (20,263,000) (11,515,000)
------------ ------------ ------------
Cash from investing activities (2,115,000) (20,263,000) (11,515,000)
------------ ------------ ------------
Cash flows from financing activities:
Reduction of long-term debt (65,204,000) (85,573,000) (70,597,000)
Proceeds from long-term debt 70,570,000 81,523,000 68,372,000
Dividends paid (106,848,000) - -
Proceeds from issuance of stock 105,000,000 - -
Redemption of preferred stock (99,000,000) (4,000,000) (4,000,000)
Amounts from Parent, net 54,906,000 9,128,000 6,613,000
Decrease (increase) in due from
affiliates, net (3,158,000) 3,309,000 (4,725,000)
------------ ------------ ------------
Cash from financing activities (43,734,000) 4,387,000 (4,337,000)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 35,074,000 900,000 (1,555,000)
Balance at beginning of year 1,414,000 514,000 2,069,000
------------ ------------ ------------
Balance at end of year $ 36,488,000 $ 1,414,000 $ 514,000
============ ============ ============
See accompanying notes and the notes to the consolidated financial statements.
F-58
<PAGE>
SCHEDULE I
Page 5 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
Notes to Financial Statements
The following notes supplement information provided in the notes
accompanying the consolidated financial statements.
1. Basis of Presentation
- -------------------------
Investments in and advances to affiliates represents interest
in majority-owned subsidiaries and associated companies. The
investments are accounted for on the equity method and,
accordingly, the carrying value approximates the Company's equity
in the recorded value of the underlying net assets.
In July 1993, Talley Manufacturing and Technology, Inc. ("the
Company"), a wholly owned subsidiary of Talley Industries, Inc.,
("Talley") was formed with the issuance of 1,000 shares of common
stock. The formation of the Company was in anticipation of an
offering, in October, 1993, of Senior Notes by the Company and
Senior Discount Debentures by Talley. Concurrently with the
issuance of these securities, Talley contributed the capital stock
of its operating subsidiaries (other than its real estate
subsidiaries) to the Company, which also assumed a substantial
portion of Talley's indebtedness and liabilities. (See Basis of
Presentation note to the Company's consolidated financial
statements).
2. Long-Term Debt
- ------------------
December 31,
--------------------
Long-term debt consists of the following: 1996 1995
(balances in thousands) -------- --------
10-3/4% Senior Notes, due 2003 $115,000 $115,000
Capitalized leases and other - 448
-------- --------
115,000 115,448
Less current maturities - 448
-------- --------
Long-term debt $115,000 $115,000
======== ========
F-59
<PAGE>
SCHEDULE I
Page 6 of 6
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
(Registrant Only)
Notes to Financial Statements
2. Long-Term Debt, continued
- -----------------------------
The Company and Talley Industries, Inc. completed a major debt
refinancing program on October 22, 1993. The proceeds from the new
financing were used to repay substantially all of the Company's
debt. The Company will be 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. (See Long-term debt note to the Company's consolidated
financial statements).
Aggregate maturities of long-term debt for the years ended
December 31, 1997 through 2001 are $-0-, $-0-, $-0-, $11,500,000
and $11,500,000, respectively. Deferred debt issue costs at
December 31, 1996, 1995 and 1994 were $3,748,000, $5,606,000 and
$6,723,000, respectively. Deferred debt issue costs are amortized
over the life of the respective debt instruments using the
straight-line method. Amortization of debt expense in 1996, 1995
and 1994 was $1,013,000, $1,117,000 and $1,117,000, respectively.
During 1996 the parent company paid off the balance of the
revolving credit facility. In connection with this debt
extinguishment, the parent company recognized approximately
$557,000, net of a $287,000 tax benefit, in extraordinary losses
which consists of deferred debt cost on the extinguished debt.
3. Income Taxes
- ----------------
The parent company and its domestic subsidiaries file a
consolidated federal income tax return. The provision for income
taxes represents the difference between amounts attributable to
each subsidiary, generally determined on a separate return basis,
and the tax computed on a consolidated basis.
4. Dividends Received
- ----------------------
The registrant received dividends, net of contributions from
consolidated subsidiaries, unconsolidated subsidiaries and 50
percent or less owned persons accounted for by the equity method
during the years ended December 31, 1996, 1995 and 1994 of
$94,117,000, $9,971,000 and $11,360,000, respectively.
F-60
<PAGE>
<TABLE>
SCHEDULE II
TALLEY MANUFACTURING AND TECHNOLOGY, INC. AND SUBSIDIARIES
<CAPTION>
Valuation and Qualifying Accounts
December 31, 1996
(thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
--------- ---------- ---------- ---------- ---------
Year Ended December 31, 1996 :
- --------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts -
accounts receivable $ 1,275 $ 158 $ - $ (508) $ 925
Reserves for notes receivable 1,003 2,826 - - 3,829
Year Ended December 31, 1995 :
- --------------------------------------
Allowance for doubtful accounts -
accounts receivable $ 994 $ 406 $ - $ (125) $1,275
Reserves for notes receivable 1,008 - - (5) 1,003
Year Ended December 31, 1994 :
- --------------------------------------
Allowance for doubtful accounts -
accounts receivable $ 1,091 $ 372 $ - $ (469) $ 994
Reserves for notes receivable 1,000 8 - - 1,008
Notes:
(a) Uncollectible accounts charged against reserves, net of bad debt recoveries.
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation of Talley Manufacturing and
Technology, Inc., attached as Exhibit 3(d) to
Registration Statement on Form S-1 dated October 15,
1993, incorporated herein by this reference.
3.2 By-laws of Incorporation of Talley Manufacturing and
Technology, Inc., attached as Exhibit 3(e) to the
Company's Form S-1 dated October 15, 1993, incorporated
herein by this reference.
4.1 Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of Talley Manufacturing and
Technology, Inc., attached as Exhibit 4(e) to the
Company's Form S-1 dated October 15, 1993, incorporated
herein by reference.
4.2 Indenture Agreement among Talley Manufacturing and
Technology, Inc., the Subsidiary Guarantors (as defined),
Talley Industries, Inc. and Bank One, Columbus, N.A., a
national banking association, as Trustee, dated as of
October 15, 1993 relating to the 10-3/4% Senior Notes due
2003 issued by Talley Manufacturing and Technology, Inc.
and the exhibits thereto, attached as Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
4.3 Certificate of Increase of Series A Preferred Stock of
Talley Manufacturing and Technology, Inc., dated
September 12, 1996, attached as Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended September 30,
1996, incorporated herein by reference.
10.1 Form of Indemnification Procedures Agreement between
Talley Manufacturing and Technology, Inc. and each of its
directors, attached as Exhibit 10(jj) to Amendment No. 1
to Form S-1 dated September 10, 1993, incorporated herein
by reference.
10.2 Tax Sharing Agreement among Talley Industries, Inc.,
Talley Manufacturing and Technology, Inc. and each of
their respective subsidiaries, dated as of October 22,
1993, attached as Exhibit 10.3 to the Company's Form 10-Q
for the quarter ended September 30, 1993, incorporated
herein by reference.
<PAGE>
10.3 Restructuring, Assumption and Cost Sharing Agreement
among Talley Industries, Inc., Talley Manufacturing and
Technology, Inc. and Talley Real Estate Company, Inc.
dated as of October 22, 1993, attached as Exhibit 10.4 to
the Company's Form 10-Q for the quarter ended September
30, 1993, incorporated herein by reference.
10.4 Loan and Security Agreement among Talley Manufacturing
and Technology, Inc., the Lenders listed therein and
Transamerica Business Credit Corporation, as Agent dated
October 22, 1993, attached as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
10.5 Airbag Collateral Security, Intercreditor and Agency
Agreement dated as of October 22, 1993 among Talley
Manufacturing and Technology, Inc., Talley Technology,
Inc., Talley Defense Systems, Inc., Talley Automotive
Products, Inc., Talley Metals Technology, Inc. and
Transamerica Business Credit Corporation as Agent and as
collateral agent for the Lenders (as defined) and the
Senior Note Trustee, Lenders and Bank One, Columbus,
N.A., a national banking association, as Trustee for the
holders of the 10-3/4% Senior Notes due 2003 issued by
Talley Manufacturing and Technology, Inc., attached as
Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
10.6 Form of Subsidiary Loan Agreement dated as of October 22,
1993 between Talley Manufacturing and Technology, Inc.
and each of certain subsidiaries, attached as Exhibit
99.1 to the Company's Form 10-Q for the quarter ended
September 30, 1993, incorporated herein by reference.
10.7 Subsidiary Loan and Security Agreement dated as of
October 22, 1993 between Talley Manufacturing and
Technology, Inc. and Talley Technology, Inc., attached as
Exhibit 99.2 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
10.8 Form of Subsidiary Continuing Guaranty and Security
Agreement dated as of October 22, 1993 between
Transamerica Business Credit Corporation, a Delaware
corporation and each of certain subsidiaries, attached
as Exhibit 99.3 to the Company's Form 10-Q for the
quarter ended September 30, 1993, incorporated herein by
reference.
<PAGE>
10.9 First Amendment to Loan and Security Agreement dated
April 29, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
10.10 Second Amendment to Loan and Security Agreement dated
June 30, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent attached as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
10.11 Third amendment to Loan and Security Agreement dated
December 16, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent.
10.12 First Amendment to Subsidiary Loan and Security
Agreement, dated as of December 16, 1994 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries.
10.13 First Amendment to Subsidiary Continuing Guaranty and
Security Agreement dated as of December 16, 1994 between
Transamerica Business Credit Corporation, and each of
the Guarantors (certain subsidiaries).
10.14 Consulting Agreement dated February 7, 1996 by and among
the Registrant and McMullen Consultants Inc., attached
as Exhibit 10.1 to the Company's Form 8-K under current
report date of February 2, 1996, incorporated herein by
reference.
10.15** Fourth Amendment to the Restoration Benefit Plan of
Talley Manufacturing and Technology, Inc. dated July 23,
1996, attached as Exhibit 99.1 to the Company's Form 10-Q
for the quarter ended June 30, 1996, incorporated
herein by reference.
10.16** Talley Manufacturing and Technology, Inc. Executive
Restoration Benefit Plan, dated October 25, 1995,
attached as Exhibit 99.6 to the Company's Form 10-Q for
the quarter ended March 31, 1996, incorporated herein by
reference.
10.17** Talley Manufacturing and Technology, Inc. Trust Under
The Executive Benefit Plans, dated March 20, 1996,
attached as Exhibit 99.7 to the Company's Form 10-Q for
the quarter ended March 31, 1996, incorporated herein by
reference.
<PAGE>
10.18** Talley Manufacturing and Technology, Inc. Executive
Disability Income Plan, dated March 20, 1996, attached
as Exhibit 99.5 to the Company's Form 10-Q for the
quarter ended March 31, 1996, incorporated herein by
reference.
10.19** Statement to register 1,200,000 shares of Common Stock
of Talley Industries, Inc. which may be issued pursuant
to the 1996 Comprehensive Stock Plan of the Company,
filed on Form S-8 on April 16, 1996, incorporated herein
by reference.
10.20** Third Amendment to the Talley Manufacturing and
Technology, Inc. Executive Death and Retirement
Supplemental Plan, dated March 20, 1996, attached as
Exhibit 99.4 to the Company's Form 10-Q for the quarter
ended March 31, 1996, incorporated herein by reference.
10.21 Waiver and Fourth Amendment to Loan and Security
Agreement dated March 20, 1996 by and among Talley
Manufacturing and Technology, Inc. and Transamerica
Business Credit Corporation, as agent, attached as
Exhibit 99.1 to the Company's Form 10-Q for the quarter
ended March 31, 1996, incorporated herein by reference.
10.22 Fifth Amendment to Loan and Security Agreement, dated
June 4, 1996 by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 99.3 to the
Company's Form 10-Q for the quarter ended June 30, 1996,
incorporated herein by reference.
10.23 Second Amendment to Subsidiary Loan and Security
Agreement, dated as of March 20, 1996 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.2 to the Company's
Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
10.24 Third Amendment to Subsidiary Loan and Security
Agreement, dated as of June 4, 1996 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.2 to the Company's
Form 10-Q for the quarter ended June 30, 1996,
incorporated herein by reference.
<PAGE>
99.1 Amended and Restated Rights Agreement by and among
Talley Industries, Inc. and Chemical Mellon Shareholder
Services, L.L.C., successor to Manufacturers Hanover
Trust Company of California, as Rights Agent, dated as
of April 30, 1986, and amended as of July 21, 1986, and
further amended and restated as of February 2, 1996, and
all exhibits thereto, specifying the terms of the Rights
(the "Amended Rights Agreement"),attached as Exhibit
99.1 to the Company's Form 8-K under current report date
of February 2, 1996, incorporated herein by reference.
99.2 Amended and Restated Voting Trust Agreement dated
February 7, 1996 by and among Talley Industries, Inc.,
John J. McMullen and First Interstate Bank of Arizona,
N.A., as Trustee, attached as Exhibit 99.2 to the
Company's Form 8-K under current report date of February 2,
1996, incorporated herein by reference.
21* Subsidiaries of the Registrant.
27* Financial Data Schedule for Talley Manufacturing and
Technology, Inc., December 31, 1996.
* Documents marked with an asterisk are filed with this
report.
** An executive compensation plan or arrangement.
EXHIBIT 21
Subsidiaries of Talley Manufacturing and Technology, Inc.
The following are the subsidiaries of the Registrant, as of December 31,
1996:
Percentage
of Voting Jurisdiction
Securities of
Owned Incorporation
---------- -------------
1. Amcan Specialty Steels, Inc. 100% New Jersey
2. Dimetrics, Inc. 100% Delaware
3. Electrodynamics, Inc. 100% Arizona
4. John J. McMullen Associates, Inc. 100% Delaware
5. Porcelain Products Co. 100% Delaware
6. Rowe Industries, Inc. 100% Delaware
7. Talley Canada, Inc. 100% Canada
8. Talley Defense Systems, Inc. 100% Delaware
9. Talley Metals Technology, Inc. 100% Delaware
10. Talley Technology, Inc. 100% Delaware
11. Universal Propulsion Company, Inc. 100% Delaware
12. Waterbury Companies, Inc. 100% Delaware
Each of the above subsidiaries is included in the Company's Consolidated
Financial Statements. Several inactive or minor corporations are not
included above because all of them, when taken in the aggregate, do not
constitute a significant subsidiary.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
Balance Sheet and Statement of Operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996<F1>
<PERIOD-END> DEC-31-1996
<CASH> 39,450,000
<SECURITIES> 0
<RECEIVABLES> 53,973,000
<ALLOWANCES> 925,000
<INVENTORY> 64,684,000
<CURRENT-ASSETS> 166,942,000
<PP&E> 147,912,000
<DEPRECIATION> 98,588,000
<TOTAL-ASSETS> 270,877,000
<CURRENT-LIABILITIES> 56,854,000
<BONDS> 123,185,000
0
6
<COMMON> 1,000
<OTHER-SE> 79,709,994
<TOTAL-LIABILITY-AND-EQUITY> 270,877,000
<SALES> 286,375,000
<TOTAL-REVENUES> 479,904,000
<CGS> 226,534,000
<TOTAL-COSTS> 288,792,000
<OTHER-EXPENSES> 63,798,000
<LOSS-PROVISION> 158,000
<INTEREST-EXPENSE> 15,756,000
<INCOME-PRETAX> 130,414,000
<INCOME-TAX> 57,009,000
<INCOME-CONTINUING> 73,405,000
<DISCONTINUED> 0
<EXTRAORDINARY> (557,000)
<CHANGES> 0
<NET-INCOME> 72,848,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Total revenues include amounts from airbag royalties litigation settlement.
</TABLE>
