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 June 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 June 30, 1997
$1.00 par value 14,113,453
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996 1
Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 1997 and 1996 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity - Six Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis 8-14
Part II Other Information
Legal Proceedings 15
Submission of Matters to a Vote of Security Holders 15-16
Exhibits and Reports on Form 8-K 16-17
Signatures 18
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(thousands)
June 30, December 31,
ASSETS 1997 1996
-------- ------------
Cash and cash equivalents $ 45,554 $ 48,758
Accounts receivable, net of allowance for
doubtful accounts of $1,114 at June 30,
1997 and $925 at December 31, 1996 48,217 53,090
Inventories, net 62,348 64,684
Deferred income taxes 3,700 3,660
Prepaid expenses 8,912 6,100
-------- --------
Current assets 168,731 176,292
Property, plant and equipment, net 52,311 49,324
Intangibles 38,751 41,965
Deferred charges and other assets 12,313 12,804
Deferred income taxes 666 -
-------- --------
Total assets $272,772 $280,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,141 $ 5,522
Accounts payable 25,104 20,116
Accrued expenses 33,963 44,189
U.S. and foreign income taxes 1,590 -
-------- --------
Current liabilities 63,798 69,827
Long-term debt 123,617 123,185
Deferred income taxes - 2,179
Other liabilities 11,057 10,708
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 14 14
Series B 750 750
Common stock, $1 par value,
authorized 20,000,000 shares 14,113 14,618
Capital in excess of par value 75,681 79,884
Foreign currency translation adjustment (609) (562)
Accumulated deficit (15,649) (20,218)
-------- --------
Total stockholders' equity 74,300 74,486
Total liabilities and -------- --------
stockholders' equity $272,772 $280,385
======== ========
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(thousands, except per share amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sales $ 66,272 $ 69,847 $133,205 $142,589
Services 21,078 17,902 42,269 32,822
Royalties 505 6,221 712 13,686
-------- -------- -------- --------
87,855 93,970 176,186 189,097
-------- -------- -------- --------
Cost of sales 48,833 52,315 97,903 107,693
Cost of services 18,835 15,847 37,835 28,868
Selling, general,
and administrative expenses 20,431 18,694 35,363 34,813
Reversal of reserves on realty assets (6,300) - (6,300) -
-------- -------- -------- --------
81,799 86,856 164,801 171,374
-------- -------- -------- --------
Earnings from operations 6,056 7,114 11,385 17,723
Other income (expense), net 223 (1,241) 755 (2,193)
-------- -------- -------- --------
6,279 5,873 12,140 15,530
-------- -------- -------- --------
Interest expense (3,644) (7,191) (7,321) (14,372)
-------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary loss 2,635 (1,318) 4,819 1,158
Income tax provision 137 513 250 1,073
-------- -------- -------- --------
Earnings (loss) before extraordinary loss 2,498 (1,831) 4,569 85
Extraordinary loss - (1,642) - (1,642)
-------- -------- -------- --------
Net earnings(loss) $ 2,498 $ (3,473) $ 4,569 $ (1,557)
======== ======== ======== ========
Earnings (loss) applicable
to common shares $ 2,307 $(11,112) $ 4,187 $(14,308)
======== ======== ======== ========
Earnings (loss) per share of common stock
and common stock equivalents:
Earnings(loss)before extraordinary loss $ .16 $ (.15) $ .29 $ (.05)
Extraordinary loss - (.12) - (.13)
-------- -------- -------- --------
Net earnings(loss)before consideration
for induced conversion of preferred stock .16 (.27) .29 (.18)
Assumed value of conversion inducement - (.55) - (.98)
Earnings (loss) applicable -------- -------- -------- --------
to common shares $ .16 $ (.82) $ .29 $ (1.16)
======== ======== ======== ========
Weighted average shares outstanding 15,190 13,582 14,280 12,289
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
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TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(thousands)
Six Months Ended
June 30,
------------------
1997 1996
-------- --------
Cash and cash equivalents at beginning of year $ 48,758 $ 10,475
Cash flows from operating activities: -------- --------
Net earnings (loss) 4,569 (1,557)
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (2,885) 1,657
Depreciation and amortization 4,438 4,388
Original discount amortization - 5,444
Net loss on sale of subsidiary and product line 1,325 -
Gain on sale of property and equipment (24) (53)
Other 409 1,540
Changes in assets and liabilities, net of
effects from acquired businesses:
Decrease in accounts receivable 4,736 6,458
Increase in inventories (2,051) (12,062)
Increase in prepaid expenses (2,874) (1,940)
Increase in other assets (6,349) (554)
Decrease in realty assets - 2,030
Increase in accounts payable 4,988 8,233
Decrease in accrued expenses (7,283) (254)
Increase (decrease) in other liabilities 1,185 (527)
Other, net (186) (16)
-------- --------
Cash flows from operating activities (2) 12,787
Cash flows from investing activities:
Proceeds from sale of subsidiary and product line 6,162 -
Purchase of assets of acquired business - (4,030)
Purchases of property and equipment (7,103) (2,675)
Reduction of long-term receivables 4,450 788
Increase in long-term receivables - (501)
Proceeds from sale of property and equipment 57 76
-------- --------
Cash flows from investing activities 3,566 (6,342)
Cash flows from financing activities:
Preferred stock conversion cost - (319)
Payment of dividends (382) -
Purchase of common stock (4,332) -
Common stock issued 6 -
Repayment of long-term debt (2,060) (16,445)
Reduction in borrowings under line of credit - (247,834)
Proceeds from borrowings under line of credit - 254,165
-------- --------
Cash flows from financing activities (6,768) (10,433)
Net decrease in cash and cash equivalents (3,204) (3,988)
-------- -------
Total cash and cash equivalents at June 30 $ 45,554 $ 6,487
======== ========
The accompanying notes are an integral part of the financial statements.
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<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1997 and 1996
(thousands)
Preferred Stock Capital in Retained
---------------------------- Common Excess of Earnings
Series A Series B Series D Stock Par Value (Deficit)
-------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 67 $1,548 $ 120 $10,053 $86,035 $(38,959)
Net loss (1,557)
Conversion to Common stock (53) (798) (120) 4,007 (3,434)
Stock grant 10 69
------ ------ ------ ------- ------- --------
BALANCE AT JUNE 30, 1996 $ 14 $ 750 $ - $14,070 $82,670 $(40,516)
====== ====== ====== ======= ======= ========
BALANCE AT DECEMBER 31, 1996 $ 14 $ 750 $ - $14,618 $79,884 $(20,218)
Net earnings 4,569
Dividends - preferred stock (382)
Stock grant 6
Common stock retirements (511) (3,821)
------ ------ ------ ------- --------
BALANCE AT JUNE 30, 1997 $ 14 $ 750 $ - $14,113 $ 75,681 $ (15,649)
====== ====== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<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 June 30, 1997 and December 31,
1996 and the results of operations for the three-month and six-month
periods ended June 30, 1997 and 1996, and cash flows and
changes in stockholders' equity for the six-month periods ended
June 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):
June 30, December 31,
1997 1996
------- -----------
Raw materials and supplies $11,935 $10,995
Work-in-process 11,083 11,564
Finished goods 24,579 26,158
Inventories applicable to
government contracts 14,751 15,967
------- -------
$62,348 $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 from the $2.1 million sale
price 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.
-6-
<PAGE>
Note 5 - Preferred Stock Conversions, continued
- -----------------------------------------------
The transactions do not impact the net earnings of the Company,
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" have been reduced. The excess of the fair
value of the common shares transferred in the transactions by the
Company, over the fair value of the common shares issuable pursuant
to the stated conversion terms of the preferred stock, have been
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 date. 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 six months ended June 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. For the six months ended June 30,
1997, another 510,367 shares were repurchased for a total cost of
approximately $4.3 million.
-7-
<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 Six Months
Ended Ended
June 30, June 30,
------------------ -------------------
1997 1996 1997 1996
REVENUES: -------- -------- --------- --------
Government Products
and Services $ 39,353 $ 37,352 $ 80,127 $ 68,971
Airbag Royalties - 6,143 - 13,393
Stainless Steel Products 29,111 32,601 59,374 71,536
Industrial Products 19,391 17,670 36,685 33,700
Realty - 204 - 1,497
-------- -------- -------- --------
$ 87,855 $ 93,970 $176,186 $189,097
======== ======== ======== ========
OPERATING INCOME:
Government Products
and Services $ 4,805 $ 2,756 $ 9,056 $ 4,793
Airbag Royalties - 6,143 - 13,393
Stainless Steel Products 2,401 4,915 5,030 9,860
Industrial Products 1,787 454 2,774 1,086
Realty 6,310 (1,382) 6,310 (2,501)
-------- -------- -------- --------
Total operating income 15,303 12,886 23,170 26,631
Corporate expense (9,607) (7,109) (12,140) (11,313)
Non-segment interest
income 583 96 1,110 212
Interest expense (3,644) (7,191) (7,321) (14,372)
-------- -------- -------- --------
Earnings (loss) before
income taxes and
extraordinary loss $ 2,635 $ (1,318) $ 4,819 $ 1,158
======== ======== ======== ========
Revenues for the six-month period ended June 30, 1997
decreased $12.9 million when compared with the corresponding period
in the prior year, principally because of the absence of airbag
royalty revenues for the 1997 period. Royalties from automotive
airbags ceased with the mid-1996 payments from TRW to settle the
airbag royalties litigation. Revenue increases for the first six
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<PAGE>
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 steel sales volume and prices, as
competitive pressures from United States and foreign suppliers
affected the sales volume and sales prices.
During the six months ended June 30, 1997 operating income
from the Government Products and Services segment increased from
$4.8 million to $9.1 million as compared with the comparable year-
earlier period, and operating income from the Company's Industrial
Products segment increased $1.7 million. These increases were more
than offset by the absence of any airbag royalty income for 1997.
Also, operating income from the Stainless Steel Products
segment for the six months ended June 30, 1997, when compared with
the first six months of 1996, was $4.8 million lower.
The gross profit percentage, excluding airbag royalties and
realty, was 23.0% for the six months ended June 30, 1997, up
slightly from the gross profit percentage of 22.3% for the
comparable period in 1996. The slight increase from the prior year
is primarily due to higher margins on certain government contracts
and an improvement in the margin on industrial products, partially
offset by a lower margin on stainless steel products.
Earnings before income taxes for the six months ended June 30,
1997 was $4.8 million compared with $1.2 million in the first six
months of the previous year. Net earnings for the six months ended
June 30, 1997 were $4.6 million compared to a net loss of $1.6
million for the same period in the prior year. Prior year's
results included a $1.6 million extraordinary loss relating to
expenses incurred in connection with the repurchase of the Senior
Discount Debentures.
GOVERNMENT PRODUCTS AND SERVICES. Revenue and operating
income for the six months ended June 30, 1997 increased by $11.2
million and $4.3 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 research and development cost by a joint
venture partner working with the Company in the development of
automotive airbag inflators.
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 six months of 1996 were $13.4 million.
-9-
<PAGE>
STAINLESS STEEL PRODUCTS. During the first six months of
1997, sales for the Stainless Steel Products segment decreased
$12.2 million, while operating income decreased $4.8 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 volume and prices, as competitive
pressures from United States and foreign suppliers affected the
sales volume and sales prices.
INDUSTRIAL PRODUCTS. In the six-month period ended June 30,
1997, Industrial Products sales increased $3.0 million while
operating income increased $1.7 million, when compared with the
same period in 1996. Increases in sales and operating income
resulted primarily 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 $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 $6.3
million reflects this reversal and compares to a $2.5 million loss
for the first six months of 1996.
OTHER. Interest expense for the six months ended June 30,
1997 decreased to $7.3 million, from $14.4 million in the
comparable period in 1996. The decrease is primarily due to the
repurchase of a substantial portion of the Company's Senior
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 the 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 six
months of 1997 of $12.1 million and $11.3 million in 1996 are above
historical levels. The 1997 corporate expenses include $5.8
million incurred in connection with the severance payments made to
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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 include $5.5 million of costs
incurred in connection with the TRW litigation. The income tax
provision for the first six months of 1997 was $.3 million compared
to $1.1 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 June 30, 1997, the Company had $45.6 million in cash and
cash equivalents and net working capital of $104.9 million. Cash
generated from operating activities for the six months ended June
30, 1997 was offset by cash used in operating activities. Cash
generated from operating activities includes amounts from earnings,
a decrease in accounts receivable, and an increase in accounts
payable, offset by cash used to increase inventories, an increase
in prepaid expenses and other assets, and a decrease in accrued
expenses. Cash generated from operations during the first six
months of 1996 was $12.8 million. Cash generated from investing
activities during the six months ended June 30, 1997 was $3.6
million, consisting primarily of the sale of assets of a subsidiary
and a product line, the collection of an income tax refund
receivable, offset by capital expenditures. Cash used in financing
activities of $6.8 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,
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 June 30, 1997 availability under the total facility
was approximately $49.7 million, of which approximately $9.7
million (the principal balance of the term loan) was borrowed.
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<PAGE>
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 June 30, 1997 cash
balances of $25.3 million held at the parent holding company level,
the Company believes that funds will be available to permit the
Company to meet its requirements.
Other Matters
- -------------
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
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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.
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
-13-
<PAGE>
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 six months ending
June 30, 1997, the Basic Earnings per share and the Diluted
Earnings per share would have been $.29 and $.30, respectively.
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
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
-14-
<PAGE>
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.
-15-
<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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Registrant held its Annual Meeting of Stockholders on May
8, 1997.
(b) The directors elected at the meeting are as follows:
Paul L. Foster
Robert T. Craig
Ralph A. Rockow
The directors whose term of office continued after the meeting
are as follows:
Jack C. Crim
Fred Israel
Joseph A. Orlando
Alex Stamatakis
John W. Stodder
Donald J. Ulrich, Jr.
David Victor
(c) The results of the election of directors were as follows:
For Withheld
---------- --------
Paul L. Foster 11,392,506 674,871
Robert T. Craig 6,061,800 47,333
Ralph A. Rockow 6,061,800 47,333
Townsend Hoopes 5,513,933 459,430
William H. Mallender 5,496,879 479,202
-16-
<PAGE>
Proposals made by a shareholder as recommendations to the
Board of Directors were also voted on at the meeting. Certain
of these proposals suggest changes to the Company's
Certificate of Incorporation, and can only be implemented by
a super-majority vote of the shareholders following action by
the Board. The results of the votes on these proposals are as
follows:
Issue For Against Abstain
------------------------- --------- --------- -------
Elimination of classified
Board of Directors 6,760,664 5,219,125 102,705
Provision to allow holders
of ten percent of shares to
call special stockholder
meetings 6,619,334 5,355,144 108,017
Elimination of certain super-
majority requirements 7,429,644 4,513,877 138,974
Elimination of the share-
holder rights ("poison pill")
plan 6,718,283 5,232,308 131,906
No other matters were voted upon at the annual meeting.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
11* Computation of Earnings per Common and Common
Equivalent Share.
27* Financial Data Schedule for Talley Industries, Inc.,
June 30, 1997.
99.1* Consent and Seventh Amendment to the Loan and
Security Agreement dated June 5, 1997 by and among
Talley Manufacturing and Technology, Inc. and
Transamerica Business Credit Corporation.
99.2* Consent and Eighth Amendment to the Loan and Security
Agreement dated July 17, 1997 by and among Talley
Manufacturing and Technology, Inc. and Transamerica
Business Credit Corporation.
-17-
<PAGE>
99.3* Defeasance Trust and Security Agreement dated as of
June 13, 1997 among Talley Industries, Inc., Bank
One, N.A., as Trustee and Bank One, N.A., as
Custodian.
* 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 June 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: August 7, 1997 By s/s Kenneth May
---------------------- --------------------------
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: August 7, 1997 By s/s Mark S. Dickerson
---------------------- --------------------------
Mark S. Dickerson
Vice President
and Secretary
-19-
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 JUNE 30: Primary Diluted Primary Diluted
--------- --------- --------- ---------
Earnings (loss) before
extraordinary loss $ 2,498 $ 2,498 $ (1,831) $ (1,831)
Preferred stock dividend - - (241) (191)
2,498 2,498 (2,072) (2,022)
Extraordinary loss - - (1,642) (1,642)
2,498 2,498 (3,714) (3,664)
Value of common shares
issued to induce conversion
of preferred stock - - (7,398) (7,398)
Net loss $ 2,498 $ 2,498 $(11,112) $(11,062)
Average common shares
outstanding during period 14,168 14,168 13,582 13,582
Common stock equivalents:
Convertible preferred stock 997 997 - 485
Stock options 25 37 - -
Shares for computation 15,190 15,202 13,582 14,067
Earnings (loss) per share:
Before extraordinary loss $ .16 $ .16 $ (.15) $ (.14)
Extraordinary loss - - (.12) (.12)
Earnings (loss) before
consideration for induced
conversion of preferred stock .16 .16 (.27) (.26)
Value of conversion inducement - - (.55) (.53)
Net earnings (loss) per
common share $ .16 $ .16 $ (.82) $ (.79)
<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
SIX MONTHS ENDED JUNE 30: Primary Diluted Primary Diluted
------- ------- ------- -------
Earnings before extraordinary
loss $ 4,569 $ 4,569 $ 85 $ 85
Preferred stock dividend (382) (382) (714) (596)
4,187 4,187 (629) (511)
Extraordinary loss - - (1,642) (1,642)
4,187 4,187 (2,271) (2,153)
Value of common shares issued
to induce conversion of
preferred stock - - (12,037) (12,037)
Net earnings (loss) $ 4,187 $ 4,187 $(14,308) $(14,190)
Average common shares
outstanding during period 14,245 14,245 12,289 12,289
Common stock equivalents:
Convertible preferred stock - - - 724
Stock options 25 37 - -
Shares issuable in connection
with acquired company 10 10 - -
Shares for computation 14,280 14,292 12,289 13,013
Earnings (loss) per share:
Before extraordinary loss $ .29 $ .29 $ (.05) $ (.04)
Extraordinary loss - - (.13) (.13)
Earnings (loss) before
consideration for induced
conversion of preferred stock .29 .29 (.18) (.17)
Value of conversion inducement - - (.98) (.92)
Net earnings (loss) per
common share $ .29 $ .29 $ (1.16) $ (1.09)
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 45,554,000
<SECURITIES> 0
<RECEIVABLES> 49,331,000
<ALLOWANCES> 1,114,000
<INVENTORY> 62,348,000
<CURRENT-ASSETS> 168,731,000
<PP&E> 150,673,000
<DEPRECIATION> 98,362,000
<TOTAL-ASSETS> 272,772,000
<CURRENT-LIABILITIES> 63,798,000
<BONDS> 123,617,000
0
764,000
<COMMON> 14,113,000
<OTHER-SE> 59,423,000
<TOTAL-LIABILITY-AND-EQUITY> 272,772,000
<SALES> 133,205,000
<TOTAL-REVENUES> 176,186,000
<CGS> 97,903,000
<TOTAL-COSTS> 135,738,000
<OTHER-EXPENSES> 35,363,000
<LOSS-PROVISION> 231,000
<INTEREST-EXPENSE> 7,321,000
<INCOME-PRETAX> 4,819,000
<INCOME-TAX> 250,000
<INCOME-CONTINUING> 4,569,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,569,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
Exhibit 99.1
CONSENT AND SEVENTH AMENDMENT
This CONSENT AND SEVENTH AMENDMENT (this "Consent") is
entered into as of the 5th day of June 1997, by and among TALLEY
MANUFACTURING AND TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), the lenders parties to the Loan Agreement referred to
below (the "Lenders"), and TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation, as agent (the "Agent") for the
Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have
heretofore entered into a Loan and Security Agreement dated October
22, 1993, as amended (the "Loan Agreement");
WHEREAS, the Borrower has formed Talley International
Sales Corporation, a Barbados corporation ("TISC"), and the
Borrower has purchased one share of the stock of TISC for a
purchase price of $1.00 (the "TISC Stock") such that TISC is a
wholly-owned subsidiary of the Borrower (the "TISC Formation");
WHEREAS, TISC has filed an election with the Internal
Revenue Service for the purpose of being treated as a Foreign Sales
Corporation ("FSC") as that term is defined in Section 922 of the
Internal Revenue Code;
WHEREAS, the Borrower intends to cause TISC to act as
agent for all of the export sales of the Subsidiaries (other than
Talley Canada, Inc.), and, in return, TISC will earn commissions to
be payable by the Subsidiaries (the "TISC Commissions");
WHEREAS, the Borrower intends to cause TISC to
subcontract certain of its responsibilities as agent to each of the
Subsidiaries (the "TISC Subcontracted Services");
WHEREAS, each of the Subsidiaries intends to charge TISC
certain fees for the performance of the TISC Subcontracted Services
(the "TISC Service Fees") and any TISC Service Fees payable by TISC
to a Subsidiary will be deducted from any TISC Commissions payable
by such Subsidiary to TISC;
WHEREAS, the TISC Formation, the earning and collection
of the TISC Commissions, the subcontracting of the TISC
Subcontracted Services and the payment of the TISC Service Fees
(collectively, the "TISC Operations" and, together with the TISC
Formation, the "TISC Formation and Operations") require the written
<PAGE>
consent of the Agent and the Required Lenders, and the Borrower has
requested that the Agent and the Required Lenders so consent;
WHEREAS, the Agent and the Required Lenders are willing
to consent to the TISC Formation and Operations on the terms and
conditions herein set forth;
NOW, THEREFORE, in consideration of the foregoing
premises and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and intending to
be legally bound, 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 Loan Agreement.
2. Consent. The Agent and the Required Lenders hereby
consent, effective as of January 23, 1997, to the TISC Formation
and Operations; provided, however, that such consent is subject to
the following conditions:
2.1. The TISC Formation and Operations shall
substantially conform to the terms set forth in the
letter from Kenneth May to Alan M. Christenfeld, Esq.,
dated February 21, 1997, a copy of which is attached
hereto as Exhibit A;
2.2. Within thirty (30) days after the end of each
fiscal quarter of the Borrower, (i) the Borrower shall
cause TISC to declare and to pay to the Borrower a
dividend in an amount equal to the lesser of (a) the
excess of the cash and cash equivalents reflected on
TISC's balance sheet at the end of such fiscal quarter
over $750,000 and (b) the maximum amount permitted by
applicable law or (ii) the Borrower shall cause TISC to
make a loan to the Borrower in an amount equal to the
excess of the cash and cash equivalents reflected on
TISC's balance sheet at the end of such fiscal quarter
over $750,000, such loan to be repaid in full by the
Borrower within sixty (60) days after the end of the
fiscal year of the Borrower, provided, however, that
within thirty (30) days following the repayment of such
loan by the Borrower, the Borrower shall cause TISC to
declare and to pay to the Borrower a dividend in an
amount equal to the lesser of (x) the amount of such loan
repayment and (y) the maximum amount permitted by
applicable law. The parties hereto agree that any
dividend or loan made by TISC to the Borrower pursuant to
this Section 2.2 may at any time exceed the amount
required under this Section 2.2.
2.3. TISC is established in accordance with, and at
all times maintains its qualification as an FSC under,
-2-
<PAGE>
Sections 921 through 927 of the Internal Revenue Code and
the rules and regulations promulgated thereunder;
2.4. TISC shall not, at any time, have any material
assets other than claims for and proceeds of the TISC
Commissions;
2.5. TISC shall not, at any time, have any material
liabilities other than obligations in respect of the TISC
Service Fees and the TISC Commissions;
2.6. TISC shall not, at any time, conduct any
material business other than the TISC Operations as
described herein and in Exhibit A attached hereto;
2.7. Such consent is strictly limited to the facts
set forth herein and in Exhibit A attached hereto; and
2.8. All other conditions set forth in Section 6
hereof shall have been satisfied.
3. Springing Stock Pledge. Upon the failure by the
Borrower to satisfy the conditions set forth in Section 2.2 of this
Consent or upon the occurrence of any other Default, Event of
Default or Subsidiary Event of Default, the Borrower shall, at the
request of the Agent and as security for the payment and
performance of all Obligations, deliver, pledge and assign to the
Agent, for its benefit and the ratable benefit of the Lenders, a
first priority security interest in all of the Borrower's right,
title and interest in and to the TISC Stock, together with all of
the Borrower's rights and privileges with respect thereto. The
Borrower shall provide to the Agent such other agreements,
financing statements, opinions, certificates, representations,
instruments and other documents as the Agent may reasonably require
in connection with the stock pledge, all in form and substance
satisfactory to the Agent.
4. Representations and Warranties. The Borrower hereby
represents and warrants to the Agent and the Lenders that (i) the
execution, delivery and performance of this Consent, 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 Consent and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower and
the Subsidiaries, except for this Consent and those others already
duly obtained, (iii) this Consent and the Confirmation of Loan
Documents set forth below have been duly executed by the Borrower
and the Subsidiaries, respectively, and constitute the legal, valid
-3-
<PAGE>
and binding obligation of the Borrower and the Subsidiaries, as the
case may be, enforceable against them in accordance with their
terms, (iv) the execution, delivery and performance by the Borrower
and the Subsidiaries of this Consent and the Confirmation of Loan
Documents, respectively, and the other documents and instruments to
be executed and delivered in connection herewith by the Borrower 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 (other than Liens the creation of which are
expressly contemplated hereunder) by reason of the terms of (a) any
contract, mortgage, Lien, lease, agreement, indenture, or
instrument to which the Borrower or any Subsidiary is a party or
which is binding upon it, (b) any requirement of law applicable to
the Borrower or the Subsidiaries or (c) the Certificate or Articles
of Incorporation or By-Laws of the Borrower or the Subsidiaries,
and (v) no event has occurred and is continuing which constitutes
a Default, an Event of Default or a Subsidiary Event of Default.
5. Amendments to Loan Agreement. Immediately after the
consummation of the transactions contemplated hereby, the Loan
Agreement shall be amended in the following respect:
5.1. The definition of the term "Non-Operating
Subsidiaries" set forth in Section 1.1 of the Loan Agreement shall
be amended in its entirety to read as follows:
"Non-Operating Subsidiaries" shall mean individually
and in the aggregate Merrick Corporation, Stencel Aero
Engineering Corporation, The Waterbury Button Company,
Talley International Investment Corporation, Talley
Automotive Products, Inc., McMullen Industries, Inc.,
Dimetrics International Inc., WDC, Inc., Talley Canada,
Inc. and Talley International Sales Corporation.
5.2. The following words shall be inserted at the
beginning of Schedule 9.20 of the Loan Agreement:
Borrower
Certain amounts loaned to the Borrower by Talley
International Sales Corporation, as contemplated by the
terms of the Consent and Seventh Amendment, dated June 5,
1997, by and among the Borrower, the Lenders and the
Agent.
6. Conditions to Effectiveness. This Consent shall be
effective as of the date first above written upon satisfaction of
the following conditions precedent:
6.1. Execution of this Consent. The Agent shall
have received a copy of this Consent duly executed by the
-4-
<PAGE>
Borrower and the Lenders constituting the Required
Lenders;
6.2. Confirmation of Loan Documents. Each of the
Subsidiaries shall have executed the Confirmation of Loan
Documents set forth below;
6.3. No Defaults. No Default, Event of Default or
Subsidiary Event of Default shall have occurred and be
existing before this Consent shall have become effective,
and no Default, Event of Default or Subsidiary Event of
Default shall result, occur or exist immediately after
this Consent shall have become effective; and
6.4. 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 Consent.
7. Reference to and Effect on Loan Documents.
7.1. Except as specifically modified herein,
all of the terms of the Loan Agreement and the Subsidiary Loan
Agreements shall remain unchanged and in full force and effect.
7.2. Except as expressly set forth herein, the
execution, delivery and effectiveness of this Consent shall not
operate as a waiver of any right, power or remedy of any Lender or
the Agent under the Loan Agreement, any Subsidiary Loan Agreement
or any of the other Loan Documents, nor constitute a waiver of any
Default, Event of Default or Subsidiary Event of Default, or a
consent to any noncompliance with any provision of the Loan
Agreement, any Subsidiary Loan Agreement or any of the other Loan
Documents.
8. Execution in Counterparts. This Consent 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.
9. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
10. Headings. Section headings in this Consent are
included herein for convenience of reference only and shall not
constitute a part of this Consent or be given any substantive
effect.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Consent 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/s Mark S. Dickerson
----------------------------
Name: Mark S. Dickerson
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION, as Agent
By: s/s Michael Burns
----------------------------
Name: Michael Burns
Title: Vice President
LENDERS:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: s/s Michael Burns
----------------------------
Name: Michael Burns
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST COMPANY
OF CHICAGO
By: s/s Elizabeth J. Limpert
----------------------------
Name: Elizabeth J. Limpert
Title: First Vice President
NATIONAL BANK OF CANADA
By: s/s Thomas H. Hopkins
----------------------------
Name: Thomas H. Hopkins
Title: Vice President
By: s/s Beth A. Pease
----------------------------
Name: Beth A. Pease
Title: Vice President
-6-
<PAGE>
CONFIRMATION OF LOAN DOCUMENTS
Each of the undersigned hereby consents to the execution
and delivery of the foregoing Consent. 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 "Loan
Agreement" shall be a reference to the Loan Agreement as modified
by the Consent. 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 June 5, 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.; TALLEY
TECHNOLOGY, INC.; UNIVERSAL
PROPULSION COMPANY; WATERBURY
COMPANIES, INC.; WDC, INC.;
By: s/s Mark S. Dickerson
---------------------------
Name: Mark S. Dickerson
Title: Secretary
<PAGE>
EXHIBIT A
THE TISC PROPOSAL LETTER
See Attached.
EXHIBIT 99.2
EXECUTION
CONSENT AND EIGHTH AMENDMENT
This CONSENT AND EIGHTH AMENDMENT (this "Consent") is
entered into as of July 17, 1997, by and among TALLEY MANUFACTURING
AND TECHNOLOGY, INC., a Delaware corporation (the "Borrower"),
TALLEY TECHNOLOGY, INC., a Delaware corporation ("Technology"),
TALLEY METALS TECHNOLOGY, INC., a Delaware corporation ("Metals"),
the lenders parties to the Loan Agreement referred to below (the
"Lenders"), and TRANSAMERICA BUSINESS CREDIT CORPORATION, a
Delaware corporation, as agent (the "Agent") for the Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have
heretofore entered into a Loan and Security Agreement dated October
22, 1993, as amended (the "Loan Agreement"); and
WHEREAS, pursuant to a Continuing Guaranty and Security
Agreement, dated October 22, 1993, as amended (the "Technology
Guaranty"), executed by Technology in favor of the Agent,
Technology has guaranteed certain indebtedness, obligations and
liabilities of the Borrower to the Agent and the Lenders under the
Loan Agreement;
WHEREAS, pursuant to the Airbag Collateral Security Agreement,
the Obligations have been secured by a Lien upon the Airbag
Collateral;
WHEREAS, Technology and the Borrower have heretofore entered
into a Subsidiary Loan and Security Agreement dated October 22,
1993, as amended (the "Technology Loan Agreement"), pursuant to
which Technology has executed in favor of the Borrower a Term Note
(as defined in the Technology Loan Agreement and hereinafter
referred to as the "Technology Term Note") and has granted to the
Borrower a Lien upon all of Technology's Collateral (as defined in
the Technology Loan Agreement and hereinafter referred to as the
"Technology Collateral");
WHEREAS, as of the date hereof, the outstanding principal
balance of the Technology Term Note is $2,499,983;
WHEREAS, Metals and the Borrower have heretofore entered into
a Subsidiary Loan and Security Agreement dated October 22, 1993, as
amended (the "Metals Loan Agreement"); and
WHEREAS, pursuant to the Collateral Assignment Agreement, the
Borrower has collaterally assigned to the Agent and the Lenders all
<PAGE>
of the Borrower's rights and Liens under or relating to the Metals
Loan Agreement;
WHEREAS, the Borrower and Technology have requested that the
Agent and the Lenders agree to release the Technology Guaranty (the
"Technology Guaranty Release") and, in connection therewith, the
Airbag Collateral (the "Airbag Collateral Release");
WHEREAS, the Senior Notes are secured by the Airbag Collateral
and the Borrower is required to comply with the provisions of the
Indenture (the "Senior Note Indenture") under which the Senior
Notes were issued in order for the Collateral Agent to be permitted
to consummate the Airbag Collateral Release;
WHEREAS, pursuant to Section 23(ii) of the Airbag Collateral
Security Agreement, upon the consummation of the Technology
Guaranty Release, the Airbag Collateral Security Agreement shall
terminate, except as otherwise set forth in Section 23 of the
Airbag Collateral Security Agreement;
WHEREAS, the Borrower intends to contribute the Technology
Term Note to the capital of Technology (the "Technology Capital
Contribution") and, in connection therewith, the Borrower desires
to terminate (the "Technology Loan Termination") the Technology
Loan Agreement and all Loan Documents (as defined therein and
hereinafter referred to as the "Technology Loan Documents") and to
release (the "Technology Collateral Release") the Technology
Collateral;
WHEREAS, the Borrower and Metals desire to amend the Metals
Loan Agreement to provide for (i) an additional term loan (the
"Metals Additional Term Loan") to be made by the Borrower to Metals
in an amount equal to the outstanding principal amount of the
Technology Term Note immediately prior to the effectiveness of the
Technology Capital Contribution and, in connection therewith, to
cause Metals to execute a new term note in favor of the Borrower in
the amount of the Metals Additional Term Loan and (ii) an increase
of $3,500,000 in the maximum principal amount of the Revolving Loan
facility made available by Borrower to Metals (the "Revolving Loan
Facility Increase") and, in connection therewith, to cause Metals
to execute an amended and restated revolving note in favor of the
Borrower reflecting such increase;
WHEREAS, the Technology Guaranty Release, the Airbag
Collateral Release, the Technology Capital Contribution, the
Technology Loan Termination, the Technology Collateral Release, the
Metals Additional Term Loan and the Revolving Loan Facility
Increase (each, individually, a "Proposed Transaction" and,
collectively, the "Proposed Transactions") require the written
consent of the Agent and the Lenders, and the Borrower and
Technology have requested that the Agent and Lenders so consent;
and
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<PAGE>
WHEREAS, the Agent and the Lenders are willing to consent to
the Proposed Transactions on the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be
legally bound, 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 Loan Agreement.
2. Consent to Proposed Transactions.
2.1. Consent. The Agent and the Lenders hereby consent
to the Proposed Transactions; provided, however, that such consent
is subject to conditions set forth in Section 2.2 of this Consent.
2.2. Conditions to Consent. The consent provided for in
Section 2.1 of this Consent is subject to the following conditions:
(a) Each Proposed Transaction shall be consummated and
become effective simultaneously with the consummation and
effectiveness of all of the other Proposed Transactions (the
date of the consummation of the Proposed Transactions being
hereinafter referred to as the "Transaction Closing Date");
(b) The Agent shall have reviewed and approved all
documents and instruments to be executed and delivered in
connection with the Technology Capital Contribution and the
Technology Loan Termination, and such Proposed Transactions
shall be consummated in accordance therewith;
(c) The original principal amount of the Metals
Additional Term Loan shall not exceed the principal balance of
the Technology Term Note outstanding on the Transaction
Closing Date immediately before giving effect to the
Technology Capital Contribution;
(d) The Borrower and Metals shall have executed an
amendment (the "Metals Amendment") to the Metals Loan
Agreement, substantially in the form of Exhibit A attached
hereto, Metals shall have executed and delivered the
Additional Term Note (as defined therein) and the Revolving
Note attached thereto (the "Amended and Restated Revolving
Note") and the Borrower and Metals 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;
(e) The Borrower and Metals shall have executed and
delivered to the Agent an instrument, in form and substance
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<PAGE>
satisfactory to the Agent, acknowledging and confirming that
the Metals Amendment, the Additional Term Note and the Amended
and Restated Revolving Note constitute Subsidiary Loan
Documents as defined under and collaterally assigned to the
Agent pursuant to the Collateral Assignment Agreement; the
Borrower shall have endorsed the Additional Term Note and the
Amended and Restated Revolving Note to the order of the Agent;
and the Borrower shall have delivered the originals of the
Additional Term Note and the Amended and Restated Revolving
Note to the Agent or its counsel, Rogers & Wells, in pledge,
pursuant to the Loan Agreement and the Collateral Assignment
Agreement;
(f) The Agent shall have received a copy of the
resolutions (in form and substance reasonably satisfactory to
the Agent) of the Board of Directors of each of the Borrower,
Technology and Metals authorizing (i) the execution, delivery
and performance of this Consent, the documents referred to
herein, and the other Loan Documents contemplated hereby and
thereby, and (ii) the consummation of the Proposed
Transactions and the other transactions contemplated hereby
and thereby, all certified by the Secretary or an Assistant
Secretary of each of the Borrower, Technology and Metals on
the date hereof. Such certificates shall state that the
resolutions set forth therein have not been amended, modified,
revoked or rescinded as of the date of such certificate;
(g) On the date hereof, immediately after giving effect
to this Consent, and on the Transaction Closing Date: no
Default or Event of Default under and as such terms are
defined and used in the Senior Note Indenture and the
Indenture (the "Discount Debenture Indenture") under which the
Discount Debentures are issued shall have occurred and be
existing; neither the Senior Notes nor the Discount Debentures
shall have been accelerated (whether by declaration or
otherwise); and the Senior Note Trustee shall not have
delivered a notice of acceleration to the Collateral Agent;
(h) On and as of the Transaction Closing Date, the
Collateral Agent shall have received all certificates,
Opinions of Counsel (as defined in the Senior Note Indenture)
and other documents required pursuant to the provisions of
Sections 15.03 and 15.04 of the Senior Note Indenture and all
other conditions, if any, for the release of Airbag Collateral
required by the Senior Note Indenture, the Discount Debenture
Indenture or applicable law shall have been satisfied to the
satisfaction of the Collateral Agent;
(i) No Default, Event of Default or Subsidiary Event of
Default shall have occurred and be existing either on the date
hereof, immediately after giving effect to this Consent or on
the Transaction Closing Date;
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<PAGE>
(j) 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 as
of the date hereof, immediately after giving effect to this
Consent, and on the Transaction Closing Date;
(k) The Agent shall have received a certificate, in form
and substance satisfactory to the Agent, dated the Transaction
Closing Date and signed by the President or a Vice President
and the Treasurer or Controller of the Borrower certifying (x)
the principal balance of the Technology Term Note outstanding
on the Transaction Closing Date immediately before giving
effect to the Technology Capital Contribution, (y) that the
conditions set forth in this Section 2.2 have been fulfilled,
and (z) such other matters as the Agent shall reasonably
require;
(l) The Agent shall have received an opinion of Mark S.
Dickerson, Esq., Vice President, Secretary and General Counsel
of Talley Industries, Inc. and counsel to the Borrower,
addressed to the Agent, the Collateral Agent and the Lenders
and in form and substance satisfactory to the Agent;
(m) 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;
(n) Such consent is strictly limited to the facts set
forth herein; and
(o) All other conditions set forth in Section 6 hereof
shall have been satisfied.
3. Representations and Warranties. The Borrower, Technology
and Metals hereby represent and warrant to the Agent and the
Lenders that (a) the execution, delivery and performance of the
this Consent, and the other documents and instruments to be
executed and delivered in connection herewith by the Borrower,
Technology and Metals are within their respective corporate powers
and have been duly authorized by all necessary corporate action,
(b) 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 Consent and the other documents
and instruments to be executed and delivered in connection herewith
by the Borrower, Technology and Metals, except for this Consent and
those others already duly obtained, (c) this Consent has been duly
executed by the Borrower, Technology and Metals and constitutes the
legal, valid and binding obligation of the Borrower, Technology and
Metals, enforceable against them in accordance with its terms, (d)
the execution, delivery and performance by the Borrower, Technology
-5-
<PAGE>
and Metals of this Consent and the other documents and instruments
to be executed and delivered in connection herewith by the
Borrower, Technology and Metals 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, Technology or Metals (other than Liens
the creation of which are expressly contemplated hereunder) by
reason of the terms of (i) any contract, mortgage, Lien, lease,
agreement, indenture, or instrument to which the Borrower,
Technology or Metals is a party or which is binding upon it, (ii)
any requirement of law applicable to the Borrower, Technology or
Metals or (iii) the Certificate or Articles of Incorporation or By-Laws
of the Borrower, Technology or Metals, (e) no event has
occurred and is continuing which constitutes a Default, an Event of
Default or a Subsidiary Event of Default, (f) the Metals Additional
Term Loan constitutes Indebtedness, as defined in the Senior Note
Indenture and the Discount Debenture Indenture, that is permitted
under Section 4.12(e) of each of such indentures, and (g) after
giving effect to the Proposed Transactions, Technology will have no
material assets and no material liabilities.
4. Covenant by Borrower and Technology. The Borrower hereby
covenants that, from and after the Transaction Closing Date, it
will not allow Technology to, and Technology hereby covenants that,
from and after the Transaction Closing Date, it will not, possess
or acquire any material assets, have or incur any material
liabilities or conduct any material business.
5. Amendments to Loan Agreement. Effective as of the
Transaction Closing Date immediately after the consummation of the
Proposed Transactions, the Loan Agreement shall be amended in the
following respects:
5.1. The definition of the term "Non-Operating
Subsidiaries" set forth in Section 1.1 of the Loan Agreement shall
be amended in its entirety to read as follows:
"Non-Operating Subsidiaries" shall mean individually
and in the aggregate Merrick Corporation, Stencel Aero
Engineering Corporation, The Waterbury Button Company,
Talley International Investment Corporation, Talley
Automotive Products, Inc., McMullen Industries, Inc.,
Dimetrics International Inc., WDC, Inc., Talley Canada,
Inc. and Talley Technology, Inc.
5.2. The words "(other than the stock of Talley
Technology, Inc., which shall be pledged under and pursuant to the
Airbag Collateral Security Agreement)" set forth in the definition
of the term "Pledged Stock" shall be deleted.
5.3. The words "Talley Technology, Inc., a Delaware
corporation" set forth in Schedule 1.3 of the Loan Agreement shall
be deleted.
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<PAGE>
5.4. The row beginning with the words "Talley Technology,
Inc." in the column entitled "Name of Sub," and all information in
such row, shall be deleted from Schedule 2.1 of the Loan Agreement.
6. Conditions to Effectiveness. This Consent shall be
effective as of the date first above written upon satisfaction of
the following conditions precedent:
6.1. Execution of this Consent. The Agent shall have
received a copy of this Consent duly executed by the Borrower,
Technology, Metals and Lenders constituting the Required Lenders.
6.2. Confirmation of Loan Documents. Each Subsidiary
shall have executed the Confirmation of Loan Documents set forth
below.
7. Authorization to Sign Metals Amendments, Releases and
Other Documents. By their signatures below, the Lenders hereby
authorize TBCC, as Agent and as collateral agent for the Lenders
and the Senior Note Trustee under the Airbag Collateral Security
Agreement (a) to execute and deliver such documents and instruments
as are necessary or appropriate, in TBCC's judgment, to effectuate,
on and after the Transaction Closing Date, the Technology Guaranty
Release, the Airbag Collateral Release, the Technology Loan
Termination and the Technology Collateral Release; (b) to consent
to the execution and delivery of the Metals Amendment,
substantially in the form of Exhibit A attached hereto; (c) to
consent to the delivery of such other documents and instruments in
connection with the Proposed Transactions as the Agent shall
require, each in form and substance satisfactory to the Agent; and
(d) to execute and deliver such written consents, releases,
terminations and other documents and instruments, and to take such
other action, in connection with the Proposed Transactions as the
Agent shall deem appropriate.
8. Reference to and Effect on Loan Documents.
8.1. Except as specifically modified herein, all of the
terms of the Loan Agreement, the Technology Loan Agreement and the
Metals Loan Agreement shall remain unchanged and in full force and
effect.
8.2. Except as expressly set forth herein, the execution,
delivery and effectiveness of this Consent shall not operate as a
waiver of any right, power or remedy of any Lender or the Agent
under the Loan Agreement, the Technology Loan Agreement, the Metals
Loan Agreement or any of the other Loan Documents, nor constitute
a waiver of any Default, Event of Default or Subsidiary Event of
Default, or a consent to any noncompliance with any provision of
the Loan Agreement, the Technology Loan Agreement, the Metals Loan
Agreement or any of the other Loan Documents.
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<PAGE>
9. Execution in Counterparts. This Consent 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.
10. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
11. Headings. Section headings in this Consent are included
herein for convenience of reference only and shall not constitute
a part of this Consent or be given any substantive effect.
[Rest of page intentionally left blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Consent to be executed and delivered by their proper and duly
authorized officers as of the date set forth above.
BORROWER:
TALLEY MANUFACTURING AND TECHNOLOGY, INC.
By: s/s Mark S. Dickerson
--------------------------
Name: Mark S. Dickerson
Title: Secretary
TECHNOLOGY:
TALLEY TECHNOLOGY, INC.
By: s/s Mark S. Dickerson
--------------------------
Name: Mark S. Dickerson
Title: Secretary
METALS:
TALLEY METALS TECHNOLOGY, INC.
By: s/s Mark S. Dickerson
--------------------------
Name: Mark S. Dickerson
Title: Secretary
AGENT:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: s/s Michael S. Burns
--------------------------
Name: Michael S. Burns
Title: Vice President
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<PAGE>
LENDERS:
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: s/s Michael S. Burns
--------------------------
Name: Michael S. Burns
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
By: s/s Elizabeth J. Limpert
--------------------------
Name: Elizabeth J. Limpert
Title: First Vice President
NATIONAL BANK OF CANADA
By: s/s Thomas H. Hopkins
--------------------------
Name: Thomas H. Hopkins
Title: Vice President
By: s/s Glenn S. Burroughs
--------------------------
Name: Glenn S. Burroughs
Title: Vice President
-10-
Exhibit 99.3
DEFEASANCE TRUST AND SECURITY AGREEMENT
Trust and Security Agreement dated as of June 13, 1997 among
Talley Industries, Inc., a Delaware Corporation (the "Company"),
Bank One, N.A. (formerly known as Bank One, Columbus, N.A.), as
Trustee (the "Trustee"), and Bank One, N.A., as Custodian (the
"Custodian").
WITNESSETH:
WHEREAS, pursuant to the Indenture (the "Indenture") dated
as of October 15, 1993 between the Company and the Trustee, the
Company issued 12 1/4% Senior Discount Debentures Due 2005 (the
"Debentures") in the aggregate principal amount of $126,555,000,
$2,239,000 of which remains outstanding, and which Debentures are
repayable in accordance with Schedule A; and
WHEREAS, in order to permit the Company to exercise Covenant
Defeasance (as defined in the Indenture) under and in accordance
with Section 8.04 of the Indenture, the Company will advance the
sums required to create an irrevocable trust to acquire and hold
certain securities which shall be used for the purpose of
satisfying the Company's obligations in respect of the
Debentures; and
WHEREAS, the Trustee has full power and authority to execute
this Agreement and to accept the trust imposed upon it;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein contained, the parties
hereto agree as follows:
ARTICLE 1
APPOINTMENT OF TRUSTEE AND CUSTODIAN
Section 1.01. Appointment of Trustee and Custodian. The
Company hereby appoints Bank One, N.A., a national banking
association, as Trustee hereunder, and the Trustee accepts the
trust created by this Agreement upon the terms and conditions
hereof. The Company hereby appoints Bank One, N.A., a national
banking association, as Custodian hereunder, and the Custodian
accepts the custodianship created by this Agreement upon the
terms and conditions hereof.
<PAGE>
ARTICLE 2
THE TRUST ESTATE
Section 2.01. Assignment of Rights and Interests. There is
hereby created and established with the Trustee an irrevocable
trust (the "Trust") to be held by the Trustee separate and apart
from all other assets of the Company or the Trustee. The Company
hereby irrevocably transfers and assigns to the Trustee all the
Company's right, title and interest in the U.S. Government
Securities (as defined in Section 2.03) described in Schedule B
hereto and the right to receive payments of interest thereon and
payments of the principal thereof at maturity, such transfer to
be effected by (i) the crediting of such U.S. Government
Securities to a Participant's Securities Account, within the
meaning of 31 C.F.R. Section 357.2, of the Custodian maintained
at a Federal Reserve Bank as part of the Treasury/Reserve
Automated Debt Entry System and (ii) the crediting by the
Custodian of such U.S. Government Securities to the Collateral
Account (as defined below). The Custodian hereby agrees to
maintain in a Participant's Securities Account of the Custodian
maintained at a Federal Reserve Bank a credit of U.S. Government
Securities corresponding to each of the U.S. Government
Securities credited from time to time to the Collateral Account
and to treat the Trustee as entitled to exercise all rights in
connection with such U.S. Government Securities. The securities
held in trust hereunder and said payments as received by the
Trustee or as thereafter invested by the Trustee are hereinafter
referred to as the "Trust Estate."
Section 2.02. Purpose of Trust. The Trust is established
for the purpose of securing the Company's obligations in respect
of the Debentures. The Trust Estate will be used to pay when due
the principal of, the premium (if any) and interest on all
outstanding Debentures in accordance with Schedule A hereto.
Except as provided in this Article or in Section 4.02, the Trust
Estate shall not be used for any other purposes.
Section 2.03. Administration of Trust Estate. As part of
the Trust Estate there shall be established by the Custodian a
collateral account (the "Collateral Account") in the name of the
Trustee to which there shall be credited as and when received by
the Custodian on behalf of the Trustee, U.S. Government
Securities and interest on the securities in the Trust Estate and
payments of the principal amount of such securities upon their
maturity. Moneys so deposited in the Collateral Account shall be
applied by the Trustee in the following order:
(a) Timely transmittal to Bank One, N.A., or its
successors, as paying agent, of funds in accordance with Schedule
A hereto. Said transmittals will be made to the paying agent at
its office at 100 Broad Street, Columbus, Ohio 43271, in good
funds on the interest and principal payment dates.
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<PAGE>
(b) At any time during the existence of the Trust created
hereby, such part of the property held hereunder which is cash
and which is not at the time needed for the making of any
payments in accordance with this Agreement shall, to the extent
practicable, be invested by the Trustee in U.S. Government
Securities as directed in writing by the Company which provide
for payments in respect of interest thereon and the principal
thereof at such times and in such amounts as, together with the
scheduled payments of interest on and principal of any other
property held by the Trustee hereunder, will enable the Trustee
to make the payments to be made by the Trustee in accordance with
this Agreement; provided that, if the Trustee is unable to make
any such investment, the Trustee may hold such property in the
form of cash until needed for the making of payments hereunder.
The Trustee shall have no liability with respect to any loss
arising from investments made in accordance with this Section
2.03(b).
"U.S. Government Securities" means non-redeemable Treasury
bonds, bills and notes (including without limitation, STRIPS), or
securities entitlements in respect thereof, that are book-entry
securities, within the meaning of 31 C.F.R. Section 357.2, and
are credited to a Participant's Security Account (as defined in
31 C.F.R. Section 357.2) of the Custodian at a Federal Reserve
Bank, which Participant's Security Account is part of the
Treasury/Reserve Automated Debt Entry System.
Section 2.04. Securities Intermediary's Jurisdiction. The
Company, the Custodian and the Trustee hereby agree that for all
purposes hereof (including for purposes of 31 C.F.R. Section
357.11(b) and Section 8-110(e) of Revised Article 8 (as defined
in 31 C.F.R. Section 357.2) the "securities intermediary's
jurisdiction" (within the meaning of such Section 8-110(e)) in
respect of the Collateral Account is the State of New York. The
Trustee and the Custodian each hereby represents that it has not
entered into, and hereby agrees that it will not enter into, any
agreement specifying any jurisdiction other than the State of New
York as its jurisdiction for purposes of 31 C.F.R. Section 357.11
or Revised Article 8 (as defined in 31 C.F.R. Section 357.2) in
connection with the Collateral Account.
Section 2.05. Transfer for Value. The parties hereto
intend that the transfer of the U.S. Government Securities by the
Company to the Trustee contemplated by Section 2.01 constitutes a
completed transfer for value and, accordingly, that the
transferred U.S Government Securities are intended no longer to
be an asset of the Company. In case, however, it should be
determined that such an outright transfer is not effected, the
Company hereby assigns and pledges to the Trustee for the benefit
of the holders from time to time of the Debentures, and grants to
the Trustee for the benefit of the holders from time to time of
the Debentures, security interests in the U.S. Government
Securities transferred by the Company to the Trustee pursuant to
Section 2.01, all other U.S. Government Securities transferred to or
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<PAGE>
acquired by the Trustee hereunder, all cash, securities or other
property from time to time held in the Collateral Account and all
of its rights and privileges with respect thereto, and all income
and profits thereon, and all interest, dividends and other
distributions with respect thereto, and all proceeds of the
foregoing.
ARTICLE 3
THE TRUSTEE AND THE CUSTODIAN
Section 3.01. Limitations on Liability. (a) The duties and
obligations of the Trustee and the Custodian shall be determined
solely by the express provisions of this Agreement, and neither
the Trustee nor the Custodian shall be liable except for the
performance of such duties and obligations as are specifically
set forth in this Agreement. The liability of the Trustee for
the payment of the principal of and interest on the Debentures
shall be limited to the application of the securities (including
the interest thereon), cash and other property in the Trust
Estate. This Agreement does not substitute the Trustee as the
obligor on the Debentures.
(b) Each of the Trustee and the Custodian may rely, and
shall be protected in acting or refraining from acting in
reliance, upon any direction, certificate, statement or other
paper or document believed by it to be genuine and to have been
signed or presented by the proper person or persons.
(c) Each of the Trustee and the Custodian may consult with
counsel or other experts and any opinion of such counsel or other
experts shall be full and complete authorization and protection
with respect to any action taken or suffered or omitted by it
hereunder in good faith and in accordance with such opinion of
counsel or other experts.
(d) Neither the Trustee nor the Custodian shall be liable
for any actions taken, suffered or omitted by it and believed by
it to be authorized or within its duties or powers conferred upon
it by this Agreement so long as the Trustee or the Custodian, as
the case may be, is not acting in bad faith or with gross
negligence. The Company agrees to indemnify the Trustee and the
Custodian and hold them harmless from and against any and all
costs, expenses or liabilities (including, without limitation,
reasonable counsel fees and settlement costs) they may suffer or
incur in connection with this Agreement, except for those caused
by its own gross negligence or bad faith. The obligations of the
Company to indemnify the Trustee and the Custodian pursuant to
this paragraph shall survive the termination of this Agreement.
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<PAGE>
(e) The Trustee may execute any of the trusts or powers
hereunder and perform any duty hereunder and exercise any right
hereunder either directly or by or through its agents or
attorneys. The Custodian may execute any of the powers hereunder
and perform any duty hereunder and exercise any right hereunder
either directly or by or through its agents or attorneys.
(f) Neither the Trustee nor the Custodian shall have any
duty with respect to amounts payable to it in respect of the
Trust Estate other than to receive them and to apply the amounts
actually received in accordance with this Agreement. Neither the
Trustee nor the Custodian shall be obliged to take legal action
to enforce the payment obligations of the issuers of the
securities in the Trust Estate or of the obligors in respect of
any investment made by the Trustee in accordance with Section
2.03. Neither the Trustee nor the Custodian shall be liable for
any loss resulting from any investment made pursuant to this
Agreement in compliance with the provisions hereof. Neither the
Trustee nor the Custodian shall be liable for the accuracy of the
calculations as to the sufficiency of the Trust Estate to pay the
Debentures or for any resulting deficiencies in the amounts
available in the Trust Estate to pay the Debentures.
(g) It shall be no part of the duty of the Trustee or the
Custodian to see to any filing, recording or registration of this
Agreement or of any agreement amendatory or supplemental hereto
or of any instrument of assignment, conveyance or further
assurance, or to the payment of any taxes, fees or charges in
connection therewith, or to give any notice with respect thereto
or to inquire or see to the payment of, or be under any duty in
respect of, any tax or assessment or other governmental charge
which may be levied or assessed on the Trust Estate or any part
thereof or against the Company.
(h) Neither the Trustee nor the Custodian shall be required
to post any bond or other security in connection with its duties
hereunder.
Section 3.02. Resignation of Trustee and Custodian. Each of
the Trustee and the Custodian may at any time resign and be
discharged from the trust hereby created by giving notice to the
Company and the Company shall upon receipt of such notice of
resignation promptly appoint a successor trustee or custodian, as
the case may be. Each of the Trustee's and Custodian's
resignation shall take effect 30 days after the mailing of the
notice of resignation, unless previously a successor trustee or
custodian, as the case may be, shall have been appointed and
shall have accepted such appointment, in which event such
resignation shall take effect immediately upon the acceptance by
such successor trustee or custodian, as the case may be. Any
successor trustee or custodian appointed as provided in this
Section 3.02 shall execute, acknowledge and deliver to the
Company an instrument accepting such appointment hereunder, and
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thereupon such successor trustee or custodian shall
become vested with all the trusts, rights, titles, interests,
powers, duties and obligations with respect to the Trust Estate
of its predecessor hereunder, with like effect as if originally
named as trustee or custodian, as the case may be, herein; and
the trustee or custodian so ceasing to act shall duly assign,
convey and deliver to such successor trustee or custodian, as the
case may be, all of the Trust Estate held by the Trustee or the
Custodian so ceasing to act.
Section 3.03. Compensation of the Trustee and the Custodian.
In consideration of the services rendered by the Trustee under
this Agreement, the Company agrees to and shall pay to the
Trustee compensation as agreed from time to time between the
Trustee and the Company. In consideration of the services
rendered by the Custodian under this Agreement, the Company
agrees to and shall pay to the Custodian compensation as agreed
from time to time between the Custodian and the Company.
ARTICLE 4
MISCELLANEOUS
Section 4.01. Representations and Warranties. (a) The
Company represents and warrants that the execution and
consummation of this Agreement are within its corporate authority
and have been duly authorized by proper corporate proceedings,
and the compliance by the Company with all of the provisions of
this Agreement will not conflict with or violate any laws or
regulations to which the Company is subject or which apply to it,
or any agreement or instrument to which the Company is a party
(including, without limitation, the Indenture), or result in the
creation of imposition of any lien, charge or encumbrance upon
any of the assets of the Company other than the lien created
hereby, or result in the acceleration of maturity of any
obligation of the Company; and no consent, authorization or order
of any court or governmental agency (other than credits to a
Participant's Securities Account of the Custodian to be made by a
Federal Reserve Bank in connection with the transfer of U.S.
Government Securities and securities entitlements in respect
thereof) is required for the consummation of the transactions
contemplated hereby.
(b) Each of the Trustee and the Custodian represents and
warrants that the execution and consummation of this Agreement
are within its corporate authority and have been duly authorized
by proper corporate proceedings, and the compliance by the
Trustee or the Custodian, as the case may be, with all of the
provisions of this Agreement will not conflict with or violate
any laws or regulations to which the Trustee or the Custodian, as
the case may be, is subject or which apply to it, or any agreement
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or instrument to which the Trustee or the Custodian, as the case
may be, is a party (including, without limitation, the Indenture),
or result in the creation of imposition of any lien, charge or
encumbrance upon any of the assets of the Trustee or the Custodian,
as the case may be, or result in the acceleration of maturity of any
obligation of the Trustee or the Custodian, as the case may be;
and no consent, authorization or order of any court or
governmental agency (other than credits to a Participant's
Securities Account of the Custodian to be made by a Federal
Reserve Bank in connection with the transfer of U.S. Government
Securities and securities entitlements in respect thereof) is
required for the consummation of the transactions contemplated
hereby.
(c) The Custodian further represents and warrants that
(i) it is (A) a Participant (as defined in 31 C.F.R. Section 357.2)
in respect of Book-entry Securities (as so defined) held through the
Treasury/Reserve Automated Debt Entry System ("TRADES") (as so defined)
with a Participant's Securities Account (as so defined) at a Federal
Reserve Bank (the "FRB") and (B) a "securities intermediary" within the
meaning of 31 C.F.R. Section 357.2 and Revised Article 8 (as defined in
31 C.F.R. Section 357.2), and (ii) the Collateral Account is a
"securities account" within the meaning of Section 8-501(a) of Revised
Article 8.
Section 4.02. Termination. This Agreement shall terminate
upon receipt by the Trustee of evidence satisfactory to it that
the Company has discharged its obligations under the Indenture,
whether by payment in full of all of the Debentures or otherwise.
Upon termination of this Agreement, any securities or funds
remaining in the Trust Estate shall be promptly transferred to
the Company.
Section 4.03. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York.
Section 4.04. Notices. (a) All instructions, notices or
other communications shall be given by mail, addressed as
follows:
In the case of the Trustee:
Bank One, N.A.
100 Broad Street
Columbus, Ohio 43271-0181
Attention: Corporate Trust Administration
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In the case of the Custodian:
Bank One, N.A.
100 Broad Street
Columbus, Ohio 43271-0181
Attention: Corporate Trust Administration
In the case of the Company:
Talley Industries, Inc.
2702 North 44th Street
Phoenix, Arizona 85008
Attention: Daniel R. Mullen, Treasurer
(b) At least 30 days but not more than 60 days prior to
October 15, 1998, the Trustee shall mail by first class mail to
each holder of the Debentures, at the Company's expense, a notice
of redemption pursuant to Section 3.03 of the Indenture.
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IN WITNESS WHEREOF, the parties hereto have each caused
this Agreement to be executed by their duly authorized officers
as of the date first above written.
TALLEY INDUSTRIES, INC.
By: s/s Daniel R. Mullen
---------------------------------
Name: Daniel R. Mullen
Title: Vice President and Treasurer
BANK ONE, N.A., A NATIONAL BANKING
ASSOCIATION, as
Trustee
By: s/s Jeffery L. Eubank
---------------------------------
Name: Jeffery L. Eubank
Title: Authorized Signatory
BANK ONE, N.A., A NATIONAL BANKING
ASSOCIATION, as
Custodian
By: s/s Jeffery L. Eubank
---------------------------------
Name: Jeffery L. Eubank
Title: Authorized Signatory
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Schedule A
Remit to: Bank One, N.A., or its successors, as paying agent
Ref: Talley Industries, Inc.
12-1/4% Senior Discount Debentures due 2005
Principal and Interest
Remit in "fed funds" the following amounts on October 15, 1998:
Face Amount $2,239,000.00
Redemption Premium 137,138.75
-------------
Total $2,376,138.75
=============
<PAGE>
Schedule B
Treasury Securities Purchased
Type: U.S. Treasury Coupon STRIPS
Maturity: 8/15/98
Face Amount: $2.4 million
Cusip #: 912833BY5
