Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-4778
TALLEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0180396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2702 North 44th Street - Suite 100-A, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirement for the past 90 days.
YES[ X ] NO[ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock September 30, 1997
- --------------------- ------------------
$1.00 par value 14,113,623
==========================================================================
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 1
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 1997
and 1996 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity -Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis 9-17
PART II - OTHER INFORMATION
Legal Proceedings 18
Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(thousands)
September 30, December 31,
ASSETS 1997 1996
------------- ------------
Cash and cash equivalents $ 40,957 $ 48,758
Accounts receivable, net of allowance for
doubtful accounts of $1,228 at September
30, 1997 and $925 at December 31, 1996 50,609 53,090
Inventories, net 67,207 64,684
Deferred income taxes 3,800 3,660
Prepaid expenses 7,361 6,100
-------- --------
Current assets 169,934 176,292
Property, plant and equipment, net 53,298 49,324
Intangibles 38,296 41,965
Deferred charges and other assets 17,114 12,804
-------- --------
Total assets $278,642 $280,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,010 $ 5,522
Accounts payable 24,016 20,116
Accrued expenses 37,251 44,189
-------- --------
Current liabilities 64,277 69,827
Long-term debt 122,946 123,185
Deferred income taxes 3,650 2,179
Other liabilities 10,686 10,708
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 14 14
Series B 749 750
Common stock, $1 par value,
authorized 20,000,000 shares 14,114 14,618
Capital in excess of par value 75,534 79,884
Foreign currency translation adjustment (34) (562)
Accumulated deficit (13,294) (20,218)
-------- --------
Total stockholders' equity 77,083 74,486
-------- --------
Total liabilities and
stockholders' equity $278,642 $280,385
======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(thousands, except per share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sales $ 67,184 $ 76,667 $200,389 $219,256
Services 20,627 17,082 62,896 49,904
Royalties 179 109,023 891 122,709
-------- -------- -------- --------
87,990 202,772 264,176 391,869
-------- -------- -------- --------
Cost of sales 48,364 70,115 146,267 177,808
Cost of services 18,481 15,168 56,316 44,036
Selling, general,
and administrative expenses 14,547 12,761 49,910 47,574
Provision (reversal) of
reserves on realty assets - 85,000 (6,300) 85,000
-------- -------- -------- --------
81,392 183,044 246,193 354,418
-------- -------- -------- --------
Earnings from operations 6,598 19,728 17,983 37,451
Other income (expense), net (435) 16,780 320 14,587
-------- -------- -------- --------
6,163 36,508 18,303 52,038
Interest expense 3,589 6,694 10,910 21,066
-------- -------- -------- --------
Earnings before income taxes
and extraordinary loss 2,574 29,814 7,393 30,972
Income tax provision 219 502 469 1,575
-------- -------- -------- --------
Earnings before extraordinary loss 2,355 29,312 6,924 29,397
Extraordinary loss - - - (1,642)
-------- -------- -------- --------
Net earnings $ 2,355 $ 29,312 $ 6,924 $ 27,755
======== ======== ======== ========
Earnings applicable to common shares $ 2,164 $ 29,121 $ 6,351 $ 14,813
======== ======== ======== ========
Earnings (loss) per share of common
stock and common stock equivalents:
Earnings before extraordinary loss $ .15 $ 1.85 $ .45 $ 1.93
Extraordinary loss - - - (.11)
Net earnings before consideration for
induced conversion of preferred stock .15 1.85 .45 1.82
Assumed value of conversion inducement - - - (.79)
-------- -------- -------- --------
Earnings applicable to common shares $ .15 $ 1.85 $ .45 $ 1.03
======== ======== ======== ========
Weighted average shares outstanding 14,156 15,855 15,246 15,202
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(thousands)
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
Cash and cash equivalents at beginning of year $ 48,758 $ 10,475
-------- --------
Cash flows from operating activities:
Net earnings 6,924 27,755
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes 1,331 (3,099)
Depreciation and amortization 6,684 6,628
Original discount amortization - 7,929
Loss on sale of subsidiary and product line 1,325 -
Provision (reversal) of reserve on realty assets (6,300) 85,000
Other 1,318 15,425
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase)decrease in accounts receivable (533) 17,028
Increase in inventories (6,910) (329)
(Increase) decrease in prepaid expenses (6,431) 476
Decrease in realty assets - 3,967
Increase in accounts payable 3,900 3,289
Increase in accrued expenses 1,053 8,172
Increase (decrease) in other liabilities 493 (588)
Other, net (186) 2,863
-------- --------
Cash flows from operating activities 2,668 174,516
Cash flows from investing activities:
Proceeds from sale of subsidiary and product line 6,162 -
Investment in joint-venture (3,510) -
Purchase of assets of acquired business - (4,327)
Purchases of property and equipment (9,921) (4,675)
Reduction of income tax receivables 4,400 -
Reduction in other assets 97 370
Proceeds from sale of property and equipment 78 150
-------- --------
Cash flows from investing activities (2,694) (8,482)
Cash flows from financing activities:
Preferred stock conversion cost - 3,637
Payment of dividends (573) -
Purchase of common stock (4,339) -
Common stock issued 57 -
Repayment of long-term debt (2,920) (18,694)
Proceeds from borrowings under line of credit - 375,213
Reduction in borrowings under line of credit - (385,792)
-------- --------
Cash flows from financing activities (7,775) (25,636)
Net decrease in cash and cash equivalents (7,801) 140,398
-------- --------
Total cash and cash equivalents at September 30, $ 40,957 $150,873
======== ========
The accompanying notes are an integral part of the financial statements.
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<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1997 and 1996
(thousands)
Capital in Retained
Preferred Stock Common Excess of Earnings
Series A Series B Series D Stock Par Value (Deficit)
-------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 67 $1,548 $ 120 $10,053 $86,035 $(38,959)
Net earnings 27,755
Conversion to common stock (53) (798) (120) 4,007 (3,438)
Common stock issued 792 3,247
------ ------ ------ ------- ------- --------
BALANCE AT SEPTEMBER 30, 1996 $ 14 $ 750 $ - $14,852 $85,844 $(11,204)
====== ====== ====== ======= ======= ========
BALANCE AT DECEMBER 31, 1996 $ 14 $ 750 $ - $14,618 $79,884 $(20,218)
Net earnings 6,924
Dividends - preferred stock (573)
Stock grant 6 51
Conversion to common stock (1) 1
Common stock retirements (511) (3,828)
------ ------ ------ ------- ------- --------
BALANCE AT SEPTEMBER 30, 1997 $ 14 $ 749 $ - $14,114 $75,534 $(13,294)
====== ====== ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 30, 1997 and December
31, 1996 and the results of operations for the three-month and
nine-month periods ended September 30, 1997 and 1996, and cash
flows and changes in stockholders' equity for the nine-month
periods ended September 30, 1997 and 1996. Such results, however,
may not be indicative of the results for the full year.
For additional information regarding significant accounting
policies, and accounting matters applicable to the Company,
reference should be made to the Company's Annual Report to
Shareholders for the year ended December 31, 1996.
Note 2 - Inventories
- --------------------
Inventories are summarized as follows (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Raw materials and supplies $12,710 $10,995
Work-in-process 11,311 11,564
Finished goods 26,784 26,158
Inventories applicable to
government contracts 16,402 15,967
------- -------
$67,207 $64,684
======= =======
Note 3 - Earnings Per Share
- ---------------------------
Earnings per share of Common stock and Common stock equivalents
has been computed on the basis of the average number of Common
shares outstanding during each period. The average number of
shares has been adjusted for assumed exercise at the beginning of
the period (or date of grant, if later) for any dilutive stock
options, with funds obtained thereby used to purchase shares of
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<PAGE>
Note 3 - Earnings Per Share, continued
- --------------------------------------
the Company's Common stock at the average price during the period,
and assumed conversion of all dilutive convertible Preferred stock.
Common stock equivalents that are anti-dilutive are excluded from
the computation of earnings per share and earnings are reduced by
the dividend requirements on such equivalents.
Note 4 - Acquisition and Dispositions
- -------------------------------------
In May 1997, a subsidiary of the Company sold certain assets
of the connector product line. Proceeds include a note receivable
for $1.9 million and cash of $.2 million.
In March 1997, the Company sold the assets of its Canadian
steel distributor. Cash proceeds from the sale were $4.1 million.
The purchaser assumed $2.3 million of liabilities.
In January 1996, a subsidiary of the Company acquired certain
assets of a manufacturer of a silicone wire product line. The
purchase price was approximately $4.3 million.
Note 5 - Preferred Stock Conversions
- ------------------------------------
On February 16, 1996, the Company issued 1,905,849 shares of
Talley Common stock in connection with the conversion of all of
the Company's Series D Preferred stock, 702,919 more shares than
originally designated. The conversion automatically extinguished
all unpaid dividends on that stock, totaling approximately $2.6
million as of December 31, 1995.
On April 22, 1996, pursuant to a conversion offer with respect
to the Company's Series B and Series A Preferred stock,
approximately 798,000 shares or approximately 52% of the
outstanding shares of Series B and approximately 53,000 shares or
approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock
for each outstanding Series B share. Series A holders who
converted received 2.0 shares of Common stock for each outstanding
Series A share. Common stock issued of approximately 1,995,000
shares in connection with the conversion of Series B Preferred
stock and approximately 106,000 in connection with the conversion
of Series A Preferred stock was approximately 948,000 and 56,000
more shares than issuable under the stated conversion terms of the
respective series of preferred stock. Prior to the conversion
there were approximately 1,548,000 shares of Series B outstanding
and 67,000 shares of Series A outstanding. The conversion
automatically extinguished all unpaid dividends on the Series B and
Series A shares that were converted totaling approximately $4.0
million ($5 per share) on the Series B Preferred stock and totaling
approximately $0.3 million ($5.50 per share) on the Series A
Preferred stock at March 31, 1996.
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<PAGE>
Note 5 - Preferred Stock Conversions, continued
- -----------------------------------------------
The transactions did not impact the net earnings of the Company
in 1996, but "earnings applicable to common shares (after deduction
of preferred stock dividends)," as supplementally disclosed by the
Company, and the "earnings per share of common stock and common
stock equivalent share" were reduced. The excess of the fair value
of the common shares transferred in the transactions by the
Company, over the fair value of the common shares issuable pursuant
to the stated conversion terms of the preferred stock, were
subtracted from net earnings in the calculations of net earnings
available to common shareholders and earnings per share.
Note 6 - Bonds Repurchased and Covenant Defeasance
- --------------------------------------------------
During 1996, the Company repurchased $124.0 million aggregate
principal amount of the Senior Discount Debentures with an accreted
value of $97.4 million at the repurchase dates. The purchase price
of the debentures was $106.0 million, including accrued interest
and prepayment premiums. The Company recognized $12.1 million in
extraordinary losses in connection with the repurchases of the
Senior Discount Debentures. This amount represents the prepayment
premium and deferred debt cost on the extinguished debt. During
the nine months ended September 30, 1997, the Company repurchased
an additional $.3 million aggregate principal amount of the Senior
Discount Debentures.
An investment was made in U.S. Treasury obligations and placed
in trust in June 1997 to effect a covenant defeasance of the
remaining $1.9 million principal amount of outstanding debentures.
For financial reporting purposes, the assets held in trust are
included in the assets of the Company and the outstanding
debentures continue to be reflected as outstanding debt. The
debentures will be redeemed on October 15, 1998, which is the
earliest optional redemption date.
Note 7 - Repurchase of Common Stock
- -----------------------------------
In late 1996 and early 1997, the Board of Directors approved
the repurchase of up to 950,000 shares of the Company's Common
stock, on the open market or in negotiated transactions, from
time to time, at prices deemed appropriate by the Company's
officers, with such shares to be retired as authorized but
unissued shares. At December 31, 1996, the total number of shares
of common stock repurchased was 277,300 shares for a total cost of
approximately $2.1 million. During the first half of 1997, another
510,367 shares were repurchased for a total cost of approximately
$4.3 million.
-7-
<PAGE>
Note 8 - Agreement and Plan of Merger
- -------------------------------------
On September 26, 1997, the Company announced that it had
entered into a definitive Agreement and Plan of Merger (Agreement)
with Carpenter Technology Corporation (Carpenter) to be acquired
for cash.
Under the terms of the Agreement, Carpenter commenced an all-
cash tender offer on October 2, 1997 for all outstanding shares of
Talley stock at a price of $12 per share of Talley Common stock,
$16 per share of Talley Series B Preferred stock, and $11.70 per
share of Talley Series A Preferred stock. Assuming a majority
(measured by aggregate voting power) of Talley's stock is duly
tendered under the tender offer and not withdrawn before the
expiration date of the offer (December 4, 1997, unless extended),
Carpenter is obligated under the terms of the Agreement to purchase
all shares of Talley stock tendered and not withdrawn, and is
further obligated to complete as soon as possible an all-cash
merger whereby all Talley shares remaining outstanding will be
acquired for cash at the same per-share prices as under the tender
offer. The tender offer is also subject to other customary
conditions, including expiration of the Hart-Scott-Rodino (HSR)
waiting period. The U.S. Department of Justice, Antitrust Division
(DOJ) has requested that the Company and Carpenter provide DOJ
certain additional information, which has the effect of
automatically extending the HSR waiting period. The Company and
Carpenter have advised DOJ that they intend to provide the
requested information as soon as possible.
In connection with the tender offer and proposed merger,
Carpenter, the Company and certain of its present and former
directors were named as defendants in various purported class
action complaints filed on behalf of the stockholders of the
Company. The complaints alleged, among other things, breach of
fiduciary duty on the part of the Board of Directors arising out of
the Merger Agreement and failure to disclose material information.
On October 16, 1997 a Memorandum of Understanding was entered into
by counsels for the plaintiffs and defendants requiring the Company
to amend and supplement the disclosure contained in its filings
with the Securities and Exchange Commission-Schedule 14D-9. In
exchange, the plaintiffs agreed to dismiss the actions. The
settlement is subject to various conditions, including Court
approval.
The foregoing summary of certain provisions of the Agreement
is general in nature and is qualified in its entirety by reference
to the definitive Agreement, which is an Exhibit to this Report.
No assurance can be given that the conditions to the consummation
of the tender offer and the merger under the Agreement will be
fulfilled or as to the timing for consummation of the tender offer
or the merger.
-8-
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is management's discussion and analysis of
certain significant factors which have affected the Company. A
summary of period-to-period changes in the consolidated statement
of earnings is shown below (in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
REVENUES: -------- -------- -------- --------
Government Products
and Services $ 37,648 $ 36,906 $117,775 $105,877
Airbag Royalties - 108,520 - 121,913
Stainless Steel Products 29,337 34,418 88,711 105,954
Industrial Products 18,608 20,077 55,293 53,777
Realty 2,397 2,851 2,397 4,348
-------- -------- -------- --------
$ 87,990 $202,772 $264,176 $391,869
======== ======== ======== ========
OPERATING INCOME:
Government Products
and Services $ 2,420 $ (1,421) $ 11,476 $ 3,372
Airbag Royalties - 135,367 - 148,760
Stainless Steel Products 1,740 (509) 6,770 9,351
Industrial Products 1,654 (7,082) 4,428 (5,996)
Realty 2,346 (86,005) 8,656 (88,506)
-------- -------- -------- --------
Total operating income 8,160 40,350 31,330 66,981
Corporate expense (2,575) (4,889) (14,715) (16,202)
Non-segment interest
income 578 1,047 1,688 1,259
Interest expense (3,589) (6,694) (10,910) (21,066)
-------- -------- -------- --------
Earnings before
income taxes and
extraordinary loss $ 2,574 $ 29,814 $ 7,393 $ 30,972
======== ======== ======== ========
Revenues for the nine-month period ended September 30, 1997
decreased $127.7 million when compared with the corresponding
period in the prior year. Earnings before income taxes and
extraordinary loss for the nine months ended September 30, 1997 was
$7.4 million compared with $31.0 million in the first nine months
of the previous year. Included in the results for periods ended
September 30, 1996 were payments received from TRW Inc. of $156.4
million to settle the airbag royalties litigation. This amount,
which represents a settlement for airbag royalties and certain
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<PAGE>
other matters, reimbursement of litigation costs and interest from
the date of award until paid, was partially offset by a provision
for reserve on realty assets of $85.0 million. Royalties from
automotive airbags ceased with the payments from TRW. Revenue
increases for the first nine months of 1997 from the Company's
Government Products and Services segment (primarily from the naval
architectural and engineering unit) were offset by decreases in
stainless steel revenues resulting from the March 1997 sale of the
Canadian steel distributor and from lower sales, as competitive
pressures from United States and foreign suppliers affected the
sales volume and sales prices.
During the nine months ended September 30, 1997 operating
income from the Government Products and Services segment and the
Realty segment increased when compared with the first nine months
of 1996. The prior year's operating income for the Realty segment
included an $85.0 million provision for reserves on realty assets;
while the current year's operating income included $6.3 million
realty asset reserve reversals, with the disposition of the
remaining property. Prior year operating income included
writedowns of goodwill and inventories in the Stainless Steel
Products and the Industrial Products segments, as well as a non-
recurring charge in the Government Products and Services segment
regarding defense contract costs and claims.
The gross profit percentage, excluding airbag royalties and
realty, was 23.3% for the nine months ended September 30, 1997, up
from the gross profit percentage of 17.8% for the comparable period
in 1996. The gross profit percentage in 1996 was below historical
levels due to non-recurring inventory and goodwill writedowns. The
1997 gross profit percentage is comparable to the 23.4% experienced
by the Company during the first nine months of 1995.
Net earnings for the nine months ended September 30, 1997 were
$6.9 million compared to net earnings of $27.8 million for the same
period in the prior year. Prior year's results included a $1.6
million extraordinary loss relating to the repurchase of the Senior
Discount Debentures.
GOVERNMENT PRODUCTS AND SERVICES. Revenue and operating
income for the nine months ended September 30, 1997 increased by
$11.9 million and $8.1 million, respectively, when compared with
the same period in the prior year, primarily the result of an
increase in service revenues from the Company's naval architectural
and engineering unit and favorable results upon conclusion, or the
timing of completion, of certain other contracts. Earnings were
also favorably impacted in 1997 when compared with 1996, as a
result of reimbursement of past research and development cost by a
joint venture partner working with the Company in the development
of automotive airbag inflators. Increases in research and
development costs reduced earnings in 1997 and 1996 and a non-
recurring charge in the third quarter of 1996 regarding defense
contract costs and claims further reduced prior year earnings.
-10-
<PAGE>
AIRBAG ROYALTIES. As described in the Notes to the
Consolidated Financial Statements for the year ended December 31,
1996, the quarterly royalty payments ceased with the payments
received from TRW in the third quarter of 1996. Airbag royalties
in the first nine months of 1996 were $121.9 million. This amount
included a portion of the payments received from TRW to settle the
airbag royalties litigation.
STAINLESS STEEL PRODUCTS. During the first nine months of
1997, sales for the Stainless Steel Products segment decreased
$17.2 million, and operating income decreased $2.6 million, when
compared with the same period in 1996. Revenue and earnings were
affected by the sale of the Canadian steel distributor in March
1997, and by lower sales, as competitive pressures from United
States and foreign suppliers affected the sales volume and sales
prices.
INDUSTRIAL PRODUCTS. In the nine-month period ended September
30, 1997, Industrial Products sales increased $1.5 million while
operating income increased $10.4 million, when compared with the
same period in 1996. The prior year's earnings were affected by
inventory and goodwill writedowns in the third quarter of 1996.
Increases in sales and operating income also resulted from
increased orders for insecticides and air fresheners.
REALTY. In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
receipt of $156.4 million from TRW to settle the airbag royalty
dispute in the third quarter of 1996, and also in view of the
slower than expected improvement in the market conditions for real
estate assets, the Company re-evaluated and changed its strategy
for exiting the real estate business. The Company adjusted its
strategy of selling properties to end users in an orderly process
over time, to a strategy of liquidation sales through pricing
adjustments and/or joint development arrangements. This change in
strategy resulted in a third quarter 1996 $85.0 million reserve for
real estate assets. In December of 1996 all real estate
properties, except for one, were sold for cash and assumption of
certain liabilities. The property not included in the December
1996 sale was sold on July 30, 1997. In anticipation of the sale
of this single remaining property, the Company reversed $6.3
million of excess reserves in June 1997. Segment operating income
of $8.7 million reflects this reversal and compares to a $88.5
million loss for the first nine months of 1996, which included the
$85.0 million reserves.
OTHER. Interest expense for the nine months ended September
30, 1997 decreased to $10.9 million, from $21.1 million in the
comparable period in 1996. The decrease is primarily due to the
repurchase of a substantial portion of the Company's Senior
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<PAGE>
Discount Debentures and the paydown of the Company's revolving
credit facility in the second half of 1996. The $1.6 million
extraordinary loss in the second quarter of 1996, which consists of
premiums paid and deferred debt costs associated with the
repurchase of discount debentures, was reclassified from interest
expense during the fourth quarter of 1996 and is so classified in
the prior year's Statement of Earnings included in this quarterly
report. The overhead expenses in the first nine months of 1997 of
$14.7 million and $16.2 million in 1996 are above historical levels.
The 1997 corporate expenses include $5.8 million incurred in connection
with the severance payments made to the former Chief Executive Officer
of the Company. Higher than normal corporate expenses were also attributed
to above average proxy solicitation costs incurred in connection with the
1997 Annual Meeting of Stockholders, due to the contested nature of the
meeting. The 1996 corporate expenses included an increase in
employee benefit costs. The income tax provision for the first
nine months of 1997 was $.5 million compared to $1.6 million in the
comparable period in 1996. Due to unrecognized federal tax
carryforward benefits, primarily the result of losses in the
Company's real estate segment, the Company has no Federal tax
provision in the 1996 or 1997 period; the tax provision is
primarily for state jurisdictions.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $41.0 million in cash
and cash equivalents and net working capital of $105.7 million.
Cash generated from operating activities for the nine months ended
September 30, 1997 of $2.7 million includes earnings, and an
increase in accounts payable and accrued expenses, offset by cash
used to increase inventories, and an increase in prepaid expenses
and other assets. Cash generated from operations during the first
nine months of 1996 was $174.5 million, due primarily to receipt of
the airbag royalties litigation payment settlement from TRW. Cash
used in investing activities during the nine months ended September
30, 1997 was $2.7 million, consisting primarily of capital
expenditures and investment in a joint venture producing airbag
components offset by proceeds from the sale of assets of a
subsidiary and a product line and the collection of an income tax
refund receivable. Cash used in financing activities of $7.8
million reflects the repurchases of the Company's common stock, the
payment of preferred stock dividends, and a decrease in the
Company's long-term debt. There were no borrowings under the
Company's line of credit during this period.
In October 1993, the Company completed a major refinancing
program. This refinancing program included an offering of $185
million of debt securities, consisting of $70 million gross
proceeds of Senior Discount Debentures due 2005, issued by the
Company to yield 12.25%, and $115 million of Senior Notes due 2003,
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with an interest rate of 10.75% issued by a wholly owned subsidiary
of the Company, Talley Manufacturing and Technology, Inc. ("Talley
Manufacturing"). In connection with this refinancing, Talley
Manufacturing obtained a secured credit facility with institutional
lenders.
Borrowings under the secured credit facility may not exceed
the collateral base as defined in the governing credit agreement.
The facility consists of a five-year revolving credit facility of
up to $40.0 million and a five-year $20.0 million term loan
facility. At September 30, 1997 availability under the total
facility was approximately $49.0 million, of which approximately
$9.0 million (the principal balance of the term loan) was borrowed.
A substantial portion of the proceeds received in 1996 from the
sale of the assets of the real estate operations and from the
resolution of the automotive airbag royalties litigation have been
used to reduce the Company's total indebtedness.
The Company has recently entered into a joint venture
agreement with Delphi Automotive Systems to manufacture automotive
airbag inflators, which will require significant capital
contributions through 1998 to fund the capital requirements of the
venture, as it develops its manufacturing capability. In addition,
the Company is expected to have capital requirements to develop its
manufacturing capability for other airbag related products. The
Company is also committed to significantly higher-than-normal
research and development expenditures for automotive airbag
inflators and other airbag related products. These commitments
will require financial resources in the next two to three years.
The Company believes with present cash balances and cash available
under the Company's credit facility, there will be sufficient
financial resources to meet these needs and to support the long-
term growth of the Company's core businesses.
As a holding company with no significant operating or income-
producing assets beyond its stock interests in Talley
Manufacturing, the Company is dependent primarily upon
distributions from Talley Manufacturing to meet its funding
requirements. Furthermore, 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 are limited by debt covenants of
Talley Manufacturing) and to any future sales of equity securities
as its primary sources of discretionary liquidity. Nevertheless,
and particularly in light of the current September 30, 1997 cash
balances of $26.6 million held at the parent holding company level,
the Company believes that funds will be available to permit the
Company to meet its requirements.
-13-
<PAGE>
OTHER MATTERS
Agreement and Plan of Merger
----------------------------
On September 26, 1997, the Company announced that it had
entered into a definitive Agreement and Plan of Merger (Agreement)
with Carpenter Technology Corporation (Carpenter) to be acquired
for cash.
Under the terms of the Agreement, Carpenter commenced an all-
cash tender offer on October 2, 1997 for all outstanding shares of
Talley stock at a price of $12 per share of Talley Common stock,
$16 per share of Talley Series B Preferred stock, and $11.70 per
share of Talley Series A Preferred stock. Assuming a majority
(measured by aggregate voting power) of Talley's stock is duly
tendered under the tender offer and not withdrawn before the
expiration date of the offer (December 4, 1997, unless extended),
Carpenter is obligated under the terms of the Agreement to purchase
all shares of Talley stock tendered and not withdrawn, and is
further obligated to complete as soon as possible an all-cash
merger whereby all Talley shares remaining outstanding will be
acquired for cash at the same per-share prices as under the tender
offer. The tender offer is also subject to other customary
conditions, including expiration of the Hart-Scott-Rodino (HSR)
waiting period. The U.S. Department of Justice, Antitrust Division
(DOJ) has requested that the Company and Carpenter provide DOJ
certain additional information, which has the effect of
automatically extending the HSR waiting period. The Company and
Carpenter have advised DOJ that they intend to provide the
requested information as soon as possible.
In connection with the tender offer and proposed merger,
Carpenter, the Company and certain of its present and former
directors were named as defendants in various purported class
action complaints filed on behalf of the stockholders of the
Company. The complaints alleged, among other things, breach of
fiduciary duty on the part of the Board of Directors arising out of
the Merger Agreement and failure to disclose material information.
On October 16, 1997 a Memorandum of Understanding was entered into
by counsels for the plaintiffs and defendants requiring the Company
to amend and supplement the disclosure contained in its filings
with the Securities and Exchange Commission-Schedule 14D-9. In
exchange, the plaintiffs agreed to dismiss the actions. The
settlement is subject to various conditions, including Court
approval.
The foregoing summary of certain provisions of the Agreement
is general in nature and is qualified in its entirety by reference
to the definitive Agreement, which is an Exhibit to this Report.
No assurance can be given that the conditions to the consummation
of the tender offer and the merger under the Agreement will be
fulfilled or as to the timing for consummation of the tender offer
or the merger.
-14-
<PAGE>
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0
million was entered against TRW Inc. (TRW) by the United States
District Court for the District of Arizona in June 1995 following
a jury verdict that TRW had repudiated and breached the April 1989
Airbag Royalty Agreement with the Company. The $138.0 million
damages amount represented the jury's calculation of the present
value of the remaining stream of Airbag Royalties which would have
been payable by TRW through the April 2001 scheduled expiration
date of the Airbag Royalty Agreement had TRW not breached the
Agreement. TRW appealed the judgment, and, during the pendency of
the appeal, was ordered by the District Court to continue making
quarterly payments to the Company in the same amounts as if the
Airbag Royalty Agreement had not been terminated and repudiated by
TRW. On June 19, 1996, the United States Court of Appeal for the
Ninth Circuit rejected TRW's appeal and affirmed the $138.0 million
judgment. A petition for rehearing filed by TRW with the Court of
Appeals was denied on July 30, 1996.
In August 1996 TRW made payments aggregating approximately
$133.1 million to the Company on account of TRW's obligations under
the judgment. The payments represented the $138.0 million face
amount of the judgment award, plus interest at the default rate
specified by the Airbag Royalty Agreement (prime plus 5%), less the
quarterly payments made by TRW pursuant to the District Court's
order during the pendency of the appeal. A further payment was
made by TRW at the same time in the amount of approximately $6.7
million as that portion of a court-ordered reimbursement of
litigation fees and costs (and interest on the reimbursement amount
at the same default rate).
During September 1996, claims between the Company and
TRW (which had been scheduled for trial) and all other matters in
dispute with TRW were settled by the parties pursuant to a global
settlement agreement. Under that settlement, TRW made a further
cash payment to the Company on September 3, 1996 in the aggregate
amount of $16.6 million. Accordingly, all claims between the
parties have now been resolved, and cash payments have been made by
TRW aggregating $156.4 million.
The litigation in which this judgment was entered arose out of
the Asset Purchase Agreement dated February 4, 1989 and the License
Agreement dated April 21, 1989, between TRW and the Company
pursuant to which TRW acquired the Company's airbag business. The
court dismissed TRW's claims that the Company had breached a non-
compete provision contained in the Asset Purchase Agreement,
thereby entitling TRW to terminate airbag royalty payments to the
Company under the License Agreement (which it purported to do in
February 1994) and obtain a paid-up license to use the Company's
airbag technology. The jury found in fact that TRW had improperly
terminated and repudiated the License Agreement.
-15-
<PAGE>
Recently Issued Accounting Standards
------------------------------------
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per Share" which is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods. Under the provisions of this new pronouncement,
the Company is required to present Basic Earnings per share and
Diluted Earnings per share. Basic Earnings per share is computed
by dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the
denominator) during the period. Income available to common
stockholders is computed by deducting both dividends declared in
the period on preferred stock (whether or not paid) and the
dividends accumulated for the period on cumulative preferred stock
(whether or not earned) from income from continuing operations and
also from net income. Diluted Earnings per share is computed
similar to Basic Earnings per share, except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares
had been issued. Under this new pronouncement, the Company is
required to disclose a reconciliation of the numerators and the
denominators of the basic and diluted per-share computations for
income from continuing operations, the effect that has been given
to preferred dividends in arriving at income available to common
stockholders in computing basic earnings per share, and securities
that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive
for the period(s) presented.
Had this Statement been effective for the nine months ending
September 30, 1997, the Basic Earnings per share and the Diluted
Earnings per share would have been $.42 and $.42, respectively.
In June 1997, the Financial Accounting Standard Board issued
SFAS No. 130 "Reporting Comprehensive Income", and SFAS No. 131
"Disclosure about Segments of an Enterprise and Related
Information". Both pronouncements are effective for fiscal years
beginning after December 15, 1997. The new requirements for
reporting comprehensive income will have minimal impact on the
Company's financial statement disclosures since items addressed by
the pronouncement, not presently included in its income statements,
are minor in amounts. The Company anticipates that its reportable
operating segments may change and may increase in number based on
the requirements of the new standard on disclosures about segments.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this
Quarterly Report contain forward-looking statements that are
based on current expectations, estimates and projections about the
-16-
<PAGE>
industries in which the Company operates. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions
are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely and cost
effective basis; the mix of products/services; the achievement of
lower costs and expenses; domestic and foreign governmental and
public policy changes including environmental regulations;
protection and validity of patent and other intellectual property
rights; reliance on large customers; the cyclical nature of certain
of the Company's businesses; the outcome of pending and future
litigation and governmental proceedings and continued availability
of financing, and financial resources in the amounts, at the times
and on the terms required to support future business. In addition,
such statements could be affected by general industry and market
conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange
rate fluctuations and other factors.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Litigation - TRW Inc.
---------------------
For a description of legal proceedings involving the Company,
see "Other Matters" within Management's Discussion and
Analysis.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
10.1 * Severance and Settlement Agreement between William
H. Mallender and Talley Industries, Inc. dated June
21, 1997.
10.2 * Employment Agreement dated August 11, 1997 between
the Company and Paul L. Foster.
11 * Computation of Earnings per Common and Common
Equivalent Share.
27 * Financial Data Schedule for Talley Industries, Inc.,
September 30, 1997.
99.1 * Ninth Amendment to the Loan and Security Agreement
dated July 31, 1997 by and among Talley Manufacturing
and Technology, Inc. and Transamerica Business Credit
Corporation.
99.2 * Form of Fourth Amendment to Subsidiary Loan and
Security Agreements dated July 31, 1997 between
Talley Manufacturing and Technology, Inc. and each of
certain subsidiaries.
99.3 Agreement and Plan of Merger among Carpenter
Technology Corporation, Score Acquisition Corp. and
Talley Industries, Inc. dated September 29, 1997
included as Exhibit B to Schedule 14D-9 filed October
2, 1997, incorporated herein by reference.
* Documents marked with an asterisk are filed with this report.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three
months ended September 30, 1997.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TALLEY INDUSTRIES, INC.
-----------------------------
(Registrant)
Date: November 5, 1997 By /s/ Kenneth May
----------------------- --------------------------
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: November 5, 1997 By /s/ Mark S. Dickerson
----------------------- --------------------------
Mark S. Dickerson
Vice President
and Secretary
-19-
EXHIBIT 10.1
SEVERANCE AND SETTLEMENT AGREEMENT
THIS SEVERANCE AND SETTLEMENT AGREEMENT (the "Agreement") is
made and entered into, freely and voluntarily, between WILLIAM H.
MALLENDER ("Mr. Mallender") and TALLEY INDUSTRIES, INC., a Delaware
corporation (the "Company").
WHEREAS, Mr. Mallender has been employed by the Company as its
Chief Executive Officer; and
WHEREAS, Mr. Mallender has resigned his employment with the
Company as well as his positions as officer and/or director with
the Company and each of its subsidiaries; and
WHEREAS, the parties mutually wish to terminate the employment
relationship in a manner which is amicable and satisfactory to both
Mr. Mallender and the Company; and
WHEREAS, Mr. Mallender and the Company are parties to an
Employment Agreement dated June 26, 1984, amended September 30,
1985; February 25, 1986; December 1,1988; February 27, 1990; and
April 1, 1995, (the "Employment Agreement") which they wish to
terminate and supersede with the terms of this Agreement.
NOW, THEREFORE, for and in consideration of the acts,
payments, covenants and mutual agreements herein described and
agreed to be performed, Mr. Mallender and the Company agree as
follows:
1. TERMINATION, Mr. Mallender's employment with the Company
terminated effective June 3, 1997, and he has no further duties,
powers, authority or responsibilities with respect to the business
or operation of the Company or any other subsidiary in the Company
Group. For purposes of this Agreement, "Company Group" means Talley
Industries, Inc., its subsidiaries, joint ventures, predecessors,
successors in interest, directors, officers, employees, legal
representatives and other agents.
2. SEVERANCE PAYMENT. In consideration of the undertakings
and promises by Mr. Mallender set out in this Agreement, the
Company agrees to pay to Mr. Mallender the gross sum of Five
Million Ninety Four Thousand Five Hundred Thirty Four Dollars
($5,094,534.00), less required tax withholdings. It is acknowledged
by Mr. Mallender and the Company that said consideration, together
with the items and amounts set forth in paragraphs 3 and 4 hereof,
is in lieu of any sums due under Section 3 of the Employment
Agreement, any severance pay, incentive pay, accrued benefits, or
other compensation or payment of any type whatsoever to which
Mr. Mallender may be arguably entitled. This payment will be made
within two business days of the execution of this Agreement by both
parties.
<PAGE>
3. BENEFITS. Mr. Mallender's participation in Company-sponsored plans
and benefits shall continue/terminate as follows:
(a) Health Coverage. Mr. Mallender and Carole
Mallender will receive medical benefits in accordance
with the terms and conditions of the executive officer
retiree medical program in effect from time to time for
executive retirees. The program will provide for
reimbursement for Mr. Mallender and Carole Mallender of
all reasonable and necessary medical care, provided the
expense of such care is considered a "medical expense"
under section 213(d) of the Internal Revenue Code of 1986, and
such treatment is not experimental. There is no
deductible, no co-insurance and no lifetime maximum. Once
Mr. Mallender or his wife reach age 65, Medicare or its
equivalent becomes the primary payor for any medical
expenses.
(b) Retirement Benefits. Mr. Mallender's
retirement benefits and coverage will be determined in
accordance with the current terms of the Company
qualified retirement plan based on a termination date of
June 3, 1997. Mr. Mallender's participation in the
Company's 401(k) plan, Talley Savings Plus, shall cease
as of June 3,1997.
(c) Supplemental Retirement Benefit. Within seven
(7) days from the date of the execution of this Agreement
by all parties, the Company will pay Mr. Mallender the
gross sum of Fifty-Seven Thousand Eight Hundred Seventy-One
Dollars ($57,871.00), less applicable tax withholdings,
as a one-time supplemental retirement benefit.
(d) Retirement Life Insurance. Mr. Mallender will
be provided with retiree life insurance benefits with a
face value of $990,000 for his life in accordance with
the executive officer retiree life insurance program in
effect from time to time for executive retirees.
(e) Restoration Benefit Plan. Mr. Mallender shall
have no right to further participation in or benefit from
the Company's Restoration Benefit Plan, and the Company
hereby waives all claims against Mr. Mallender for
repayment of any amounts previously paid to Mr. Mallender
under the Restoration Benefit Plan.
(f) Split Dollar Insurance Policies. Within seven
(7) days of the execution of this Agreement by all parties
(or three (3) days after receipt of a final payoff calculation
from Jackson National Life Insurance Company, if later),
2
<PAGE>
the Company will make a single, lump-sum premium payment
sufficient to fully pay up the premiums on the Jackson National
life insurance policy presently in Mr. Mallender's name in the
face amount of One Million Seven Hundred Fifty Thousand Dollars
($1,750,000.00) and relinquish any claims it has under
the policy. Upon such assignment by the Company and the
receipt by Mr. Mallender of the sums set forth in Section
2 of this Agreement Mr. Mallender will transfer to the
Company all of his right, title and interest in and to
the Sun Life insurance policy in his name in the face
amount of Eight Hundred Thousand Dollars ($800,000.00)
and relinquish any claims he has under the policy.
(g) Long-Term Disability. The Company will
continue to pay the annual premium(s) for Mr. Mallender's
individual long-term disability policy issued by
Maccabees until he reaches age 65, and the Company shall
not thereafter have any obligations with respect to said
coverage.
(h) Employee Group Life Insurance. Mr. Mallender
may participate in the Company's employee group term life
insurance plan at his expense until age 65, pursuant to
the terms and conditions of the plan as they may be
amended; provided, however, that Mr. Mallender pays all
premiums for such insurance within thirty (30) days after
receiving notice that such premiums are due; and provided
further that coverage under such plan cannot be
reinstated once it has lapsed for nonpayment of premiums
due.
(i) Stock Options. Mr. Mallender may participate
in the Company's Stock Option Plan pursuant to the terms
of his existing grant letters dated March 20, 1990.
4. OTHER CONSIDERATION. In further consideration of the
undertakings and promises set out in this Agreement, Mr. Mallender
shall also receive the following benefits:
(a) Executive Auto. Within seven (7) days from the
date of the execution of this Agreement by all parties,
the Company will transfer to Mr. Mallender title in the
Company-owned Chevrolet Suburban automobile presently in
his possession.
(b) Club Dues. Within seven (7) days from the date
of execution of this Agreement by all parties, the
Company will pay Mr. Mallender the sum of Four Thousand
Dollars ($4,000.00) as reimbursement for one year's
country club dues.
3
<PAGE>
(c) Office and Secretarial Assistance. Within
seven (7) days from the date of execution of this
Agreement by all parties, the Company will pay Mr.
Mallender the sum of Twenty Thousand Dollars ($20,000.00)
for future office expenses and will permit Mr. Mallender
to retain his present personal office furniture as
further described in Exhibit A hereto, but excluding art
work and corporate office conference room furnishings.
The Company will at its sole cost and expense also
provide Mr. Mallender with executive secretarial
assistance by Jean Ostrander for the period ending on
December 31, 1997.
(d) Attorneys' Fees. Promptly upon receipt of
appropriate supporting documentation and demand, the
Company will reimburse Mr. Mallender for his attorneys'
fees incurred in connection with the termination of Mr.
Mallender's employment and review and negotiation of this
Agreement in the maximum amount of Ten Thousand Dollars
($10,000.00).
(e) Travel and Outplacement Expenses. Promptly
upon receipt of appropriate supporting documentation the
Company will reimburse Mr. Mallender for the reasonable
job search travel and outplacement expenses actually
incurred by him in the maximum amount of Ten Thousand
Dollars ($10,000.00).
(f) Reimbursement of Corporate Expenses. The
Company will reimburse Mr. Mallender for all documented
business expenses incurred by Mr. Mallender for a proper
Company purpose after March 31, 1997 but before June 4,
1997 which have not been previously reimbursed.
5. INDEMNIFICATION. The Company and Mr. Mallender
acknowledge and agree that the Indemnification Procedures Agreement
dated August 25, 1993 between the Company and Mr. Mallender is in
full force and effect, and is not terminated or modified by this
Agreement. Talley Manufacturing and Technology, Inc. ("Talley
Manufacturing") and Mr. Mallender acknowledge and agree that the
Indemnification Procedures Agreement dated August 25,1993 between
Talley Manufacturing and Mr. Mallender is in full force and effect,
and is not terminated or modified by the Agreement. These
Agreements are referred to herein as the "lndemnification
Agreements." The Company acknowledges that Mr. Mallender's services
as director, officer, employee, agent and/or representative of each
member of the Company Group was at the request of the Company.
6. RELEASE BY MR. MALLENDER. Mr. Mallender hereby releases,
acquits and forever discharges the Company Group of and from any
and all actions, causes of action, claims, damages, expenses or
costs of whatever nature, known or unknown, that he might now have,
4
<PAGE>
that he has had or that might subsequently accrue to him,
including, but not limited to, any and all claims arising out of
his employment with the Company Group and the termination thereof,
any and all claims for vacation, holiday, incentive, bonus or
severance pay, any and all claims arising under any Company Group
employment contract, policy or practice, any and all claims arising
under Title Vll of the Civil Rights Act of 1964, 42 U.S.C.
Section 2000(e), et seq., the Age Discrimination in Employment Act, 29
U.S.C. Section 621, et seq., the Fair Labor Standards Act, 29 U.S.C.
Section 201, et seq., the Arizona Civil Rights Act, A.R.S. Section
41-1401 et seq., and any other federal, state or local statute or
ordinance, and any claims or causes of action Mr. Mallender has had
or may have had regarding any mistreatment, discrimination, negligence,
malfeasance, wrongful or negligent discharge, breach of contract, breach
of express or implied covenant, libel, slander, intentional or negligent
infliction of emotional distress, or any other wrongdoing or illegality
by the Company Group regarding the termination of Mr. Mallender's employment
or his treatment while employed by the Company, provided, however, that
Mr. Mallender does not hereby release, acquit or discharge any claim for
(i) breach of this Agreement, (ii) failure to pay benefits to which he is
entitled under existing benefit plans, programs and agreements listed in
paragraph 3 of this Agreement, (iii) indemnification under applicable law
or the articles of incorporation or bylaws of any member of the Company
Group, and (iv) breach or default under the Indemnification Agreements.
Mr. Mallender further covenants and agrees never to join
in or commence any action, suit or proceeding, in law or in equity,
or before any administrative agency or to incite, encourage or
participate in any such action, suit or proceeding against the
Company Group in any way pertaining to or arising out of his
employment by and with the Company Group or the termination of his
employment, except as otherwise provided in this Agreement.
7. RELEASE BY THE COMPANY GROUP.
(a) Except as set forth in subparagraph (b) below,
each corporate member of the Company Group hereby
releases, acquits and forever discharges Mr. Mallender of
and from any and all actions, causes of action, claims,
damages, expenses or costs of whatever nature, known or
unknown, that it might now have, that it has had or that
might subsequently accrue to it, including, but not
limited to, any and all claims arising out of Mr.
Mallender's employment with any member of the Company
Group, including loss or injury to the Company Group
occasioned by ill-advised good faith judgment or
negligence in connection with the Company's business, up
to the effective date of this Agreement; provided,
however that no member of the Company Group waives any
claim for breach of this Agreement or, until December 31,
1997, any Unreleased Claim which is discoverable before
that date through reasonable due diligence. An Unreleased
5
<PAGE>
Claim shall mean a claim a member of the Company Group
has against Mr. Mallender arising out of misconduct by
Mr. Mallender in his capacity as director, officer, or
employee of such member of the Company Group which shall
have caused a loss to such member of the Company Group or
pursuant to which Mr. Mallender or a third party shall
have received an improper personal benefit as, for
example, but not limited to, embezzlement,
misappropriation of a corporate opportunity, wrongful
conversion of tangible or intangible corporate property
for his or a third party's benefit, or causing a member
of the Company Group to enter into an agreement with Mr.
Mallender or any third party affiliated with Mr.
Mallender or any entity in which Mr. Mallender or such
affiliated third party has a financial interest without
requisite disclosure and board approval of such
agreement. An Unreleased Claim shall be made by written
notice to Mr. Mallender on or before December 31, 1997,
which notice sets forth with reasonable specificity the
facts upon which the Claim is based and the amount or
estimated amount of the loss suffered by the Company
Group or the amount of improper personal benefit
received. The Company Group agrees that any Unreleased
Claim which is discoverable through reasonable due
diligence by December 31, 1997 which shall not have been
properly brought in accordance with the prior sentence
shall be forever released, acquitted and discharged as of
five o'clock p.m. Mountain Standard Time, December 31,
1997. The term "Unreleased Claim" shall not include any
claim for loss or injury to the Company Group occasioned
by ill-advised good faith judgment or negligence in
connection with the Company's business or any claim for
reimbursement due a member of the Company Group where the
claim relates to expense reports submitted by Mr.
Mallender during his employment with the Company Group.
(b) This release does not act in any way to
release, waive, or discharge any claim a member of the
Company Group may have against Mr. Mallender for fraud or
criminal violations of state or federal laws. The time
for asserting such a claim is limited only by the
applicable state or federal statute of limitations.
8. COOPERATION.
(a) The Company Group may, from time to time,
require Mr. Mallender's cooperation in providing a member
of the Company Group with documentary or testimonial
information. Mr. Mallender agrees to cooperate fully and
completely with such requests.
6
<PAGE>
(b) If Mr. Mallender has knowledge or is alleged to
have knowledge of any matters which are the subject of
any pending, threatened or future litigation involving
the Company, Mr. Mallender will make himself available to
testify if and as necessary. Mr. Mallender will also make
himself reasonably available to the attorneys
representing the Company in connection with any such
litigation for such purposes as they may deem necessary,
including but not limited to the review of documents,
discussion of the case and preparation for trial. This
Agreement is not intended to and shall not be construed
so as to in any way limit or affect the testimony which
Mr. Mallender gives in any such litigation; it is
understood and agreed that Mr. Mallender will at all
times testify fully, truthfully and accurately, whether
in deposition, trial or otherwise. The Company will
reimburse Mr. Mallender for any reasonable out-of-pocket
expenses incurred by him in making himself available to
the Company or the attorneys referred to in this
paragraph.
9. NON-COMPETITION. Mr. Mallender shall not for a period of
one (1 ) year following the effective date of this Agreement engage
or participate directly, or indirectly, either as a principal,
agent, employee, employer, consultant, stockholder, director,
copartner, or in any other individual capacity, in the conduct or
management of, or own any stock or other proprietary interest in,
any business which at the time competes with the business of the
Company Group as it exists on the date of this Agreement unless he
shall have obtained the prior consent thereto of the Board of
Directors of the Company, except that Mr. Mallender shall be free
without such consent to make reasonable investments in any
publicly-owned company so long as he does not become a controlling
party in such company.
10. CONFIDENTIALITY OF INFORMATION. Mr. Mallender agrees
that he will not for a period of three (3) years following the
effective date of this Agreement either directly or indirectly,
except as authorized in writing on behalf of the Company, disclose
or communicate to any person, individual, firm or corporation, any
non-public information of any kind concerning any matters affecting
or relating to the business of the Company Group, including without
limitation, any of the customers, prices, sales, manner of
operation, plans, trade secrets, processes, financial or other data
of the Company Group, without regard to whether any or all of such
information would otherwise be deemed material.
11. TAXABILITY OF SETTLEMENT MONIES.
(a) The Company agrees to pay Mr. Mallender an
additional amount equal to the quotient of: (i) the total
amount of any excise taxes assessed against Mr. Mallender
under Section 4999 of the Internal Revenue Code and any
7
<PAGE>
corresponding state tax ("Golden Parachute Taxes") by
reason of his receipt of the settlement consideration
tendered under this Agreement; divided by (ii) one minus
the maximum combined federal and state income tax rate
applicable to Mr. Mallender for 1997 (as stated as a
fraction). Such payment shall be made by the Company
within five (5) days after its receipt from Mr. Mallender
of a copy of the applicable taxing authority's final
determination.
Mr. Mallender shall have no duty to contest or
defend any assessment or proposed assessment of Golden
Parachute Taxes. If the Company desires to contest or
defend any such assessment or proposed assessment, Mr.
Mallender shall cooperate fully, including, without
limitation and where appropriate, the execution and
filing of any and all consents, waivers, extensions of
any applicable statutes of limitations, powers of
attorney and other documents as shall be reasonably
requested by the Company in connection with such contest;
and Mr. Mallender further agrees, as and to the extent
reasonably requested by the Company, to use his best
efforts to obtain any certificate or other document from
any federal or state taxing authority, or any other
person, as may be necessary to mitigate, reduce or
eliminate any such Golden Parachute Taxes; provided,
however, that all costs incurred in connection with or
related to any such audit, litigation or other proceeding
shall be at the sole cost of the Company, and the Company
shall indemnify and hold Mr. Mallender harmless from,
against and in respect of any such costs incurred in
connection therewith. Nothing contained in this
paragraph 11(a) shall be construed to impose a duty on
the Company to contest against any such assessment or
proposed assessment.
(b) Except as provided in paragraph 11(a) above,
Mr. Mallender shall be solely responsible for the payment
of all federal and state income taxes and penalties
assessed against him, and agrees to indemnify and hold
the Company harmless in the event that any taxing
authority seeks payment from the Company of any
additional taxes, interest, penalties or assessments owed
by Mr. Mallender.
12. RELIANCE. Mr. Mallender warrants and represents that:
(i) he has relied on his own judgment regarding the consideration
for and language of this Agreement; (ii) he has been given a
reasonable period of time to consider said Agreement and has been
advised to consult with legal counsel of his own choosing before
signing this Agreement which he has done; (iii) no statement made
by the Company has in any way coerced or unduly influenced him to
execute this Agreement; and (iv) this Agreement is written in a
manner that is understandable to him and he has read and understood
all provisions of this Agreement.
8
<PAGE>
13. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled
by arbitration in Phoenix, Arizona (using three or more
Arbitrators) in accordance with the Rules of the American
Arbitration Association. The prevailing party in any arbitration or
other legal proceeding pertaining to this Agreement shall recover
from the other party its reasonable attorneys' fees in such
proceeding. The parties agree that judgment upon the award rendered
by the arbitrators may be entered in any court having jurisdiction
thereof.
14. RETURN OF COMPANY PROPERTY. Mr. Mallender further
represents and agrees that he has returned or, within ten (10) days
after his execution hereof, will return to the Company all
equipment and other property belonging to it (including, without
limitation, business credit cards, building passes and building
keys), which have been or is in his care, custody, possession or
control, except as otherwise provided in this Agreement.
15. NON-ADMISSION OF LIABILITY. By entering into this
Agreement, neither party admits to any liability or wrongdoing
whatsoever.
16. CONFIDENTIALITY OF AGREEMENT. The Company Group and Mr.
Mallender agree to keep confidential the terms and existence of
this Agreement, as well as the content of the negotiations Which
led to this Agreement, unless and to the extent disclosed in
filings with the Securities Exchange Commission or other
governmental agencies or otherwise required by law.
17. ENTIRE AGREEMENT. This Agreement and all provisions
thereof, including all representations and promises contained
herein, are contractual and not a mere recital and shall continue
in permanent force and effect. This Agreement constitutes the sole
and entire agreement of the parties in respect to the subject
matter hereof, superseding all prior agreements and understandings
between the parties, and there are no agreements of any nature
whatsoever between the parties hereto except as expressly stated
herein. This Agreement may not be modified or changed unless done
so in writing and signed by both parties.
18. SEVERABILITY. Should any part, term or provision of this
Agreement be declared or determined by any court to be illegal or
invalid, the validity of the remaining parts, terms or provisions,
shall not be affected thereby and said illegal or invalid part,
term or provision shall be deemed not to be a part of this
Agreement.
19. OTHER INSTRUMENTS. The parties expressly agree to
execute any and all further or additional instruments as may
reasonably be required, and to perform any other act necessary, to
effectuate and carry out the purposes of this Agreement.
9
<PAGE>
20. CHOICE OF LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona.
21. DUE AUTHORIZATION. The Company represents that this
Agreement has been duly authorized by each corporate member of the
Company Group and has been duly executed by authorized officers of
each corporate member of the Company Group.
/s/ William H. Mallender
--------------------------------------
WILLIAM H. MALLENDER
Date: June 21, 1997
10
<PAGE>
TALLEY INDUSTRIES, INC.
By: /s/ Paul L. Foster
--------------------------------
Its: Chairman of the Board
Date: 6 /21/97
THE FOLLOWING CORPORATE MEMBERS OF THE COMPANY GROUP AGREE TO
THE PROVISIONS OF PARAGRAPHS 6, 7, 8, 9, 10 AND 16:
AMCAN SPECIALTY STEELS, INC.;
DIMETRICS, INC; ELECTRODYNAMICS, INC.;
JOHN J. MCMULLEN ASSOCIATES, INC.;
LME CAPITAL CORPORATION; NEW
CALIFORNIA CORP.; PORCELAIN PRODUCTS
CO.; ROWE INDUSTRIES, INC.; TALLEY
AUTOMOTIVE PRODUCTS, INC.; TALLEY
CANADA, INC.; TALLEY DEFENSE
SYSTEMS, INC.; TALLEY INTERNATIONAL
INVESTMENT CORPORATION; TALLEY
INTERNATIONAL SALES CORPORATION;
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.;TALLEY METALS
TECHNOLOGY, INC.; TALLEY REAL ESTATE
COMPANY, INC.; TALLEY REALTY
DEVELOPMENT, INC.; TALLEY REALTY
FINANCE AND INVESTMENT COMPANY, INC.;
TALLEY REALTY HOLDING COMPANY,
INCORPORATED; TALLEY REALTY
INVESTMENT GROUP, INC.; TALLEY
TECHNOLOGY, INC.; UNIVERSAL
PROPULSION COMPANY; WATERBURY
COMPANIES, INC.; WDC, INC.
By: /s/ Mark S. Dickerson
-----------------------------------
Mark S. Dickerson
Secretary
Dated: June 21, 1997
11
<PAGE>
EXHIBIT A
Property No. Description
------------ -----------
C8337 Executive Desk
C8337A Executive Credenza
C8337B Executive Swivel Chair
C8337C Executive Breakfront (not including dishes or
other display items)
C8337D Cocktail Table
C8337E Sofa
C8337F Wing Chair
C8337G Wing Chair
C8337H Guest Arm Chair
C8337I Guest Arm Chair
C8337J Lamp
C8337K Lamp
C8337L Brass Horse Lamp
"Ship Display" Table
Lamp table
Lamp table
Plant Stand
Planter Box
Planter Box
Wall Thermometer
Waste Basket
Square Brass Planter Box
Round Brass Planter Box
C83A33Y 5 Drawer Lateral File*
C83A332 5 Drawer Lateral File*
85002 4 Drawer Fire Proof File*
85R01 GE Refrigerator w/ice maker*
95601A-C HP Vectra 486DX66 w/monitor & printer*
95606 Panasonic P/75 Laptop PC*
93615 486/33 Insight PC*
93616 486/33 Insight PC*
93617 HP LaserJet 4 Printer*
90607 Xerox 6240 Word Processor*
2 fax machines*
* Items already in the possession of Bill Mallender or Jean Ostrander
12
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of William H. Mallender who is a party
to that certain Severance and Settlement Agreement (the
"Agreement") with Talley Industries, Inc., a Delaware corporation
(the "Company"), executed as of June 21 , 1997, hereby declares
that she has read the Agreement in its entirety, and being fully
convinced of the wisdom and equity of the terms and conditions of
the Agreement, and in consideration of the recitals and of the
provisions of the Agreement, hereby expresses her acceptance of the
same and does agree to its provisions.
The undersigned further agrees that the provisions of the
Agreement shall be binding upon her to the extent of any interest
which she has or may have in the subject matter of the Agreement.
The undersigned further agrees that she will at any time make,
execute and deliver such instruments and documents which may be
necessary to carry out the provisions of the Agreement.
Furthermore, the undersigned agrees that in the event of divorce,
in lieu of an interest in the subject matter of the Agreement, she
shall accept other assets of the marital estate of equal value.
This instrument is not a present transfer or release of any
rights which the undersigned has or may have due to her marriage.
DATED as of the 21 day of June, 1997.
/s/ Carole Mallender
----------------------------------
CAROLE MALLENDER
SUBSCRIBED AND SWORN to before me this 21 day of June, 1997,
by Carole Mallender.
/s/ Rillia R. Cray
----------------------------------
NOTARY PUBLIC
My Commission Expires: OFFICIAL SEAL
July 25, 1998
- ------------------------------
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Agreement made as of the 11th day of August, 1997 by
and between Talley Industries, Inc. ("Employer") and Dr. Paul
Foster ("Employee").
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, the Employer desires to employ Employee as its
Chief Executive Officer on an interim basis and Employee desires to
be so employed by the Employer on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and of
the mutual covenants herein contained it is agreed as follows:
1. EMPLOYMENT. Employer hereby agrees to employ
Employee to serve Employer and its present and future subsidiary
and affiliated companies and divisions (hereinafter collectively
referred to as the "Corporate Group") for a term of one year (the
"Employment Term") commencing June 9, 1997 and ending June 9, 1998,
subject however, to the termination provisions of paragraph 4
herein. During such period Employee will: (I) devote his full time
and best efforts to the affairs of Employer and the Corporate Group
spending no time or efforts on the businesses or affairs of others,
(ii) serve Employer as Chief Executive Officer and perform such
duties as Employer shall from time to time designate including but
not limited to assisting in the Employer's search for a Chief
Executive Officer, and (iii) serve as required as an officer and/or
director of the Employer and/or the Corporate Group.
2. COMPENSATION AND BENEFITS.
(a) Effective as of June 9, 1997, Employer agrees to
pay Employee a salary (the "Base Salary") at the rate of Four
Hundred Thousand Dollars ($400,000.00) per annum, payable in semi-
monthly installments as compensation for his services during the
Employment Term hereunder. During the term of this Agreement,
Employer shall make available to Employee the use of a company
automobile and reimburse Employee for his spouse's reasonable
travel expenses between Philadelphia, Pennsylvania and Phoenix,
Arizona, and provide Employee with a two bedroom apartment in
Phoenix, Arizona. Employee will not receive directors fees during
the term of this Agreement.
<PAGE>
(b) Employee will not be eligible for Employer-provided
health benefits, but Employer agrees to pay for the Employee's cost
of the following benefits provided through Saint Joseph's
University during the period September 1, 1997 through August 31,
1998, in lieu of benefits at Talley: (I) Medical (Blue Cross/Blue
Shield Personal Choice PPO); (ii) Dental (Penndental); (iii) Vision
(Opticare); (iv) Long-term Care (UNUM); and (v) matching
contribution of Seven Thousand Six Hundred Forty-two Dollars
($7,642) (net after tax) for Saint Joseph's University 403(b) Plan.
The matching contribution shall be paid to Employee and the
remaining sums shall be paid to either Saint Joseph's University or
the applicable benefit provider. Employer will also provide
Employee with company-sponsored life and long-term disability
insurance coverage in accordance with company policy through August
31, 1998.
3. BONUSES. Employee shall be an eligible participant
under the Employer's bonus programs, if any, in accordance with
their terms as they may be amended.
4. TERMINATION.
(a) The Employer shall have the right to terminate
this Agreement, and any modifications, extensions or supplements
thereof or thereto at any time during the existence thereof, for
any reason whatsoever, provided, however, the Employee shall be
given one (1) months' notice thereof (or pay in lieu of notice) and
paid the balance of the Base Salary due and provided with the
payments and/or benefits set forth in paragraph 2(b) over the
remainder of the Employment Term.
(b) In the event of notice of termination, the
Employer shall have the right, during the period between the date
of receipt of such notice by the Employee and the effective date of
termination, to relieve, and withdraw, the Employee from any or all
duties, powers, authority or responsibilities with respect to the
business or operation of the Employer. Employee agrees to resign
from all offices and positions with Employer and the Corporate
Group, including but not limited to, any positions he may hold as
an officer and/or director of Employer and the Corporate Group,
effective upon the date of such notice of termination, provided
however that Employee may maintain his seat on Employer's Board of
Directors for the remainder of his elected term. In the event
Employee fails to resign from such positions, Employee irrevocably
appoints the Secretary of Employer as his attorney-in-fact to
execute letters of resignation on his behalf.
(c) Notwithstanding the provisions of subparagraph 4(a)
above, in the event the Employee has been charged in good faith by
the Employer or by a public authority, in a judicial or
administrative proceeding, with wrongdoing in connection with the
Employer's business or the performance of the Employee's duties
under this Agreement, the Employer may terminate this Agreement and
2
<PAGE>
shall not be required to make any further payments to Employee. The
wrongdoing referred to in this paragraph is intended to encompass
willful misconduct which injures or causes a loss to the Corporate
Group or a benefit to the Employee or third parties, as, for
example, by embezzlement, appropriation of corporate opportunity,
conversion of tangible or intangible corporate property, the making
of agreements with third parties in which the Employee or anyone
related to or associated with him have a direct or indirect
interest and the like and it is not intended to encompass loss or
injury to the Employer occasioned by ill advised good faith
judgment or negligence in connection with the Employer's business.
5. REPLACEMENT. In the event Employer hires a new
Chief Executive Officer during the Employment Term, Employee agrees
to perform consulting services for the Employer and Employer agrees
to compensate Employee the equivalent salary and benefits listed
herein during the remaining Employment Term.
6. EXPENSES. The Employer shall reimburse the Employee
against vouchers covering the same for all reasonable and necessary
expenses incurred by him in the performance of services under this
Agreement.
7. CONFIDENTIALITY. The Employee agrees that so long
as this Agreement is in effect and for a period of two (2) years
following the termination of this Agreement for any reason he will
not either directly, or indirectly, except in the course of
carrying out the business of the Employer or as authorized in
writing on behalf of the Employer, disclose or communicate to any
person, individual, firm or corporation, any information of any
kind concerning any matters affecting or relating to the business
of the Employer or any of its subsidiaries, including without
limitation, any of the customers, prices, sales, manner of
operation, plans, trade secrets, processes, financial or other data
of the Employer or any of its subsidiaries, without regard to
whether any or all of such information would otherwise be deemed
confidential or material.
8. NONCOMPETITION. The Employee agrees that so long as
this Agreement is in effect he shall not engage or participate
directly, or indirectly, either as principal, agent, employee,
employer, consultant, stockholder, director, co-partner, or any
other individual or representative capacity whatever, in the
conduct or management of, or own any stock or other proprietary
interest in, any business which at the time competes with the
business of the Employer or any then subsidiary of the Employer
unless he shall have obtained the prior consent thereto of the
Board of Directors of the Employer, except that the Employee shall
be free without such consent to make reasonable investments in any
publicly-owned company or mutual fund so long as he does not become
a controlling party in such company.
3
<PAGE>
9. MISCELLANEOUS. It is further agreed:
(a) This Agreement shall be governed in all
respects, whether as to validity, construction, capacity,
performance or otherwise, by the laws of the State of Arizona, and
Arizona shall be the location of any arbitration or litigation
arising under this Agreement, except as otherwise appropriate for
transfer of or actions on arbitration awards or the judgment of
federal courts in Arizona and except as otherwise required by law
for appeals.
(b) Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled
by arbitration in Phoenix, Arizona in accordance with the Rules of
the American Arbitration Association. The prevailing party in any
arbitration or other legal proceeding pertaining to this Agreement
shall recover its reasonable attorneys' fees in such proceeding.
The parties agree that judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction
thereof.
(c) In case any one or more of the provisions of
this Agreement should be determined to be invalid, illegal or
unenforceable in any respect, the validity, legality and
unenforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
(d) The paragraph headings of this Agreement are
for convenience of reference only and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(e) This Agreement and all provisions thereof,
including all representations and promises contained herein, are
contractual and not a mere recital and shall continue in permanent
force and effect. This Agreement constitutes the sole and entire
agreement of the parties in respect to the subject matter hereof,
superseding all prior agreements and understandings between the
parties, and there are no agreements of any nature whatsoever
between the parties hereto except as expressly stated herein. No
amendments or additions to this Agreement shall be binding unless
in writing and signed by both parties.
4
<PAGE>
IN WITNESS WHEREOF, the Employee has hereunto affixed his hand and
the Employer has caused these presents to be executed by a duly
authorized officer, all as of the day and year first above written.
/s/ Paul Foster
---------------------------------
Dr. Paul Foster
WITNESS: TALLEY INDUSTRIES, INC.
/s/ Ralph A. Rockow By /s/ Joseph A. Orlando
- ------------------------ ------------------------------
Ralph A. Rockow Joseph A. Orlando
Chairman of the Executive
Compensation Committee
WITNESS:
/s/ Katherine Wilcox By /s/ Mark S. Dickerson
- ------------------------ ------------------------------
Katherine Wilcox Mark S. Dickerson
Secretary
5
<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of Dr. Paul Foster hereby consents to
the foregoing "Employment Agreement."
Dated: As of August 10, 1997
/s/ Corolyn E. Clark
--------------------------------
Corolyn E. Clark
EXHIBIT 11
Page 1 of 2
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Share
(thousands, except per share amounts)
1 9 9 7 1 9 9 6
------------------ ------------------
Fully Fully
THREE MONTHS ENDED SEPTEMBER 30: Primary Diluted Primary Diluted
------- ------- ------- -------
Earnings before preferred
stock dividend $ 2,355 $ 2,355 $29,312 $29,312
Preferred stock dividend (191) (191) - -
------- ------- ------- -------
Net earnings $ 2,164 $ 2,164 $29,312 $29,312
======= ======= ======= =======
Average common shares
outstanding during period 14,114 14,114 14,560 14,560
Common stock equivalents:
Convertible preferred stock - - 997 997
Stock options 42 79 117 117
Shares issuable in connection
With acquired company - - 181 181
------- ------- ------- -------
Shares for computation 14,156 14,193 15,855 15,855
======= ======= ======= =======
Net earnings per common share $ .15 $ .15 $ 1.85 $ 1.85
======= ====== ======= =======
<PAGE>
EXHIBIT 11
Page 2 of 2
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Share
(thousands, except per share amounts)
1 9 9 7 1 9 9 6
------------------ ------------------
Fully Fully
NINE MONTHS ENDED SEPTEMBER 30: Primary Diluted Primary Diluted
------- ------- ------- -------
Earnings before
extraordinary loss $ 6,924 $ 6,924 $29,397 $29,397
Preferred stock dividend - - - -
------- ------- ------- -------
6,924 6,924 29,397 29,397
Extraordinary loss - - (1,642) (1,642)
------- ------- ------- -------
6,924 6,924 27,755 27,755
Value of common shares issued
to induce conversion of
preferred stock - - (12,037) (12,037)
------- ------- ------- -------
Net earnings $ 6,924 $ 6,924 $15,718 $15,718
======= ======= ======= =======
Average common shares
outstanding during period 14,200 14,200 13,051 13,051
Common stock equivalents:
Convertible preferred stock 997 997 1,648 1,648
Stock options 42 79 228 228
Shares issuable in connection
with acquired company 7 7 275 275
------- ------- ------- -------
Shares for computation 15,246 15,283 15,202 15,202
======= ======= ======= =======
Earnings per share:
Before extraordinary loss $ .45 $ .45 $ 1.93 $ 1.93
Extraordinary loss - - (.11) (.11)
------- ------- ------- -------
Earnings before
consideration for induced
conversion of preferred stock .45 .45 1.82 1.82
Value of conversion inducement - - (.79) (.79)
------- ------- ------- -------
Net earnings per
common share $ .45 $ .45 $ 1.03 $ 1.03
======= ======= ======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
Balance Sheet and Statement of Operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,957,000
<SECURITIES> 0
<RECEIVABLES> 51,837,000
<ALLOWANCES> 1,228,000
<INVENTORY> 67,207,000
<CURRENT-ASSETS> 169,934,000
<PP&E> 153,408,000
<DEPRECIATION> 100,110,000
<TOTAL-ASSETS> 278,642,000
<CURRENT-LIABILITIES> 64,277,000
<BONDS> 122,946,000
0
763,000
<COMMON> 14,114,000
<OTHER-SE> 62,206,000
<TOTAL-LIABILITY-AND-EQUITY> 278,642,000
<SALES> 200,389,000
<TOTAL-REVENUES> 264,176,000
<CGS> 146,267,000
<TOTAL-COSTS> 202,583,000
<OTHER-EXPENSES> 49,910,000
<LOSS-PROVISION> 350,000
<INTEREST-EXPENSE> 10,910,000
<INCOME-PRETAX> 7,393,000
<INCOME-TAX> 469,000
<INCOME-CONTINUING> 6,924,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,924,000
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
EXHIBIT 99.1
NINTH AMENDMENT
TO LOAN AND SECURITY AGREEMENT
This NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of the 31st day of July, 1997, by
and among TALLEY MANUFACTURING AND TECHNOLOGY, INC., a Delaware
corporation (the "Borrower"), TRANSAMERICA BUSINESS CREDIT
CORPORATION, as agent (the "Agent"), and the lenders parties to the
Loan Agreement referred to below (the "Lenders").
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have
heretofore entered in a Loan and Security Agreement dated
October 22, 1993, as amended (the "Loan Agreement"); and
WHEREAS, the Agent, the Lenders and the Borrower wish to enter
into this Amendment to make certain changes to the Loan Agreement;
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto hereby agree as
follows:
1. Definitions. Capitalized terms used herein but not
defined herein shall have the respective meanings ascribed to them
in the Loan Agreement.
2. Amendments to Change Borrowing Base Reporting. Subject
to the Borrower's maintaining, at all times, Excess Availability of
at least Ten Million Dollars ($10,000,000), the Borrower's duty to
provide Borrowing Base Certificates to the Agent shall be changed
from a weekly reporting frequency to a monthly reporting frequency.
The change shall be effected by (a) amending Section 2.4(a) of the
Loan Agreement in its entirety to read as follows:
(a) (i) So long as (x) no Default, Event of Default or
Subsidiary Event of Default has occurred and exists and (y)
Excess Availability is Ten Million Dollars ($10,000,000) or
more, Borrower shall, on the fifth Business Day following the
end of each month, provide Agent with preliminary Borrowing
Base Certificates for itself and for each Subsidiary on a
consolidating basis for such month, and on the fifteenth day
<PAGE>
following the end of each month, unless sooner requested by
Agent, provide Agent with the final versions of such Borrowing
Base Certificates, each in the form attached hereto as Exhibit
A-1 for such month; and (ii) (x) after the occurrence and
during the continuance of any Default, Event of Default or
Subsidiary Event of Default or (y) if and for so long as
Excess Availability is less than Ten Million Dollars
($10,000,000), Borrower shall, on the second Business Day
following the end of each week, unless sooner requested by
Agent, provide Agent with Borrowing Base Certificates for
itself and for each Subsidiary on a consolidating basis in the
form attached hereto as Exhibit A-2 for such week.
(b) deleting the words "EXHIBIT A Form of Borrowing Base
Certificate" on the List of Exhibits and substituting the following
words therefor:
EXHIBIT A-1 Form of Monthly Borrowing Base Certificate
EXHIBIT A-2 Form of Weekly Borrowing Base Certificate
(c) deleting the Exhibit A attached to the Loan Agreement; and (d)
providing that the Exhibits A-1 and A-2 to the Loan Agreement shall
be in the forms thereof attached hereto as Exhibits A-1 and A-2.
3. Amendments to Section 4.1. Effective July 1, 1997, the
non-default interest rate with respect to Base Rate Loans or any
other Obligations other than LIBOR Loans is hereby decreased from
a fluctuating rate equal to one-half percent (.50%) per annum above
the Base Rate in effect from time to time to a fluctuating rate
equal to the Base Rate in effect from time to time and with respect
to LIBOR Loans is hereby decreased from a fluctuating rate equal to
two and three-quarters percent (2 3/4%) per annum above the LIBOR
Rate to two percent (2%) per annum above the LIBOR Rate. Such
decreases shall be effected by (a) deleting the words "one-half
percent (.50%) per annum above" in the third and fourth lines of
Section 4.1(a)(i) of the Loan Agreement and (b) deleting the words
"two and three-quarters percent (2 3/4%)" from the third line of
Section 4.1(a)(ii) of the Loan Agreement and substituting the words
"two percent (2%)" therefor.
4. Amendments to Eliminate Unused Line Fee. Effective July
1, 1997, the unused line fee shall be eliminated. Such elimination
shall be effected by (a) deleting Section 4.5 of the Loan
Agreement, (b) deleting the words "(with an appropriate adjustment
of any amount payable under Section 4.5 to avoid duplicative
charges to Borrower)" beginning in the fourth to the last line of
Section 4.10 of the Loan Agreement, and (c) deleting the words
"together with all paid unused line fees pursuant to Section 4.5"
from the third and fourth lines of Section 22.4(b) of the Loan
Agreement.
-2-
<PAGE>
5. Amendments to Cash Dominion Procedures. So long as no
Default, Event of Default or Subsidiary Event of Default has
occurred and Borrower maintains at least Ten Million Dollars
($10,000,000) of Excess Availability, the Borrower shall be
permitted to receive directly from the Collecting Banks the funds
deposited therein. This change shall be effected (a) by adding to
Section 1.1 of the Loan Agreement, in appropriate alphabetical
order, the following definition:
"Blockage Notices" shall have the meaning ascribed to
such term in Section 13.1 hereof.
and (b) by amending and restating Section 13 of the Loan Agreement
in its entirety to read as follows:
13. Payments; Collection.
13.1 Unless otherwise agreed in writing from time to time
hereafter, all payments which Borrower is required to make to
Agent under this Agreement or under any of the other Loan
Documents may, at the option of the Agent, be made by
appropriate debits to the Loan Account. Agent may in its sole
discretion elect to bill Borrower for such amounts in which
case the amount shall be immediately due and payable with
interest thereon as provided herein. At any time after either
(a) an Event of Default has occurred or (b) Agent reasonably
believes or suspects that Borrower or its Affiliates have
committed fraud or made a statement, representation or
warranty which shall have been materially false or misleading
when made, then Agent or its designee may, at any time, notify
customers or Account Debtors that Receivables have been
assigned to Agent or of its security interest therein, collect
the same directly and charge all reasonable out-of-pocket
collection costs and expenses to the Loan Account. All
proceeds of Collateral (including all revenue, collections and
other monies from the Subsidiaries under the Subsidiary Loan
Agreements), all dividends and other sums paid to Borrower by
the Subsidiaries and all payments of money by any Person
shall, at the direction of Agent, be deposited by the Borrower
into a lockbox account, dominion account or such other
"blocked account" as Agent may require pursuant to an
arrangement with such bank as may be selected by Borrower and
be acceptable to Agent ("Collecting Bank"). The Borrower
shall issue, and shall cause the Subsidiary Borrowers to
issue, to the Collecting Banks irrevocable letters of
instruction, in form and substance satisfactory to the Agent,
directing the Collecting Banks, upon receipt of instructions
-3-
<PAGE>
("Blockage Notices") to do so from the Agent, thenceforth to
transfer all funds then and thereafter deposited in the
Collecting Banks solely to the Agent, either to any account
maintained by the Agent at the Collecting Bank or by wire
transfer to appropriate account(s) of the Agent, and not to
the Borrower or any Subsidiary. All funds deposited in such
"blocked account" shall immediately become Collateral and the
Borrower shall use its best efforts to obtain the agreement by
the Collecting Bank to waive any offset rights against the
funds so deposited. Agent assumes no responsibility for such
"blocked account" arrangement, including without limitation,
any claim of accord and satisfaction or release with respect
to deposits accepted by the Collecting Bank thereunder.
Alternatively, upon the issuance of a Blockage Notice, Agent
may establish depository accounts in the name of Agent at a
bank or banks for the deposit of such funds and Borrower shall
deposit all proceeds of Receivables, dividends and other sums
paid to Borrower by the Subsidiaries or cause same to be
deposited, in kind, in such depository accounts of Agent in
lieu of depositing same to the blocked accounts. Except as
otherwise contemplated in Section 13.2 hereof, Agent will
credit all such payments to Borrower's Loan Account,
conditional upon final collection; credit will be given for
cleared funds received prior to 1:00 p.m. Eastern Standard or
Daylight Savings Time, by Agent at its account at the First
National Bank of Chicago (or such other account of Agent as it
shall designate in writing to Borrower), two (2) Business Days
after such receipt thereof and until receipt by Agent at such
address, no credit will be given. In all cases, Borrower's
Loan Account will be credited only with the net amounts
actually received by Agent. Should any check or item of
payment not be honored for payment, then, Borrower shall be
deemed not to have made such payment, and interest shall be
recalculated accordingly. Any prepayment of any LIBOR Loan
shall be accompanied by payment of any amounts required under
Section 5.4 (b) hereof.
Borrower agrees to pay to Agent any and all out-of-pocket
fees, costs and expenses which Agent incurs in connection with
opening and maintaining any "blocked account" and depositing
for collection by Agent any check or item of payment received
and/or delivered to any Collecting Bank, Agent or any Lender,
respectively, on account of the Obligations and Borrower
further agrees to reimburse Agent for any claims asserted by
the Collecting Banks in connection with Borrower's "blocked
account" and any amounts paid to any Collecting Banks arising
out of Agent's indemnification of such Collecting Banks
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<PAGE>
against damages incurred by the Collecting Bank in the operation of
such Borrower's "blocked account". Borrower further agrees that
Agent shall have the right, in its sole discretion, to require
Borrower to establish lock box accounts in addition to, or in lieu
of, Borrower's "blocked account", which lock box accounts will be
subject to an agreement (consistent with the provisions of this
Agreement) acceptable to Agent among Agent, Borrower and the
Collecting Banks.
13.2 Notwithstanding the provisions of Section 13.1
hereof and Article 13 of the Subsidiary Loan Agreements, so
long as (a) no Default, Event of Default or Subsidiary Event
of Default has occurred and (b) Excess Availability is Ten
Million Dollars ($10,000,000) or more, Borrower shall be
permitted to receive directly from the Collecting Banks the
funds deposited therein. However, if at any time (x) any
Default, Event of Default or Subsidiary Event of Default shall
occur, or (y) Excess Availability shall be or become less than
Ten Million Dollars ($10,000,000), such permission shall
automatically cease and Agent may, and upon the request of the
Required Lenders shall, then and thereafter issue Blockage
Notices to the Collecting Banks.
6. Amendment to Working Capital Covenant. Section 18.1 of the
Loan Agreement shall be amended by deleting the columns titled
"Period" and "Amount" therein and replacing them in their entirety
with the following:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $60,000,000
July 1, 1997 through September 30, 1997 $55,000,000
October 1, 1997 through December 31, 1997 $50,000,000
January 1, 1998 through March 31, 1998 $50,000,000
April 1, 1998 through June 30, 1998 $50,000,000
July 1, 1998 through September 30, 1998 $50,000,000
October 1, 1998 through December 31, 1998 $50,000,000
Every Month Thereafter $50,000,000 plus
an increase of
$250,000 each
January 1,
commencing
January 1, 1999
-5-
<PAGE>
7. Amendment to Fixed Charge Coverage Ratio Covenant. Section
18.2 of the Loan Agreement shall be amended and restated in its
entirety to read as follows:
"Borrower shall cause Borrower's and its Subsidiaries
consolidated Fixed Charge Coverage Ratio, as measured at the end of
each calendar quarter, for the fiscal year to date period then
ending, to exceed the following during the term of this Agreement:
Period Ratio
------ -----
April 1, 1997 through June 30, 1997 .85 to 1
July 1, 1997 through September 30, 1997 .85 to 1
October 1, 1997 through December 31, 1997 .85 to 1
January 1, 1998 through March 31, 1998 .65 to 1
April 1, 1998 through June 30, 1998 .95 to 1
July 1, 1998 through September 30, 1998 1.00 to 1
Each March 31, June 30, September 30,
and December 31 thereafter 1.00 to 1
provided, however, that Borrower's and its Subsidiaries'
consolidated Fixed Charge Coverage Ratio as of the end of any such
quarter shall be computed (i) without taking into account payments
made by the Borrower in connection with any severance package
provided by the Borrower to William H. Mallender and (ii) without
including in the computation of the sum of the consolidated amount
of all Capital Expenditures those Capital Expenditures made by the
Borrower or its Subsidiaries in connection with the development or
manufacturing of occupant restraint systems or any component
thereof.
8. Amendment to Tangible Net Worth Covenant. Section 18.3 of
the Loan Agreement shall be amended by deleting the columns titled
"Period" and "Amount" therein and replacing them in their entirety
with the following:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $1,000,000
July 1, 1997 through September 30, 1997 $1,000,000
October 1, 1997 through December 31, 1997 $1,000,000
-6-
<PAGE>
Period Amount
------ ------
January 1, 1998 through March 31, 1998 $2,000,000
April 1, 1998 through June 30, 1998 $2,000,000
July 1, 1998 through September 30, 1998 $2,000,000
October 1, 1998 through December 31, 1998 $2,000,000
Every Month Thereafter $2,000,000 plus an increase
of $1,000,000 each January 1,
commencing January 1, 1999
9. Amendment to Capital Expenditures Covenant. Section 18.4
of the Loan Agreement shall be amended by deleting the words "in
the calendar quarter ending December 31, 1993, in an aggregate
amount exceeding Two Million Five Hundred Thousand Dollars
($2,500,000) and in any calendar year thereafter, in an aggregate
amount exceeding Seven Million Dollars ($7,000,000)" beginning in
the second line therein and substituting the following therefor:
"in the calendar year ending December 31, 1997, and in any
calendar year thereafter, in an aggregate amount exceeding
Twenty Million Dollars ($20,000,000)".
10. Amendment to R&D Expenditures Covenant. Section 18.5 of
the Loan Agreement shall be amended by (i) deleting "1994" in the
second line therein and substituting "1997" therefor and (ii)
deleting the words "Five Million Dollars ($5,000,000)" in the third
line therein and substituting "Fourteen Million Dollars
($14,000,000)" therefor.
11. Elimination of the Net Income Before Taxes Financial
Covenant. Section 18.6 of the Loan Agreement shall be deleted in
its entirety.
12. Conditions to Effectiveness. Except for Sections 3 and
4 of this Amendment which shall each be effective as of July 1,
1997, and Sections 6, 7, 8, 9, 10 and 11 of this Amendment which
shall each be effective as of April 1, 1997, this Amendment shall
be effective as of the date first above written, provided, however,
that any and all Sections of this Amendment shall only be effective
upon satisfaction of the following conditions precedent:
12.1. Execution of this Amendment. The Agent shall
have received this Amendment executed by a duly authorized officer
of each Lender and the Borrower.
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<PAGE>
12.2. Amendment to Subsidiary Loan Documents. The
Borrower and each Subsidiary shall have executed an amendment (the
"Subsidiary Amendment") to their respective Subsidiary Loan
Agreement, substantially in the form of Exhibit B attached hereto,
and shall have delivered such other documents and instruments in
connection therewith as the Agent shall require, each in form and
substance satisfactory to the Agent.
12.3. Confirmation of Loan Documents. Each Subsidiary
shall have executed the Confirmation of Loan Documents set forth
below.
12.4. Corporate Proceedings. The Agent shall have
received a copy of the resolutions (in form and substance
reasonably satisfactory to Agent) of the Board of Directors of the
Borrower and the Subsidiaries authorizing (i) the execution,
delivery and performance of this Amendment, the documents referred
to in Sections 12.2 and 12.3 hereof, and the other Loan Documents
contemplated hereby and thereby, and (ii) the consummation of the
transactions contemplated hereby and thereby, all certified by the
Secretary or an Assistant Secretary of the Borrower and the
Subsidiaries on the date hereof. Such certificate shall state that
the resolutions set forth therein have not been amended, modified,
revoked or rescinded as of the date of such certificate.
12.5. No Defaults. No Default, Event of Default or
Subsidiary Event of Default shall have occurred and be existing
either before or immediately after giving effect to this Amendment.
12.6. Representations and Warranties True. The
representations and warranties contained herein, in the Loan
Agreement and in all other Loan Documents (other than
representations and warranties that expressly speak only as of a
specified different date) shall be true and correct both as of the
date hereof and immediately after giving effect to this Amendment.
12.7. Certificate of Officers. The Agent shall have
received a certificate, in form and substance satisfactory to the
Agent, dated the date of the effectiveness of this Amendment and
signed by the President or a Vice President and the Treasurer or
Controller of the Borrower certifying that the conditions set forth
in this Section 12 have been fulfilled and as to such other matters
as the Agent shall reasonably require.
12.8. Other Conditions. The Agent shall have received
such other agreements, opinions, certificates, representations,
instruments and other documents as it may reasonably require, all
in form and substance satisfactory to the Agent.
-8-
<PAGE>
13. Representations and Warranties. The Borrower hereby
represents and warrants to the Lenders and the Agent that (i) the
execution, delivery and performance of this Amendment and the other
documents and instruments to be executed and delivered in
connection herewith by the Borrower and the Subsidiaries are within
their respective corporate powers and have been duly authorized by
all necessary corporate action, (ii) no consent, approval,
authorization of, or declaration or filing with, any governmental
or public authority, and no consent of any other Person, is
required in connection with the execution, delivery and performance
of this Amendment and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower and
the Subsidiaries, except for those already duly obtained, (iii)
this Amendment and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower and
the Subsidiaries have been duly executed by the Borrower and such
Subsidiaries and constitute the legal, valid and binding obligation
of the Borrower and such Subsidiaries, enforceable against them in
accordance with their terms, (iv) the execution, delivery and
performance by the Borrower and the Subsidiaries of this Amendment
and the other documents and instruments to be executed and
delivered in connection herewith by the Borrower and the
Subsidiaries do not and will not conflict with, or constitute a
violation or breach of, or constitute a default under, or result in
the creation or imposition of any Lien upon the property of the
Borrower or any of the Subsidiaries by reason of the terms of (a)
any contract, mortgage, Lien, lease, agreement, indenture, or
instrument to which the Borrower or such Subsidiary is a party or
which is binding upon it, (b) any requirement of law applicable to
the Borrower or such Subsidiary, or (c) the Certificate or Articles
of Incorporation or By-Laws of the Borrower or such Subsidiary, (v)
no event has occurred and is continuing which constitutes a
Default, an Event of Default or a Subsidiary Event of Default, and
(vi) no change or development or event involving a prospective
change, which in any such case has had or could reasonably be
expected to have a material adverse effect on the ability of the
Borrower to perform its obligations under the Loan Documents or on
the business, operations, assets, conditions (financial or
otherwise) or prospects of Borrower on a consolidated basis, has
occurred and is continuing.
14. Authorization to Sign Amendments to Subsidiary Loan
Documents and other Documents. By their signatures below, the
Lenders hereby authorize Transamerica Business Credit Corporation,
as Agent for the Lenders, to consent to the execution and delivery
of the Subsidiary Amendment, substantially in the form of Exhibit B
attached hereto; to consent to the delivery of such other documents
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<PAGE>
and instruments in connection therewith as the Agent shall require,
each in form and substance satisfactory to the Agent; and to
execute and deliver such written consents and other documents or
instruments in connection therewith as the Agent shall deem
appropriate.
15. Reference to and Effect on Loan Documents.
15.1. On and after the date hereof, each reference
in the Loan Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other
Loan Documents to the Loan Agreement, shall mean and be a reference
to the Loan Agreement as amended hereby.
15.2. Except as specifically amended or waived
above, all of the terms of the Loan Agreement shall remain
unchanged and in full force and effect.
15.3. The execution, delivery and effectiveness of
this Amendment shall not operate as a waiver of any Default, Event
of Default or Subsidiary Event of Default, nor as a waiver of any
right, power or remedy of any Lender or the Agent under the Loan
Agreement or any of the other Loan Documents, nor constitute a
waiver of any provision of the Loan Agreement or any of the other
Loan Documents, other than as specifically set forth herein.
16. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and
delivered (including delivery by telecopier) shall be deemed to be
an original and all of which taken together shall constitute one
and the same instrument.
17. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
18. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment or be given any substantive
effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their proper and duly
authorized officers as of the date set forth above.
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
By: /s/ Mark S. Dickerson
-------------------------
Name: Mark S. Dickerson
Title: Secretary
AGENT:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael Burns
-------------------------
Name: Michael Burns
Title: Vice President
LENDERS:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael Burns
-------------------------
Name: Michael Burns
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
By: /s/ Elizabeth J. Limpert
-------------------------
Name: Elizabeth J. Limpert
Title: First Vice President
NATIONAL BANK OF CANADA
By: /s/ Thomas H. Hopkins
-------------------------
Name: Thomas H. Hopkins
Title: Vice President
By: /s/ Beth A. Pease
-------------------------
Name: Beth A. Pease
Title: Vice President
-11-
<PAGE>
CONFIRMATION OF LOAN DOCUMENTS
Each of the undersigned hereby acknowledges that the
Loan and Security Agreement, dated October 22, 1993 (as amended or
modified, the "Loan Agreement"), among Talley Manufacturing and
Technology, Inc., a Delaware corporation, Transamerica Business
Credit Corporation, as agent, and each of the financial
institutions identified on the signature pages thereto is being
amended pursuant to the foregoing Ninth Amendment to Loan and
Security Agreement (the "Amendment"). Each of the undersigned
hereby confirms that each of the Loan Documents to which it is a
party shall remain in full force and effect on the terms provided
therein and that each reference in the Loan Documents to the
"Parent Loan Agreement" shall be a reference to the Loan Agreement
as modified or amended by the Amendment. Each of the undersigned
further confirms that there exists no Default or Event of Default
(as defined in the Subsidiary Loan Agreement to which it is a
party) and that all representations and warranties made by it in
the Loan Documents to which it is a party are true and correct as
though made on and as of the date hereof (other than
representations and warranties that expressly speak only as of a
specified different date).
Dated: As of July 31, 1997
AMCAN SPECIALTY STEELS, INC.;
DIMETRICS, INC.; ELECTRODYNAMICS,
INC.; JOHN J. MCMULLEN ASSOCIATES,
INC.; PORCELAIN PRODUCTS CO.; ROWE
INDUSTRIES, INC.; TALLEY AUTOMOTIVE
PRODUCTS, INC.; TALLEY DEFENSE
SYSTEMS, INC.; TALLEY INTERNATIONAL
INVESTMENT CORPORATION; TALLEY METALS
TECHNOLOGY, INC.; UNIVERSAL PROPULSION
COMPANY; WATERBURY COMPANIES, INC.;
WDC, INC.
By: /s/ Mark S. Dickerson
-------------------------
Name: Mark S. Dickerson
Title: Secretary
EXHIBIT 99.2
FOURTH AMENDMENT TO
SUBSIDIARY LOAN AND SECURITY AGREEMENTS
This FOURTH AMENDMENT TO SUBSIDIARY LOAN AND SECURITY
AGREEMENTS (this "Amendment") is entered into as of the 31st
day of July, 1997, by and among each of the Borrowers listed
on the signature pages hereof (each, individually, a "Borrower"
and, collectively, the "Borrowers") and TALLEY MANUFACTURING AND
TECHNOLOGY, INC., a Delaware corporation (the "Lender").
W I T N E S S E T H:
WHEREAS, each of the Borrowers has heretofore entered into a
Subsidiary Loan and Security Agreement with the Lender dated
October 22, 1993, as amended (each, individually, a "Subsidiary
Loan Agreement" and, collectively, the "Subsidiary Loan
Agreements");
WHEREAS, the Lender has assigned all of its rights under the
Subsidiary Loan Agreements and the other Loan Documents with all of
the Borrowers to the Agent for the benefit of the lenders (the
"Parent Lenders") under the Parent Loan Agreement pursuant to the
Collateral Assignment Agreement;
WHEREAS, the Lender, the Agent and the Parent Lenders are
about to enter into a Ninth Amendment to Loan and Security
Agreement with respect to the Parent Loan Agreement (the "Parent
Amendment") to make certain changes thereto;
WHEREAS, the Lender and the Borrowers wish to enter into this
Amendment to make certain changes to the Subsidiary Loan Agreements
consistent with those to be made to the Parent Loan Agreement
pursuant to the Parent Amendment and the execution and delivery of
this Amendment is a condition precedent to the effectiveness of the
Parent Amendment; and
WHEREAS, the consent of Agent is required for the execution,
delivery and performance of this Amendment with respect to the
Subsidiary Loan Agreements with all of the Borrowers.
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto hereby agree as
follows:
1. Definitions. Capitalized terms used herein and not
defined herein shall have the respective meanings given to such
terms in the Subsidiary Loan Agreements.
<PAGE>
2. Amendments to Change Borrowing Base Reporting.
2.1. The first sentence of Section 2.4 of each Subsidiary
Loan Agreement is hereby amended in its entirety to read as
follows:
On the fifth Business Day following the end of each month,
unless sooner requested by Lender, Borrower shall provide
Lender with a preliminary Borrowing Base Certificate, and on
the fifteenth day following the end of each month, Borrower
shall provide Lender with the final version of such Borrowing
Base Certificate, each substantially in the form attached
hereto as Exhibit A-1 for such month; provided, however, that
if, at any time, under Section 2.4(a) of the Parent Loan
Agreement, the Lender is required to provide Borrowing Base
Certificates to the Agent on a weekly basis, then, on the
second Business Day following the end of each week, the
Borrower shall provide Lender with a Borrowing Base
Certificate substantially in the form attached hereto as
Exhibit A-2 for such week.
2.2. The list of Exhibits in each Subsidiary Loan
Agreement is hereby amended by deleting the words "EXHIBIT A
Form of Borrowing Base Certificate" and substituting the
following words therefor:
EXHIBIT A-1 Form of Monthly Borrowing Base Certificate
EXHIBIT A-2 Form of Weekly Borrowing Base Certificate
2.3. Each Subsidiary Loan Agreement is hereby amended by
deleting EXHIBIT A thereto.
2.4. Exhibits A-1 and A-2 to each Subsidiary Loan
Agreement shall be in the forms thereof attached hereto as Exhibits
A-1 and A-2.
3. Amendment to Section 4.1. The first sentence of Section
4.1 of each Subsidiary Loan Agreement is hereby amended by deleting
the words "one-half percent (.50%) per annum above" from the fourth
line thereof and substituting the words "equal to" therefor.
4. Amendment to Cash Dominion Procedures.
4.1. The following definition shall be added to Section
1.1 of each Subsidiary Loan Agreement, in appropriate alphabetical
order:
"Blockage Notices" shall have the meaning ascribed to
such term in Section 13.1 hereof.
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<PAGE>
4.2. Section 13 of each Subsidiary Loan Agreement shall
be amended and restated in its entirety to read as follows:
"13. Payments; Collection.
13.1. Unless otherwise agreed in writing from time to
time hereafter, all payments which Borrower is required to
make to Lender under this Agreement or under any of the other
Loan Documents may, at the option of the Lender, be made by
appropriate debits to the Loan Account. Lender may in its
sole discretion elect to bill Borrower for such amounts in
which case the amount shall be immediately due and payable
with interest thereon as provided herein. At any time after
either (a) an Event of Default has occurred or (b) Lender
reasonably believes or suspects that Borrower or its
Affiliates have committed fraud or made a statement,
representation or warranty which shall have been materially
false or misleading when made, then Lender or its designee
may, at any time, notify customers or Account Debtors that
Receivables have been assigned to Lender or of its security
interest therein, collect the same directly and charge all
reasonable out-of-pocket collection costs and expenses to the
Loan Account. All proceeds of Collateral and all payments of
money by any Person shall, at the direction of Lender, be
deposited into a lockbox account, dominion account or such
other "blocked account" as Lender may require pursuant to an
arrangement with such bank as may be selected by Borrower and
be acceptable to Agent (the "Collecting Bank"). The Borrower
shall issue to the Collecting Banks irrevocable letters of
instruction, in form and substance satisfactory to the Agent,
directing the Collecting Banks, upon receipt of instructions
("Blockage Notices") to do so from the Agent, thenceforth to
transfer all funds then and thereafter deposited in the
Collecting Banks solely to the Agent, either to any account
maintained by the Agent at the Collecting Bank or by wire
transfer to appropriate account(s) of the Agent, and not to
the Borrower or any Subsidiary. All funds deposited in such
"blocked account" shall immediately become Collateral and the
Borrower shall use its best efforts to obtain the agreement by
the Collecting Bank to waive any offset rights against the
funds so deposited. Agent assumes no responsibility for such
"blocked account" arrangement, including without limitation,
any claim of accord and satisfaction or release with respect
to deposits accepted by the Collecting Bank thereunder.
Alternatively, upon the issuance of a Blockage Notice, Lender
may establish depository accounts in the name of Lender at a
bank or banks for the deposit of such funds and Borrower shall
deposit all proceeds of Receivables, dividends and other sums
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<PAGE>
paid to Borrower by the Subsidiaries or cause same to be
deposited, in kind, in such depository accounts of Lender in
lieu of depositing same to the blocked accounts. Except as
otherwise contemplated in Section 13.2 hereof, Lender will
credit all such payments to the Loan Account, conditional upon
final collection; credit will be given for cleared funds
received prior to 1:00 p.m. New York City time, by Lender at
its account at the First National Bank of Chicago (or such
other account of Lender as it shall designate in writing to
Borrower), two (2) Business Days after such receipt thereof
and until receipt by Lender at such address, no credit will be
given. In all cases, the Loan Account will be credited only
with the net amounts actually received by Lender. Should any
check or item of payment not be honored for payment, then,
Borrower shall be deemed not to have made such payment, and
interest shall be recalculated accordingly.
Borrower agrees to pay to Lender any and all out-of-pocket
fees, costs and expenses which Lender incurs in connection with
opening and maintaining any "blocked account" and depositing for
collection by Lender any check or item of payment received and/or
delivered to Collecting Bank or Lender on account of the Obligations
and Borrower further agrees to reimburse Lender for any claims asserted
by the Collecting Banks in connection with Borrower's "blocked account"
and any amounts paid to any Collecting Banks arising out of Lender's
indemnification of such Collecting Banks against damages incurred by
the Collecting Bank in the operation of such Borrower's
"blocked account". Borrower further agrees that Lender shall have the
right, in its sole discretion, to require Borrower to establish lock box
accounts in addition to, or in lieu of, Borrower's "blocked account",
which lock box accounts will be subject to an agreement (consistent with
the provisions of this Agreement) acceptable to Lender, Borrower and the
Collecting Banks."
13.2. Notwithstanding the provisions of Section 13.1
hereof, so long as (a) no Default, Event of Default or
Subsidiary Event of Default (as such terms are defined in the
Parent Loan Agreement) has occurred and (b) Excess
Availability (as defined in the Parent Loan Agreement) is Ten
Million Dollars ($10,000,000) or more, Borrower shall be
permitted to receive directly from the Collecting Banks the
funds deposited therein. However, if at any time (x) any
Default, Event of Default or Subsidiary Event of Default (as
such terms are defined in the Parent Loan Agreement) shall
occur, or (y) Excess Availability (as defined in the Parent
Loan Agreement) shall be or become less than Ten Million
Dollars ($10,000,000), such permission shall automatically
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<PAGE>
cease and Agent may, and upon the request of the Required
Lenders (as defined in the Parent Loan Agreement) shall, then
and thereafter issue Blockage Notices to the Collecting Banks.
5. Amendments to Section 19 of Talley Defense Systems, Inc.
Subsidiary Loan Agreement.
5.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Talley Defense Systems, Inc. Subsidiary Loan Agreement
shall be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $10,000,000
July 1, 1997 through September 30, 1997 $10,000,000
October 1, 1997 through December 31, 1997 $10,000,000
January 1, 1998 through March 31, 1998 $11,000,000
April 1, 1998 through June 30, 1998 $11,000,000
July 1, 1998 through September 30, 1998 $11,000,000
October 1, 1998 through December 31, 1998 $11,000,000
Every Month Thereafter $11,000,000
plus an
increase of
$500,000 each
January 1,
commencing
January 1,
1999
5.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Talley Defense Systems, Inc. Subsidiary Loan
Agreement shall be amended by (i) deleting the columns titled
"Calendar Quarter Ending" and "Amount" and replacing them in their
entirety with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $1,000,000
September 30, 1997 $1,000,000
December 31, 1997 $1,000,000
March 31, 1998 $1,250,000
June 30, 1998 $1,250,000
September 30, 1998 $1,250,000
December 31, 1998 $1,250,000
Each Calendar Quarter Thereafter $1,250,000 plus an
increase of $250,000
each January 1,
commencing January
1, 1999
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<PAGE>
and (ii) adding the following at the end of Section 19.2 "provided,
however, that Borrower's Free Cash Flow as of the end of any such
quarter shall be computed without including in the computation of
the sum of Capital Expenditures those Capital Expenditures made by
the Borrower or its Affiliates in connection with the participation
by the Borrower or its Affiliates in the Aegis Technologies, L.L.C.
joint venture regarding the joint development of certain airbag technology."
6. Amendments to Section 19 of Universal Propulsion Company,
Inc. Subsidiary Loan Agreement.
6.1. Amendment to Tangible Net Worth Covenant. Section 19.1
of the Universal Propulsion Company, Inc. Subsidiary Loan Agreement shall
be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $13,000,000
July 1, 1997 through September 30, 1997 $13,000,000
October 1, 1997 through December 31, 1997 $13,000,000
January 1, 1998 through March 31, 1998 $13,500,000
April 1, 1998 through June 30, 1998 $13,500,000
July 1, 1998 through September 30, 1998 $13,500,000
October 1, 1998 through December 31, 1998 $13,500,000
Every Month Thereafter $13,500,000
plus an
increase of
$500,000 each
January 1,
commencing
January 1, 1999
6.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Universal Propulsion Company, Inc. Subsidiary
Loan Agreement shall be amended by deleting the columns titled
"Calendar Quarter Ending" and "Amount" and replacing them in their
entirety with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 ($1,300,000)
September 30, 1997 ($2,500,000)
December 31, 1997 ($4,500,000)
March 31, 1998 ($4,250,000)
June 30, 1998 ($4,000,000)
September 30, 1998 ($3,750,000)
December 31, 1998 ($3,500,000)
Each Calendar Quarter Thereafter ($3,500,000) plus an
increase of $250,000
each January 1,
commencing January
1, 1999
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<PAGE>
7. Amendments to Section 19 of Electrodynamics, Inc.
Subsidiary Loan Agreement.
7.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Electrodynamics, Inc. Subsidiary Loan Agreement shall
be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $9,000,000
July 1, 1997 through September 30, 1997 $9,000,000
October 1, 1997 through December 31, 1997 $9,000,000
January 1, 1998 through March 31, 1998 $10,000,000
April 1, 1998 through June 30, 1998 $10,000,000
July 1, 1998 through September 30, 1998 $10,000,000
October 1, 1998 through December 31, 1998 $10,000,000
Every Month Thereafter $10,000,000 plus an
increase of
$1,000,000
each January 1,
commencing
January 1, 1999
7.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Electrodynamics, Inc. Subsidiary Loan Agreement
shall be amended by deleting the columns titled "Calendar Quarter
Ending" and "Amount" and replacing them in their entirety with the
following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $2,000,000
September 30, 1997 $2,250,000
December 31, 1997 $2,500,000
March 31, 1998 $2,500,000
June 30, 1998 $2,750,000
September 30, 1998 $2,750,000
December 31, 1998 $2,750,000
Each Calendar Quarter Thereafter $2,750,000 plus an
increase of $250,000
each January 1,
commencing January
1, 1999
8. Amendments to Section 19 of Rowe Industries, Inc.
Subsidiary Loan Agreement.
8.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Rowe Industries, Inc. Subsidiary Loan Agreement shall
be amended and restated in its entirety to read as follows:
-7-
<PAGE>
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $100,000
July 1, 1997 through September 30, 1997 $100,000
October 1, 1997 through December 31, 1997 $100,000
January 1, 1998 through March 31, 1998 $250,000
April 1, 1998 through June 30, 1998 $250,000
July 1, 1998 through September 30, 1998 $250,000
October 1, 1998 through December 31, 1998 $250,000
Every Month Thereafter $250,000 plus
an increase of
$100,000 each
January 1,
commencing
January 1,
1999
8.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Rowe Industries, Inc. Subsidiary Loan Agreement
shall be amended by deleting the columns titled "Calendar Quarter
Ending" and "Amount" and replacing them in their entirety with the
following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $100,000
September 30, 1997 $100,000
December 31, 1997 $100,000
March 31, 1998 $125,000
June 30, 1998 $125,000
September 30, 1998 $125,000
December 31, 1998 $125,000
Each Calendar Quarter Thereafter $125,000 plus an
increase of $25,000
each January 1,
commencing January
1, 1999
9. Amendments to Section 19 of John J. McMullen Associates,
Inc. Subsidiary Loan Agreement.
9.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the John J. McMullen Associates, Inc. Subsidiary Loan
Agreement shall be amended and restated in its entirety to read as
follows:
-8-
<PAGE>
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $7,000,000
July 1, 1997 through September 30, 1997 $7,000,000
October 1, 1997 through December 31, 1997 $7,000,000
January 1, 1998 through March 31, 1998 $7,250,000
April 1, 1998 through June 30, 1998 $7,250,000
July 1, 1998 through September 30, 1998 $7,250,000
October 1, 1998 through December 31, 1998 $7,250,000
Every Month Thereafter $7,250,000
plus an increase
of $250,000 each
January 1, commencing
January 1, 1999
9.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the John J. McMullen Associates, Inc. Subsidiary
Loan Agreement shall be amended by deleting the columns titled
"Calendar Quarter Ending" and "Amount" and replacing them in their
entirety with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $4,000,000
September 30, 1997 $4,000,000
December 31, 1997 $4,000,000
March 31, 1998 $5,000,000
June 30, 1998 $5,000,000
September 30, 1998 $5,000,000
December 31, 1998 $5,000,000
Each Calendar Quarter Thereafter $5,000,000 plus an
increase of $250,000
each January 1, commencing
January 1, 1999
10. Amendments to Section 19 of Talley Metals Technology,
Inc. Subsidiary Loan Agreement.
10.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Talley Metals Technology, Inc. Subsidiary Loan Agreement
shall be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $21,500,000
July 1, 1997 through September 30, 1997 $21,500,000
October 1, 1997 through December 31, 1997 $21,500,000
January 1, 1998 through March 31, 1998 $22,000,000
-9-
<PAGE>
Period Amount
------ ------
April 1, 1998 through June 30, 1998 $22,000,000
July 1, 1998 through September 30, 1998 $22,000,000
October 1, 1998 through December 31, 1998 $22,000,000
Every Month Thereafter $22,000,000
plus an increase of
$250,000 each January 1,
commencing January 1, 1999
10.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Talley Metals Technology, Inc. Subsidiary Loan
Agreement shall be amended by deleting the columns titled "Calendar
Quarter Ending" and "Amount" and replacing them in their entirety
with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $2,500,000
September 30, 1997 $3,500,000
December 31, 1997 $5,000,000
March 31, 1998 $5,000,000
June 30, 1998 $6,000,000
September 30, 1998 $6,000,000
December 31, 1998 $6,000,000
Each Calendar Quarter Thereafter $6,000,000 plus an
increase of $250,000
each January 1,
commencing January 1, 1999
11. Amendments to Section 19 of Amcan Specialty Steels, Inc.
Subsidiary Loan Agreement.
11.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Amcan Specialty Steels, Inc. Subsidiary Loan Agreement
shall be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $4,500,000
July 1, 1997 through September 30, 1997 $4,500,000
October 1, 1997 through December 31, 1997 $4,500,000
January 1, 1998 through March 31, 1998 $4,750,000
April 1, 1998 through June 30, 1998 $4,750,000
July 1, 1998 through September 30, 1998 $4,750,000
October 1, 1998 through December 31, 1998 $4,750,000
Every Month Thereafter $4,750,000
plus an increase of
$250,000 each January 1,
commencing January 1, 1999
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<PAGE>
11.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Amcan Specialty Steels, Inc. Subsidiary Loan
Agreement shall be amended by deleting the columns titled "Calendar
Quarter Ending" and "Amount" and replacing them in their entirety
with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $500,000
September 30, 1997 $525,000
December 31, 1997 $550,000
March 31, 1998 $550,000
June 30, 1998 $600,000
September 30, 1998 $625,000
December 31, 1998 $650,000
Each Calendar Quarter Thereafter $650,000 plus an
increase of $100,000
each January 1,
commencing January
1, 1999
12. Amendments to Section 19 of Porcelain Products Co.
Subsidiary Loan Agreement.
12.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Porcelain Products Co. Subsidiary Loan Agreement shall
be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $6,500,000
July 1, 1997 through September 30, 1997 $6,500,000
October 1, 1997 through December 31, 1997 $6,500,000
January 1, 1998 through March 31, 1998 $7,000,000
April 1, 1998 through June 30, 1998 $7,000,000
July 1, 1998 through September 30, 1998 $7,000,000
October 1, 1998 through December 31, 1998 $7,000,000
Every Month Thereafter $7,000,000
plus an
increase of
$250,000 each
January 1,
commencing
January 1,
1999
12.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Porcelain Products Co. Subsidiary Loan
Agreement shall be amended by deleting the columns titled "Calendar
Quarter Ending" and "Amount" and replacing them in their entirety
with the following:
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<PAGE>
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $2,000,000
September 30, 1997 $3,000,000
December 31, 1997 $3,000,000
March 31, 1998 $3,250,000
June 30, 1998 $3,250,000
September 30, 1998 $3,250,000
December 31, 1998 $3,250,000
Each Calendar Quarter Thereafter $3,250,000 plus an
increase of $150,000
each January 1,
commencing January
1, 1999
13. Amendments to Section 19 of Dimetrics, Inc. Subsidiary
Loan Agreement.
13.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Dimetrics, Inc. Subsidiary Loan Agreement shall be
amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $3,500,000
July 1, 1997 through September 30, 1997 $3,500,000
October 1, 1997 through December 31, 1997 $3,500,000
January 1, 1998 through March 31, 1998 $4,000,000
April 1, 1998 through June 30, 1998 $4,000,000
July 1, 1998 through September 30, 1998 $4,000,000
October 1, 1998 through December 31, 1998 $4,000,000
Every Month Thereafter $4,000,000
plus an
increase of
$100,000 each
January 1,
commencing
January 1, 1999
13.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Dimetrics, Inc. Subsidiary Loan Agreement shall
be amended by deleting the columns titled "Calendar Quarter Ending"
and "Amount" and replacing them in their entirety with the
following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 ($1,750,000)
September 30, 1997 ($1,500,000)
December 31, 1997 ($1,250,000)
March 31, 1998 ($1,500,000)
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<PAGE>
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1998 ($1,250,000)
September 30, 1998 ($1,000,000)
December 31, 1998 ($750,000)
Each Calendar Quarter Thereafter ($750,000) plus an
increase of $100,000
each January 1,
commencing January 1, 1999
14. Amendments to Section 19 of Waterbury Companies, Inc.
Subsidiary Loan Agreement.
14.1. Amendment to Tangible Net Worth Covenant. Section
19.1 of the Waterbury Companies, Inc. Subsidiary Loan Agreement
shall be amended and restated in its entirety to read as follows:
Borrower shall cause its Tangible Net Worth, as measured at
the end of each calendar month, to equal or exceed the
following amounts during the term of this Agreement:
Period Amount
------ ------
April 1, 1997 through June 30, 1997 $13,500,000
July 1, 1997 through September 30, 1997 $13,500,000
October 1, 1997 through December 31, 1997 $13,500,000
January 1, 1998 through March 31, 1998 $14,000,000
April 1, 1998 through June 30, 1998 $14,000,000
July 1, 1998 through September 30, 1998 $14,000,000
October 1, 1998 through December 31, 1998 $14,000,000
Every Month Thereafter $14,000,000
plus an
increase of
$500,000 each
January 1,
commencing
January 1, 1999
14.2. Amendment to Cumulative Free Cash Flow Covenant.
Section 19.2 of the Waterbury Companies, Inc. Subsidiary Loan
Agreement shall be amended by deleting the columns titled "Calendar
Quarter Ending" and "Amount" and replacing them in their entirety
with the following:
Calendar Quarter Ending Amount
----------------------- ------
June 30, 1997 $1,500,000
September 30, 1997 $2,500,000
December 31, 1997 $2,750,000
March 31, 1998 $2,800,000
June 30, 1998 $2,850,000
September 30, 1998 $2,900,000
December 31, 1998 $2,950,000
Each Calendar Quarter Thereafter $2,950,000 plus an
increase of $50,000
each January 1,
commencing January 1, 1999
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<PAGE>
15. Conditions to Effectiveness. Except for Section 3 of
this Amendment which shall be effective as of July 1, 1997, and
Sections 5 through 14, inclusive, which shall each be effective as
of April 1, 1997, this Amendment shall be effective as of the date
first above written, provided, however, that any and all Sections
of this Amendment shall only be effective upon satisfaction of the
following conditions precedent:
15.1. Execution of this Amendment. The Agent shall have
received this Amendment executed by a duly authorized officer of
Lender and each Borrower.
15.2. Consent of Agent. TBCC, as Agent, shall have
consented to the execution, delivery and performance of this
Amendment by executing the Consent set forth below.
15.3. Amendments to Parent Loan Documents. The Lender
shall have executed the Parent Amendment and the Lender and each
Borrower shall have executed and/or delivered such other documents
and instruments in connection therewith as the Parent Lenders and
the Agent shall require as a condition precedent to the
effectiveness thereof, each in form and substance satisfactory to
the Agent, and such Parent Amendment shall have become effective.
15.4. Corporate Proceedings. The Agent shall have
received a copy of the resolutions (in form and substance
reasonably satisfactory to Agent) of the Board of Directors of each
Borrower authorizing the execution, delivery and performance of
this Amendment and the other Loan Documents contemplated hereby,
all certified by the Secretary or an Assistant Secretary of each
Borrower on the date hereof. Such certificate shall state that the
resolutions set forth therein have not been amended, modified,
revoked or rescinded as of the date of such certificate.
15.5. No Defaults. No Default or Event of Default shall
have occurred and be existing either before or immediately after
giving effect to this Amendment.
15.6. Representations and Warranties True. The
representations and warranties contained herein, in the Subsidiary
Loan Agreements and in all other Loan Documents (other than
representations and warranties that expressly speak only as of a
specified different date) shall be true and correct both as of the
date hereof and immediately after giving effect to this Amendment.
15.7. Certificate of Officers. The Agent shall have
received a certificate, in form and substance satisfactory to the
Agent, dated the date of the effectiveness of this Amendment and
signed by the President, a Vice President or the Secretary, and the
Treasurer or Controller, of each Borrower certifying that the
conditions set forth in this Section 15 have been fulfilled and as
to such other matters as the Agent shall reasonably require.
-14-
<PAGE>
15.8. Other Conditions. The Agent shall have received
such other agreements, opinions, certificates, representations,
instruments and other documents as it may reasonably require, all
in form and substance satisfactory to the Agent.
16. Representations and Warranties. Each Borrower hereby
represents and warrants to the Lender and the Agent that (i) the
execution, delivery and performance of this Amendment and the other
documents and instruments to be executed and delivered in
connection herewith by such Borrower and the Affiliates are within
their respective corporate powers and have been duly authorized by
all necessary corporate action, (ii) no consent, approval,
authorization of, or declaration or filing with, any governmental
or public authority, and no consent of any other Person, is
required in connection with the execution, delivery and performance
of this Amendment and the other documents and instruments to be
executed and delivered in connection herewith by such Borrower and
the Affiliates, except for those already duly obtained, (iii) this
Amendment and the other documents and instruments to be executed
and delivered in connection herewith by such Borrower and the
Affiliates have been duly executed by such Borrower and Affiliates
and constitute the legal, valid and binding obligation of such
Borrower and Affiliates, enforceable against them in accordance
with their terms, (iv) the execution, delivery and performance by
such Borrower and the Affiliates of this Amendment and the other
documents and instruments to be executed and delivered in
connection herewith by such Borrower and Affiliates do not and will
not conflict with, or constitute a violation or breach of, or
constitute a default under, or result in the creation or imposition
of any Lien upon the property of such Borrower or any of the
Affiliates by reason of the terms of (a) any contract, mortgage,
Lien, lease, agreement, indenture, or instrument to which such
Borrower or such Subsidiary is a party or which is binding upon it,
(b) any requirement of law applicable to such Borrower or such
Subsidiary, or (c) the Certificate or Articles of Incorporation or
By-Laws of such Borrower or such Subsidiary, (v) no event has
occurred and is continuing which constitutes a Default or an Event
of Default, and (vi) no change or development or event involving a
prospective change, which in any such case has had or could
reasonably be expected to have a material adverse effect on the
ability of such Borrower to perform its obligations under the Loan
Documents or on the business, operations, assets, conditions
(financial or otherwise) or prospects of the Borrowers on a
consolidated basis has occurred and is continuing.
17. Reference to and Effect on Loan Documents.
17.1. On and after the date hereof, each reference in
the Subsidiary Loan Agreements to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in
the other Loan Documents to a Subsidiary Loan Agreement, shall mean
and be a reference to such Subsidiary Loan Agreement as amended
hereby.
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<PAGE>
17.2. Except as specifically amended above, all of the
terms of the Subsidiary Loan Agreements shall remain unchanged and
in full force and effect.
17.3. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any Default or Event of
Default, nor as a waiver any right, power or remedy of any Lender
or the Agent under any Subsidiary Loan Agreement or any of the
other Loan Documents, nor constitute a waiver of any provision of
any Subsidiary Loan Agreement or any of the other Loan Documents.
18. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and
delivered (including delivery by telecopier) shall be deemed to be
an original and all of which taken together shall constitute one
and the same instrument.
19. Governing Law. This Amendment shall be governed by, and
shall be construed and enforced in accordance with, the laws of the
State of New York.
20. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment or be given any substantive
effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their proper and duly
authorized officers as of the date set forth above.
BORROWERS:
AMCAN SPECIALTY STEELS, INC.; DIMETRICS,
INC.; ELECTRODYNAMICS, INC.; JOHN J.
MCMULLEN ASSOCIATES, INC.; PORCELAIN
PRODUCTS CO.; ROWE INDUSTRIES, INC.;
TALLEY AUTOMOTIVE PRODUCTS, INC.; TALLEY
DEFENSE SYSTEMS, INC.; TALLEY
INTERNATIONAL INVESTMENT CORPORATION;
TALLEY METALS TECHNOLOGY, INC.; UNIVERSAL
PROPULSION COMPANY; WATERBURY COMPANIES,
INC.; WDC, INC.
By:/s/ Mark S. Dickerson
--------------------------
Name: Mark S. Dickerson
Title: Secretary
LENDER:
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
By:/s/ Daniel R. Mullen
--------------------------
Name: Daniel R. Mullen
Title: Treasurer
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<PAGE>
CONSENT OF AGENT
The undersigned, as Agent, hereby consents to the
execution, delivery and performance of the foregoing Fourth
Amendment to Subsidiary Loan and Security Agreements with respect
to the Subsidiary Loan Agreements.
Dated: As of July 31, 1997
TRANSAMERICA BUSINESS CREDIT CORPORATION, as Agent
By:/s/ Michael Burns
---------------------
Name: Michael Burns
Title: Vice President
