<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Schedule 13E-4
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
TALLEY INDUSTRIES, INC.
(Name of Issuer)
TALLEY INDUSTRIES, INC.
(Name of Person(s) Filing Statement)
Series A Convertible Preferred Stock, $1 par value
Series B $1 Cumulative Convertible Preferred Stock, $1 Par Value
(Title of Classes of Securities)
874687205 (Series A Preferred)
874687304 (Series B Preferred)
(CUSIP Numbers of Classes of Securities)
Mark S. Dickerson, Esq.
Vice President, General Counsel and Secretary
Talley Industries, Inc.
2702 North 44th Street, Suite 100-A
Phoenix, Arizona 85008
(602) 957-7711
copy to:
David Victor, Esq.
Meyer, Hendricks, Victor, Ruffner & Bivens, P.L.C.
2929 North Central Avenue, Suite 1800
Phoenix, Arizona 85012-2762
(602) 207-1240
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Person(s) Filing Statement)
March 22, 1996
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
Transaction Valuation* Amount of Filing Fee
$25,716,600 $5,143
----------- ------
* For purposes of calculation of fee only. The amount of the filing
fee equals 1/50 of one percent of the value of the securities to
be converted. This amount assumes the conversion of all 66,695
shares of Series A Preferred outstanding and all 1,547,887 shares
of Series B Preferred outstanding. The market value of the Series
A Preferred is estimated based on the average of the high and low
prices of the Common Stock offered in the conversion offer as of
3/14/96. The market value of the Series B Preferred is based on
the average of the high and low prices of the Series B Preferred
as of 3/14/96.
[ ] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting
fee was previously paid. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
Amount Previously Paid: Filing Party:
---------- ----------
Form of Registration No.: Date Filed:
---------- ----------
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The filing of this Statement by Talley Industries, Inc. ("Talley")
should not be deemed an admission by Talley that the Conversion Offer
contemplated hereby is subject to Rule 13e-4 under the Securities
Exchange Act of 1934, as amended. This Statement is filed by Talley
solely to eliminate such uncertainty, if any, as may exist in this
regard and constitutes neither an admission by Talley as to the
applicability of Rule 13e-4 to the transactions described herein nor a
waiver by Talley of any rights.
Item 1. Security and Issuer.
Preliminary Note: References in this Schedule to the "Offering Circular"
and the "Letter of Transmittal" are to the Offering Circular dated March 21,
1996 (the "Offering Circular") and the Conversion Notice and Letter of
Transmittal dated March 21, 1996 (the "Letter of Transmittal"), filed herewith
as Exhibits (a)(1) and (a)(2), respectively.
(a) The Issuer is Talley Industries, Inc. The Issuer's principal
executive offices are located at 2702 North 44th Street, Suite 100-A, Phoenix,
Arizona 85008.
(b) The information required by this sub-item may be found on the
Outside Front Cover Page of the Offering Circular and under the following
headings in the Offering Circular: "The Conversion Offer" and "The Conversion
Offer--Conditions of the Conversion Offer." Such information is incorporated
herein by reference.
(c) See "Comparative Market Prices" in the Offering Circular and the
Issuer's Annual Report on Form 10-K for the year ended December 31, 1995,
included as Appendix A to the Offering Circular, incorporated herein by
reference.
(d) Not applicable.
Item 2. Source and Amount of Funds or Other Consideration.
(a) See "The Conversion Offer" and "Talley Capital Stock" in the
Offering Circular, incorporated herein by reference.
(b) Not applicable.
Item 3. Purpose of Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
See "Background of the Conversion Offer--Reasons for the Conversion
Offer" in the Offering Circular, incorporated herein by reference. The shares of
Series A Preferred and Series B Preferred surrendered to the Issuer on the
conversion thereof into shares of Common Stock shall upon appropriate filing and
recording to the extent required by law, have the status of authorized and
unissued shares of Series A Preferred and Series B Preferred, respectively.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) See "Background of the Conversion Offer," "Talley Capital Stock" and
"Selected Historical and Pro Forma Financial Data" in the Offering Circular,
incorporated herein by reference.
(f) Not applicable.
(g) Not applicable.
(h) See "Certain Considerations--Considerations Applicable to Holders of
Series A and B Preferred Who Do Not Convert in Connection with this Conversion
Offer" in the Offering Circular, incorporated herein by reference.
<PAGE> 3
(i) See "Background of the Conversion Offer--Reasons for Converting in
Connection with this Conversion Offer" in the Offering Circular, incorporated
herein by reference.
(j) Not applicable.
Item 4. Interest in Securities of the Issuer.
Neither the Issuer nor to the best of its knowledge, any of the other
persons covered by Item 4 of this Schedule (i.e., executive officers, directors,
associates and affiliates of the foregoing) has effected any transaction in the
Series A Preferred or Series B Preferred during the 40 business days preceding
the date of the Offering Circular.
Item 5. Contracts, Arrangements, Understandings or Relationships With Respect to
the Issuer's Securities.
See "The Conversion Offer--Conditions of the Conversion Offer" in the
Offering Circular, incorporated herein by reference, which describes the
intentions of the Trustee of Talley Savings Plus, the Issuer's employee stock
ownership plan, and virtually all directors and executive officers of the
Issuer to convert the shares of Series B Preferred held by them in connection
with the Conversion Offer.
Item 6. Persons Retained, Employed or to be Compensated.
The Conversion Offer is being made by the Issuer in reliance on the
exemption from the Securities Act registration requirements afforded by
Section 3(a)(9) thereof. Therefore, the Issuer has not employed or retained
and will not compensate any persons to make solicitations or recommendations in
connection with the Conversion Offer. See "The Conversion Offer" and
"Conversion Offer Procedures--Payment of Expenses" in the Offering Circular,
incorporated herein by reference.
Item 7. Financial Information.
(a) (1) See the Issuer's Annual Report on Form 10-K for the year ended
December 31, 1995, included as Appendix A to the Offering Circular and
incorporated herein by reference.
(2) Not applicable.
(3) See "Selected Historical and Pro Forma Financial Data" in the
Offering Circular, incorporated herein by reference.
(4) See "Selected Historical and Pro Forma Financial Data" in the
Offering Circular, incorporated herein by reference.
(b) See "Selected Historical and Pro Forma Financial Data" in the
Offering Circular, incorporated herein by reference.
Item 8. Additional Information.
(a) Not applicable.
(b) See "The Conversion Offer--Conditions of the Conversion Offer" in
the Offering Circular, incorporated herein by reference.
(c) Not applicable.
(d) Not applicable.
(e) The Offering Circular, including the Appendices thereto, and the
Letter of Transmittal should be read in their entirety and are incorporated
herein by reference.
<PAGE> 4
Item 9. Material to be Filed as Exhibits.
(a) (1) Offering Circular dated March 21, 1996.
(2) Conversion Notice and Letter of Transmittal dated March 21, 1996
(3) Letters from the Chairman of the Board of the Issuer to holders
of Series A Preferred and Series B Preferred.
(4) Tombstone advertisement scheduled to be published on March 22,
1996.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: March 22, 1996 TALLEY INDUSTRIES, INC.
By: /s/ Mark S. Dickerson, Esq.
----------------------------------
Vice President, General Counsel
and Secretary
<PAGE> 1
TALLEY
INDUSTRIES
CONVERSION OFFER
-------------------
2.0 SHARES OF COMMON STOCK
UPON CONVERSION OF
EACH SHARE OF SERIES A CONVERTIBLE PREFERRED STOCK*
-------------------
2.5 SHARES OF COMMON STOCK
UPON CONVERSION OF
EACH SHARE OF SERIES B $1 CUMULATIVE CONVERTIBLE PREFERRED STOCK**
Talley Industries, Inc. ("Talley" or the "Company") is offering to issue
additional shares of its Common Stock ("Common Stock") to induce conversion of
outstanding shares of its Series A Convertible Preferred Stock ("Series A
Preferred") and its Series B $1 Cumulative Convertible Preferred Stock ("Series
B Preferred") (together, the "Series A and B Preferred"). The offer (the
"Conversion Offer") is as follows:
*Series A Preferred -- A total of 2.0 shares of Common Stock will be
issued to the holder of each share of Series A Preferred converted in
connection with this Conversion Offer: each Series A Preferred share is
currently convertible into 0.95 share of Common Stock in accordance with
its stated terms, and an additional 1.05 shares of Common Stock will be
issued as to each Series A Preferred share converted. See "The Conversion
Offer" for a further description.
**Series B Preferred -- A total of 2.5 shares of Common Stock will be
issued to the holder of each share of Series B Preferred converted in
connection with this Conversion Offer: each Series B Preferred share is
currently convertible into 1.3125 shares of Common Stock in accordance
with its stated terms, and an additional 1.1875 shares of Common Stock
will be issued as to each Series B Preferred share converted. See "The
Conversion Offer" for a further description.
On the Expiration Date (as defined below) of this Conversion Offer, each of
the 66,695 shares of outstanding Series A Preferred will have an aggregate
dividend arrearage of $5.50, and each of the 1,547,887 shares of outstanding
Series B Preferred will have an aggregate dividend arrearage of $5.00. All
unpaid dividends in arrears on shares of Series A and B Preferred are
automatically extinguished without payment on conversion. See "Talley Capital
Stock -- Series A Preferred"; "-- Series B Preferred."
The Common Stock and Series B Preferred are listed on the New York Stock
Exchange ("NYSE") under the symbols "TAL" and "TALB," respectively. There is no
established market for the Series A Preferred, which trades only sporadically.
On March 19, 1996, the last trading day before the Company publicly announced
this Conversion Offer, the closing price of the Common Stock on the NYSE was
$7 3/8 per share, and the closing price of the Series B Preferred was $16 3/8
per share. The closing prices of the Common Stock and the Series B Preferred on
the NYSE on March 20, 1996, the last trading day before the date of this
Offering Circular, were $7 1/4 and $17 1/2 per share, respectively. The Company
has applied for listing of the additional shares of Common Stock offered in
connection with this Conversion Offer and anticipates that such Common Stock
will be approved for listing, subject to notice of issuance, upon consummation
of this Conversion Offer.
The Company's obligation to complete this Conversion Offer as to either the
Series A Preferred or the Series B Preferred is subject (among other things) to
the proper delivery for conversion, as defined herein, of at least 51% of the
outstanding shares of that series. Accordingly, if the minimum number of shares
of either the Series A Preferred or the Series B Preferred is not properly
delivered pursuant to this Conversion Offer, then the Company will not be
obligated to consummate this Conversion Offer as to that series (but may elect
to do so in its judgment). See "The Conversion Offer -- Conditions of the
Conversion Offer."
SERIES A AND B PREFERRED DELIVERED FOR CONVERSION IN CONNECTION WITH THIS
CONVERSION OFFER WILL STILL BE ENTITLED TO BE VOTED AT THE APRIL 9, 1996 ANNUAL
MEETING.
THIS CONVERSION OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME ON APRIL 22, 1996 UNLESS EXTENDED
BY THE COMPANY (THE "EXPIRATION DATE").
THE DATE OF THIS OFFERING CIRCULAR IS MARCH 21, 1996
<PAGE> 2
This Conversion Offer is made upon the terms, and is subject to the
conditions, set forth in this Offering Circular and in the accompanying
Conversion Notice and Letter of Transmittal (the "Letter of Transmittal").
Series A and B Preferred shares delivered for conversion in connection with
this Conversion Offer may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. See "Conversion Offer
Procedures -- Withdrawal of Deliveries."
Based solely upon the $7 1/4 per share closing price of the Common Stock on
March 20, 1996, the dollar value of the Common Stock issuable to holders of
Series A and B Preferred accepting this Conversion Offer is as follows:
Series A Preferred: A total of $14.50 in Common Stock, or $6.89 for
the 0.95 share of Common Stock currently issuable upon conversion in
accordance with its stated terms, plus $7.61 in additional shares to induce
conversion.
Series B Preferred: A total of $18.13 in Common Stock, or $9.52 for
the 1.3125 shares of Common Stock currently issuable upon conversion in
accordance with its stated terms, plus $8.61 in additional shares to induce
conversion.
No assurance can be given as to future market price fluctuations and changes in
the relative values of the shares of Common Stock and Series A and B Preferred.
Holders should obtain current market price quotations before making a final
decision regarding this Conversion Offer. The number of additional shares of
Common Stock being offered to induce conversion will NOT be adjusted by the
Company for fluctuations in the market prices of Common Stock and Series A and B
Preferred.
The Trustee of Talley Savings Plus ("TSP"), the Company's employee stock
ownership plan, has indicated its intention to convert all of TSP's Series B
Preferred in connection with the Conversion Offer, amounting to 408,394 shares
(26.38% of the Series B Preferred). In addition, the Company has been advised
that virtually all of the 11,000 shares of Series B Preferred held directly by
executive officers and directors of the Company will be converted by them in
this Conversion Offer (no shares of Series A Preferred are held by officers or
directors). See "The Conversion Offer."
The Company will not seek or obtain an independent "fairness opinion" or
independent valuation regarding this Conversion Offer and is not making any
recommendation to holders of Series A Preferred or Series B Preferred whether to
accept or reject this Conversion Offer. Each holder of shares of Series A
Preferred or Series B Preferred should carefully review this Conversion Offer
and decide whether to convert such shares in connection with this Conversion
Offer. See "Background of the Conversion Offer" and "Certain Considerations" for
an explanation of factors that led the Company and its Board of Directors to
make this Conversion Offer and for a description of certain considerations which
the Company believes holders may want to evaluate in making a decision to
convert in connection with this Conversion Offer.
Holders of Series A and B Preferred were recently mailed a copy of the
Company's 1995 Annual Report to Shareholders (the "Shareholder Report") and the
Company's Proxy Statement dated March 8, 1996 for the forthcoming annual meeting
of stockholders to be held April 9, 1996 (the "Proxy Statement"). If a holder
desires an additional copy of the Shareholder Report or the Proxy Statement, one
may be obtained, free of charge, by contacting the Information Agent (identified
below) at (212) 344-6733 (Collect) or (800) 554-7733 (Toll Free). Appendix A to
this Offering Circular is a copy, without exhibits, of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (the "Annual Report"),
describing the Company and its various businesses, and including the Company's
audited consolidated financial statements (and notes thereto). The information
contained in these materials should be reviewed carefully by each holder of
Series A Preferred or Series B Preferred in considering this Conversion Offer.
See "Certain Considerations" and "Certain Federal Income Tax Consequences"
for a discussion of various factors that also should be considered by holders of
Series A and B Preferred in evaluating this Conversion Offer.
No person has been authorized to give any information pertaining to this
Conversion Offer or the Company, except as contained in this Offering Circular
and its Appendices, the Shareholder Report and the Proxy Statement. Any
information not so contained must not be relied upon as having been authorized
by the
i
<PAGE> 3
Company. Neither the delivery of this Offering Circular nor the consummation of
this Conversion Offer will be deemed to create any implication that there has
been no change in the information set forth herein or in the Shareholder Report,
the Annual Report and the Proxy Statement since their respective dates. All
questions should be directed to the Information Agent.
NEITHER THIS CONVERSION OFFER NOR THE COMMON STOCK ISSUABLE IN ACCORDANCE
HEREWITH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY
LAWS OF ANY STATE OR OTHER JURISDICTION. THIS CONVERSION OFFER IS BEING MADE BY
THE COMPANY IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES ACT REGISTRATION
REQUIREMENTS AFFORDED BY SECTION 3(A)(9) THEREOF. IN ACCORDANCE WITH THE
REQUIREMENTS FOR SUCH EXEMPTION, THE COMPANY WILL NOT PAY ANY COMMISSION OR
OTHER REMUNERATION TO ANY BROKER, DEALER, SALESMAN OR OTHER PERSON FOR
SOLICITING DELIVERIES OF THE SERIES A AND B PREFERRED FOR CONVERSION. REGULAR
EMPLOYEES OF THE COMPANY, WHO WILL NOT RECEIVE ADDITIONAL COMPENSATION THEREFOR,
MAY PROVIDE INFORMATION TO HOLDERS OF THE SERIES A AND B PREFERRED CONCERNING
THIS CONVERSION OFFER.
This Conversion Offer is not being made to, nor will the Company accept
deliveries for conversion from, holders of Series A and B Preferred in any
jurisdiction in which the acceptance thereof or this Conversion Offer would not
be in compliance with the securities or Blue Sky laws of such jurisdiction.
Talley is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional
Offices located at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New
York, New York 10048. In addition, such reports, proxy statements and other
information concerning Talley may be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005. While disclaiming
that the Conversion Offer is necessarily a transaction of the type described in
such schedule, the Company has filed with the SEC an Issuer Tender Offer
Statement on Schedule 13E-4 (the "Schedule 13E-4") under the Exchange Act. For
certain further information with respect to the Company and the Conversion
Offer, reference is made to the Schedule 13E-4, including the exhibits filed as
part thereof or incorporated by reference therein. Copies of the Schedule 13E-4
and its exhibits may be inspected and copied (at prescribed rates) at the
offices of the SEC at the addresses set forth above.
"Safe Harbor" statement under the Private Securities Litigation Reform Act
of 1995: Certain of the statements in this Offering Circular under "Background
of the Conversion Offer" and "Certain Considerations" and elsewhere herein
(including certain statements in the Annual Report reproduced as Appendix A
which contains a description of the Company and Management's Discussion and
Analysis of Financial Conditions and Results of Operations ("Management's
Discussion and Analysis")), and certain statements in the Proxy Statement and
other Company materials referred to herein, are not historical facts and are
"forward looking statements" that involve risks and uncertainties, including,
but not limited to, the course and results of litigation affecting the Company
(including the litigation with TRW Inc.), stock market conditions and
fluctuations, future economic conditions, the impact of competitive products,
services and pricing, research and development, commercialization and
technological difficulties, government contracting risks, the availability and
cost of financing, environmental matters, the values and marketability of real
estate held by the Company, the effect of the Company's accounting policies and
other risks described in the Company's filings with the SEC.
KISSEL-BLAKE INC. IS SERVING AS THE INFORMATION AGENT ("INFORMATION AGENT")
FOR THIS CONVERSION OFFER. ITS TELEPHONE NUMBER IS SET FORTH ON THE BACK COVER
OF THIS OFFERING CIRCULAR. ALL QUESTIONS REGARDING THIS CONVERSION OFFER SHOULD
BE DIRECTED TO THE INFORMATION AGENT.
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C. IS SERVING AS THE CONVERSION
AGENT ("CONVERSION AGENT") FOR THIS CONVERSION OFFER. ITS TELEPHONE NUMBERS AND
ADDRESSES ARE SET FORTH ON THE BACK COVER OF THIS OFFERING CIRCULAR. ALL
DOCUMENTS TO BE SUBMITTED IN CONNECTION WITH THIS CONVERSION OFFER SHOULD BE
DELIVERED TO THE CONVERSION AGENT AT ONE OF ITS ADDRESSES SET FORTH ON THE BACK
COVER OF THIS OFFERING CIRCULAR.
ii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OFFERING CIRCULAR SUMMARY................................................ 1
BACKGROUND OF THE CONVERSION OFFER....................................... 4
THE CONVERSION OFFER..................................................... 7
CERTAIN CONSIDERATIONS................................................... 11
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 14
TALLEY CAPITAL STOCK..................................................... 15
COMPARATIVE MARKET PRICES................................................ 19
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA......................... 20
CONVERSION OFFER PROCEDURES.............................................. 23
SHARES ELIGIBLE FOR FUTURE RESALE........................................ 27
APPENDIX A: ANNUAL REPORT................................................ A-1
APPENDIX B: CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED............. B-1
APPENDIX C: CERTIFICATE OF DESIGNATION OF SERIES B PREFERRED............. C-1
</TABLE>
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NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAS BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
iii
<PAGE> 5
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Offering Circular, the Company's Annual
Report reproduced as Appendix A to this Offering Circular and in the Company's
recently mailed Proxy Statement.
THE COMPANY
Talley 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 through a royalty
agreement and is currently developing new airbag technologies. The Company's
Industrial Products segment manufactures and distributes stainless steel rods
and bars and other stainless steel products, high-voltage ceramic insulators
used in power transmission and distribution systems, and specialized welding
equipment and systems. The Company's Specialty Products segment manufactures and
sells aerosol insecticides, air fresheners and sanitizers, and custom designed
metal buttons. The Company is also engaged in the orderly sale and disposition
of the assets of its real estate operations. Substantially all of the Company's
facilities are located in and provide sales and services to the United States
and Canada. See the description of the Company and its financial statements
included in Appendix A and "Notes to Consolidated Financial
Statements -- Commitments and Contingencies" in Appendix A for a discussion of
material litigation affecting the Company.
The principal executive offices of the Company, which is a Delaware
corporation, are located at 2702 North 44th Street, Suite 100-A, Phoenix,
Arizona 85008, and its telephone number is (602) 957-7711.
THE CONVERSION OFFER
BASIC TERMS................ The Company is offering to issue additional shares
of its Common Stock to induce conversion of
outstanding shares of its Series A and B Preferred,
as follows:
Series A Preferred.... A total of 2.0 shares of Common Stock will be
issued to the holder of each share of Series A
Preferred converted in connection with this
Conversion Offer: each Series A Preferred share is
currently convertible into 0.95 share of Common
Stock in accordance with its stated terms, and an
additional 1.05 shares of Common Stock will be
issued as to each Series A Preferred share
converted. See "The Conversion Offer" for a further
description.
Series B Preferred.... A total of 2.5 shares of Common Stock will be
issued to the holder of each share of Series B
Preferred converted in connection with this
Conversion Offer: each Series B Preferred share is
currently convertible into 1.3125 shares of Common
Stock in accordance with its stated terms, and an
additional 1.1875 shares of Common Stock will be
issued as to each Series B Preferred share
converted. See "The Conversion Offer" for a further
description.
Common Stock............... The Common Stock is described in this Offering
Circular under "Talley Capital Stock -- Common
Stock."
1
<PAGE> 6
Dividend Arrearage......... On the Expiration Date, each of the 66,695 shares
of outstanding Series A Preferred will have an
aggregate dividend arrearage of $5.50, and each of
the 1,547,887 shares of outstanding Series B
Preferred will have an aggregate dividend arrearage
of $5.00. Under the stated terms of the Series A
and B Preferred all unpaid dividends in arrears on
shares are automatically extinguished without
payment upon conversion. See "Talley Capital
Stock -- Series A Preferred"; "-- Series B
Preferred."
No Adjustment for Market
Price Fluctuations......... The number of additional shares of Common Stock
being offered to induce conversion will NOT be
adjusted by the Company for fluctuations in the
market prices of Common Stock and Series A and B
Preferred.
No Adjustment of Conversion
Ratio.................... The conversion ratios for Series A and B Preferred
that remains outstanding and unconverted after the
Expiration Date of this Conversion Offer will NOT
be adjusted on account of additional shares of
Common Stock offered or issued in connection with
this Conversion Offer.
No Fractional Shares....... No fractional shares of Common Stock will be issued
in connection with this Conversion Offer and, as
part of the inducement to convert, any fractional
share otherwise issuable will be rounded up to the
next whole share. See "The Conversion Offer."
All or None Conversion..... Beneficial owners who desire to convert Series A
Preferred and/or Series B Preferred in connection
with this Conversion Offer must convert all, and
not less than all, of their Series A Preferred
and/or Series B Preferred.
Expenses................... Converting holders of Series A and B Preferred will
not be required to pay brokerage commissions or
fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes for conversion of
Series A and B Preferred or receipt of additional
shares of Common Stock upon such conversion. The
Company will pay all reasonable out-of-pocket
expenses incurred by brokers, custodians, nominees
and fiduciaries in forwarding copies of this
Offering Circular and related documents to the
beneficial owners of Series A and B Preferred, and
in handling or forwarding deliveries of Series A
and B Preferred shares for conversion. See
"Conversion Offer Procedures -- Payment of
Expenses."
CONDITIONS OF THE
CONVERSION OFFER........... The Company will have no obligation to accept any
Series A Preferred or Series B Preferred delivered
pursuant to this Conversion Offer unless (i) proper
delivery for conversion is made of at least 51% of
the outstanding shares of that series (for each
series, the "Minimum Shares") and (ii) the other
conditions set forth herein are satisfied. If the
Minimum Shares of either series are not so
delivered, then the Company will not be obligated
to consummate this Conversion Offer as to that
series (but may elect to do so in its judgment).
See "The Conversion Offer -- Conditions of the
Conversion Offer."
2
<PAGE> 7
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............. For a summary discussion of certain federal income
tax consequences relating to this Conversion Offer,
including the deemed dividend distribution that is
taxable as ordinary income to holders accepting
this Conversion Offer, see "Certain Federal Income
Tax Consequences."
NO APPRAISAL OR
SIMILAR RIGHTS........... No appraisal or similar rights under the Delaware
General Corporation Law or other applicable law
will be available to holders of Series A and B
Preferred electing not to convert in connection
with this Conversion Offer.
CONVERSION OFFER PROCEDURES
Expiration Date............ This Conversion Offer will expire at 5:00 p.m. New
York City time, on April 22, 1996, unless extended
as provided in this Offering Circular. See
"Conversion Offer Procedures -- Expiration Date;
Extension; Amendment; Termination."
Procedures for Delivery.... To be delivered properly under this Conversion
Offer, certificates evidencing shares of Series A
and B Preferred, together with a properly completed
and duly executed Letter of Transmittal (or
facsimile thereof), and any other documents
required by the Letter of Transmittal, must be
received by the Conversion Agent at one of the
addresses set forth on the back cover of this
Offering Circular prior to 5:00 p.m., New York City
time, on the Expiration Date, or holders of Series
A and B Preferred must comply with the specific
procedures for guaranteed delivery described
herein. See "Conversion Offer
Procedures -- Procedures for
Conversion"; "-- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Series A and B Preferred shares delivered for
conversion in connection with this Conversion Offer
may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
Information Agent.......... Kissel-Blake Inc. is serving as Information Agent
for this Conversion Offer. Requests for additional
copies of the Offering Circular and Letter of
Transmittal should be directed to the Information
Agent. All questions relating to this Conversion
Offer should also be directed to the Information
Agent. Its telephone number is (800) 554-7733.
Conversion Agent........... Chemical Mellon Shareholders Services, L.L.C. is
serving as Conversion Agent for this Conversion
Offer. All documents to be submitted in connection
with this Conversion Offer should be delivered to
the Conversion Agent at one of its addresses set
forth on the back cover of this Offering Circular.
VOTING OF DELIVERED
SHARES..................... Shares of Series A and B Preferred delivered for
conversion under this Conversion Offer will still
be entitled to be voted at the April 9, 1996 Annual
Meeting by the record holders of such shares as of
the record date for the Annual Meeting.
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BACKGROUND OF THE CONVERSION OFFER
Talley is a diversified manufacturer of a wide range of proprietary and
other specialized products for defense, industrial and commercial applications.
For a description of the business and properties of the Company, see "Business"
in Appendix A. For information regarding the financial condition and operating
results of the Company, see the Company's audited consolidated financial
statements (and related notes) and "Management's Discussion and Analysis" also
included in Appendix A.
Talley's financial strength and outlook have improved over the last few
years, following the difficulties the Company encountered in the late 1980's as
a result of substantial declines in the value of Talley's large real estate
portfolio. Beginning in 1989, the value and liquidity of most real estate held
for development and investment in the Southwest declined dramatically. This
caused a precipitous decline in the value of Talley's real estate portfolio and
triggered covenant defaults under virtually all of Talley's outstanding debt as
of December 31, 1991. As a result, the Company had to restructure and refinance
all of its non-real estate debt. This was accomplished in two major
transactions -- one during late 1992 and the other in October 1993, when two
simultaneous public offerings of debt securities were successfully underwritten
and a concurrent private term loan and revolving credit facility were completed.
At that same time, Talley made the decision to exit its real estate business in
an orderly fashion and to re-focus its resources on the Company's core
businesses.
As a result of its financial difficulties, the Company suspended all
dividends in early 1991 on its Common Stock and its three then-outstanding
series of preferred stock -- Series A and B Preferred and the Company's Series D
Cumulative Convertible Preferred Stock (the "Series D Preferred"). On December
31, 1995, the unpaid dividend arrearages on the outstanding Series A and B
Preferred and Series D Preferred aggregated more than $10.0 million, including
approximately $7.7 million on Series A and B Preferred and approximately $2.6
million on the Series D Preferred then outstanding.
The Company has improved its financial position in the last two years. The
results of operations during this period have been enhanced by improvements in
operating income and an increasing level of airbag royalties received from TRW
Inc. ("TRW") under the license agreement executed in connection with the
Company's 1989 sale of its automotive airbag business to TRW. See "Business" in
Appendix A. These improvements have contributed to the Company's improved
liquidity and financial position. See "Management's Discussion and Analysis" in
Appendix A.
Nevertheless, the Company's balance sheet remains highly leveraged, and the
stringent debt covenants imposed on the Company under its 1993 refinancing
continue to limit the Company's flexibility and opportunities. In addition to
covenant limitations on the use of the Company's cash resources, the Company's
strategy is to use available cash resources to reduce debt while maintaining its
on-going investment in the growth of its core businesses and the extension of
those core businesses into attractive and profitable niches.
REASONS FOR THE CONVERSION OFFER
The high level of the unpaid dividend arrearages, together with the
possibility that the Company may not have the ability to cure or prevent further
escalation of those arrearages in the foreseeable future unless the level of
outstanding Series A and B Preferred could be reduced significantly, has led the
Board of Directors to adopt a strategy to reduce the number of outstanding
shares of Series A and B Preferred by offering additional shares of Common Stock
to induce the conversion of as many shares of Series A and B Preferred as
possible. As described below, this strategy was implemented by the Company in a
transaction completed last month to induce conversion of the Series D Preferred.
Conversion of Series A and B Preferred has the effect, among other things, of
eliminating without payment both unpaid dividend arrearages and future dividends
on the converted shares. Among the factors leading the Board to this strategy
are the following:
- The Company's debt covenants effectively preclude the Company from making
significant dividend payments for the foreseeable future. See "Talley
Capital Stock -- Talley Debt Covenants."
- Even if dividend payments on Series A and B Preferred become permissible
in significant amounts under the Company's debt covenants, the dollar
amount of the payments required to cure all dividend
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<PAGE> 9
arrearages on the outstanding Series A and B Preferred could seriously
and adversely affect the Company's liquidity and its efforts to grow its
core businesses.
- Despite the Company's success during the last several years in the
pending TRW litigation, including the $138.0 million judgment entered in
the Company's favor in 1995, all litigation is unpredictable both as to
results and timing. Further, virtually all proceeds from the judgment
entered against TRW (if affirmed on appeal and received by the Company)
are committed under the terms of the Company's debt covenants to a
mandatory offer to redeem outstanding debt. The Company believes that any
such redemption offer would likely be fully subscribed, meaning that the
judgment proceeds would not be available to cure the dividend arrearages
at their current levels.
- Dividend payments are not deductible for tax purposes. Accordingly, the
after-tax cash cost to the Company to cure the Series A and B Preferred
dividend arrearages would be substantial unless those arrearages could
first be reduced by a significant reduction in the number of shares of
outstanding Series A and B Preferred. This tax factor is likely to become
more significant if (as the Company anticipates) the continued receipt of
quarterly payments from TRW and/or a successful recovery of the judgment
entered against TRW would consume entirely the accumulated net tax
operating losses of the Company and the anticipated tax benefits from
realization of tax losses attributable to the Company's real estate
holdings (which, in large part, have not yet been recognized for tax
purposes).
- The perceived "overhang" attributable to an escalating level of Series A
and B Preferred dividend arrearages would likely hamper the Company's
efforts to increase the value of its Common Stock. Among other things, it
is not permissible under the terms of Series A and B Preferred to declare
or pay any dividends on Common Stock unless and until all Series A and B
Preferred dividend arrearages are cured.
- The existence of dividend arrearages results in a number of additional
expenses and administrative difficulties for a publicly held company such
as Talley.
Similar factors led the Board to approve a transaction with the holder of
the Series D Preferred in February 1996 (the "Series D Conversion"). That
transaction entailed the immediate conversion of all 120,293 shares of Series D
Preferred then outstanding at a 10:1 conversion ratio in accordance with its
terms and the issuance of an additional 702,919 shares of Common Stock to induce
the conversion. The conversion eliminated without payment the approximately $2.6
million in dividend arrearages on the Series D Preferred, as specified by the
terms of the Series D Preferred. Those terms also provided that, if the Series D
Preferred were not redeemed or converted by February 28, 1998, then: (i) the
dividend rate would increase from the current annual rate of $4.50 per share to
an annual rate of $15.75 per share (an aggregate increase of approximately
$1,350,000 each year) and (ii) the liquidation preference and redemption price
would increase from $150 to $175 per share. Certain of the unique
characteristics of the Series D Preferred, and particularly the scheduled
ratchet in the dividend rate in 1998, made the Series D Conversion unusually
compelling in the Board's view. Also, because the Series D Preferred has always
been privately held, the Company was able to obtain certain voting and transfer
restrictions until 2001 on the Common Stock issued in the Series D Conversion.
See "Notes to Consolidated Financial Statements -- Capital Stock" in Appendix A.
The Board determined that many of the considerations underlying the Series
D Conversion are equally applicable to the Series A and B Preferred,
particularly in light of the high aggregate level of dividend arrearages on the
Series A and B Preferred. Accordingly, the Board determined to make this
Conversion Offer to the holders of Series A and B Preferred. The terms for this
Conversion Offer were determined by the Company in light of its desire to
achieve the objectives set forth above. Among the factors considered by the
Company in determining the number of additional shares of Common Stock being
offered in this Conversion Offer were: (i) the conversion and other rights and
preferences of the Series A and B Preferred and the amount of unpaid dividend
arrearages on the Series A and B Preferred; (ii) a comparison with the relative
terms of the Series D Preferred and of the Series D Conversion, including the
transfer and voting restrictions applicable to the Common Stock issued in that
transaction; (iii) the historical and recent market prices, liquidity and
trading activity in the Common Stock and Series B Preferred, and the estimated
value and
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<PAGE> 10
relative illiquidity of Series A Preferred; and (iv) the investment risks
associated with an investment in Talley capital stock and general market
conditions.
REASONS FOR CONVERTING IN CONNECTION WITH THIS CONVERSION OFFER
The Company believes that this Conversion Offer is in the best interests of
the Company and the holders of its Common Stock. However, the Company believes
that the holders of Series A and B Preferred should make their own
determinations whether to accept or reject this Conversion Offer and,
accordingly, makes no recommendation to them regarding this Conversion Offer.
Outlined below are some of the reasons the Company believes that holders of
Series A and B Preferred may choose to accept this Conversion Offer. Along with
these reasons, holders of Series A and B Preferred should weigh and take into
account all of the factors listed under the caption "Certain Considerations" in
making their determinations whether to accept or reject this Conversion Offer.
- The number of additional shares offered in this Conversion Offer
represents a premium above the current stated conversion ratios of the
Series A and B Preferred to induce holders to convert their shares. The
stated conversion ratios of Series A and B Preferred are not being
increased. Following the Expiration Date, holders of Series A and B
Preferred who choose not to accept this Conversion Offer will not be
entitled upon conversion to any additional shares of Common Stock being
offered or issued in connection with this Conversion Offer.
- When this Conversion Offer was first publicly announced, the market value
of the Common Stock issuable in connection with this Conversion Offer (a
total of 2.0 shares of Common Stock for each share of Series A Preferred
and 2.5 shares for each share of Series B Preferred) had a market value
in excess of the estimated value of Series A Preferred (which does not
trade regularly) and the NYSE closing price of the Series B Preferred. To
the extent the relative values of Common Stock and Series A and B
Preferred continue to reflect any such premium, holders of the Series A
and B Preferred who choose not to accept this Conversion Offer will not
participate in such premium. Market prices will vary, however, so holders
of Series A and B Preferred should check current quotes before making a
final decision based on relative market values.
- Dividend arrearages on Series A and B Preferred do not earn interest and
are automatically extinguished without payment when a holder converts
shares into Common Stock. The Company's debt covenants and the priorities
the Company has set for the use of available cash not required for debt
payments make it unlikely that the arrearages will be cured during the
foreseeable future unless the level of outstanding Series A and B
Preferred is reduced significantly through this Conversion Offer or
otherwise.
- The Series A Preferred is not traded on any established market and, to
the Company's knowledge, no broker or dealer "makes a market" in shares
of Series A Preferred. Based upon the Company's review of the transfer
records, Series A Preferred appears to change hands only sporadically.
Accordingly, the Series A Preferred is, and is likely to remain, highly
illiquid. Because the Series A Preferred is illiquid, holders desiring to
sell their shares could find it necessary to convert their Series A
Preferred into Common Stock, which would eliminate any dividend arrearage
without payment.
- Although the Series B Preferred is currently listed and traded on the
NYSE, its trading volume and liquidity are substantially lower than that
of the Common Stock (an average trading volume during 1995 of 1,636
shares per trading day for the Series B Preferred compared with 30,180
shares per trading day for the Common Stock). This liquidity differential
will likely increase to the extent that this Conversion Offer results in
fewer outstanding shares of Series B Preferred.
- Currently, the criterion for continued listing of preferred stock on the
NYSE is a public "float" (i.e., shares held by non-affiliates of the
Company) of at least 100,000 shares or $2.0 million in value. If the
Series B Preferred does not continue to meet the requirements for
listing, by reason of decreases in the outstanding shares of Series B
Preferred resulting from this Conversion Offer or fluctuations in price,
the liquidity of the Series B Preferred could be further impaired by a
de-listing from the NYSE. In the
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<PAGE> 11
event of such a de-listing of Series B Preferred, the Company is under no
obligation to arrange for a "market maker" to maintain an active trading
market for the Series B Preferred in that event.
- The Series B Preferred is currently registered under the Exchange Act,
but that registration may be terminated if the Series B Preferred is
neither listed on the NYSE or another national securities exchange nor
held of record by 300 or more persons. If registration were terminated,
the Series B Preferred would no longer be "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System.
- The Company believes that some investors acquire and hold convertible
preferred stock rather than common stock because of a desire to forego a
portion of the appreciation potential of common stock in exchange for a
higher level of current dividend income and the lower perceived risk and
volatility which often accompany the liquidation and dividend preferences
of preferred stock. In the case of the Series A and B Preferred, however,
those factors may be less compelling, because dividends have not been
declared or paid for the last five years, and the Company's restrictive
debt covenants and its leveraged balance sheet make it unclear when or if
the Company would be able to cure the accumulated dividend arrearage on
Series A and B Preferred at present levels or resume regular dividends.
Nevertheless, Series A and B Preferred do have certain preferences (as
compared with Common Stock) that holders will surrender upon accepting
this Conversion Offer. See "Talley Capital Stock -- Common Stock";
"-- Preferred Stock." See also Appendices B and C. Series A and B
Preferred delivered for conversion under this Conversion Offer will still
be entitled to be voted at the April 9, 1996 Annual Meeting.
- The Trustee of TSP has indicated its intention to convert all of TSP's
Series B Preferred in connection with this Conversion Offer, amounting to
408,394 shares (26.38% of the Series B Preferred). In addition, the
Company has been advised that virtually all of the 11,000 shares of
Series B Preferred held directly by executive officers and directors of
the Company will be converted by them in connection with this Conversion
Offer (no shares of Series A Preferred are held by officers or
directors). See "The Conversion Offer."
- Because the holders of Series A and B Preferred have no rights of
optional redemption (only the Company can elect to redeem Series A and B
Preferred), holders generally have no right to compel the payment of
dividend arrearages or redemption of their shares.
- Neither the Delaware General Corporation Law nor the Company's
organizational documents provide for dissenters rights of appraisal (or
other comparable rights) for holders of Series A Preferred or Series B
Preferred not accepting this Conversion Offer.
- As described under "Certain Federal Income Tax Consequences," a portion
of the additional Common Stock received by holders accepting this
Conversion Offer will be currently taxable to the recipient as ordinary
income.
THE CONVERSION OFFER
The Company is making this Conversion Offer to induce conversion of the
outstanding shares of its Series A and B Preferred, as follows:
Series A Preferred -- A total of 2.0 shares of Common Stock will be
issued to the holder of each share of Series A Preferred converted in
connection with this Conversion Offer: each Series A Preferred share is
currently convertible into 0.95 share of Common Stock pursuant to the
Restated Certificate of Incorporation, as amended (the "Certificate") of
Talley, and an additional 1.05 shares of Common Stock will be issued in
respect of the conversion of each Series A Preferred share converted in
accordance with this Conversion Offer.
Series B Preferred -- A total of 2.5 shares of Common Stock will be
issued to the holder of each share of Series B Preferred converted in
connection with this Conversion Offer: each Series B Preferred share is
currently convertible into 1.3125 shares of Common Stock pursuant to the
Certificate, and an
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<PAGE> 12
additional 1.1875 shares of Common Stock will be issued in respect of the
conversion of each Series B Preferred share converted in accordance with
this Conversion Offer.
This Conversion Offer is made upon the terms and subject to the conditions set
forth in this Offering Circular and in the accompanying Letter of Transmittal.
On the Expiration Date, each share of Series A Preferred will have an
aggregate dividend arrearage of $5.50, and each share of Series B Preferred will
have an aggregate dividend arrearage of $5.00. Pursuant to the Certificate, all
unpaid dividends for the Series A and B Preferred are automatically extinguished
without payment upon conversion. The conversion ratios for Series A and B
Preferred remaining outstanding after the Expiration Date will NOT be adjusted
on account of additional shares offered or issued in connection with this
Conversion Offer. See "Talley Capital Stock" for a description of the Company's
Common Stock and Series A and B Preferred and certain related matters.
The number of additional shares of Common Stock being offered to induce
conversion will NOT be adjusted by the Company for any fluctuations in the
relative market values of Common Stock and Series A and B Preferred.
No fractional shares of Common Stock will be issued in this Conversion
Offer. If, upon conversion of Series A and B Preferred in connection with this
Conversion Offer, a beneficial owner would thereupon be entitled to receive a
total number of shares of Common Stock which, after aggregating the shares
issued pursuant to the Certificate and the additional shares issued as an
inducement to convert, includes a fractional share, as part of the inducement to
convert the Company will issue one share of Common Stock in lieu of the
fractional share.
Beneficial owners of Series A Preferred and/or Series B Preferred who
desire to convert their shares in connection with this Conversion Offer must
convert all, and not less than all, of the Series A Preferred and/or Series B
Preferred beneficially owned by them. By delivering or by causing the Registered
Holder (as defined below) to effect delivery for conversion, each beneficial
owner of such Series A and B Preferred represents and warrants that delivery has
been effected with respect to all Series A and B Preferred beneficially owned by
them.
Series A and B Preferred shares delivered for conversion in connection with
this Conversion Offer may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. See "Conversion Offer
Procedures -- Withdrawal of Deliveries."
CONDITIONS OF THE CONVERSION OFFER
The Company will have no obligation to accept any Series A and B Preferred
shares delivered for conversion pursuant to this Conversion Offer if any of the
following conditions exist, and may terminate or amend this Conversion Offer as
provided herein before the acceptance of any such shares for conversion:
(a) If, in the case of the Series A Preferred, less than 34,014 shares
of Series A Preferred (51% of the 66,695 aggregate shares of Series A
Preferred presently outstanding) are properly delivered for conversion (but
failure to satisfy this condition as to Series A Preferred will not affect
the Company's obligation as to Series B Preferred); or
(b) If, in the case of the Series B Preferred, less than 789,422
shares of Series B Preferred (51% of the 1,547,887 aggregate shares of
Series B Preferred presently outstanding) are properly delivered for
conversion (but failure to satisfy this condition as to Series B Preferred
will not affect the Company's obligation as to Series A Preferred); or
(c) If any action or proceeding is instituted or is threatened in any
court or by or before any governmental agency or instrumentality with
respect to (i) this Conversion Offer or (ii) the Company or its capital
stock which, in the judgment of the Company, has or may have a material
adverse effect on the business, financial condition, operations or
prospects of the Company or impairs or may impair the benefits of this
Conversion Offer to the Company or the ability of the Company to proceed
with this Conversion Offer; or
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<PAGE> 13
(d) If the judgment against TRW, currently on appeal before the Ninth
Circuit, is resolved in favor of the Company (See "Certain
Considerations -- Considerations Applicable to Holders of Common Stock and
to Both Converting and Continuing Holders of Series A and B Preferred"); or
(e) If there has been proposed, adopted or enacted any law, statute,
rule or regulation that, in the judgment of the Company, has or may have a
material adverse effect on the business, financial condition, operations or
prospects of the Company or impairs or may impair the material benefits of
this Conversion Offer to the Company or the ability of the Company to
proceed with this Conversion Offer; or
(f) If any change or changes have occurred or are threatened in the
business, assets, liabilities, condition (financial or otherwise),
operations, results of operations or prospects of the Company that, in the
judgment of the Company, has or may have a material adverse effect on the
Company; or
(g) If the additional shares of Common Stock issuable under this
Conversion Offer to induce conversion are not authorized for listing by the
NYSE; or
(h) If after the date of the commencement of the Conversion Offer, any
tender or exchange offer for 15% or more of the outstanding shares of
Common Stock, Series A Preferred or Series B Preferred (other than the
Conversion Offer), or any merger, acquisition, business combination or
other similar transaction with or involving the Company, shall have been
proposed, announced or made by any person or entity other than the Company
or any subsidiary.
The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth above has occurred and the
condition is not waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to Series A Preferred or Series B
Preferred, or the waiver of a condition as to either series, need not be
accompanied by the same action as to the other series. Any such amendment,
extension or termination will be followed as promptly as practicable by public
announcement thereof. If this Conversion Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose each amendment in a manner reasonably calculated to inform the holders
of such amendment and, if such amended Conversion Offer would otherwise expire
during such period, the Company will extend each such amended Conversion Offer
for a period which the Company in its judgment deems appropriate, depending upon
the significance of the amendment and the manner of disclosure to holders of the
Series A and B Preferred. Any such extension will be in compliance with the
applicable rules and regulations of the SEC. See "Conversion Offer
Procedures -- Expiration Date; Extension; Amendment; Termination."
The Trustee of TSP has indicated its intention to convert all of TSP's
Series B Preferred in connection with this Conversion Offer, amounting to
408,394 shares (26.38% of the Series B Preferred). In addition, the Company has
been advised that virtually all of the 11,000 shares of Series B Preferred held
by executive officers and directors of the Company will be converted by them in
connection with this Conversion Offer (no shares of Series A Preferred are held
by officers or directors).
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions and may be waived by the Company in whole or in part at any time and
from time to time in the judgment of the Company. Any determination by the
Company concerning the events described above will be final and binding upon all
parties.
INTERESTS OF CERTAIN PERSONS IN THE CONVERSION OFFER
No officer, director, manager, stockholder, equity holder or affiliate of
the Company has any material interest, direct or indirect, in this Conversion
Offer other than interests, if any, of such individuals as stockholders or
equity holders of the Company that are shared by all other stockholders and
equity holders of the Company. See "The Conversion Offer" above, which indicates
that TSP and virtually all directors and executive officers of Talley holding
Series B Preferred have informed the Company of their present intentions to
convert the shares of Series B Preferred held by them in connection with this
Conversion Offer; no Series A Preferred is held by any officer or director of
the Company.
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<PAGE> 14
ANTICIPATED ACCOUNTING TREATMENT OF CONVERSION OFFER
See "Selected Historical and Pro Forma Financial Data" for a description of
the financial and accounting consequences of this Conversion Offer.
FEES AND EXPENSES
Holders of Series A and B Preferred delivered for conversion will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the conversion of
Series A and B Preferred shares or the issuance of additional shares of Common
Stock in connection with this Conversion Offer. The Company will pay all
reasonable out-of-pocket expenses incurred by brokers, custodians, nominees and
fiduciaries in forwarding copies of this Offering Circular and related documents
to the beneficial owners of the Series A and B Preferred, and in handling or
forwarding deliveries of Series A and B Preferred shares for conversion. Holders
of Series A and B Preferred will be responsible for all other costs incurred in
converting shares pursuant to this Conversion Offer. See "Conversion Offer
Procedures -- Payment of Expenses."
INFORMATION AGENT
Kissel-Blake Inc. is serving as Information Agent for this Conversion
Offer. Its telephone number is (212) 344-6733 (Collect) or (800) 554-7733 (Toll
Free). All questions concerning this Conversion Offer and requests for
additional copies of the Offering Circular and Letter of Transmittal should be
directed to the Information Agent.
CONVERSION AGENT
Chemical Mellon Shareholder Services, L.L.C. is serving as Conversion Agent
for this Conversion Offer. All documents to be submitted in connection with this
Conversion Offer should be delivered to the Conversion Agent at one of its
addresses set forth on the back cover of this Offering Circular.
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CERTAIN CONSIDERATIONS
Holders of Series A and B Preferred should consider, among other things,
the specific considerations set forth below as well as the other information set
forth elsewhere in this Offering Circular (including the Appendices) and in the
Company materials referenced in this Offering Circular before determining
whether to convert shares in connection with this Conversion Offer.
CONSIDERATIONS APPLICABLE TO HOLDERS OF SERIES A AND B PREFERRED WHO DO NOT
CONVERT IN CONNECTION WITH THIS CONVERSION OFFER
The conversion of Series A and B Preferred in connection with this
Conversion Offer may have certain adverse consequences to holders of Series A
and B Preferred who do not convert, including the following:
Illiquidity of Series B Preferred; Possible NYSE De-listing. The trading
volume and liquidity of the Series B Preferred are substantially lower than that
of the Common Stock. If a significant portion of the outstanding shares of the
Series B Preferred are converted pursuant to this Conversion Offer, this
reduction in the outstanding shares of Series B Preferred likely would adversely
affect the liquidity of the Series B Preferred that remains outstanding.
Currently, the criteria for continued listing of preferred stock on the NYSE is
a public "float" (i.e., shares held by non-affiliates of the Company) of at
least 100,000 shares and $2.0 million in value. If the Series B Preferred were
to fail to continue to meet either of these requirements for NYSE listing, as a
result of this Conversion Offer or otherwise, then the liquidity of the Series B
Preferred could be impaired. In the event of such de-listing of Series B
Preferred, the Company is under no obligation to arrange for a "market maker" to
maintain an active trading market for the Series B Preferred in that event.
Illiquidity of Series A Preferred. The Series A Preferred is not traded on
any established market and, to the Company's knowledge, no broker or dealer
"makes a market" in shares of Series A Preferred. Based upon the Company's
review of the transfer records, Series A Preferred appears to change hands only
sporadically. Accordingly, the Series A Preferred is, and is likely to remain,
highly illiquid, and to the extent that shares of Series A Preferred are
converted, the Company anticipates that any market for shares of Series A
Preferred will become even more limited. Because the Series A Preferred is
illiquid, holders desiring to sell their shares could find it necessary to
convert their Series A Preferred into Common Stock, which would eliminate
without payment any dividend arrearage.
No Interest on Dividend Arrearages; Restrictions on Dividends. Unpaid
dividends on Series A and B Preferred accumulate, but do not earn interest and
are automatically extinguished without payment in the event a holder converts
Series A Preferred or Series B Preferred into Common Stock. The Company's debt
covenants and the priorities the Company has set for the use of available cash
not required for debt service and principal reductions make it unlikely that the
present dividend arrearages will be cured during the foreseeable future.
No Adjustment in Conversion Ratio. Pursuant to the terms of the Series A
and B Preferred, no adjustment will be made in the conversion ratios for Series
A and B Preferred on account of dividend arrearages or on account of the
additional shares of Common Stock offered or issued in connection with this
Conversion Offer.
No Redemption Right. Except in certain limited circumstances, neither
Series A Preferred nor Series B Preferred is redeemable at the option of the
holder; only the Company has the right to elect to redeem shares of Series A and
B Preferred.
No Appraisal or Similar Rights. No appraisal or similar rights under
Delaware General Corporation Law or other applicable law will be available to
holders of Series A and B Preferred electing not to convert in connection with
this Conversion Offer.
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CONSIDERATIONS APPLICABLE TO HOLDERS OF SERIES A AND B PREFERRED WHO DO CONVERT
IN CONNECTION WITH THIS CONVERSION OFFER
Elimination of Dividend Rights, Liquidation Preferences and Protective
Covenants. Holders of Series A and B Preferred who convert their shares of
Series A and B Preferred into Common Stock will no longer be entitled to the
liquidation preferences, protective covenants and cumulative dividend rights of
the Series A and B Preferred. See "Talley Capital Stock -- Series A Preferred";
"-- Series B Preferred." Such holders will become subject to all of the risks
associated with common equity, including the preferential claims of holders of
the Company's debt and holders of then-outstanding preferred stock, in the event
of a liquidation, dissolution or winding up of the Company. Further, the special
voting rights now exercisable by the Series A and B Preferred (by virtue of
accumulated dividend arrearages) will be surrendered by holders accepting this
Conversion Offer for any election after the election scheduled for the April 9,
1996 Annual Meeting, although such holders will thereafter hold voting rights as
holders of Common Stock. See "Talley Capital Stock -- Common Stock"; "-- Series
A Preferred"; "-- Series B Preferred."
The Board of Directors is authorized under the Certificate, without a
further vote of the stockholders of the Company, to issue up to 5,000,000 shares
of preferred stock (less any shares of preferred stock then outstanding) in one
or more series and to fix the designations, preferences, powers and relative,
participating, optional or other rights and restrictions thereof. The Company
may issue one or more series of preferred stock in the future that will have
preferences over the Common Stock with respect to the payment of dividends and
upon liquidation, dissolution or winding-up of the Company or otherwise. See
"Talley Capital Stock."
No Adjustment for Market Price Fluctuations. Pursuant to the terms and
conditions of this Conversion Offer, the number of shares of Common Stock
issuable in connection with this Conversion Offer will not be adjusted on
account of fluctuations in the relative market values of Common Stock and Series
A and B Preferred.
Certain Tax Consequences. A portion of the additional shares of Common
Stock received by holders of Series A and B Preferred who accept this Conversion
Offer will be currently taxable to the recipient as ordinary income. See
"Certain Federal Income Tax Consequences."
Restrictions on Conversion Offer. Issuance of Common Stock in connection
with this Conversion Offer will be made as of the Expiration Date only after a
timely receipt by the Conversion Agent of a properly completed and duly executed
Letter of Transmittal, including all other documents required by such Letter of
Transmittal. Therefore, holders of Series A and B Preferred desiring to convert
such Series A and B Preferred should allow sufficient time to ensure timely
delivery. The Conversion Agent and the Company are under no duty to give
notification of defects or irregularities with respect to the deliveries of
Series A and B Preferred for conversion.
CONSIDERATIONS APPLICABLE TO HOLDERS OF COMMON STOCK AND TO BOTH CONVERTING AND
CONTINUING HOLDERS OF SERIES A AND B PREFERRED
High Leverage; Recent Operating Results. On December 31, 1995, the Company
had approximately $241.6 million in total debt and approximately $58.3 million
in stockholders' equity. This Conversion Offer will not materially affect
overall stockholders' equity of the Company. The continued high level of the
Company's debt will continue to pose substantial risks to holders of the
Company's equity securities, and could have material adverse effects on the
marketability, price and future value of such securities. In addition, the
Company's existing debt covenants permit the Company to incur additional
indebtedness in certain circumstances.
The Company reported net earnings of $18.0 million for the year ended
December 31, 1995, including a $14.4 million extraordinary gain from the
extinguishment of certain real estate debt for less than book value and a $7.0
million provision for an additional reserve on realty assets resulting from the
decision to sell a property over the short-term in bulk rather than to pursue
partial sales. The Company reported net earnings of $3.5 million in 1994 and
experienced net losses of $6.5 million, $14.6 million, $43.2 million and $50.2
million in 1993, 1992, 1991 and 1990, respectively. See "Management's Discussion
and Analysis" in Appendix A.
12
<PAGE> 17
There can be no assurance that the Company's operations will continue to be
profitable or that the Company's cash flow will be sufficient to service its
significant debt.
Debt Agreement Restrictions; Dividend Policy. The Company's debt
agreements contain various restrictions on the Company's activities and require
the Company to achieve and maintain certain financial ratios. Such restrictions
include, among other things, significant limitations on the ability of the
Company to make dividend and other payments with respect to its outstanding
capital stock. These debt covenants do not permit the Company either to pay down
the unpaid dividend arrearages on the Series A and B Preferred to any
significant extent, or to redeem, repurchase or otherwise acquire a significant
number of shares of Series A and B Preferred, except in consideration of shares
of Common Stock. See "Talley Capital Stock -- Talley Debt Covenants." The
Company's policy is to retain earnings for the foreseeable future for
reinvestment in its businesses.
Other Transactions to Reduce Series A and B Preferred. Following the
Conversion Offer, and depending on the number of shares of Series A and B
Preferred converted, the Company would not be prohibited from taking additional
actions to reduce further or eliminate any remaining Series A and B Preferred.
Such transactions could be undertaken on terms which are more favorable or less
favorable than the Conversion Offer.
Market Value of the Company's Securities. The market value of the Common
Stock to be issued in connection with this Conversion Offer, as well as the
value of Series A and B Preferred not converted, will depend on the future
performance of the Company and market factors generally, which are influenced by
a number of conditions beyond the Company's control.
Dependence on Government Contracts. A significant portion of Talley's
revenues has been derived historically from contracts with agencies of, and
prime contractors and subcontractors to, the U.S. Government, principally the
Department of Defense. Management anticipates that its defense-related
government contract business will continue to represent a significant portion of
its business in the future. There can be no assurance that the U.S. Government
will continue its commitment to programs in which the Company's products and
services are applicable, or as to the effect of any changes in Government policy
on Talley's business. If the U.S. Government significantly reduces its defense
spending (which has occurred during the last several years) or dramatically
changes the composition of its expenditures, then the earnings of Talley's
Government Products and Services segment could be materially adversely impacted.
The programs in which the Company participates may extend for several years, but
are normally contracted and funded on an annual basis. While Talley is currently
a party to many government contracts, most of which are not, individually,
material with respect to the amount of revenue generated, certain contracts have
from time to time in the past accounted for significant revenues. If current
contracts are not renewed when they expire, or if the Company is unsuccessful in
obtaining alternative contracts prior to such time, a significant reduction in
revenues could result. See "Business -- Financial Information About Industry
Segments"; "-- Narrative Description of Business" in Appendix A.
TRW Litigation. Litigation between the Company and TRW has been pending
since shortly after the Company's sale of its airbag manufacturing business in
1989. In 1995, the federal district court for the district of Arizona entered
judgment against TRW in favor of the Company in TRW Inc. vs. Talley Industries,
Inc. et al. The court dismissed all claims asserted by TRW against the Company
in that litigation while the jury reached a verdict in favor of the Company on
its counterclaims against TRW, and awarded the Company a total of $138.0
million. This case is now on appeal before the Ninth Circuit. A separate trial
of other claims and counterclaims between the Company and TRW is expected to
commence this Spring. As with all pending litigation, the final disposition, the
timing and the amount of any recovery are uncertain. See "Management's
Discussion and Analysis" in Appendix A for further information.
Sensitivity of Certain Operations to Economic Cycles. Certain of the
Company's businesses, particularly its steel operations, are cyclical in nature
and especially sensitive to fluctuation in general economic activity. In
addition, the ceramic insulator business is particularly sensitive to housing
starts. Recessionary conditions or increases in interest rates in the general
economy would be likely to have an adverse impact on Talley's future operating
performance.
13
<PAGE> 18
Real Estate Held for Orderly Disposition. Due to the prolonged downturn in
the real estate sector of the economy in the southwestern U.S. and nationally in
the late 1980's and early 1990's, the Company has recorded pre-tax charges
against earnings to reflect write-downs and reserves in connection with the
Company's real estate portfolio totaling $141.5 million since 1989. Further
deterioration of these real estate markets, or a decision by the Company to sell
some or all of its remaining real estate holdings in bulk, could negatively
affect the Company, requiring the Company to record additional charges and
adversely affecting the prices obtainable by the Company for disposition of
realty assets and the timing of dispositions. In addition, market conditions may
necessitate installment sales, rather than all-cash transactions, which may
extend the period of time required for orderly disposition of the realty assets.
As a result, the period of time necessary to achieve satisfactory dispositions
of realty assets could be extended, adversely affecting the Company's ability to
repay debt and reduce leverage. See "Management's Discussion and Analysis" in
Appendix A.
Competition. Competition for the Company's products and services varies
widely. The markets for a number of the Company's products and services are
highly competitive, and many of the Company's competitors have financial,
technical, marketing, manufacturing, distribution and other resources
substantially greater than those of the Company. See "Business -- Narrative
Description of Business" in Appendix A.
Environmental Matters. The Company's operations are subject to federal,
state and local laws, regulations and ordinances relating to the storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain hazardous materials, substances and wastes used in connection with its
businesses. The Company believes that its current operations are in substantial
compliance with such laws, regulations and ordinances. The Company may also bear
responsibility, under certain circumstances, for the activities of tenants or
prior owners of its real properties, for environmental liabilities associated
with businesses or properties which have been sold and for the clean-up of
hazardous materials which may have been generated, stored or disposed of before
the implementation of current standards and procedures. Due to the nature of the
Company's operations, it is involved from time to time in administrative and
judicial proceedings, inquiries and other public or private claims relating to
environmental matters. There can be no assurance that material costs or
liabilities will not be incurred in connection with any such proceedings,
inquiries or claims. Further, modifications of existing laws and regulations or
the adoption of new laws and regulations in the future, particularly with
respect to environmental and safety standards, could require capital
expenditures that may have a material adverse effect on the financial position
or results of operations of the Company. See "Management's Discussion and
Analysis -- Environmental" in Appendix A.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), final, temporary and proposed United States
Treasury Regulations promulgated thereunder, and the administrative and judicial
interpretations thereof, all as in effect as of the date of this Offering
Circular. Such laws or interpretations are subject to change (possibly with
retroactive effect) or different interpretations. The effectiveness of this
Conversion Offer is not conditioned upon the receipt of any ruling from the
Internal Revenue Service, and no ruling has been or will be requested on any tax
matters relating to this Conversion Offer.
TAX CONSEQUENCES TO HOLDERS OF SERIES A AND B PREFERRED
Conversion of shares of Series A and B Preferred in connection with this
Conversion Offer will be treated as a recapitalization under Section
368(a)(1)(E) of the Code. Therefore, a holder of Series A Preferred or Series B
Preferred accepting this Conversion Offer will not recognize gain or loss on the
conversion of such holder's Series A Preferred or Series B Preferred, but will
be deemed to have received a distribution to which Section 301 of the Code
applies (the "Deemed Distribution") equal to the lesser of: (i) the amount by
which the fair market value of the Common Stock received on the date of
distribution exceeds the issue price of the Series A Preferred or Series B
Preferred, as the case may be, and (ii) the amount of the unpaid dividend
arrearage with respect to the Series A Preferred or Series B Preferred, as the
case may be, on such date.
14
<PAGE> 19
Assuming the Expiration Date is not extended and occurs on April 22, 1996, the
dividend arrearage as of that date will be $5.50 for each share of Series A
Preferred and $5.00 for each share of Series B Preferred. The Deemed
Distribution will constitute a dividend for tax purposes taxable as ordinary
income, to the extent of the Company's current or accumulated earnings and
profits. The Company anticipates that it will have sufficient earnings and
profits for tax purposes such that all of the Deemed Distribution will be
taxable on this basis.
A holder's tax basis in the Common Stock received will equal such holder's
basis in the Series A Preferred or Series B Preferred converted in connection
with this Conversion Offer, increased by the amount of the Deemed Distribution
treated as a taxable dividend. A holder will have a split holding period for
each share of Common Stock. The holding period for a portion of each such share
will commence on the date such share is actually or constructively received by
the holder pursuant to this Conversion Offer. Although there is no authority
precisely on point, it is believed that the portion that will have this new
holding period will be equal to the fraction determined by dividing the amount
of the Deemed Distribution on the shares of converted Series A Preferred or
Series B Preferred, as the case may be, by the aggregate fair market value of
the shares of Common Stock received in connection with this Conversion Offer.
The holding period for the remaining fractional portion of each such share of
Common Stock will include the period for which the Series A Preferred or Series
B Preferred, as the case may be, was held by the holder.
A dividends received deduction equal to 70 percent of the amount of the
Deemed Distribution that is taxable as a dividend is generally available to
corporate stockholders, but with certain exceptions based on the particular
circumstances of the stockholder, including the denial of the deduction for
certain preferred stock owned for less than 90 days. The Clinton Administration
has recently proposed that the 70 percent deduction be reduced. A corporate
stockholder may be required to reduce its basis in shares of Common Stock by the
amount of the dividends received deduction if the portion of the Deemed
Distribution taxable as a dividend constitutes an "extraordinary dividend,"
within the meaning of Section 1059 of the Code. Corporate stockholders should
consult their own tax advisors concerning the availability of the dividends
received deduction and the application of the extraordinary dividend rules in
this situation.
TAX CONSEQUENCES TO THE COMPANY
The Company will not recognize gain or loss in connection with the
transactions contemplated by this Conversion Offer. The Company's current or
accumulated earnings and profits for tax purposes will be deemed to have been
reduced to the extent of the aggregate Deemed Distributions are recognized by
holders of Series A and B Preferred converting shares in connection with this
Conversion Offer.
THE ABOVE DISCUSSION IS OF A GENERAL NATURE AND DOES NOT FULLY ADDRESS ANY
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OR THE FEDERAL INCOME TAX CONSEQUENCES
FOR STOCKHOLDERS WHO DO NOT HOLD SERIES A PREFERRED OR SERIES B PREFERRED AS A
CAPITAL ASSET OR FOR FOREIGN STOCKHOLDERS. THIS DISCUSSION IS FOR GENERAL
INFORMATION ONLY, AND EACH STOCKHOLDER SHOULD CONSULT WITH HIS, HER OR ITS OWN
TAX ADVISOR AS TO THE CONSEQUENCES OF THIS CONVERSION OFFER.
TALLEY CAPITAL STOCK
At the present time Talley's Certificate authorizes the issuance of
20,000,000 shares of $1 par value Common Stock and 5,000,000 shares of $1 par
value preferred stock ("Talley Preferred Stock"). On February 27, 1996, there
were issued and outstanding 11,959,501 shares of Common Stock (including the
1,905,849 shares issued in the Series D Conversion), and 4,657,480 shares in the
aggregate were reserved for issuance upon conversion of the Series A and B
Preferred, at their current stated conversion ratios, exercise of employee stock
options, issuance pursuant to TSP, and issuance in connection with a 1994
acquisition. If all holders of Series A and B Preferred were to convert their
Series A and B Preferred in connection with this Conversion Offer, 1,908,146
additional shares of Common Stock (plus a limited number of shares issuable in
lieu of fractional shares) would be issued and outstanding (over and above the
shares into which the Series A
15
<PAGE> 20
and B Preferred are convertible by their stated terms). In addition, subject to
approval at the April 9, 1996 Annual Meeting, up to an additional 1,400,000
shares would be reserved for issuance pursuant to the employee stock plans.
Shares of Common Stock and Talley Preferred Stock authorized by the
Certificate, but not outstanding or reserved for issuance, may be issued in the
judgment of Talley's Board of Directors from time to time for such consideration
as the Board of Directors may determine and for any corporate purpose, without
further action by the stockholders, except as may be required by law or by the
rules of the NYSE. As permitted by the General Corporation Law of Delaware, such
authorized and unissued shares of Talley Preferred Stock may be issued in such
series, and with such designations, relative rights and preferences (including
voting rights), as the Board may determine.
Certain of the rights of the holders of Series A Preferred, Series B
Preferred and Common Stock are summarized below. Reference is made to the
Powers, Preferences, Rights and Limitations of the Series A Preferred and Series
B Preferred included herein as Appendices B and C, respectively, for a complete
statement of the applicable provisions.
No holders of any shares of capital stock of Talley have any preemptive or
comparable rights. All of the shares of Talley Preferred Stock and Common Stock
now outstanding or to be issued upon acceptance of this Conversion Offer, are,
or upon issuance will be, fully paid and non-assessable.
Each share of Common Stock outstanding has attached to it one Preferred
Stock Purchase Right (the "Purchase Rights") that entitles its holder, in
certain circumstances, to purchase Series C Preferred Stock at a stated price or
shares of Common Stock having a market value of two times the exercise price of
the right. Purchase Rights are also attached to all newly issued shares of
Common Stock. In addition to the Purchase Rights, the Certificate and the
Company's By-Laws contain certain provisions that may deter certain takeover
attempts, including, but not limited to provisions: (i) establishing a
classified Board of Directors; (ii) authorizing shares of preferred stock with
respect to which the Board of Directors has the power to fix the preferences,
privileges and restrictions, without any further vote or action by the
stockholders; (iii) requiring the vote of holders of four-fifths of the voting
power of the Company in order to remove directors (who may be removed only for
cause), to approve certain business transactions with holders of 5% of the
voting power of the Company, and to amend certain provisions of the Certificate
and By-Laws; (iv) permitting stockholder action to be taken only at an annual
meeting or special meeting of stockholders, and not by written consent in lieu
of a meeting; and (v) permitting special meetings of stockholders to be called
only by the Board of Directors, the Chairman of the Board, or the President of
the Company. The foregoing provisions, together with certain provisions of
Delaware law, insofar as they may deter takeover attempts, may affect the market
prices of Talley's outstanding capital stock.
COMMON STOCK
Subject to the rights of holders of Talley Preferred Stock, the holders of
Common Stock are entitled to receive such dividends as are declared by the Board
of Directors, to cast one vote for each share on all matters submitted to the
vote of stockholders, and, upon liquidation, to share ratably in any assets
available for distribution to them. See "Certain
Considerations -- Considerations Applicable to Holders of Common Stock and to
Both Converting and Continuing Holders of Series A and B Preferred." However, it
is not likely that dividends can or would be declared on Common Stock for the
foreseeable future.
By its terms, Common Stock does not entitle the holders thereof to any of
the preferences to which the Series A and B Preferred are entitled, such as
priority to the payment of dividends and to the distribution of assets in the
event of a liquidation of the Company, and special voting rights in the case of
dividend arrearages.
PREFERRED STOCK
As stated above, Talley Preferred Stock may be issued from time to time in
one or more series. The shares of each series of Talley Preferred Stock are
entitled to dividends as determined by the Board of Directors before any
dividend may be paid to the Common Stock with respect to the same dividend
period.
16
<PAGE> 21
The Talley Preferred Stock also has certain liquidation preferences. At the
present time there are two series of Talley Preferred Stock outstanding, namely,
Series A Preferred and Series B Preferred. The following summary descriptions of
the Series A and B Preferred are qualified in their entirety by the Certificates
of Designation included in Appendices B and C, respectively. There are no shares
of Series C Preferred Stock presently outstanding, although that series has been
authorized by the Company's Board of Directors.
SERIES A PREFERRED
Dividend Rights. Holders of Series A Preferred are entitled to receive
cumulative dividends (when and as declared), payable quarterly (on March 15,
June 15, September 15 and December 15 each year), at the annual rate of $1.10
per share. No dividends or other distributions may be paid on Common Stock, nor
may any shares of Common Stock or Talley Preferred Stock be redeemed, retired,
purchased or otherwise acquired, unless at the time thereof dividends on all
outstanding shares of Series A Preferred for all past quarterly periods (and the
current period) have been paid or declared and sufficient funds set aside
therefor.
Voting Rights. Except when they have class voting rights as described
below, holders of Series A Preferred are entitled to four-tenths of a vote per
share on all matters voted on by stockholders (including election of directors);
such votes may not be cumulated.
Talley may not create any class of capital stock ranking prior to the
Series A Preferred, nor make any adverse change in the rights of the Series A
Preferred, without the approval of the holders of at least two-thirds of the
aggregate number of shares outstanding of Series A Preferred, Series B
Preferred, and any other series of Talley Preferred Stock hereafter accorded the
same right, voting separately as a class without regard to series. Talley may
not increase the number of authorized shares of Talley Preferred Stock to more
than 5,000,000, nor create any class of capital stock ranking on a parity with
the Talley Preferred Stock, without the approval of the holders of at least a
majority of the aggregate number of shares outstanding of Series A Preferred and
any other series of Talley Preferred Stock accorded the same right (including
the Series B Preferred), voting separately as a class, without regard to series.
If dividends on the Series A Preferred are in arrears for six or more
quarterly periods (as is the case presently), the authorized number of directors
of Talley is required to be increased by two, and holders of Series A Preferred,
Series B Preferred and any other series of Talley Preferred Stock hereafter
accorded the same rights, have the right, voting separately as a class without
regard to series, to elect two persons to fill such directorships. See
"Background of the Conversion Offer."
Conversion. Each share of Series A Preferred is convertible into Common
Stock at the ratio of 0.95 share of Common Stock for each share of Series A
Preferred. This ratio is subject to adjustment in the event of subdivision,
combination or reclassification of Common Stock, the issuance of rights or
warrants to purchase Common Stock at less than the prevailing market price, or
the payment of stock dividends on Common Stock (other than common stock
dividends of 3% or less paid in any one-year period ending on July 1). No
adjustment in the conversion ratio is made on account of unpaid dividends at the
time of any conversion, and all such dividends are automatically extinguished
without payment on conversion. Further, no adjustment in the conversion ratio
will be made on account of the offer or issuance of Common Stock in connection
with this Conversion Offer. In the event of redemption of any shares of Series A
Preferred, the conversion rights thereof expire on the tenth day before the date
fixed for such redemption.
Redemption. Shares of Series A Preferred are redeemable at the option of
Talley at any time, at a redemption price of $25.00 per share, plus unpaid
dividends thereon to the date fixed for redemption. The Series A Preferred is
not redeemable at the option of the holder.
Liquidation. In the event of liquidation, dissolution or winding up of
Talley, whether voluntary or involuntary, holders of Series A Preferred are
entitled to receive, out of any assets available for distribution to
stockholders, $25.00 per share plus any unpaid dividends, before any payment may
be made in respect of Common Stock or any subordinate class or series of
Talley's capital stock, but have no further right of participation in the
remaining assets. If, on any liquidation, dissolution or winding up of Talley,
the assets available for distribution to holders of shares of Talley Preferred
Stock of all series are insufficient to pay such
17
<PAGE> 22
holders the full preferential amount to which they are entitled, then such
assets will be distributed ratably among the shares of all series then
outstanding of Talley Preferred Stock in accordance with the respective
preferential amounts payable with respect thereto.
SERIES B PREFERRED
Dividend Rights. Holders of Series B Preferred are entitled to receive
cumulative dividends (when and as declared), payable quarterly (on January 8,
April 8, July 8 and October 8 each year), at the annual rate of $1.00 per share.
No dividends or other distributions may be paid on the Common Stock nor may any
shares of Common Stock or Talley Preferred Stock be redeemed, retired, purchased
or otherwise acquired, unless at the time thereof dividends on all outstanding
shares of Series B Preferred for all past quarterly periods (and the current
period) have been paid or declared and sufficient funds set aside therefor.
Voting Rights. Except when they have class voting rights as described
below, holders of Series B Preferred are entitled to one vote per share on all
matters voted on by stockholders (including election of directors); such votes
may not be cumulated.
Talley may not create any class of capital stock ranking prior to the
Series B Preferred, nor make any adverse change in the rights of the Series B
Preferred, without the approval of the holders of at least two-thirds of the
aggregate number of shares outstanding of Series B Preferred, Series A
Preferred, and any other series of Talley Preferred Stock hereafter accorded the
same right, voting separately as a class without regard to series. Talley may
not increase the number of authorized shares of Talley Preferred Stock to more
than 5,000,000 or create any class of capital stock ranking on a parity with the
Talley Preferred Stock, without the approval of the holders of at least a
majority of the aggregate number of shares outstanding of Series B Preferred,
Series A Preferred, and any other series of Talley Preferred Stock accorded the
same right, voting separately as a class without regard to series.
If dividends on the Series B Preferred are in arrears for six or more
quarterly periods (as is the case presently), the authorized number of directors
of Talley is required to be increased by two, and holders of Series B Preferred,
Series A Preferred, and any other series of Talley Preferred Stock hereafter
accorded the same rights, have the right, voting separately as a class without
regard to series, to elect two person to fill such directorships. See
"Background of the Conversion Offer."
Conversion. Each share of Series B Preferred is convertible into Common
Stock at the ratio of 1.3125 shares of Common Stock for each share of Series B
Preferred. This ratio is subject to adjustment in the event of subdivision,
combination or reclassification of Common Stock, the issuance of rights or
warrants to purchase Common Stock at less than the prevailing market price, or
the payment of stock dividends on Common Stock (other than common stock
dividends of 3% or less paid in any one-year period ending on May 14). No
adjustment in the conversion ratio is made on account of unpaid dividends at the
time of any conversion, and all such dividends are automatically extinguished
without payment on conversion. Further, no adjustment in the conversion ratio
will be made on account of the offer or issuance of additional shares of Common
Stock in connection with this Conversion Offer. In the event of redemption of
any shares of Series B Preferred, the conversion rights thereof expire on the
tenth day before the date fixed for such redemption.
Redemption. Shares of Series B Preferred are redeemable at the option of
Talley at a price of $52.50 per share plus all dividends unpaid thereon to the
date fixed for redemption. The Series B Preferred is not redeemable at the
option of the holder.
Liquidation. Upon any liquidation, dissolution or winding up of Talley,
holders of Series B Preferred are entitled to receive, out of any assets
available for distribution to stockholders, $20.00 per share if such
liquidation, dissolution or winding up is involuntary, or $52.50 per share if
voluntary, plus any unpaid dividends, before any payment may be made in respect
of Common Stock or any subordinate class or series of Talley capital stock, but
have no further right of participation in the remaining assets. If, on any
liquidation, dissolution or winding up of Talley, the assets available for
distribution to holders of shares of Talley Preferred Stock of all series then
outstanding are insufficient to pay such holders the full preferential amount to
which
18
<PAGE> 23
they are entitled, then such assets will be distributed ratably among the shares
of all series of Talley Preferred Stock in accordance with the respective
preferential amounts payable with respect thereto.
TALLEY DEBT COVENANTS
The Company's outstanding debt covenants require 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 payable on Talley's capital stock and other payments and incurrence
of debt. See "Notes to Consolidated Financial Statements -- Long-Term Debt" in
Appendix A.
COMPARATIVE MARKET PRICES
The Common Stock and Series B Preferred are listed under the symbols TAL
and TALB, respectively, on the NYSE. There is no active market for the Series A
Preferred. Set forth below are the closing prices per share of the Company's
Common Stock and Series B Preferred, respectively, on the NYSE on (i) March 19,
1996, the last trading day before public announcement of this Conversion Offer,
and (ii) March 20, 1996, the last trading day before the date of this Offering
Circular:
<TABLE>
<CAPTION>
CLOSING PRICE PER SHARE CLOSING PRICE PER SHARE
DATE OF COMMON STOCK OF SERIES B PREFERRED
---- ----------------------- ------------------------
<S> <C> <C>
March 19, 1996................ 7 3/8 $ 1$6 3/8
March 20, 1996................ 7 1/4 $ 1$7 1/2
</TABLE>
The following table sets forth the high and low reported closing prices per
share of the Company's Common Stock and Series B Preferred on the NYSE for the
calendar quarters indicated.
<TABLE>
<CAPTION>
COMMON SERIES B
STOCK PREFERRED
--------------- -------------------
1995 HIGH LOW HIGH LOW
---- --- ---- ----
<S> <C> <C> <C> <C>
First Quarter................................... $10 1/4 $7 3/8 $15 1/2 $12 1/2
Second Quarter.................................. $11 $7 1/2 $17 1/8 $13 1/2
Third Quarter................................... $ 9 3/4 $7 5/8 $16 1/2 $14 1/2
Fourth Quarter.................................. $ 9 1/4 $7 5/8 $16 1/2 $12 7/8
1996
First Quarter (through March 20, 1996).......... $ 8 5/8 $7 $17 1/2 $15 3/4
</TABLE>
HOLDERS OF SERIES A AND B PREFERRED ARE ADVISED TO OBTAIN CURRENT NYSE
MARKET QUOTATIONS FOR THE COMMON STOCK AND SERIES B PREFERRED BEFORE MAKING A
FINAL DECISION ON THIS CONVERSION OFFER. No assurance can be given as to the
market price of Common Stock or Series B Preferred at any time. No adjustment in
the number of shares of Common Stock issuable in connection with this Conversion
Offer will be made for fluctuations in the market price of Common Stock, Series
A Preferred or Series B Preferred.
As of February 27, 1996, there were 2,542 record holders of Common Stock,
42 record holders of Series A Preferred and 1,248 record holders of Series B
Preferred. TSP currently holds 784,693 shares of Common Stock and 408,394 shares
of Series B Preferred. If, pursuant to this Conversion Offer, TSP converts all
such shares of Series B Preferred, TSP will then hold a total of 1,805,678
shares of Common Stock; the Trustee of TSP has informed the Company of its
present intention to convert all shares of Series B Preferred held by TSP in
connection with this Conversion Offer.
19
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Included in Appendix A are the Company's Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis. Holders of Series A
and B Preferred should refer to Appendix A for detailed financial information
about the Company.
The following historical and pro forma unaudited financial information for
the year ended December 31, 1995 is based on the consolidated financial
statements of the Company and has been prepared to give effect to this
Conversion Offer (and the Series D Conversion), as if each had been consummated
at the beginning of 1995. The pro forma adjustments assume acceptance of this
Conversion Offer, in the alternative, by holders of 51% and 100% of the
outstanding shares of Series A and B Preferred and, in each case, 100% of the
Series D Preferred (the Series D Conversion was completed effective February 16,
1996). The pro forma financial information does not purport to be indicative of
the results which would actually have been obtained had such transactions been
completed as of the assumed date and for the period presented or which may be
obtained in the future, and should be read in conjunction with the consolidated
financial statements of the Company and the related notes appearing in Appendix
A to this Offering Circular. The assumptions on which the following pro forma
financial information is based are further described in the accompanying
footnotes.
<TABLE>
<CAPTION>
ASSUMING CONVERSION OF 51% OF SERIES A
AND B PREFERRED AND
100% OF SERIES D PREFERRED
----------------------------------------
YEAR ENDED DECEMBER 31, 1995 PRO FORMA
(AMOUNTS IN THOUSANDS, EXCEPT ADJUSTMENTS
RATIOS AND PER SHARE AMOUNTS) HISTORICAL (A)(B)(C) PRO FORMA
- ---------------------------------------------------------- ---------- ----------- ---------
<S> <C> <C> <C>
Revenue................................................... $ 385,286 -- $ 385,286
====== ===== ======
Earnings before extraordinary gains....................... $ 3,555 $ (200) 3,355
Extraordinary gains....................................... 14,409 -- 14,409
------ ----- ------
Net earnings.............................................. $ 17,946 $ (200) $ 17,764
====== ===== ======
Net earnings applicable to common shares (after deduction
of preferred stock dividends)........................... $ 15,801 $ 1,168 $ 16,969
====== ===== ======
Net earnings per share of common stock and common stock
equivalents............................................. $ 1.28 $ (0.15) $ 1.13
====== ===== ======
Weighted average shares outstanding(c).................... 14,001 1,678 15,679
====== ===== ======
Ratio of earnings to fixed charges and preferred stock
dividends(d)............................................ 1.15 0.04 1.19
====== ===== ======
Working capital........................................... $ 95,402 $ (200) $ 95,202
Total assets.............................................. 372,599 (200) 372,399
Stockholder equity........................................ 58,334 (200) 58,134
Book value per share of common stock(g)................... $ .27 $ 3.37 $ 3.64
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
ASSUMING CONVERSION OF 100% OF SERIES A
AND B PREFERRED
AND 100% OF SERIES D PREFERRED
----------------------------------------
PRO FORMA
ADJUSTMENTS
HISTORICAL (B)(E)(F) PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue................................................... $ 385,286 -- $ 385,286
====== ===== ======
Earnings before extraordinary gains....................... $ 3,555 $ (200) 3,355
Extraordinary gains....................................... 14,409 -- 14,409
------ ----- ------
Net earnings.............................................. $ 17,946 $ (200) $ 17,764
====== ===== ======
Net earnings applicable to common shares (after deduction
of preferred stock dividends)........................... $ 15,801 $ 1,963 $ 17,764
====== ===== ======
Net earnings per share of common stock and common stock
equivalents............................................. $ 1.28 $ (0.21) $ 1.07
====== ===== ======
Weighted average shares outstanding (c)................... 14,001 2,615 16,616
====== ===== ======
Ratio of earnings to fixed charges and
preferred stock dividends(d)............................ 1.15 0.07 1.22
====== ===== ======
Working capital........................................... $ 95,402 $ (200) $ 95,202
Total assets.............................................. 372,599 (200) 372,399
Stockholder equity........................................ 58,334 (200) 58,134
Book value per share of common stock(g)................... $ .27 $ 2.47 $ 2.74
</TABLE>
- ---------------
(a) Assumes that 51% of the outstanding shares of Series A Preferred were
converted in connection with this Conversion Offer and an aggregate of
approximately 68,000 shares of Common Stock were issued -- approximately
36,000 representing the inducement to convert, and that 51% of the
outstanding shares of Series B Preferred were converted pursuant to this
Conversion Offer and an aggregate of 1,974,000 shares of Common stock were
issued -- approximately 937,000 representing the inducement to convert.
Also gives effect to the conversion of 100% of the Series D Preferred
pursuant to the Series D Conversion, and the issuance of an aggregate of
1,905,849 shares of Common Stock (which transaction was completed effective
February 16, 1996) -- 702,919 representing the inducement to convert. The
annual dividend requirement, adjusted for such assumed conversions for
Series A and B Preferred and for conversion of Series D Preferred, would
have been reduced by approximately $37,000, $789,000 and $541,000,
respectively. See note (f) below.
(b) Does not include the one time non-cash charge for the additional shares
issuable in connection with this Conversion Offer: 2.0 shares issued in
connection with each share of Series A Preferred (of which, 0.95 share is
issuable pursuant to the Certificate), 2.5 shares issued in connection with
each share of Series B Preferred (of which, 1.3125 shares are issuable
pursuant to the Certificate); and for the additional shares issued pursuant
to the conversion of the Series D Preferred (an additional 702,919 shares
were issued pursuant to the conversion of the Series D Preferred: 15.8
shares issued in connection with each share of Series D Preferred (of
which, 10.0 were issued pursuant to the Certificate). This charge does not
affect net income or balance sheet items; only earnings applicable to
common stockholders and net earnings per common share are affected.
(c) Weighted average shares outstanding includes Common Stock and Common Stock
equivalents. Average Common Stock equivalents on a historical basis
includes shares of Series A Preferred, Series B Preferred and Series D
Preferred in the amounts of 64,000, 2,032,000 and 1,203,000, respectively.
On a pro forma basis the weighted average shares outstanding excludes any
shares of Talley Preferred Stock assumed to be converted but does include
the Common Stock assumed to be issued in connection with the conversion of
such shares.
(d) In computing the ratio of earnings to fixed charges and preferred stock
dividends, "earnings" represent pre-tax income from continuing operations
plus fixed charges, exclusive of interest capitalized. "Fixed charges and
preferred stock dividends" consists of interest expense (including
capitalized interest), that
21
<PAGE> 26
portion of rental expense which is representative of the interest factor,
and preferred stock dividend requirements which represents the dividend
amount increased by the pretax earnings from continuing operations that
would be required to cover such dividend requirements. Due to the
carryforward of the net operating loss tax benefits in the period, there
was no federal tax provision that would increase the dividend amount. The
ratio of earnings to fixed charges and preferred stock dividends for the
year ending December 31, 1994 was 0.91. The earnings in 1994 were
inadequate to cover fixed charges and preferred stock dividends by $3.0
million.
(e) Adjustments give effect to fees and expenses the Company will be required
to pay in cash in connection with this Conversion Offer, estimated to be
$200,000, which will be accounted for as a reduction in Stockholders'
equity.
(f) Assumes that 100% of the outstanding shares of Series A Preferred were
converted in connection with this Conversion Offer and an aggregate of
approximately 133,000 shares of Common Stock were issued -- approximately
70,000 representing the inducement to convert, and that 100% of the
outstanding shares of Series B Preferred were converted pursuant to this
Conversion Offer and an aggregate of 3,870,000 shares of Common Stock were
issued -- approximately 1,838,000 representing the inducement to convert.
Also gives effect to the conversion of 100% of the Series D Preferred in
connection with the Series D Conversion and the issuance of an aggregate of
1,905,849 shares of Common Stock were issued (which transaction was
completed effective February 16, 1996) -- 702,919. The dividend
requirement, assuming the conversions noted for the Series A Preferred,
Series B Preferred and Series D Preferred, would have been reduced by
approximately $73,000, $1,548,000 and $541,000, respectively.
(g) Book value per share is computed by dividing stockholders' equity by the
number of shares of Common Stock outstanding. Stockholders' equity has been
reduced by the involuntary liquidation value and the dividend arrearage for
Series A and B Preferred outstanding. Stockholders' equity on a historical
basis was also reduced by the actual value of Common Stock issued in
connection with the Series D Conversion -- which transaction was completed
effective February 16, 1996.
22
<PAGE> 27
CONVERSION OFFER PROCEDURES
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
This Conversion Offer will expire at 5:00 p.m., New York City time, on
April 22, 1996, unless extended by the Company.
The Company reserves the right, in its judgment, (i) to terminate this
Conversion Offer if any of the events set forth under the caption "The
Conversion Offer -- Conditions of the Conversion Offer" have occurred and have
not been waived by the Company, by giving oral or written notice of such
termination to the Conversion Agent and (ii) to extend or otherwise amend the
terms of this Conversion Offer in any manner. The amendment, extension or
termination of this Conversion Offer as to Series A Preferred or Series B
Preferred, or the waiver of a condition as to either series, need not be
accompanied by the same action as to the other series. Any such extension,
termination or amendment will be followed as promptly as practicable by public
announcement thereof. If this Conversion Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose each amendment in a manner reasonably calculated to inform the holders
of such amendment and, if such amended Conversion Offer would otherwise expire
during such period, the Company will extend each such amended Conversion Offer
for a period which the Company in its judgment deems appropriate, depending upon
the significance of the amendment and the manner of disclosure to holders of the
Series A and B Preferred. Any such extension will be in compliance with the
applicable rules and regulations of the SEC.
Subject to applicable law (including Rule 13e-4(e)(2) under the Exchange
Act, to the extent it may be applicable or relevant, which requires that
material changes be promptly disseminated to holders in a manner reasonably
calculated to inform them of such changes) and without limiting the manner in
which the Company may choose to make a public announcement, if any, of any
extension, amendment, waiver or termination of this Conversion Offer, the
Company will have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
If, prior to the Expiration Date, the Company should decide to increase or
decrease the number of shares of Series A and B Preferred that it desires to be
converted or to increase or decrease the additional shares of Common Stock being
offered as an inducement in this Conversion Offer and, at the time notice of any
such increase or decrease is first published, sent or given to holders of such
shares, this Conversion Offer is scheduled to expire at any time earlier than
the period ending on the tenth business day from and including the date that
such notice is first so published, sent or given, this Conversion Offer will be
extended at least until the expiration of such ten business day period. For
purposes of this Conversion Offer, a "business day" means any day other than a
Saturday, Sunday or federal holiday, and consists of the time period from 12:01
a.m. through 12:00 midnight, New York City time.
PROCEDURES FOR CONVERSION
The delivery of certificates for shares of Series A and B Preferred for
conversion in this Conversion Offer by a holder pursuant to one of the
procedures set forth below will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set forth
in this Offering Circular, in the Letter of Transmittal, and in the Certificate.
The holder of a share or shares of Series A Preferred or Series B Preferred
may exercise the conversion rights as to such shares under the Certificate and
receive the additional Common Stock offered in connection with this Conversion
Offer by delivering to the Conversion Agent the certificate or certificates for
all of the Series A and B Preferred held by such holder, together with the
properly completed Letter of Transmittal (or manually signed facsimile thereof),
executed by the Registered Holder (defined below) thereof, and any other
documents required by the Letter of Transmittal (such as appropriate stock
powers, if the certificates for such shares of Series A and B Preferred have not
been endorsed, and evidence of authority to act, if the Letter of Transmittal or
any certificates for such shares of Series A and B Preferred or related stock
powers are signed by someone acting in a fiduciary or representative capacity),
all of which must be received by the Conversion
23
<PAGE> 28
Agent at one of its addresses set forth on the back cover of this Offering
Circular prior to 5:00 p.m., New York City time, on the Expiration Date. The
term "Registered Holder" will mean the person in whose name the Series A
Preferred or Series B Preferred is registered on the books of the Company's
transfer agent. LETTERS OF TRANSMITTAL AND CERTIFICATES FOR SHARES OF SERIES A
AND B PREFERRED SHOULD BE DELIVERED TO THE CONVERSION AGENT AND NOT TO THE
COMPANY.
The Conversion Agent will make a request promptly after the date of this
Offering Circular to establish accounts with respect to the Series A and B
Preferred at the Depository Trust Company ("DTC"), and the Philadelphia
Depository Trust Company ("PHILADEP", and together with DTC, collectively
referred to as the "Book Entry Transfer Facilities") for the purpose of
facilitating this Conversion Offer. Any financial institution that is a
participant in any of the Book Entry Transfer Facilities systems may make book
entry transfer of the Series A and B Preferred to the Conversion Agent by
causing DTC or PHILADEP to transfer such Series A and B Preferred into the
Conversion Agent's account in accordance with such Book Entry Transfer
Facility's procedure for such transfer. (Such transfer shall not affect the
beneficial ownership of the transferred shares.) Although transfer of Series A
and B Preferred may be effected through book entry transfer into the Conversion
Agent's account at DTC or PHILADEP, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received or confirmed by the
Conversion Agent at one of its addresses as set forth on the back cover of this
Offering Circular prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO A BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE CONVERSION AGENT.
Signatures on the Letter of Transmittal must be guaranteed by a firm that
is a financial institution (including most commercial banks, savings and loan
associations and brokerage houses) that is a participant in one of the signature
guarantee programs described in the Letter of Transmittal (each, an "Eligible
Institution") unless the certificate or certificates for the shares of Series A
and B Preferred to be converted pursuant thereto are delivered (i) by a
Registered Holder of such shares who has not completed either of the boxes
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution.
THE METHOD OF DELIVERY TO THE CONVERSION AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER, BUT IF SUCH DELIVERY IS BY MAIL IT IS RECOMMENDED THAT HOLDERS
USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE CONVERSION
AGENT BEFORE THE EXPIRATION DATE.
Only a Registered Holder of Series A Preferred or Series B Preferred may
deliver certificates for shares of Series A and B Preferred for conversion in
this Conversion Offer. If the Letter of Transmittal is signed by a person other
than the Registered Holder of the Series A and B Preferred, the certificates
representing such Series A and B Preferred must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name or names of
the Registered Holder (or Registered Holders) appear on such certificates,
together with a letter (or other evidence) describing the transaction pursuant
to which the Series A and B Preferred was transferred. If the Letter of
Transmittal or any certificates for shares of Series A and B Preferred or
related stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers or corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and, unless waived by the Company, provide evidence satisfactory to the
Company of their authority to so act.
Any beneficial owner whose Series A and B Preferred is registered in the
name of its broker, dealer, commercial bank, trust company or other nominee and
who wishes to convert such shares in connection with this Conversion Offer
should contact such Registered Holder promptly and instruct such Registered
Holder to effect delivery on its behalf. If such beneficial owner wishes to
effect delivery on its own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering the
certificate or
24
<PAGE> 29
certificates for its shares of Series A and B Preferred or effecting delivery
through the Book Entry Transfer Facilities described above, either make
appropriate arrangements to register ownership of the Series A and B Preferred
in such holder's name or obtain a properly completed stock power from the
Registered Holder. Beneficial owners should be aware that the transfer of record
ownership may take considerable time.
By delivering certificates for shares of Series A and B Preferred for
conversion in connection with this Conversion Offer, each Registered Holder
represents and warrants to the Company that such Registered Holder has full
power and authority to convert such shares of Series A and B Preferred and that
such shares are free and clear of all liens, restrictions, charges and
encumbrances and are not subject to any adverse claim. Each Registered Holder
will, upon request, execute and deliver any additional documents deemed by the
Conversion Agent or the Company to be necessary or desirable to complete the
conversion of the Series A and B Preferred delivered by such Registered Holder.
GUARANTEED DELIVERY PROCEDURES
If a Registered Holder of the Series A Preferred or Series B Preferred
desires to deliver the certificate or certificates for shares to be converted
and such certificates are not immediately available (or the procedures for
book-entry transfer cannot be completed on a timely basis), or time will not
permit such holder's certificates or other required documents to reach the
Conversion Agent before the Expiration Date, a delivery for conversion may be
effected if (i) the delivery is made by or through an Eligible Institution, (ii)
prior to the Expiration Date, the Conversion Agent receives from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by telegram, telex, facsimile transmission, mail or hand delivery) setting
forth the name and address of the holder of Series A and B Preferred and the
number of shares of Series A and B Preferred to be converted, stating that the
delivery for conversion is being made thereby and guaranteeing that, within
three NYSE trading days after execution of the Notice of Guaranteed Delivery,
the certificates for Series A and B Preferred to be converted, in proper form
for conversion, or book-entry confirmation, along with a duly executed Letter of
Transmittal, and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Conversion Agent, and (iii)
the certificates for Series A and B Preferred to be converted, in proper form
for conversion, or book-entry confirmation, along with a duly executed Letter of
Transmittal, and all other documents required by the Letter of Transmittal are
received by the Conversion Agent within three NYSE trading days after execution
of Notice of Guaranteed Delivery.
EFFECTIVE DELIVERIES; COMPLIANCE WITH CONDITIONS OF THIS CONVERSION OFFER;
DELIVERY OF COMMON STOCK
Upon the terms and subject to the conditions of the Certificate and this
Conversion Offer (including the terms and conditions of any extension or
amendment), the certificates for all shares of Series A and B Preferred to be
converted that are validly delivered pursuant to this Conversion Offer and not
properly withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date will be accepted and deemed delivered to the Company for conversion
pursuant to the Certificate and will be converted as of the Expiration Date and
entitled to the additional benefits of this Conversion Offer. Each Letter of
Transmittal for validly delivered certificates that is not withdrawn will
constitute written notice of conversion pursuant to the respective terms of the
Series A Preferred and Series B Preferred; provided, that such notice of
conversion will not be deemed delivered or effective until the Company has
notified the Conversion Agent of acceptance as set forth below. The Company,
through the Conversion Agent, will deliver certificates for Common Stock issued
in respect of converted shares within five NYSE trading days following the later
to occur of (i) the Expiration Date or (ii) receipt of the certificate or
certificates for shares of Series A and B Preferred to be converted and all
other documents required by the Letter of Transmittal pursuant to the guaranteed
delivery procedures set forth herein. See "Conversion Offer
Procedures -- Guaranteed Delivery Procedures."
All questions as to the validity, form, eligibility (including time of
receipt), delivery and withdrawal of certificates for shares of Series A and B
Preferred will be resolved by the Company, whose determination will be final and
binding on all parties. The Company reserves the absolute right to reject any or
all deliveries for conversion that are not in proper form or which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right, in its judgment, to waive any irregularities or conditions of delivery as
to
25
<PAGE> 30
particular Series A and B Preferred. The Company's interpretation of the terms
and conditions of this Conversion Offer (including the instructions in the
Letter of Transmittal) and the Certificate will be final and binding. Unless
waived, any irregularities or defects in connection with deliveries must be
cured within such time as the Company determines. Neither the Company, the
Conversion Agent nor any other person will be under any duty to give
notification of irregularities or defects in such deliveries or shall incur any
liability for failure to give such notification. Deliveries will not be deemed
to have been made until such irregularities have been cured or waived.
If any shares of Series A and B Preferred are not converted in connection
with this Conversion Offer because of an invalid delivery, the occurrence or
nonoccurrence of certain other events set forth herein or otherwise, such
unaccepted certificates for such shares of Series A and B Preferred will be
returned, at the Company's expense, to the Registered Holder thereof as promptly
as practicable after the Expiration Date or the termination of this Conversion
Offer, as applicable.
WITHDRAWAL OF DELIVERIES
Any holder of Series A Preferred or Series B Preferred who has delivered a
certificate or certificates for, or effected delivery with respect to, shares of
Series A and B Preferred for conversion may withdraw such delivery at any time
prior to 5:00 p.m., New York City time, on the Expiration Date and unless
already accepted for conversion by the Company, may be withdrawn at any time
after 12:00 midnight, New York City time, on May 16, 1996 (such date and time
being the expiration of 40 business days from the commencement of the Conversion
Offer).
To be effective, a written telegraphic, telex or facsimile transmission
notice of withdrawal must (i) be received by the Conversion Agent at one of the
addresses set forth on the back cover of this Offering Circular prior to 5:00
p.m., New York City time, on the Expiration Date, (ii) specify the name of the
person having made or effected the delivery to be withdrawn, (iii) identify the
Series A and B Preferred with respect to which delivery is to be withdrawn and
(iv) be (a) signed by the Registered Holder in the same manner as the original
signature on the Letter of Transmittal by which the certificates representing
such Series A and B Preferred were delivered (including any required signature
guarantees) or (b) accompanied by evidence satisfactory to the Company that the
Registered Holder withdrawing such delivery has succeeded to beneficial
ownership of such Series A and B Preferred. If certificates representing Series
A and B Preferred have been delivered or otherwise identified to the Conversion
Agent, the name of the Registered Holder and the serial numbers of the
particular certificate(s) to be withdrawn must also be so furnished to the
Conversion Agent as aforesaid prior to the physical release of the withdrawn
certificate(s). A properly withdrawn delivery will thereafter be deemed not
validly delivered for purposes of this Conversion Offer; provided, however, that
delivery may be again made following one of the procedures described herein at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
All questions as to the validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
PAYMENT OF EXPENSES
This Conversion Offer is being made by the Company in reliance on the
exemption from the Securities Act registration requirements afforded by Section
3(a)(9) thereof. Therefore, the Company has not retained any dealer-manager in
connection with this Conversion Offer and will not make any payments to brokers,
dealers, salespersons or others for soliciting conversion in connection with
this Conversion Offer. The Company, however, will pay each of the Information
Agent and the Conversion Agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith. The Company will also pay the reasonable out-of-pocket expenses
incurred by brokers, custodians, nominees and fiduciaries in forwarding copies
of this Offering Circular and related documents to the owners of
26
<PAGE> 31
Series A and B Preferred, and in handling or forwarding deliveries of Series A
and B Preferred shares for conversion. Holders of Series A and B Preferred will
be responsible for all other costs incurred in evaluating or converting in
connection with this Conversion Offer.
The estimated expenses to be incurred in connection with this Conversion
Offer will be paid by the Company and are estimated in the aggregate to be
$200,000.
The Company will pay all transfer taxes, if any, applicable to the
conversion of Series A and B Preferred in connection with this Conversion Offer
and issuance of additional shares of Common Stock. If, however, Common Stock is
to be delivered to, or is to be registered or issued in the name of, any person
other than the Registered Holder of the Series A and B Preferred, or if Series A
and B Preferred to be converted is registered in the name of any person other
than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the issuance of Common Stock pursuant to this
Conversion Offer, the amount of any such transfer taxes (whether imposed on the
Registered Holder or any other person) will be payable by the delivering holder.
Such holder hereby acknowledges and agrees that the Company and the Conversion
Agent may defer effecting such transfer and may retain such shares of Common
Stock until satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted to them.
SHARES ELIGIBLE FOR FUTURE RESALE
Upon consummation of this Conversion Offer, assuming 100% conversion of
Series A and B Preferred in connection with this Conversion Offer, there will be
15,962,609 shares of Common Stock outstanding. Assuming 51% conversion of Series
A and B Preferred in connection with this Conversion Offer, there will be
14,001,086 shares of Common Stock outstanding. All of the shares of Common Stock
to be issued in connection with this Conversion Offer to holders of Series A and
B Preferred who are not otherwise affiliates of the Company will be freely
transferable without restriction or registration under the Securities Act.
27
<PAGE> 32
APPENDIX A
THIS APPENDIX A IS A REPRODUCTION OF THE TALLEY INDUSTRIES, INC. ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 (WITHOUT EXHIBITS), AS FILED
WITH THE SEC, BUT REPAGINATED FOR INCLUSION IN THIS OFFERING CIRCULAR.
================================================================================
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, 1995
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. 1-4778
TALLEY INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 86-0180396
(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:
------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, $1 Par Value ON WHICH REGISTERED
Series B $1 Cumulative Convertible New York Stock Exchange
Preferred Stock, $1 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirement for the past 90 days. YES [X] NO [ ]
Indicate 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]
The aggregate market value of voting stock held by non-affiliates on
February 1, 1996 was $125,071,000.
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 [ ]
As of February 1, 1996 there were 10,053,652 shares of Talley Industries,
Inc. Common Stock $1 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year (December 31, 1995) are incorporated by reference in Part III.
===============================================================================
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business
(a) Developments since January 1, 1995...................................... I-1
(b) Financial Information About Industry Segments........................... I-1
(c) Narrative Description of Business....................................... I-1
(d) Financial Information about Foreign and Domestic Operations and Export
Sales....................................................................... I-10
(e) Executive Officers of the Registrant.................................... I-10
Item 2. Properties.................................................................. I-11
Item 3. Legal Proceedings........................................................... I-11
Item 4. Submission of Matters to a Vote of Security Holders......................... I-11
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-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... II-1
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... III-1
Item 11. Executive Compensation...................................................... III-2
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. III-2
Item 13. Certain Relationships and Related Transactions.............................. III-2
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. IV-1
Signatures.................................................................. IV-2
</TABLE>
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PART I
ITEM 1. BUSINESS.
(A) DEVELOPMENTS SINCE JANUARY 1, 1995.
On June 27, 1995, the federal district court for the District of Arizona
entered judgment against TRW Inc. in favor of the Company in TRW Inc. vs. Talley
Industries, Inc. et al. The court dismissed all claims asserted by TRW against
the Company while the jury reached a verdict in favor of the Company on its
counterclaims against TRW, awarding the Company a total of $138 million. TRW has
filed an appeal of the judgment to the Ninth Circuit Court of Appeals, on which
oral argument was heard on February 14, 1996. On January 26, 1996 the federal
district court awarded the Company $7.1 million in attorneys' fees and expenses
incurred in this litigation. The Company anticipates that TRW will appeal this
award. (Also see Commitments and Contingencies note to the Company's
Consolidated Financial Statements, included in a separate section of this
report).
Substantially all outstanding debt of a fully consolidated real estate
joint venture, in which the Company had a $29.2 million interest, was converted,
pursuant to a plan of reorganization in a Chapter 11 bankruptcy proceeding, into
equity in a new company as of July 18, 1995. A subsidiary of the Company now
owns approximately 90% of the equity in the new company.
During 1995, the Company realized an extraordinary gain of $14,409,000 from
the retirement of certain realty debt. The gain represents the difference
between the value of the debt recorded on the books and the consideration given
and costs incurred to settle the obligations.
On February 2, 1996 the Company's Board of Directors approved a transaction
providing for the immediate conversion of all of the Company's Series D
Cumulative Convertible Preferred stock (120,293 shares) into 1,905,849 shares of
Talley Common Stock. The Company completed the conversion and issued the Common
stock as of February 16, 1996. The conversion automatically extinguishes all
unpaid dividends on that stock totaling approximately $2.6 million as of
December 31, 1995. The transaction will not impact the net earnings of the
Company in 1996, but "earnings applicable to common shares (after deduction of
preferred stock dividends)", as supplementally disclosed by the Company, and the
"earnings per share of common stock and common equivalent share" will be
reduced. The excess of the fair value of the common shares transferred in the
transaction by the Company to the single shareholder over the fair value of the
common shares issuable pursuant to the original conversion terms will be
subtracted from net earnings in the calculations of net earnings available to
common shareholders and earnings per share.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
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 five business segments in
continuing operations, including the year ended December 31, 1995, are
incorporated by reference to the material appearing in the Notes to Consolidated
Financial Statements on pages F-28 through F-32 of the Company's financial
statements for the year ended December 31, 1995, 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-8 of the Company's financial statements for
the year ended December 31, 1995, included in a separate section of this report.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
GENERAL
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 participates in the rapidly
expanding market for automotive airbags through its royalty agreement
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with TRW, Inc. ("TRW"), which provides the Company with a quarterly payment
through April 30, 2001 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 Company's Industrial Products segment manufactures and distributes
stainless steel products, high-voltage ceramic insulators used in power
transmission and distribution systems, and specialized welding equipment and
systems. The Company's Specialty Products segment manufactures and sells 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. The Company is also engaged in the orderly sale of
the assets of its real estate operations, the net proceeds from which will be
utilized to prepay certain outstanding indebtedness.
(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
automobile airbag market, which it pioneered prior to the sale of that business
segment to TRW, Inc. in 1989. 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, 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.
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- 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. The Company is re-entering the automotive
airbag market, made possible by the expiration of the five-year
non-compete clause of the TRW Asset Purchase Agreement. New products
include advanced, non-sodium azide inflators 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 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, and is currently the
sole supplier of video mapper systems to the FAA. The Company's
proprietary video mappers superimpose accurate, high resolution electronic
map images, including ground topography and weather, onto radar screens
which are used by both commercial and military air traffic controllers to
coordinate the position of aircraft.
- 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.
- 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 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.
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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. 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 directly to the Company.
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 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,
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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 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.
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; 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.
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Backlog
The backlog of firm orders in the Government Products and Services segment
amounted to approximately $469 million at December 31, 1995, $97 million at
December 31, 1994 and $128 million at December 31, 1993. The Company estimates
that approximately $106 million of the orders outstanding at December 31, 1995
will be delivered by December 31, 1996. The backlog amounts as presented herein
are composed of funded and unfunded components. The government funded components
and firm industrial contracts on December 31, 1995 and 1994 totaled $98.9
million and $97.3 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 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 Inc. 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 is 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 more fully described below.
As described in the Notes to Consolidated Financial Statements under the
heading Commitments and Contingencies on page F-23 to F-25 of the Company's
financial statements for the year ended December 31, 1995, included in a
separate section of this report, a judgment was entered in the Company's favor
in June 1995 to the effect that TRW had breached its obligations under the
license agreement, and the Company was awarded $138 million, as the jury's
calculation of the present value of the royalties estimated to be payable by TRW
to the Company under the license agreement for the balance of its term. That
judgment is currently on appeal by TRW, but pending resolution of the appeal,
the trial court has ordered TRW to continue to make quarterly payments to the
Company in the amount of royalties that otherwise would be due under the license
agreement. If and when the judgment is affirmed on appeal, TRW will be obligated
to pay the judgment to the Company (plus accrued interest from the date of the
judgment, but net of the quarterly payments made by TRW since the date of the
judgment). At that time, TRW's obligation to make further royalty payments would
cease, because the effect of the judgment award is to pre-pay the royalties
otherwise accruing under the license agreement.
Accordingly, the descriptions below of this segment of the Company's
business and the Company's royalty entitlement under the 1989 license agreement
are subject to the judgment entered in the Company's favor and the effect of
that judgment (as, if and when affirmed on the pending appeal) upon the
Company's entitlement to any further royalties once the judgment has been paid
by TRW.
As an outgrowth of the research and development efforts in its core
propellant businesses, the Company was a pioneer in the development of the
automotive airbag. Airbags supplied by the Company were installed by General
Motors in approximately 12,000 automobiles during the 1970's and were the first
airbags installed in any significant number of automobiles. While the Company's
program with General Motors was successful, low market awareness and acceptance
prevented the airbag from attaining wide-spread popularity for a number of
years. During this period, the Company continued to develop and refine its
airbag technology, while establishing relationships with certain U.S. and
foreign automakers and suppliers. As demand for airbags increased in the 1980's,
the Company's technology, manufacturing expertise and strong customer
relationships made it a leading supplier of automobile airbags, and the Company
designed and constructed a highly automated production facility that began
producing airbags in volume during 1988. In 1989, the Company sold
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its automotive airbag business to TRW, in part because TRW's offer involved not
only an attractive cash price for the business, but also an opportunity to
participate in the future growth of the industry. This participation comes
through a royalty agreement under which royalties are payable both on TRW's
worldwide airbag sales and on its competitors' airbags installed in vehicles
manufactured or sold in North America.
At the closing of the 1989 sale of TRW, the Company received $97.8 million
in cash and entered into the 12-year Airbag Royalty Agreement. The Airbag
Royalty Agreement requires TRW to pay the Company quarterly royalties through
April 30, 2001 (the "Airbag Royalty") based upon the following formula: (i)
$1.16 for each airbag "unit" (inflator plus one or more components) manufactured
and sold by TRW worldwide (the per-unit amount increases by $.01 on May 1 of
each year); (ii) 75% of the per-unit amount for each inflator manufactured and
sold separately by TRW worldwide; and (iii) $0.55 for each airbag unit supplied
by any other airbag manufacturer and installed in any vehicle manufactured or
sold in North America. The Company will receive the Airbag Royalty for any
airbag using a gas-generating composition; the higher royalty amount for TRW
airbags applies regardless of whether the specific technology used is that which
was originally licensed by the Company to TRW. The Company also is entitled to
receive royalties from TRW for technology licenses and similar arrangements
under which TRW makes its airbag technology available to third parties.
Royalties to the Company from such arrangements have not been significant to
date.
The terms of the Airbag Royalty Agreement allow the Company to participate
in the expanding market for airbags. A continued increase in the use of dual
vehicle airbags is expected as a consequence of several factors, including: (i)
government legislation mandating the use of dual airbags in all cars, light
trucks, sport utility vehicles and vans sold in the U.S. on a phased-in basis;
(ii) increasing consumer demand as a result of the demonstrated effectiveness of
airbags at saving lives and preventing serious injury, and the convenience of
airbags as compared with automatic seatbelts; and (iii) the decreasing price of
airbags as competition and production volumes increase. The U.S. government has
passed legislation mandating that airbags be installed as standard equipment
according to the following schedule: (i) 95% of 1997 model year cars (100% of
1998 models) are to be equipped with driver and passenger side airbags for the
front seat, and (ii) 80% of 1998 model-year light trucks, vans and sport utility
vehicles (100% of 1999 models) are to be equipped with driver and passenger side
airbags for the front seat.
(3) Industrial Products Segment.
The Company's Industrial Products segment operates in three product areas:
stainless steel, high-voltage ceramic insulators and other specialized
industrial products. Demand for the Company's products is directly related to
the level of general economic activity and therefore has been positively
impacted most recently by an improved national economy and increased
construction activity. The Company's operations are technologically advanced and
its products are highly competitive in terms of quality, brand recognition and
price. The Company's stainless steel mini-mill utilizes modern computer
automation, strict quality controls, and strong engineering and technical
capabilities to maintain its position as a low cost, high quality producer of
stainless bar and rod products.
Stainless Steel
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 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
15% of the mini-mill's total production currently, has five distribution depots
located in South Carolina, New Jersey,
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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.
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.
Other Specialized 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.
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
business organizations and government entities. These organizations vary in
size, complexity and purchasing structures. The Company's sales and marketing
efforts use a combination of direct sales, independent distributors and original
equipment manufacturers arrangements.
Competition
The Company's Industrial 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 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 Industrial Products segment totaled
approximately $34 million at December 31, 1995, $32 million at December 31, 1994
and $19 million at December 31, 1993. The Company estimates that substantially
all of the orders outstanding at December 31, 1995 will be delivered by December
31, 1996. Increases are attributed to general improvement in the economy, a
major steel mill competitor exiting the market and an increase in demand from
new and current customers.
I-8
<PAGE> 42
(4) Specialty Products Segment.
The Company's Specialty Products segment is focused 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.
Insect and Odor Control
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 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.
Custom Metal Buttons
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.
Marketing
The Company utilizes several hundred independent distributors to market its
insect and odor control products to the various pest control and sanitary supply
companies that service the industrial maintenance supply and commercial pest
control industry. The agricultural market is served by a large number of
independent agricultural products distributors. The Company has a small
marketing staff which is responsible for working with and overseeing the
distributors who carry its products.
The Company's button business maintains a small sales force which is
responsible for obtaining new and maintaining existing customer relationships.
Individual sales representatives are focused on the military commercial uniform
market, the fashion apparel markets and the men's accessories market. The
Company's advertising for its Specialty Products businesses is limited to
product brochures and ads in various trade publications.
I-9
<PAGE> 43
Competition
Competitors for the Company's pest and odor control products consist of
numerous small companies as well as divisions of large corporations. Because
pest and odor control is a broad market, competitors include a range of
chemical, manufacturing and pet care companies. Competition for pest control
products is based on product efficiency, quality, price and the ability to offer
a broad range of product formulations.
Competitors for the Company's custom button business consist principally of
two companies, both of which are similar in size to the Company's button
operations. The Company maintains the strongest position in the military and
commercial uniform market. Both of the Company's competitors maintain an equal
presence with the Company in the fashion markets.
Backlog
The backlog of firm orders in the Specialty Products segment totaled
approximately $.9 million at December 31, 1995, $1.4 million at December 31,
1994 and $1.4 million at December 31, 1993. The Company estimates that
substantially all of the orders outstanding at December 31, 1995 will be
delivered by December 31, 1996.
(5) Real Estate Held for Orderly Disposition.
In 1992, Management adopted a plan to dispose of the Company's real estate
operations, reflecting a strategic decision to exit this business. The Company's
real estate portfolio consists primarily of undeveloped commercial, industrial
and residential land located in the greater Phoenix, Arizona; San Diego,
California and San Antonio, Texas areas.
(6) Other General Information.
Research and Development. During the years ended December 31, 1995, 1994
and 1993, the Company's consolidated expenditures for Company-sponsored research
and development activities were approximately $4.2 million, $4.3 million and
$3.1 million, respectively. For the same reporting periods, customer-sponsored
research and development expenditures were $10.1 million, $8.2 million and $11.6
million, respectively.
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. (Also see Item 3 "Legal Proceedings" and "Commitments and
Contingencies" note to the consolidated financial statements, included in a
separate section of this report).
Employees. As of December 31, 1995, the Company had 2,359 employees,
approximately 17% 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.
(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-28 through F-32 of the Company's financial statements for
the year ended December 31, 1995, 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.
I-10
<PAGE> 44
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 939,000 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.; and
Pascagoula, Mississippi, all of which are leased.
Facilities used by the Industrial Products segment include approximately
826,000 square feet of manufacturing and assembly plants and related office,
warehouse and sales space, located in Davidson, North Carolina; Carey, Ohio;
Knoxville, Tennessee; 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, and the Netherlands. The operations of the Specialty Products segment
are conducted in several facilities consisting of approximately 192,000 square
feet of manufacturing, warehouse and office space in four locations: Waterbury,
Connecticut; Randolph, Vermont; and Independence, Louisiana. All of these
facilities are owned by the Company with the exception of eight Industrial
Products segment sales and warehouse facilities consisting of 176,000 square
feet, and 20,500 square feet of Specialty Products segment warehouse and office
facilities, which are leased.
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" on page F-23 to F-25 of the Company's financial statements
for the year ended December 31, 1995, 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, 1995.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Various statements in the Management's Discussion and Analysis, and
elsewhere in this report are based upon projections and estimates, as distinct
from past or historical facts and events. These forward-looking statements,
based as they are on estimates and projections of future results, conditions and
other factors, are subject to a number of risks and uncertainties that could
cause actual results to be materially different, including changes in future
economic conditions, the competitive environment for our products and services
and customer acceptance, the success of research and development activities, the
future values of real estate assets being disposed of, the level of Government
defense spending, litigation involving the Company, the Company's anticipated
results of operations and financial position, and a number of other factors and
assumptions.
I-11
<PAGE> 45
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is incorporated by reference to the
material under the captions "Long-Term Debt" on pages F-17 through F-18,
"Capital Stock" on pages F-19 through F-20 and "Stock Market Data" on page F-37
of the Company's financial statements for the year ended December 31, 1995,
included in a separate section of this report.
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," "Selected
Financial Data" and "Stock Market Data" on pages F-33 and F-36 through F-37,
respectively, of the Company's financial statements for the year ended December
31, 1995, 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-8 of the Company's financial statements for the
year ended December 31, 1995, included in a separate section of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, together with the report thereon by
Price Waterhouse LLP, along with the material appearing under the caption
"Quarterly Financial Results (Unaudited)" on page F-35 of the Company's
financial statements for the year ended December 31, 1995, are included in a
separate section of this report. (See "Index to Financial Statements and
Schedules" on page F-1.)
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-1
<PAGE> 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS.
The information required by this item is incorporated by reference to the
material appearing under the caption "VII -- Election of Directors" of the
Company's 1996 Proxy Statement.
(B) EXECUTIVE OFFICERS.
The names and ages of all executive officers of the Company, as of February
26, 1996, the offices and all other positions with the Company presently held by
them, the dates of their first election to those offices and their other
positions and business experience during the past five years are listed on the
following page.
There are no family relationships between any of the executive officers of
the Company. All officers of the Company are elected each year at the meeting of
the Board of Directors of the Company, held after the annual meeting of
stockholders, to serve at the pleasure of the Board of Directors of the Company.
Mr. Mallender, however, is employed by the Company pursuant to a written
employment contract for a term expiring on May 21, 2000. Information regarding
Mr. Mallender's contract is incorporated by reference to the material appearing
under the caption "IX Executive Compensation -- Executive Employment Contracts"
of the Company's 1996 Proxy Statement. There are no agreements or understandings
between any officer of the Company and any person other than the Company
pursuant to which he was selected as an officer of the Company. There have been
no events under any bankruptcy or insolvency law, no criminal proceedings and no
judgments, orders or injunctions relating to securities or commodities
activities or business practices material to the evaluation of the ability or
integrity of any officer of the Company during the past five years.
III-1
<PAGE> 47
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE OFFICES
- ----------------------- --- ------------------------------ ---------------------------------
<S> <C> <C> <C>
William H. Mallender... 60 Chairman of the Board (1983) Chairman of the Board (1983) and
and Chief Executive Officer Chief Executive Officer of
(1981), Chairman of the Registrant (1981); President of
Executive Committee (1981) Registrant (1983-1981); Executive
Vice President of Registrant
(1981-1978); General Counsel of
Registrant (1981-1971); Secretary
of Registrant (1981-1973); Vice
President of Registrant
(1978-1971)
Jack C. Crim........... 65 President (1983) and Chief President of Registrant (1983);
Operating Officer (1982) Chief Operating Officer of
Registrant (1982); Executive Vice
President of Registrant
1983-1982; President, Townsend
Division, Textron, Inc.
(diversified manufacturer)
(1982-1980); Group Vice
President, Textron, Inc.
(1980-1973)
Mark S. Dickerson...... 44 Vice President (1993), General Vice President (1993); Secretary
Counsel and Secretary (1982) and General Counsel of Registrant
(1982); Assistant Counsel of
Registrant (1982-1978)
Kenneth May............ 54 Vice President (1993) and Vice President (1993); Controller
Controller (1982) of Registrant (1982); Assistant
Controller of Registrant (1981);
Director of Planning and Business
Analysis for Registrant
(1981-1978)
Daniel R. Mullen....... 54 Vice President (1993) and Vice President (1993); Treasurer
Treasurer (1982) of Registrant (1982); Vice
President of Finance, Southwest
Pipe and Supply Company (pump
manufacturer) (1982); Treasurer
and Chief Financial Officer,
AMERCO (equipment rental)
(1982-1970)
</TABLE>
(C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item is incorporated by reference to the
material appearing under the caption "XV -- Compliance With Section 16(a) of the
Exchange Act" of the Company's 1996 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
material appearing under the captions "IX -- Executive Compensation" and
"IV -- The Board of Directors and its Committees" of the Company's 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
material appearing under the captions "VI -- Security Ownership of Certain
Beneficial Owners" and "VIII -- Security Ownership of Management of the Company"
of the Company's 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
material appearing under the caption "V -- Other Relationships and Certain
Transactions" of the Company's 1996 Proxy Statement. Also, reference is made to
Notes to Consolidated Financial Statements under the caption "Related Parties
Transaction" of the Company's financial statements for the year ended December
31, 1995, included in a separate section of this report.
III-2
<PAGE> 48
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, 1995. A Form 8-K was filed with a report date of February 2, 1996, reporting
the amendment to the Preferred Share Purchase Rights Agreement originally issued
in 1986. The Form 8-K also reported the approval by the Company's Board of
Directors of a transaction providing for the immediate conversion of the
Company's Series D Cumulative Convertible Preferred Stock into Common Stock.
IV-1
<PAGE> 49
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 INDUSTRIES, INC.
By: /s/ MARK S. DICKERSON
--------------------------------------
Mark S. Dickerson
Vice President and Secretary
February 28, 1996
Phoenix, Arizona
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.
<TABLE>
<C> <S> <C>
/s/ WILLIAM H. MALLENDER Director, Chairman of the Board February 28, 1996
- ------------------------------------------ Principal Executive Officer
William H. Mallender
/s/ JACK C. CRIM Director, President February 28, 1996
- ------------------------------------------ Chief Operating Officer
Jack C. Crim
/s/ KENNETH MAY Vice President, Controller February 28, 1996
- ------------------------------------------ Principal Accounting Officer
Kenneth May
/s/ DANIEL R. MULLEN Vice President, Treasurer February 28, 1996
- ------------------------------------------ Principal Financial Officer
Daniel R. Mullen
Director
- ------------------------------------------
Neil W. Benson
/s/ PAUL L. FOSTER Director February 28, 1996
- ------------------------------------------
Paul L. Foster
/s/ TOWNSEND W. HOOPES Director February 28, 1996
- ------------------------------------------
Townsend W. Hoopes
/s/ FRED ISRAEL Director February 28, 1996
- ------------------------------------------
Fred Israel
/s/ JOHN D. MACNAUGHTON, JR. Director February 28, 1996
- ------------------------------------------
John D. MacNaughton, Jr.
</TABLE>
IV-2
<PAGE> 50
<TABLE>
<C> <S> <C>
/s/ JOSEPH A. ORLANDO Director February 28, 1996
- ------------------------------------------
Joseph A. Orlando
/s/ ALEX STAMATAKIS Director February 28, 1996
- ------------------------------------------
Alex Stamatakis
/s/ JOHN W. STODDER Director February 28, 1996
- ------------------------------------------
John W. Stodder
/s/ DONALD J. ULRICH Director February 28, 1996
- ------------------------------------------
Donald J. Ulrich
/s/ DAVID VICTOR Director February 28, 1996
- ------------------------------------------
David Victor
</TABLE>
IV-3
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE IN
THIS REPORT
-----------
<S> <C>
(1) Financial Statements:
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. F-2
Consolidated Statement of Operations -- Years ended December 31,
1995, 1994 and 1993................................................ F-9
Consolidated Balance Sheet -- December 31, 1995 and 1994............ F-10
Consolidated Statement of Changes in Stockholders' Equity -- Years
ended December 31, 1995, 1994 and 1993............................. F-11
Consolidated Statement of Cash Flows -- Years ended December 31,
1995, 1994 and 1993................................................ F-12
Notes to Consolidated Financial Statements, including Summary of
Segment Operations................................................. F-13
Five Year Summary of Operations..................................... F-33
Report of Independent Accountants................................... F-34
Quarterly Financial Results......................................... F-35
Selected Financial Data and Supplemental Data....................... F-36
Stock Market Data................................................... F-37
Financial Statement Schedules:
I -- Condensed Financial Information of Registrant.............. F-39
II -- Valuation and Qualifying Accounts.......................... F-43
III -- Real Estate and Accumulated Depreciation................... F-44
IV -- Mortgage Loans on Real Estate.............................. F-45
</TABLE>
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> 52
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Revenue and results of operations improved significantly over 1994. General
economic improvement and operating efficiencies have benefited the Company's
stainless steel production and distribution business, which has been a major
factor in the improved financial results. The expanding demand for automotive
airbags has increased the Company's airbag royalties. For the year ended
December 31, 1995 the Company had net earnings of $18.0 million, an improvement
over the net earnings in 1994 of $3.5 million. Earnings in 1995 include a $14.4
million extraordinary gain from the settlement of certain real estate debt for
less than book value, and a $7.0 million provision for reserve on realty assets
resulting from the decision to sell a property over the short-term in bulk
rather than to pursue parcel sales over the next several years.
Revenues in 1995 were $385.3 million, compared to $327.8 million in 1994.
Increases in revenues from the Company's steel operations of $47.9 million were
partially offset by decreases in certain defense contract revenues. The
reduction in defense contract revenue is primarily associated with the overall
reduction in defense spending and the completion of certain contracts.
The gross profit percentage on sales and services (exclusive of airbag and
other royalties) decreased from 24.1% in 1994 to 23.4% in 1995. The decrease is
primarily due to completion in 1994 of certain non-recurring high margin defense
contracts.
Revenue for the year ended December 31, 1994 increased $3.6 million when
compared with 1993. Net earnings of $3.5 million in 1994 compares with a net
loss of $6.5 million in the prior year. The gross profit percentage increased
from 23.1% in 1993 to 24.1% in 1994, primarily due to a change in the mix of
defense contracts and improvement in stainless steel pricing.
GOVERNMENT PRODUCTS AND SERVICES
Revenue from the Government Products and Services segment in 1995 decreased
$1.5 million or 1% compared with 1994. Operating income decreased $8.0 million
or 44%. 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. Decreases were also attributed to certain contract
delays.
U.S. Defense spending has declined over the last several years as part of
efforts to refocus national spending and reduce the federal budget deficit. 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 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, 1994 decreased
by $29.2 million and $6.2 million, respectively, when compared with 1993. The
decrease in revenue and operating income resulted primarily from the completion
of certain non-recurring contracts and a scheduled pricing reduction under an
extended range munitions program.
AIRBAG ROYALTY
Under the terms of an airbag licensing agreement executed in April 1989,
the Company has the right to receive royalty payments for a period of twelve
years ending April 30, 2001. Revenue from airbag royalties increased from $17.3
million in 1994 to $24.0 million in 1995. The increase is primarily a result of
the increasing airbag installation rates. The timing and amount of increases in
the airbag royalty stream are dependent on several factors, such as the number
of vehicles manufactured or sold in the United States, the
F-2
<PAGE> 53
timing of U.S. car makers' compliance with legislative mandates and the market
shares of the licensee (both foreign and domestic), which are beyond the control
of the Company. On June 27, 1995, the Company was awarded $138 million which
represents the jury's determination of the present value of the royalties that
would otherwise have been paid to the Company through April 2001. This award is
being appealed; however, the federal district court has ordered the quarterly
payments to continue during the appeal. Discontinuance of quarterly payments for
any reason would have an adverse impact on the Company's future earnings. (See
also Commitments and Contingencies note to the consolidated financial
statements.)
Royalty income from automotive airbags increased from $9.6 million in 1993
to $17.3 million in 1994.
INDUSTRIAL PRODUCTS
The Industrial Products segment had increased revenue of $54.6 million, or
42%, and increased operating income of $15.2 million in 1995 when compared to
1994. The increase in revenue is primarily related to the increased orders and
higher selling prices for stainless steel bars and rods and increased demand for
ceramic insulator products due to an improved national economy, increased
construction activity, a reduction in the number of competitors and improved
market share. In early 1995 the U.S. Commerce Department placed anti-dumping
tariffs on stainless steel bars imported from certain countries, which the
Company believes have aided in the continuance of the positive performance of
the steel operations. Sales from the Company's steel operations for the years
ended December 31, 1995 and 1994 were $145.8 million and $97.9 million,
respectively. Operating income for 1995 and 1994 was $19.7 million and $6.7
million, respectively.
In 1994, revenue and operating income for this segment increased $21.7
million and $5.0 million, respectively, when compared to 1993. The increases
were due primarily to the improved demand for stainless steel bars and rods.
Operating results also increased due to rising prices in stainless steel bars
and rods and due to cost reduction efforts at the Company's steel and ceramic
insulator operations.
SPECIALTY PRODUCTS
The Specialty Products segment had increased revenue and a slight increase
in operating income in 1995 when compared to 1994 of $2.7 million and $.3
million, respectively. The acquisition of a manufacturer of metal buttons in mid
1994 was the primary reason for the sales improvement over the 1994 results, in
spite of sluggish demand for certain other consumer products.
Revenue in 1994 increased $2.4 million, while operating income decreased
slightly by $.1 million over 1993. The increase in revenue resulted from the
mid-year acquisition of the manufacturer of metal buttons.
REALTY
In 1993, the Company initiated a plan for the orderly disposition of all
its remaining real estate assets. Sales in the Realty segment were $2.2 million
in 1995, $7.2 million in 1994 and $6.1 million in 1993. The operating loss
increased from $3.7 million in 1994 to $11.4 million in 1995 due primarily to a
$7.0 million provision for reserve on realty assets resulting from the decision
to sell a property over the short-term in bulk rather than pursue parcel sales
over the next several years. The operating loss in 1993 was $4.4 million.
On March 28, 1994, a fully consolidated real estate joint venture, in which
the Company had a $29.2 million interest, instituted Chapter 11 proceedings in
the United States Bankruptcy Court for the District of Arizona. At the same time
the joint venture filed a proposed plan of reorganization that would provide for
the conversion of substantially all outstanding debt of the joint venture into
equity in a new company to be formed to continue the project. On April 28, 1995
the Court approved the plan, subject to the consummation of certain settlement
agreements with several creditors of the joint venture. These conditions were
satisfied and the plan became effective on July 18, 1995. A subsidiary of the
Company, pursuant to the provisions of the plan, now owns approximately 90% of
the equity of the new company.
The valuation of the real estate assets of the above-mentioned joint
venture is premised upon the future sale of the property following the
completion of planned improvements. While the venture will continue to try to
sell this property in its current condition, the Company believes that a sale is
not likely unless the joint
F-3
<PAGE> 54
venture is able to obtain additional financing to perfect and maintain the
development entitlements and to construct the necessary infrastructure and other
improvements to obtain salable development tracts and lots. If the Company is
unable to sell the property in its current condition and is also unable to
obtain development financing, the Company could incur a loss of substantially
all of its investment in the project.
The estimated net realizable value for each Realty property equals or
exceeds its book value. It is currently the Company's intention to dispose of
these properties in an orderly process over time. Accordingly, the lower of
historical cost or estimated net realizable value is the appropriate carrying
value for properties under generally accepted accounting principles. If,
however, the Company were to change its intention and any of these properties
were sold in bulk at market values, the Company could incur a material loss.
Additionally, if market conditions deteriorate further or continue to remain
depressed for an extended period of time (and as a result the sales do not occur
as estimated in the net realizable value analyses), the Company may incur
material losses.
OTHER MATTERS
In 1995, other income, net of other expenses was a net expense of $3.6
million, compared to $3.0 million in 1994 and 1993. The Company's other expenses
are expenses primarily incurred in connection with holding and developing real
estate properties totaling $3.6 million in 1995, $3.6 million in 1994 and $4.0
million in 1993. These expenses have been included in the Realty segment
operating results. Interest income, which is one of the major other components
of other income, and is related to the balance in notes receivable and short-
term investments, was $.6 million in 1995, $.5 million in 1994 and $.6 million
in 1993. Corporate overhead was $15.5 million in 1995, $17.2 million in 1994 and
$14.8 million in 1993. The amounts 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
being received from the licensee, and the inclusion in 1993 of certain period
costs associated with the Company's refinancing efforts in that year. On January
26, 1996, the federal district court awarded the Company $7.1 million in
attorney fees and expenses incurred in its litigation with the licensee (see
Commitments and Contingencies note to the Consolidated Financial Statements).
The Company anticipates that the licensee will appeal the award.
Due to an unrecognized federal tax carryforward benefit, primarily the
result of losses in the Company's Realty segment, the Company has had no federal
tax provision in 1995, 1994 and 1993. The income tax provision for 1995 was $3.4
million compared to a net tax benefit of $4.3 million in 1994. The tax benefit
in 1994 is primarily the result of favorable state tax legislation in the State
of Arizona, which resulted in a $5.6 million reversal of state income taxes
previously accrued. This benefit is partially offset by other state tax
provisions.
The Company's backlog was approximately $503.3 million as of December 31,
1995 and $130.9 million as of December 31, 1994. Approximately 27.9% of the
backlog as of December 31, 1995 is expected to result in revenue during 1996,
with the remaining 72.1% expected to result in revenue during subsequent
periods. The backlog amounts as presented herein are composed of funded and
unfunded components. The government funded components and firm industrial
contracts at December 31, 1995 and 1994 totaled $133.5 million and $130.9
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 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.
F-4
<PAGE> 55
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 1995 of $15.6 million or 4% of consolidated revenue and earnings before
income taxes of $2.4 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, 1995.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1994 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" effective for the Company
at December 31, 1994. The Company does not presently have nor has it had any
derivative type instruments since mid-1993 when a single interest rate swap
agreement was terminated as described in the notes to the financial statements.
In late March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for fiscal years beginning after December 15, 1995. The
application of this Statement will require the Company to carry real estate
projects that are substantially complete and ready for their intended use at the
lower of cost or fair value, less cost to sell. If the sum of the expected
future net cash flow (undiscounted and without interest charges) is less than
the carrying amount of projects that are not substantially complete and ready
for their intended use, an impairment loss would be recognized. The Company,
consistent with existing generally accepted accounting principles, currently
states the majority of its land and land under development at the lower of cost
or net realizable value. The effect of implementing this new accounting
pronouncement has not yet been quantified.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," which is effective for transactions entered into in fiscal years
that begin after December 15, 1995. The Company has employee incentive
arrangements wherein employees receive shares of stock. When this pronouncement
becomes effective, the Company will be 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.
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
On June 27, 1995, the federal district court for the District of Arizona
entered judgment against TRW Inc. in favor of the Company in TRW Inc. vs. Talley
Industries, Inc. et al. The court dismissed all claims asserted by TRW against
the Company while the jury reached a verdict in favor of the Company on its
counterclaims against TRW, awarding the Company a total of $138 million. The
award (which is in addition to (i) royalty payments of $24.4 million paid prior
to the judgment and during the pendency of this action pursuant to a preliminary
injunction order, and (ii) the court's January 26, 1996 award of $7.1 million
for attorneys' fees and recoverable costs relating to this litigation)
represents the jury's determination of the
F-5
<PAGE> 56
present value of the royalties that would otherwise have been paid to the
Company by TRW for the period from April 1995 through April 2001.
The litigation in which this judgment was entered arose out of the Asset
Purchase Agreement dated February 4, 1989 and the License Agreement dated April
21, 1989, between TRW and the Company pursuant to which TRW acquired the
Company's airbag business. The court dismissed TRW's claims that the Company had
breached a non-compete provision contained in the Asset Purchase Agreement,
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. TRW has
filed an appeal of the judgment to the Ninth Circuit Court of Appeals, on which
oral argument was heard on February 14, 1996. The Company anticipates that TRW
will also appeal the district court's award of attorneys' fees and expenses.
On July 26, 1995 the district court granted a stay of enforcement of the
judgment pending appeal upon the posting by TRW of a $175 million bond and the
continuation of quarterly payments to the Company in the amount of royalties
that otherwise would be due under the License Agreement. Upon affirmation of the
judgment on appeal, TRW would be required to pay the judgment plus interest
(which the court ruled will accrue from June 27, 1995 at the rate specified by
the 1989 License Agreement -- i.e., prime plus five percent), offset by the
continued quarterly payments made in the interim as ordered by the court. TRW
has sought and the Court of Appeals has denied emergency review of the district
court's order requiring the continued quarterly payments pending appeal. The
denial of emergency relief by the Court of Appeals is without prejudice to TRW's
appeal from the district court's order.
Certain other claims asserted by TRW and the Company against each other are
the subject of a separate action which remains pending. In that action, TRW has
challenged certain representations by the Company that the airbag manufacturing
plant sold to TRW by the Company in 1989 met applicable government requirements,
and that the associated real estate was sufficient to permit construction of
certain additional facilities. The Company's claims against TRW include claims
that TRW failed to properly exploit the license granted to TRW by the Company in
1989 and denied the Company certain contractually provided audit rights. It is
currently anticipated that these remaining claims will come to trial early in
the spring of 1996. Management anticipates that the above-described claims will
be resolved without any material adverse impact on the results of operations or
financial position of the Company.
In September 1994, the Arizona Court of Appeals reversed a 1992 Arizona Tax
Court ruling that entitled the Company to file a combined tax return in the
State of Arizona for the fiscal year ended March 31, 1983, and in April 1995,
the Supreme Court of the State of Arizona denied the Company's Petition for
Review. Based on the appellate court decision, the Company paid approximately
$1.3 million in taxes and interest for the period ending March 31, 1983. The
Company believes the appellate court erred in its decision; however, the Company
held discussions with state authorities in an effort to resolve the dispute for
the periods ending on December 31, 1984 and 1985. The tax and related interest
assessment in dispute is approximately $5.0 million. If the Company is
unsuccessful in reaching an agreement with the state, it intends to vigorously
litigate these tax and interest assessments. Legislation adopted in 1994 in
Arizona specifically allows companies to file combined tax returns in Arizona
for periods from January 1, 1986, and on December 8, 1994 the Arizona Department
of Revenue withdrew its assessments against the Company for 1986 and subsequent
years. Management believes that the final resolution of the above matter will
not result in a material adverse impact on the results of operations or
financial position of the Company.
ENVIRONMENTAL
A subsidiary of the Company has been named as a potentially responsible
party under the Comprehensive Environmental Response Compensation and Liability
Act in connection with the remediation of the Beacon Heights Landfill in Beacon
Falls, Connecticut and the Laurel Park Landfill in Naugatuck, Connecticut.
Management's review indicates that the Company sent ordinary rubbish and
off-specification plastic parts to these landfills and did not send any
hazardous wastes to either site.
F-6
<PAGE> 57
Two coalitions of potentially responsible parties have entered into consent
decrees with the Environmental Protection Agency to remediate these sites. Each
coalition has in turn brought an action against other potentially responsible
parties, including a subsidiary of the Company, to contribute to the cleanup
costs. In October 1995, the Company settled the Laurel Park matter, including a
payment by the Company that was not material to the results of operations of the
Company. The federal court hearing the case has dismissed claims brought against
the subsidiary by the Beacon Heights coalition. However, the coalition has
indicated that it intends to appeal the court's ruling. Based upon management's
review and the status of the proceedings, with respect to the Beacon Heights
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.
A subsidiary of the Company is conducting an investigation of alleged
groundwater contamination at a facility in Athens, Georgia, in cooperation with
the current owner of the site. The site was owned by the subsidiary until March
1988. 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
The Company, in October 1993, completed a major refinancing program. This
refinancing program included an offering of $185.0 million of debt securities,
consisting of $70.0 million gross proceeds of Senior Discount Debentures due
2005, issued by the Company to yield 12.25% and $115.0 million of Senior Notes
due 2003, with an interest rate of 10.75%, issued by Talley Manufacturing and
Technology, Inc. ("Talley Manufacturing"). Talley Manufacturing, a wholly owned
subsidiary of the Company, owns all of the Company's subsidiaries, except the
subsidiaries holding the Company's real estate operations. In connection with
this refinancing, Talley Manufacturing obtained a $60.0 million secured credit
facility with institutional lenders. At December 31, 1995 availability under the
facility, based on inventory and receivable levels, and certain plant and
equipment, was approximately $48.0 million, of which $25.0 million was borrowed.
The proceeds from the offering and the initial borrowings under the secured
credit facility were used to repay substantially all of the Company's previously
outstanding non-real estate related debt. The Company anticipates that the new
capital structure will support the long-term growth of the Company's core
businesses and permit the implementation of its strategy to use proceeds
received from the increasing airbag royalties and from the orderly sale of the
assets of its real estate operations to reduce its total indebtedness.
As a holding company with no significant operating or income-producing
assets beyond its stock interest in Talley Manufacturing and the subsidiaries
holding its real estate operations, the Company will be dependent primarily upon
distributions from those subsidiaries in order to meet its debt service and
other obligations. The Company will be entitled to receive certain distributions
from Talley Manufacturing (absent certain defaults under Talley Manufacturing's
indebtedness) for a period of five years, to be used to fund certain carrying
and other costs associated with the orderly disposition of the Company's real
estate assets. The Company will be required to use certain funds received from
Talley Manufacturing and certain funds from real estate sales to make offers to
redeem certain indebtedness of the Company. During the first half of 1996 the
Company will be required to make an offer to redeem a portion of its 12.25%
Senior Discount Debentures. The dollar amount of such redemption will be
computed based on the provisions of the Company's indentures and loan agreement,
which amount is estimated to be approximately $10 to $15 million, and is
expected to be available under present credit facilities.
The cash available to the Company is required to be used for the specific
purposes noted, and because certain debt covenants limit the Company's ability
to incur additional indebtedness, the Company will be dependent upon the payment
of dividends from Talley Manufacturing (which payments will generally be limited
by debt covenants of Talley Manufacturing) and to future sales of equity
securities as its primary sources of discretionary liquidity. To the extent such
sources do not provide adequate funds, the Company may
F-7
<PAGE> 58
be unable to fund expected costs and improvements associated with its real
estate holdings or to make cash interest payments on its outstanding
indebtedness when required. Nevertheless, and particularly in light of the
absence of requirements for the Company to make cash payments of interest on
outstanding indebtedness until April 15, 1999, the Company believes funds will
be available in sufficient amounts, and at the required times, to permit the
Company to meet its obligations.
At December 31, 1995, the Company had $10.5 million in cash and cash
equivalents and $95.4 million in working capital. During 1995 the Company
generated $14.5 million of cash flow from operating activities. This amount
reflects cash generated from earnings and a reduction of realty assets, offset
in part by cash used due to an increase in accounts receivable of $13.4 million,
and a decrease in accounts payable and accrued expenses totaling $3.8 million.
Since the Company is engaged in government contracting activities, the amount of
receivables may fluctuate based on the timing of contract shipments and
collections on such contracts. Accordingly, the balances of receivables at the
end of 1995, 1994 and 1993 reflect this fluctuation. The increase in receivables
in 1995 also reflects the impact of a significant increase in sales and related
working capital increases from the Company's steel operations. The Company used
$7.4 million of cash for investing activities during 1995, which consisted
primarily of $8.9 million in purchases of property and equipment, $.8 million
proceeds from sale of property and equipment and $1.0 million net reduction of
long term receivables. Cash used in financing activities of $9.6 million
reflects a reduction in debt from cash generated from operations. Borrowings and
pay downs under revolving credit facilities are also included in financing
activities.
The Company has not made any dividend payments on its preferred and common
stock since the first quarter of 1991, and the ability to pay dividends in the
future is limited by the provisions of the Company's debt agreements. Dividends
in arrears on preferred shares totaled $10.3 million at December 31, 1995.
On February 2, 1996 the Company's Board of Directors approved a transaction
providing for the immediate conversion of all of the Company's Series D
Preferred stock (120,293 shares, convertible under the original terms on a 10 to
1 basis) into 1,905,849 shares of Talley Common Stock. The conversion
automatically extinguishes all unpaid dividends on that stock totaling
approximately $2.6 million as of December 31, 1995. The transaction will not
impact the net earnings of the Company in 1996, but "earnings applicable to
common shares (after deduction of preferred stock dividends)", as supplementally
disclosed by the Company, and the "earnings per share of common stock and common
equivalent share" will be reduced. The excess of the fair value of the common
shares transferred in the transaction by the Company to the single shareholder
over the fair value of the common shares issuable pursuant to the original
conversion terms will be subtracted from net earnings in the calculations of net
earnings available to common shareholders and earnings per share.
F-8
<PAGE> 59
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Sales............................................ $301,296,000 $249,201,000 $250,062,000
Services......................................... 58,821,000 59,989,000 63,270,000
Royalties........................................ 25,169,000 18,570,000 10,868,000
------------ ------------ ------------
385,286,000 327,760,000 324,200,000
------------ ------------ ------------
Cost of sales.................................... 224,236,000 182,415,000 185,900,000
Cost of services................................. 51,485,000 52,314,000 54,927,000
Selling, general and administrative expenses..... 63,297,000 62,763,000 57,877,000
Provision for reserve on realty assets........... 7,000,000 -- --
------------ ------------ ------------
346,018,000 297,492,000 298,704,000
------------ ------------ ------------
Earnings from operations......................... 39,268,000 30,268,000 25,496,000
Other income (expense), net...................... (3,629,000) (2,978,000) (2,978,000)
------------ ------------ ------------
35,639,000 27,290,000 22,518,000
------------ ------------ ------------
Interest expense................................. 28,666,000 28,089,000 25,744,000
------------ ------------ ------------
Earnings (loss) before income taxes and
extraordinary gains (loss)..................... 6,973,000 (799,000) (3,226,000)
Income tax provision (benefit)................... 3,418,000 (4,305,000) 2,768,000
------------ ------------ ------------
Earnings (loss) before extraordinary gains
(loss)......................................... 3,555,000 3,506,000 (5,994,000)
Extraordinary gains (loss), net of income
taxes.......................................... 14,409,000 -- (504,000)
------------ ------------ ------------
Net earnings (loss).............................. $ 17,964,000 $ 3,506,000 $ (6,498,000)
=========== =========== ===========
Earnings (loss) applicable to common shares
(after deduction of preferred stock
dividends)..................................... $ 15,801,000 $ 1,339,000 $ (8,665,000)
=========== =========== ===========
Earnings (loss) per share of common stock
and common stock equivalents:
Before extraordinary gains (loss).............. $ .25 $ .13 $ (.85)
Extraordinary gains (loss)..................... 1.03 -- (.05)
------------ ------------ ------------
Net earnings (loss).............................. $ 1.28 $ .13 $ (.90)
=========== =========== ===========
Weighted average shares outstanding.............. 14,001,000 10,412,000 9,676,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 60
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 10,475,000 $ 13,002,000
Accounts receivable, net of allowance for doubtful accounts
of $1,275,000 in 1995 and $994,000 in 1994.................... 69,453,000 55,257,000
Inventories..................................................... 67,191,000 66,069,000
Deferred income taxes........................................... 1,200,000 800,000
Prepaid expenses................................................ 8,296,000 7,895,000
------------ ------------
Total current assets.................................. 156,615,000 143,023,000
Realty assets................................................... 104,964,000 110,899,000
Long-term receivables, net...................................... 10,113,000 13,277,000
Property, plant and equipment, at cost, net of accumulated
depreciation of $92,395,000 in 1995 and $87,969,000 in 1994... 48,760,000 46,353,000
Intangibles, at cost, net of accumulated amortization of
$16,985,000 in 1995 and $15,376,000 in 1994................... 43,969,000 46,288,000
Deferred charges and other assets............................... 8,178,000 10,063,000
------------ ------------
Total assets.......................................... $372,599,000 $369,903,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt............................ $ 3,734,000 $ 3,549,000
Current maturities of realty debt............................... 2,155,000 19,575,000
Accounts payable................................................ 22,473,000 25,974,000
Accrued expenses................................................ 32,851,000 39,696,000
------------ ------------
Total current liabilities............................. 61,213,000 88,794,000
Long-term debt.................................................. 227,736,000 220,447,000
Long-term realty debt........................................... 7,980,000 5,564,000
Deferred income taxes........................................... 7,437,000 6,655,000
Other liabilities............................................... 9,899,000 8,277,000
Commitments and contingencies................................... -- --
Stockholders' equity:
Preferred stock, $1 par value, authorized 5,000,000; shares
issued:
67,000 shares of Series A (71,000 in 1994) ($1,677,000
involuntary liquidation preference)................... 67,000 71,000
1,548,000 shares of Series B (1,548,000 in 1994)
($30,964,000 involuntary liquidation preference)...... 1,548,000 1,548,000
120,000 shares of Series D (120,000 in 1994) ($18,044,000
involuntary liquidation preference)................... 120,000 120,000
Common stock, $1 par value, authorized 20,000,000; shares
issued:
10,053,000 shares (10,047,000 in 1994)................... 10,053,000 10,047,000
Capital in excess of par value................................ 86,035,000 86,026,000
Foreign currency translation adjustments...................... (530,000) (723,000)
Accumulated deficit........................................... (38,959,000) (56,923,000)
------------ ------------
Total stockholders' equity.................................... 58,334,000 40,166,000
------------ ------------
Total liabilities and stockholders' equity.................... $372,599,000 $369,903,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 61
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK CAPITAL IN RETAINED
-------------------------------- COMMON EXCESS OF TREASURY EARNINGS
SERIES A SERIES B SERIES D STOCK PAR VALUE STOCK (DEFICIT)
-------- ---------- -------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1992................... $ 71,000 $1,548,000 $120,000 $ 9,519,000 $83,537,000 $ -0- $(53,931,000)
Net loss............... (6,498,000)
Stock grants........... 141,000 403,000
Stock issued........... 387,000 1,308,000
Treasury stock
acquired............. (528,000)
Treasury stock
issued............... 57,000
Decrease in guaranteed
debt of ESOP......... 778,000
------- ---------- -------- ----------- ----------- --------- ------------
BALANCE AT DECEMBER 31,
1993................... 71,000 1,548,000 120,000 10,047,000 86,026,000 (471,000) (60,429,000)
Net earnings........... 3,506,000
Treasury stock
issued............... 471,000
------- ---------- -------- ----------- ----------- --------- ------------
BALANCE AT DECEMBER 31,
1994................... 71,000 1,548,000 120,000 10,047,000 86,026,000 -0- (56,923,000)
Conversion to Common
stock................ (4,000) 4,000
Exercised stock
options.............. 2,000 9,000
Net earnings........... 17,964,000
------- ---------- -------- ----------- ----------- --------- ------------
BALANCE AT DECEMBER 31,
1995................... $ 67,000 $1,548,000 $120,000 $10,053,000 $86,035,000 $ -0- $(38,959,000)
======= ========== ======== =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 62
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of
year........................................ $ 13,002,000 $ 12,194,000 $ 10,168,000
------------- ------------- -------------
Cash flows from operating activities:
Net earnings (loss)......................... 17,964,000 3,506,000 (6,498,000)
Adjustments to reconcile net income to cash
flows from operating activities:
Extraordinary items.................... (14,409,000) -- 504,000
Change in deferred income taxes........ 382,000 (5,565,000) 1,780,000
Depreciation and amortization.......... 8,443,000 9,557,000 10,085,000
Gain on sale of property and
equipment........................... (62,000) (173,000) (191,000)
Loss due to transfer of realty
assets.............................. -- -- 1,166,000
Loss on termination of interest rate
swap agreement...................... -- -- (1,670,000)
Original discount amortization......... 10,187,000 9,024,000 --
Provision reserve for realty assets.... 7,000,000 -- --
Other.................................. (7,000) 4,801,000 5,279,000
Changes in assets and liabilities, net of
effects of acquisitions and divestitures:
(Increase) decrease in accounts
receivable.......................... (13,379,000) 2,935,000 (8,584,000)
(Increase) decrease in inventories..... (1,122,000) (93,000) 1,176,000
(Increase) decrease in prepaid
expenses............................ (401,000) 1,769,000 (1,899,000)
Decrease in realty assets.............. 5,947,000 6,036,000 5,317,000
Increase in other assets............... (240,000) (587,000) (10,772,000)
Increase (decrease) in accounts
payable............................. (3,501,000) 2,353,000 3,915,000
Increase (decrease) in accrued
expenses............................ (277,000) (1,154,000) 5,498,000
Decrease in other liabilities.......... (1,714,000) (722,000) (1,056,000)
Other, net............................. (314,000) 471,000 (201,000)
------------- ------------- -------------
Cash flows from operating
activities........................ 14,497,000 32,158,000 3,849,000
------------- ------------- -------------
Cash flows from investing activities:
Purchase of assets of acquired business..... (287,000) (5,688,000) --
Proceeds from sale of subsidiary............ -- -- 2,756,000
Purchases of property and equipment......... (8,931,000) (3,932,000) (5,347,000)
Reduction of long-term receivables.......... 1,020,000 237,000 2,140,000
New long-term receivables................... -- (551,000) (388,000)
Proceeds from sale of property and
equipment................................ 772,000 302,000 291,000
------------- ------------- -------------
Cash flows from investing
activities........................ (7,426,000) (9,632,000) (548,000)
------------- ------------- -------------
Cash flows from financing activities:
Exercise of stock options................... 11,000 -- --
Repayment of long-term debt................. (494,576,000) (402,127,000) (390,660,000)
Repayment of realty debt.................... (6,593,000) (2,145,000) (5,543,000)
Proceeds from new long-term debt............ 491,560,000 382,554,000 394,928,000
------------- ------------- -------------
Cash flows from financing
activities........................ (9,598,000) (21,718,000) (1,275,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents................................. (2,527,000) 808,000 2,026,000
------------- ------------- -------------
Total cash and cash equivalents at end of
year........................................ $ 10,475,000 $ 13,002,000 $ 12,194,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 63
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its majority-owned domestic and foreign subsidiaries. Real estate joint
ventures that are majority owned and under the control of the Company are also
included in the consolidated accounts of the Company. All unconsolidated
companies are reflected in the financial statements on the equity basis. All
material intercompany transactions have been eliminated.
NATURE OF OPERATIONS:
Talley Industries, Inc. is a diversified manufacturer of a wide range of
proprietary and other specialized products for defense, industrial and
commercial applications. Through its Government Products and Services segment,
the Company manufactures an extensive array of propellant devices and electronic
components for defense systems and commercial applications and provides naval
architectural and marine engineering services. The vast majority of the
Government Products and Services are for U.S. Defense and are smaller components
of larger units and systems that are generally designed to enhance safety or
improve performance. The Company participates in the expanding market for
automotive airbags through a royalty agreement and is currently developing new
airbag technologies. The Company's Industrial Products segment manufactures and
distributes stainless steel rods and bars and other stainless steel products,
high-voltage ceramic insulators used in power transmission and distribution
systems, and specialized welding equipment and systems. The Company's Specialty
Products segment manufactures and sells aerosol insecticides, air fresheners and
sanitizers, and custom designed metal buttons. The Company is also engaged in
the orderly sale and disposition of the assets of its real estate operations.
Substantially all of the Company's facilities are located in and provide sales
and services to the United States and Canada.
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.
REALTY ASSETS:
Realty assets consist of those parcels and developments which are expected
to be sold within the operating cycle of the Realty segment. Historically, the
operating cycle of the Realty segment has been three to five years. Realty
assets are stated at the lower of historical cost or estimated net realizable
value and include land held for sale together with related development and
carrying costs (interest and property taxes during development), and equity
investments in realty joint ventures. For financial reporting purposes, realty
F-13
<PAGE> 64
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets must be carried at the lower of historical cost or estimated net
realizable value. Net realizable value is the estimated selling price in the
ordinary course of business less estimated costs of completion (to the stage of
completion assumed in determining the selling price), holding and disposal. Net
realizable value differs from market value in that, among other things, market
value is based on the price obtainable in a bulk cash sale at the present time,
considers a potential purchaser's requirement for future profit and discounts
the timing of expected cash receipts at a market rate of interest, whereas net
realizable value is the price obtainable in the future for individual properties
as improved, net of disposal costs, without provision for future profit and
without discounting future cash receipts to present value. The Company accounts
for and reports the value of foreclosed realty assets at fair value less the
estimated costs to sell the assets.
The Company annually completes a formal review of its real estate
properties. In connection with these reviews, values of substantially all
properties are established by independent appraisal firms. In establishing
values, the appraisers consider comparable sales, absorption rates, area
economic conditions, improvement costs and income potential, among other
factors. When discounting is appropriate, risk weighted interest rates are used
as determined by the appraisers. The estimated net realizable value for each
property equals or exceeds its book value. It is currently the Company's
intention to dispose of these properties in an orderly process over time.
Accordingly, the lower of historical cost or estimated net realizable value is
the appropriate carrying value for properties under generally accepted
accounting principles. If, however, the Company were to change its intention and
any of these properties were sold in bulk at the market values, the Company
could incur a material loss. Additionally, if market conditions deteriorate
further or continue to remain depressed for an extended period of time (and as a
result the sales do not occur as estimated in the net realizable value
analyses), the Company may incur material losses.
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.
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.
F-14
<PAGE> 65
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
Effective January 1, 1992 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting For Income Taxes". This
pronouncement requires the Company to recognize 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. Under this
method, 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.
EARNINGS PER SHARE:
Net earnings per share of Common stock and Common stock equivalents has
been computed on the basis of the average number of Common shares outstanding
during each year. The average number of shares has been adjusted for assumed
exercise at the beginning of the year (or date of grant, if later) for any
dilutive stock options, with funds obtained thereby used to purchase shares of
the Company's Common stock at the average price during the year, and assumed
conversion of all dilutive convertible preferred stock. Common stock equivalents
that are anti-dilutive are excluded from the computation of earnings per share
and earnings are reduced by the dividend requirements on such equivalents.
INTANGIBLES:
The excess cost of investments in subsidiaries over the equity in net
assets at acquisition date is being amortized using the straight-line method
over periods not in excess of 40 years. The majority of the Company's
intangibles consist of goodwill, which is the excess of cost over tangible and
identifiable intangible assets acquired. The carrying value of intangibles is
evaluated periodically in relation to the operating performance and future cash
flow of the underlying businesses.
EARNINGS OR LOSS APPLICABLE TO COMMON SHARES:
Earnings or loss applicable to Common shares is computed by reducing the
net earnings or loss by dividends, including undeclared or unpaid dividends, of
the Company's Preferred A, B and D stocks.
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(BALANCES IN
THOUSANDS)
<S> <C> <C>
Raw material and supplies................................ $11,878 $11,757
Work-in-process.......................................... 11,222 11,733
Finished goods........................................... 28,955 24,616
Inventories substantially applicable to fixed-price
government contracts in process, reduced by progress
payments of $5,870,000
and $8,273,000 in 1995 and 1994, respectively.......... 15,136 17,963
------- -------
$67,191 $66,069
======= =======
</TABLE>
REALTY ASSETS
The Company has adopted a plan to divest itself of realty assets which is
expected to be accomplished over several years. Realty assets at December 31,
1995 of $104,964,000 are primarily unimproved commercial, industrial and mixed
use properties.
F-15
<PAGE> 66
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In reference to the Company's consolidated cash flow in 1995, non-cash
Realty asset transactions included an increase in Realty assets of $4,038,000
and an increase in Realty debt of $3,649,000 upon the consolidation of a
previously unconsolidated joint venture. Non-cash Realty items also included
reductions of $7,600,000 in Realty assets at December 31, 1995. In 1994,
non-cash Realty asset transactions included a decrease in both Realty assets and
Realty debt in the amount of $934,000. In 1993, non-cash Realty asset
transactions included an increase in Realty assets and an increase in Realty
debt and accrued expenses in the amount of $19,128,000 upon the consolidation of
a previously unconsolidated joint venture. Non-cash Realty items also included
reductions of $4,677,000 due to forfeitures of properties and other
transactions. The value of foreclosed assets at December 31, 1995 and 1994 were
$29,773,000 and $31,932,000, respectively.
LONG-TERM RECEIVABLES
Long-term receivables consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
(BALANCES IN
THOUSANDS)
<S> <C> <C>
Notes receivable, including accrued interest and income tax
refunds....................................................... $10,584 $13,516
Amounts due within one year, included in accounts receivable.... (471) (239)
------- -------
$10,113 $13,277
======= =======
</TABLE>
Long-term receivables include income tax receivables of $5,975,000, which
must be approved by the Congressional Joint Committee on Taxation before payment
will be received, and accordingly are classified as non-current. The remaining
notes range in length from one to fifteen years and bear interest at December
31, 1995 at rates ranging from 8% to 10%. Payment terms vary by note, but
generally require monthly, quarterly or annual interest and principal payments.
The notes receivable balance is net of reserves of $1,260,000 and $2,358,000 at
December 31, 1995 and 1994, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(BALANCES IN
THOUSANDS)
<S> <C> <C>
Machinery and equipment....................................... $107,576 $100,383
Buildings and improvements.................................... 30,791 31,224
Land.......................................................... 2,788 2,715
-------- --------
$141,155 $134,322
======== ========
</TABLE>
Depreciation of property, plant and equipment was $6,834,000, $7,735,000,
and $8,286,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. During the first quarter of 1995, the Company completed a review
of the fixed asset lives at its stainless steel production facility. The Company
determined that as a result of actions taken to increase its preventive
maintenance and programs initiated with its suppliers to increase the quality of
their products, actual lives for certain asset categories were generally longer
than the useful lives used for depreciation purposes. Therefore, the Company
extended the estimated useful lives of certain categories of plant and equipment
at its stainless steel production facility, effective January 1, 1995. The
effect of this change in estimated useful lives reduced depreciation expense for
1995 by approximately $1,602,000, and accordingly increased earnings before
income taxes and extraordinary gain by the same amount.
F-16
<PAGE> 67
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(BALANCES IN
THOUSANDS)
<S> <C> <C>
10 3/4% Senior Notes, due 2003................................. $115,000 $115,000
12 1/4% Senior Discount Debentures, due 2005
(face amount $126,555,000)................................... 90,878 80,691
Notes, interest based on prime or other variable market rates,
due 1998..................................................... 14,341 17,949
Revolving credit facilities.................................... 10,579 9,377
Capitalized leases and other................................... 672 979
-------- --------
231,470 223,996
Less current maturities........................................ 3,734 3,549
-------- --------
Long-term debt................................................. $227,736 $220,447
======== ========
</TABLE>
On October 22, 1993 the Company completed a major debt refinancing program.
The Company received gross proceeds of $70,000,000 from the issuance of Senior
Discount Debentures, due 2005, which were issued to yield 12.25% (face amount of
$126,555,000). In addition, Talley Manufacturing and Technology, Inc., ("Talley
Manufacturing") a wholly owned subsidiary of the Company, which owns all of the
Company's subsidiaries (except for the subsidiaries holding the Company's real
estate operations), issued $115,000,000 of Senior Notes, due 2003, with an
interest rate of 10.75%. Talley Manufacturing also completed a $60,000,000
secured credit facility with two institutional lenders. The gross proceeds of
the public offerings, plus an initial borrowing under the secured credit
facility, after payment of underwriting and other fees and expenses associated
with these financings, were used to repay substantially all of the Company's
previously outstanding non-real estate related debt.
The indentures for the Senior Notes and the Senior Discount Debentures and
the loan agreement relating to the secured credit facility contain covenants
requiring specified fixed charge coverage ratios, working capital levels,
capital expenditure limits, net worth levels, cash flow levels and certain other
restrictions including limitations on dividends and other payments and
incurrence of debt. As a holding company with no significant operating or
income-producing assets beyond its stock interests in Talley Manufacturing and
the subsidiaries holding its real estate operations, the Company is dependent
primarily upon distributions from these subsidiaries to meet its debt service
and other obligations. Payments from the subsidiaries are generally limited by
the debt covenants of Talley Manufacturing.
Substantially all of the receivables, inventory and property, plant and
equipment of Talley Manufacturing and its subsidiaries are pledged as collateral
in connection with the secured credit facility. In addition, the subsidiaries of
Talley Manufacturing have guaranteed Talley Manufacturing's obligations under
the Senior Notes and the secured credit facility and the Company has guaranteed
the Senior Notes on a subordinated basis. The capital stock of Talley
Manufacturing has been pledged by the Company to secure the Senior Discount
Debentures.
The Senior Notes mature on October 15, 2003 and Talley Manufacturing is
required to make mandatory sinking fund payments of $11,500,000 on October 15,
in each of 2000, 2001 and 2002. Interest is payable semi-annually, having
commenced April 15, 1994. The Senior Discount Debentures mature on October 15,
2005. No interest on the Discount Debentures will be payable until April 15,
1999, when interest will be payable semi-annually on April 15 and October 15 of
each year. In the event that certain financial and other conditions are
satisfied, the Discount Debentures require prepayments based on defined levels
of airbag royalties received and proceeds from real estate sales.
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, 1995 availability under the facility, based on inventory
F-17
<PAGE> 68
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and receivable levels and certain plant and equipment, was approximately
$48,000,000, of which approximately $25,000,000 was borrowed. Upon the
occurrence of certain specified events at any time following the third
anniversary of the facility, the agent thereunder may elect to terminate the
facility. 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 3 1/4%, with an additional fee of one-quarter of one
percent on unused amounts under the revolving facility.
Aggregate maturities of long-term debt for the years ending December 31,
1996 through December 31, 2000, are $3,734,000, $3,094,000, $18,764,000, $0 and
$11,500,000, respectively. Cash payments for total interest, net of amounts
capitalized, during 1995, 1994 and 1993 were $16,132,000, $16,758,000 and
$21,675,000, respectively. Accrued interest expense at December 31, 1995, 1994
and 1993 was $3,626,000, $11,855,000 and $10,999,000, respectively. Deferred
debt issue costs at December 31, 1995, 1994 and 1993 were $8,509,000, $9,922,000
and $11,362,000, 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 1995, 1994 and 1993 was $1,413,000, $1,413,000
and $952,000, respectively. Total capitalized lease obligations on buildings and
equipment included in long-term debt at December 31, 1995 is $338,000, of which
$322,000 is due within one year.
REALTY DEBT
Realty debt consists primarily of amounts payable in connection with
properties acquired by the Company's real estate operations. The various notes
bear interest at rates ranging from 7.6% to 11.5% with maturities ranging from
1996 through 2004. Payment terms vary by note, but generally require monthly,
quarterly or annual interest and principal payments. Realty debt at December 31,
1995 and 1994 was $10,135,000 and $25,139,000, respectively. During 1995, the
Company recognized $14,409,000 in extraordinary gains in connection with the
settlement of certain real estate debt for less than book value. Aggregate
maturities of Realty debt for the years ending December 31, 1996 through 2000
are $2,153,000, $1,666,000, $694,000, $501,000 and $664,000, respectively.
Realty debt is collateralized by properties and notes receivable of the
Company's real estate operations with a carrying value of approximately
$85,463,000.
STOCK OPTIONS
At December 31, 1995, under the 1990 and 1978 Stock Option Plans, 761,000
and 478,000 shares of Common stock, respectively, were reserved for sale to
officers and employees. The plans require incentive stock option prices to be no
less than the market value of the stock at the date of grant and that all
options, incentive and non-qualified, become exercisable in ten years or less
from the date of grant, as specified in the individual grants. During the year
ended December 31, 1995, no options were granted under the 1990 Stock Option
Plan, but 100,000 options were granted during 1994 under this plan. There were
137,000 shares granted during 1995 under the 1978 Stock Option Plan, but no
shares were granted during 1994 under this plan. During the year ended December
31, 1993, 438,000 options were granted under the 1990 Stock Option Plan and
132,000 grants were made under the 1978 Stock Option Plan. During the years
ended December 31, 1995, 1994 and 1993, the only options exercised under either
of the two stock option plans were 2,000 options exercised at a price of $5.375
per share during 1995 under the 1990 Plan. Under the 1978 Stock Option Plan
during 1995, 1994 and 1993, respectively, there were 193,000, 12,000 and 63,000
options that expired or were cancelled. During 1995 there were no options that
were cancelled under the 1990 Plan. During 1994, there were 8,000 options that
were cancelled under the 1990 Plan.
At December 31, 1995, there were 878,000 total options outstanding at an
average price of $5.46, with 672,000 options exercisable. At December 31, 1994,
934,000 options were outstanding at an average price of $5.97 with 844,000
exercisable. Common stock reserved for future option grants under the 1978 Plan
amounted to 128,000 and 72,000 shares at December 31, 1995 and 1994,
respectively. Common stock reserved
F-18
<PAGE> 69
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for future option grants under the 1990 Plan amounted to 233,000 and 128,000 at
December 31, 1995 and 1994, respectively.
CAPITAL STOCK
Each share of Series A Convertible Preferred stock entitles its holder to
receive an annual cash dividend of $1.10 per share; to convert it into .95 of a
share of Common stock, as adjusted in the event of future dilution; to receive
up to $25.00 per share in the event of involuntary or voluntary liquidation;
and, subject to certain conditions in loan agreements, may be redeemed at the
option of the Company at a price of $25.00 per share plus accrued and unpaid
dividends.
Each share of Series B $1.00 Cumulative Convertible Preferred stock
entitles its holder to receive an annual cash dividend of $1.00 per share; to
convert it into 1.31 shares of Common stock, as adjusted in the event of future
dilution; to receive up to $20.00 per share plus accrued and unpaid dividends in
the event of involuntary liquidation; to receive up to $52.50 plus accrued and
unpaid dividends per share in the event of voluntary liquidation and, subject to
certain conditions in loan agreements, may be redeemed at the option of the
Company at a price of $52.50 per share plus accrued and unpaid dividends.
Each share of Common stock has a preferred stock purchase right attached,
allowing the holder, upon the occurrence of a change in control, as defined in a
Rights agreement (as amended and restated on February 2, 1996), to buy one
one-hundredth of a share of Series C Junior Participating Preferred stock at an
exercise price of $32. The Series C stock, which may be purchased upon exercise
of the Rights, is nonredeemable and junior to other series of the Company's
preferred stock. No shares of Series C stock have been issued as of December 31,
1995.
Each share of Series D Convertible Preferred stock entitles its holder to
receive an annual cash dividend of $4.50 per share ($15.75 after February 28,
1998); to convert it into 10 shares of Common stock, as adjusted in the event of
future dilution; to receive $150 per share ($175 after February 28, 1998) in the
event of involuntary or voluntary liquidation; and subject to certain conditions
in loan agreements, may be redeemed at the option of the Company at the higher
of $150 per share ($175 after February 28, 1998) or the average of the
conversion value per share for the last ten trading days prior to redemption
(not to exceed $200 per share).
Dividends on the shares of Series A, Series B and Series D Preferred stock
are cumulative and must be paid in the event of liquidation and before any
distribution to holders of Common stock. The Company has not made any dividend
payments on its preferred and common stock since the first quarter of 1991, and
the ability to pay dividends in the future is limited by the provision of the
Company's debt agreements. Cumulative dividends on preferred shares that have
not been declared or paid since the first quarter of 1991 are approximately:
Series A -- $350,000 ($5.225 per share), Series B -- $7,354,000 ($4.75 per
share) and Series D $2,571,000 ($21.375 per share). The failure to pay the
regular quarterly dividends for the first three quarters of 1992 on the
Preferred stock gave rise at that time to the right of the holders of the three
series to elect two directors to the Company's Board of Directors.
At December 31, 1995 there were 5,861,000 shares of Common stock reserved
for conversion of preferred stock, for exercise of stock options, for issuance
of shares under the Employee Stock Purchase Plan and for the payment of a
portion of the purchase price of a business acquisition completed in 1994.
On February 2, 1996 the Company's Board of Directors approved a transaction
providing for the immediate conversion of all of the Company's Series D
Preferred stock (120,293 shares) into 1,905,849 shares of Talley Common stock.
The conversion automatically extinguished all unpaid dividends on that stock.
The transaction will not impact the net earnings of the Company in 1996, but
"earnings applicable to common shares (after deduction of preferred stock
dividends)," as supplementally disclosed by the Company, and the "earnings per
share of common stock and common equivalent share" will be reduced. The excess
of the fair value of the common shares transferred in the transaction by the
Company to the single shareholder over the
F-19
<PAGE> 70
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of the common shares issuable pursuant to the original conversion
terms will be subtracted from net earnings in the calculations of net earnings
available to common shareholders and earnings per share. The Series D Preferred
stock had been held in a voting trust agreement since its issuance in connection
with a 1988 acquisition by the Company. The Common stock will continue to be
held in the voting trust, which has been extended under the agreement until
March 2001.
LEASES
Rental expense for continuing operations (reduced by rental income from
subleases of $441,000 in 1995, $329,000 in 1994 and $340,000 in 1993) amounted
to $4,770,000 in 1995, $5,179,000 in 1994 and $5,622,000 in 1993. Aggregate
future minimum rental payments required under operating leases having an initial
lease term in excess of one year for years ending December 31, 1996 through
December 31, 2000 are $4,255,000, $3,364,000, $2,908,000, $1,535,000 and
$682,000, respectively, with $1,335,000 payable in future years. Minimum
operating lease payments have not been reduced by future minimum sublease
rentals of $248,000.
Aggregate future minimum payments under capital leases for years ending
December 31, 1996 and December 31, 1997 are $343,000 and $18,000, respectively,
with no payments in later years. Minimum capital lease payments have not been
reduced by future minimum sublease rentals of $265,000. The present value of net
minimum lease payments is $339,000 after deduction of $22,000, representing
interest and estimated executory costs. The net book value of leased buildings
and equipment under capital leases at December 31, 1995 and 1994 amounted to
$656,000 and $213,000, respectively.
EMPLOYEE BENEFIT 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 1995, 1994 and 1993 was $4,132,000, $4,837,000 and
$5,069,000, respectively.
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:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(BALANCES IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 1,138 $ 1,377 $ 1,594
Interest cost on projected benefit obligation........ 2,781 2,360 2,504
Actual return on assets.............................. (11,377) 643 (5,712)
Net amortization and deferral........................ 8,035 (3,493) 3,173
-------- ------- -------
Net pension cost..................................... $ 577 $ 887 $ 1,559
======== ======= =======
</TABLE>
F-20
<PAGE> 71
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the aggregate funded status of defined
benefit plans at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
-------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- -------------
(BALANCES IN THOUSANDS)
<S> <C> <C>
Fair value of plan assets................................. $ 45,857 $ 1,852
Projected benefit obligation.............................. (41,955) (1,998)
-------- -------
Projected benefit obligation (in excess of) or less
than plan assets........................................ 3,902 (146)
Unrecognized net loss (gain).............................. (5,008) (175)
Unrecognized prior service cost........................... (252) 4
Unrecognized net liability................................ 520 344
Unfunded accumulated benefit obligation................... -- (173)
-------- -------
Pension liability......................................... $ (838) $ (146)
======== =======
Accumulated benefits...................................... $ 37,046 $ 1,998
Vested benefits........................................... $ 35,094 $ 1,955
1994
-------------------------------
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
------------- -------------
(balances in thousands)
<S> <C> <C>
Fair value of plan assets................................. $ 36,474 $ 1,451
Projected benefit obligation.............................. (30,004) (1,641)
-------- -------
Projected benefit obligation (in excess of) or less
than plan assets........................................ 6,470 (190)
Unrecognized net loss (gain).............................. (7,612) (260)
Unrecognized prior service cost........................... (266) 4
Unrecognized net liability................................ 622 413
Unfunded accumulated benefit obligation................... -- (157)
-------- -------
Pension liability......................................... $ (786) $ (190)
======== =======
Accumulated benefits...................................... $ 27,160 $ 1,641
Vested benefits........................................... $ 25,535 $ 1,611
</TABLE>
The provisions of Statement of Financial Accounting Standards No. 87
"Employers' Accounting for Pensions," require the recognition of an additional
liability and related intangible asset to the extent that accumulated benefits
exceed plan assets. At December 31, 1995 and 1994 the Company's additional
liabilities were $173,000 and $157,000, respectively. The Company recorded an
intangible asset in the same amount. At December 31, 1995 the Directors' Pension
plan was unfunded with a projected benefit obligation of $897,000 and an
additional liability of $201,000. The net pension cost for 1995 was $234,000.
Assumptions used in 1995, 1994 and 1993 to determine the actuarial present
value of plan benefit obligations were:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Assumed discount rate......................................... 6.5% 8.5% 7.0%
Assumed rate of compensation increase......................... 4.5% 5.0% 4.5%
Expected rate of return on plan assets........................ 9.0% 9.0% 9.0%
</TABLE>
F-21
<PAGE> 72
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995 the total value of defined
benefit plan assets exceed total vested benefits by $10,660,000.
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 1995 and 1994 were $502,000
and $713,000, respectively. Any dividends received on the shares held by the
ESOP are reinvested in shares of Company stock. No dividends were received
during 1995, 1994 or 1993.
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 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 1995. Current service costs and interest costs for 1995 were
approximately $10,000 and $99,000, respectively.
INCOME TAXES
Earnings before income taxes and extraordinary gain and the provision
(credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
(BALANCES IN THOUSANDS)
<S> <C> <C> <C>
Earnings (loss) before income taxes and extraordinary
gain:
United States........................................ $4,541 $(2,341) $(3,229)
Foreign.............................................. 2,432 1,542 3
------ ------- -------
$6,973 $ (799) $(3,226)
====== ======= =======
Current tax expense:
United States........................................ $ 728 $ - $ 347
Foreign.............................................. 1,154 731 59
State and local...................................... 1,154 530 581
------ ------- -------
3,036 1,261 987
------ ------- -------
Deferred tax expense (credit):
United States........................................ (701) -- (347)
Foreign.............................................. 25 15 8
State and local...................................... 1,058 (5,581) 2,120
------ ------- -------
382 (5,566) 1,781
------ ------- -------
$3,418 $(4,305) $ 2,768
====== ======= =======
</TABLE>
F-22
<PAGE> 73
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(BALANCES IN
THOUSANDS)
<S> <C> <C>
Gross deferred tax assets:
Net operating losses and tax credit carryforward............... $ 1,484 $ 8,493
Reserves on realty assets...................................... 7,883 9,841
Accrued expenses............................................... 11,356 9,621
Other.......................................................... 2,498 1,618
Valuation allowance for deferred tax assets.................... (17,664) (23,856)
-------- --------
Net deferred tax asset........................................... 5,557 5,717
-------- --------
Gross deferred tax liabilities:
Depreciation................................................... 5,957 6,662
Accrued expenses............................................... 4,604 3,908
Other.......................................................... 1,233 1,002
-------- --------
Gross deferred tax liability................................... 11,794 11,572
-------- --------
Net deferred tax liabilities..................................... $ 6,237 $ 5,855
======== ========
</TABLE>
Reasons for the differences between the amount of income tax determined by
applying the applicable statutory federal income tax rate to pretax income are:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Computed tax at statutory U.S. tax rates.................. $ 2,371 $ (272) $(1,098)
Net operating loss utilization............................ (1,542) 796 1,098
State and local taxes..................................... 2,212 (5,051) 2,701
Other..................................................... 377 222 67
------- ------- -------
$ 3,418 $(4,305) $ 2,768
======= ======= =======
</TABLE>
United States income taxes have not been provided on approximately
$1,000,000 of undistributed earnings of subsidiaries incorporated outside the
United States, since it is the Company's intent to reinvest such earnings. Net
cash (payments) refunds for income taxes during 1995, 1994 and 1993 were
$(2,676,000), $(569,000) and $828,000, respectively.
At December 31, 1995, the Company had an unrecognized net operating loss
carryforward for financial statement purposes of approximately $43,000,000. The
Company has no net operating loss for federal tax purposes. The Company has
alternative minimum tax credits of approximately $1,484,000, which can be
utilized against regular taxes in the future.
Pursuant to legislation passed in 1994 in the State of Arizona regarding
the rules for filing consolidated state income tax returns, the Company reversed
$5,600,000 in 1994 of state income tax accruals to reflect the change in the
law.
COMMITMENTS AND CONTINGENCIES
TRW Claims. On June 27, 1995, the federal district court for the District
of Arizona entered judgment against TRW Inc. in favor of the Company in TRW Inc.
vs. Talley Industries, Inc. et al. The court dismissed all claims asserted by
TRW against the Company while the jury reached a verdict in favor of the Company
on its counterclaims against TRW, awarding the Company a total of $138,000,000.
The award (which is in addition to (i) royalty payments of $24,400,000 paid
prior to the judgment and during the pendency of this
F-23
<PAGE> 74
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
action pursuant to a preliminary injunction order, and (ii) the court's January
26, 1996 award of $7,085,000 for attorneys' fees and recoverable costs relating
to this litigation) represents the jury's determination of the present value of
the royalties that would otherwise have been paid to the Company by TRW for the
period from April 1995 through April 2001.
The litigation in which this judgment was entered arose out of the Asset
Purchase Agreement dated February 4, 1989 and the License Agreement dated April
21, 1989, between TRW and the Company pursuant to which TRW acquired the
Company's airbag business. The court dismissed TRW's claims that the Company had
breached a non-compete provision contained in the Asset Purchase Agreement,
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. TRW has
filed an appeal of the judgment to the Ninth Circuit Court of Appeals, on which
oral argument was heard on February 14, 1996. The Company anticipates that TRW
will also appeal the district court's award of attorneys' fees and expenses.
On July 26, 1995 the district court granted a stay of enforcement of the
judgment pending appeal upon the posting by TRW of a $175,000,000 bond and the
continuation of quarterly payments to the Company in the amount of royalties
that otherwise would be due under the License Agreement. Upon affirmation of the
judgment on appeal, TRW would be required to pay the judgment plus interest
(which the court ruled will accrue from June 27, 1995 at the rate specified by
the 1989 License Agreement -- i.e., prime plus five percent), offset by the
continued quarterly payments made in the interim as ordered by the court. TRW
has sought and the Court of Appeals has denied emergency review of the district
court's order requiring the continued quarterly payments pending appeal. The
denial of emergency relief by the Court of Appeals is without prejudice to TRW's
appeal from the district court's order.
Certain other claims asserted by TRW and the Company against each other are
the subject of a separate action which remains pending. In that action, TRW has
challenged certain representations by the Company that the airbag manufacturing
plant sold to TRW by the Company in 1989 met applicable government requirements,
and that the associated real estate was sufficient to permit construction of
certain additional facilities. The Company's claims against TRW include claims
that TRW failed to properly exploit the license granted to TRW by the Company in
1989 and denied the Company certain contractually provided audit rights. It is
currently anticipated that these remaining claims will come to trial early in
the spring of 1996. Management anticipates that the above-described claims will
be resolved without any material adverse impact on the results of operations or
financial position of the Company.
Environmental. A subsidiary of the Company has been named as a potentially
responsible party under the Comprehensive Environmental Response Compensation
and Liability Act in connection with the remediation of the Beacon Heights
Landfill in Beacon Falls, Connecticut and the Laurel Park Landfill in Naugatuck,
Connecticut. Management's review indicates that the Company sent ordinary
rubbish and off-specification plastic parts to these landfills and did not send
any hazardous wastes to either site.
Two coalitions of potentially responsible parties have entered into consent
decrees with the Environmental Protection Agency to remediate these sites. Each
coalition has in turn brought an action against other potentially responsible
parties, including a subsidiary of the Company, to contribute to the cleanup
costs. In October 1995, the Company settled the Laurel Park matter, including a
payment by the Company that was not material to the results of operations of the
Company. The federal court hearing the case has dismissed claims brought against
the subsidiary by the Beacon Heights coalition. However, the coalition has
indicated that it intends to appeal the court's ruling. Based upon management's
review and the status of the proceedings, with respect to the Beacon Heights
matter, management believes that any reasonably anticipated losses from this
claim will not result in a material adverse impact on the results of operations
or the financial position of the Company.
F-24
<PAGE> 75
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A subsidiary of the Company is conducting an investigation of alleged
groundwater contamination at a facility in Athens, Georgia, in cooperation with
the current owner of the site. The site was owned by the subsidiary until March
1988. 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.
Tax. 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. The
Company believes the appellate court erred in its decision; however, the Company
held discussions with state authorities in an effort to resolve the dispute for
the periods ending on December 31, 1984 and 1985. The tax and related interest
assessment in dispute is approximately $5,000,000. If the Company is
unsuccessful in reaching an agreement with the state, it intends to vigorously
litigate these tax and interest assessments. Legislation adopted in 1994 in
Arizona specifically allows companies to file combined tax returns in Arizona
for periods from January 1, 1986, and on December 8, 1994 the Arizona Department
of Revenue withdrew its assessments against the Company for 1986 and subsequent
years. Management believes that the final resolution of the above matter will
not result in a material adverse impact on the results of operations or
financial position of the Company.
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.
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(BALANCES IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash & cash equivalents....................... $ 10,475 $ 10,475 $ 13,002 $ 13,002
Non-trade receivables......................... 10,584 10,584 13,516 13,516
Realty debt................................... 10,135 10,135 25,139 20,784
Other debt.................................... 231,470 238,881 223,996 191,690
</TABLE>
The following notes summarize the major methods and assumptions used by the
Company in estimating the fair values of financial instruments.
F-25
<PAGE> 76
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
NON-TRADE RECEIVABLES
Interest rates on non-trade receivables, including the current portion, are
generally at current market rates. Accordingly the carrying value and fair value
of the receivables are equal after considering allowances for the carrying value
of certain notes.
DEBT
The fair value of the Company's realty and other debt, including the
current portion, at December 31, 1995 and 1994 is based on quoted market prices
or, if market prices are not available, the fair value is estimated using
discounted cash flow analysis based on estimated rates for similar instruments.
The Company has the right to receive royalty payments under a license
agreement executed in April, 1989 in connection with the sale of its airbag
operations to TRW. Under the agreement, the Company is entitled to receive
royalties for the twelve year period commencing May 1, 1989 and ending April 30,
2001. The rates at which these royalties are to be paid are; $1.16 for each
airbag unit manufactured and sold anywhere in the world by TRW and its
subsidiaries (this amount increases by $.01 per unit on May 1 of each year of
the royalty term); 75% of the per-unit amount specified above for each inflator
manufactured and sold anywhere in the world by TRW and subsidiaries; and $.55
for each airbag unit supplied by companies other than TRW for use in a vehicle
manufactured or sold in North America.
The fair value of the royalty stream is dependent upon many factors,
including automobile production, the number of produced vehicles with airbag
systems and the market share of TRW. Royalties recognized in the year ending
December 31, 1995 were $23,977,000. Also see Commitments and Contingencies note.
RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs were $4,227,000,
$4,304,000 and $3,122,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. For the same periods, customer-sponsored research and development
expenditures were $10,093,000, $8,231,000 and $11,620,000, respectively.
EXTRAORDINARY GAINS (LOSS)
During 1995 the Company realized a net gain of $14,409,000 from the
retirement of realty debt. The gain represents the difference between the value
of the debt recorded on the books of the Company and the consideration given and
costs incurred to settle the obligation. Due to the Company's net operating tax
loss position, there is no tax provision in connection with the gain.
In 1993, as a result of the termination of the interest swap agreement and
the payoff of the underlying debt, the Company recognized an extraordinary loss
of $1,670,000. Due to the consolidated tax position of the Company there was no
tax benefit recognized in connection with this loss. The Company does not
presently have, nor has it had, any derivative type instruments since the
aforementioned interest swap agreement terminated in 1993. Also in 1993, an
extraordinary gain of $1,166,000 was recognized in connection with the transfer
of real estate assets to creditors to settle debt associated with such assets.
The gain represents the excess of the carrying value of the debt over the fair
value of the properties transferred to the creditor. Included in losses from
operations is a corresponding charge representing the book value in excess of
the fair value of the properties transferred.
F-26
<PAGE> 77
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS AND DISPOSITIONS
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 Company sold the net assets of its precision potentiometer business in
July 1993, for a cash purchase price of $2,756,000, which approximated the book
value of the net assets sold.
The excess of cost over tangible and identifiable intangible assets
acquired, net of amortization at December 31, 1995, 1994, and 1993 was
$43,392,000, $45,716,000, and $43,696,000, 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
1995, 1994 and 1993 total billings for the firm were $249,000, $610,000 and
$715,000, respectively, and were for foreign and domestic services relating to
litigation and general corporate matters. In 1995, the Company also paid
$120,000 in consulting fees to one of the Company's directors. Fees were paid to
a second law firm in 1993 of $329,000. A 1993 addition to the Company's board of
directors was a partner in such firm until he retired in June 1993.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1994 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" effective for the Company
at December 31, 1994. The Company does not presently have nor has it had any
derivative type instruments since mid-1993 when a single interest rate swap
agreement was terminated as described in the notes to the financial statements.
In late March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for fiscal years beginning after December 15, 1995. The
application of this Statement will require the Company to carry real estate
projects that are substantially complete and ready for their intended use at the
lower of cost or fair value, less cost to sell. If the sum of the expected
future net cash flow (undiscounted and without interest charges) is less than
the carrying amount of projects that are not substantially complete and ready
for their intended use, an impairment loss would be recognized. The Company,
consistent with existing generally accepted accounting principles, currently
states the majority of its land and land under development at the lower of cost
or net realizable value. The effect of implementing this new accounting
pronouncement has not yet been quantified.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," which is effective for transactions entered into in fiscal years
that begin after December 15, 1995. The Company has employee incentive
arrangements wherein employees receive shares of stock. When this pronouncement
becomes effective, the Company will be 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
F-27
<PAGE> 78
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option. Certain pro-forma disclosures are required when a Company uses the
"intrinsic value" based method instead of the "fair value" based method.
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 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 participates in the rapidly
expanding market for automotive airbags through its royalty agreement with TRW,
which provides the Company with a quarterly royalty payment through April 30,
2001 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
Company's Industrial Products segment manufactures and distributes stainless
steel products, high-voltage ceramic insulators used in the power transmission
and distribution systems, and specialized welding equipment and systems. The
Company's Specialty Products segment manufactures and sells aerosol
insecticides, air fresheners and sanitizers, and custom designed metal buttons.
The Company is also engaged in the orderly sale of the assets of its real estate
operations.
GOVERNMENT PRODUCTS AND SERVICES
The Company's Government Products and Services segment provides a wide
range of products and services for government programs. The vast majority of the
Company's products are smaller components of larger units and systems and are
generally designed to enhance safety or improve performance. The Company
manufactures proprietary propellant products which, when ignited, produce a
specified thrust or volume of gas within a desired time period. Propellant
products manufactured include ballistic devices for aircraft ejection systems,
rocket motors, extended range munitions components and dispersion systems.
The Company's propellant devices are currently used on ejection seats on
high performance domestic and foreign military aircraft. Rocket motors
manufactured by the Company include a complete line of rocket boosters and
propulsion systems used for reconnaissance, surveillance, and target
acquisition. The Company's extended range munitions components utilize
propellant technologies to significantly extend the range of existing U.S.
artillery. Other electronic products include sub-miniature elapsed time
indicators, events counters, fault annunciators, and lighting products used in
aerospace and military applications to monitor equipment performance. Naval
architecture and marine engineering services provided by the Company include
detail design and engineering services for new military and commercial
construction as well as a significant amount of maintenance and retrofit work
for existing ships.
The Company's Government Products and Services segment also manufactures
specialized electronic display and monitoring devices and high performance cable
connection assemblies.
Direct sales to the U.S. Government and its agencies, primarily from the
Government Products and Services segment accounted for approximately 17%, 23%
and 24% of the Company's sales for the years ended December 31, 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994 the amount billed but not paid
by customers under retainage provisions in long-term contracts was $1,212,000
and $1,075,000, respectively. The $1,212,000 receivable under retainage
provisions is expected to be collected in 1996 through 2001 in the amounts of
$391,000, $38,000, $119,000, $637,000, $0 and $27,000, respectively. Amounts in
process but unbilled at December 31, 1995 and 1994 were $5,976,000 and
$6,257,000, respectively.
F-28
<PAGE> 79
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AIRBAG ROYALTIES
The Company participates in the rapidly expanding market for automotive
airbags through its royalty agreement with TRW. The Company entered into the
Airbag Royalty Agreement as part of the 1989 sale of its automotive airbag
manufacturing business. The terms of the Airbag Royalty Agreement require TRW to
make quarterly royalty payments to the Company through April 30, 2001 for any
airbag units manufactured and sold worldwide by TRW as well as for any other
airbags installed in vehicles manufactured or sold in North America. (See
Commitments and Contingencies note.)
INDUSTRIAL PRODUCTS
The Company's Industrial Products segment operates in three product areas:
stainless steel, high-voltage ceramic insulators and automated welding
equipment. Demand for these products is directly related to the level of general
economic activity.
Through its stainless steel operation, 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. The
Industrial Products segment also manufactures and distributes high-voltage
ceramic insulators for electric utilities, municipalities and other governmental
units, as well as for electrical contractors and original equipment
manufacturers. Products include a wide array of transformer bushings and
accessories, special and standard porcelain for high and low-voltage
applications, apparatus bushing assemblies, and transmission and distribution
class insulators which are manufactured for both domestic and international
markets. In addition, the Company manufactures specialized advanced-technology
welding systems, power supply systems and humidistats for the utility, pipeline
and original equipment manufacturer markets. Welding equipment manufactured by
the Company includes systems that are specially designed to operate in hostile
environments such as nuclear radiation.
SPECIALTY PRODUCTS
The Company's Specialty Products segment is focused on two distinct
markets: aerosol insecticides, air fresheners and sanitizers servicing the
industrial maintenance supply, pest control and agricultural markets, and custom
designed metal buttons for the military and commercial uniform and upscale
fashion markets. The majority of the Company's aerosol insecticides are
proprietary formulations of natural active ingredients.
REALTY
In 1992, management adopted a plan to dispose of the Company's real estate
operations, reflecting a strategic decision to exit this business. The Company's
real estate portfolio consists primarily of undeveloped commercial, industrial
and residential land located in the greater Phoenix, Arizona; San Diego,
California and San Antonio, Texas areas.
OTHER MATTERS
The Company's U.S. operations had export sales of $20,354,000, $15,932,000
and $26,672,000 for the years ended December 31, 1995, 1994 and 1993,
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, 1995 and
total assets at December 31, 1995 of $15,600,000 and $9,600,000, respectively.
F-29
<PAGE> 80
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign exchange losses included in earnings for the years ended December
31, 1995, 1994 and 1993 were not material. The foreign currency translation
adjustment included in stockholders' equity decreased from $(723,000) at
December 31, 1994 to $(530,000)at December 31, 1995.
Sales between segments are not significant and have been eliminated.
Operating income is total revenue less operating expenses and excludes general
Corporate expenses, non-segment interest income and interest expense. Interest
income associated with segment assets is included in segment operations income.
Corporate assets consist principally of cash and cash equivalents, notes
receivable, income taxes receivable and a building.
The Company's backlog was approximately $503,300,000 as of December 31,
1995 and $130,900,000 as of December 31, 1994. Approximately 27.9% of the
backlog as of December 31, 1995 is expected to result in revenue during 1996,
with the remaining 72.1% expected to result in revenue during subsequent
periods. The backlog amounts as presented herein are composed of funded and
unfunded components. The government funded components and firm industrial
contracts at December 31, 1995 and 1994 totaled $133,500,000 and $130,900,000,
respectively.
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.
F-30
<PAGE> 81
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tables which follow show assets, depreciation and amortization and
capital expenditures by segment:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS BY SEGMENT
Government Products and Services........................... $100,226 $ 98,424 $114,347
Airbag Royalties........................................... 5,434 4,700 3,704
Industrial Products........................................ 98,263 86,583 86,879
Specialty Products......................................... 35,170 34,698 27,951
Realty..................................................... 106,540 114,642 121,355
-------- -------- --------
345,633 339,047 354,236
Corporate.................................................. 26,966 30,856 28,202
-------- -------- --------
$372,599 $369,903 $382,438
======== ======== ========
DEPRECIATION AND AMORTIZATION BY SEGMENT
Government Products and Services........................... $ 3,143 $ 3,306 $ 4,163
Airbag Royalties........................................... -- -- --
Industrial Products........................................ 3,783 4,750 4,427
Specialty Products......................................... 1,198 1,161 1,138
Realty..................................................... 15 15 15
-------- -------- --------
8,139 9,232 9,743
Corporate.................................................. 304 325 342
-------- -------- --------
$ 8,443 $ 9,557 $ 10,085
======== ======== ========
CAPITAL EXPENDITURES BY SEGMENT
Government Products and Services........................... $ 2,532 $ 1,820 $ 1,648
Airbag Royalties........................................... -- -- --
Industrial Products........................................ 4,867 1,420 2,842
Specialty Products......................................... 1,423 561 754
Realty..................................................... 1 -- 1
-------- -------- --------
8,823 3,801 5,245
Corporate.................................................. 108 131 102
-------- -------- --------
$ 8,931 $ 3,932 $ 5,347
======== ======== ========
</TABLE>
F-31
<PAGE> 82
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SEGMENT OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE BY SEGMENT:
Government Products and Services............ $139,600 $141,074 $170,323 $183,162 $168,961
Airbag Royalties............................ 23,977 17,292 9,606 5,566 3,161
Industrial Products......................... 183,649 129,080 107,402 95,097 117,682
Specialty Products.......................... 35,834 33,157 30,797 35,738 41,061
Realty...................................... 2,226 7,157 6,072 1,155 6,028
--------- --------- --------- --------- ---------
$385,286 $327,760 $324,200 $320,718 $336,893
========= ========= ========= ========= =========
OPERATING INCOME BY SEGMENT:
Government Products and Services............ $ 10,225 $ 18,194 $ 24,354 $ 26,101 $ 23,940
Airbag Royalties............................ 23,977 17,292 9,606 5,566 3,161
Industrial Products......................... 22,632 7,464 2,438 (45) 839
Specialty Products.......................... 5,119 4,854 5,001 5,055 5,345
Realty...................................... (11,436) (3,677) (4,416) (16,449) (26,946)
--------- --------- --------- --------- ---------
50,517 44,127 36,983 20,228 6,339
Corporate expenses.......................... (15,468) (17,163) (14,846) (9,672) (16,127)
Non-segment interest income................. 590 326 381 1,923 2,248
Interest expense............................ (28,666) (28,089) (25,744) (31,630) (35,519)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes and
extraordinary gains (loss)................ $ 6,973 $ (799) $ (3,226) $(19,151) $(43,059)
========= ========= ========= ========= =========
</TABLE>
Operating income in 1995 includes a pretax provision for a reserve on real
estate assets of $7,000,000. Operating income in 1992 includes a charge to
earnings of $11,908,000 to adjust the carrying value of foreclosed assets of the
Realty segment. Operating income in 1991 includes a pretax provision for a
reserve on real estate assets of $21,000,000 and an increase to the
restructuring reserve of $5,000,000.
F-32
<PAGE> 83
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue..................................... $385,286 $327,760 $324,200 $320,718 $336,893
Cost of sales and services.................. 275,721 234,729 240,827 234,956 255,971
Selling, general and administrative
expenses.................................. 63,297 62,763 57,877 58,669 60,780
Restructuring costs......................... -- -- -- -- 5,000
Provision for reserve on realty assets...... 7,000 -- -- -- 21,000
Adjustment in foreclosed realty assets...... -- -- -- 11,908 --
--------- --------- --------- --------- ---------
346,018 297,492 298,704 305,533 342,751
--------- --------- --------- --------- ---------
Earnings from operations.................... 39,268 30,268 25,496 15,185 (5,858)
Other income (expense), net................. (3,629) (2,978) (2,978) (2,706) (1,682)
--------- --------- --------- --------- ---------
35,639 27,290 22,518 12,479 (7,540)
--------- --------- --------- --------- ---------
Interest expense............................ 28,666 28,089 25,744 31,630 35,788
Interest capitalized........................ -- -- -- -- (269)
--------- --------- --------- --------- ---------
28,666 28,089 25,744 31,630 35,519
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations
before income taxes and extraordinary
gains (loss).............................. 6,973 (799) (3,226) (19,151) (43,059)
Income tax provision (benefit).............. 3,418 (4,305) 2,768 (1,947) 925
--------- --------- --------- --------- ---------
Earnings (loss) from continuing
operations................................ 3,555 3,506 (5,994) (17,204) (43,984)
Earnings from discontinued operations, net
of income taxes........................... -- -- -- -- 825
Extraordinary gains (loss), net of income
tax....................................... 14,409 -- (504) 2,637 --
--------- --------- --------- --------- ---------
Net earnings (loss)......................... $ 17,964 $ 3,506 $ (6,498) $(14,567) $(43,159)
========= ========= ========= ========= =========
Earnings (loss) applicable to common shares
(after deduction of preferred stock
dividends)................................ $ 15,801 $ 1,339 $ (8,665) $(16,735) $(45,331)
========= ========= ========= ========= =========
Earnings (loss) per share of common stock
and common stock equivalents:
Continuing operations..................... $ .25 $ .13 $ (.85) $ (2.11) $ (5.24)
Discontinued operations................... -- -- -- -- .09
Extraordinary gains (loss)................ 1.03 -- (.05) .29 --
--------- --------- --------- --------- ---------
Net earnings (loss)............... $ 1.28 $ .13 $ (.90) $ (1.82) $ (5.15)
========= ========= ========= ========= =========
Weighted average shares outstanding......... 14,001 10,412 9,676 9,189 8,795
========= ========= ========= ========= =========
</TABLE>
F-33
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF TALLEY INDUSTRIES, 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 Industries, Inc. and its subsidiaries at December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, 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 19, 1996
F-34
<PAGE> 85
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
------- -------- --------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue.......................................... $88,709 $100,306 $90,848 $105,423
Gross profit on sales and services............... 18,915 22,913 18,064 24,504
Earnings (loss) before extraordinary gain........ (3,887) 2,787 2,279 2,376
Extraordinary gain............................... 7,261 542 6,244 362
-------- --------- -------- ---------
Net earnings..................................... 3,374 3,329 8,523 2,738
======== ========= ======== =========
Earnings (loss) per share:
Before extraordinary gain...................... (.28) .20 .16 .17
Extraordinary gain............................. .52 .04 .45 .02
-------- --------- -------- ---------
Net earnings........................... .24 .24 .61 .19
======== ========= ======== =========
YEAR ENDED DECEMBER 31, 1994
Revenue.......................................... $78,317 $ 79,494 $81,349 $ 88,600
Gross profit on sales and services............... 16,327 16,758 19,408 21,968
-------- --------- -------- ---------
Net earnings (loss).................... (506) 722 963 2,327
======== ========= ======== =========
Earnings (loss) per share.............. (.10) .02 .04 .17
======== ========= ======== =========
YEAR ENDED DECEMBER 31, 1993
Revenue.......................................... $77,117 $ 85,675 $84,400 $ 77,008
Gross profit on sales and services............... 17,715 18,395 19,978 16,417
Loss before extraordinary loss................... (1,071) (524) (1,685) (2,714)
Extraordinary loss............................... -- -- -- (504)
-------- --------- -------- ---------
Net loss............................... (1,071) (524) (1,685) (3,218)
======== ========= ======== =========
Earnings (loss) per share:
Before extraordinary loss...................... (.17) (.11) (.23) (.34)
Extraordinary loss............................. -- -- -- (.05)
-------- --------- -------- ---------
Net loss............................... (.17) (.11) (.23) (.39)
======== ========= ======== =========
</TABLE>
Included in the first quarter of 1995, is a $7,000,000 provision for
reserve on realty assets resulting from the decision to sell a property over the
short term in bulk rather than try and pursue parcel sales over the next several
years. Also, in the first quarter, the Company recognized a net extraordinary
gain of $7,261,000 and an additional extraordinary gain of $542,000, $6,244,000
and $362,000 during the second, third, and fourth quarters, respectively. These
extraordinary gains resulted from the settlement of certain realty debt for less
than book value.
Included in the first quarter of 1994 is a state income tax benefit of
$5,600,000, the result of the passage of favorable state tax legislation.
Additionally, a provision in 1994 for legal expenses of $4,500,000 in the first
quarter and $1,500,000 in the fourth quarter was made in connection with
litigation with TRW.
In the fourth quarter of 1993, the Company recognized an extraordinary loss
of $1,670,000 due to the termination of the interest swap agreement and the
payoff of the underlying debt. An extraordinary gain of $1,166,000 was also
recognized in the fourth quarter in connection with the transfer of real estate
assets to creditors to settle debt associated with such assets.
F-35
<PAGE> 86
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Capital expenditures....................... $ 8,931 $ 3,932 $ 5,347 $ 4,592 $ 6,575
Depreciation and amortization.............. 8,443 9,557 10,085 10,598 11,235
Current assets............................. 156,615 143,023 148,145 135,752 209,051
Current liabilities........................ 61,213 88,794 84,367 75,864 387,085 *
Working capital............................ 95,402 54,229 63,778 59,888 (178,035)*
Total assets............................... 372,599 369,903 382,438 363,822 466,891
Total debt................................. 241,605 249,135 262,086 253,824 322,247
Long-term debt............................. 227,736 220,447 231,669 217,304 --
Long-term realty debt...................... 7,980 5,564 11,446 12,452 --
Long-term debt, subject to acceleration.... -- -- -- -- 248,642 *
Stockholders' equity....................... 58,334 40,166 36,542 40,781 53,697
Current ratio.............................. 2.6 1.6 1.8 1.8 .5
Debt to equity ratio....................... 4.1 6.2 7.2 6.2 6.0
======== ======== ======== ======== =========
</TABLE>
For the dividends per common share see Stock Market Data on page F-37.
* Long-term debt, subject to acceleration is included in current liabilities
SUPPLEMENTAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Taxes, other than income:
Payroll.................................. $ 7,231 $ 7,181 $ 7,060 $ 7,209 $ 7,350
Property................................. 1,991 1,660 1,557 1,721 1,931
Other.................................... 412 338 328 382 627
-------- -------- -------- -------- ---------
9,634 9,179 8,945 9,312 9,908
Maintenance and repairs.................... 6,220 4,557 4,669 4,626 4,628
Rent....................................... 5,211 5,508 5,962 7,334 7,944
Advertising................................ 1,053 786 648 720 958
Research and development................... 4,227 4,304 3,122 3,904 4,223
======== ======== ======== ======== =========
</TABLE>
F-36
<PAGE> 87
STOCK MARKET DATA
SECURITIES
Two of the Company's securities are listed on the New York Stock Exchange:
Common stock (TAL) and Series B $1.00 Cumulative Preferred stock (TALB). Series
A Preferred stock is traded occasionally in the over-the-counter market. Series
D Convertible Preferred stock is owned by one individual and has never been
traded. As of February 1, 1996, there were 2,554 holders of record of Talley
Industries, Inc. Common stock.
The high and low sales prices of the Common and Series B Preferred stock on
the New York Stock Exchange, by quarter, for the years ended December 31, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
COMMON STOCK (TAL) SERIES B (TALB)
-------------------------------------- ----------------------------------------
1995 1994 1995 1994
QUARTER ---------------- --------------- --------------- -----------------
ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------- ---- --- ---- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March................. $10 1/4 $7 3/8 $7 3/8 $5 3/8 $15 1/2 $12 1/2 $12 3/4 $ 10
June.................. 11 7 1/2 7 1/4 5 5/8 17 1/8 13 1/2 12 1/2 10
September............. 9 3/4 7 5/8 9 1/8 5 7/8 16 1/2 14 1/2 15 1/2 10 1/2
December.............. 9 1/4 7 5/8 9 1/2 7 1/4 16 1/2 12 7/8 16 1/4 12 1/2
==== === === === ==== ==== ==== ====
</TABLE>
DIVIDENDS
No dividends on Common or Preferred stocks were declared or paid since the
first quarter of 1991. Quarterly dividend payments on Series A Preferred and
Series B Preferred stock amounted to 27.5 cents and 25 cents per share,
respectively, during the first quarter of 1991 and before. Dividends on
Preferred D stock were paid at a quarterly rate of $1.125 per share since first
issued in the first quarter of 1988 through the first quarter of 1991. Dividends
were paid on Common stock during 1990 at a rate of 12.5 cents per share and at a
rate of 5 cents per share for the first quarter of 1991.
REGISTRAR
Chemical Mellon Shareholder Services, L.L.C., Washington Bridge Station,
New York, New York 10033.
TRANSFER AGENT
Common stock, Series A Preferred stock and Series B Preferred stock.
Chemical Mellon Shareholder Services, L.L.C., Post Office Box 712399, Los
Angeles, California 90071.
10.75% Senior Notes and 12.25% Senior Discount Debentures. Bank One Ohio
Trust Company, 100 E. Broad Street, Columbus, Ohio 43271-0181.
FORM 10-K
A copy of Talley Industries' Annual Report on Form 10-K to the Securities
and Exchange Commission may be obtained, without charge, by writing to the
Treasurer at the Company's Executive Offices.
ANNUAL MEETING
The annual meeting of shareholders of Talley Industries, Inc. will be held
on April 9, 1996, 11:00 a.m., Mountain Standard Time at the Ritz-Carlton Hotel,
2401 E. Camelback Road, Phoenix, Arizona 85016.
F-37
<PAGE> 88
DIRECTORS AND CORPORATE MANAGEMENT
DIRECTORS
<TABLE>
<S> <C> <C>
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
John D. MacNaughton, Jr. -- President, The MacNaughton Co.
Joseph A. Orlando -- Independent financial consultant **
Alex Stamatakis -- Chairman of the Board, Stamatakis Industries, Inc. * **
John W. Stodder -- Vice Chairman, Jostens, Inc. *
Donald J. Ulrich -- Owner and Vice Chairman, Ventura Coastal Corporation
David Victor -- Member, Meyer, Hendricks, Victor, Ruffner & Bivens, P.L.C. **
</TABLE>
- ---------------
* Executive Committee Members
** Audit Committee
CORPORATE MANAGEMENT
<TABLE>
<S> <C> <C>
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
</TABLE>
F-38
<PAGE> 89
SCHEDULE I
PAGE 1 OF 4
TALLEY INDUSTRIES, INC.
(REGISTRANT ONLY)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................ $ 6,883 $ 10,210
Prepaid expenses..................................................... 296 297
-------- --------
Total current assets......................................... 7,179 10,507
Investment in and advances to affiliates............................... 141,216 109,345
Deferred charges and other assets...................................... 2,607 2,903
-------- --------
Total assets................................................. $151,002 $122,755
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accrued expenses..................................................... $ 117 $ 109
-------- --------
Total current liabilities......................................... 117 109
Long-term debt....................................................... 90,878 80,691
Other liabilities.................................................... 1,673 1,789
Stockholders' equity:
Preferred stock, $1 par value, authorized 5,000,000 shares
-- Series A.......................................................... 67 71
-- Series B.......................................................... 1,548 1,548
-- Series D.......................................................... 120 120
Common stock, $1 par value, authorized 20,000,000 shares............. 10,053 10,047
Capital in excess of par value....................................... 86,035 86,026
Foreign currency translation adjustments............................. (530) (723)
Retained earnings.................................................... (38,959) (56,923)
-------- --------
Total stockholders' equity................................... 58,334 40,166
-------- --------
Total liabilities and stockholders' equity................... $151,002 $122,755
======== ========
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-39
<PAGE> 90
SCHEDULE I
PAGE 2 OF 4
TALLEY INDUSTRIES, INC.
(REGISTRANT ONLY)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Selling, general and administrative expenses..................... $ -- $ -- $ 1,695
------- ------- -------
-- -- 1,695
Other income..................................................... 417 264 69
------- ------- -------
417 264 1,626
------- ------- -------
Interest expense................................................. 10,643 9,486 7,367
------- ------- -------
(10,226) (9,222) (8,993)
Income tax benefit............................................... (9,128) (6,613) (3,624)
------- ------- -------
Loss before earnings of subsidiaries and extraordinary gains..... (1,098) (2,609) (5,369)
Extraordinary gain (loss), net of taxes.......................... 14,409 -- (568)
Earnings (loss) from subsidiaries................................ 4,653 6,115 (561)
------- ------- -------
Net earnings (loss).............................................. $ 17,964 $ 3,506 $(6,498)
======= ======= =======
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-40
<PAGE> 91
SCHEDULE I
PAGE 3 OF 4
TALLEY INDUSTRIES, INC.
(REGISTRANT ONLY)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities........................ $ 28,533 $12,837 $ (6,919)
Cash flows from investing activities:
Increase in investment in subsidiaries.................... (23,083) (8,372) (168)
------ ------ ------
Cash from investing activities......................... (23,083) (8,372) (168)
------ ------ ------
Cash flows from financing activities:
Stock redemption and options exercised.................... 11 -- --
Proceeds from long-term debt.............................. -- -- 70,000
Reduction of long-term debt............................... -- -- (56,021)
Decrease in due from affiliates, net...................... (8,788) (5) (1,142)
------ ------ ------
Cash from financing activities......................... (8,777) (5) 12,837
------ ------ ------
Increase (decrease) in cash and cash equivalents............ (3,327) 4,460 5,750
Balance at beginning of year.............................. 10,210 5,750 --
------ ------ ------
Balance at end of year.................................... $ 6,883 $10,210 $ 5,750
====== ====== ======
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-41
<PAGE> 92
SCHEDULE I
PAGE 4 OF 4
TALLEY INDUSTRIES, 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. ("Talley
Manufacturing"), a wholly-owned subsidiary of Talley Industries, Inc.
("Talley"), was formed. The formation of Talley Manufacturing was in
anticipation of the offering of Senior Notes by Talley Manufacturing 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 Talley
Manufacturing, which also assumed a substantial portion of Talley's indebtedness
and liabilities. At the same time, Talley Manufacturing 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 Talley and its subsidiaries, (other
than real estate related debt) including indebtedness assumed by Talley
Manufacturing.
Upon completion of the reorganization of entities under the common control
of Talley described above and the new financing, Talley Manufacturing owns all
of the capital stock of the operating subsidiaries of Talley (other than the
real estate operations held for orderly sale). The financial statements of
Talley have been prepared for all periods presented, giving effect to the
reorganization described above.
2. LONG-TERM DEBT
Long-term debt consists of 12 1/4% of Senior Discount Debentures, due 2005
with a face value of $126,555,000 and a balance at December 31, 1995 and 1994 of
$90,878,000 and $80,691,000, respectively. Deferred debt issue costs at December
31, 1995, 1994 and 1993 were $2,903,000, $3,199,000 and $3,490,000,
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 1995, 1994 and 1993 was $296,000, $296,000 and $62,000, respectively.
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 parent company received dividends from, or made contributions to
consolidated subsidiaries, unconsolidated subsidiaries and 50 percent or less
owned persons accounted for by the equity method during the years ended December
31, 1995, 1994 and 1993 of $1,300,000, $-0- and $2,752,000, respectively.
F-42
<PAGE> 93
SCHEDULE II
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995
(THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------ ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful
accounts -- accounts receivable...... $ 994 $ 406 $ -- $ (125) $ 1,275
Reserves for notes receivable........... 2,358 -- -- (1,098) 1,260
Year Ended December 31, 1994:
Allowance for doubtful
accounts -- accounts receivable...... $1,091 $ 372 $ -- $ (469) $ 994
Reserves for notes receivable........... 2,274 84 -- -- 2,358
Year Ended December 31, 1993:
Allowance for doubtful
accounts -- accounts receivable...... $ 867 $ 987 $ -- $ 763(a) $ 1,091
Reserves for notes receivable........... 1,670 1,485 -- 881 2,274
</TABLE>
- ---------------
Notes:
(a) Uncollectible accounts charged against reserves, net of bad debt recoveries.
F-43
<PAGE> 94
SCHEDULE III
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COST CAPITALIZED GROSS AMOUNT AT WHICH
TO COMPANY SUBSEQUENT TO CARRIED AT CLOSE OF PERIOD
----------------- ACQUISITION -----------------------------
BLDGS ------------------ BLDGS
AND LAND CARRYING AND (3)
DESCRIPTION ENCUMBRANCES LAND IMPROVE IMPROVE COSTS LAND IMPROVE RESERVE
- ----------------------------------- ------------ ------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Corporate Park North....... $ -0- $ 6,097 $ -0- $ 85 $ 206 $ 6,388 $ -0- $ 0
(Developed Business Park -- AZ)
Elliot & McQueen................... 1,796 15,181 0 2,006 2,528 19,715 0 (9,441)
(Industrial Property -- AZ)
West Wing Ranch.................... 586 11,030 0 156 3,705 14,891 0 (2,388)
(Residential Property -- AZ)
McGinty Ranch...................... 700 12,824 0 250 3,638 16,712 0 (11,348)
(Resort & Residential -- CA)
Las Montanas....................... 1,148 11,618 0 28,554 8,079 48,251 0 0
(Resort & Residential -- CA)
San Antonio........................ 0 13,117 0 6 649 13,772 0 (8,194)
(Industrial, Comm. & Res. -- TX)
Other (Each less than 5%).......... 3,956 27,164 4,715 780 4,775 37,434 0 (20,828)
(Comm.,Indus. & Res -- AZ)
Collateralized credit lines........ 1,949 0 0 0 0 0 0 0
(Various properties)
------- ------- ------ ------- ------- -------- ---- --------
$ 10,135 $97,031 $4,715 $31,837 $23,580 $157,163 $ -0- $(52,199)
======= ======= ====== ======= ======= ======== ==== ========
(5)
(1)(2)(4) ACCUM DATE OF DATE DEP.
DESCRIPTION TOTAL DEPREC. CONSTR. ACQUIRED LIFE
- ----------------------------------- --------- ------- ------- --------- -----
Arizona Corporate Park North....... $ 6,388 N/A N/A 12/89 N/A
(Developed Business Park -- AZ)
Elliot & McQueen................... 10,274 N/A N/A 11/85 N/A
(Industrial Property -- AZ)
West Wing Ranch.................... 12,503 N/A N/A 12/87 N/A
(Residential Property -- AZ)
McGinty Ranch...................... 5,364 N/A N/A 3/86 N/A
(Resort & Residential -- CA)
Las Montanas....................... 48,251 N/A N/A Various N/A
(Resort & Residential -- CA)
San Antonio........................ 5,578 N/A N/A 5/90 N/A
(Industrial, Comm. & Res. -- TX)
Other (Each less than 5%).......... 16,606 1,934 N/A 9/81-7/93 15-40
(Comm.,Indus. & Res -- AZ)
Collateralized credit lines........ 0
(Various properties)
--------
$104,964
========
</TABLE>
- ---------------
NOTES:
(1) CARRYING COSTS -- RECONCILIATION OF BEGINNING AND ENDING BALANCE:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
BALANCE JANUARY 1........................................................................ $110,899 $117,869 $108,733
ADDITIONS
Acquisition through foreclosure...................................................... -- -- 250
Full consolidation of previously unconsolidated joint ventures....................... 4,238 -- 19,128
DEDUCTIONS
Cost of Real Estate sold/write offs and other charges................................ (3,173) (5,973) (5,272)
Property given in exchange........................................................... -- (997) (4,970)
Increase in reserve.................................................................. (7,000) -- --
-------- -------- --------
BALANCE DECEMBER 31...................................................................... $104,964 $110,899 $117,869
</TABLE>
(2) The total aggregate cost for income tax purposes is $136,000.
(3) Writedown to net realizable or fair value.
(4) There were no intercompany profits recognized in connection with above
listed properties.
(5) The change in accumulated depreciation of $200 during 1995 is due to
depreciation expense for the year.
F-44
<PAGE> 95
SCHEDULE IV
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIODIC FACE AMOUNT
DESCRIPTION INTEREST RATE DATE PAYMENT TERMS PRIOR LIENS OF MORTGAGES
- -------------------------------------------- ------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Georgia/Canada
Commercial properties with
buildings -- 2nd Mortgage............... 9.5% Mar 1995 (b) -- $3,829
Arizona
Unimproved commercial properties -- 1st Dec 1995-
Mortgage................................ 5.0%-11% Oct 2008 (b) -- 1,100
------
$4,929
======
PRINCIPAL AMOUNT OF
CARRYING(A)(C) LOANS SUBJECT TO
AMOUNT OF DELINQUENT PRINCIPAL
DESCRIPTION MORTGAGES OR INTEREST
- -------------------------------------------- -------------- -----------------------
Georgia/Canada
Commercial properties with
buildings -- 2nd Mortgage............... $2,829 This amount represents
a receivable which is
in default.
Arizona
Unimproved commercial properties -- 1st
Mortgage................................ 852
------
$3,681
======
</TABLE>
- ---------------
Notes:
(a) Carrying amount of mortgages reconciliation of beginning and ending
balances:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance January 1,......................................................... $ 6,028 $ 5,839 $ 8,931
Additions
New mortgage loans -- principal........................................ -- 501 318
Deductions
Collections of principal............................................... (1,020) (237) (1,888)
Net change in accrued interest......................................... -- (48) (12)
Foreclosures (d)....................................................... -- -- (510)
Exchange of notes for other assets or in settlement of debt............ (1,327) -- --
Change in reserves..................................................... -- (27) (1,000)
------- ------- -------
Balance December 31,....................................................... $ 3,681 $ 6,028 $ 5,839
======= ======= =======
</TABLE>
(b) Payment terms vary by note, but generally require monthly, quarterly or
annual interest and principal payments.
(c) The income tax basis of these notes at December 31, 1995 is $4,938. All
loans are of the conventional type.
(d) Actual or in-substance foreclosures or deeds received in lieu of
foreclosure.
F-45
<PAGE> 96
APPENDIX B
THE POWERS, PREFERENCES, RIGHTS AND LIMITATIONS
OF THE SERIES OF THE PREFERRED STOCK
OF
TALLEY INDUSTRIES, INC.
DESIGNATED
SERIES A CONVERTIBLE PREFERRED STOCK
The series of 320,000 shares of the Preferred Stock, par value $1 per
share, of the Corporation, hereby designated "Series A Convertible Preferred
Stock," to be issued from time to time as the Board of Directors may determine,
shall have the following powers, preferences, rights and limitations in addition
to those applicable generally to the Preferred Stock of the Corporation:
(a) The holders of shares of Series A Convertible Preferred Stock
shall be entitled to receive, when and as declared by the Board of
Directors, out of funds and assets of the Corporation legally available
therefor, an annual cash dividend at the rate of $1.10 per share, payable
quarterly on the dividend payment dates, hereby fixed as the fifteenth day
of March, June, September and December, to stockholders of record on the
respective record dates, not exceeding 50 days preceding such quarterly
dividend payment dates, fixed for that purpose by the Board of Directors.
Dividends on each share of the Series A Convertible Preferred Stock shall
accrue and be cumulative from the date of issue and shall be appropriately
pro-rated with respect to the period between such date of issue and the
first dividend payment date. Accumulations of dividends shall not bear
interest.
No dividend shall be paid or declared and set apart for payment on any
shares of Preferred Stock for any quarterly dividend period unless a
dividend for the same quarterly dividend period and all past quarterly
dividend periods, if any, ending within such quarterly period ratable in
proportion to the respective annual dividend rates fixed therefor, shall be
or have been paid or declared and set apart for payment on all shares of
Preferred Stock of all series then outstanding and entitled to receive
dividends for such quarterly dividend period or for any past quarterly
dividend period, if any, ending within such quarterly dividend period.
So long as any shares of Series A Convertible Preferred Stock are
outstanding, the Corporation shall not declare and pay or set apart for
payment any dividends or make any other distribution on the Common Stock
and shall not redeem, retire, purchase or otherwise acquire, or permit any
subsidiary to purchase or otherwise acquire, any shares of Common Stock or
Preferred Stock, unless at the time of making such declaration, payment,
distribution, redemption, retirement, purchase or acquisition dividends on
all outstanding shares of Series A Convertible Preferred Stock for all past
quarterly dividend periods shall have been paid or declared and sufficient
funds set apart for the payment thereof.
(b) The Corporation may, at the option of the Board of Directors,
redeem all or any part of the outstanding Series A Convertible Preferred
Stock at any time after June 30, 1971 at the redemption prices listed
below, plus accrued and unpaid dividends, if any, provided that notice of
redemption is sent by certified mail to the holders of record of the Series
A Convertible Preferred Stock to be redeemed at least 45, but not more than
90 days prior to the date of redemption specified in such notice, addressed
to each such holder at his address as it appears in the records of the
Corporation. On or after the redemption date each holder of shares of
Series A Convertible Preferred Stock to be redeemed shall present and
surrender his certificate or certificates for such shares to the
Corporation at the place designated in such notice and thereupon the
redemption price of such shares shall be paid to or on the order of the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be canceled. In case less
than all the shares represented by any such certificates are redeemed, a
new certificate shall be issued representing the unredeemed shares. From
and after the redemption date (unless default shall be made by the
Corporation in payment of the redemption price)
B-1
<PAGE> 97
all dividends on the shares of Series A Convertible Preferred Stock
designated for redemption in such notice shall cease to accrue, and all
rights of the holders thereof as stockholders of the Corporation, except
the right to receive the redemption price thereof upon the surrender of
certificates representing the same, without interest, shall cease and
terminate and such shares shall not thereafter be transferred (except with
the consent of the Corporation) on the books of the Corporation, and such
shares shall not be deemed to be outstanding for any purpose whatsoever. At
its election the Corporation prior to the redemption date may deposit the
redemption price of the shares of Series A Convertible Preferred Stock so
called for redemption in trust for the holders thereof with a bank or trust
company (having a capital and surplus of not less than $5,000,000) in the
Borough of Manhattan, City and State of New York, or in any other city in
which the Corporation at the time shall maintain a transfer agency with
respect to such stock, in which case such notice to holders of the Series A
Convertible Preferred Stock to be redeemed shall state the date of such
deposit, shall specify the office of such bank or trust company as the
place of payment of the redemption price, and shall call upon such holders
to surrender the certificates representing such shares at such price on or
after the date fixed in such redemption notice (which shall not be later
than the redemption date) against payment of the redemption price. From and
after the making of such deposit, the shares of Series A Convertible
Preferred Stock so designated for redemption shall not be deemed to be
outstanding for any purpose whatsoever, and the rights of the holders of
such shares shall be limited to the right to receive the redemption price
of such shares, without interest, upon surrender of the certificates
representing the same to the Corporation at said office of such bank or
trust company, and the right of conversion (on or before the close of
business on the tenth day prior to the date fixed for redemption) herein
provided. Any funds so deposited which shall not be required for such
redemption because of the exercise of such right of conversion after the
date of such deposit shall be returned to the Corporation. Any interest
accrued on such funds shall be paid to the Corporation from time to time.
Any moneys so deposited which shall remain unclaimed by the holders of such
Series A Convertible Preferred Stock at the end of six years after the
redemption date shall be returned by such bank or trust company to the
Corporation after which the holders of the Series A Convertible Preferred
Stock shall look only to the Corporation for payment of the redemption
price. In the event that less than all the outstanding shares of Series A
Convertible Preferred Stock are to be redeemed at one time, the shares so
to be redeemed shall be determined by lot or pro rata in such manner as the
Board of Directors may determine. The prices at which each share of Series
A Convertible Preferred Stock may be redeemed during the periods set forth
below are as follows:
<TABLE>
<S> <C>
Prior to July 1, 1971: no right to redeem.
If redemption date occurs after June 30, 1971 but before July 1, 1972: $26.0950.
If redemption date occurs after June 30, 1972 but before July 1, 1973: $25.9855.
If redemption date occurs after June 30, 1973 but before July 1, 1974: $25.8760.
If redemption date occurs after June 30, 1974 but before July 1, 1975: $25.7665.
If redemption date occurs after June 30, 1975 but before July 1, 1976: $25.6570.
If redemption date occurs after June 30, 1976 but before July 1, 1977: $25.5475.
If redemption date occurs after June 30, 1977 but before July 1, 1978: $25.4380.
If redemption date occurs after June 30, 1978 but before July 1, 1979: $25.3285.
If redemption date occurs after June 30, 1979 but before July 1, 1980: $25.2190.
If redemption date occurs after June 30, 1980 but before July 1, 1981: $25.1095.
If redemption date occurs after June 30, 1981: $25.0000.
</TABLE>
(c) In the event of any voluntary liquidation, dissolution or winding
up of the Corporation, holders of Series A Convertible Preferred Stock
shall be entitled to be paid out of the assets of the Corporation available
for distribution to its stockholders before any payment shall be made in
respect of any class or series of stock which shall rank subordinate
thereto as to assets the fixed amount of $25.00 for each share of Series A
Convertible Preferred Stock held by them and accrued and unpaid dividends,
if any, thereon. Upon any involuntary dissolution, liquidation or winding
up of the Corporation, the holders of Series A Convertible Preferred Stock
shall be entitled to receive out of the assets of the Corporation available
for distribution to its stockholders before any payment shall be made in
respect of any class or series of stock
B-2
<PAGE> 98
which shall rank subordinate thereto as to assets the fixed amount of
$25.00 for each share of Series A Convertible Preferred Stock held by them
and accrued and unpaid dividends, if any, thereon.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation the assets of the Corporation available for
distribution to its Series A Convertible Preferred Stockholders shall be
insufficient to pay the holders of Series A Convertible Preferred Stock the
full amount to which they are entitled hereunder, the holders of Series A
Convertible Preferred Stock shall share ratably in any distribution of
assets according to the respective amounts which would be payable in
respect of the shares of Series A Convertible Preferred Stock held by them
upon such distribution if all amounts payable on or with respect to Series
A Convertible Preferred Stock were paid in full. If upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
payment shall have been made to the holders of the Series A Convertible
Preferred Stock of the full amount to which they shall respectively be
entitled hereunder, such holders shall not be entitled to any further
participation in the distribution of the remaining assets of the
Corporation available for distribution to its stockholders.
Neither the merger or consolidation of the Corporation into or with
another corporation nor the merger or consolidation of any other
corporation into or with the Corporation, nor the sale, transfer or lease
of all or substantially all the assets of the Corporation, shall be deemed
to be a voluntary or involuntary liquidation, dissolution or winding up of
the Corporation.
(d) Each holder of record of Series A Convertible Preferred Stock
shall have the right to four-tenths (.4) of a vote in person or by proxy
for each share of Series A Convertible Preferred Stock standing in his name
on the books of the Corporation. Each holder of record of Series A
Convertible Preferred Stock shall be entitled to notice of any meeting of
stockholders of the Corporation and to participate in any such meeting in
the manner provided for holders of shares of Common Stock of the
Corporation under any applicable law, provision of the Certificate of
Incorporation or by-law. Except as otherwise provided in this resolution or
required by law, the holders of Series A Convertible Preferred Stock and
the holders of Common Stock shall vote together as one class, together with
the holders of any other series of the Preferred Stock hereafter issued
which shall be accorded such voting rights by the Board of Directors as
permitted in the Corporation's Certificate of Incorporation.
If and when dividends in an aggregate amount equivalent to the total
sum payable as dividends for six or more quarterly periods with respect to
the Series A Convertible Preferred Stock shall be in arrears, the
authorized number of directors constituting the Board of Directors shall be
increased by two. In such event the holders of the Series A Convertible
Preferred Stock and any other series of Preferred Stock, hereafter issued
which shall be accorded such class voting right by the Board of Directors
as permitted in the Corporation's Certificate of Incorporation and which
shall have the right to elect two directors as a result of a prior or
subsequent default in the payment of dividends on such series (such other
series being hereinafter called "Other Series of Preferred Stock") shall
have the exclusive and special right, voting separately as a class without
regard to series, to elect two persons to fill such directorships in which
case the remaining members of the Board shall be elected exclusively by the
holders of all other classes or series of stock entitled to vote for
directors, voting separately as a class. Whenever such right shall have
vested, it shall be exercised initially either at a special meeting of the
Preferred Stockholders so entitled to vote or at the next annual
stockholders' meeting, but thereafter it shall be exercised only at annual
stockholders' meetings. Such right of the Series A Convertible Preferred
Stock shall continue until the dividends in default on the Series A
Convertible Preferred Stock shall have been paid in full and the full
dividends on the Series A Convertible Preferred Stock for the then current
quarterly dividend period shall have been declared and paid or set aside
for payment. When such dividends are so paid or provided for, such right
shall terminate, subject to revesting in the event of each and every
subsequent similar default.
A special meeting for the exercise of such right shall be called by
the Secretary of the Corporation as promptly as possible, and in any event
within ten days, after receipt of a written request signed by the holders
of record of at least 10% of the outstanding shares of Series A Convertible
Preferred Stock; provided, however, that no such special meeting need be
called during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
B-3
<PAGE> 99
At any meeting held for the election of directors at which the holders
of shares of Series A Convertible Preferred Stock (or such holders and
holders of Other Series of Preferred Stock voting together as a class)
shall have the right to elect two directors as hereinabove provided, the
presence, in person or by proxy, of the holders of a majority of the number
of outstanding shares of Series A Convertible Preferred Stock (or the
holders of a majority of the number of outstanding shares of Series A
Convertible Preferred Stock and Other Series of Preferred Stock taken
together as the case may be) shall be required to constitute a quorum of
such class for the election of any director by the holders of such Series A
Convertible Preferred Stock or by such holders and holders of Other Series
of Preferred Stock. At any such meeting or adjournment thereof the absence
of a quorum of the holders of Series A Convertible Preferred Stock or of
such holders and holders of Other Series of Preferred Stock shall not
prevent the election of directors other than those to be elected by such
holders of Series A Convertible Preferred Stock or by such holders and
holders of Other Series of Preferred Stock voting together as a class. The
directors elected by such holders of Series A Convertible Preferred Stock
or by such holders and holders of Other Series of Preferred Stock shall
serve until the next annual meeting or until their respective successors
shall be elected and shall qualify, provided, however, that when the right
of the holders of Series A Convertible Preferred Stock and Other Series of
Preferred Stock to elect directors as herein provided shall terminate, the
terms of office of all persons so elected by such holders shall terminate,
and the number of directors of the Corporation shall thereupon be such
number as may be provided for in the by-laws of the Corporation without
regard to any increase made pursuant to this section (d). During any period
in which the holders of shares of Series A Convertible Preferred Stock or
such holders and the holders of Other Series of Preferred Stock have the
right to elect two directors as provided for herein, any vacancy in the
directorships filled by such holders shall be filled by the vote of the
remaining director theretofore elected by such holders. If not so filled
within 40 days after the creation thereof, the Secretary of the Corporation
shall call a special meeting of the holders of the Series A Convertible
Preferred Stock or such holders and the holders of Other Series of
Preferred Stock and such vacancy or vacancies shall be filled at such
special meeting.
So long as any shares of the Series A Convertible Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or
written consent of the holders of at least two-thirds of the aggregate
number of shares at the time outstanding of the Series A Convertible
Preferred Stock and any other series of Preferred Stock hereafter issued
which shall be accorded such class voting right by the Board of Directors
as permitted in the Certificate of Incorporation, voting or consenting, as
the case may be, separately as a class without regard to series:
(i) authorize, create or increase any class of capital stock
ranking prior to the Preferred Stock as to dividends or upon
liquidation, dissolution or winding up; or
(ii) alter or change any of the powers, preferences or special
rights given to the Preferred Stock by the Certificate of Incorporation
so as to affect the Preferred Stock adversely.
So long as any shares of the Series A Convertible Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote or
written consent of the holders of at least a majority of the aggregate
number of shares at the time outstanding of the Series A Convertible
Preferred Stock and any other series of Preferred Stock hereafter issued
which shall be accorded such class voting right by the Board of Directors
as permitted in the Certificate of Incorporation, voting or consenting, as
the case may be, separately as a class without regard to series:
(i) increase to more than 3,500,000 shares the number of shares of
Preferred Stock at the time authorized by the Certificate of
Incorporation of the Corporation.
(ii) authorize, create or increase any class of capital stock
ranking on a parity with the Preferred Stock as to dividends or upon
liquidation, dissolution or winding up.
No vote or written consent of the holders of Series A Convertible
Preferred Stock shall be required for any purpose if, at or prior to the
time when any such action otherwise requiring such vote or written
B-4
<PAGE> 100
consent is to take effect, provision is made for the redemption of all
shares of Series A Convertible Preferred Stock at the time outstanding.
(e) The shares of the Series A Convertible Preferred Stock shall not
be entitled to the benefit of any sinking or purchase fund to be applied to
the redemption or purchase of such stock.
(f) The Series A Convertible Preferred Stock shall be convertible into
Common Stock of the Corporation at the option of the holders thereof at any
time at the rate, subject to the provisions for adjustment hereinafter set
forth, of seventy-two hundredths (.72) of a share of Common Stock for each
share of Series A Convertible Preferred Stock. No allowance or adjustment
for dividends on either class of stock shall be made upon conversion. The
right to convert any shares called for redemption shall expire at the close
of business on the tenth day prior to the redemption date thereof.
The holder of a share or shares of Series A Convertible Preferred
Stock may exercise the conversion rights as to any thereof by delivering to
the Corporation during regular business hours, at the office of the
transfer agent of the Corporation for the Series A Convertible Preferred
Stock (which shall be located within the City of New York) or at such other
place as may be designated by the Corporation, the certificate or
certificates for the shares to be converted, duly endorsed or assigned in
blank or to the Corporation (if required by it), accompanied in any event
by written notice stating that the holder elects to convert such shares and
stating the name or names (with address) in which the certificate or
certificates for Common Stock are to be issued. Conversion shall be deemed
to have been effected on the date when such delivery is made, and such date
is referred to herein as the "conversion date." As promptly as practicable
thereafter the Corporation shall issue and deliver to or upon the written
order of such holder, at such office or other place designated by the
Corporation, a certificate or certificates for the number of full shares of
Common Stock to which he is entitled and a check or fractional scrip
certificate in respect of any fraction of a share as provided below. The
person in whose name the certificate or certificates for Common Stock are
to be issued shall be deemed to have become a holder of Common Stock of
record on the conversion date unless the transfer books of the Corporation
are closed on that date, in which event he shall be deemed to have become a
holder of Common Stock of record on the next succeeding date on which the
transfer books are open, but the conversion rate shall be that in effect on
the conversion date.
The issuance of Common Stock on conversion of Series A Convertible
Preferred Stock shall be without charge to the converting holder of Series
A Convertible Preferred Stock for any fee, expense or tax in respect of the
issuance thereof, but the Corporation shall not be required to pay any fee,
expense or tax which may be payable in respect of any transfer involved in
the issuance and delivery of shares in any name other than that of the
holder of record on the books of the Corporation of the shares of Series A
Convertible Preferred Stock converted, and the Corporation shall not, in
any such case, be required to issue or deliver any certificate for shares
of Common Stock unless and until the person requesting the issuance thereof
shall have paid to the Corporation the amount of such fee, expense or tax
or shall have established to the satisfaction of the Company that such fee,
expense or tax has been paid.
The number of shares of Common Stock deliverable upon conversion of
each share of Series A Convertible Preferred Stock shall be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall (A) take a record of the holders
of the Common Stock, for the purpose of entitling them to receive a
dividend payable in shares of Common Stock, (B) subdivide its
outstanding shares of Common Stock into a greater number of shares, (C)
combine its outstanding shares of Common Stock into a smaller number of
shares, or (D) issue by reclassification of its Common Stock any shares
of the Corporation or any class or series, the holder of each share of
the Series A Convertible Preferred Stock shall thereafter be entitled to
receive upon the conversion of such share the number of shares of Common
Stock of the Corporation which he would have owned or have been entitled
to receive after the happening of that one of the events described above
which shall have happened had such share of the Series A Convertible
Preferred Stock held by him been converted immediately prior to the
happening of such event, such adjustment to become effective immediately
after the opening of business on the day
B-5
<PAGE> 101
following such record date or the day upon which such subdivision,
combination or reclassification becomes effective.
(ii) In case of any consolidation or merger of the Corporation with
or into another corporation, or in the case of any sale or conveyance to
another corporation of all or substantially all the property of the
Corporation, each holder of the Series A Convertible Preferred Stock
then outstanding and thereafter remaining outstanding shall have the
right thereafter to convert each share held by him into the kind and
amount of shares of stock, other securities, cash or property receivable
upon such consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock into which such share might have been
converted immediately prior to such consolidation, merger, sale or
conveyance, and shall have no other conversion rights; in any such
event, effective provision shall be made, in the certificate of
incorporation of the resulting or surviving corporation or otherwise, so
that the provisions set forth herein for the protection of the
conversion rights of the shares of the Series A Convertible Preferred
Stock shall thereafter be applicable, as nearly as reasonably may be, to
any such other shares of stock, other securities, cash or property
deliverable upon conversion of the shares of the Series A Convertible
Preferred Stock remaining outstanding or other convertible stock or
securities received by the holders in place thereof, and any such
resulting or surviving corporation shall expressly assume the obligation
to deliver, upon the exercise of the conversion privilege, such shares,
other securities, cash or property as the holders of the shares of the
Series A Convertible Preferred Stock remaining outstanding, or other
convertible stock or securities received by the holders in place
thereof, shall be entitled to receive pursuant to the provisions hereof,
and to make provision for the protection of the conversion right as
above provided.
(iii) In case the Corporation shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase Common Stock at a price per
share less than the current market price of the Common Stock (as defined
in this clause (iii) below) on such record date, the number of shares of
Common Stock into which each share of Series A Convertible Preferred
Stock shall be convertible after such record date shall be determined by
multiplying the number of shares of Common Stock into which such share
of Series A Convertible Preferred Stock was convertible immediately
prior to such record date by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding on such record date
plus the number of additional shares of Common Stock to be offered for
subscription or purchase, and of which the denominator shall be the
number of shares of Common Stock outstanding on such record date plus
the number of shares of Common Stock which the aggregate offering price
of the total number of shares so to be offered would purchase at such
current market price. Shares of Common Stock owned by or held for the
account of the Corporation or any subsidiary shall not be deemed
outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in
the event that such rights or warrants are not so issued, the conversion
rate shall again be adjusted to be the conversion rate which would then
be in effect if such record date had not been fixed. For the purposes of
any computation under this clause (iii), the current market price per
share of Common Stock on any date shall mean the average of the daily
closing prices thereof for the 30 consecutive full business days
commencing 45 full business days before the day in question. As used
herein, the "closing price" for any day shall mean the last sales price
regular way on such day or, if no sale took place on such day, the
average of the closing bid and asked prices regular way, in either case
as officially quoted on the principal stock exchange on which such stock
is listed or, if the Common Stock is not listed or admitted to trading
on any exchange, the average of the closing bid and asked prices as
furnished by any New York Stock Exchange member firm selected from time
to time by the Board of Directors for the purpose of, if such bid and
asked prices are not available, such other prices as may be selected by
the Board of Directors for the purpose.
In the event that the Corporation takes a record of holders of
Common Stock for the purpose of entitling them to receive a dividend
payable in any security convertible into Common Stock and the holder of
a share of Series A Convertible Preferred Stock thereafter converts all
or part of the shares
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of Series A Convertible Preferred Stock into shares of Common Stock in
accordance with the provisions hereof, such holder shall be entitled to
receive upon such conversion in addition to the shares of Common Stock
deliverable to him in accordance with the provisions hereof, the number
of shares or principal amount of such security convertible into Common
Stock as he would have been entitled to receive if he had converted
immediately prior to the taking of such record.
No adjustment in the number of shares into which each share of the
Series A Convertible Preferred Stock is convertible shall be required
unless such adjustment would require an increase or decrease of at least
1/100th of a share in the number of shares into which such share is then
convertible; provided, however, that any adjustment which by reason
hereof is not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
Whenever any adjustment is required in the number of shares into
which each share of the Series A Convertible Preferred Stock is
convertible, the Corporation shall forthwith file at the office or
agency maintained for the purpose of conversion of the Series A
Convertible Preferred Stock a statement describing in reasonable detail
the adjustment and method of calculation used.
The Corporation shall at all times keep available for issue and
delivery the full number of shares of stock or other securities into
which all outstanding shares of Series A Convertible Preferred Stock are
convertible.
No certificate for a fraction of a share shall be issued upon any
conversion, but in lieu of any fractional share that would otherwise be
required to be issued in accordance with the foregoing provisions, the
Corporation may at its option issue fractional scrip certificates in form
approved by the Board of Directors, exchangeable with other scrip
certificates aggregating one or more full shares for stock certificates
representing such full share or shares or may pay to the person otherwise
entitled to such fractional share a sum in cash equal to such fraction
multiplied by the closing price of the Common Stock on the last day prior
to the day of the conversion for which a closing price exists. The "closing
price" for any day shall mean the last sales price regular way on such day
or, if no sale took place on such day, the average of the closing bid and
asked prices regular way, in either case as officially quoted on the
principal stock exchange on which the Common Stock is listed or, if the
Common Stock is not listed or admitted to trading on an exchange, the
average of the closing bid and asked prices as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of
Directors for the purpose or, if such bid and asked prices are not
available, such other prices as may be selected by the Board of Directors
for the purpose. If more than one share of Series A Convertible Preferred
Stock shall be surrendered for conversion at one time by the same holder,
the number of full shares of Common Stock which shall be issuable upon
conversion of such Series A Convertible Preferred Stock shall be computed
on the basis of the aggregate number of shares of Convertible Preferred
Stock so surrendered.
The certificate of any independent firm of public accountants selected
by the Board of Directors shall be conclusive evidence of the correctness
of any adjustment made pursuant to this section.
(g) If the Company shall offer for subscription pro rata to the
holders of shares of Common Stock any additional securities of any class
(other than Common Stock) or any other rights or if after June 30, 1971 the
Company shall declare any dividend (other than a cash dividend) upon its
Common Stock or make any other distribution (other than in cash) to the
holders of shares of its Common Stock, then in any such case, the Company
shall give not less than ten days' notice prior to the record date with
respect to such action to the holders of the Series A Convertible Preferred
Stock specifying the nature of such action and the record date therefor.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any such action.
(h) Shares of the Series A Convertible Preferred Stock redeemed or
purchased by the Corporation or surrendered to the Corporation on the
conversion thereof into shares of Common Stock as hereinabove provided
shall upon appropriate filing and recording to the extent required by law,
have the status of authorized and unissued shares of Series A Convertible
Preferred Stock.
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APPENDIX C
THE POWERS, PREFERENCES, RIGHTS AND LIMITATIONS
OF THE SERIES OF THE PREFERRED STOCK
OF
TALLEY INDUSTRIES, INC.
DESIGNATED
SERIES B $1 CUMULATIVE CONVERTIBLE PREFERRED STOCK
The series of 2,892,000 shares of the Preferred Stock, par value $1 per
share of the Corporation, designated "Series B $1 Cumulative Convertible
Preferred Stock" and herein referred to as "Series B" shall have the following
powers, preferences, rights and limitations in addition to those applicable
generally to the Preferred Stock of the Corporation:
(A) Number of Shares. The number of shares which shall constitute
Series B shall be 2,892,000, which number of shares may be increased or
decreased (but not below the number thereof then outstanding) from time to
time by action of the Board of Directors.
(B) Dividend Rights. The holders of shares of Series B shall be
entitled to receive, when and as declared by the Board of Directors, out of
funds and assets of the Corporation legally available therefor, an annual
cash dividend at the rate of $1.00 per share, payable quarterly on dividend
payment dates, hereby fixed as the eighth day of April, July, October and
January, to stockholders of record on the respective record dates
(including stockholders of record on such dates of shares of capital stock
of General Time Corporation converted into shares of Series B pursuant to
the Agreement and Plan of Merger, dated as of March 12, 1969, as amended by
the agreement dated as of January 20, 1970 between the Corporation and
General Time Corporation (herein referred to as the "Merger Agreement")),
not exceeding 50 days preceding such quarterly dividend payment dates,
fixed for that purpose by the Board of Directors provided, however, that no
dividend shall be paid or payable on the first dividend payment date
following the Effective Time as defined in the Merger Agreement. Dividends
on each share of Series B issued pursuant to the Merger Agreement in
exchange for Common and Preferred Stock of General Time Corporation shall
accrue and be cumulative from the first day of the calendar quarter next
succeeding the calendar quarter during which the Effective Time, as defined
in the Merger Agreement, shall have occurred. Dividends on all other shares
of Series B shall accrue and be cumulative from the date of issue and shall
be appropriately pro-rated with respect to the period between such date of
issue and the first dividend payment date. Accumulations of dividends shall
not bear interest.
(B.1.) No dividend shall be paid or declared and set apart for
payment on any shares of Preferred Stock for any quarterly dividend
period unless a dividend for the same quarterly dividend period and all
past quarterly dividend periods, if any, ending within such quarterly
period ratable in proportion to the respective annual dividend rates
fixed therefor, shall be or have been paid or declared and set apart for
payment on all shares of Preferred Stock of all series then outstanding
and entitled to receive dividends for such quarterly dividend period or
for any past quarterly dividend period, if any, ending within such
quarterly dividend period.
(B.2.) So long as any shares of Series B are outstanding, the
Corporation shall not declare and pay or set apart for payment any
dividends or make any other distribution on any junior stock (which
shall mean the Corporation's Common Stock and any other class or series
of capital stock of the Corporation hereafter authorized over which the
Series B shall have preference or priority in the payment of dividends
or upon the dissolution of, or the distribution of the assets of, the
Corporation) other than a dividend payable in junior stock, and shall
not redeem, retire, purchase or otherwise acquire, or permit any
subsidiary to purchase or otherwise acquire, any shares of junior stock
or Preferred Stock, unless at the time of making such declaration,
payment, distribution, redemption,
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retirement, purchase or acquisition dividends on all outstanding shares
of Series B for all past quarterly dividend periods shall have been paid
or declared and sufficient funds set apart for the payment thereof. The
foregoing restriction on acquisition of shares of junior stock shall be
inapplicable to any payments in lieu of issuance of fractional shares
thereof whether upon any merger, conversion, stock dividend or
otherwise.
(C) Redemption Rights. The Corporation may, at the option of the
Board of Directors, redeem all or any part of the outstanding shares of
Series B at any time after the expiration of five years from the Effective
Time (as that term is defined in the Merger Agreement) of the merger of the
Corporation and General Time Corporation at $52.50 per share plus all
dividends accrued and unpaid thereon up to the date fixed for redemption,
if any, provided that notice of redemption is sent by certified mail to the
holders of record of the Series B Shares to be redeemed at least 45, but
not more than 90, days prior to the date of redemption specified in such
notice, addressed to each such holder at his address as it appears in the
records of the Corporation. In the event that less than all of the
outstanding shares of Series B are to be redeemed at one time, the shares
so to be redeemed shall be determined by lot or pro rata in such manner as
the Board of Directors may determine. On or after the redemption date each
holder of shares of Series B to be redeemed shall present and surrender his
certificate or certificates for such shares to the Corporation at the place
designated in such notice and thereupon the redemption price of such shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In case less than all the shares represented
by any such certificates are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after the redemption date
(unless default shall be made by the Corporation in payment of the
redemption price) all dividends on the shares of Series B designated for
redemption in such notice shall cease to accrue, and all rights of the
holders thereof as stockholders of the Corporation, except the right to
receive the redemption price thereof upon the surrender of Certificates
representing the same, without interest, shall cease and terminate and such
shares shall not thereafter be transferred (except with the consent of the
Corporation) on the books of the Corporation, and such shares shall not be
deemed to be outstanding for any purpose whatsoever. At its election, the
Corporation prior to the redemption date may deposit the redemption price
of the shares of Series B so called for redemption in trust for the holders
thereof with a bank or trust company (having a capital and surplus of not
less than $5,000,000) in the Borough of Manhattan, City and State of New
York, or in any other city in which the Corporation at the time shall
maintain a transfer agency with respect to such stock, in which case such
notice to holders of shares of the Series B to be redeemed shall state the
date of such deposit, shall specify the office of such bank or trust
company as the place of payment of the redemption price, and shall call
upon such holders to surrender the certificates representing such shares at
such price on or after the date fixed in such redemption notice (which
shall not be later than the redemption date) against payment of the
redemption price. From and after the making of such deposit, the shares of
Series B so designated for redemption shall not be deemed to be outstanding
for any purpose whatsoever (including, without limitation, all voting
rights, but excepting the right to convert said shares to Common Stock
herein provided) and the rights of the holders of such shares shall be
limited to (i) the right to receive the redemption price of such shares,
without interest, upon surrender of the certificates representing the same
to the Corporation at said office of such bank or trust company, and (ii)
the right of conversion (on or before the close of business on the tenth
day prior to the date fixed for redemption) herein provided. Any funds so
deposited which shall not be required for such redemption because of the
exercise of such right of conversion after the date of such deposit shall
be returned to the Corporation. Any interest accrued on such funds shall be
paid to the Corporation from time to time. Any moneys so deposited which
shall remain unclaimed by the holders of shares of such Series B at the end
of six years after the redemption date shall be returned by such bank or
trust company to the Corporation after which holders of shares of the
Series B shall look only to the Corporation for payment of the redemption
price.
(D) Amount Payable on Dissolution. In the event of any voluntary
liquidation, dissolution or winding up of the Corporation, holders of
shares of Series B shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders, before any
payment shall be made in respect of the Corporation's junior stock, the
fixed amount of $52.50 for each share of Series B held by them plus
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all dividends accrued and unpaid thereon, if any, up to the date fixed for
distribution. Upon any involuntary dissolution, liquidation or winding up
of the Corporation, the holders of shares of Series B shall be entitled to
receive out of the assets of the Corporation available for distribution to
its stockholders, before any payment shall be made in respect of any junior
stock, the fixed amount of $20.00 for each share of Series B held by them
plus all dividends accrued and unpaid thereon, if any, up to the date fixed
for distribution.
(D.1.) If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets of the
Corporation available for distribution to the holders of shares of
Series B shall be insufficient to pay such holders the full amount to
which they are entitled hereunder, the holders of shares of Series B
shall share ratably in any distribution of assets according to the
respective amounts which would be payable in respect of the shares of
Series B held by them upon such distribution if all amounts payable on
or with respect to shares of Series B were paid in full. If upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, payment shall have been made to the holders of the Series B
of the full amount to which they shall respectively be entitled
hereunder, such holders shall not be entitled to any further
participation in the distribution of the remaining assets of the
Corporation available for distribution to its stockholders.
(D.2.) Neither the recapitalization or merger or consolidation of
the Corporation into or with another corporation nor the merger or
consolidation of any other corporation into or with the Corporation, nor
the sale, transfer or lease of all or substantially all the assets of
the Corporation shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
(E) Voting Rights. Except as otherwise provided by law, each holder
of record of shares of Series B shall have the right to one (1) vote in
person or by proxy for each share of Series B standing in his name on the
books of the Corporation. Each holder of record of shares of Series B shall
be entitled to notice of any meeting of stockholders of the Corporation and
to participate in any such meeting in the manner provided for holders of
shares of Common Stock of the Corporation under any applicable law,
provision of the Certificate of Incorporation or by-law. Except as
otherwise provided in this resolution or required by law, the holders of
shares of Series B and the holders of shares of Common Stock shall vote
together as one class, together with the holders of any other series of
Preferred Stock heretofore or hereafter issued which shall be accorded such
voting rights by the Board of Directors as permitted in the Corporation's
Certificate of Incorporation.
(E.1.) If and when dividends in an aggregate amount equivalent to
the total sum payable as dividends for six or more quarterly periods
with respect to the shares of Series B shall be in arrears, the
authorized number of directors constituting the Board of Directors shall
be increased by two. In such event, the holders of shares of the Series
B and any other series of Preferred Stock heretofore or hereafter issued
which shall be accorded such class voting right by the Board of
Directors as permitted in the Corporation's Certificate of Incorporation
and which shall have the right to elect two directors as a result of a
default in the payment of dividends on such series (such other series
being hereinafter called "Other Series of Preferred Stock") shall have
the exclusive and special right, voting separately as a class without
regard to series, to elect two persons to fill such directorships in
which case the remaining members of the Board shall be elected
exclusively by the holders of all other classes or series of stock
entitled to vote for directors, voting separately as a class. Whenever
such right to elect two directors shall have been vested, it shall be
exercised initially either at a special meeting of the Preferred
Stockholders so entitled to vote or at the next annual stockholders'
meeting, but thereafter it shall be exercised only at annual
stockholders' meetings. Such right of the Series B stock to elect two
directors shall continue until the dividends in default on the Series B
stock shall have been paid in full and the full dividends on the Series
B stock for the then current quarterly dividend period shall have been
declared and paid or set aside for payment. When such dividends are so
paid or provided for, such right to elect two directors shall terminate,
subject to revesting in the event of each and every subsequent similar
default.
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(E.2.) A special meeting for the exercise of such right shall be
called by the Secretary of the Corporation as promptly as possible, and
in any event within ten days, after receipt of a written request signed
by the holders of record of at least 10% of the outstanding shares of
Preferred Stock entitled to exercise such right; provided, however, that
no such special meeting need be called during the 90-day period
preceding the date fixed for the annual meeting of stockholders.
(E.3.) At any meeting held for the election of directors at which
the holders of shares of Series B(or such holders and holders of Other
Series of Preferred Stock voting together as a class) shall have the
right to elect two directors as hereinabove provided, the presence, in
person or by proxy, of the holders of a majority of the number of
outstanding shares of Series B (or the holders of a majority of the
number of outstanding shares of Series B and Other Series of Preferred
Stock taken together, as the case may be) shall be required to
constitute a quorum of such class for the election of any director by
the holders of shares of such Series B or by such holders and holders of
Other Series of Preferred Stock. At any such meeting or adjournment
thereof the absence of a quorum of the holders of shares of Series B or
of such holders and holders of Other Series of Preferred Stock shall not
prevent the election of directors other than those to be elected by such
holders of shares of Series B or by such holders and holders of Other
Series of Preferred Stock voting together as a class. The directors
elected by such holders of shares of Series B or by such holders and
holders of Other Series of Preferred Stock shall serve until the next
annual meeting or until their respective successors shall be elected and
shall qualify, provided, however, that when the right of the holders of
shares of Series B and Other Series of Preferred Stock to elect
directors as provided herein shall terminate, the terms of office of all
persons so elected by such holders shall terminate, and the number of
directors of the Corporation shall thereupon be such number as may be
provided for in the by-laws of the Corporation without regard to any
increase made pursuant hereto. During any period in which the holders of
shares of Series B or such holders and the holders of Other Series of
Preferred Stock have the right to elect two directors as provided for
herein, any vacancy in the directorships filled by such holders shall be
filled by the vote of the remaining director theretofore elected by such
holders. If not so filled within 40 days after the creation thereof, the
Secretary of the Corporation shall call a special meeting of the holders
of shares of the Series B or such holders and the holders of Other
Series of Preferred Stock and such vacancy or vacancies shall be filled
at such special meeting.
(E.4.) So long as any shares of the Series B are outstanding, the
Corporation shall not, without the affirmative vote or written consent
of the holders of at least two-thirds of the aggregate number of shares
at the time outstanding of the Series B and any other series of
Preferred Stock heretofore or hereafter issued which shall be accorded
such class voting right by the Board of Directors as permitted in the
Certificate of Incorporation, voting or consenting, as the case may be,
separately as a class without regard to series:
(i) authorize, create or increase any class of capital stock
ranking prior to any of the Preferred Stock as to dividends or upon
liquidation, dissolution or winding up; or
(ii) alter or change any of the powers, preferences or special
rights given to any of the Preferred Stock by the Certificate of
Incorporation so as to affect the Preferred Stock adversely.
(E.5.) So long as any shares of the Series B are outstanding, the
Corporation shall not, without the affirmative vote or written consent
of the holders of at least a majority of the aggregate number of shares
at the time outstanding of the Series B and any other series of
Preferred Stock heretofore or hereafter issued which shall be accorded
such class voting right by the Board of Directors as permitted in the
Certificate of Incorporation, voting or consenting, as the case may be,
separately as a class without regard to series.
(i) increase to more than 3,500,000 shares the number of shares
of Preferred Stock at the time authorized by the Certificate of
Incorporation of the Corporation; or
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(ii) authorize, create or increase any class of capital stock
ranking on a parity with the Preferred Stock as to dividends or upon
liquidation, dissolution or winding up of the Corporation.
(F) No Sinking Fund. The shares of Series B shall not be entitled to
the benefit of any sinking or purchase fund to be applied to the redemption
or purchase of such stock.
(G) Conversion Rights. Shares of Series B shall be convertible into
Common Stock of the Corporation at the option of the holders thereof at any
time at the rate, subject to the provisions for adjustment hereinafter set
forth, of one (1) share of Common Stock for each share of Series B. No
allowance or adjustment for dividends on either class of stock shall be
made upon conversion. The right to convert any shares called for redemption
shall expire at the close of business on the tenth day prior to the
redemption date thereof.
(G.1.) The holder of a share or shares of Series B may exercise the
conversion rights as to any thereof by delivering to the Corporation
during regular business hours, at the office of the transfer agent of
the Corporation for the Series B (which shall be located within the City
of New York) or at such other place as may be designated by the
Corporation, the certificate or certificates for the shares to be
converted, duly endorsed or assigned in blank or to the Corporation (if
required by it), accompanied in any event by written notice stating that
the holder elects to convert such shares and stating the name or names
(with address) in which the certificate or certificates for Common Stock
are to be issued. Conversion shall be deemed to have been effected on
the date when such delivery is made, and such date is referred to herein
as the "Conversion Date." As promptly as practicable thereafter, the
Corporation shall issue and deliver to or upon the written order of such
holder, at such office or other place designated by the Corporation, a
certificate or certificates for the number of full shares of Common
Stock to which he is entitled and a check or fractional scrip
certificate in respect of any fraction of a share as provided below. The
person in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become a holder of Common Stock
of record on the Conversion Date unless the transfer books of the
Corporation are closed on that date, in which event he shall be deemed
to have become a holder of Common Stock of record on the next succeeding
date on which the transfer books are open, but the conversion rate shall
be that in effect on the Conversion Date.
(G.2.) The issuance of Common Stock on conversion of shares of
Series B shall be without charge to the converting holder of shares of
Series B or any fee, expense or tax in respect of the issuance thereof,
but the Corporation shall not be required to pay any fee, expense or tax
which may be payable in respect of any transfer involved in the issuance
and delivery of shares in any name other than that of the holder of
record on the books of the Corporation of the shares of Series B
converted, and the Corporation shall not, in any such case, be required
to issue or deliver any certificate for shares of Common Stock unless
and until the person requesting the issuance thereof shall have paid to
the Corporation the amount of such fee, expense or tax or shall have
established to the satisfaction of the Company that such fee, expense or
tax has been paid.
(G.3.) No certificate for a fraction of a share shall be issued
upon any conversion, but in lieu of any fractional share that would
otherwise be required to be issued in accordance with the foregoing
provisions, the Corporation may, at its option, issue fractional scrip
certificates in form approved by the Board of Directors, exchangeable
with other scrip certificates aggregating one or more full shares for
stock certificates representing such full share or shares or may pay to
the person otherwise entitled to such fractional share a sum in cash
equal to such fraction multiplied by the closing price of the Common
Stock on the last day prior to the day of the conversion for which a
closing price exists. If more than one share of Series B shall be
surrendered for conversion at one time by the same holder, the number of
full shares of Common stock which shall be issuable upon conversion of
such shares of Series B shall be computed on the basis of the aggregate
number of such shares so surrendered.
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(H) Adjustment of Conversion Rate. The number of shares of Common
Stock deliverable upon conversion of each share of Series B shall be
subject to adjustment from time to time as follows:
(i) In case after March 12, 1969 the Corporation shall (A) take a
record of the holders of the Common Stock for the purpose of entitling
them to receive a dividend payable in shares of Common Stock, (B)
subdivide its outstanding shares of Common Stock into a greater number
of shares, (C) combine its outstanding shares of Common Stock into a
smaller number of shares or (D) issue by reclassification of its Common
Stock any shares of the Corporation of any class or series, the holder
of each share of the Series B shall thereafter be entitled to receive
upon the conversion of such share the number of shares of Common Stock
and other shares of the Corporation which he would have owned or have
been entitled to receive after the happening of that one or more of the
events described above which shall have happened had such share of the
Series B held by him been converted immediately prior to the happening
of such event or events, such adjustment to become effective immediately
after the opening of business on the day following such record date or
the day upon which such subdivision, combination or reclassification
becomes effective; provided, however, that no adjustment of the
conversion rate shall be made upon the declaration by the Corporation on
or after a date 3 years subsequent to the Effective Time (as that term
is defined in the Merger Agreement) of any dividend payable in Common
Stock to the extent that the total of (a) the number of shares of Common
Stock issuable pursuant to such a declaration and (b) the total number
of shares of Common Stock of the Corporation previously issued as
dividends on its Common Stock during the twelve month period commencing
on the date 3 years subsequent to said Effective Time, or any twelve
month period commencing on any anniversary date thereof, in which the
payment of the dividend so declared will occur does not exceed 3% of the
total number of shares of Common Stock of the Corporation outstanding at
the time of such declaration and prior to giving effect thereto
(excluding for the purpose of any such computation any Common Stock
owned by or held for the account of the Corporation or any subsidiary);
and if such total number of shares of Common Stock exceeds such
percentage, an adjustment of the conversion rate shall be made, but in
computing such adjustment only the number of shares of Common Stock of
the Corporation in excess of such percentage issued during such 12 month
period as dividends on its Common Stock shall be taken into account.
(ii) In the case of any recapitalization, consolidation or merger
of the Corporation with or into another corporation, or in the case of
any sale or conveyance to another corporation of all or substantially
all the property of the Corporation, each holder of shares of Series B
then outstanding and thereafter remaining outstanding shall have the
right thereafter to convert each share held by him into the kind and
amount of shares of stock, other securities, cash or property receivable
upon such reclassification or consolidation, merger, sale or conveyance
by a holder of the number of shares of Common Stock into which such
share might have been converted immediately prior to such
reclassification, consolidation, merger, sale or conveyance, and shall
have no other conversion rights; in any such event, effective provision
shall be made, in the certificate of incorporation of the resulting or
surviving corporation or otherwise, so that the provisions set forth
herein for the protection of the conversion rights of the shares of the
Series B shall thereafter be applicable, as nearly as reasonably may be,
to any such other shares of stock, other securities, cash or property
deliverable upon conversion of the shares of the Series B remaining
outstanding or other convertible stock or securities received by the
holders in place thereof, and any such resulting or surviving
corporation shall expressly assume the obligation to deliver, upon the
exercise of the conversion privilege, such shares, other securities,
cash or property as the holders of the shares of the Series B remaining
outstanding, or other convertible stock or securities received by the
holders in place thereof, shall be entitled to receive pursuant to the
provisions hereof, and to make provision for the protection of the
conversion right as above provided.
(iii) In case the Corporation shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase Common Stock at a price per
share less than the current market price of the Common Stock (as defined
in this clause (iii)
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<PAGE> 109
below) on such record date, the number of shares of Common Stock into
which each share of Series B shall be convertible after such record date
shall be determined by multiplying the number of shares of Common Stock
into which such share of Series B was convertible immediately prior to
such record date by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on such record date plus
the number of additional shares of Common Stock to be offered for
subscription or purchase, and the denominator of which shall be the
number of shares of Common Stock outstanding on such record date plus
the number of shares of Common Stock which the aggregate offering price
of the total number of shares so to be offered would purchase at such
current market price. Shares of Common Stock owned by or held for the
account of the Corporation or any subsidiary shall not be deemed
outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed; and in
the event that such rights or warrants are not so issued, the conversion
rate shall again be adjusted to be the conversion rate which would then
be in effect if such record date had not been fixed. For the purposes of
any computation under this clause (iii), the current market price per
share of Common Stock on any date shall mean the average of the daily
closing prices thereof for the 30 consecutive full business days
commending 45 full business days before the day in question. As used in
this Certificate, the "closing price" for any day shall mean the last
sales price regular way on such day or, if no sale took place on such
day, the average of the closing bid and asked prices regular way, in
either case as officially quoted on the principal stock exchange on
which such stock is listed or, if the Common Stock is not listed or
admitted to trading on any exchange, the average of the closing bid and
asked prices as furnished by any New York Stock Exchange member firm
selected from time to time by the Board of Directors for the purpose or,
if such bid and asked prices are not available, such other prices as may
be selected by the Board of Directors for the purpose.
(H.1.) In the event that the Corporation takes a record of holders
of Common Stock for the purpose of entitling them to receive a dividend
payable in any security convertible into Common Stock and the holder of
a share of Series B thereafter converts all or part of the shares of
Series B into shares of Common Stock in accordance with the provisions
hereof, such holder shall be entitled to receive upon such conversion in
addition to the shares of Common Stock deliverable to him in accordance
with the provisions hereof, the number of shares or principal amount of
such security convertible into Common Stock as he would have been
entitled to receive if he had converted immediately prior to the taking
of such record.
(H.2.) No adjustment in the number of shares into which each share
of the Series B is convertible shall be required unless such adjustment
would require an increase or decrease of at least 1/100th of a share in
the number of shares into which such share is then convertible;
provided, however, that any adjustment which by reason hereof is not
required to be made shall be carried forward and taken into account in
determining the necessity for, as well as the amount of, any subsequent
adjustment.
(H.3.) Whenever any adjustment is required in the number of shares
into which each share of the Series B is convertible, the Corporation
shall forthwith file at the office or agency maintained for the purpose
of conversion of the shares of Series B a statement describing in
reasonable detail the adjustment and the method of calculation used.
(H.4.) The Corporation shall at all times keep available for issue
and delivery the full number of shares of stock or other securities into
which all outstanding shares of Series B are convertible.
(H.5.) The certificate of any independent firm of public
accountants selected by the Board of Directors shall be conclusive
evidence of the correctness of any adjustment made pursuant to this
section.
(I) Notice. If the Corporation shall offer for subscription pro rata
to the holders of shares of Common Stock any additional securities of any
class or any other rights or if after a date 3 years subsequent to the
Effective Time, the Company shall declare any dividend (other than a cash
dividend) upon its Common Stock or make any other distribution (other than
in cash) to the holders of shares of its
C-7
<PAGE> 110
Common Stock, then in any such case, the Company shall give not less than
ten days' notice prior to the record date with respect to such action to
the holders of shares of Series B specifying the nature of such action and
the record date therefor. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of any such action.
(J) Redemption. Shares of Series B redeemed or purchased by the
Corporation or surrendered to the Corporation on the conversion thereof
into shares of Common Stock as hereinabove provided shall upon appropriate
filing and recording to the extent required by law, have the status of
authorized and unissued shares of Series B.
(K) No Other Rights. The shares of Series B shall not have any
powers, preferences or rights and qualifications, limitations or
restrictions other than as set forth above and in the Certificate of
Incorporation, as amended, of the Corporation.
C-8
<PAGE> 1
CONVERSION NOTICE AND LETTER OF TRANSMITTAL
TALLEY INDUSTRIES, INC.
IN RESPECT OF ITS CONVERSION OFFER TO ISSUE
2.0 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES A CONVERTIBLE PREFERRED STOCK
AND
2.5 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES B $1 CUMULATIVE CONVERTIBLE PREFERRED STOCK
AS DESCRIBED IN THE OFFERING CIRCULAR, DATED MARCH 21, 1996
THIS CONVERSION OFFER, AND WITHDRAWAL RIGHTS FOR PREFERRED SHARES DELIVERED FOR
CONVERSION IN CONNECTION WITH THE CONVERSION OFFER, WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON APRIL 22, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
The Conversion Agent for the Conversion Offer is:
Chemical Mellon Shareholder Services, L.L.C.
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
P.O. Box 845 120 Broadway, 13th Floor
Midtown Station New York, NY 10271
New York, NY 10018 Attention: Reorganization Department
Attention: Reorganization Department
</TABLE>
DELIVERY OF THIS NOTICE OF CONVERSION AND LETTER OF TRANSMITTAL (THE
"LETTER OF TRANSMITTAL") TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
/ / CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN
ACCOUNT MAINTAINED BY THE CONVERSION AGENT WITH A BOOK-ENTRY TRANSFER
FACILITY AND COMPLETE THE FOLLOWING:
Name of Delivery Institution:
------------------------------------------
Check Box of Book-Entry Transfer Facility:
-----------------------------
/ / The Depository Trust Company
/ / Philadelphia Depository Trust Company
Account Number
---------------------------------------------------------
Transaction Code Number
------------------------------------------------
/ / CHECK HERE IF SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE CONVERSION AGENT AND COMPLETE
<PAGE> 2
THE FOLLOWING. PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED
DELIVERY.
Name(s) of Registered Holder(s)
---------------------------------------
Window Ticket Number (if any)
-----------------------------------------
Date of Execution of Notice of Guaranteed Delivery
--------------------
Name of Eligible Institution that Guaranteed Delivery
LIST BELOW THE PREFERRED SHARES TO WHICH THIS LETTER OF TRANSMITTAL RELATES:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
DESCRIPTION OF PREFERRED SHARES DELIVERED
- --------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) SHARE CERTIFICATE TOTAL NUMBER OF SHARES TO
OF REGISTERED HOLDER(S)(A) NUMBER(S)(B) BE CONVERTED(C)
- --------------------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
Total Shares:
- --------------------------------------------------------------------------------------------------------
(a) "Registered Holder" means the person in whose name the Series A Preferred or Series B Preferred is
registered on the books of the Company's transfer agent. If not already printed hereon, please
print the name and address of the Registered Holder exactly as they appear on the certificate(s)
representing the Preferred Shares delivered hereby.
(b) Need not be completed by Book Entry Holders. If space is inadequate, please attach a separate
signed schedule.
(c) Beneficial owners who desire to convert Preferred Shares in connection with this Conversion Offer
must deliver all, and not less than all, of their Preferred Shares for conversion. No payment is
being made in respect of accrued and unpaid dividends on Preferred Shares delivered and accepted
for conversion.
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
The undersigned hereby delivers the above-described Preferred Shares of the
Company, in accordance with the Company's offer to issue 2.0 shares of its
Common Stock, par value $1 per share ("Common Stock"), upon conversion of each
share of Series A Convertible Preferred Stock (the "Series A Preferred") and 2.5
shares of its Common Stock upon conversion of each share of Series B $1
Cumulative Convertible Preferred Stock (the "Series B Preferred," and together
with the Series A Preferred, the "Preferred Shares") in accordance with the
Company's Restated Certificate of Incorporation, as amended (the "Certificate")
and upon the terms and subject to the conditions set forth in the Offering
Circular dated March 21, 1996 (the "Offering Circular"), and in this Letter of
Transmittal (together with the Offering Circular, the "Conversion Offer").
Receipt of the Offering Circular and Letter of Transmittal are hereby
acknowledged. The undersigned understands that holders of Preferred Shares
accepted for conversion will not receive any dividend payments in respect of
such Preferred Shares.
On the terms and subject to the conditions of the Conversion Offer, and
subject to, and effective upon, acceptance for conversion by the Company of the
Preferred Shares delivered herewith and the issuance of shares of Common Stock
in respect thereof in accordance with the terms of the Certificate and the
Conversion Offer, the undersigned hereby relinquishes all right, title and
interest in and to all such Preferred Shares as are being delivered hereby and
that are accepted for conversion pursuant to the Conversion Offer. The
undersigned hereby irrevocably constitutes and appoints the Conversion Agent as
the true and lawful agent
<PAGE> 3
and attorney-in-fact of the undersigned (with full knowledge that the Conversion
Agent also acts as the agent of the Company) with respect to the Preferred
Shares delivered hereby and accepted for conversion pursuant to the Conversion
Offer, with full power of substitution (such power of attorney being deemed to
be an irrevocable power coupled with an interest), to (a) deliver the Preferred
Shares to the Company for conversion pursuant to the Certificate and (b) receive
the Common Stock to be issued in connection with conversion of such Preferred
Shares and the Conversion Offer, all in accordance with the terms and subject to
the conditions of the Conversion Offer; provided, however, that the undersigned
shall retain the voting rights with respect to such Preferred Shares until the
Company has accepted the same for conversion in connection with the Conversion
Offer.
By delivering certificates for Preferred Shares for conversion in
connection with this Conversion Offer, the undersigned represents and warrants
to the Company that the undersigned has full power and authority to convert such
Preferred Shares and that such Preferred Shares are free and clear of all liens,
restrictions, charges and encumbrances and are not subject to any adverse claim.
The undersigned will, upon request, execute and deliver any additional documents
deemed by the Conversion Agent or the Company to be necessary or desirable to
complete the conversion of the Preferred Shares delivered hereby.
The undersigned understands that the delivery of Preferred Shares for
conversion in connection with this Conversion Offer by a holder pursuant to one
of the procedures set forth in the Offering Circular and this Letter of
Transmittal will constitute an agreement between the undersigned and the Company
in accordance with the terms and subject to the conditions of the Conversion
Offer.
All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors, and assigns of the
undersigned.
Unless otherwise indicated herein under "Special Issuance Instructions,"
please issue the shares of Common Stock due in respect of the Preferred Shares
accepted for conversion in the name(s) of the Registered Holder(s) appearing
above under "Description of Preferred Shares Delivered." In addition, unless
otherwise indicated under "Special Delivery Instructions," please mail the
shares of Common Stock due in respect of the Preferred Shares accepted for
conversion, and/or return any Preferred Shares not accepted for conversion and
accompanying documents, as appropriate, to the Registered Holder(s) at the
address(es) appearing above under "Description of Preferred Shares Delivered."
If both the "Special Issuance Instructions" and "Special Delivery Instructions"
are completed, please issue the shares of Common Stock due in respect of the
Preferred Shares accepted for conversion in the name(s) of, and mail the shares
of Common Stock due in respect of the Preferred Shares accepted for conversion
to, the person(s) so indicated. The undersigned recognizes that the Company has
no obligation pursuant to the "Special Issuance Instructions" to transfer any
Preferred Shares from the name(s) of the Registered Holder(s) thereof if the
Company does not accept for conversion any of the Preferred Shares so delivered.
The undersigned acknowledges and agrees that the Company and the Conversion
Agent may in appropriate circumstances defer effecting such transfer and may
retain such shares of Common Stock until satisfactory evidence of the payment of
transfer taxes payable on account of such transfer by the undersigned, or
exemption therefrom, is submitted to them.
<PAGE> 4
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 7 AND 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Shares accepted for conversion are to be issued in
the name of someone other than the Registered Holder appearing above under
"Description of Preferred Shares Delivered."
Issue Common Stock to:
Name
-------------------------------------------
(PLEASE TYPE OR PRINT)
Address
-------------------------------------------
-------------------------------------------
-------------------------------------------
(INCLUDE ZIP CODE)
TAXPAYER IDENTIFICATION NO.
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 7 AND 8)
To be completed ONLY if the shares of Common Stock to be issued upon
conversion of the Preferred Shares accepted for conversion are to be sent to
someone other than the Registered Holder appearing above under "Description of
Preferred Shares Delivered."
Deliver Common Stock to:
Name
------------------------------------------
(PLEASE TYPE OR PRINT)
Address
------------------------------------------
------------------------------------------
------------------------------------------
(INCLUDE ZIP CODE)
<PAGE> 5
SIGN AND DATE HERE
(PLEASE COMPLETE SUBSTITUTE W-9 BELOW)
PURSUANT TO THE CONVERSION OFFER AND THE CERTIFICATE, THE UNDERSIGNED HEREBY
DELIVERS TO THE CONVERSION AGENT FOR CONVERSION THE PREFERRED SHARES SET FORTH
ABOVE UNDER "DESCRIPTION OF PREFERRED SHARES DELIVERED."
<TABLE>
<S> <C>
Dated: ,1996 Name(s) of Registered Holder(s)
------------------------------------ ---------------------------------------
---------------------------------------
- ----------------------------------------------- (PLEASE TYPE OR PRINT)
- -----------------------------------------------
(SIGNATURE(S) OF HOLDER(S)) Address
---------------------------------------
(Must be signed by Registered Holder(s) exactly ---------------------------------------
as name(s) appear(s) on the certificates (INCLUDE ZIP CODE)
representing the Preferred Shares or on a
security position listing or by person(s) Area Code and
authorized to become Registered Holder(s) by Telephone No.
certificates and documents transmitted ---------------------------------------
herewith. If signature is by trustees,
executors, administrators, guardians, Guarantee of Signature(s)
attorneys-in-fact, officers of corporations or (IF REQUIRED; SEE INSTRUCTIONS 1 AND 2)
others acting in a fiduciary or representative
capacity, please set forth the following Authorized Signature
information and see Instruction 1.) ---------------------------------------
Name(s) Name
- ---------------------------------------------- ---------------------------------------
- ---------------------------------------------- (PLEASE PRINT)
(PLEASE PRINT)
Name of Firm
Capacity ---------------------------------------
- ----------------------------------------------
Address
---------------------------------------
---------------------------------------
(INCLUDE ZIP CODE)
Area Code and
Telephone No.
---------------------------------------
Dated:
---------------------------------------,
1996
</TABLE>
HOLDERS WHO DO NOT WISH TO CONVERT THEIR PREFERRED SHARES NEED NOT TAKE ANY
ACTION WITH RESPECT TO THIS CONVERSION OFFER.
<PAGE> 6
SUBSTITUTE
FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR
TAXPAYER
IDENTIFICATION NO.
PART 1 TAXPAYER IDENTIFICATION NO. -- FOR ALL ACCOUNTS
PART II FOR PAYEES
EXEMPT
FROM BACKUP
------------------ WITHHOLDING (SEE
Enter your taxpayer identification ENCLOSED
number in the appropriate box. GUIDELINES)
For most individuals and sole
proprietors, this is your social
Social Security number. For other
entities, it is your Employer Social Security
Identification Number. If you do number
not have a number, see How to -----------------
Obtain a TIN in the enclosed
Guidelines.
OR
------------------
Note: If the account is in more
than one name, see the chart in
the enclosed Guidelines to
determine what number to enter.
Employer
Identification
number
------------------
CERTIFICATION. -- Under penalties of perjury, I certify that:
(1) The number shown above on this form is my correct Taxpayer Identification
Number or I am waiting for a number to be issued to me, and either (a) I
have mailed or delivered an application to receive a taxpayer
identification number to the appropriate Internal Revenue Service Center
or Social Security Administration Office or (b) I intend to mail or
deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within sixty (60) days, 31% of
any "Deemed Distribution" (as defined in the Offering Circular) made to me
thereafter will be withheld until I provide a number;
(2) I am not subject to backup withholding either because (a) I am exempt from
backup withholding, or (b) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding; and
(3) Any other information provided on this form is true, correct and complete.
- --------------------------------------------------------------------------------
SIGNATURE DATE , 199
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY "DEEMED DISTRIBUTION" (AS DEFINED IN THE OFFERING
CIRCULAR) MADE TO YOU IN CONNECTION WITH THE CONVERSION OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE CONVERSION OFFER
1. SIGNATURES ON LETTERS OF TRANSMITTAL
Only a Registered Holder of Series A Preferred or Series B Preferred may
deliver certificates for Preferred Shares for conversion in this Conversion
Offer. Any beneficial owner whose Preferred Shares are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to convert such shares in connection with this Conversion Offer should
contact such Registered Holder promptly and instruct such Registered Holder to
effect delivery on its behalf. If this Letter of Transmittal is signed by the
Registered Holder(s) of the Preferred Shares delivered hereby, the signatures
must correspond exactly with the name(s) as written on the face of the
certificates without any change whatsoever. If any of the Preferred Shares
delivered hereby are owned of record by two or more joint owners, all such
owners must sign this Letter of Transmittal.
If the Letter of Transmittal is signed by a person other than the
Registered Holder of the Preferred Shares, the certificates representing such
Preferred Shares must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name or names of the Registered Holder (or
Registered Holders) appear on such certificates, together with a letter (or
other evidence) describing the transaction pursuant to which the Preferred
Shares were transferred. Signatures on any stock powers or other transfer
<PAGE> 7
documents submitted in connection with this Letter of Transmittal must be
guaranteed by an Eligible Institution. See Instruction 2.
If the Letter of Transmittal or any certificates for Preferred Shares or
related stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers or corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and provide evidence satisfactory to the Company of their authority to
so act.
2. GUARANTEE OF SIGNATURES.
Signatures on this Letter of Transmittal must be guaranteed by a financial
institution (including most commercial banks, savings and loan associations and
brokerage houses) that is a participant in the Security Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Guarantee
Program or the Stock Exchange Medallion Program ("Eligible Institutions"),
unless the certificate(s) for the Preferred Shares delivered hereby are
delivered (i) by a Registered Holder of such Preferred Shares who has not
completed either of the boxes entitled "Special Issuance Instructions" or
"Special Delivery Instructions" herein or (ii) for the account of an Eligible
Institution.
3. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; BOOK ENTRY
TRANSFER.
Unless guaranteed delivery procedures are utilized, this Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed, along with any required signature guarantees and any other
documents required by this Letter of Transmittal, must be received by the
Conversion Agent at one of its addresses set forth herein on or prior to 5:00
p.m., New York City time, on the Expiration Date.
In addition, unless guaranteed delivery procedures are utilized (or book
entry transfer is effected as provided below), certificates for all Preferred
Shares to be converted must be received by the Conversion Agent at one of its
addresses set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date.
If a Registered Holder of Preferred Shares desires to deliver the
certificate or certificates for such shares to be converted and such
certificates are not immediately available (or the procedures for book-entry
transfer discussed below cannot be completed on a timely basis), or time will
not permit such holder's certificates or other required documents to reach the
Conversion Agent before the Expiration Date, a delivery for conversion may be
effected by following the guaranteed delivery procedures set forth in the
Offering Circular under "Conversion Offer Procedures -- Guaranteed Delivery
Procedures."
Any financial institution that is a participant in any of the Book Entry
Transfer Facilities systems may make book entry transfer of the Preferred Shares
to the Conversion Agent by causing the Depository Trust Company ("DTC") or the
Philadelphia Depository Trust Company ("PHILADEP", and together with DTC,
collectively referred to as the "Book Entry Transfer Facilities") to transfer
such Preferred Shares into the Conversion Agent's account in accordance with
such Book Entry Transfer Facility's procedure for such transfer. (Such transfer
shall not affect the beneficial ownership of the transferred shares.) Although
transfer of Preferred Shares may be effected through book entry transfer into
the Conversion Agent's account at DTC or PHILADEP, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Conversion Agent at one of its addresses as set forth herein
prior to 5:00 p.m., New York City time, on the Expiration Date (unless
guaranteed delivery procedures are utilized). DELIVERY OF DOCUMENTS TO A BOOK
ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE
DELIVERY TO THE CONVERSION AGENT.
THE METHOD OF DELIVERY OF PREFERRED SHARES AND ALL OTHER REQUIRED DOCUMENTS
TO THE CONVERSION AGENT IS AT THE ELECTION AND RISK OF THE HOLDER DELIVERING
SUCH SHARES. IF SENT BY MAIL IT IS RECOMMENDED THAT THE HOLDER USE REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE CONVERSION AGENT BEFORE THE
EXPIRATION DATE.
<PAGE> 8
No alternative, conditional or contingent deliveries will be accepted. All
holders delivering Preferred Shares for conversion, by execution of this Letter
of Transmittal (or facsimile thereof), waive any right to receive any notice of
the acceptance of their Preferred Shares for conversion.
All questions as to the validity, form and eligibility (including time of
receipt) of deliveries for conversion of Preferred Shares will be resolved by
the Company, whose determination will be final and binding on all parties. The
Company reserves the absolute right to reject any or all deliveries for
conversion that are not in proper form or which would, in the opinion of counsel
for the Company, be unlawful. Neither the Company, the Conversion Agent nor any
other person will be under any duty to give notification of any defects or
irregularities in any deliveries or incur any liability for failure to give any
such notification. Deliveries will not be deemed to have been made until such
irregularities have been cured or waived. The Company also reserves the right,
in its judgment, to waive any irregularities or conditions of delivery as to
particular Preferred Shares. The Company's interpretation of the terms and
conditions of this Conversion Offer (including the instructions in the Letter of
Transmittal) will be final and binding. Unless waived, any irregularities or
defects in connection with deliveries must be cured within such time as the
Company determines.
4. WITHDRAWAL OF DELIVERIES.
Any holder of Preferred Shares who has delivered a certificate or
certificates for, or effected delivery with respect to, Preferred Shares for
conversion may withdraw such delivery at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
All questions as to the validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, whose
determination will be final and binding on all parties. Neither the Company, the
Conversion Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification.
5. NO PARTIAL CONVERSIONS.
Beneficial owners of Series A Preferred and Series B Preferred who desire
to convert their shares in connection with this Conversion Offer must convert
all, and not less than all, of the Series A Preferred and/or Series B Preferred
beneficially owned by them.
6. RETURN OF CERTIFICATES NOT ACCEPTED FOR CONVERSION.
If any Preferred Shares delivered for conversion are not converted in
connection with this Conversion Offer because of an invalid delivery, the
occurrence or nonoccurrence of certain other events set forth in the Offering
Circular or otherwise, such unaccepted certificates for such Preferred Shares
will be returned, at the Company's expense, to the Registered Holder thereof as
promptly as practicable after the Expiration Date or the termination of this
Conversion Offer, as applicable.
7. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
conversion of Preferred Shares in connection with this Conversion Offer and
issuance of additional shares of Common Stock. If, however, Common Stock is to
be delivered to, or is to be registered or issued in the name of, any person
other than the Registered Holder of the Preferred Shares, or if the Preferred
Shares to be converted are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the issuance of Common Stock pursuant to this Conversion
Offer, the amount of any such transfer taxes (whether imposed on the Registered
Holder or any other person) will be payable by the delivering holder. Such
holder hereby acknowledges and agrees that the Company and the Conversion Agent
may defer effecting such transfer and may retain such shares of Common Stock
until satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted to them.
<PAGE> 9
8. SPECIAL ISSUANCE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS.
If certificates representing shares of Common Stock are to be issued to a
person other than the person signing this Letter of Transmittal or if such
certificates are to be sent or returned to someone other than the person signing
this Letter of Transmittal or to an address other than that shown above, the
appropriate information set forth in "Special Issuance Instructions" and
"Special Delivery Instructions" should be completed.
9. BACKUP WITHHOLDING.
Federal income tax law requires that, unless an exception applies, a
recipient (a "Payee") of the shares of Common Stock issued in respect of
converted Preferred Shares must provide the Conversion Agent (as payor) with
such Payee's taxpayer identification number ("TIN") and certify that such number
is correct. In the case of a Payee who is an individual, the Payee's TIN is his
or her social security number. In addition, a Payee must certify that such Payee
is not subject to backup withholding. If the foregoing requirements are not
satisfied, the Payee may be subject to a $50 penalty imposed by the Internal
Revenue Service (the "IRS") and to backup withholding. The Payee with respect to
any converted Preferred Shares will be either (i) the delivering holder of such
Preferred Shares or (ii) if the shares of Common Stock are issued to one or more
other persons pursuant to the Special Issuance Instructions, as indicated in the
applicable box, such other person or persons. Certain Payees (including among
others, all corporations and certain foreign Payees) are not subject to these
backup withholding and reporting requirements. In order to satisfy the
Conversion Agent that a foreign individual qualifies as an exempt recipient,
such Payee must submit a statement, signed under penalties of perjury, attesting
to that individual's exempt status. Such statement can be obtained from the
Conversion Agent. Foreign Payees should consult their own tax advisers with
respect to the tax consequences (including backup withholding requirements) of
the Conversion Offer.
If backup withholding applies, the Conversion Agent is required to withhold
31% of any "Deemed Distribution" (as defined in the Offering Circular) made to
the Payee. Backup withholding is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained provided that the required information is furnished to the IRS.
To prevent backup withholding, each nonexempt Payee must provide his or her
correct TIN by completing the Substitute Form W-9 set forth herein, certifying
that the TIN provided is correct (or that such Payee is awaiting a TIN). See the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional instructions. In addition, the Payee must
also certify that he or she is not subject to backup withholding either because
(i) such Payee has not been notified by the IRS that he or she is subject to
backup withholding as a result of failure to report all interest or dividends or
(ii) the IRS has notified such Payee that he or she is no longer subject to
backup withholding. Failure to complete the Substitute Form W-9 will not, by
itself, cause Preferred Shares to be deemed invalidly delivered, but may subject
the payee to backup withholding.
10. WAIVER OF CONDITIONS.
Subject to the terms of the Conversion Offer, the conditions of the
Conversion Offer may be waived by the Company, in whole or in part, at any time
and from time to time, in the Company's judgment, in the case of any Preferred
Shares delivered. The Conversion Offer is conditioned upon, among other things,
at least 51% of the outstanding shares of Series A Preferred and at least 51% of
the outstanding shares of Series B Preferred being duly delivered for conversion
prior to the Expiration Date, but failure to satisfy this condition as to one
series will not affect the Company's obligation as to the other series.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance may be directed to, and additional copies of the
Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Information Agent at the address listed below.
<PAGE> 10
The Information Agent for the Conversion Offer is:
KISSEL-BLAKE INC.
110 Wall Street
New York, New York 10005
(212) 344-6733 (Collect)
(800) 554-7733 (Toll Free)
Bankers and Brokers call
(212) 344-6733
<PAGE> 1
[TALLEY INDUSTRIES LETTERHEAD]
IMPORTANT: THIS OFFER EXPIRES ON APRIL 22, 1996
March 21, 1996
TO: HOLDERS OF THE SERIES B $1 CUMULATIVE CONVERTIBLE PREFERRED STOCK
("SERIES B PREFERRED STOCK") OF TALLEY INDUSTRIES, INC. ("TALLEY")
Talley is pleased to offer you a one-time opportunity, from today until
5:00 p.m., New York City time, on April 22, 1996, to receive 2.5 shares of
Talley common stock upon conversion of each of your shares of Series B
Preferred Stock.
Currently, your shares of Series B Preferred Stock are each convertible
into 1.3125 shares of Talley common stock. If you choose to convert in
connection with this offer (the "Conversion Offer"), you will receive a total
of 2.5 shares of Talley common stock for each share of Series B Preferred Stock
converted, or 1.1875 additional shares of common stock. Although the financial
condition of Talley has improved since we last paid dividends to you and our
other shareholders in early 1991, our debt covenants and competing demands for
available cash resources make it unlikely in the foreseeable future that we
will cure the dividend arrearages at their present level or resume the payment
of regular dividends.
We urge you to convert your shares in response to the Conversion Offer
because we believe that it benefits all participants.
We believe you will benefit because the Conversion Offer provides you
with Talley common stock having a higher market value than your Series B
Preferred Stock prior to the announcement of this offer. Moreover, the shares
of Talley common stock received by you trade more actively than your Series B
Preferred Stock, thereby enhancing their liquidity.
The transaction benefits Talley because the successful conclusion of
the Conversion Offer will strengthen its financial position by eliminating a
large and increasing dividend arrearage and improving its capital structure.
We believe that these benefits to Talley will translate into enhanced
shareholder value for the holders of Talley common stock, including Series B
holders accepting this offer.
The accrued and unpaid dividends on the Series B Preferred Stock,
through the scheduled expiration date of the Conversion Offer, will equal $5.00
per share. By converting your Series B Preferred Stock into Talley common
stock, your right to receive such accumulated and unpaid dividends is
automatically extinguished without payment, as specified by the stated
conversion terms of the Series B Preferred Stock.
<PAGE> 2
March 21, 1996
Page 2
The Conversion Offer is described in the enclosed Offering Circular
dated March 21, 1996 and in the accompanying Conversion Notice and Letter of
Transmittal. As you will see, a similar offer is also being made to the holders
of Talley's other series of outstanding preferred stock (Series A). The
Offering Circular includes Talley's Annual Report on Form 10-K for the year
ended December 31, 1995 and other important information concerning the
Conversion Offer and the Company. Please read this material carefully for a
full description of the terms and conditions of the Conversion Offer. We also
recommend that you review our 1995 Annual Report to Shareholders and Proxy
Statement that were recently mailed to you.
TO CONVERT SHARES OF SERIES B PREFERRED IN CONNECTION WITH THIS
CONVERSION OFFER AND RECEIVE 2.5 SHARES OF TALLEY COMMON STOCK UPON CONVERSION
OF EACH SHARE OF SERIES B PREFERRED STOCK, PLEASE FOLLOW THE INSTRUCTIONS IN
THE ENCLOSED CONVERSION NOTICE AND LETTER OF TRANSMITTAL. IF YOU HAVE ANY
QUESTIONS REGARDING THIS CONVERSION OFFER, PLEASE CALL KISSEL-BLAKE INC., THE
INFORMATION AGENT FOR THE OFFER, AT 800-554-7733 (TOLL FREE) OR
(212) 344-6733 (COLLECT).
Very truly yours,
/s/ WILLIAM H. MALLENDER
William H. Mallender
<PAGE> 3
[TALLEY INDUSTRIES LETTERHEAD]
IMPORTANT: THIS OFFER EXPIRES ON APRIL 22, 1996
March 21, 1996
TO: HOLDERS OF THE SERIES A CONVERTIBLE PREFERRED STOCK
("SERIES A PREFERRED STOCK") OF TALLEY INDUSTRIES, INC. ("TALLEY")
Talley is pleased to offer you a one-time opportunity, from today until
5:00 p.m., New York City time, April 22, 1996, to receive 2.0 shares of Talley
common stock upon conversion of each of your shares of Series A Preferred
Stock.
Currently, your shares of Series A Preferred Stock are each convertible
into 0.95 share of Talley common stock. If you choose to convert in connection
with this offer (the "Conversion Offer"), you will receive a total of 2.0
shares of Talley common stock for each share of Series A Preferred Stock
converted, or 1.05 additional shares of common stock. Although the financial
condition of Talley has improved since we last paid dividends to you and our
other shareholders in early 1991, our debt covenants and competing demands for
available cash resources make it unlikely in the foreseeable future that we
will cure the dividend arrearages at their present level or resume the payment
of regular dividends.
I urge you to convert your shares in response to the Conversion Offer
because I believe that it benefits all participants.
We believe you will benefit because the Conversion Offer provides you
with Talley common stock having a higher market value than your Series A
Preferred Stock prior to the announcement of this offer. Moreover, Talley
common stock is listed on the New York Stock Exchange (TAL) and trades
actively; your Series A Preferred Stock has no active market and is illiquid.
The transaction benefits Talley because the successful conclusion of
the Conversion Offer will strengthen its financial position by eliminating a
large and increasing dividend arrearage and improving its capital structure. We
believe that these benefits to Talley will translate into enhanced shareholder
value for the holders of Talley common stock, including Series A holders
accepting this offer.
The accrued and unpaid dividends on the Series A Preferred Stock,
through the scheduled expiration date of the Conversion Offer, will equal $5.50
per share. By converting your Series A Preferred Stock into Talley common
stock, your right to receive such accumulated and unpaid dividends is
automatically extinguished without payment, as specified by the stated
conversion terms of the Series A Preferred Stock.
<PAGE> 4
March 21, 1996
Page 2
The Conversion Offer is described in the enclosed Offering Circular
dated March 21, 1996 and in the accompanying Conversion Notice and Letter of
Transmittal. As you will see, a similar offer is also being made to the holders
of Talley's other series of outstanding preferred stock (Series B). The Offering
Circular includes Talley's Annual Report on Form 10-K for the year ended
December 31, 1995 and other important information concerning the Conversion
Offer and the Company. Please read this material carefully for a full
description of the terms and conditions of the Conversion Offer. We also
recommend that you review our 1995 Annual Report to Shareholders and Proxy
Statement that were recently mailed to you.
TO CONVERT SHARES OF SERIES A PREFERRED IN CONNECTION WITH THIS
CONVERSION OFFER AND RECEIVE 2.0 SHARES OF TALLEY COMMON STOCK UPON CONVERSION
OF EACH SHARE OF SERIES A PREFERRED STOCK, PLEASE FOLLOW THE INSTRUCTIONS IN THE
ENCLOSED CONVERSION NOTICE AND LETTER OF TRANSMITTAL. IF YOU HAVE ANY QUESTIONS
REGARDING THIS CONVERSION OFFER, PLEASE CALL KISSEL-BLAKE INC., THE INFORMATION
AGENT FOR THE OFFER, AT 800-554-7733 (TOLL FREE) OR (212) 344-6733 (COLLECT).
Very truly yours,
/s/ WILLIAM H. MALLENDER
William H. Mallender
<PAGE> 1
This announcement is neither an offer to convert nor a solicitation of an offer
to convert the Preferred Stock. The Conversion Offer is made solely by the
Offering Circular dated March 21, 1996 and the related Conversion Notice and
Letter of Transmittal. This Conversion Offer is not being made to, nor will
deliveries for conversion be accepted from or on behalf of, holders of Preferred
Stock in any jurisdiction in which making or delivering shares for conversion in
connection with the Conversion Offer would violate that jurisdiction's laws.
TALLEY INDUSTRIES, INC.
NOTICE OF OFFER TO ISSUE
2.0 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES A CONVERTIBLE PREFERRED STOCK
AND
2.5 SHARES OF COMMON STOCK UPON CONVERSION OF
EACH SHARE OF SERIES B $1 CUMULATIVE CONVERTIBLE PREFERRED STOCK
Talley Industries, Inc. (the "Company") is offering additional
shares of its Common Stock ("Common Stock") to induce conversion of its
outstanding Series A Convertible Preferred Stock ("Series A Preferred") and its
outstanding Series B $1 Cumulative Convertible Preferred Stock ("Series B
Preferred"). The conversion offer is being made on the terms and subject to the
conditions contained in the Company's Offering Circular dated March 21, 1996
(the "Offering Circular") and related Conversion Notice and Letter of
Transmittal (which together constitute the "Conversion Offer"). Holders who
convert in connection with the Conversion Offer will receive:
A total of 2.0 shares of Common Stock upon conversion of each share
of Series A Preferred - each Series A Preferred share is currently
convertible into 0.95 share of Common Stock in accordance with its
stated terms, and an additional 1.05 shares of Common Stock will be
issued as to each Series A Preferred share converted.
A total of 2.5 shares of Common Stock upon conversion of each share
of Series B Preferred - each Series B Preferred share is currently
convertible into 1.3125 shares of Common Stock in accordance with
its stated terms, and an additional 1.1875 shares of Common Stock
will be issued as to each Series B Preferred share converted.
The Company's obligation to complete the Conversion Offer as to
either the Series A Preferred or the Series B Preferred is subject to (among
other conditions as set forth in the Offering Circular) the proper delivery for
conversion of at least 51% of the outstanding shares of that series. The
Conversion Offer is open to all holders of Series A Preferred and Series B
Preferred during the period of the Conversion Offer, as described in the
Offering Circular.
- --------------------------------------------------------------------------------
THIS CONVERSION OFFER WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON MONDAY, APRIL 22, 1996, UNLESS
EXTENDED (THE "EXPIRATION DATE"). SHARES OF SERIES A
PREFERRED AND SERIES B PREFERRED DELIVERED FOR
CONVERSION MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
- --------------------------------------------------------------------------------
Questions relating to the Conversion Offer should be directed to
the Information Agent at the telephone numbers listed below. Copies of the
Offering Circular, the related Conversion Notice and Letter of Transmittal and
other documents relating to the Conversion Offer may be obtained from the
Information Agent.
The Information Agent for the Conversion Offer is:
Kissel-Blake Inc.
110 Wall Street
New York, New York 10005
(212) 344-6733 (Collect)
(800) 554-7733 (Toll Free)
Bankers and Brokers call
(212) 344-6733
March 22, 1996
