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:
Name of each Exchange
Title of each class on which registered
Common Stock, $1 Par Value New York Stock Exchange
Series B $1 Cumulative Convertible
Preferred Stock, $1 Par Value New York Stock Exchange
<TABLE>
<S>
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.
<S>
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by court. Yes[ ] No[ ]
As of February 1, 1996 there were 10,053,652 shares of Talley Industries, Inc. Common Stock $1 par
value outstanding.
<S>
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.
</TABLE>
<PAGE>
TABLE OF CONTENTS
Part I Page
Item 1. Business
(a) Developments since January 1, 1995 I-1
(b) Financial Information About Industry
Segments I-2
(c) Narrative Description of Business I-3
(d) Financial Information about Foreign
and Domestic Operations and Export
Sales I-26
(e) Executive Officers of the Registrant I-26
Item 2. Properties I-26
Item 3. Legal Proceedings I-28
Item 4. Submission of Matters to a Vote of
Security Holders I-28
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-2
Part III
Item 10. Directors and Executive Officers of the
Registrant III-1
Item 11. Executive Compensation III-4
Item 12. Security Ownership of Certain Beneficial
Owners and Management III-4
Item 13. Certain Relationships and Related Transactions III-4
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) DEVELOPMENTS SINCE JANUARY 1, 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
I-1
<PAGE>
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-40 through F-46 of the Company's
I-2
<PAGE>
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-13 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 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
I-3
<PAGE>
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
I-4
<PAGE>
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.
I-5
<PAGE>
> 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.
> 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
I-6
<PAGE>
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.
I-7
<PAGE>
> 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.
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
I-8
<PAGE>
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.
I-9
<PAGE>
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.
I-10
<PAGE>
The market for the Company's electronics components products
is highly competitive. The Company believes that it shares the
market for aerospace elapsed time indicators, fault indicators and
events counters primarily with one competitor. The Company
believes that its safe and arming devices compete with several
companies.
The Company believes that its market for naval architectural
and marine engineering services is served by the Company and a
small number of other major firms. These companies actively
compete with each other, and to a lesser extent with smaller design
firms, for U.S. Navy programs, foreign contracts and subcontracts
with private shipyards.
GOVERNMENT CONTRACT MATTERS
A high percentage of the Company's government defense contracts
are fixed-price contracts. The Company's naval architecture and
marine engineering contracts are generally cost reimbursable.
Although the Company's fixed-price contracts generally permit the
Company to retain unexpected profits if costs are less than
projected, the Company bears 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
I-11
<PAGE>
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
I-12
<PAGE>
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
I-13
<PAGE>
over-runs could have an adverse effect on the Company's results of
operations.
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.
I-14
<PAGE>
(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-34 to
F-36 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
I-15
<PAGE>
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 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
I-16
<PAGE>
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.
I-17
<PAGE>
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.
I-18
<PAGE>
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, 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
I-19
<PAGE>
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.
I-20
<PAGE>
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-21
<PAGE>
(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.
I-22
<PAGE>
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
I-23
<PAGE>
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.
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.
I-24
<PAGE>
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.
I-25
<PAGE>
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-40 through F-46 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.
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
I-26
<PAGE>
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,
I-27
<PAGE>
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-34 to F-36 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-28
<PAGE>
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-24 through F-26, "Capital Stock" on pages F-27 through F-29
and "Stock Market Data" on pages F-52 through F-53 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-47 and F-51 through F-53, 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-13 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
pages F-49 through F-50 of the Company's financial statements for
II-1
<PAGE>
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-2
<PAGE>
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
III-1
<PAGE>
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-2
<PAGE>
<TABLE>
<CAPTION>
E X E C U T I V E O F F I C E R S O F T H E R E G I S T R A N T
Name Age Offices Business Experience
<S> <S> <S> <S>
William H. Mallender 60 Chairman of the Board (1983) Chairman of the Board (1983) and Chief Executive Officer
and Chief Executive Officer of Registrant (1981); President of Registrant (1983-1981);
(1981), Chairman of the Executive Vice President of Registrant (1981-1978);
Executive Committee (1981) 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); Chief Operating Officer of
Operating Officer (1982) 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 and General Counsel of
Counsel and Secretary (1982) Registrant (1982); Assistant Counsel of Registrant (1982-1978)
Kenneth May 54 Vice President (1993) and Vice President (1993); Controller of Registrant (1982);
Controller (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 of Registrant (1982);
Treasurer (1982) Vice President of Finance, Southwest Pipe and Supply Company
(pump manufacturer) (1982); Treasurer and Chief Financial
Officer, AMERCO (equipment rental) (1982-1970)
</TABLE>
III-3
<PAGE>
(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-4
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a)-1 FINANCIAL STATEMENTS
A list of the financial statements included herein is set
forth in the Index to Financial Statements and Schedules
submitted as a separate section of this Report.
(a)-2 FINANCIAL STATEMENT SCHEDULES
A list of the financial statement schedules included herein is
contained in the accompanying Index to Financial Statements
and Schedules submitted as a separate section of this Report.
(a)-3 EXHIBITS
Exhibits listed in the Exhibit Index on the pages preceding
the exhibits of this report are filed as a part of this
report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 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>
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 Mark S. Dickerson
February 28, 1996 Mark S. Dickerson
Phoenix, Arizona Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
William H. Mallender Director, Chairman
William H. Mallender of the Board
Principal Executive
Officer February 28, 1996
Jack C. Crim Director, President
Jack C. Crim Chief Operating
Officer February 28, 1996
Kenneth May Vice President,
Kenneth May Controller
Principal Accounting
Officer February 28, 1996
Daniel R. Mullen Vice President,
Daniel R. Mullen Treasurer
Principal Financial
Officer February 28, 1996
IV-2
<PAGE>
Director
Neil W. Benson
Paul L. Foster Director February 28, 1996
Paul L. Foster
Townsend W. Hoopes Director February 28, 1996
Townsend W. Hoopes
Fred Israel Director February 28, 1996
Fred Israel
John D. MacNaughton, Jr. Director February 28, 1996
John D. MacNaughton, Jr.
Joseph A. Orlando Director February 28, 1996
Joseph A. Orlando
Alex Stamatakis Director February 28, 1996
Alex Stamatakis
John W. Stodder Director February 28, 1996
John W. Stodder
Donald J. Ulrich Director February 28, 1996
Donald J. Ulrich
David Victor Director February 28, 1996
David Victor
IV-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
PAGE IN
THIS REPORT
(1) Financial Statements:
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . F-2
Consolidated Statement of Operations - Years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . F-14
Consolidated Balance Sheet - December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . F-15
Consolidated Statement of Changes in Stockholders'
Equity - Years ended December 31, 1995,
1994 and 1993. . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statement of Cash Flows - Years
ended December 31, 1995, 1994 and 1993 . . . . . . . F-18
Notes to Consolidated Financial Statements,
including Summary of Segment Operations. . . . . . . F-19
Five Year Summary of Operations. . . . . . . . . . . . F-47
Report of Independent Accountants. . . . . . . . . . . F-48
Quarterly Financial Results. . . . . . . . . . . . . . F-49
Selected Financial Data and Supplemental Data. . . . . F-51
Stock Market Data. . . . . . . . . . . . . . . . . . . F-52
Financial Statement Schedules:
I - Condensed Financial Information of
Registrant. . . . . . . . . . . . . . . . . . F-55
II - Valuation and Qualifying Accounts . . . . . . . F-61
III - Real Estate and Accumulated Depreciation . . . . F-62
IV - Mortgage Loans on Real Estate. . . . . . . . . . F-63
All other schedules are omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Separate financial statements for 50% or less owned companies
accounted for by the equity method have been omitted because each
such company does not constitute a significant subsidiary.
F-1
<PAGE>
TALLEY 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
F-2
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Government Products and Services, continued
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 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
F-3
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Industrial Products, continued
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.
F-4
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Realty, continued
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 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
F-5
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Other Matters, continued
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
F-6
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Other Matters, continued
services rendered pursuant to specific funded task orders and is
not obligated to issue additional task orders or to pay the
estimated total contract price. The term "unfunded" used herein
refers to the portion of the Company's total backlog that
represents the excess of the stated value of the Company's executed
contracts over the amounts funded by the customer for such
contracts including unexercised options.
Substantially all operations of the Company are located within
the United States. The Company operates a steel distribution
system in Canada which had sales in 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.
F-7
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recently Issued Accounting Pronouncements, continued
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 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.
F-8
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Litigation, continued
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.
F-9
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Litigation, continued
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.
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
F-10
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Environmental, continued
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.
F-11
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources, continued
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 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
F-12
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources, continued
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-13
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statement of Operations
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-14
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1995 1994
------------ ------------
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
============ ============
F-15
<PAGE>
December 31, 1995 1994
------------ ------------
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
============ ============
The accompanying notes are an integral part of the financial
statements.
F-16
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Changes in Stockholders' Equity
Capital in Retained
Preferred Stock Common Excess of Treasury Earnings
Series A Series B Series D Stock Par Value Stock (Deficit)
-------- ---------- -------- ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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-17
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Cash Flows
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-18
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of
the Company and its majority-owned domestic and foreign
subsidiaries. Real estate joint ventures that are majority owned
and under the control of the Company are also included in the
consolidated accounts of the Company. All unconsolidated companies
are reflected in the financial statements on the equity basis. All
material intercompany transactions have been eliminated.
Nature of Operations:
Talley Industries, Inc. is a diversified manufacturer of a wide
range of proprietary and other specialized products for defense,
industrial and commercial applications. Through its Government
Products and Services segment, the Company manufactures an
extensive array of propellant devices and electronic components for
defense systems and commercial applications and provides naval
architectural and marine engineering services. The vast majority
of the Government Products and Services are for U.S. Defense and
are smaller components of larger units and systems that are
generally designed to enhance safety or improve performance. The
Company participates in the expanding market for automotive airbags
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.
F-19
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies, (continued)
Cash and Cash Equivalents, (continued):
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 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
F-20
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies, (continued)
Realty Assets, (continued):
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-21
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies, (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.
F-22
<PAGE>
Notes to Consolidated Financial Statements
Inventories
Inventories are summarized as follows:
(balances in thousands) 1995 1994
------- -------
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
======= =======
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.
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:
(balances in thousands) 1995 1994
-------- --------
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
======== ========
Long-term receivables include income tax receivables of
$5,975,000, which must be approved by the Congressional Joint
F-23
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Receivables, (continued)
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:
(balances in thousands) 1995 1994
-------- --------
Machinery and equipment $107,576 $100,383
Buildings and improvements 30,791 31,224
Land 2,788 2,715
-------- --------
$141,155 $134,322
======== ========
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.
Long-Term Debt
Long-term debt consists of the following:
(balances in thousands) 1995 1994
-------- --------
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
======== ========
F-24
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
On October 22, 1993 the Company completed a major debt
refinancing program. The Company received gross proceeds of
$70,000,000 from the issuance of Senior Discount Debentures, due
2005, which were issued to yield 12.25% (face amount of
$126,555,000). In addition, Talley Manufacturing and Technology,
Inc., ("Talley Manufacturing") a wholly owned subsidiary of the
Company, which owns all of the Company's subsidiaries (except for
the subsidiaries holding the Company's real estate operations),
issued $115,000,000 of Senior Notes, due 2003, with an interest
rate of 10.75%. Talley Manufacturing also completed a $60,000,000
secured credit facility with two institutional lenders. The gross
proceeds of the public offerings, plus an initial borrowing under
the secured credit facility, after payment of underwriting and
other fees and expenses associated with these financings, were used
to repay substantially all of the Company's previously outstanding
non-real estate related debt.
The indentures for the Senior Notes and the Senior Discount
Debentures and the loan agreement relating to the secured credit
facility contain covenants requiring specified fixed charge
coverage ratios, working capital levels, capital expenditure
limits, net worth levels, cash flow levels and certain other
restrictions including limitations on dividends and other payments
and incurrence of debt. As a holding company with no significant
operating or income-producing assets beyond its stock interests in
Talley Manufacturing and the subsidiaries holding its real estate
operations, the Company is dependent primarily upon distributions
from these subsidiaries to meet its debt service and other
obligations. Payments from the subsidiaries are generally limited
by the debt covenants of Talley Manufacturing.
Substantially all of the receivables, inventory and property,
plant and equipment of Talley Manufacturing and its subsidiaries
are pledged as collateral in connection with the secured credit
facility. In addition, the subsidiaries of Talley Manufacturing
have guaranteed Talley Manufacturing's obligations under the Senior
Notes and the secured credit facility and the Company has
guaranteed the Senior Notes on a subordinated basis. The capital
stock of Talley Manufacturing has been pledged by the Company to
secure the Senior Discount Debentures.
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.
F-25
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
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 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.
F-26
<PAGE>
Notes to Consolidated Financial Statements
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 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
F-27
<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
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
F-28
<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
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. 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.
F-29
<PAGE>
Notes to Consolidated Financial Statements
Employee Benefit Plans, (continued)
The Company generally contributes the greater of the amounts
expensed or the minimum statutory funding requirements.
Pension costs for defined benefit plans include the following
components:
(balances in thousands) 1995 1994 1993
-------- -------- --------
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
======== ======== ========
The following table sets forth the aggregate funded status of
defined benefit plans at December 31, 1995 and 1994:
1995
----------------------------
Assets Exceed Accumulated
Accumulated Benefits
(balances in thousands) Benefits Exceed Assets
------------- -------------
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
F-30
<PAGE>
Notes to Consolidated Financial Statements
Employee Benefit Plans, (continued)
1994
----------------------------
Assets Exceed Accumulated
Accumulated Benefits
(balances in thousands) Benefits Exceed Assets
------------- -------------
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
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:
1995 1994 1993
---- ---- ----
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%
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.
F-31
<PAGE>
Notes to Consolidated Financial Statements
Employee Benefit Plans, (continued)
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:
(balances in thousands) 1995 1994 1993
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
======== ======== ========
F-32
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities for 1995
and 1994 are as follows:
(balances in thousands) 1995 1994
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
======== ========
Reasons for the differences between the amount of income tax
determined by applying the applicable statutory federal income tax
rate to pretax income are:
1995 1994 1993
------- -------- --------
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
======= ======== ========
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
F-33
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
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 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
F-34
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
TRW Claims, (continued)
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.
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.
F-35
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Environmental, (continued)
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
F-36
<PAGE>
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments, (continued)
Statement No. 107 "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a force or
liquidation sale.
(balances in thousands) 1995 1994
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
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
The following notes summarize the major methods and
assumptions used by the Company in estimating the fair values of
financial instruments.
Cash and cash equivalents
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments.
Non-trade receivables
Interest rates on non-trade receivables, including the current
portion, are generally at current market rates. Accordingly the
carrying value and fair value of the receivables are equal after
considering allowances for the carrying value of certain notes.
Debt
The fair value of the Company's 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
F-37
<PAGE>
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments, (continued)
Debt, continued
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-38
<PAGE>
Notes to Consolidated Financial Statements
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
F-39
<PAGE>
Notes to Consolidated Financial Statements
Recently Issued Accounting Standards, (continued)
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.
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
F-40
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
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-41
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (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.
F-42
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
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.
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
F-43
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Other Matters, continued
estimated total contract price. The term "unfunded" used herein
refers to the portion of the Company's total backlog that
represents the excess of the stated value of the Company's executed
contracts over the amounts funded by the customer for such
contracts including unexercised options.
The tables which follow show assets, depreciation and amortization
and capital expenditures by segment:
(in thousands) 1995 1994 1993
-------- -------- --------
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
======== ======== ========
F-44
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Summary of Segment Operations
(in thousands)
Years Ended December 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <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>
F-45
<PAGE>
Talley Industries, Inc. and Subsidiaries
Summary of Segment Operations, (continued)
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-46
<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Five Year Summary of Operations
(in thousands, except per share amounts)
Years Ended December 31, 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <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>
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF TALLEY INDUSTRIES, INC.
In our opinion, the consolidated financial statements listed in 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-48
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Quarterly Financial Results (Unaudited)
(in thousands, except per share amounts)
Quarter Ended March June September December
--------- -------- --------- ---------
Year Ended December 31, 1995
<S> <C> <C> <C> <C>
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>
<PAGE>
Talley Industries, Inc. and Subsidiaries
Quarterly Financial Results (Unaudited) - continued
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-50
<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Financial Data
SELECTED FINANCIAL DATA
(in thousands, except ratios)
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
======== ======== ======== ======== ========
For the dividends per common share see Stock Market Data on page F-52.
* Long-term debt, subject to acceleration is included in current liabilities
SUPPLEMENTAL DATA
(in thousands)
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-51
<PAGE>
<TABLE>
Talley Industries, Inc. and Subsidiaries
<CAPTION>
Stock Market Data
SECURITIES
<S>
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:
Common Stock (TAL) Series B (TALB)
Quarter 1995 1994 1995 1994
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>
F-52
<PAGE>
Talley Industries, Inc. and Subsidiaries
Stock Market Data (continued)
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-53
<PAGE>
Directors and Corporate Management
DIRECTORS
William H. Mallender - Chairman of the Board and Chief
Executive Officer *
Jack C. Crim - President and Chief Operating Officer
Neil W. Benson - Chartered Accountant, Lewis Golden &
Co. **
Paul L. Foster - Professor of Finance, Saint Joseph's
University **
Townsend Hoopes - Retired, formerly President,
Association of American Publishers,
Inc. **
Fred Israel - Retired, formerly Senior Partner
Israel and Raley
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. **
* Executive Committee Members
** Audit Committee
CORPORATE MANAGEMENT
William H. Mallender - Chairman of the Board and Chief
Executive Officer
Jack C. Crim - President and Chief Operating Officer
William E. Bonnell - Vice President - Human Resources
Mark S. Dickerson - Vice President, General Counsel and
Secretary
Kenneth May - Vice President and Controller
Daniel R. Mullen - Vice President and Treasurer
George W. Poole - Vice President - Government Relations
F-54
<PAGE>
SCHEDULE I
Page 1 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
DECEMBER 31,
1995 1994
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
======== ========
See accompanying notes and the notes to the consolidated financial
statements.
F-55
<PAGE>
SCHEDULE I
Page 2 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
DECEMBER 31,
1995 1994
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
======== ========
See accompanying notes and the notes to the consolidated financial
statements.
F-56
<PAGE>
SCHEDULE I
Page 3 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
1995 1994 1993
-------- -------- --------
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)
======== ======== ========
See accompanying notes and the notes to the consolidated financial
statements.
F-57
<PAGE>
SCHEDULE I
Page 4 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
1995 1994 1993
-------- -------- --------
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
======== ======== ========
See accompanying notes and the notes to the consolidated financial
statements.
F-58
<PAGE>
SCHEDULE I
Page 5 of 6
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.
F-59
<PAGE>
SCHEDULE I
Page 6 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
Notes to Financial Statements
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-60
<PAGE>
<TABLE>
SCHEDULE II
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1995
(thousands)
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
<S>
Notes:
(a) Uncollectible accounts charged against reserves, net of bad debt recoveries.
</TABLE>
F-61
<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
Cost Capitalized
Initial Cost to Subsequent To Gross Amount at Which
Company Acquisition Carried at Close of Period
--------------- ----------------- ---------------------------------------
Bldgs Bldgs
and Land Carrying and (3) (1)(2)(4)
Description Encumbrances Land Improve Improve Costs Land Improve Reserve Total
- ------------------------------- ------------ -------- ------- ------- -------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona Corporate Park North $ -0- $ 6,097 $ -0- $ 85 $ 206 $ 6,388 $-0- $ 0 $ 6,388
(Developed Business Park - AZ)
Elliot & McQueen 1,796 15,181 0 2,006 2,528 19,715 0 (9,441) 10,274
(Industrial Property - AZ)
West Wing Ranch 586 11,030 0 156 3,705 14,891 0 (2,388) 12,503
(Residential Property - AZ)
McGinty Ranch 700 12,824 0 250 3,638 16,712 0 (11,348) 5,364
(Resort & Residential - CA)
Las Montanas 1,148 11,618 0 28,554 8,079 48,251 0 0 48,251
(Resort & Residential - CA)
San Antonio 0 13,117 0 6 649 13,772 0 (8,194) 5,578
(Industrial, Comm. & Res. - TX)
Other (Each less than 5%) 3,956 27,164 4,715 780 4,775 37,434 0 (20,828) 16,606
(Comm.,Indus. & Res - AZ)
Collateralized credit lines 1,949 0 0 0 0 0 0 0 0
(Various properties) ------- -------- ------ ------- ------- -------- ----- -------- --------
$10,135 $ 97,031 $4,715 $31,837 $23,580 $157,163 $-0- $(52,199) $104,964
======= ======== ====== ======= ======= ======== ===== ======== ========
NOTES:
(1) CARRYING COSTS - RECONCILIATION OF BEGINNING AND ENDING BALANCE:
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
======== ======== ========
<S>
(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.
</TABLE>
F-62
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (Cont.)
December 31, 1995
(In thousands)
(5)
Accum Date of Date Dep
Description Deprec. Constr. Acquired Life
- ------------------------------- ------- ------- -------- ----
<S> <C> <C> <C> <C>
Arizona Corporate Park North N/A N/A 12/89 N/A
(Developed Business Park - AZ)
Elliot & McQueen N/A N/A 11/85 N/A
(Industrial Property - AZ)
West Wing Ranch N/A N/A 12/87 N/A
(Residential Property - AZ)
McGinty Ranch N/A N/A 3/86 N/A
(Resort & Residential - CA)
Las Montanas N/A N/A Various N/A
(Resort & Residential - CA)
San Antonio N/A N/A 5/90 N/A
(Industrial, Comm. & Res. - TX)
Other (Each less than 5%) 1,934 N/A 9/81-7/93 15-40
(Comm.,Indus. & Res - AZ)
<S>
(5) The change in accumulated depreciation of $200 during 1995 is due to
depreciation expense for the year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
Page 1 of 2
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Mortgage Loans on Real Estate
December 31, 1995
(In thousands)
Principal Amount of
Periodic Face Amount Carrying(a)(c) Loans Subject to
Interest Payment Prior of Amount of Delinquent Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
- ------------------------ -------- -------- -------- ------- --------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Georgia/Canada
- --------------
Commercial properties
with buildings - 2nd
Mortgage 9.5% Mar 1995 (b) - $3,829 $2,829 This amount represents
a receivable which is
Arizona in default.
- -------
Unimproved commercial
properties - 1st Dec 1995-
Mortgage 5.0%-11% Oct 2008 (b) - 1,100 852
------ ------
$4,929 $3,681
====== ======
</TABLE>
F-63
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
Page 2 of 2
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Mortgage Loans on Real Estate
December 31, 1995
(In thousands)
<S>
Notes:
(a) Carrying amount of mortgages reconciliation of beginning and ending balances:
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
======== ======= =======
<S>
(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.
</TABLE>
F-64
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation as presently in
effect, a copy of which was attached as Exhibit 2 of
Registrant's current report on Form 8-K for the month of
July, 1976, incorporated herein by this reference.
3.2 Certificate of Amendment of Certificate of Incorporation
dated May 22, 1987, attached as Exhibit 3 to the
Company's Form 10-Q for the quarter ended March 31, 1988,
incorporated herein by this reference.
3.3 By-laws of Registrant as amended March 9, 1993, attached
as Exhibit 3.3 to the Company's Form 10-K for the year
ended December 31, 1992, incorporated herein by this
reference.
4.1 Amended and Restated Rights Agreement between the
Registrant and Chemical Mellon Shareholder Services,
L.L.C., successor to Manufacturers Hanover Trust Company
of California, as Rights Agent, dated as of April 30,
1986, and amended as of July 21, 1986 and further amended
and restated as of February 2, 1996, specifying the terms
of the Rights (the " Amended Rights Agreement"), attached
as Exhibit 2.4 to the Company's Form 8-A dated February
2, 1996, incorporated herein by this reference.
4.2 Certificate of Designations for Registrant's Series C
Junior Participating Preferred Stock (Exhibit A to the
Amended Rights Agreement), attached as Exhibit 2.5 to the
Company's Form 8-A dated February 2, 1996, incorporated
herein by this reference.
4.3 Form of Right Certificate (Exhibit B to the Amended
Rights Agreement), attached as Exhibit 1.1 to the
Company's Form 8-A dated February 2, 1996, incorporated
herein by this reference.
4.4 Form of Purchase Agreement between the Company and a
selling shareholder or a representative thereof, attached
as Exhibit 28.1 to the Company's Form S-3 filed on
November 14, 1986 (Registration No. 33-10193),
incorporated herein by this reference.
4.5 Report dated May 4, 1987 reporting the April 28, 1987
Board of Directors' declaration of a five-for-four split
of the Company's Common Stock, filed on Form 8-K on May
4, 1987, incorporated herein by this reference.
4.6 Certificate of Designation, Preferences and Rights of
Series D Cumulative Convertible Preferred Stock which was
attached as Exhibit 4 of Registrant's current report on
Form 8-K dated March 17, 1988, incorporated herein by
this reference.
<PAGE>
4.7 Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of Talley Manufacturing and
Technology, Inc., attached as Exhibit 4(e) to the
Company's Form S-1 dated October 15, 1993, incorporated
herein by reference.
4.8 Indenture Agreement between Talley Industries, Inc. and
Bank One, Columbus, N.A., a national banking association,
as Trustee, dated as of October 15, 1993 relating to the
12-1/4% Senior Discount Debentures due 2005 issued by
Talley Industries, Inc. and the exhibits thereto,
attached as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended September 30, 1993, incorporated herein
by reference.
4.9 Indenture Agreement among Talley Manufacturing and
Technology, Inc., the Subsidiary Guarantors (as defined),
Talley Industries, Inc. and Bank One, Columbus, N.A., a
national banking association, as Trustee, dated as of
October 15, 1993 relating to the 10-3/4% Senior Notes due
2003 issued by Talley Manufacturing and Technology, Inc.
and the exhibits thereto, attached as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
9.1 Amended and Restated Voting Trust Agreement entered into
as of February 7, 1996, by and among Talley Industries,
Inc., John J. McMullen and First Interstate Bank of
Arizona, N.A., as Trustee, attached as Exhibit 9.1 of
Registrant's current report on Form 8-K dated February 2,
1996, incorporated herein by this reference.
10.1** Employment Agreement dated June 26, 1984 between the
Company and William H. Mallender, attached as Exhibit
10.1 to the Company's Form 10-K for the year ended
December 31, 1984, incorporated herein by this reference.
10.2** Amendment to Employment Agreement dated September 30,
1985, between the Company and William H. Mallender,
attached as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended September 30, 1985, incorporated herein
by this reference.
10.3** Second Amendment to Employment Agreement dated February
25, 1986 between the Company and William H. Mallender,
attached as Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1988,
incorporated herein by this reference.
10.4** Third Amendment to Employment Agreement dated December 1,
1988 between the Company and William H. Mallender,
attached as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1988,
incorporated herein by this reference.
<PAGE>
10.5** Fourth Amendment to Employment Agreement dated February
27, 1990 between the Company and William H. Mallender,
attached as Exhibit 28.2 to the Company's Form 10-Q for
the quarter ended March 31, 1990, incorporated herein by
this reference.
10.6** Fifth Amendment to Employment Agreement dated April 1,
1995 between the Company and William H. Mallender,
attached as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1995, incorporated herein by
this reference.
10.7** Amended and Restated Executive Incentive Plan of the
Company adopted February 22, 1994, attached as Exhibit
10.6 to the Company's Form 10-K for the year ended
December 31, 1994, incorporated by this reference.
10.8** Long-Term Incentive Plan of the Company adopted July 26,
1983, attached as Exhibit 4.1 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1983,
incorporated herein by this reference.
10.9** Amended and Restated 1978 Stock Option Plan of the
Company, adopted July 26, 1983, attached as Exhibit 4.3
to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1983, incorporated herein by this
reference.
10.10** 1990 Stock Option Plan of the Company attached as Exhibit
A to the Company's Proxy Statement dated March 21, 1990,
incorporated herein by this reference.
10.11** Plan for Deferral of Directors' Fees as established by
the Company on December 30, 1975, attached as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1983, incorporated herein by
this reference.
10.12** Amendment dated December 14, 1979 to the Plan for
Deferral of Directors' Fees established by the Company on
December 30, 1975, attached as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1983, incorporated herein by this reference.
10.13** Second Amended and Restated 1978 Stock Option Plan of the
Company, dated July 8, 1987, attached as Exhibit 4.8 to
the Company's Form S-8 Registration Statement, filed June
18, 1987, incorporated herein by this reference.
10.14** Restated Talley Industries, Inc. Retirement Plan
Directors Only effective July 28, 1987, dated June 14,
1988, attached as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the period ended December 31,
1988, incorporated herein by this reference.
<PAGE>
10.15 License Agreement by and between Talley Industries, Inc.,
Talley Defense Systems, Inc. and Talley Automotive
Products, Inc., and TRW Inc., dated April 21, 1989
attached as Exhibit 28.1 to the Company's Form 8-K dated
April 21, 1989, incorporated herein by this reference.
10.16** Talley Industries, Inc. Executive Death and Retirement
Supplemental Plan dated July 1, 1987, attached as Exhibit
10.31 to the Company's Form 10-K for the period ended
December 31, 1989, incorporated herein by this reference.
10.17** Talley Industries, Inc. Restoration Benefit Plan dated
November 30, 1975, attached as Exhibit 7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
March 31, 1976, incorporated herein by this reference.
10.18** First Amendment to the Talley Industries, Inc. Executive
Death and Retirement Supplemental Plan, dated March 25,
1981, attached as Exhibit 10.34 to the Company's Form
10-K for the period ended December 31, 1990, incorporated
herein by this reference.
10.19** First Amendment to the Restoration Benefit Plan of Talley
Industries, Inc., dated January 2, 1990, attached as
Exhibit 10.34 to the Company's Form 10-K for the period
ended December 31, 1989, incorporated herein by this
reference.
10.20** Second Amendment to the Restoration Benefit Plan of
Talley Industries, Inc. dated March 25, 1991, attached as
Exhibit 10.39 to the Company's Form 10-K for the period
ended December 31, 1990, incorporated herein by this
reference.
10.21** Second Amendment to Talley Industries, Inc. Retirement
Plan Directors Only effective January 1, 1991, dated May
7, 1991, attached as Exhibit 10.2 to the Company's Form
10-Q for the quarter ended June 30, 1991, incorporated
herein by reference.
10.22** Form of Indemnification Procedures Agreement between each
director of Holdings and Holdings, attached as Exhibit
10(hh) to Amendment No. 1 of the Company's Form S-1 dated
September 10, 1993, incorporated herein by reference.
10.23** Form of Indemnification Procedures Agreement between
Holdings and each director of Holdings who is also an
officer, attached as Exhibit 10(ii) to Amendment No. 1 of
the Company's Form S-1 dated September 10, 1993,
incorporated herein by reference.
10.24 Form of Indemnification Procedures Agreement between
Talley Manufacturing and each of its directors, attached
as Exhibit 10(jj) to Amendment No. 1 of the Company's
Form S-1 dated September 10, 1993, incorporated herein by
reference.
<PAGE>
10.25** Memorandum of Terms and Conditions applicable to:
Performance Units granted for calendar years 1993 through
1997 under the 1983 Long-Term Incentive Plan and Stock
Options granted in 1993 under The Second Amended and
Restated 1978 Stock Option Plan and the 1990 Stock Option
Plan, attached as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended March 31, 1993, incorporated herein
by reference.
10.26 Tax Sharing Agreement among Talley Industries, Inc.,
Talley Manufacturing and Technology, Inc. and each of
their respective subsidiaries, dated as of October 22,
1993, attached as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended September 30, 1993, incorporated
herein by reference.
10.27 Restructuring, Assumption and Cost Sharing Agreement
among Talley Industries, Inc., Talley Manufacturing and
Technology, Inc. and Talley Real Estate Company, Inc.
dated as of October 22, 1993, attached as Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended September
30, 1993, incorporated herein by reference.
10.28** Talley Industries, Inc. Directors Benefit Plan as
established by the Company effective January 1, 1994,
attached as Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended March 31, 1994, incorporated herein by
reference.
10.29** Third Amendment to The Restoration Benefit Plan of Talley
Industries, Inc., dated June 30, 1994, attached as
Exhibit 10.29 to the Company's Form 10-K for the year
ended December 31, 1994, incorporated herein by
reference.
11* Computation of earnings per share.
21* Subsidiaries of the Registrant.
23.1* Consent of Company's Independent Public Accountants to
the incorporation by reference of their reports for the
current year accompanying the financial statements
included in the Company's Forms S-3 and S-8 Registration
Statements.
23.2* Consent of Company's Independent Public Accountants to
the incorporation by reference of their report for the
current year accompanying the financial statements
included in the Form 11-K Annual Report (Exhibit 99.1
herein) for the year ended December 31, 1995 into the
Registrant's applicable Form S-8 Registration Statements.
27* Financial Data Schedule for Talley industries, Inc.
December 31, 1995.
99.1* Annual Report on Form 11-K for The Employee Stock
Purchase Plan of Talley Industries, Inc. and Affiliated
Companies for the year ended December 31, 1995.
<PAGE>
99.2 Loan and Security Agreement among Talley Manufacturing
and Technology, Inc., the Lenders listed therein and
Transamerica Business Credit Corporation, as Agent dated
October 22, 1993, attached as Exhibit 99.1 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
99.3 First Amendment to Loan and Security Agreement dated
April 29, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
99.4 Second Amendment to Loan and Security Agreement dated
June 30, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
99.5 Third Amendment to Loan and Security Agreement dated
December 16, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 99.5 to the
Company's Form 10-K for the year ended December 31, 1994,
incorporated herein by reference.
99.6 Airbag Collateral Security, Intercreditor and Agency
Agreement dated as of October 22, 1993 among Talley
Manufacturing and Technology, Inc., Talley Technology,
Inc., Talley Defense Systems, Inc., Talley Automotive
Products, Inc., Talley Metals Technology, Inc. and
Transamerica Business Credit Corporation as Agent and as
collateral agent for the Lenders (as defined) and the
Senior Note Trustee, Lenders and Bank One, Columbus,
N.A., a national banking association, as Trustee for the
holders of the 10-3/4% Senior Notes due 2003 issued by
Talley Manufacturing and Technology, Inc., attached as
Exhibit 99.2 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
99.7 Form of Subsidiary Loan Agreement dated as of October 22,
1993 between Talley Manufacturing and Technology, Inc.
and each of certain subsidiaries, attached as Exhibit
99.3 to the Company's Form 10-Q for the quarter ended
September 30, 1993, incorporated herein by reference.
99.8 Subsidiary Loan and Security Agreement dated as of
October 22, 1993 between Talley Manufacturing and
Technology, Inc. and Talley Technology, Inc., attached as
Exhibit 99.4 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
<PAGE>
99.9 Form of Subsidiary Continuing Guaranty and Security
Agreement dated as of October 22, 1993 between
Transamerica Business Credit Corporation, a Delaware
corporation and each of certain subsidiaries, attached as
Exhibit 99.5 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
99.10 First Amendment to Subsidiary Loan and Security
Agreement, dated as of December 16, 1994 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.10 to the Company's
Form 10-K for the year ended December 31, 1994,
incorporated herein by reference.
99.11 First Amendment to Subsidiary Continuing Guaranty and
Security Agreement dated as of December 16, 1994 between
Transamerica Business Credit Corporation, and each of the
Guarantors (certain subsidiaries), attached as Exhibit
99.11 to the Company's Form 10-K for the year ended
December 31, 1994, incorporated herein by reference.
99.12 Consulting Agreement dated February 7, 1996 by and among
Talley Manufacturing and Technology, Inc. and McMullen
Consultants Inc., attached as Exhibit 99.1 to the
Company's Form 8-K under current report date of February
2, 1996, incorporated herein by reference.
* Documents marked with an asterisk are filed with this
report.
** An executive compensation plan or arrangement.
<TABLE>
EXHIBIT 11
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Computation of Earning per Share
(In thousands, except per share amounts)
<S>
The computations of earnings per share on both the primary and fully diluted basis for the years ended December 31, 1995, 1994,
1993, 1992 and 1991 were as follows:
Y E A R S E N D E D D E C E M B E R 3 1,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------- ----------------- -------------------- -------------------- --------------------
Primary Diluted Primary Diluted Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- -------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) from
continuing operations $ 3,555 $ 3,555 $ 3,506 $ 3,506 $ (5,994) $ (5,994) $(17,204) $(17,204) $(43,984) $(43,984)
Preferred stock dividends - - (2,167) (2,167) (2,167) (2,167) (2,168) (2,168) (2,172) (2,172)
Earnings (loss) for
computation from continuing
operations 3,555 3,555 1,339 1,339 (8,161) (8,161) (19,372) (19,372) (46,156) (46,156)
Discontinued operations - - - - - - - - 825 825
Extraordinary gains (loss) 14,409 14,409 - - (504) (504) 2,637 2,637 - -
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Net earnings (loss) for
computation $17,964 $17,964 $ 1,339 $ 1,339 $ (8,665) $ (8,665) $(16,735) $(16,735) $(45,331) $(45,331)
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
Average number of common
shares outstanding during
the year 10,051 10,051 10,029 10,029 9,676 9,676 9,189 9,189 8,795 8,795
Common stock equivalents:
Convertible preferred stock 3,300 3,300 - - - - - - - -
Stock options 327 347 245 261 - - - - - -
Shares issuable in
connection with
acquired company 323 323 138 138 - - - - - -
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Shares for computation 14,001 14,021 10,412 10,428 9,676 9,676 9,189 9,189 8,795 8,795
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share from
continuing operations $ .25 $ .25 $ .13 $ .13 $ (.85) $ (.85) $ (2.11) $ (2.11) $ (5.24) $ (5.24)
Discontinued operations - - - - - - - - .09 .09
Extraordinary gains (loss) 1.03 1.03 - - (.05) (.05) .29 .29 - -
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per share $ 1.28 $ 1.28 $ .13 $ .13 $ (.90) $ (.90) $ (1.82) $ (1.82) $ (5.15) $ (5.15)
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
EXHIBIT 21
Subsidiaries of Talley Industries, Inc.
The following are the subsidiaries of the Registrant, as of December 31,
1995:
Percentage
of Voting Jurisdiction
Securities of
Owned Incorporation
---------- -------------
1. Talley Manufacturing and Technology, Inc. 100% Delaware
a. Amcan Specialty Steels, Inc. 100% New Jersey
b. Dimetrics, Inc. 100% Delaware
c. Electrodynamics, Inc. 100% Arizona
d. John J. McMullen Associates, Inc. 100% Delaware
e. Porcelain Products Co. 100% Delaware
f. Rowe Industries, Inc. 100% Delaware
g. Talley Canada, Inc. 100% Canada
h. Talley Defense Systems, Inc. 100% Delaware
i. Talley Metals Technology, Inc. 100% Delaware
j. Talley Technology, Inc. 100% Delaware
k. Universal Propulsion Company, Inc. 100% Delaware
l. Waterbury Companies, Inc. 100% Delaware
2. Talley Real Estate Company, Inc. 100% Delaware
a. Talley Realty Development, Inc. 100% Delaware
b. Talley Realty Holding Company, Inc. 100% Delaware
b.(1) LME Capital Corporation 90% Deleware
c. Talley Realty Investment Group, Inc. 100% Delaware
d. Talley Realty Finance and
Investment Company, Inc. 100% Arizona
d.(1) New California Corp. 100% California
Each of the above subsidiaries is included in the Company's Consolidated
Financial Statements. Several inactive or minor corporations are not
included above because all of them, when taken in the aggregate, do not
constitute a significant subsidiary.
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-3 and S-8 (Nos. 33-10193, 2-85486, 2-85487, 2-91162,
2-85473, 33-5432, 2-63214, 33-22657, 33-30335, 33-37258, 33-15175,
33-47065, 33-51492, 33-60922, 33-51511 and 33-53901) of Talley
Industries, Inc. of our report dated February 19, 1996 appearing
on page F-48 of this Form 10-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 28, 1996
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-8 (Nos. 2-85473, 33-5432, 33-47065 and 33-51492) of Talley
Industries, Inc. of our report dated February 22, 1996 appearing
on page F-1 of the Annual Report on Form 11-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,475,000
<SECURITIES> 0
<RECEIVABLES> 70,728,000
<ALLOWANCES> 1,275,000
<INVENTORY> 67,191,000
<CURRENT-ASSETS> 156,615,000
<PP&E> 141,155,000
<DEPRECIATION> 92,395,000
<TOTAL-ASSETS> 372,599,000
<CURRENT-LIABILITIES> 61,213,000
<BONDS> 235,716,000
0
1,735,000
<COMMON> 10,053,000
<OTHER-SE> 46,546,000
<TOTAL-LIABILITY-AND-EQUITY> 372,599,000
<SALES> 301,296,000
<TOTAL-REVENUES> 385,286,000
<CGS> 224,236,000
<TOTAL-COSTS> 275,721,000
<OTHER-EXPENSES> 73,926,000
<LOSS-PROVISION> 406,000
<INTEREST-EXPENSE> 28,666,000
<INCOME-PRETAX> 6,973,000
<INCOME-TAX> 3,418,000
<INCOME-CONTINUING> 3,555,000
<DISCONTINUED> 0
<EXTRAORDINARY> 14,409,000
<CHANGES> 0
<NET-INCOME> 17,964,000
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 0.00
</TABLE>
EXHIBIT 99.1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-4778
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
B. Name of issuer of the securities held pursuant to the
plan and the address of its principal executive office:
TALLEY INDUSTRIES, INC.
2702 North 44th Street
Phoenix, Arizona 85008
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
INDEX OF FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Pages
Report of Independent Accountants F-1
Financial Statements:
Statement of Financial Condition - December 31, 1995
and 1994 F-2
Statement of Income and Changes in Plan Equity -
For the years ended December 31, 1995, 1994 and 1993 F-3
Notes to Financial Statements F-4
Schedules:
Schedules I, II and III have been omitted because the
required information is shown in the financial statements.
Exhibits:
None
<PAGE>
Report of Independent Accountants
To the Participants and Administrator
of Talley Savings Plus, The Employee
Stock Purchase Plan of Talley
Industries, Inc. and Affiliated Companies
In our opinion, the accompanying statement of financial condition
and the related statement of income and changes in plan equity
present fairly, in all material respects, the financial condition
of Talley Savings Plus, The Employee Stock Purchase Plan of Talley
Industries, Inc. and Affiliated Companies at December 31, 1995 and
1994, and the changes in its plan equity 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 Plan's management; our
responsibility is to express an opinion on these financial
statements based upon 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 22, 1996
F-1
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
STATEMENT OF FINANCIAL CONDITION
December 31,
-------------------------
ASSETS 1995 1994
----------- ------------
Investments, at market:
Common Stock of Talley Industries,
Inc. - 770,193 shares and 824,224
shares (cost $5,641,754 and
$5,969,341) in 1995 and 1994,
respectively $ 6,642,915 $ 6,387,737
Preferred Stock (Series B
convertible) of Talley Industries,
Inc. - 406,394 and 399,394 shares
(cost $6,787,001 and $6,680,702)
in 1995 and 1994, respectively 6,603,903 5,042,349
Money market fund and cash 182,095 97,186
Receivables from Talley Industries,
Inc. and Affiliated Companies:
Employee contributions 35,689 34,212
Employer contributions 17,841 17,088
Interest receivable 965 526
----------- -----------
Total assets 13,483,408 11,579,098
----------- -----------
LIABILITIES
Forfeiture payable 21,020 12,653
----------- -----------
Total liabilities 21,020 12,653
----------- -----------
Plan equity $13,462,388 $11,566,445
=========== ===========
The accompanying notes are an integral part of the financial
statements.
F-2
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY
Years Ended December 31,
------------------------------------
ADDITIONS: 1995 1994 1993
----------- ----------- ----------
Interest income $ 8,819 $ 3,751 $ 11,577
Realized gains 9,094 45,519 -
Unrealized appreciation
in market value of
investments 2,038,018 2,213,402 4,247,228
Contributions:
Employee 968,757 940,921 935,332
Employer 502,442 712,901 696,695
----------- ----------- ----------
3,527,130 3,916,494 5,890,832
----------- ----------- ----------
DEDUCTIONS:
Withdrawals and terminations 1,622,820 2,057,728 807,201
Forfeitures 8,367 18,350 32,966
Interest expense - 15,556 31,720
----------- ----------- ----------
1,631,187 2,091,634 871,887
----------- ----------- ----------
Net increase 1,895,943 1,824,860 5,018,945
PLAN EQUITY:
Beginning of year 11,566,445 9,741,585 4,722,640
----------- ----------- ----------
End of year $13,462,388 $11,566,445 $9,741,585
=========== =========== ==========
The accompanying notes are an integral part of the financial
statements.
F-3
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
The accounts of the Plan are maintained on an accrual basis.
Assets of the Plan are valued at current value. Securities are
valued in an active market at the last reported sales price on the
last business day of the year. Benefits are recorded when paid.
DESCRIPTION OF PLAN
The following brief description of the Talley Savings Plus Plan is
provided for general information purposes only. Reference should
be made to the Plan agreement for more complete information.
General - Talley Savings Plus is an employee stock purchase
plan adopted January 1, 1984 for the employees of
Talley Industries, Inc. and Affiliated Companies.
The Plan is classified as a "defined contribution
plan", an "individual account plan" and an
"employee pension benefit plan" under the Employee
Retirement Income Security Act of 1974 (ERISA).
A participant's benefits at any time depend on the
amount credited to his individual account and
accordingly the Company, the Committee and the
Trustee do not guarantee any level of benefits.
Eligibility - Employees eligible to participate under the Plan
are those who have attained the age of twenty-one
(21) years and have completed one (1) "year of
continuous service" as defined in the Plan.
Employee
Contributions - Each eligible employee who elects to participate
may contribute, out of amounts he or she would
otherwise receive in cash, 1% to 5% of his or her
pretax compensation from the Company to the Plan's
trust fund.
Employer
Contributions - For so long as the Plan is in effect, the Company
will contribute property having a value equal to
50% of employee contributions. Under the terms of
the Plan, the Company may contribute Common stock,
Series B $1.00 Cumulative Convertible Preferred
F-4
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Employer
Contributions - stock, cash or other property. The Company made
(Cont.) additional contributions to the Plan of .5% of the
aggregate compensation of those employees who were
participants in the payroll stock ownership plan
(PAYSOP) prior to the Tax Reform Act of 1986,
which repealed the PAYSOP provision in the tax
code. In its sole discretion, the Company may
make a contribution to the Plan in such amount as
it may determine, from time to time. Such
contributions may be made without regard to the
existence of profits. The Company's discretionary
contribution is allocated based on the
relationship of the Company contribution account
balances of participants eligible for
discretionary contribution to Company contribution
account balances for all participants. In
addition, in its sole discretion, the Company may
make a contribution to the Plan for the purpose of
paying the interest due on notes payable. The
Company contributions for the match of 50% of the
employee contributions, for the discretionary
contribution, and for the interest payments were
$489,897, $12,545 and $ -0-, respectively, in 1995
and $471,297, $227,997 and $13,607, respectively,
in 1994.
Investment
Program - Amounts contributed at an employee's direction,
along with all contributions made by the Company
other than PAYSOP contributions, are invested in
one fund consisting of shares of Common stock and
Series B Preferred stock of the Company and a
money market fund. PAYSOP contributions are
invested solely in Common stock of the Company.
Investment earnings or losses are allocated
monthly based on beginning of month balances of
the respective participant's accounts. During
1994, 33,405 unallocated shares, which
collateralized a note payable, were released and
allocated to participant accounts as principal
payments were made on the loan collateralized by
such shares. The note payable was paid off in
1994.
F-5
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Investment
Program - During the years ended December 31, 1995 and 1994,
(Cont.) the Plan sold 14,900 shares and 60,863 shares,
respectively, of Common stock for proceeds of
$116,214 and $467,708, respectively. There were
no sales of securities in 1993. There were
distributions of stock to participants, related to
withdrawals and terminations, valued at $331,191,
$560,687 and $373,076 for 1995, 1994 and 1993,
respectively.
Vesting - Each participant will at all times be fully vested
as to all amounts credited or allowable to him
under the participant's own employee contribution
account and the Company PAYSOP account. Company
matching contributions will vest 20% per year of
service until fully vested; however, such
contributions will be fully vested upon
termination by death, disability or retirement,
upon attainment of age 65 or upon termination of
the Plan or complete discontinuance of Company
matching contributions. Non-vested Company
contributions will be forfeited upon termination
of employment with the Company. Amounts allowable
as forfeitures will be applied to Plan expenses.
Distributions - Upon the death, disability, retirement or other
separation from employment of a participant,
distribution of all vested amounts credited to
such participant will be made in a lump sum. All
such distributions will be in cash or Company
Common stock or Series B Preferred stock at the
discretion of the Committee, except the
participant may request that distribution from his
accounts be made in Common stock or Series B
Preferred stock of the Company, in which event
distribution from the accounts will be made in
such stock.
F-6
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Expenses - Commissions and trustee fees and other
administrative expenses are paid by the Company to
the extent not paid by forfeitures. The Company
has also contributed amounts to the plan to pay
the interest expense on the note payable.
Participants - At December 31, 1995 there were 826 participants
in the Plan.
INCOME TAX STATUS
Talley Industries, Inc. has received a ruling from the Internal
Revenue Service substantiating that the Plan qualifies under
Section 401 of the Internal Revenue Code of 1986. The Company
restated the plan documents effective January 1, 1994 to comply
with the Tax Reform Act of 1986, subsequent legislation and
applicable regulations. A request for a new determination letter
on March 1995 is still pending due to IRS backlog. A plan that
qualifies is exempt from Federal Income Tax, and amounts
contributed are not taxed to the employee until a distribution from
the Plan is received. If a former employee receives a full
distribution of his or her Plan accounts due to his or her
termination of employment with the Company, he or she will realize
taxable income in an amount by which the value of his or her
distribution exceeds the amount of his or her own undistributed
contributions that have previously been taxed. Under federal laws
effective beginning in 1993, the Company is required to withhold
20% of each distribution a participant receives unless the
distribution is transferred directly into an IRA or a qualified
plan, or unless the distribution is specifically exempted by the
law.
In addition to the foregoing tax consequences, special rules are
applicable if the distribution to the employee includes shares of
Common stock. If the employee receives a lump sum distribution of
the entire vested amount of his or her accounts in a single taxable
year due to separation from employment, and the distribution
includes shares of Common stock, the difference between the fair
market value of the stock distributed and its cost to the Trustee
(the "net unrealized appreciation"), if the fair market value is
greater than such cost, is not recognized for tax purposes at the
time of distribution. Only the aggregate cost of the distributed
F-7
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
INCOME TAX STATUS, (CONTINUED)
stock to the Trustee is includable in the employee's gross income
at the time of distribution. When the employee disposes of the
stock in a subsequent sale or taxable transfer, any excess of the
amount realized by such recipient over the costs of such stock to
the Trustee will constitute and be taxed as a capital gain.
Reconciliation of Financial Statements to the Annual Return/Report
of Employee Benefit Plan (Internal Revenue Service Form 5500)
The following is a reconciliation of net assets available for
benefits per the financial statements and the net assets available
per the Form 5500:
December 31,
--------------------------
1995 1994
----------- -----------
Net assets available for benefits
per the financial statements $13,462,388 $11,566,445
Amounts allocated to withdrawing
participants (60,108) (176,254)
----------- -----------
Net assets available for benefits
per the Form 5500 $13,402,280 $11,390,191
=========== ===========
The following is a reconciliation of benefits paid to participants
per the financial statements to the Form 5500:
Year Ended
December 31, 1995
----------------------
Benefits paid to participants
per the financial statements $1,622,820
Amounts allocated to withdrawing
participants at December 31, 1995 60,108
Amounts allocated to withdrawing
participants at December 31, 1994 (176,254)
Benefits paid to participants per ----------
the Form 5500 $1,506,674
==========
F-8
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
RECONCILIATION OF FINANCIAL STATEMENTS TO THE ANNUAL RETURN/REPORT
OF EMPLOYEE BENEFIT PLAN (INTERNAL REVENUE SERVICE FORM 5500),
CONTINUED
Amounts allocated to withdrawing participants are recorded on the
Form 5500 for benefit claims that have been processed and approved
for payment prior to year end, but not yet paid.
Note Payable
Pursuant to a 1986 amendment to the Plan which gives the
Administration Committee authority to direct the trustee to borrow
funds to purchase Company securities, a promissory note for
$2,000,000 was executed on April 17, 1989. The note payable was
paid off in 1994.
F-9
