UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 1-4778
TALLEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0180396
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2702 North 44th Street, Phoenix, Arizona 85008
----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1 Par Value New York Stock Exchange
Series B $1 Cumulative Convertible
Preferred Stock, $1 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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<S>
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirement for the past 90 days. Yes[ X ] No[ ]
<S>
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<S>
The aggregate market value of voting stock held by non-affiliates on January 31, 1997 was
$127,145,000.
<S>
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by court. Yes[ ] No[ ]
<S>
As of January 31, 1997 there were 14,286,153 shares of Talley Industries, Inc. Common Stock $1 par value
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year (December 31, 1996) are incorporated by reference in
Part III.
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TABLE OF CONTENTS
Part I PAGE
Item 1. Business
(a) Developments since January 1, 1996 I-1
(b) Financial Information About Industry Segments I-4
(c) Narrative Description of Business I-4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales I-23
(e) Executive Officers of the Registrant I-23
Item 2. Properties I-23
Item 3. Legal Proceedings I-25
Item 4. Submission of Matters to a Vote of Security Holders I-25
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1
Item 8. Financial Statements and Supplementary Data II-1
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-2
Part III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-3
Item 12. Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13. Certain Relationships and Related Transactions III-3
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
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PART I
Item 1. Business.
- ------------------
(a) Developments since January 1, 1996.
- ----------------------------------------
Airbag Royalty Settlement
- -------------------------
On June 19, 1996, the United States Court of Appeals for the Ninth
Circuit rejected an appeal by TRW Inc. (TRW), and affirmed the previously
reported $138,000,000 judgment for the Company in TRW Inc. vs. Talley
Industries, Inc. et al. In August 1996, TRW made payments aggregating
approximately $133,144,000 to the Company on account of TRW's obligations
under the judgment. The payments represented the $138,000,000 face
amount of the judgment award, plus interest at the default rate specified
by the Airbag Royalty Agreement (prime plus 5%), less the quarterly
payments made by TRW pursuant to the District Court's order during the
pendency of the appeal. A further payment was made by TRW at the same
time in the amount of approximately $6,704,000 as that portion of a
court-ordered reimbursement of litigation fees and costs (and interest
on the reimbursement amount at the same default rate) from which TRW had
not taken an appeal.
During September 1996, other claims between the Company and TRW
(which had been scheduled for trial) and all other matters in dispute
with TRW were settled by the parties pursuant to a global settlement
agreement. Under that settlement, TRW made a further cash payment to the
Company on September 3, 1996 in the aggregate amount of $16,601,000.
Accordingly, all claims between the parties have now been resolved, and
cash payments have been made by TRW to the Company aggregating
$156,449,000. The quarterly royalty payments ceased with the settlement
payments from TRW.
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Conversion of Preferred Stock
- -----------------------------
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 at December 31, 1995. The conversion
automatically extinguished all unpaid dividends on that stock, totaling
approximately $2,600,000.
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 of approximately 1,995,000
shares were issued in connection with the conversion of the Series B
Preferred stock and approximately 106,000 shares were issued in
connection with the conversion of the Series A 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 $4,000,000 ($5
per share) on the Series B Preferred stock and totaling approximately
$300,000 ($5.50 per share) on the Series A Preferred stock at March 31,
1996.
Repurchase of Senior Discount Debentures
- ----------------------------------------
During 1996, pursuant to the terms of the 12.25% Senior Discount
Debentures, the Company was required to repurchase a total of
$124,002,000 aggregate principal amount of the debentures.
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This amount represents over 98% of the debentures with an accreted value
of $97,451,000. The Company paid $105,968,000 including accrued
interest and prepayment premiums, to repurchase the tendered debentures.
In connection with this debt extinguishment, the Company recognized a
$12,052,000 extraordinary loss, which consists of a prepayment premium
and deferred debt cost on the extinguished debt.
Sale of Realty Assets
- ---------------------
In 1992, the Company initiated a plan for the orderly disposition of
all its remaining real estate assets. With the resolution of the airbag
royalty dispute with TRW and after receiving payments in connection
therewith 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 an $85,000,000
writedown in real estate assets for financial reporting purposes. In
December of 1996 all real estate properties, except for one, were sold
for cash and assumption of certain liabilities. The Company is actively
marketing the remaining property.
Payment of Dividends
- --------------------
On December 2, 1996, the Company paid all dividend arrearages on its
Series A and Series B Preferred stock. Dividend arrearage on the Series
A Preferred stock of $6.05 per share and on the Series B Preferred stock
of $5.50 per share were paid on December 2, 1996 to holders of record at
the close of business on November 18, 1996. Total payment of the
dividend arrearage was approximately $4,206,000. The Company also
resumed quarterly dividend payments on its Series A and Series B
Preferred stock.
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(b) Financial Information about Industry Segments.
- ---------------------------------------------------
The disposition of the assets of the Realty Segment, the settlement
of the dispute with TRW regarding, among other matters, royalties from
the Airbag Royalty Segment, and the cessation of such royalties along
with the significant increase during the last several years in the volume
and profitability of the Company's stainless steel operations has
prompted a reclassification of the Company's segments of operations. The
steel operations have been segregated into a separate Stainless Steel
Products segment and removed from the Industrial Products segment. The
Specialty Products segment has been combined with those operations
remaining in the Industrial Products segment. All prior periods have
been restated to reflect the reclassifications.
A segment description along with tables showing sales and operating
income for each of the last five years, and identifiable assets for each
of the last three years attributable to each of the Company's five
business segments are incorporated herein by reference to the material
appearing in the Notes to Consolidated Financial Statements on pages
F-49 through F-57 of the Company's financial statements for the year
ended December 31, 1996, included in a separate section of this report.
For an additional discussion of segment operations, see also
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages F-2 through F-17 of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
(c) Narrative Description of Business.
- ---------------------------------------
General
- -------
The Company is a diversified manufacturer of a wide range of
proprietary and other specialized products for defense, industrial and
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commercial applications. Through its Government Products and Services
segment, the Company manufactures an extensive array of propellant
devices and electronic components for defense systems and commercial
applications and provides naval architectural and marine engineering
services. The Company has participated in the automotive airbag market
through its royalty agreement with TRW, which provided the Company with
a quarterly payment for any airbag manufactured and sold by TRW worldwide
and for any other airbag installed in a vehicle manufactured or sold in
North America. The royalties ceased with the settlement payments from
TRW in the third quarter of 1996, which totaled $156,449,000, as a result
of the litigation involving the airbag royalty agreement and other
matters (See also Litigation in the Notes to Consolidated Financial
Statements). The Company's Stainless Steel Products segment manufactures
and distributes stainless steel products. The Company's Industrial
Products segment manufactures and sells high-voltage ceramic insulators
used in power transmission and distribution systems, specialized welding
equipment and systems, aerosol insecticides, air fresheners and
sanitizers for the commercial and agricultural markets, and custom
designed metal buttons for military and commercial uniforms and upscale
fashion apparel. The Company has sold substantially all of the assets
of its real estate operations.
(1) Government Products and Services Segment.
-----------------------------------------
The Company's Government Products and Services segment provides a
wide range of products and services for government programs. The
majority of the Company's products are smaller components of larger units
and systems and are generally designed to enhance safety or improve
performance. Products manufactured by the Company which have significant
replacement requirements include items having finite shelf lives,
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such as propellants for pilot ejection seats, as well as products
regularly consumed in training and combat situations. Many of the
Company's existing products and its new product development efforts
are focused on mobile, tactical and "smart" military weapons and systems.
The Company is developing new technologies that will enable it to re-
enter the automobile airbag market, which it pioneered prior to the sale
of that business segment to TRW in 1989. The Company's primary efforts
are directed towards the components of the airbag system that initiates
the inflation (the initiator) and the inflator. The Company provides a
broad range of architectural and engineering design consulting services
for the U.S. Navy, commercial clients and shipyards, and has most
recently been expanding its design services into the environmental
protection market.
Solid Propellant Devices and Related Products
- ---------------------------------------------
A majority of the products manufactured by the Company's
Government Products and Services segment are based upon the Company's
core technologies and expertise in the design and manufacture of
propellants and related products. Propellants are solid fuels which,
when ignited, produce a specified thrust or volume of gas for a
designated period. The Company's propellant products are typically
custom designs developed by the Company in response to customers'
technical requirements and specifications.
The following sets forth a brief summary of several of the solid
propellant devices and related products manufactured by the Company:
- Pilot Ejection Systems. The Company manufactures ejection seats
and related propellant devices for aircraft ejection systems in
high performance military aircraft. The Company also manufactures
escape systems for a number of foreign aircraft.
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- Rocket Motors. The Company manufactures a wide range of rocket
motors and rocket catapults. These products include booster
rockets for decoy missiles, as well as for unmanned vehicles. The
Company also manufactures rocket catapults and rocket motors for
its aircraft escape systems.
- Gas Generators. The Company manufactures a broad range of solid
propellant gas generators. These products provide pneumatic power
for guidance and control systems, hydraulic systems, and safe and
arming devices on a wide range of missile systems.
- Extended Range Munitions Components. The Company's extended range
munitions components utilize propellant technologies to
dramatically extend the range of U.S. artillery. The Company's
extended range munitions utilize a solid propellant to reduce drag
or rocket assist to provide thrust to extend the range of new
howitzer artillery.
- Dispersion Systems. The Company pioneered the use of airbag
technologies for modern munitions delivery systems. The Company's
dispersion systems utilize airbag assemblies to eject submunitions
from carrier missile systems.
- Weapons Systems. These weapon systems include a light anti-armor
weapon for the U.S. Navy and a light-weight disposable version of
a U.S. Marine Corps shoulder-launched weapon system for the U.S.
Army.
- Ejector Racks. These ejection racks enable helicopter pilots to
discard munitions, missiles or extra fuel in emergency situations.
- Countermeasure Systems. The Company manufactures several training
and combat countermeasure systems for naval, aircraft and
submarine applications. Countermeasure systems are designed to
divert incoming weapons from their targets.
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- Insensitive Munitions. The Company develops and manufactures
propellant products which are being qualified to meet certain
rigorous safety requirements. These munitions are generally
insensitive to shock, puncture, high temperatures and pressure.
- Electro Explosive Devices ("EED"). Electro-explosive devices
manufactured by the Company include rocket motor igniters,
explosive bolts and separation nuts and booster cartridges, as
well as initiators for these and other components.
- Automotive Airbag Products. New products include advanced, non-
sodium azide inflators, ceramic initiators and an inflatable seat
belt.
High Reliability Electronic Products
- ------------------------------------
The Company designs and manufactures specialized electronic display
and monitoring devices, electromechanical instruments and components, and
high performance cable assemblies which are used by the aerospace and
defense industries. The Company's products are designed to perform at
a high level of reliability, conform to tight tolerance specifications
and withstand harsh operating environments. The following sets forth a
brief summary of the primary electronic products manufactured by the
Company:
- Air Traffic Control Systems. The Company has supplied electronic
displays to the Federal Aviation Administration ("FAA") for over
20 years for use in certain air traffic control applications.
- Airborne Flight Data Recorders. The Company is a manufacturer of
flight data recorders that are used on military aircraft. These
flight data recorders are used to evaluate training simulations
and record flight information, and are designed to maintain data
integrity in the event of a crash.
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- Safe and Arming Devices. The Company manufactures electronic and
electromechanical devices which are used to safely control, arm
and fire warheads on torpedoes, mines and missiles. These
products are designed to meet a high standard for safety
requirements. Electronic Safe and Arming Devices have advantages
over electromechanical devices in that they respond far quicker,
can be programmed to vary arming time, have greater precision and
are more reliable.
- Indicators. The Company is a producer of elapsed time indicators,
event counters and fault indicators, with a significant share of
the domestic aerospace market. The Company's indicator products
are capable of functioning with a high degree of accuracy and are
built to withstand the harsh operating environment present in
aerospace applications.
- Interconnect Products. The Company also designs, manufactures and
sells high quality interconnect products and accessories for
military, aerospace and commercial marketplaces. These products
include high voltage silicone wire and cable, multi-pin high and
low voltage connector and cable assembly interconnection systems,
and triax and coax high voltage connections and cable assemblies.
The major applications for these products include medical
equipment, radar and CRT displays, electronic countermeasure
systems and power supplies.
Naval Architecture and Marine Engineering Services
- --------------------------------------------------
The Company's naval architecture and marine engineering business
provides a broad range of consulting services for the U.S. Navy, as well
as for commercial clients and shipyards. The Company's naval design and
engineering business has provided services for over 35 years and
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possesses domestic and international experience in all phases of the
design process for military and commercial ships. These services include
initial feasibility and conceptual studies, contract design, and detail
design and engineering for new and retrofitted ships. The Company also
provides the engineering services necessary to physically integrate
combat systems and electronics into Navy ships and provides program
management and logistics support services to the Navy and commercial
customers. The Company has been expanding its design services into the
environmental protection market, and has been successful in obtaining a
prime contract in support of the U.S. Navy's Hazardous Material Afloat
program. The Company maintains separate segments to meet the different
technical, performance and administrative needs of its customers.
Direct contracts with the U.S. Navy currently account for a majority
of the Company's naval architecture and marine engineering revenue, with
additional revenue attributable to subcontracts under Navy contracts.
The remaining revenues are derived from commercial shipyards or
industrial customers for ship and other marine design services. The
majority of the Company's contracts with the U.S. Navy are cost plus a
fixed fee. Under these contracts, the Company is reimbursed for its
actual costs plus a percentage fee based on the estimated costs in the
original contract.
The demand for design services for the U.S. Navy is largely driven
by the number of new ship classes being developed or older classes being
retrofitted, versus the actual number of ships within a class being built
or operated. The majority of engineering and detail design costs are
incurred with the introduction of a new class of ship or the retrofit of
one or more ships of an existing class.
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Marketing
- ---------
The Company markets its government products and services directly to
the Department of Defense, other U.S. government departments, foreign
government agencies, and other contractors. The Company's marketing
strategy focuses on those contracts and programs which are likely to be
emphasized in the current defense environment and for which the Company
has a competitive advantage in technology and expertise.
The Company's technical sales personnel are strategically located
across the country for easy access to its customers. The Company also
uses independent sales agents to market its products to various foreign
governments and to sell its electronic component products. In addition,
the Company enters into joint marketing agreements with foreign
manufacturers to provide access to markets not available directly to the
Company.
Competition
- -----------
Competition for the Company's government products and services varies
widely. The markets for several of the Company's products and services
are highly competitive, and many of the Company's competitors have
greater financial resources than the Company. However, the Company also
competes in a variety of small niche markets. Production of the products
within these markets frequently requires government/product
qualification, which can be costly and time-consuming to obtain. Once
a contract has been has been awarded, the relatively small size of these
markets often discourages additional suppliers from pursuing
qualification. Within these markets the Company is occasionally a sole
supplier.
The market for the Company's electronics components products is
highly competitive. The Company believes that it shares the market for
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aerospace elapsed time indicators, fault indicators and events counters
primarily with one competitor. The Company believes that its safe and
arming devices compete with several companies.
The Company believes that its market for naval architectural and
marine engineering services is served by the Company and a small number
of other major firms. These companies actively compete with each other,
and to a lesser extent with smaller design firms, for U.S. Navy programs,
foreign contracts and subcontracts with private shipyards.
Government Contract Matters
- ---------------------------
A high percentage of the Company's government defense contracts are
fixed-price contracts. The Company's naval architecture and marine
engineering contracts are generally cost reimbursable. Although the
Company's fixed-price contracts generally permit the Company to retain
unexpected profits if costs are less than projected, the Company bears
the risk that increased or unexpected costs may reduce profit or cause
the Company to sustain losses on a particular contract. From time to
time the Company accepts fixed-price contracts for products that have not
been previously developed. In such cases, the Company is subject to the
risk of delays and cost over-runs. Under U.S. Government regulations,
certain costs, including financing and interest costs and foreign
marketing expenses, are not allowable. The U.S. Government also
regulates the methods under which costs are allocated to Government
contracts. With respect to U.S. Government contracts that are obtained
pursuant to an open bid process and therefore result in a firm fixed
price, the Government has no right to renegotiate any profits earned
thereunder. In Government contracts where the price is negotiated at a
fixed price rather than on a cost-plus basis, as long as the financial
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and pricing information supplied to the Government is current, accurate
and complete, the Government has no right to renegotiate any profits
earned thereunder. However, if the Government later conducts an audit
of the contractor and determines that such data was inaccurate, or
incomplete or not current, the Government may initiate an action to
recover the amount of any significantly overstated costs plus applicable
profit or fee and interest. If the submission of inaccurate, incomplete
or not current data was knowingly made, then the Government may seek to
recover an additional penalty equal to the amount of the overstated
costs; and if the submission was willful or intentional the Government
may seek additional penalties and damages. Certain cost reimbursement
contracts are also subject to review and price adjustment by the
Government.
U.S. Government contracts are, by their terms, subject to termination
by the Government either for its convenience or for default by the
contractor. Fixed-price contracts provide for payment upon termination
for items delivered to and accepted by the Government. If the
termination is for convenience, fixed-price contracts provide for payment
of the contractor's costs incurred plus the costs of settling and paying
claims by terminated subcontractors, other settlement expenses and a
reasonable profit on its incurred performance costs. However, if a fixed-
price contract termination is for default, (i) the contractor is paid
such amount as may be agreed upon for completed and partially completed
products and services accepted by the Government, (ii) the Government is
not liable for the contractor's costs with respect to unaccepted items
and is entitled to repayment of advance payments and progress payments,
if any, related to the terminated portions of the contracts and (iii) the
contractor may be liable for excess costs incurred by the Government in
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procuring undelivered products and services from another source. Foreign
defense contracts generally contain comparable provisions relating to
termination at the convenience of the government.
Companies supplying defense-related products and services to the U.S.
Government are subject to certain additional business risks unique to
that industry. These risks include: the ability of the Government to
unilaterally suspend the Company from new contracts pending resolution
of alleged violations of certain procurement laws or regulations;
procurements which are dependent upon appropriated funds by the
Government; changes in the Government's procurement policies (such as
a greater emphasis on competitive procurements or cancellation of
programs due to budgetary changes); the possibility of inadvertent
Government disclosure of a contractor's proprietary information to third
parties; and the possible need to bid on programs in advance of design
completion. A reduction in expenditures by the Government for the
Company's products and services, lower margins resulting from
increasingly competitive procurement policies, a reduction in the volume
of contracts or subcontracts awarded to the Company, incomplete,
inaccurate or non-current data allegations, terminations or cancellations
of programs, or substantial cost over-runs could have an adverse effect
on the Company's results of operations.
Backlog
- -------
The backlog of government funded programs and firm industrial
contracts in the Government Products and Services segment amounted to
approximately $112.0 million at December 31, 1996, $98.9 million at
December 31, 1995 and $97.3 million at December 31, 1994. The total
backlog, including unfunded programs amounted to approximately $423
million at December 31, 1996, $469 million at December 31, 1995 and $97
million at December 31, 1994. The Company estimates that approximately
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$82.1 million of the government funded and firm industrial backlog and
$119.5 million of the total backlog outstanding at December 31, 1996 is
expected to be completed or shipped during 1997.
The term funded used herein refers to the aggregate revenue remaining
to be earned at a given time under (i) contracts held by the Company
(excluding renewals or extensions thereof, which are at the discretion
of the customer) to the extent of the funded (i.e., appropriated by
Congress and allotted to the contract by the procuring Government agency)
amounts thereunder, and (ii) task orders or delivery orders issued to the
Company under contracts which provide that the customer is obligated to
pay only for services rendered pursuant to specific funded task orders
and is not obligated to issue additional task orders or to pay the
estimated total contract price. The term unfunded used herein refers to
the portion of the Company's total backlog that represents the excess of
the stated value of the Company's executed contracts over the amounts
funded by the customer for such contracts including unexercised options.
(2) Airbag Royalties Segment.
-------------------------
This segment of the Company's business consists of the Company's
royalty entitlement under the license agreement it signed with TRW in
April 1989 in connection with the sale of the Company's automotive airbag
business to TRW at that time. Under the terms of that license agreement,
the Company was entitled to receive a royalty each quarter from TRW
measured by the level of TRW's airbag sales and the level of industry
sales.
As described in the Notes to Consolidated Financial Statements under
the heading Commitments and Contingencies of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report, on June 19, 1996, the United States Court of
Appeals for the Ninth Circuit rejected TRW's appeal and affirmed the
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$138,000,000 judgment for the Company in TRW Inc. vs. Talley Industries,
Inc. et al. In August 1996, TRW made payments aggregating approximately
$133,144,000 to the Company on account of TRW's obligations under the
judgment. The payments represented the $138,000,000 face amount of the
judgment award, plus interest at the default rate specified by the Airbag
Royalty Agreement (prime plus 5%), less the quarterly payments made by
TRW pursuant to the District Court's order during the pendency of the
appeal. A further payment was made by TRW at the same time in the amount
of approximately $6,704,000 as that portion of a court-ordered
reimbursement of litigation fees and costs (and interest on the
reimbursement amount at the same default rate) from which TRW had not
taken an appeal.
In September 1996, other claims between the Company and TRW (which
had been scheduled for trial) and all other matters in dispute with TRW
were settled by the parties pursuant to a global settlement agreement.
Under that settlement, TRW made a further cash payment to the Company on
September 3, 1996 in the aggregate amount of $16,601,000. Accordingly,
all claims between the parties have now been resolved, and cash payments
have been made by TRW to the Company aggregating $156,449,000. The
quarterly royalty payment ceased with the settlement payments from TRW.
The Company is currently developing new airbag technologies,
including an improved inflator and a ceramic initiator, with initial
sales for both airbag components expected in 1998.
(3) Stainless Steel Products Segment.
---------------------------------
The Company operates a modern stainless steel mini-mill which
converts purchased stainless steel billets into a variety of grades,
sizes and shapes of hot rolled and cold finished bar and rod. The
facility utilizes computer automation and quality control processes that
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have resulted in a high standard of product quality, service and
delivery. Located in South Carolina, the mini-mill has relatively low
operating costs and is situated close to major north-south and east-west
interstate highways. The Company has annealing, shot blasting, pickling
and cold finishing capabilities, which broaden the product range, shorten
lead times, improve product quality and lower costs. The Company sells
its products to a number of steel distributors, including a master
distributor which is owned by the Company, and to a lesser extent to
industrial end-users. The Company-owned master distributor sells
stainless steel bar, angle and flats to independent distributors, and
also provides cutting, grinding and boring services. The Company's
master distributor, which resells approximately 17% of the mini-mill's
total production currently, has five distribution depots located in South
Carolina, New Jersey, Pennsylvania, Illinois and Texas. The Company also
owns a Canadian distributor, which sells primarily flat stainless steel
products (not produced by the mini-mill). This distributor has locations
in Ontario and Quebec.
Demand for the Company's products is directly related to the level
of general economic activity and the competition, and therefore, has been
impacted most recently by competitive pressures from domestic and foreign
steel suppliers. The Company's operations are technologically advanced
and its products are highly competitive in terms of quality, brand
recognition and price.
Marketing
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The Company markets its stainless steel products to distributors,
manufacturers and fabricators. These organizations vary in size,
complexity and purchasing structures. The Company's sales and marketing
efforts use a combination of direct sales and independent distributors.
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Competition
- -----------
The Company's Stainless Steel Products businesses are highly
competitive, with competition typically based on price, quality, delivery
time, engineering expertise and customer service. The Company's
competitors include major domestic and international companies, many
of which have financial, technical, marketing, manufacturing,
distribution and other resources substantially greater than those of the
Company, as well as smaller competitors which focus on specific market
niches.
Backlog
- -------
The backlog of firm orders in the Stainless Steel Products segment
totaled approximately $17.4 million at December 31, 1996, $27.9 million
at December 31, 1995 and $26.2 million at December 31, 1994. The Company
estimates that substantially all of the orders outstanding at December
31, 1996 will be delivered by December 31, 1997.
(4) Industrial Products Segment.
----------------------------
The Company's Industrial Products segment operates in three product
areas: high-voltage ceramic insulators, specialty products, and other
industrial products.
High-Voltage Ceramic Insulators
- -------------------------------
The Company's high-voltage ceramic insulator business manufactures
and sells electrical insulators and related items for use in power
transmission and distribution systems, principally to electric utilities,
municipalities and other government units, as well as to electrical
contractors and original equipment manufacturers. High-voltage ceramic
insulators are required to perform with high levels of reliability and
typically require product certification from electric utilities to be
used for new or replacement applications. Demand for these products is
I-18
<PAGE>
influenced by the level of economic activity, particularly housing
starts, with a fairly stable minimum demand level due to normal
replacement and repair cycles.
The Company's primary customers include original equipment
manufacturers as well as many of the major utilities throughout the U.S.
and the world.
Specialty Products
- ------------------
The Company's specialty products focus on two primary markets:
insect and odor control for the industrial maintenance supply, pest
control and agricultural markets; and custom designed metal buttons for
the military and commercial uniform and fashion markets.
The Company offers a complete line of insecticides, air fresheners
and sanitizers for sale through distributors to the industrial
maintenance supply, pest control and agricultural markets. The Company's
insecticide products are sold under unique trademarks to agricultural and
pest control distributors, respectively, who sell to pest control
professionals. The Company's insecticide formulations focus on using
natural active ingredients including pyrethrin (derived from the
chrysanthemum flower), boric acid and sassafras. The Company offers a
complete line of insecticides to control the most common crawling and
flying insects. The insecticides are mixed and packaged at the Company's
Louisiana manufacturing plant and formulated into aerosol, liquid and
powder form.
Air freshening and sanitizing products are formulated and packaged
for specific air freshening and sanitizing situations, which vary based
on room size, type of odor to be treated, and desired fragrance. In
addition, the products are designed for one of four different delivery
methods: (i) metered, automatic aerosols for areas up to 6,000 cubic
feet, (ii) fan delivered solids for areas up to 1,500 cubic feet,
I-19
<PAGE>
(iii) manual aerosols for immediate air freshening and (iv) passive
solids for small enclosed areas.
In addition to manufacturing odor and insect control formulations,
the Company also manufactures and sells metered and fan driven dispensers
for these products. Metered dispensers utilize a timing mechanism to
deliver aerosol spray at programmable time intervals. Fan driven
dispensers utilize battery operated fans to distribute the scent of
selected air fresheners.
The Company designs and manufactures a wide range of custom metal
buttons for the military and commercial uniform and fashion markets. The
Company also produces insignias, cuff links, money clips, tie bars and
other accessories as a complement to its button products. The buttons
are individually stamped from custom designed steel dies.
The use of steel dies and a brass stamping process allow the Company
to produce button designs with extremely fine detail and high resolution.
The Company custom designs and produces metal buttons for the U.S.
military based on detailed military specifications. The market for
commercial uniform buttons includes local police, fire departments and
other civil servants. The Company continues to increase its presence in
the fashion apparel market by working with apparel manufacturers on
custom button designs for their manufactured garments.
Other Industrial Products
- -------------------------
The Company designs, manufactures and sells specialized advanced-
technology welding equipment and systems, power supply systems and
humidistats, and also provides contract assembly and manufacturing for
original equipment manufacturers. The Company's welding equipment and
systems are highly-engineered and advanced technologically. The
Company's product lines include patented welding systems which can be
I-20
<PAGE>
remotely controlled for use in radioactive and other contaminated
environments. These products are sold to the utility, pipeline,
shipbuilding, aerospace and specialty construction industries.
The power supply systems manufactured by the Company are principally
low-wattage systems and are sold to original equipment manufacturers in
the telecommunications, medical, computer and other industrial markets.
The power supply market is highly competitive, with numerous
manufacturers in the U.S.
The Company also manufactures and sells humidistats. Humidistats are
used to regulate humidity levels and are principally sold to home
appliance manufacturers.
Marketing
- ---------
The Company markets its industrial products to domestic and foreign
customers. The Company utilizes a network of direct sales staff,
independent distributors, manufacturers and distributors, to market its
industrial products to the various pest control and sanitary supply
companies, and agricultural market.
Competition
- -----------
Competitors in the Industrial Products segment include a wide range
of domestic and foreign manufacturers and resale distributors, and
chemical and pet care companies. Competition is based on product
efficiency, quality, price, delivery time, engineering expertise and the
ability to offer a broad range of products.
The Company maintains the strongest position in the resale market of
porcelain products, humidistats, and military and commercial uniform
button market.
Backlog
- -------
The backlog of firm orders in the Industrial Products segment
totaled approximately $7.7 million at December 31, 1996, $6.6 million at
I-21
<PAGE>
December 31, 1995 and $7.4 million at December 31, 1994. The Company
estimates that substantially all of the orders outstanding at December
31, 1996 will be delivered by December 31, 1997.
(5) Realty.
-------
In 1992, the Company initiated a plan for the orderly disposition of
all its remaining real estate assets. With the resolution of the airbag
royalty dispute with TRW and after receiving payments in connection
therewith 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 an $85,000,000
writedown in real estate assets for financial reporting purposes. In
December of 1996 all real estate properties, except for one, were sold
for cash and assumption of certain liabilities. The Company plans to
dispose of the single property not included in the 1996 bulk sale.
(6) Other General Information.
--------------------------
Research and Development. During the years ended December 31, 1996,
1995 and 1994, the Company's consolidated expenditures for Company-
sponsored research and development activities were approximately $8.7
million, $4.2 million and $4.3 million, respectively. For the same
reporting periods, customer-sponsored research and development
expenditures were $8.8 million, $10.1 million and $8.2 million,
respectively. The large increase in 1996 expenditures is related to the
development of automotive airbag components and a continued higher level
of expenditures is anticipated in the near future.
I-22
<PAGE>
Environmental Protection. The Company does not anticipate that
compliance with various laws and regulations relating to the protection
of the environment will have any material effect upon its capital
expenditures, earnings or competitive position.
Employees. As of December 31, 1996, the Company had 2,494
employees, approximately 16.7% of whom are represented by unions.
Proprietary Rights. Various of the Company's businesses are
dependent in part upon unpatented know-how and technologies, including
the solid propellent businesses. While various patents, trademarks and
tradenames are held by the Company and are used in its businesses, none
of them are critical to any segment, and the Company's business is not
dependent upon them to a material extent.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
- ----------------------------------------------------------------------
Information required by this item is incorporated by reference to the
Notes to Consolidated Financial Statements appearing under the heading
"Segment Operations" on pages F-49 through F-57 of the Company's
financial statements for the year ended December 31, 1996, included in
a separate section of this report.
(e) Executive Officers of the Registrant.
- ------------------------------------------
Reference is hereby made to the information contained in Item 10(b)
of this Form 10-K.
Item 2. Properties.
- --------------------
The Company's operations are conducted at numerous manufacturing and
assembly plants, warehouses, offices and sales facilities located in 20
states, as well as warehouses, offices and sales facilities in Canada and
the Netherlands. The principal facilities of the Government Products and
Services segment include approximately 931,000 square feet of
manufacturing and assembly facilities, in addition to related warehouse,
I-23
<PAGE>
office and sales facilities. The principal manufacturing and assembly
facilities for this segment are located in Mesa, Arizona; Phoenix,
Arizona; Rolling Meadows, Illinois; and Toledo, Ohio. The majority of
these facilities are owned by the Company. However, at the two Arizona
facilities, the Company owns the plants and equipment and leases the
underlying land from the State of Arizona. One of these locations is
leased under long-term leases, while the second location is currently
under a year-to-year lease. The Company's naval architectural and
engineering services are provided out of several offices, with the major
ones located in New York, New York; Arlington, Virginia; Newport News,
Virginia; Washington, D.C.; Pittsburgh, Pennsylvania; and Pascagoula,
Mississippi, all of which are leased.
Facilities used by the Stainless Steel Products segment include
approximately 415,000 square feet of manufacturing and assembly plants
and related office, warehouse and sales space, located in Hartsville,
South Carolina; and sales and warehouse facilities in New Brunswick,
New Jersey; Hermitage, Pennsylvania; Chicago, Illinois; Houston, Texas;
Charlotte, North Carolina; Toronto and Montreal, Canada. All of the
facilities are owned by the Company with the exception of sales and
warehouse facilities consisting of 171,000 square feet.
The operations of the Industrial Products segment are conducted in
several facilities consisting of approximately 604,000 square feet of
manufacturing, warehouse and office space located in Carey, Ohio;
Knoxville, Tennessee; Waterbury, Connecticut; Randolph, Vermont;
Independence, Louisiana; Davidson, North Carolina and the Netherlands.
Most of these facilities are owned by the Company except for 24,000
square feet of warehouse facilities.
I-24
<PAGE>
In total, over two-thirds of all the facilities (by square footage)
are owned by the Company and have been pledged as collateral to secure
a credit facility. The Company's facilities, which are continually added
to or modernized, are generally considered to be in good condition and
adequate for the business operations currently being conducted.
Item 3. Legal Proceedings.
- ---------------------------
Information required by this item is incorporated by reference to the
Notes to Consolidated Financial Statements appearing under the heading
"Commitments and Contingencies" of the Company's financial statements for
the year ended December 31, 1996, included in a separate section of this
report.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
I-25
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ----------------------------------------------------------------------
Matters.
- --------
The information required by this item is incorporated by reference
to the material under the captions "Long-Term Debt" on pages F-29
through F-32, "Capital Stock" on pages F-38 through F-40 and "Stock
Market Data" on pages F-63 through F-64 of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
Item 6. Selected Financial Data.
- --------------------------------
The information required by this item is incorporated by reference
to the material under the captions "Five Year Summary of Operations,"
"Selected Financial Data" and "Stock Market Data" on pages F-58, F-62
through F-64, respectively, of the Company's financial statements for the
year ended December 31, 1996, included in a separate section of this
report.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations.
- ----------------------
The information required by this item is incorporated by reference
to the material on pages F-2 through F-17 of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The Consolidated Financial Statements, together with the report
thereon by Price Waterhouse LLP, along with the material appearing under
the caption "Quarterly Financial Results (Unaudited)" on pages F-60
through F-61 of the Company's financial statements for the year ended
December 31, 1996, are included in a separate section of this report.
(See "Index to Financial Statements and Schedules" on page F-1.)
II-1
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
The Company's Independent Accountants during the two most recent
fiscal years have neither resigned, declined to stand for re-election nor
been dismissed.
II-2
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
(a) Directors.
- ---------------
The information required by this item is incorporated by reference
to the material appearing under the caption "Election of Directors" of
the Company's 1997 Proxy Statement.
(b) Executive Officers.
- ------------------------
The names and ages of all executive officers of the Company,
the offices and all other positions with the Company presently held
by them, the dates of their first election to those offices and their
other positions and business experience during the past five years
are listed on the following page.
There are no family relationships between any of the executive
officers of the Company. All officers of the Company are elected each
year at the meeting of the Board of Directors of the Company, held in
connection with the annual meeting of stockholders, to serve at the
pleasure of the Board of Directors of the Company. Mr. Mallender,
however, is employed by the Company pursuant to a written employment
contract for a term expiring on May 21, 2000. Information regarding Mr.
Mallender's contract is incorporated by reference to the material
appearing under the caption "Executive Compensation - Executive
Employment Contracts" of the Company's 1997 Proxy Statement. There are
no agreements or understandings between any officer of the Company and
any person other than the Company pursuant to which he was selected
as an officer of the Company.
There have been no events under any bankruptcy or insolvency law, no
criminal proceedings and no judgments, orders or injunctions relating to
securities or commodities activities or business practices material to
the evaluation of the ability or integrity of any officer of the Company
during the past five years.
III-1
<PAGE>
<TABLE>
E X E C U T I V E O F F I C E R S O F T H E R E G I S T R A N T
-----------------------------------------------------------------------
Name Age Offices Business Experience
- -------------------- --- ---------------------------- ------------------------------------------------------------------
<S> <C> <C> <C>
William H. Mallender 61 Chairman of the Board (1983) Chairman of the Board (1983) and Chief Executive Officer
and Chief Executive Officer of Registrant (1981); President of Registrant (1983-1981);
(1981), Chairman of the Executive Vice President of Registrant (1981-1978);
Executive Committee (1981) General Counsel of Registrant (1981-1971); Secretary of
Registrant (1981-1973); Vice President of Registrant (1978-1971)
Jack C. Crim 66 President (1983) and Chief President of Registrant (1983); Chief Operating Officer of
Operating Officer (1982) Registrant (1982); Executive Vice President of Registrant
1983-1982; President, Townsend Division, Textron, Inc.
(diversified manufacturer) (1982-1980); Group Vice President,
Textron, Inc. (1980-1973)
Mark S. Dickerson 45 Vice President (1993), General Vice President (1993); Secretary and General Counsel of
Counsel and Secretary (1982) Registrant (1982); Assistant Counsel of Registrant (1982-1978)
Kenneth May 55 Vice President (1993) and Vice President (1993); Controller of Registrant (1982);
Controller (1982) Assistant Controller of Registrant (1981); Director of Planning
and Business Analysis for Registrant (1981-1978)
Daniel R. Mullen 55 Vice President (1993) and Vice President (1993); Treasurer of Registrant (1982);
Treasurer (1982) Vice President of Finance, Southwest Pipe and Supply Company
(pump manufacturer) (1982); Treasurer and Chief Financial
Officer, AMERCO (equipment rental) (1982-1970)
</TABLE>
III-2
<PAGE>
(c) Compliance with Section 16(a) of the Exchange Act.
- -------------------------------------------------------
The information required by this item is incorporated by reference
to the material appearing under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's 1997 Proxy Statement.
Item 11. Executive Compensation.
- ---------------------------------
The information required by this item is incorporated by reference
to the material appearing under the captions "Executive Compensation" and
"The Board of Directors and its Committees" of the Company's 1997 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required by this item is incorporated by reference
to the material appearing under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management of the
Company" of the Company's 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required by this item is incorporated by reference
to the material appearing under the caption "Other Relationships and
Certain Transactions" of the Company's 1997 Proxy Statement. Also,
reference is made to Notes to Consolidated Financial Statements under the
caption "Related Parties Transaction" of the Company's financial
statements for the year ended December 31, 1996, included in a separate
section of this report.
III-3
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a)-1 Financial Statements
A list of the financial statements included herein is set forth in
the Index to Financial Statements and Schedules submitted as a
separate section of this Report.
(a)-2 Financial Statement Schedules
A list of the financial statement schedules included herein is
contained in the accompanying Index to Financial Statements and
Schedules submitted as a separate section of this Report.
(a)-3 Exhibits
Exhibits listed in the Exhibit Index on the pages preceding the
exhibits of this report are filed as a part of this report.
(b) Reports on Form 8-K
A report on Form 8-K was filed with a report date of December 3,
1996, reporting the sale of all, except for one, of the Company's
real estate properties for cash and assumption of certain
liabilities.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TALLEY INDUSTRIES, INC.
By Mark S. Dickerson
----------------------------------
March 25, 1997 Mark S. Dickerson
Phoenix, Arizona Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
William H. Mallender Director, Chairman
- ------------------------ of the Board
William H. Mallender Principal Executive
Officer March 25, 1997
Jack C. Crim Director, President
- ------------------------ Chief Operating
Jack C. Crim Officer March 25, 1997
Kenneth May Vice President,
- ------------------------ Controller
Kenneth May Principal Accounting
Officer March 25, 1997
Daniel R. Mullen Vice President,
- ------------------------ Treasurer
Daniel R. Mullen Principal Financial
Officer March 25, 1997
IV-2
<PAGE>
Neil W. Benson Director March 25, 1997
- -----------------------
Neil W. Benson
Paul L. Foster Director March 25, 1997
- -----------------------
Paul L. Foster
Townsend W. Hoopes Director March 25, 1997
- -----------------------
Townsend W. Hoopes
Fred Israel Director March 25, 1997
- -----------------------
Fred Israel
Joseph A. Orlando Director March 25, 1997
- -----------------------
Joseph A. Orlando
Alex Stamatakis Director March 25, 1997
- -----------------------
Alex Stamatakis
John W. Stodder Director March 25, 1997
- -----------------------
John W. Stodder
- ----------------------- Director
Donald J. Ulrich
David Victor Director March 25, 1997
- -----------------------
David Victor
IV-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
Page in
This Report
(1) Financial Statements:
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . F-2
Consolidated Statement of Earnings - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . F-18
Consolidated Balance Sheet - December 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . F-19
Consolidated Statement of Changes in Stockholders'
Equity - Years ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . F-21
Consolidated Statement of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 . . . . . . . . . F-22
Notes to Consolidated Financial Statements,
including Summary of Segment Operations. . . . . . F-23
Five Year Summary of Operations. . . . . . . . . . . F-58
Report of Independent Accountants. . . . . . . . . . F-59
Quarterly Financial Results. . . . . . . . . . . . . F-60
Selected Financial Data and Supplemental Data. . . . F-62
Stock Market Data. . . . . . . . . . . . . . . . . . F-63
Financial Statement Schedules:
I - Condensed Financial Information of
Registrant. . . . . . . . . . . . . . . . F-67
II - Valuation and Qualifying Accounts . . . . . F-73
III - Real Estate and Accumulated Depreciation . . F-74
IV - Mortgage Loans on Real Estate. . . . . . . . F-75
All other schedules are omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Separate financial statements for 50% or less owned companies
accounted for by the equity method have been omitted because each
such company does not constitute a significant subsidiary.
F-1
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Introduction
- ------------
For the year ended December 31, 1996 the Company had net
earnings of $18.7 million compared to $18.0 million in 1995.
Revenue and earnings were significantly impacted in 1996 by the
receipt of $156.4 million from TRW Inc. (TRW) in satisfaction of
the court's judgment relating to the Company's airbag royalties
dispute and certain other matters. Earnings in 1996 also include
an $85.0 million provision for reserves on real estate as a result
of the Company's change in strategy for exiting the real estate
business. The results of operations in 1996 also includes a $12.1
million extraordinary loss from the early extinguishment of
substantially all of the Company's 12.25% Senior Discount
Debentures.
Revenues in 1996 were $502.7 million, compared to $385.3
million in 1995. Increases in revenues from the Company's Airbag
Royalties segment were partially offset by decreases in revenues
from the Stainless Steel Products segment. The reduction in
Stainless Steel Products segment revenue is primarily associated
with lower selling prices as a result of competitive pressures from
domestic and foreign suppliers.
The gross profit percentage on sales and services (exclusive of
airbag and other royalties) decreased from 23.4% in 1995 to 17.9%
in 1996. The decrease is primarily due to $10.7 million in non-
recurring writedowns of inventory and other cost of sales items and
is also due in part to lower margins on sales in the Stainless
Steel Products segment.
Revenue for the year ended December 31, 1995 increased $57.5
million when compared with 1994. Net earnings of $18.0 million in
1995 compares with a net earnings of $3.5 million in 1994. The
gross profit percentage decreased from 24.1% in 1994 to 23.4% in
1995, primarily due to completion in 1994 of certain non-recurring
high margin defense contracts.
Segment Operations
- ------------------
The disposition of the assets of the Realty Segment, the
settlement of the dispute with TRW regarding, among other matters,
royalties from the Airbag Royalty segment, and the cessation of
such royalties along with the significant increase during the last
F-2
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Segment Operations, continued
- -----------------------------
several years in the volume and profitability of the Company's
stainless steel operations has prompted a reclassification of the
Company's segments of operations. The steel operations have been
segregated into a separate Stainless Steel Products segment and
removed from the Industrial Products segment. The Specialty
Products segment has been combined with those operations remaining
in the Industrial Products segment. All prior periods have been
restated to reflect the reclassification.
Government Products and Services
- --------------------------------
Revenue from the Government Products and Services segment in
1996 increased $8.1 million or 5.8% compared with 1995. Operating
income decreased $3.2 million or 30.9%. The increase in revenue is
primarily the result of increased service revenues from the
Company's naval architectural and marine engineering services
business. The decrease in operating income resulted primarily from
a $3.9 million non-recurring charge in the third quarter regarding
defense contract costs and claims along with increased levels of
research and development. Short-term earnings in this segment are
expected to be impacted by above normal levels of airbag research
and development cost. Benefits from this effort are expected as
soon as 1998.
The Company has experienced a reduction in some defense contract
revenue and has not been fully excluded from the effects of defense
budget cuts. However, management believes that its defense
businesses are relatively well-positioned within their respective
markets and are focused on products consistent with the current
military philosophy, which emphasizes "smart", tactical weapons
and lighter, more mobile fighting forces. In addition, management
is emphasizing non-military products to lessen the Company's
dependency on government contracts.
Revenue and operating income for the year ended December 31,
1995 decreased by $1.5 million and $8.0 million, respectively, when
compared with 1994. The decrease in revenue and operating income
F-3
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Government Products and Services, continued
- -------------------------------------------
resulted primarily from the overall reduction in U.S. defense
spending and the completion of certain non-recurring contracts and
certain contract delays.
Airbag Royalty
- --------------
Revenue from airbag royalties increased from $24.0 million
in 1995 to $121.9 million in 1996. Revenue in the current year
includes a portion of the payments received from TRW Inc. to settle
the airbag royalties litigation that had been in dispute for
several years. Remaining portions of the $156.4 million TRW
payments represent reimbursement of litigation costs and interest
from the date of the award until paid, and the settlement of
certain other claims between the Company and TRW.
The third quarter payments from TRW with respect to the airbag
royalties litigation represented the jury's calculation of the
present value of the remaining stream of airbag royalties which
would have been payable by TRW through April 2001 in accordance
with the Airbag Royalty Agreement, plus interest at the default
rate specified by the Airbag Royalty Agreement (prime plus 5%),
less the quarterly payments made by TRW pursuant to the District
Court's order during the pendency of the appeal. The settlement
payment resolved all claims and disputes between the Company and
TRW Inc. (See also "Litigation-TRW Inc." as a separate caption
within Management's Discussion and Analysis of Financial Condition
and Results of Operations).
Royalty income from automotive airbags increased from $17.3
million in 1994 to $24.0 million in 1995.
Stainless Steel Products
- ------------------------
The Stainless Steel Products segment had a decrease in revenue
of $9.4 million, or 6.5%, and a decrease in operating income of
$8.7 million in 1996 when compared to 1995. The decrease in
revenue and operating income is primarily related to the
competitive pressures from domestic and foreign suppliers in the
F-4
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Stainless Steel Products, continued
- -----------------------------------
cyclical stainless steel business and accordingly, resulted in
lower selling prices and consequently lower margins. The decrease
in operating income is also due to a $1.9 million non-recurring
writedown in goodwill during 1996. Revenue and operating income,
while below 1995 results, are at a level above historical
performance levels.
In 1995, revenue and operating income for this segment
increased $47.8 million and $13.0 million, respectively, when
compared to 1994. The increases were due primarily to the
increased orders and higher selling prices for stainless steel bars
and rods resulting from an improved national economy, a reduction
in the number of competitors and improved market share.
Industrial Products
- -------------------
Revenue of $74.0 million for the Industrial Products segment
was approximately equal to revenue in 1995, however, operating
income decreased $11.8 million in 1996 when compared to 1995. The
decrease in operating income is primarily a result of a $9.1
million non-recurring inventory and goodwill writedown. Also
contributing to the decrease in operating income is a general slow-
down in the apparel industry, which decreased button sales, and the
effects of the weather which has impacted insecticide sales.
In 1995, revenue and operating income for this segment
increased $9.4 million and $2.4 million, respectively, when
compared to 1994. The increases resulted from higher sales of
ceramic insulators and the acquisition of a manufacturer of metal
buttons in mid 1994.
Realty
- ------
In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
resolution of the airbag royalty dispute and after receiving
payments in connection therewith in the third quarter of 1996, and
also in view of the slower than expected improvement in the market
F-5
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Realty, continued
- -----------------
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 Company plans to dispose of
the single property not included in this bulk sale. Sales in the
Realty segment were $22.8 million in 1996, $2.2 million in 1995 and
$7.2 million in 1994. The operating loss increased from $11.4
million in 1995 to $88.5 million in 1996 due primarily to the $85.0
million provision for reserve on realty assets.
Other Matters
- -------------
In 1996, other income, net of other expenses was a net income
of $16.3 million, compared to a net expense of $3.6 million in 1995
and $3.0 million in 1994. The $19.9 million increase in income is
primarily the result of interest income earned on the TRW Inc.
litigation proceeds, earned from the date of the award until paid,
and also earned on invested funds upon receipt. In 1995 and 1994
the other income, net of expense, included as the major component,
expenses incurred in connection with holding and developing real
estate properties. These expenses were $3.6 million in each of the
years 1995 and 1994, and are included in the Realty segment
operating results. Corporate overhead was $18.8 million in 1996,
$15.5 million in 1995 and $17.2 million in 1994. The amounts in
1995 and 1994 are above normal levels due to litigation costs in
1995 of approximately $5.0 million, and in 1994 of approximately
$6.0 million related to resolution of claims in connection with
airbag royalties. Corporate expenses in 1996 include an increase
F-6
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Other Matters, continued
- ------------------------
in employee benefit costs and also include litigation cost incurred
in connection with the airbag royalties litigation. Litigation
costs were fully offset by reimbursement of these costs, which were
received upon settlement of the litigation in the third quarter.
Due to an unrecognized federal tax carryforward benefit,
primarily the result of losses in the Company's Realty segment, the
Company has had no federal tax provision in 1996, 1995 and 1994.
The income tax provision for 1996 was $1.8 million compared to a
provision of $3.4 million in 1995.
The Company's backlog of funded government contracts and firm
industrial orders was approximately $137.1 million as of December
31, 1996 and $133.5 million as of December 31, 1995. The
government backlog, including funded and unfunded components and
firm industrial contracts at December 31, 1996 and 1995 totaled
$447.7 million and $503.3 million, respectively.
The term "funded" used herein refers to the aggregate revenue
remaining to be earned at a given time under (i) contracts held by
the Company (excluding renewals or extensions thereof, which are at
the discretion of the customer) to the extent of the funded (i.e.,
appropriated by Congress and allotted to the contract by the
procuring Government agency) amounts thereunder, and (ii) "task
orders" or "delivery orders" issued to the Company under contracts
which provide that the customer is obligated to pay only for
services rendered pursuant to specific funded task orders and is
not obligated to issue additional task orders or to pay the
estimated total contract price. The term "unfunded" used herein
refers to the portion of the Company's total backlog that
represents the excess of the stated value of the Company's executed
contracts over the amounts funded by the customer for such
contracts including unexercised options.
Substantially all operations of the Company are located within
the United States. The Company operates a steel distribution
system in Canada which had sales in 1996 of $15.2 million or 3.0%
of consolidated revenue and earnings before income taxes of $0.7
million.
F-7
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Other Matters, continued
- ------------------------
Foreign exchange gains and losses for each of the last three
years have not been material. The general lack of inflationary
pressures in areas where the Company and its subsidiaries operate
also limited the impact of changing prices on the Company's sales
and income from operations for the three years ended December 31,
1996.
Recently Issued Accounting Standards
- ------------------------------------
In October 1994 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation," which is effective for
transactions entered into in fiscal years that begin after December
15, 1995. Under the provisions of this new pronouncement, the
Company is required to account for such transactions under the
"fair value" based method or the "intrinsic value" based method.
Under the "fair value" based method, compensation cost is measured
at the grant date, based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Under the "intrinsic value" based method, (present
accounting), compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date,
over the amount an employee must pay to acquire the stock. For
stock options, fair value is determined using an option-pricing
model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividend on it, and the
risk-free interest rate over the expected life of the option.
Certain pro-forma disclosures are required when a Company uses the
"intrinsic value" based method instead of the "fair value" based
method. The Company presently accounts for stock based
compensation in accordance with APB Opinion No. 25 "Accounting for
Stock Issued to Employees", and will continue to apply APB No. 25
for purposes of determining net income, as provided for in the
recent pronouncement. The Company has presented in the Notes to
F-8
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Other Matters, continued
- ------------------------
Recently Issued Accounting Standards, continued
- -----------------------------------------------
the financial statements the pro forma and other disclosures
required by SFAS No. 123. (Also see "Stock Option Plans" under the
caption "Benefit Plans" in the Notes to Consolidated Financial
Statements).
Other pronouncements issued by the Financial Accounting
Standards Board with future effective dates are either not
applicable or not material to the consolidated financial statements
of the Company.
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0
million was entered against TRW Inc. (TRW) by the United States
District Court for the District of Arizona in June 1995 following
a jury verdict that TRW had repudiated and breached the April 1989
Airbag Royalty Agreement with the Company. The $138.0 million
damages amount represented the jury's calculation of the present
value of the remaining stream of Airbag Royalties which would have
been payable by TRW through the April 2001 scheduled expiration
date of the Airbag Royalty Agreement had TRW not breached the
Agreement. TRW appealed the judgment, and, during the pendency of
the appeal, was ordered by the District Court to continue making
quarterly payments to the Company in the same amounts as if the
Airbag Royalty Agreement had not been terminated and repudiated by
TRW. On June 19, 1996, the United States Court of Appeal for the
Ninth Circuit rejected TRW's appeal and affirmed the $138.0 million
judgment. A petition for rehearing filed by TRW with the Court of
Appeals was denied on July 30, 1996.
In August 1996 TRW made payments aggregating approximately
$133.1 million to the Company on account of TRW's obligations under
the judgment. The payments represented the $138.0 million face
amount of the judgment award, plus interest at the default rate
F-9
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================
Other Matters, continued
- ------------------------
Litigation - TRW Inc., continued
--------------------------------
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.
Litigation - Arizona Department of Revenue
------------------------------------------
The Arizona Department of Revenue issued Notices of Correction
of Income Tax dated March 17, 1986 to the Company for the fiscal
year ending March 31, 1983. These Notices pertain to whether
subsidiaries of the Company must file separate income tax returns
F-10
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters, continued
- ------------------------
Litigation - Arizona Department of Revenue, continued
-----------------------------------------------------
in Arizona rather than allowing the Company to file on a
consolidated basis. The amount of additional Arizona income tax
alleged to be due as a result of the Notices of Correction was
approximately $0.4 million plus interest. In May 1992 the Arizona
Tax Court granted judgment in favor of the Company and against the
Department on all claims asserted against the Company. In October
1992 the Tax Court entered judgment in favor of the Company
awarding the Company approximately $0.6 million for the Arizona
income taxes the Company overpaid for its fiscal year ending March
31, 1983 together with interest and attorneys' fees.
In September 1994, the Arizona Court of Appeals reversed the
1992 Arizona Tax Court ruling that entitled the Company to file a
combined tax return in the State of Arizona for the fiscal year
ended March 31, 1983, and in April 1995, the Supreme Court of the
State of Arizona denied the Company's Petition for Review. Based
on the appellate court decision, the Company in 1995 paid
approximately $1.3 million in taxes and interest for the period
ending March 31, 1983. On October 15, 1996 the Company made a
payment of $4.8 million to resolve the dispute for the periods
ending December 31, 1984 and 1985. Legislation adopted in 1994 in
Arizona specifically allows companies to file combined tax returns
in Arizona for periods from January 1, 1986.
Environmental
-------------
A subsidiary of the Company has been named as a potentially
responsible party by the Environmental Protection Agency ("EPA")
under the Comprehensive Environmental Response Compensation and
Liability Act in connection with the remediation of the Beacon
Heights Landfill in Beacon Falls, Connecticut. Management's review
indicates that the Company sent ordinary rubbish and off-
specification plastic parts to this landfill and did not send any
F-11
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Other Matters, continued
- ------------------------
Environmental, continued
------------------------
hazardous wastes to the site. A coalition of potentially
responsible parties has entered into consent decrees with the EPA
to remediate the site. The coalition has in turn brought an action
against other potentially responsible parties, including a
subsidiary of the Company, to contribute to the cleanup costs. The
federal district court hearing the case dismissed claims against
the subsidiary. However, in November 1996 the Second Circuit Court
of Appeals reversed the district court's ruling and remanded the
case for trial. Based upon management's review and the status of
the proceedings, management believes that any reasonably
anticipated losses from this claim will not result in a material
adverse impact on the results of operations or the financial
position of the Company.
The current owner of a site in Athens, Georgia is conducting
an informal investigation of alleged groundwater contamination. A
subsidiary of the Company was an owner of the site until March
1988, and is cooperating with the investigation. The Georgia
Environmental Protection Division made a determination in 1995 that
the site should be listed on its Hazardous Site Inventory. No
lawsuit or administrative enforcement proceedings have been
initiated in this matter. Based on remediation estimates received,
management believes that any reasonably anticipated losses from the
alleged contamination will not result in a material adverse impact
on the results of operations or the financial position of the
Company.
Liquidity and Capital Resources
- -------------------------------
In October 1993, the Company 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,
F-12
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
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 of $60.0 million
with institutional lenders.
Borrowings under the secured credit facility may not exceed
the collateral base as defined in the governing credit agreement.
The facility consists of a five-year revolving credit facility of
up to $40.0 million and a five-year $20.0 million term loan
facility. At December 31, 1996 availability under the total
facility was approximately $52.0 million, of which approximately
$12.0 million was borrowed.
The Company anticipates that the present capital structure
will support the long-term growth of the Company's core businesses.
A substantial portion of the proceeds received from the sale of the
assets of the real estate operations and from TRW, which resulted
from the recent airbag royalty litigation settlement, have been
used to reduce the Company's total indebtedness.
As a holding company with no significant operating or income-
producing assets beyond its stock interests in Talley Manufacturing
and the subsidiaries holding its remaining real estate operations
(a single California property), the Company will be dependent
primarily upon distributions from those subsidiaries in order to
meet its debt service and other obligations. The Company will be
entitled to receive certain distributions from Talley Manufacturing
(absent certain defaults under Talley Manufacturing indebtedness)
until the end of 1998, to be used to fund certain carrying and
other costs associated with the disposition of the Company's real
estate assets. The Company is required to use certain funds
received from Talley Manufacturing and certain funds from real
estate sales to make offers to redeem the Company's Senior Discount
Debentures. Such funds have been used to redeem all but $2.1
million of the Debentures as of December 31, 1996.
F-13
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
Because the cash available to the Company is required to be
used for these specific purposes, and because certain debt
covenants limit the Company's ability to incur additional
indebtedness, the Company will be dependent upon the payment of
dividends from Talley Manufacturing (which payments will generally
be limited by debt covenants of Talley Manufacturing) and to future
sales of equity securities as its primary sources of discretionary
liquidity. Nevertheless, and particularly in light of the absence
of requirements for the Company to make cash payments of interest
on its Senior Discount Debentures until April 15, 1999, and the
amount of outstanding Senior Discount Debentures, after the
repurchases discussed below, and due to the unallocated portion of
excess royalties that resulted from the recent airbag litigation
settlement, which are now available, the Company believes that
funds will be available in sufficient amounts, and at the required
times, to permit the Company to meet its obligations.
At December 31, 1996, the Company had $48.8 million in cash
and cash equivalents and net working capital of $106.5 million.
Cash generated from operating activities for the year ended
December 31, 1996 was $172.7 million. The higher than normal cash
generation primarily reflects settlement proceeds of $156.4 million
from TRW Inc., $16.0 million net proceeds from sale of real estate
assets, and a $16.6 million reduction in accounts receivable. Cash
generated from operations during 1995 was $14.5 million. Cash used
in investing activities during the year ended December 31, 1996 was
$10.3 million, consisting primarily of assets purchased as a part
of a product line acquisition, and capital expenditures. Cash used
in financing activities of $124.1 million reflects a reduction in
long-term debt due primarily to the repurchase of substantially all
of the Company's Senior Discount Debentures and a reduction in the
Company's revolving debt facility.
During 1996, the Company repurchased $124.0 million aggregate
principal amount of the Senior Discount Debentures with an
accreted value of $97.4 million. The purchase price of the
F-14
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
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.
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 the Series B Preferred
stock and approximately 106,000 shares in connection with the
conversion of Series A Preferred stock was approximately 948,000
and 56,000 more shares than issuable under the original 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.
F-15
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Liquidity and Capital Resources, continued
- ------------------------------------------
On December 2, 1996, the Company paid all dividend arrearages
on its Series A and Series B Preferred stock. Dividend arrearage
on the Series A Preferred stock of $6.05 per share and on the
Series B Preferred stock of $5.50 per share were paid on December
2, 1996 to holders of record at the close of business on November
18, 1996. Total payment of the dividend arrearage was
approximately $4.2 million. The Company also resumed quarterly
dividend payments on its Series A and Series B Preferred 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, in 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 Common shares repurchased
was 277,300 shares for a total cost of approximately $2.1 million.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this
Annual Report contain forward-looking statements that are based on
current expectations, estimates and projections about the
industries in which the Company operates. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions
are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
F-16
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
===============================================================
Forward-Looking Statements, continued
- -------------------------------------
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely, cost effective
basis; the mix of products/services; the achievement of lower costs
and expenses; domestic and foreign governmental and public policy
changes including environmental regulations; protection and
validity of patent and other intellectual property rights; reliance
on large customers; the cyclical nature of certain of the Company's
businesses; the outcome of pending and future litigation and
governmental proceedings and continued availability of financing,
and financial resources in the amounts, at the times and on the
terms required to support future business. In addition, such
statements could be affected by general industry and market
conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange
rate fluctuations and other factors.
F-17
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Earnings
Years Ended December 31, 1996 1995 1994
- -------------------------------------------- ------------------------------------------
<S> <C> <C> <C>
Sales $309,169,000 $301,296,000 $249,201,000
Services 70,315,000 58,821,000 59,989,000
Royalties 123,214,000 25,169,000 18,570,000
- -------------------------------------------- ------------ ------------ ------------
502,698,000 385,286,000 327,760,000
- -------------------------------------------- ------------ ------------ ------------
Cost of sales 249,307,000 224,236,000 182,415,000
Cost of services 62,258,000 51,485,000 52,314,000
Selling, general and administrative expenses 64,393,000 63,297,000 62,763,000
Provision for reserve on realty assets 85,000,000 7,000,000 -
- -------------------------------------------- ------------ ------------ ------------
460,958,000 346,018,000 297,492,000
- -------------------------------------------- ------------ ------------ ------------
Earnings from operations 41,740,000 39,268,000 30,268,000
Other income (expense), net 16,295,000 (3,629,000) (2,978,000)
- -------------------------------------------- ------------ ------------ ------------
58,035,000 35,639,000 27,290,000
Interest expense 25,406,000 28,666,000 28,089,000
- -------------------------------------------- ------------ ------------ ------------
Earnings (loss) before income taxes and
extraordinary gains (loss) 32,629,000 6,973,000 (799,000)
Income tax provision (benefit) 1,836,000 3,418,000 (4,305,000)
- -------------------------------------------- ------------ ------------ ------------
Earnings before extraordinary gains (loss) 30,793,000 3,555,000 3,506,000
Extraordinary gains (loss), net of
income taxes (12,052,000) 14,409,000 -
- -------------------------------------------- ------------ ------------ ------------
Net earnings $ 18,741,000 $ 17,964,000 $ 3,506,000
============================================ ============ ============ ============
Earnings applicable to common shares
(after deduction of preferred stock
dividends and value of induced conversion) $ 5,608,000 $ 15,801,000 $ 1,339,000
============================================ ============ ============ ============
Earnings per share of common stock
and common stock equivalents:
Before extraordinary gains (loss) $ 2.13 $ .25 $ .13
Extraordinary gains (loss) (.87) 1.03 -
Value of induced conversion (.86) - -
- -------------------------------------------- ------------ ------------ ------------
Net earnings $ .40 $ 1.28 $ .13
============================================ ============ ============ ============
Weighted average shares outstanding 13,913,000 14,001,000 10,412,000
============================================ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-18
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996 1995
- --------------------------------- ------------ ------------
ASSETS
Cash and cash equivalents $ 48,758,000 $ 10,475,000
Accounts receivable, net of
allowance for doubtful accounts
of $925,000 in 1996 and
$1,275,000 in 1995 53,090,000 69,453,000
Inventories 64,684,000 67,191,000
Deferred income taxes 3,660,000 1,200,000
Prepaid expenses 6,100,000 8,296,000
- --------------------------------- ------------ ------------
Total current assets 176,292,000 156,615,000
Realty assets - 104,964,000
Long-term receivables, net 6,517,000 10,113,000
Property, plant and equipment,
at cost, net of accumulated
depreciation of $98,588,000
in 1996 and $92,395,000 in 1995 49,324,000 48,760,000
Intangibles, at cost, net of
accumulated amortization of
$18,313,000 in 1996 and
$16,985,000 in 1995 41,965,000 43,969,000
Deferred charges and other assets 6,287,000 8,178,000
- --------------------------------- ------------ ------------
Total assets $280,385,000 $372,599,000
================================= ============ ============
F-19
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
December 31, 1996 1995
- -------------------------------------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 5,160,000 $ 3,734,000
Current maturities of realty debt 362,000 2,155,000
Accounts payable 20,116,000 22,473,000
Accrued expenses 44,189,000 32,851,000
- -------------------------------------------- ------------- ------------
Total current liabilities 69,827,000 61,213,000
Long-term debt 123,185,000 227,736,000
Long-term realty debt - 7,980,000
Deferred income taxes 2,179,000 7,437,000
Other liabilities 10,708,000 9,899,000
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000; shares issued:
Series A - 14,000 shares
(67,000 in 1995) ($345,000
involuntary liquidation preference) 14,000 67,000
Series B - 750,000 shares
(1,548,000 in 1995)
($14,992,000 involuntary
liquidation preference) 750,000 1,548,000
Series D - 0 shares (120,000 in 1995) - 120,000
Common stock, $1 par value, authorized
20,000,000; shares issued:
14,618,000 shares (10,053,000 in 1995) 14,618,000 10,053,000
Capital in excess of par value 79,884,000 86,035,000
Foreign currency translation adjustments (562,000) (530,000)
Accumulated deficit (20,218,000) (38,959,000)
------------------------------------------ ------------ ------------
Total stockholders' equity 74,486,000 58,334,000
------------------------------------------ ------------ ------------
Total liabilities and stockholders' equity $280,385,000 $372,599,000
========================================== ============ ============
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Changes in Stockholders' Equity
Capital in Retained
Preferred Stock Common Excess of Treasury Earnings
Series A Series B Series D Stock Par Value Stock (Deficit)
-------- ---------- ------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $71,000 $1,548,000 $120,000 $10,047,000 $86,026,000 $(471,000) $(60,429,000)
Net earnings 3,506,000
Treasury stock issued 471,000
- -------------------------------- -------- ---------- -------- ----------- ----------- ---------- ------------
Balance at December 31, 1994 71,000 1,548,000 120,000 10,047,000 86,026,000 -0- (56,923,000)
Conversion to Common stock (4,000) 4,000
Exercised stock options 2,000 9,000
Net earnings 17,964,000
- -------------------------------- -------- ---------- -------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 67,000 1,548,000 120,000 10,053,000 86,035,000 -0- (38,959,000)
Dividends - Preferred stock (4,398,000)
Common stock retirements (277,000) (1,791,000)
Stock options exercised 612,000 2,857,000
Conversion to Common stock (53,000) (798,000) (120,000) 4,008,000 (3,438,000)
Common stock issued 222,000 619,000
Net earnings 18,741,000
-------- ---------- --------- ----------- ------------ ----------- ------------
Balance at December 31, 1996 $ 14,000 $ 750,000 $ -0- $14,618,000 $ 79,884,000 $ -0- $(20,218,000)
================================ ======== ========== ========= =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statement of Cash Flows
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 10,475,000 $ 13,002,000 $ 12,194,000
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from operating activities:
Net earnings 18,741,000 17,964,000 3,506,000
Adjustments to reconcile net income to cash
flows from operating activities:
Extraordinary items 12,052,000 (14,409,000) -
Change in deferred income taxes (7,718,000) 382,000 (5,565,000)
Depreciation and amortization 8,878,000 8,443,000 9,557,000
(Gain) loss on sale of property and equipment 147,000 (62,000) (173,000)
Original discount amortization 8,639,000 10,187,000 9,024,000
Provision reserve for realty assets 85,000,000 7,000,000 -
Other 9,154,000 (7,000) 4,801,000
Changes in assets and liabilities, net of
effects of acquisitions and divestitures:
(Increase) decrease in accounts receivable 16,569,000 (13,379,000) 2,935,000
(Increase) decrease in inventories 2,507,000 (1,122,000) (93,000)
(Increase) decrease in prepaid expenses 1,941,000 (401,000) 1,769,000
Decrease in realty assets 16,030,000 5,947,000 6,036,000
Increase in other assets (3,000,000) (240,000) (587,000)
Increase (decrease) in accounts payable (2,357,000) (3,501,000) 2,353,000
Increase (decrease) in accrued expenses 5,054,000 (277,000) (1,154,000)
Decrease in other liabilities (2,124,000) (1,714,000) (722,000)
Other, net 3,151,000 (314,000) 471,000
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from operating activities 172,664,000 14,497,000 32,158,000
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from investing activities:
Purchase of assets of acquired business (4,337,000) (287,000) (5,688,000)
Purchases of property and equipment (6,752,000) (8,931,000) (3,932,000)
Reduction of long-term receivables 1,890,000 1,020,000 237,000
New long-term receivables (1,418,000) - (551,000)
Proceeds from sale of property and equipment 347,000 772,000 302,000
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from investing activities (10,270,000) (7,426,000) (9,632,000)
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 3,524,000 11,000 -
Payment of cash dividends (4,398,000) - -
Issuance of common stock 384,000 - -
Purchase of common stock (2,068,000) - -
Redemption of Discount Debentures (97,451,000) - -
Reduction in borrowings under line of credit (385,792,000) (490,361,000) (399,918,000)
Other reductions in debt (3,734,000) (4,215,000) (2,209,000)
Repayment of realty debt (9,790,000) (6,593,000) (2,145,000)
Proceeds from borrowings under line of credit 375,214,000 491,560,000 382,554,000
- --------------------------------------------------- ------------ ------------ ------------
Cash flows from financing activities (124,111,000) (9,598,000) (21,718,000)
- --------------------------------------------------- ------------ ------------ ------------
Net increase(decrease) in cash and cash equivalents 38,283,000 (2,527,000) 808,000
- --------------------------------------------------- ------------ ------------ ------------
Total cash and cash equivalents at end of year $ 48,758,000 $ 10,475,000 $ 13,002,000
=================================================== ============ ============ ============
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-22
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of
the Company and its majority-owned domestic and foreign
subsidiaries. Real estate joint ventures that are majority owned
and under the control of the Company are also included in the
consolidated accounts of the Company. All unconsolidated companies
are reflected in the financial statements on the equity basis. All
material intercompany transactions have been eliminated.
Nature of Operations:
Talley Industries, Inc. is a diversified manufacturer of a wide
range of proprietary and other specialized products for defense,
industrial and commercial applications. Through its Government
Products and Services segment, the Company manufactures an
extensive array of propellant devices and electronic components for
defense systems and commercial applications and provides naval
architectural and marine engineering services. The vast majority
of the Government Products and Services are for U.S. Defense and
are smaller components of larger units and systems that are
generally designed to enhance safety or improve performance. The
Company participates in the expanding market for automotive
airbags, historically through a royalty agreement and currently
through developing new airbag technologies. The Company's
Stainless Steel Products segment manufactures and distributes
stainless steel rods and bars and other stainless steel products.
The Company's Industrial Products segment manufactures and sells
high-voltage ceramic insulators used in power transmission and
distribution systems, and specialized welding equipment and
systems, aerosol insecticides, air fresheners and sanitizers, and
custom designed metal buttons. During 1996, the Company sold all
but one of its real estate properties which were a part of the
Realty segment. Substantially all of the Company's facilities are
located in and provide sales and services to the United States and
Canada.
F-23
<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Accounting Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
Cash equivalents, which consist primarily of commercial paper and
money market funds, are stated at cost plus accrued interest, which
approximates market.
Inventories:
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method for substantially all
commercial inventories. Costs accumulated under government
contracts are stated at actual cost, net of progress payments, not
in excess of estimated realizable value.
Revenue Recognition:
Sales are generally recorded by the Company when products are
shipped or services performed. Sales under government contracts
are recorded when the units are shipped and accepted by the
government or as costs are incurred on the percentage-of-completion
method. Applicable earnings are recorded pro rata based upon total
estimated earnings at completion of the contracts. Anticipated
future losses on contracts are charged to income when identified.
Airbag royalties are recognized on an accrual basis, based on
production of airbag units by the licensee and production and sales
of automobiles for airbag units not produced by the licensee.
F-24
<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Property and Depreciation:
Property, plant and equipment are recorded at cost and
include expenditures which substantially extend their useful lives.
Expenditures for maintenance and repairs are charged to earnings as
incurred. With the exception of items being depreciated under
composite lives, profit or loss on items retired or otherwise
disposed of is reflected in earnings. When items being depreciated
under composite lives are retired or otherwise disposed of,
accumulated depreciation is charged with the asset cost and
credited with any proceeds with no effect on earnings; however,
abnormal dispositions of these assets are reflected in earnings.
Depreciation of plant and equipment, other than buildings and
improvements on leased land, is computed primarily by the
straight-line method over the estimated useful lives of the assets.
Depreciation of buildings on leased land and amortization of
leasehold improvements and equipment are computed on the
straight-line method over the shorter of the terms of the related
leases or the estimated useful lives of the buildings or
improvements. The principal estimated useful lives are: building
and improvement 10-40 years, machinery and equipment 5-10 years.
Income Taxes:
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Deferred tax liabilities and assets are determined based on
differences between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse. United States income taxes are provided on the portion of
earnings remitted or expected to be remitted from foreign
subsidiaries.
F-25
<PAGE>
Notes to Consolidated Financial Statements
Significant Account Policies, (continued)
Earnings Per Share:
Net earnings per share of Common stock and Common stock
equivalents has been computed on the basis of the average number of
Common shares outstanding during each year. The average number of
shares has been adjusted for assumed exercise at the beginning of
the year (or date of grant, if later) for any dilutive stock
options, with funds obtained thereby used to purchase shares of the
Company's Common stock at the average price during the year, and
assumed conversion of all dilutive convertible preferred stock.
Common stock equivalents that are anti-dilutive are excluded from
the computation of earnings per share and earnings are reduced by
the dividend requirements on such equivalents.
Intangibles:
The excess cost of investments in subsidiaries over the equity
in net assets at acquisition date is being amortized using the
straight-line method over periods not in excess of 40 years. The
majority of the Company's intangibles consist of goodwill, which is
the excess of cost over tangible and identifiable intangible assets
acquired. The carrying value of intangibles is evaluated
periodically in relation to the operating performance and future
cash flow of the underlying businesses.
Earnings or Loss Applicable to Common Shares:
Earnings or loss applicable to Common shares is computed by
reducing the net earnings or loss by dividends, including
undeclared or unpaid dividends, of the Company's Preferred A, B and
D stocks.
F-26
<PAGE>
Notes to Consolidated Financial Statements
Inventories
Inventories are summarized as follows:
(balances in thousands) 1996 1995
- ----------------------------------------- ------- -------
Raw material and supplies $10,995 $11,878
Work-in-process 11,564 11,222
Finished goods 26,158 28,955
Inventories substantially applicable to
fixed-price government contracts in
process, reduced by progress payments
of $7,924,000 and $5,870,000 in 1996
and 1995, respectively 15,967 15,136
- ----------------------------------------- ------- -------
$64,684 $67,191
======= =======
Realty Assets
In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
resolution of the airbag royalty dispute with TRW and after
receiving payments in connection therewith 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 an
$85,000,000 writedown in real estate assets for financial reporting
purposes. In December of 1996 all real estate properties, except
for one, were sold for cash and assumption of certain liabilities.
The Company plans to dispose of the single property not included in
this bulk sale.
Realty assets are stated at the lower of historical cost or
estimated net realizable value and include land held for sale
together with related development and carrying costs (interest and
F-27
<PAGE>
Notes to Consolidated Financial Statements
Realty Assets, (continued)
property taxes during development), and equity investments in
realty joint ventures. For financial reporting purposes, realty
assets must be carried at the lower of historical cost or estimated
net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business less estimated
costs of completion (to the stage of completion assumed in
determining the selling price), holding and disposal. The Company
accounts for and reports the value of foreclosed realty assets at
fair value less the estimated costs to sell the assets.
In 1995, non-cash Realty asset transactions included an
increase in both Realty assets and Realty debt in the amount of
$4,038,000 and $3,649,000, respectively, upon the consolidation of
a previously unconsolidated joint venture. Non-cash Realty items
in 1995 also included reductions of $4,677,000 due to forfeitures
of properties and other transactions. The value of foreclosed
assets at December 31, 1995 was $29,773,000. There were no
foreclosed assets at December 31, 1996.
Long-Term Receivables
Long-term receivables consist of the following:
(balances in thousands) 1996 1995
- -------------------------------------- -------- --------
Notes receivable, including accrued
interest and income tax refunds $ 6,640 $ 10,584
Amounts due within one year, included
in accounts receivable (123) (471)
-------- --------
$ 6,517 $ 10,113
======== ========
Long-term receivables include income tax receivables of
$5,431,000, which must be approved by the Congressional Joint
Committee on Taxation before payment will be received, and
accordingly are classified as non-current. The remaining notes
F-28
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Receivables, continued
range in length from one to fourteen years and bear interest at
December 31, 1996 at rates ranging from 8% to 10%. Payment terms
vary by note, but generally require monthly, quarterly or annual
interest and principal payments. The notes receivable balance is
net of reserves of $4,086,000 and $1,260,000 at December 31, 1996
and 1995, respectively.
Property, Plant and Equipment
Property, plant and equipment, is summarized as follows:
(balances in thousands) 1996 1995
- -------------------------------------- -------- --------
Machinery and equipment $114,020 $107,576
Buildings and improvements 31,338 30,791
Land 2,554 2,788
- -------------------------------------- -------- --------
$147,912 $141,155
======== ========
Depreciation of property, plant and equipment was $7,278,000,
$6,834,000, and $7,735,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Long-Term Debt
Long-term debt consists of the following:
(balances in thousands) 1996 1995
- -------------------------------------- -------- --------
10-3/4% Senior Notes, due 2003 $115,000 $115,000
12-1/4% Senior Discount Debentures,
due 2005 (face amount $2,553,000) 2,066 90,878
Notes, interest based on prime or
other variable market rates, due 1998 11,263 14,341
Revolving credit facilities - 10,579
Capitalized leases and other 16 672
- --------------------------------------- -------- --------
128,345 231,470
Less current maturities 5,160 3,734
- --------------------------------------- -------- --------
Long-term debt $123,185 $227,736
======== ========
F-29
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
On October 22, 1993 the Company completed a major debt
refinancing program. The Company received gross proceeds of
$70,000,000 from the issuance of Senior Discount Debentures, due
2005, which were issued to yield 12.25% (face amount of
$126,555,000). In addition, Talley Manufacturing and Technology,
Inc., ("Talley Manufacturing") a wholly owned subsidiary of the
Company, which owns all of the Company's subsidiaries (except for
the subsidiaries holding the Company's real estate operations),
issued $115,000,000 of Senior Notes, due 2003, with an interest
rate of 10.75%. Talley Manufacturing also completed a $60,000,000
secured credit facility with two institutional lenders. The gross
proceeds of the public offerings, plus an initial borrowing under
the secured credit facility, after payment of underwriting and
other fees and expenses associated with these financings, were used
to repay substantially all of the Company's previously outstanding
non-real estate related debt.
The indentures for the Senior Notes and the Senior Discount
Debentures and the loan agreement relating to the secured credit
facility contain covenants requiring specified fixed charge
coverage ratios, working capital levels, capital expenditure
limits, net worth levels, cash flow levels and certain other
restrictions including limitations on dividends and other payments
and incurrence of debt. As a holding company with no significant
operating or income-producing assets beyond its stock interests in
Talley Manufacturing and the subsidiaries holding its real estate
operations, the Company is dependent primarily upon distributions
from these subsidiaries to meet its debt service and other
obligations. Payments from the subsidiaries are generally limited
by the debt covenants of Talley Manufacturing.
Substantially all of the receivables, inventory and property,
plant and equipment of Talley Manufacturing and its subsidiaries
are pledged as collateral in connection with the secured credit
facility. In addition, the subsidiaries of Talley Manufacturing
have guaranteed Talley Manufacturing's obligations under the Senior
Notes and the secured credit facility and the Company has
guaranteed the Senior Notes on a subordinated basis. The capital
stock of Talley Manufacturing has been pledged by the Company to
secure the Senior Discount Debentures.
F-30
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
The Senior Notes mature on October 15, 2003 and Talley
Manufacturing is required to make mandatory sinking fund payments
of $11,500,000 on October 15, in each of 2000, 2001 and 2002.
Interest is payable semi-annually, having commenced April 15, 1994.
The Senior Discount Debentures mature on October 15, 2005. No
interest on the Senior Discount Debentures will be payable until
April 15, 1999, when interest will be payable semi-annually on
April 15 and October 15 of each year. In the event that certain
financial and other conditions are satisfied, the Senior Discount
Debentures require prepayments based on defined levels of airbag
royalties received and proceeds from real estate sales.
During 1996, the Company repurchased a substantial portion of
the Senior Discount Debentures through several offers and open
market purchases. Total aggregate principal amount of the
repurchased debentures was $124,002,000 with an accreted value of
$97,451,000. The Company paid a total of $105,968,000 including
accrued interest and prepayment premiums to repurchase the tendered
debentures. The Company recognized a $12,052,000 extraordinary
loss in connection with the debt extinguishment, which consists of
prepayment premiums and deferred debt cost on the extinguished
debt. During the fourth quarter of 1996, the Company reclassified
approximately $1,642,000 from interest expense to extraordinary
loss. This amount consists of prepayment premiums and deferred
debt cost incurred in the second quarter of 1996 in connection with
the repurchase of the Senior Discount Debentures.
The secured credit facility consists of a five year revolving
credit facility of up to $40,000,000 and a five year $20,000,000
term loan facility. At December 31, 1996 availability under the
facility, based on inventory and receivable levels and certain
plant and equipment, was approximately $52,000,000, of which
approximately $12,000,000 was borrowed. The five-year term
facility requires monthly amortization payments based on a seven
year amortization schedule, with the balance due upon expiration in
October 1998. The credit facility interest rate is prime plus one
half of one percent or LIBOR plus 2-3/4%, with an additional fee of
one-quarter of one percent on unused amounts under the revolving
facility.
F-31
<PAGE>
Notes to Consolidated Financial Statements
Long-Term Debt, (continued)
Aggregate maturities of long-term debt for the years ending
December 31, 1997 through December 31, 2001, are $5,160,000,
$8,185,000, $-0-, $11,500,000 and $11,500,000, respectively.
Maturities for 1997 include the balance of Senior Discount
Debentures due in 2005, since the Company plans to redeem the
balance outstanding in the coming year. Cash payments for total
interest, net of amounts capitalized, during 1996, 1995 and 1994
were $45,175,000, $16,132,000 and $16,758,000, respectively.
Accrued interest expense at December 31, 1996, 1995 and 1994 was
$2,748,000, $3,626,000 and $11,855,000, respectively. Unamortized
deferred debt issue costs at December 31, 1996, 1995 and 1994 were
$3,748,000, $8,509,000 and $9,922,000, respectively. Deferred debt
issue costs are amortized over the life of the respective debt
instruments using the straight line method. Amortization of debt
expense, including amounts related to debt reductions, in 1996,
1995 and 1994 was $4,761,000, $1,413,000 and $1,413,000,
respectively. Total capitalized lease obligations on buildings and
equipment included in long-term debt at December 31, 1996 is
$16,000, all of which is due within one year.
Realty Debt
At December 31, 1996 Realty debt consists primarily of amounts
payable in connection with the single remaining property held by
the Company's real estate operations. Of the two remaining notes,
one has no stated interest rate and the second note bears interest
at the rate of 9%, with all amounts due in 1997. Realty debt at
December 31, 1996 and 1995 was $362,000 and $10,135,000,
respectively. During 1995, the Company recognized $14,409,000 in
extraordinary gains in connection with the settlement of certain
real estate debt for less than book value.
Benefit Plans
Stock Option Plans
------------------
In April 1996, the Company's shareholders approved the "1996
Comprehensive Stock Plan of Talley Industries, Inc." (the Plan)
effective as of January 1, 1996 for key employees of the Company.
Under the Plan, 1,200,000 shares of Common stock are available for
F-32
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
issuance in connection with incentive stock options, non-qualified
stock options, stock appreciation rights, bonus stock, awards in
lieu of cash obligations and other stock-based awards. The Plan
also permits cash payments either as a separate award or as a
supplement to a stock-based award. Options may be granted at an
exercise price, in the case of an incentive stock option, of not
less than the fair market value of the shares on the date of grant,
and in the case of an option other than an incentive stock option,
of not less than 50% of the fair market value of the shares on the
date of grant. The Plan replaces the Company's 1983 Restricted
Stock Plan, the 1983 Long-Term Incentive Plan (both of which plans
have terminated) and the 1978 and 1990 Stock Option Plans. As a
result of the approval of the Plan, no further grants of options
will be made under either the 1978 or 1990 Stock Options Plans. As
of December 31, 1996 no options have been granted under the 1996
Comprehensive Stock Plan. As of December 31, 1996, outstanding
options under the 1990 and 1978 plans were 56,000 and 199,050,
respectively. The 1990 and 1978 plans require incentive stock
option prices to be no less than the market value at the date of
the grant and that all options, incentive and non-qualified, become
exercisable generally in five years, but in no case greater than
ten years from the date of grant, as specified in the individual
grants.
Information regarding these option plans for 1996, 1995 and
1994 is as follows:
1996 1995 1994
------------------- ------------------- ---------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
-------- -------- -------- -------- ---------
Options outstanding,
beginning of year 878,300 $5.46 933,925 $5.97 855,925
Options exercised (612,500) 4.36 - - -
Options forfeited (10,750) 8.00 (192,675) 9.73 (22,000)
Options granted - - 137,050 8.00 100,000
-------- ------- -------- ------- ---------
Options outstanding,
end of year 255,050 $8.00 878,300 $5.46 933,925
======== ======= ======== ======= =========
F-33
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
1996 1995 1994
Shares Shares Shares
----------- ----------- -----------
Option price range at
end of year $5.38-$9.75 $4.25-$9.75 $4.25-$9.75
----------- ----------- -----------
Option price range for
exercised shares $4.25-$8.00 - $4.25-$9.75
----------- ----------- -----------
Options available for
grant at end of year 1,200,000 360,986 200,186
----------- ----------- -----------
Weighted average fair
value of options
granted during the year - $2.61
----------- -----------
Information on the Company's fixed price stock options
outstanding at December 31, 1996 is as follows:
Remaining
Options Options Contractual Number
Outstanding Price Life Exercisable
----------- ------- ----------- -----------
83,750 $9.75 4 Years 83,750
56,000 5.38 3 Years 2,000
115,300 8.00 4 Years 16,260
------- -------
255,050 102,010
======= =======
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" at December 31, 1996. Accordingly,
no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for
awards in 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
F-34
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Stock Option Plans, continued
-----------------------------
(Balance in thousands, except per share amounts 1996 1995
- -------------------------------------------------------------------
Net earnings - as reported $18,741 $17,964
Net earnings - pro forma $18,673 $17,858
Earnings per share - as reported $ .40 $ 1.28
Earnings per share - pro forma $ .40 $ 1.27
- -------------------------------------------------------------------
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995:
dividend yield of 0%; risk-free interest rate of 6.21%; expected
volatility of 43 %, and expected lives of 5.0 years. There were no
grants of options during 1996.
In April 1996, the Company's shareholders approved the "1996
Non-Employee Director Stock Plan of Talley Industries, Inc." (the
Director Plan) effective as of January 1, 1996 for non-employee
directors of the Company. Under the Director Plan, 200,000 shares
of Common stock are available for issuance in connection with the
Annual Restricted Stock Grants or the Annual Option Grants. The
exercise price under an option will be equal to the fair market
value of the Common stock on the date of grant. At December 31,
1996, a total of 10,000 options for shares of Common stock had
been granted under the Director Plan with an option price of $7.88.
Retirement Plans
----------------
The Company and its subsidiaries have pension plans covering
a majority of its employees. Normal retirement age is 65, but
provisions are made for early retirement. For subsidiaries with
defined benefit plans, benefits are generally based on years of
service and salary levels. Contributions to the respective defined
contribution plans are based on each participant's annual pay and
age. The Company also has a retirement plan for its Board of
Directors. Benefits are payable under the plan after five years of
service upon reaching age 68, or retirement if later. Net pension
cost in 1996, 1995 and 1994 was $3,695,000, $4,132,000 and
$4,837,000, respectively.
F-35
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Retirement Plans, continued
---------------------------
The Company generally contributes the greater of the amounts
expensed or the minimum statutory funding requirements.
Pension costs for defined benefit plans include the following
components:
(balances in thousands) 1996 1995 1994
- ----------------------------- -------- -------- --------
Service cost-benefits earned
during the year $ 1,542 $ 1,138 $ 1,377
Interest cost on projected
benefit obligation 2,785 2,781 2,360
Actual return on assets (6,731) (11,377) 643
Net amortization and deferral 2,602 8,035 (3,493)
- ----------------------------- -------- -------- --------
Net pension cost $ 198 $ 577 $ 887
======== ======== ========
The following table sets forth the aggregate funded status of
defined benefit plans at December 31, 1996 and 1995:
1996 1995
------------- ----------------------------
Assets Exceed Assets Exceed Accumulated
Accumulated Accumulated Benefits
(balances in thousands) Benefits Benefits Exceed Assets
- ---------------------------- ------------- ------------- --------------
Fair value of plan assets $ 52,471 $ 45,857 $ 1,852
Projected benefit obligation (42,439) (41,955) (1,998)
- ---------------------------- ------------- ------------- -------------
Projected benefit obligation
(in excess of) less than
plan assets 10,032 3,902 (146)
Unrecognized net loss (gain) (11,356) (5,008) (175)
Unrecognized prior service
cost (234) (252) 4
Unrecognized net liability 692 520 344
Unfunded accumulated benefit
obligation - - (173)
- ---------------------------- ------------- ------------- -------------
Pension liability $ (866) $ (838) $ (146)
============================ ============= ============= =============
Accumulated benefits $ 38,035 $ 37,046 $ 1,998
Vested benefits $ 36,336 $ 35,094 $ 1,955
F-36
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Retirement Plans, continued
---------------------------
The Directors' Pension plan was unfunded with a projected
benefit obligation of $1,009,000 and $897,000 at December 31, 1996
and 1995, respectively. The net pension cost for 1996 and 1995
were $247,000 and $234,000, respectively.
Assumptions used in 1996, 1995 and 1994 to determine the
actuarial present value of plan benefit obligations were:
1996 1995 1994
---- ---- ----
Assumed discount rate 7.25% 6.5% 8.5%
Assumed rate of compensation increase 4.5% 4.5% 5.0%
Expected rate of return on plan assets 9.0% 9.0% 9.0%
Net periodic pension cost is determined using the assumptions
as of the beginning of the year. The funded status is determined
using the assumptions as of the end of the year. Assets of the
Company's pension plans consist of marketable equity securities,
guaranteed investment contracts and corporate and government debt
securities. At December 31, 1996 the total value of defined
benefit plan assets exceed total vested benefits by $16,135,000.
Effective January 1, 1984, the Company established an employee
stock purchase plan for eligible U.S. employees. Each eligible
employee who elects to participate may contribute 1% to 5% of his
or her pretax compensation from the Company. The Company
contributes an amount equal to 50% of the employee contributions.
Total Company contributions during 1996 and 1995 were $535,000 and
$502,000, respectively.
Other Postemployment Benefits
-----------------------------
Health care and life insurance benefits are presently provided
to a small number of retired employees of one of the Company's
subsidiaries. The cost of retiree health care and life insurance
benefits are minor in amount and are recognized as benefits
are paid. The Company adopted Statement of Financial Accounting
F-37
<PAGE>
Notes to Consolidated Financial Statements
Benefit Plans, (continued)
Other Postemployment Benefits, continued
----------------------------------------
Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pension" in the first quarter of 1993, as
required by the pronouncement. The transition obligation of
approximately $1,474,000 is being amortized over a 20 year period.
The amortization of the unrecognized transition obligation for the
single subsidiary affected by the new pronouncement was $72,000 in
1996. Current service costs and interest costs for 1996 were
approximately $10,000 and $99,000, respectively.
Accrued Compensation
--------------------
Accrued Compensation was $14,427,000, $10,751,000 and
$8,981,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Accrued Compensation includes accruals for vacation
pay and corporate incentives.
Capital Stock
Each share of Series A Convertible Preferred stock entitles
its holder to receive an annual cash dividend of $1.10 per share;
to convert it into .95 of a share of Common stock, as adjusted in
the event of future dilution; to receive up to $25.00 per share in
the event of involuntary or voluntary liquidation; and, subject to
certain conditions in loan agreements, may be redeemed at the
option of the Company at a price of $25.00 per share plus accrued
and unpaid dividends.
Each share of Series B $1.00 Cumulative Convertible Preferred
stock entitles its holder to receive an annual cash dividend of
$1.00 per share; to convert it into 1.31 shares of Common stock, as
adjusted in the event of future dilution; to receive up to $20.00
per share plus accrued and unpaid dividends in the event of
involuntary liquidation; to receive up to $52.50 plus accrued and
unpaid dividends per share in the event of voluntary liquidation
and, subject to certain conditions in loan agreements, may be
redeemed at the option of the Company at a price of $52.50 per
share plus accrued and unpaid dividends. Dividends on the shares
F-38
<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
of Series A and Series B Preferred stock are cumulative and must be
paid in the event of liquidation and before any distribution to
holders of Common stock.
Each share of Common stock has a preferred stock purchase
right attached, allowing the holder, upon the occurrence of a
change in control, as defined in a Rights agreement (as amended and
restated on February 2, 1996), to buy one one-hundredth of a share
of Series C Junior Participating Preferred stock at an exercise
price of $32. The Series C stock, which may be purchased upon
exercise of the Rights, is nonredeemable and junior to other series
of the Company's preferred stock. No shares of Series C stock have
been issued as of December 31, 1996.
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 at December 31, 1995. The
conversion automatically extinguished all unpaid dividends on that
stock, totaling approximately $2,600,000. The Series D Preferred
stock had been held in a voting trust agreement since its issuance
in connection with a 1988 acquisition by the Company. The Common
stock will continue to be held in the voting trust, which has been
extended under the agreement until March 2001.
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 of approximately 1,995,000 shares
were issued in connection with the conversion of the Series B
Preferred stock and approximately 106,000 shares were issued in
connection with the conversion of the Series A 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 $4,000,000 ($5 per share) on the Series B Preferred
stock and totaling approximately $300,000 ($5.50 per share) on the
F-39
<PAGE>
Notes to Consolidated Financial Statements
Capital Stock, (continued)
Series A Preferred stock at March 31, 1996. The Company has
resumed quarterly dividend payments on the Series A and Series B
Preferred stock. The ability to pay dividends in the future is
limited by the provisions of the Company's debt requirements.
The conversion transactions do not impact the net earnings of
the Company in 1996, but "earnings applicable to common shares
(after deduction of preferred stock dividends)," as supplementally
disclosed by the Company, and the "earnings per share of common
stock and common equivalent share" 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 original conversion terms have been
subtracted from net earnings in the calculations of net earnings
available to common shareholders and earnings per share.
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, in 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, total number of common shares repurchased was
277,300 shares, for a total cost of approximately $2,082,000.
At December 31, 1996 there were 3,753,000 shares of Common
stock reserved for conversion of preferred stock, for exercise of
stock options, for issuance of shares under the Employee 401(k)
Plan and for the payment of a portion of the purchase price of a
business acquisition completed in 1994.
Leases
Rental expense (reduced by rental income from subleases of
$373,000 in 1996, $441,000 in 1995 and $329,000 in 1994) amounted
to $5,142,000 in 1996, $4,770,000 in 1995 and $5,179,000 in 1994.
Aggregate future minimum rental payments required under operating
leases having an initial lease term in excess of one year for years
ending December 31, 1997 through December 31, 2001 are $4,084,000,
$3,508,000 $1,784,000, $780,000 and $524,000, respectively, with
$1,015,000 payable in future years. Minimum operating lease
payments have not been reduced by future minimum sublease rentals
of $283,000.
F-40
<PAGE>
Notes to Consolidated Financial Statements
Leases, (continued)
Aggregate future minimum payment under capital leases for the
year ending December 31, 1997 is $18,000, with no payments in later
years. The present value of net minimum lease payments is $16,000
after deduction of $2,000, representing interest and estimated
executory costs. The net book value of leased buildings and
equipment under capital leases at December 31, 1996 and 1995
amounted to $-0- and $656,000, respectively.
Income Taxes
Earnings before income taxes and extraordinary items and the
provision (credit) for income taxes consists of the following:
(balances in thousands) 1996 1995 1994
- -------------------------------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary items:
United States $ 31,899 $ 4,541 $ (2,341)
Foreign 730 2,432 1,542
- -------------------------------- -------- -------- --------
$ 32,629 $ 6,973 $ (799)
======== ======== ========
Current tax expense:
United States $ 3,768 $ 728 $ -
Foreign 350 1,154 731
State and local 5,436 1,154 530
- -------------------------------- -------- -------- --------
9,554 3,036 1,261
-------- -------- --------
Deferred tax expense (credit):
United States (3,754) (701) -
Foreign 14 25 15
State and local (3,978) 1,058 (5,581)
- -------------------------------- -------- -------- --------
(7,718) 382 (5,566)
-------- -------- --------
$ 1,836 $ 3,418 $ (4,305)
======== ======== ========
F-41
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities for 1996
and 1995 are as follows:
(balances in thousands) 1996 1995
- ---------------------------------- -------- --------
Gross deferred tax assets:
Net operating losses and tax
credit carryforward $ - $ 1,484
Reserves on realty assets 10,165 7,883
Accrued expenses 8,211 11,356
Other 3,106 2,498
Valuation allowance for
deferred tax assets (10,368) (17,664)
- ---------------------------------- -------- --------
Net deferred tax assets 11,114 5,557
- ---------------------------------- -------- --------
Gross deferred tax liabilities:
Depreciation 5,703 5,957
Accrued expenses 1,954 4,604
Other 1,976 1,233
Gross deferred tax liabilities 9,633 11,794
- ---------------------------------- -------- --------
Net deferred tax asset (liability) $ 1,481 $ (6,237)
================================== ======== ========
During the year ended December 31, 1996 the valuation
allowance for deferred tax assets decreased $7,296,000.
Approximately $6,900,000 of the reduction was related to the
deferred tax asset associated with the Company's Senior Discount
Debentures, which were substantially all redeemed in 1996,
including the amortized original issue discount, which accordingly
reduced income taxes in 1996.
Reasons for the differences between the amount of income tax
determined by applying the applicable statutory federal income tax
rate to pretax income are:
(balances in thousands) 1996 1995 1994
- ---------------------------------- -------- -------- --------
Computed tax at statutory U.S.
tax rates $ 11,095 $ 2,371 $ (272)
Effect of loss carryforwards
and valuation allowance (13,289) (1,476) (1,751)
Goodwill and other non-deductible
items 3,202 519 574
State and local taxes 1,458 2,212 (5,051)
Other (630) (208) 2,195
- ---------------------------------- -------- -------- --------
$ 1,836 $ 3,418 $ (4,305)
======== ======== ========
F-42
<PAGE>
Notes to Consolidated Financial Statements
Income Taxes, (continued)
United States income taxes have not been provided on
approximately $1,000,000 of undistributed earnings of subsidiaries
incorporated outside the United States, since it is the Company's
intent to reinvest such earnings. Net cash payments for income
taxes during 1996, 1995 and 1994 were $8,526,000, $2,676,000 and
$569,000, respectively.
Commitments and Contingencies
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0
million was entered against TRW Inc. (TRW) by the United States
District Court for the District of Arizona in June 1995 following
a jury verdict that TRW had repudiated and breached the April 1989
Airbag Royalty Agreement with the Company. The $138.0 million
damages amount represented the jury's calculation of the present
value of the remaining stream of Airbag Royalties which would have
been payable by TRW through the April 2001 scheduled expiration
date of the Airbag Royalty Agreement had TRW not breached the
Agreement. TRW appealed the judgment, and, during the pendency of
the appeal, was ordered by the District Court to continue making
quarterly payments to the Company in the same amounts as if the
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).
F-43
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Litigation - TRW Inc., continued
--------------------------------
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.
Litigation - Arizona Department of Revenue
------------------------------------------
The Arizona Department of Revenue issued Notices of Correction
of Income Tax dated March 17, 1986 to the Company for the fiscal
year ending March 31, 1983. These Notices pertain to whether
subsidiaries of the Company must file separate income tax returns
in Arizona rather than allowing the Company to file on a
consolidated basis. The amount of additional Arizona income tax
alleged to be due as a result of the Notices of Correction was
approximately $400,000 plus interest. In May 1992 the Arizona
Tax Court granted judgment in favor of the Company and against the
Department on all claims asserted against the Company. In October
1992 the Tax Court entered judgment in favor of the Company
awarding the Company approximately $600,000 for the Arizona income
taxes the Company overpaid for its fiscal year ending March 31,
1983 together with interest and attorneys' fees.
F-44
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Litigation - Arizona Department of Revenue, continued
-----------------------------------------------------
In September 1994, the Arizona Court of Appeals reversed the
1992 Arizona Tax Court ruling that entitled the Company to file a
combined tax return in the State of Arizona for the fiscal year
ended March 31, 1983, and in April 1995, the Supreme Court of the
State of Arizona denied the Company's Petition for Review. Based
on the appellate court decision, the Company paid approximately
$1,300,000 in taxes and interest for the period ending March 31,
1983. On October 15, 1996, the Company made a payment of
$4,842,000 to resolve the related dispute for the period ending
December 31, 1984 and 1985. Legislation adopted in 1994 in Arizona
specifically allows companies to file combined tax returns in
Arizona for periods from January 1, 1986, and on December 8, 1994
the Arizona Department of Revenue withdrew its assessments against
the Company for 1986 and subsequent years.
Environmental
-------------
A subsidiary of the Company has been named as a potentially
responsible party by the Environmental Protection Agency ("EPA")
under the Comprehensive Environmental Response Compensation and
Liability Act in connection with the remediation of the Beacon
Heights Landfill in Beacon Falls, Connecticut. Management's review
indicates that the Company sent ordinary rubbish and off-
specification plastic parts to this landfill and did not send any
hazardous wastes to the site. A coalition of potentially
responsible parties has entered into consent decrees with
the EPA to remediate the site. The coalition has in turn brought
an action against other potentially responsible parties, including
a subsidiary of the Company, to contribute to the cleanup costs.
The federal district court hearing the case dismissed claims
against the subsidiary. However, in November 1996 the Second
Circuit Court of Appeals reversed the district court's ruling and
remanded the case for trial. Based upon management's review and
the status of the proceedings, with respect to this matter,
management believes that any reasonably anticipated losses from
this claim will not result in a material adverse impact on the
results of operations or the financial position of the Company.
F-45
<PAGE>
Notes to Consolidated Financial Statements
Commitments and Contingencies, (continued)
Environmental, continued
------------------------
The current owner of a site in Athens, Georgia is conducting
an informal investigation of alleged groundwater contamination. A
subsidiary of the Company was an owner of the site until March
1988, and is cooperating with the investigation. The Georgia
Environmental Protection Division made a determination in 1995 that
the site should be listed on its Hazardous Site Inventory. No
lawsuit or administrative enforcement proceedings have been
initiated in this matter. Based on remediation estimates received,
management believes that any reasonably anticipated losses from the
alleged contamination will not result in a material adverse impact
on the results of operations or the financial position of the
Company.
Fair Value of Financial Instruments
The following table presents the carrying amounts and fair
values of the Company's financial instruments for which it is
practicable to estimate. Financial Accounting Standards Board
Statement No. 107 "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a force or
liquidation sale.
(balances in thousands) 1996 1995
- -------------------------- ------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash & cash equivalents $ 48,758 $ 48,758 $ 10,475 $ 10,475
Non-trade receivables 6,644 6,644 10,584 10,584
Realty debt 362 362 10,135 10,135
Other debt 128,345 131,978 231,470 238,881
F-46
<PAGE>
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments, (continued)
The following notes summarize the major methods and
assumptions used by the Company in estimating the fair values of
financial instruments.
Cash and cash equivalents
- -------------------------
The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments.
Non-trade receivables
- ---------------------
Interest rates on non-trade receivables, including the current
portion, are generally at current market rates. Accordingly the
carrying value and fair value of the receivables are equal after
considering allowances for the carrying value of certain notes.
Debt
- ----
The fair value of the Company's debt, including the current
portion, at December 31, 1996 and 1995 is based on quoted market
prices or recent market activity.
Research and Development Costs
Company-sponsored research and development costs were
$8,694,000, $4,227,000 and $4,304,000 for the years ended December
31, 1996, 1995, and 1994, respectively. The large increase in 1996
expenditures is related to the development of automotive airbag
components and a continued higher level of expenditures is
anticipated in the near future. For the same periods, customer-
sponsored research and development expenditures were $8,796,000,
$10,093,000 and $8,231,000, respectively.
Extraordinary Gains (Loss)
During 1996, the Company realized a net loss of $12,052,000
from the early paydown of the 12.25% Senior Discount Debentures.
The loss consists of prepayment premiums and deferred debt cost on
the extinguished portion of the debt. Due to the consolidated tax
position of the Company, there was no tax benefit recognized in
connection with this loss.
F-47
<PAGE>
Notes to Consolidated Financial Statements
Extraordinary Gains (Loss), (continued)
During 1995 the Company realized a net gain of $14,409,000
from the retirement of realty debt. The gain represents the
difference between the value of the debt recorded on the books of
the Company and the consideration given and costs incurred to
settle the obligation. Due to the Company's net operating tax loss
position, there is no tax provision in connection with the gain.
Acquisitions and Dispositions
In January 1996, a subsidiary of the Company acquired certain
assets of Markel, a manufacturer of a silicone wire product line.
The purchase price was approximately $4.3 million.
In July 1994, a subsidiary of the Company acquired certain
assets of the Ball and Socket Manufacturing Company, Inc., a
manufacturer of metal buttons. The purchase price was
approximately $4,800,000, including cash of $2,100,000, 323,232
shares of the Company's Common stock scheduled for issuance two
years after closing and certain liabilities assumed and acquisition
costs incurred.
The excess of cost over tangible and identifiable intangible
assets acquired, net of amortization at December 31, 1996, 1995,
and 1994 was $41,819,000, $43,392,000, and $45,716,000,
respectively.
Related Party Transactions
In each of the last three years the Company and its
subsidiaries incurred legal fees payable to the law firm of one of
the Company's directors. During 1996, 1995 and 1994 total billings
for the firm were $479,000, $249,000 and $610,000, respectively,
and were for foreign and domestic services relating to litigation
and general corporate matters. In 1996, the Company also paid
$189,000 in consulting fees and related expenses to one of the
Company's directors.
Recently Issued Accounting Standards
In October 1994 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 123
F-48
<PAGE>
Notes to Consolidated Financial Statements
Recently Issued Accounting Standards, (continued)
"Accounting for Stock-Based Compensation," which is effective for
transactions entered into in fiscal years that begin after December
15, 1995. Under the provisions of this new pronouncement, the
Company is required to account for such transactions under the
"fair value" based method or the "intrinsic value" based method.
Under the "fair value" based method, compensation cost is measured
at the grant date, based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Under the "intrinsic value" based method, (present
accounting), compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date,
over the amount an employee must pay to acquire the stock. For
stock options, fair value is determined using an option-pricing
model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividend on it, and the
risk-free interest rate over the expected life of the option.
Certain pro-forma disclosures are required when a Company uses the
"intrinsic value" based method instead of the "fair value" based
method. The Company presently accounts for stock based
compensation in accordance with APB Opinion No. 25 "Accounting for
Stock Issued to Employees", and will continue to apply APB No. 25
for purposes of determining net income, as provided for in the
recent pronouncement. The Company has presented in the notes to
the financial statements the pro forma and other disclosures
required by SFAS No. 123. (Also see "Stock Option Plans" under the
caption "Benefit Plans" in the Notes to Consolidated Financial
Statements).
Other pronouncements issued by the Financial Accounting
Standards Board with future effective dates are either not
applicable or not material to the consolidated financial statements
of the Company.
Segment Operations
The disposition of the assets of the Realty segment, the
settlement of the dispute with TRW regarding, among other matters,
royalties from the Airbag Royalty segment, and the cessation of
such royalties along with the significant increase during the last
F-49
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
several years in the volume and profitability of the Company's
stainless steel operations has prompted a reclassification of the
Company's segments of operations. The steel operations have been
segregated into a separate Stainless Steel Products segment and
removed from the Industrial Products segment. The Specialty
Products segment has been combined with those operations remaining
in the Industrial Products Segment. All prior periods have been
restated to reflect the reclassifications.
The Company is a diversified manufacturer of a wide range of
proprietary and other specialized products for defense, industrial
and commercial applications. Through its Government Products and
Services segment, the Company manufactures an extensive array of
propellant devices and electronic components for defense systems
and commercial applications and provides naval architectural and
marine engineering services. The Company has participated in the
rapidly expanding market for automotive airbags through its royalty
agreement with TRW, which provided the Company with a quarterly
royalty payment for any airbag manufactured and sold by TRW
worldwide and for any other airbag installed in a vehicle
manufactured or sold in North America. The royalties ceased upon
receipt of a settlement from TRW Inc. (See "Litigation-TRW Inc" in
Management's Discussion and Analysis of Financial Condition and
Results of Operations)
The Company is currently developing new airbag technologies -
including an improved inflator and a ceramic initiator with initial
sales for both airbag components expected in 1998.
The Company's Stainless Steel Products segment manufactures
and distributes stainless steel products, including a variety of
grades, sizes, and shapes of hot rolled and cold finished bars and
rods.
The Company's Industrial Products segment manufactures and
sells high-voltage ceramic insulators used in the power
transmission and distribution systems, specialized welding
equipment and systems, aerosol insecticides, air fresheners and
sanitizers, and custom designed metal buttons.
F-50
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Government Products and Services
The Company's Government Products and Services segment
provides a wide range of products and services for government
programs. The vast majority of the Company's products are smaller
components of larger units and systems and are generally designed
to enhance safety or improve performance. The Company manufactures
proprietary propellant products which, when ignited, produce a
specified thrust or volume of gas within a desired time period.
Propellant products manufactured include ballistic devices for
aircraft ejection systems, rocket motors, extended range munitions
components and dispersion systems.
The Company's propellant devices are currently used on
ejection seats on high performance domestic and foreign military
aircraft. Rocket motors manufactured by the Company include a
complete line of rocket boosters and propulsion systems used for
reconnaissance, surveillance, and target acquisition. The
Company's extended range munitions components utilize propellant
technologies to significantly extend the range of existing U.S.
artillery. Other electronic products include sub-miniature elapsed
time indicators, events counters, fault annunciators, and lighting
products used in aerospace and military applications to monitor
equipment performance. Naval architecture and marine engineering
services provided by the Company include detail design and
engineering services for new military and commercial construction
as well as a significant amount of maintenance and retrofit work
for existing ships.
The Company's Government Products and Services segment also
manufactures specialized electronic display and monitoring devices
and high performance cable connection assemblies.
Direct sales to the U.S. Government and its agencies,
primarily from the Government Products and Services segment
accounted for approximately 15%, 17% and 23% of the Company's sales
for the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995 the amount billed but not paid by
customers under retainage provisions in long-term contracts was
$1,205,000 and $1,212,000, respectively. The $1,205,000 receivable
F-51
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Government Products and Services, continued
under retainage provisions is expected to be collected in 1997
through 2002 in the amounts of $208,000, $174,000, $308,000,
$73,000, $172,000 and $270,000, respectively. Amounts in process
but unbilled at December 31, 1996 and 1995 were $7,305,000 and
$5,976,000, respectively.
Airbag Royalties
The Company has participated in the rapidly expanding market
for automotive airbags through its royalty agreement with TRW,
which provided the Company with a quarterly royalty payment for
any airbag manufactured and sold by TRW worldwide and for any other
airbag installed in a vehicle manufactured or sold in North
America. The royalties ceased upon receipt of a settlement from
TRW Inc. (See "Litigation-TRW Inc." in Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The Company is currently developing new airbag technologies -
including an improved inflator and a ceramic initiator with initial
sales for both airbag components expected in 1998.
Stainless Steel Products
The Company's Stainless Steel Products segment produces and
distributes stainless steel bars and rods. Demand for these
products is directly related to the level of general economic
activity.
The Company operates a mini-mill which converts purchased
stainless steel billets into a variety of sizes of both hot rolled
and cold finished bar and rod. The Company's stainless steel
mini-mill has utilized advanced computer automation, strict quality
controls, and strong engineering and technical capabilities to
maintain its position as a low cost, high quality producer. In
addition to its stainless steel manufacturing operation, the
Company distributes stainless steel and other specialty steel
products through seven locations in the U.S. and Canada.
F-52
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Industrial Products
The Industrial Products segment manufactures and distributes
high-voltage ceramic insulators for electric utilities,
municipalities and other governmental units, as well as for
electrical contractors and original equipment manufacturers.
Products include a wide array of transformer bushings and
accessories, special and standard porcelain for high and low-
voltage applications, apparatus bushing assemblies, and
transmission and distribution class insulators which are
manufactured for both domestic and international markets. In
addition, the Company manufactures specialized advanced-technology
welding systems, power supply systems and humidistats for the
utility, pipeline and original equipment manufacturer markets.
Welding equipment manufactured by the Company includes systems that
are specially designed to operate in hostile environments such as
nuclear radiation. The Company also produces aerosol insecticides,
air fresheners and sanitizers servicing the industrial maintenance
supply, pest control and agricultural markets, and custom designed
metal buttons for the military and commercial uniform and upscale
fashion markets. The majority of the Company's aerosol insecticides
are proprietary formulations of natural active ingredients.
Realty
In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the
resolution of the airbag royalty dispute and after receiving
payments in connection therewith 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 an $85,000,000 writedown in
real estate assets for financial reporting purposes. In December
of 1996 all real estate properties, except for one, were sold for
cash and assumption of certain liabilities. The Company plans to
dispose of the single property not included in this bulk sale.
F-53
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Other Matters
The Company's U.S. operations had export sales of $24,058,000,
$20,354,000 and $15,932,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
Substantially all facilities and operations of the Company's
operations are located within the United States. The Company
operates a steel distribution system located in Canada with sales
for the year ended December 31, 1996 and total assets at December
31, 1996 of $15,208,000 and $9,300,000, respectively.
Foreign exchange losses included in earnings for the years
ended December 31, 1996, 1995 and 1994 were not material. The
foreign currency translation adjustment included in stockholders'
equity decreased from $(530,000) at December 31, 1995 to $(562,000)
at December 31, 1996.
Sales between segments are not significant and have been
eliminated. Operating income is total revenue less operating
expenses and excludes general Corporate expenses, non-segment
interest income and interest expense. Interest income associated
with segment assets is included in segment operations income.
Corporate assets consist principally of cash and cash equivalents,
notes receivable, income taxes receivable and a building.
The government funded components and firm industrial contracts
at December 31, 1996 and 1995 totaled $137,100,000 and
$133,500,000, respectively. The Company's total backlog, including
funded and unfunded components, was approximately $447,700,000 as
of December 31, 1996 and $503,300,000 as of December 31, 1995.
Approximately $107,133,000 of the government funded and firm
industrial backlog and $144,627,000 of the total backlog
outstanding at December 31, 1996 is expected to be completed or
shipped during 1997.
The term "funded" used herein refers to the aggregate revenue
remaining to be earned at a given time under (a) contracts held by
the Company (excluding renewals or extensions thereof, which are at
the discretion of the customer) to the extent of the funded (i.e.,
appropriated by Congress and allotted to the contract by the
procuring Government agency) amounts thereunder, and (b) "task
orders" or "delivery orders" issued to the Company under contracts
F-54
<PAGE>
Notes to Consolidated Financial Statements
Segment Operations, (continued)
Other Matters, continued
which provide that the customer is obligated to pay only for
services rendered pursuant to specific (funded) task orders and is
not obligated to issue additional task orders or to pay the
estimated total contract price. The term "unfunded" used herein
refers to the portion of the Company's total backlog that
represents the excess of the stated value of the Company's executed
contracts over the amounts funded by the customer for such
contracts including unexercised options.
The tables which follow show assets, depreciation and
amortization and capital expenditures by segment:
(in thousands) 1996 1995 1994
- ----------------------------------------
Assets by Segment
Government Products and Services $104,480 $100,226 $ 98,424
Airbag Royalties - 5,434 4,700
Stainless Steel Products 67,331 75,082 65,397
Industrial Products 47,345 58,351 55,884
Realty 673 106,540 114,642
- ---------------------------------------- -------- -------- --------
219,829 345,633 339,047
Corporate 60,556 26,966 30,856
- ---------------------------------------- -------- -------- --------
$280,385 $372,599 $369,903
======== ======== ========
Depreciation and Amortization by Segment
Government Products and Services $ 3,779 $ 3,143 $ 3,306
Airbag Royalties - - -
Stainless Steel Products 2,589 2,608 3,354
Industrial Products 2,196 2,373 2 557
Realty 14 15 15
- ---------------------------------------- -------- -------- --------
8,578 8,139 9,232
Corporate 300 304 325
- ---------------------------------------- -------- -------- --------
$ 8,878 $ 8,443 $ 9,557
======== ======== ========
Capital Expenditures by Segment
Government Products and Services $ 2,393 $ 2,532 $ 1,820
Airbag Royalties - - -
Stainless Steel Products 2,491 3,821 999
Industrial Products 1,823 2,469 982
Realty 2 1 -
- ---------------------------------------- -------- -------- --------
6,709 8,823 3,801
Corporate 43 108 131
- ---------------------------------------- -------- -------- --------
$ 6,752 $ 8,931 $ 3,932
======== ======== ========
F-55
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Summary of Segment Operations
(in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue by segment:
Government Products and Services $147,694 $139,600 $141,074 $170,323 $183,162
Airbag Royalties 121,913 23,977 17,292 9,606 5,566
Stainless Steel Products 136,343 145,760 97,916 73,819 60,151
Industrial Products 73,954 73,723 64,321 64,380 70,684
Realty 22,794 2,226 7,157 6,072 1,155
- ----------------------------------- -------- -------- -------- -------- --------
$502,698 $385,286 $327,760 $324,200 $320,718
======== ======== ======== ======== ========
Operating income by segment:
Government Products and Services $ 7,068 $ 10,225 $ 18,194 $ 24,354 $ 26,101
Airbag Royalties 148,760 23,977 17,292 9,606 5,566
Stainless Steel Products 10,981 19,693 6,686 1,236 499
Industrial Products (3,706) 8,058 5,632 6,203 4,511
Realty (88,546) (11,436) (3,677) (4,416) (16,449)
- ----------------------------------- -------- -------- -------- -------- --------
74,557 50,517 44,127 36,983 20,228
Corporate expenses (18,771) (15,468) (17,163) (14,846) (9,672)
Non-segment interest income 2,249 590 326 381 1,923
Interest expense (25,406) (28,666) (28,089) (25,744) (31,630)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary gains (loss) $ 32,629 $ 6,973 $ (799) $ (3,226) $(19,151)
- ----------------------------------- ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Summary of Segment Operations, (continued)
Operating income in 1996 includes receipt of $156,449,000 from
TRW Inc. to settle the airbag royalties litigation and other
matters, a pretax provision for a reserve on real estate assets of
$85,000,000 and non-recurring writedowns of inventory and goodwill
totaling approximately $11,019,000. Operating income in 1995
includes a pretax provision for a reserve on real estate assets of
$7,000,000.
F-57
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Five Year Summary of Operations
(in thousands, except per share amounts)
Years Ended December 31, 1996 1995 1994 1993 1992
- -------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $502,698 $385,286 $327,760 $324,200 $320,718
Cost of sales and services 311,565 275,721 234,729 240,827 234,956
Selling, general and administrative expenses 64,393 63,297 62,763 57,877 58,669
Provision for reserve on realty assets 85,000 7,000 - - -
Adjustment in foreclosed realty assets - - - - 11,908
- --------------------------------------------- -------- -------- -------- -------- --------
460,958 346,018 297,492 298,704 305,533
- --------------------------------------------- -------- -------- -------- -------- --------
Earnings from operations 41,740 39,268 30,268 25,496 15,185
Other income (expense), net 16,295 (3,629) (2,978) (2,978) (2,706)
- --------------------------------------------- -------- -------- -------- -------- --------
58,035 35,639 27,290 22,518 12,479
Interest expense 25,406 28,666 28,089 25,744 31,630
- --------------------------------------------- -------- --------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary gains (loss) 32,629 6,973 (799) (3,226) (19,151)
- --------------------------------------------- -------- -------- -------- -------- --------
Income tax provision (benefit) 1,836 3,418 (4,305) 2,768 (1,947)
- --------------------------------------------- -------- -------- -------- -------- --------
Earnings (loss) before extraordinary
gains (loss) 30,793 3,555 3,506 (5,994) (17,204)
Extraordinary gains (loss), net of income tax (12,052) 14,409 - (504) 2,637
- --------------------------------------------- -------- -------- -------- -------- --------
Net earnings (loss) $ 18,741 $ 17,964 $ 3,506 $ (6,498) $(14,567)
============================================= ======== ======== ======== ======== ========
Earnings (loss) applicable to common shares
(after deduction of preferred stock
dividends and value of induced conversion) $ 5,608 $ 15,801 $ 1,339 $ (8,665) $(16,735)
======== ======== ======== ======== ========
Earnings (loss) per share of common stock
and common stock equivalents:
Before extraordinary gains (loss) $ 2.13 $ .25 $ .13 $ (.85) $ (2.11)
Extraordinary gains (loss) (.87) 1.03 - (.05) .29
Value of induced conversion (.86) - - - -
- --------------------------------------------- -------- -------- -------- -------- --------
Net earnings (loss) $ .40 $ 1.28 $ .13 $ (.90) $ (1.82)
============================================= ======== ======== ======== ======== ========
Weighted average shares outstanding 13,913 14,001 10,412 9,676 9,189
============================================= ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF TALLEY INDUSTRIES, INC.
In our opinion, the consolidated financial statements listed in the
index appearing on page F-1 present fairly, in all material
respects, the financial position of Talley Industries, Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 17, 1997
F-59
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Quarterly Financial Results (Unaudited)
(in thousands, except per share amounts)
Quarter Ended March June September December
- ---------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Revenue $ 95,127 $ 93,970 $202,772 $110,829
Gross profit on sales and services 19,263 19,587 8,466 20,603
Earnings (loss) before extraordinary loss 1,916 (1,831) 29,312 1,396
Extraordinary loss - (1,642) - (10,410)
- ---------------------------------------------- --------- -------- -------- --------
Net earnings (loss) $ 1,916 $ (3,473) $ 29,312 $ (9,014)
Earnings (loss) per share:
Before extraordinary loss $ .13 $ (.15) $ 1.85 $ .08
Extraordinary loss - (.12) - (.70)
Value of induced conversion (.42) (.55) - -
- ---------------------------------------------- --------- -------- -------- --------
Net earnings (loss) $ (.29) $ (.82) $ 1.85 $ (.62)
============================================== ========= ======== ======== ========
Year Ended December 31, 1995
Revenue $ 88,709 $100,306 $ 90,848 $105,423
Gross profit on sales and services 18,915 22,913 18,064 24,504
Earnings (loss) before extraordinary gain (3,887) 2,787 2,279 2,376
Extraordinary gain 7,261 542 6,244 362
- ---------------------------------------------- --------- -------- -------- --------
Net earnings $ 3,374 $ 3,329 $ 8,523 $ 2,738
============================================== ========= ======== ======== ========
Earnings (loss) per share:
Before extraordinary gain $ (.28) $ .20 $ .16 $ .17
Extraordinary gain .52 .04 .45 .02
- ---------------------------------------------- --------- -------- -------- --------
Net earnings $ .24 $ .24 $ .61 $ .19
============================================== ========= ======== ======== ========
Year Ended December 31, 1994
Revenue $ 78,317 $ 79,494 $ 81,349 $ 88,600
Gross profit on sales and services 16,327 16,758 19,408 21,968
--------- -------- -------- --------
Net earning (loss) $ (506) $ 722 $ 963 $ 2,327
============================================== ========= ======== ======== ========
Net earnings (loss) per share $ (.10) $ .02 $ .04 $ .17
============================================== ========= ======== ======== ========
</TABLE>
<PAGE>
Talley Industries, Inc. and Subsidiaries
Quarterly Financial Results (Unaudited) - continued
Results in the third quarter of 1996 reflect payments received
from TRW Inc. of $156,449,000 to settle the airbag royalties
litigation and certain other matters, and reimbursement of
litigation costs and interest from the date of the award until
paid. Also included in the third quarter of 1996 is an $85,000,000
provision for reserve on realty assets as a result of a change in
the Company's 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.
The $1,642,000 extraordinary loss in the second quarter, which
consists of premiums paid and deferred debt costs associated with
the repurchase of the Company's Senior Discount Debentures, was
reclassified from interest expense during the fourth quarter.
Included in the first quarter of 1995, is a $7,000,000
provision for reserve on realty assets resulting from the decision
to sell a property over the short term in bulk rather than pursue
parcel sales over the next several years. Also, in 1995, the
Company recognized extraordinary gains of $7,261,000, $542,000,
$6,244,000 and $362,000 during the first, second, third, and fourth
quarters, respectively. These extraordinary gains resulted from
the settlement of certain realty debt for less than book value.
Included in the first quarter of 1994 is a state income tax
benefit of $5,600,000, the result of the passage of favorable state
tax legislation.
F-61
<PAGE>
<TABLE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<CAPTION>
Financial Data
SELECTED FINANCIAL DATA
(in thousands, except ratios)
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital expenditures $ 6,752 $ 8,931 $ 3,932 $ 5,347 $ 4,592
Depreciation and amortization 8,878 8,443 9,557 10,085 10,598
Current assets 176,292 156,615 143,023 148,145 135,752
Current liabilities 69,827 61,213 88,794 84,367 75,864
Working capital 106,465 95,402 54,229 63,778 59,888
Total assets 280,385 372,599 369,903 382,438 363,822
Total debt 128,707 241,605 249,135 262,086 253,824
Long-term debt 123,185 227,736 220,447 231,669 217,304
Long-term realty debt - 7,980 5,564 11,446 12,452
Stockholders' equity 74,486 58,334 40,166 36,542 40,781
Current ratio 2.5 2.6 1.6 1.8 1.8
Debt to equity ratio 1.7 4.1 6.2 7.2 6.2
=============================== ======== ======== ======== ======== ========
For the dividends per common share see Stock Market Data on page F-64.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DATA
(in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Taxes, other than income:
Payroll $ 7,759 $ 7,231 $ 7,181 $ 7,060 $ 7,209
Property 1,406 1,991 1,660 1,557 1,721
Other 458 412 338 328 382
- ------------------------------- -------- -------- -------- -------- --------
9,623 9,634 9,179 8,945 9,312
Maintenance and repairs 6,826 6,220 4,557 4,669 4,626
Rent 5,252 5,211 5,508 5,962 7,334
Advertising 1,171 1,053 786 648 720
Research and development 8,694 4,227 4,304 3,122 3,904
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Talley Industries, Inc. and Subsidiaries
<TABLE>
Stock Market Data
<CAPTION>
SECURITIES
<S>
Two of the Company's securities are listed on the New York Stock Exchange: Common stock
(TAL) and Series B $1.00 Cumulative Preferred stock (TALB). Series A Preferred stock is
traded occasionally in the over-the-counter market. As of February 1, 1997, there were 2,547
holders of record of Talley Industries, Inc. Common stock.
<S>
The high and low sales prices of the Common and Series B Preferred stock on the New York
Stock Exchange, by quarter, for the years ended December 31, 1996 and 1995 were as follows:
Common Stock (TAL) Series B (TALB)
---------------------------------- -----------------------------------
1996 1995 1996 1995
Quarter --------------- ---------------- ----------------- ----------------
Ended High Low High Low High Low High Low
- ----------- ------ ------ ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March $8 5/8 $6 3/4 $10 1/4 $7 3/8 $17 3/4 $15 3/4 $15 1/2 $12 1/2
June 9 1/8 6 1/2 11 7 1/2 21 16 1/4 17 1/8 13 1/2
September 9 3/8 7 1/4 9 3/4 7 5/8 20 3/4 18 1/4 16 1/2 14 1/2
December 8 6 5/8 9 1/4 7 5/8 20 13 1/4 16 1/2 12 7/8
=========== ====== ====== ======= ====== ======= ======= ======= =======
</TABLE>
<PAGE>
Talley Industries, Inc. and Subsidiaries
Stock Market Data (continued)
DIVIDENDS
In December 1996 the Company paid dividend arrearages on its
Series A Preferred stock of $6.05 per share and on its Series B
Preferred stock of $5.50 per share. The Company had not paid
dividends on its Preferred shares since the first quarter of 1991.
Quarterly dividends on Series A and Series B Preferred stock are
27.5 cents and 25 cents, respectively. All outstanding Preferred
D stock were converted into Common stock during 1996. The
conversion automatically extinguished all unpaid dividends on that
stock. Dividends on Preferred D stock were paid at a quarterly
rate of $1.125 per share since first issued in the first quarter of
1988 through the first quarter of 1991. Dividends were paid on
Common stock during 1990 at a rate of 12.5 cents per share and at
a rate of 5 cents per share for the first quarter of 1991. No
dividends have been paid on Common stock since the first quarter of
1991.
REGISTRAR
ChaseMellon Shareholder Services, L.L.C., P.O. Box 469,
Washington Bridge Station, New York, New York 10033 (1-800-356-
2017).
TRANSFER AGENT
Common stock, Series A Preferred stock and Series B Preferred
stock. ChaseMellon Shareholder Services, L.L.C., P.O. Box 469,
Washington Bridge Station, New York, New York 10033 (1-800-356-
2017).
10.75% Senior Notes and 12.25% Senior Discount Debentures. Bank
One Ohio Trust Company, 100 E. Broad Street, Columbus, Ohio 43271-
0181.
FORM 10-K
A copy of Talley Industries' Annual Report on Form 10-K to the
Securities and Exchange Commission may be obtained, without charge,
by writing to the Treasurer at the Company's Executive Offices.
F-64
<PAGE>
DIRECTORS AND CORPORATE MANAGEMENT
DIRECTORS
William H. Mallender - Chairman of the Board and Chief Executive
Officer *
Jack C. Crim - President and Chief Operating Officer
Neil W. Benson - Chartered Accountant, Lewis Golden & Co. **
Paul L. Foster - Professor of Finance, Saint Joseph's
University **
Townsend Hoopes - Retired, formerly President, Association
of American Publishers, Inc. **
Fred Israel - Retired, formerly Senior Partner Israel
and Raley
Joseph A. Orlando - Independent financial consultant **
Alex Stamatakis - Chairman of the Board, Stamatakis
Industries, Inc. * **
John W. Stodder - Vice Chairman Emeritus, Jostens, Inc. *
Donald J. Ulrich - Owner and Vice Chairman, Ventura Coastal
Corporation
David Victor - Member, Osborn Maledon **
* Executive Committee Members
** Audit Committee
CORPORATE MANAGEMENT
William H. Mallender - Chairman of the Board and Chief Executive
Officer
Jack C. Crim - President and Chief Operating Officer
William E. Bonnell - Vice President - Human Resources
Mark S. Dickerson - Vice President, General Counsel and
Secretary
Kenneth May - Vice President and Controller
Daniel R. Mullen - Vice President and Treasurer
George W. Poole - Vice President - Government Relations
F-65
<PAGE>
SCHEDULE I
Page 1 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
DECEMBER 31,
--------------------
1996 1995
Assets -------- --------
Current assets:
Cash and cash equivalents $ 8,920 $ 6,883
Prepaid expenses - 296
Total current assets 8,920 7,179
Investment in and advances to affiliates 78,344 141,216
Deferred charges and other assets - 2,607
-------- --------
Total assets $ 87,264 $151,002
======== ========
See accompanying notes and the notes to the consolidated financial statements.
F-66
<PAGE>
SCHEDULE I
Page 2 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
DECEMBER 31,
--------------------
1996 1995
Liabilities and Stockholders' Equity -------- --------
Current liabilities:
Current maturities of long-term debt $ 2,066 $ -
Accounts payable 949 -
Accrued expenses 8,179 117
-------- --------
Total current liabilities 11,194 117
Long-term debt - 90,878
Other liabilities 1,584 1,673
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares
- Series A 14 67
- Series B 750 1,548
- Series D - 120
Common stock, $1 par value,
authorized 20,000,000 shares 14,618 10,053
Capital in excess of par value 79,884 86,035
Foreign currency translation adjustments (562) (530)
Retained earnings (20,218) (38,959)
-------- --------
Total stockholders' equity 74,486 58,334
-------- --------
Total liabilities and
stockholders' equity $ 87,264 $151,002
======== ========
See accompanying notes and the notes to the consolidated financial statements.
F-67
<PAGE>
SCHEDULE I
Page 3 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Selling, general and administrative
expenses $ (321) $ - $ -
-------- -------- --------
(321) - -
Other income (expense) (7,998) 417 264
-------- -------- --------
(7,677) 417 264
-------- -------- --------
Interest expense 9,044 10,643 9,486
-------- -------- --------
(16,721) (10,226) (9,222)
Income tax benefit (55,173) (9,128) (6,613)
-------- -------- --------
Earnings (loss) before earnings
of subsidiaries and
extraordinary items 38,452 (1,098) (2,609)
Extraordinary gain (loss), net of
taxes (11,495) 14,409 -
Earnings (loss) from subsidiaries (8,216) 4,653 6,115
-------- -------- --------
Net earnings $ 18,741 $ 17,964 $ 3,506
======== ======== ========
See accompanying notes and the notes to the consolidated financial statements.
F-68
<PAGE>
SCHEDULE I
Page 4 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities $ 39,173 $ 28,533 $ 12,837
Cash flows from investing activities:
(Increase) decrease in investment
in subsidiaries 54,190 (23,083) (8,372)
-------- -------- --------
Cash from investing activities 54,190 (23,083) (8,372)
-------- -------- --------
Cash flows from financing activities:
Proceeds from exercise of stock
options 3,524 11 -
Dividends paid (4,398) - -
Stock issued 384 - -
Stock repurchase (2,068) - -
Reduction of long-term debt (97,451) - -
Increase (decrease) in due
from affiliates, net 8,683 (8,788) (5)
-------- -------- --------
Cash from financing activities (91,326) (8,777) (5)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 2,037 (3,327) 4,460
Balance at beginning of year 6,883 10,210 5,750
-------- -------- --------
Balance at end of year $ 8,920 $ 6,883 $ 10,210
======== ======== ========
See accompanying notes and the notes to the consolidated financial statements.
F-69
<PAGE>
SCHEDULE I
Page 5 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
Notes to Financial Statements
The following notes supplement information provided in the notes
accompanying the consolidated financial statements.
1. Basis of Presentation
- -------------------------
Investments in and advances to affiliates represents interest
in majority-owned subsidiaries and associated companies. The
investments are accounted for on the equity method and, accordingly,
the carrying value approximates the Company's equity in the recorded
value of the underlying net assets.
In July 1993, Talley Manufacturing and Technology, Inc.
("Talley Manufacturing"), a wholly-owned subsidiary of Talley
Industries, Inc. ("Talley"), was formed. The formation of Talley
Manufacturing was in anticipation of the offering of Senior Notes by
Talley Manufacturing and Senior Discount Debentures by Talley.
Concurrently with the issuance of these securities, Talley contributed
the capital stock of its operating subsidiaries (other than its real
estate operations held for orderly sale) to Talley Manufacturing,
which also assumed a substantial portion of Talley's indebtedness and
liabilities. At the same time, Talley Manufacturing entered into a
new credit facility with certain lenders. The net proceeds from the
Senior Notes, the Senior Discount Debentures and the new credit
facility were used to repay substantially all of the indebtedness of
Talley and its subsidiaries, (other than real estate related debt)
including indebtedness assumed by Talley Manufacturing.
Upon completion of the reorganization of entities under the
common control of Talley described above and the new financing, Talley
Manufacturing owns all of the capital stock of the operating
subsidiaries of Talley (other than the real estate operations held for
orderly sale). The financial statements of Talley have been prepared
for all periods presented, giving effect to the reorganization
described above.
F-70
<PAGE>
SCHEDULE I
Page 6 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
Notes to Financial Statements
2. Long-Term Debt
- ------------------
Long-term debt consists of 12-1/4% of Senior Discount
Debentures, due 2005 with a face value of $2,553,000 and a balance at
December 31, 1996 and 1995 of $2,066,000 and $90,878,000,
respectively. Deferred debt issue costs at December 31, 1996, 1995
and 1994 were $-0-, $2,903,000 and $3,199,000, respectively. Deferred
debt issue costs are amortized over the life of the respective debt
instruments using the straight line method. Amortization of debt
expense, including amounts written off in connection with the
redemption of debentures, in 1996, 1995 and 1994 was $2,903,000,
$296,000 and $296,000, respectively.
During 1996, the parent company repurchased a substantial
portion of the Senior Discount Debentures. Total aggregate principal
amount of the repurchased debentures was $124,002,000, with an
accreted value of $97,451,000. The parent company paid a total of
$105,968,000 including accrued interest and prepayment premiums to
repurchase the tendered debentures. The parent company recognized
approximately $11,495,000 in extraordinary losses in connection with
the debt extinguishment, which consists of a prepayment premium and
deferred debt cost on the extinguished debt.
3. Income Taxes
- ----------------
The parent company and its domestic subsidiaries file a consolidated
federal income tax return. The provision for income taxes represents
the difference between amounts attributable to each subsidiary,
generally determined on a separate return basis, and the tax computed
on a consolidated basis.
4. Dividends Received
- ----------------------
The parent company received dividends from, or made contributions to
consolidated subsidiaries, unconsolidated subsidiaries and 50 percent
or less owned persons accounted for by the equity method during the
years ended December 31, 1996, 1995 and 1994 of $106,850,000,
$1,300,000 and $-0-, respectively.
F-71
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1996
(thousands)
Additions
----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- --------- ---------- ----------- ---------- ---------
Year Ended December 31, 1996:
- ----------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts - accounts
receivable $1,275 $ 158 $ - $ (508) $ 925
Reserves for notes receivable 1,260 2,826 - - 4,086
Year Ended December 31, 1995:
- ----------------------------
Allowance for doubtful
accounts - accounts
receivable $ 994 $ 406 $ - $ (125) $1,275
Reserves for notes receivable 2,358 - - (1,098) 1,260
Year Ended December 31, 1994:
- ----------------------------
Allowance for doubtful
accounts - accounts
receivable $1,091 $ 372 $ - $ (469) $ 994
Reserves for notes receivable 2,274 84 - - 2,358
Notes:
- -----
(a) Uncollectible accounts charged against reserves, net of bad debt recoveries.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
Cost Capitalized
Initial Cost to Subsequent To Gross Amount at Which
Company Acquisition Carried at Close of Period
----------------- ------------------ -------------------------------------
Bldgs and Land Carrying Bldgs and (3) (1)(2)(4)
Description Encumbrances Land Improve. Improve. Costs Land Improve. Reserve Total
- ----------------------------- ------------ -------- --------- ------- --------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Las Montanas $ 353 $ 11,618 $ 0 $28,554 $ 8,079 $48,251 $ 0 $(48,251) $ 0
- ------------
(Resort & Residential - CA)
Collateralized credit lines 9 0 0 0 0 0 0 0 0
------- -------- ----- ------- ------- ------- ---- -------- ---------
$ 362 $ 11,618 $ 0 $28,554 $ 8,079 $48,251 $ 0 $(48,251) $ 0
======= ======== ===== ======= ======= ======= ==== ======== =========
Accum. (5) Date of Date Dep.
Deprec. Constr. Acquired Life
--------- ------- -------- -------
Las Montanas N/A N/A Various N/A
- ------------
(Resort & Residential - CA) Collateralized credit lines
NOTES:
- -----
(1) CARRYING COSTS - RECONCILIATION OF BEGINNING AND ENDING BALANCE:
Years Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
BALANCE JANUARY 1 $104,964 $110,899 $117,869
ADDITIONS
Full consolidation of previously unconsolidated joint ventures - 4,238 -
DEDUCTIONS
Cost of Real Estate sold (19,964) (3,173) (5,973)
Property given in exchange - - (997)
Increase in reserve (85,000) (7,000) -
-------- -------- --------
BALANCE DECEMBER 31 $ 0 $104,964 $110,899
======== ======== ========
(2) The total aggregate cost for income tax purposes is $15,000.
(3) Writedown to net realizable or fair value.
(4) There were no intercompany profits recognized in connection with above listed properties.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE IV
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Mortgage Loans on Real Estate
December 31, 1996
(In thousands)
Principal Amount of
Periodic Face Amount Carrying(a)(c) Loans Subject to
Interest Payment Prior of Amount of Delinquent Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
- ----------------------- -------- --------- --------- ------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Georgia/Canada
Commercial properties
with buildings - 2nd
Mortgage 9.5% Mar 1995 (b) - $3,829 $ -0- This amount represents
a receivable which is
Arizona in default.
Unimproved commercial
properties - 1st Jul 1997-
Mortgage 8%-10% Jul 2011 (b) - 538 285
------ ------
$4,367 $ 285
====== ======
Notes:
(a) Carrying amount of mortgages reconciliation of beginning and ending balances:
Years Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance January 1, $ 3,681 $ 6,028 $ 5,839
Additions
New mortgage loans - principal 1,418 - 501
Deductions
Collections of principal (1,890) (1,020) (237)
Net change in accrued interest (6) - (48)
Exchange of notes for other assets
or in settlement of debt (89) (1,327) -
Change in reserves (2,829) - (27)
------- ------- -------
Balance December 31, $ 285 $ 3,681 $ 6,028
======= ======= =======
(b) Payment terms vary by note, but generally require monthly, quarterly or annual interest and principal payments.
(c) The income tax basis of these notes at December 31, 1996 is $4,371. All loans are of the conventional type.
</TABLE>
<PAGE>
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation as presently in
effect, a copy of which was attached as Exhibit 2 of
Registrant's current report on Form 8-K for the month of
July, 1976, incorporated herein by this reference.
3.2 Certificate of Amendment of Certificate of Incorporation
dated May 22, 1987, attached as Exhibit 3 to the
Company's Form 10-Q for the quarter ended March 31, 1988,
incorporated herein by this reference.
3.3 By-laws of Registrant as amended March 9, 1993, attached
as Exhibit 3.3 to the Company's Form 10-K for the year
ended December 31, 1992, incorporated herein by this
reference.
4.1 Amended and Restated Rights Agreement between the
Registrant and Chemical Mellon Shareholder Services,
L.L.C., successor to Manufacturers Hanover Trust Company
of California, as Rights Agent, dated as of April 30,
1986, and amended as of July 21, 1986 and further amended
and restated as of February 2, 1996, specifying the terms
of the Rights (the " Amended Rights Agreement"), attached
as Exhibit 2.4 to the Company's Form 8-A dated February
2, 1996, incorporated herein by this reference.
4.2 Certificate of Designations for Registrant's Series C
Junior Participating Preferred stock (Exhibit A to the
Amended Rights Agreement), attached as Exhibit 2.5 to the
Company's Form 8-A dated February 2, 1996, incorporated
herein by this reference.
4.3 Form of Right Certificate (Exhibit B to the Amended
Rights Agreement), attached as Exhibit 1.1 to the
Company's Form 8-A dated February 2, 1996, incorporated
herein by this reference.
4.4 Form of Purchase Agreement between the Company and a
selling shareholder or a representative thereof, attached
as Exhibit 28.1 to the Company's Form S-3 filed on
November 14, 1986 (Registration No. 33-10193),
incorporated herein by this reference.
<PAGE>
4.5 Report dated May 4, 1987 reporting the April 28, 1987
Board of Directors' declaration of a five-for-four split
of the Company's Common stock, filed on Form 8-K on May
4, 1987, incorporated herein by this reference.
4.6 Certificate of Designation, Preferences and Rights of
Series D Cumulative Convertible Preferred Stock which was
attached as Exhibit 4 of Registrant's current report on
Form 8-K dated March 17, 1988, incorporated herein by
this reference.
4.7 Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of Talley Manufacturing and
Technology, Inc., attached as Exhibit 4(e) to the
Company's Form S-1 dated October 15, 1993, incorporated
herein by reference.
4.8 Indenture Agreement between Talley Industries, Inc. and
Bank One, Columbus, N.A., a national banking association,
as Trustee, dated as of October 15, 1993 relating to the
12-1/4% Senior Discount Debentures due 2005 issued by
Talley Industries, Inc. and the exhibits thereto,
attached as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended September 30, 1993, incorporated herein
by reference.
4.9 Indenture Agreement among Talley Manufacturing and
Technology, Inc., the Subsidiary Guarantors (as defined),
Talley Industries, Inc. and Bank One, Columbus, N.A., a
national banking association, as Trustee, dated as of
October 15, 1993 relating to the 10-3/4% Senior Notes due
2003 issued by Talley Manufacturing and Technology, Inc.
and the exhibits thereto, attached as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
4.10 Certificate of Elimination With Respect to the Series D
Cumulative Convertible Preferred Stock of Talley
Industries, Inc. Pursuant to Section 151 (g), dated July
23, 1996, attached as Exhibit 4.1 to the Company's Form
10-Q for the quarter ended June 30, 1996, incorporated
herein by reference.
9.1 Amended and Restated Voting Trust Agreement entered into
as of February 7, 1996, by and among Talley Industries,
Inc., John J. McMullen and First Interstate Bank of
Arizona, N.A., as Trustee, attached as Exhibit 9.1 of
Registrant's current report on Form 8-K dated February 2,
1996, incorporated herein by this reference.
<PAGE>
10.1** Employment Agreement dated June 26, 1984 between the
Company and William H. Mallender, attached as Exhibit
10.1 to the Company's Form 10-K for the year ended
December 31, 1984, incorporated herein by this reference.
10.2** Amendment to Employment Agreement dated September 30,
1985, between the Company and William H. Mallender,
attached as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended September 30, 1985, incorporated herein
by this reference.
10.3** Second Amendment to Employment Agreement dated February
25, 1986 between the Company and William H. Mallender,
attached as Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1988,
incorporated herein by this reference.
10.4** Third Amendment to Employment Agreement dated December 1,
1988 between the Company and William H. Mallender,
attached as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1988,
incorporated herein by this reference.
10.5** Fourth Amendment to Employment Agreement dated February
27, 1990 between the Company and William H. Mallender,
attached as Exhibit 28.2 to the Company's Form 10-Q for
the quarter ended March 31, 1990, incorporated herein by
this reference.
10.6** Fifth Amendment to Employment Agreement dated April 1,
1995 between the Company and William H. Mallender,
attached as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1995, incorporated herein by
this reference.
10.7** Amended and Restated Executive Incentive Plan of the
Company adopted February 22, 1994, attached as Exhibit
10.6 to the Company's Form 10-K for the year ended
December 31, 1994, incorporated by this reference.
10.8** Long-Term Incentive Plan of the Company adopted July 26,
1983, attached as Exhibit 4.1 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1983,
incorporated herein by this reference.
10.9** Amended and Restated 1978 Stock Option Plan of the
Company, adopted July 26, 1983, attached as Exhibit 4.3
to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1983, incorporated herein by this
reference.
10.10** Second Amended and Restated 1978 Stock Option Plan of the
Company, dated July 8, 1987, attached as Exhibit 4.8 to
the Company's Form S-8 Registration Statement, filed June
18, 1987, incorporated herein by this reference.
<PAGE>
10.11** 1990 Stock Option Plan of the Company attached as Exhibit
A to the Company's Proxy Statement dated March 21, 1990,
incorporated herein by this reference.
10.12** Plan for Deferral of Directors' Fees as established by
the Company on December 30, 1975, attached as Exhibit
10.15 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1983, incorporated herein by
this reference.
10.13** Amendment dated December 14, 1979 to the Plan for
Deferral of Directors' Fees established by the Company on
December 30, 1975, attached as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1983, incorporated herein by this reference.
10.14** Restated Talley Industries, Inc. Retirement Plan
Directors Only effective July 28, 1987, attached as
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the period ended December 31, 1988, incorporated
herein by this reference.
10.15** First Amendment to Talley Industries, Inc. Retirement
* Plan Directors Only, dated June 14, 1988.
10.16** Second Amendment to Talley Industries, Inc. Retirement
Plan Directors Only effective January 1, 1991, dated May
7, 1991, attached as Exhibit 10.2 to the Company's Form
10-Q for the quarter ended June 30, 1991, incorporated
herein by reference.
10.17** Talley Industries, Inc. Directors Benefit Plan as
established by the Company effective January 1, 1994,
attached as Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended March 31, 1994, incorporated herein by
reference.
10.18** Statement to register 200,000 shares of Common stock of
Talley industries, Inc. which may be issued to the 1996
Non-Employee Director Stock Plan of the Company, filed on
Form S-8 on April 16, 1996, incorporated herein by
reference.
10.19** Talley Industries, Inc. Executive Death and Retirement
Supplemental Plan dated July 1, 1987, attached as Exhibit
10.31 to the Company's Form 10-K for the period ended
December 31, 1989, incorporated herein by this reference.
10.20** First Amendment to the Talley Industries, Inc. Executive
Death and Retirement Supplemental Plan, dated March 25,
1981, attached as Exhibit 10.34 to the Company's Form
10-K for the period ended December 31, 1990, incorporated
herein by this reference.
<PAGE>
10.21** Second Amendment to the Talley Industries, Inc. Executive
Death and Retirement Supplemental Plan, dated December
22, 1994, attached as Exhibit 99.3 to the Company's Form
10-Q for the quarter ended March 31, 1996, incorporated
herein by reference.
10.22** Third Amendment to the Talley Manufacturing and
Technology, Inc. Executive Death and Retirement
Supplemental Plan, dated March 20, 1996, attached as
Exhibit 99.4 to the Company's Form 10-Q for the quarter
ended March 31, 1996, incorporated herein by reference.
10.23** Talley Industries, Inc. Restoration Benefit Plan dated
November 30, 1975, attached as Exhibit 7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
March 31, 1976, incorporated herein by this reference.
10.24** First Amendment to the Restoration Benefit Plan of Talley
Industries, Inc., dated January 2, 1990, attached as
Exhibit 10.34 to the Company's Form 10-K for the period
ended December 31, 1989, incorporated herein by this
reference.
10.25** Second Amendment to the Restoration Benefit Plan of
Talley Industries, Inc. dated March 25, 1991, attached as
Exhibit 10.39 to the Company's Form 10-K for the period
ended December 31, 1990, incorporated herein by this
reference.
10.26** Third Amendment to The Restoration Benefit Plan of Talley
Industries, Inc., dated June 30, 1994, attached as
Exhibit 10.29 to the Company's Form 10-K for the year
ended December 31, 1994, incorporated herein by
reference.
10.27** Fourth Amendment to the Restoration Benefit Plan of
Talley Manufacturing and Technology, Inc. dated July 23,
1996, attached as Exhibit 99.1 to the Company's Form 10-Q
for the quarter ended June 30, 1996, incorporated herein
by reference.
10.28** Talley Manufacturing and Technology, Inc. Executive
Restoration Benefit Plan, dated October 25, 1995,
attached as Exhibit 99.6 to the Company's Form 10-Q for
the quarter ended March 31, 1996, incorporated herein by
reference.
10.29** Talley Manufacturing and Technology, Inc. Trust Under The
Executive Benefit Plans, dated March 20, 1996, attached
as Exhibit 99.7 to the Company's Form 10-Q for the
quarter ended March 31, 1996, incorporated herein by
reference.
<PAGE>
10.30** Talley Manufacturing and Technology, Inc. Executive
Disability Income Plan, dated March 20, 1996, attached as
Exhibit 99.5 to the Company's Form 10-Q for the quarter
ended March 31, 1996, incorporated herein by reference.
10.31** Statement to register 1,200,000 shares of Common stock of
Talley Industries, Inc. which may be issued pursuant to
the 1996 Comprehensive Stock Plan of the Company, filed
on Form S-8 on April 16, 1996, incorporated herein by
reference.
10.32 License Agreement by and between Talley Industries, Inc.,
Talley Defense Systems, Inc. and Talley Automotive
Products, Inc., and TRW Inc., dated April 21, 1989
attached as Exhibit 28.1 to the Company's Form 8-K dated
April 21, 1989, incorporated herein by this reference.
10.33** Form of Indemnification Procedures Agreement between each
director of Holdings and Holdings, attached as Exhibit
10(hh) to Amendment No. 1 of the Company's Form S-1 dated
September 10, 1993, incorporated herein by reference.
10.34** Form of Indemnification Procedures Agreement between
Holdings and each director of Holdings who is also an
officer, attached as Exhibit 10(ii) to Amendment No. 1 of
the Company's Form S-1 dated September 10, 1993,
incorporated herein by reference.
10.35 Form of Indemnification Procedures Agreement between
Talley Manufacturing and each of its directors, attached
as Exhibit 10(jj) to Amendment No. 1 of the Company's
Form S-1 dated September 10, 1993, incorporated herein by
reference.
10.36** Memorandum of Terms and Conditions applicable to:
Performance Units granted for calendar years 1993 through
1997 under the 1983 Long-Term Incentive Plan and Stock
Options granted in 1993 under The Second Amended and
Restated 1978 Stock Option Plan and the 1990 Stock Option
Plan, attached as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended March 31, 1993, incorporated herein
by reference.
10.37 Tax Sharing Agreement among Talley Industries, Inc.,
Talley Manufacturing and Technology, Inc. and each of
their respective subsidiaries, dated as of October 22,
1993, attached as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended September 30, 1993, incorporated
herein by reference.
10.38 Restructuring, Assumption and Cost Sharing Agreement
among Talley Industries, Inc., Talley Manufacturing and
Technology, Inc. and Talley Real Estate Company, Inc.
dated as of October 22, 1993, attached as Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended September
30, 1993, incorporated herein by reference.
<PAGE>
10.39 Report dated December 3, 1996 reporting the sale of all,
except for one, of the Company's real estate properties
for cash and assumption of certain liabilities, filed on
form 8-K on December 18,1996, incorporated herein by
reference.
11* Computation of earnings per share.
21* Subsidiaries of the Registrant.
23.1* Consent of Company's Independent Public Accountants to
the incorporation by reference of their reports for the
current year accompanying the financial statements
included in the Company's Forms S-3 and S-8 Registration
Statements.
23.2* Consent of Company's Independent Public Accountants to
the incorporation by reference of their report for the
current year accompanying the financial statements
included in the Form 11-K Annual Report (Exhibit 99.1
herein) for the year ended December 31, 1996 into the
Registrant's applicable Form S-8 Registration Statements.
27* Financial Data Schedule for Talley industries, Inc.
December 31, 1996.
99.1* Annual Report on Form 11-K for The Employee Stock
Purchase Plan of Talley Industries, Inc. and Affiliated
Companies for the year ended December 31, 1996.
99.2 Loan and Security Agreement among Talley Manufacturing
and Technology, Inc., the Lenders listed therein and
Transamerica Business Credit Corporation, as Agent dated
October 22, 1993, attached as Exhibit 99.1 to the
Company's Form 10-Q for the quarter ended September 30,
1993, incorporated herein by reference.
99.3 First Amendment to Loan and Security Agreement dated
April 29, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
99.4 Second Amendment to Loan and Security Agreement dated
June 30, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 1994,
incorporated herein by reference.
99.5 Third Amendment to Loan and Security Agreement dated
December 16, 1994, by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 99.5 to the
Company's Form 10-K for the year ended December 31, 1994,
incorporated herein by reference.
<PAGE>
99.6 Waiver and Fourth Amendment to Loan and Security
Agreement dated March 20, 1996 by and among Talley
Manufacturing and Technology, Inc. and Transamerica
Business Credit Corporation, as agent, attached as
Exhibit 99.1 to the Company's Form 10-Q for the quarter
ended March 31, 1996, incorporated herein by reference.
99.7 Fifth Amendment to Loan and Security Agreement, dated
June 4, 1996 by and among Talley Manufacturing and
Technology, Inc. and Transamerica Business Credit
Corporation, as agent, attached as Exhibit 99.3 to the
Company's Form 10-Q for the quarter ended June 30, 1996,
incorporated herein by reference.
99.8 Airbag Collateral Security, Intercreditor and Agency
Agreement dated as of October 22, 1993 among Talley
Manufacturing and Technology, Inc., Talley Technology,
Inc., Talley Defense Systems, Inc., Talley Automotive
Products, Inc., Talley Metals Technology, Inc. and
Transamerica Business Credit Corporation as Agent and as
collateral agent for the Lenders (as defined) and the
Senior Note Trustee, Lenders and Bank One, Columbus,
N.A., a national banking association, as Trustee for the
holders of the 10-3/4% Senior Notes due 2003 issued by
Talley Manufacturing and Technology, Inc., attached as
Exhibit 99.2 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
99.9 Form of Subsidiary Loan Agreement dated as of October 22,
1993 between Talley Manufacturing and Technology, Inc.
and each of certain subsidiaries, attached as Exhibit
99.3 to the Company's Form 10-Q for the quarter ended
September 30, 1993, incorporated herein by reference.
99.10 Subsidiary Loan and Security Agreement dated as of
October 22, 1993 between Talley Manufacturing and
Technology, Inc. and Talley Technology, Inc., attached as
Exhibit 99.4 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
99.11 First Amendment to Subsidiary Loan and Security
Agreement, dated as of December 16, 1994 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.10 to the Company's
Form 10-K for the year ended December 31, 1994,
incorporated herein by reference.
99.12 Second Amendment to Subsidiary Loan and Security
Agreement, dated as of March 20, 1996 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.2 to the Company's
Form 10-Q for the quarter ended March 31, 1996,
incorporated herein by reference.
<PAGE>
99.13 Third Amendment to Subsidiary Loan and Security
Agreement, dated as of June 4, 1996 between Talley
Manufacturing and Technology, Inc. and each of certain
subsidiaries, attached as Exhibit 99.2 to the Company's
Form 10-Q for the quarter ended June 30, 1996,
incorporated herein by reference.
99.14 Form of Subsidiary Continuing Guaranty and Security
Agreement dated as of October 22, 1993 between
Transamerica Business Credit Corporation, a Delaware
corporation and each of certain subsidiaries, attached as
Exhibit 99.5 to the Company's Form 10-Q for the quarter
ended September 30, 1993, incorporated herein by
reference.
99.15 First Amendment to Subsidiary Continuing Guaranty and
Security Agreement dated as of December 16, 1994 between
Transamerica Business Credit Corporation, and each of the
Guarantors (certain subsidiaries), attached as Exhibit
99.11 to the Company's Form 10-K for the year ended
December 31, 1994, incorporated herein by reference.
99.16 Consulting Agreement dated February 7, 1996 by and among
Talley Manufacturing and Technology, Inc. and McMullen
Consultants Inc., attached as Exhibit 99.1 to the
Company's Form 8-K under current report date of February
2, 1996, incorporated herein by reference.
99.17 Report dated June 19, 1996 reporting the affirmation of
the $138 million judgment by the Ninth Circuit Court of
Appeals in favor of the Company in TRW Inc. vs. Talley
Industries, Inc. et al, filed on Form 8-K on June 26,
1996, incorporated herein by reference.
99.18* Talley Savings Plus, an employee stock purchase plan for
the employees of Talley Industries, Inc. and affiliated
Companies, as amended and restated December 16, 1994.
99.19* First Amendment to Talley Savings Plus, an employee stock
purchase plan for the employees of Talley Industries,
Inc. and Affiliated Companies, dated March 7, 1996.
99.20* Second Amendment to Talley Savings Plus, an employee stock
purchase plan for the employees of Talley Industries,
Inc. and Affiliated Companies, dated December 17, 1996.
* Documents marked with an asterisk are filed with this
report.
** An executive compensation plan or arrangement.
EXHIBIT 10.15
AMENDMENT TO TALLEY INDUSTRIES, INC.
RETIREMENT PLAN
(DIRECTORS ONLY)
By declaration effective April 1, 1981, Talley Industries,
Inc. (The Company ) established a Retirement Plan (the Plan ) for
members of its Board of Directors. The Plan was thereafter amended
and restated in its entirety as of July 28, 1987. The purpose of
this amendment is to permit eligibility by members of the Board of
Directors who may otherwise be entitled to retirement benefits from
the Company. Except as amended by this amendment the terms and
conditions of the Plan shall continue in full force and effect.
Section 3 of the Plan is hereby amended in its entirety to
read as follows:
3. Eligibility. A member of the Board of Directors
shall be a Participant if such member (a) is at the
Effective Date a member of the Board of Directors or is
thereafter elected to the Board of Directors; (b) is not
at the time of participation hereunder a full-time
employee of the Company or any of its subsidiaries; and
(c) has served as a Director of the Company for at least
five (5) years (although such service need not be
consecutive). Service by a Director as a director of
the former General Time Corporation merged into the
Company on May 14, 1970, shall be deemed to be, and shall
be counted as, service as a Director of the Company.
TALLEY INDUSTRIES, INC.
By: William H. Mallender
----------------------------
Its: Chairman of the Board
DATED: June 14, 1988
<TABLE>
<CAPTION>
EXHIBIT 11
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earning per Share
(In thousands, except per share amounts)
The computations of earnings per share on both the primary and fully diluted basis for the five years ended December 31, 1996 were
as follows:
Y E A R S E N D E D D E C E M B E R 3 1,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Primary Diluted Primary Diluted Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings before extraordinary
gains (losses) $ 30,793 $ 30,793 $ 3,555 $ 3,555 $ 3,506 $ 3,506 $(5,994) $(5,994) $(17,204) $(17,204)
Preferred stock dividends (1,096) (1,096) - - (2,167) (2,167) (2,167) (2,167) (2,168) (2,168)
Earnings (loss) for computation
before extraordinary items 29,697 29,697 3,555 3,555 1,339 1,339 (8,161) (8,161) (19,372) (19,372)
Extraordinary gains (losses) (12,052) (12,052) 14,409 14,409 - - (504) (504) 2,637 2,637
Earnings before value of induced
conversion 17,645 17,645 17,964 17,964 1,339 1,339 (8,665) (8,665) (16,735) (16,735)
Value of Common shares issued to
induce conversion of Preferred
stock (12,037) (12,037) - - - - - - - -
Net earnings (loss) for
computation $ 5,608 $ 5,608 $ 17,964 $ 17,964 $ 1,339 $ 1,339 $(8,665) $(8,665) $(16,735) $(16,735)
Average number of Common shares
outstanding during the year 13,501 13,501 10,051 10,051 10,029 10,029 9,676 9,676 9,189 9,189
Common stock equivalents:
Convertible Preferred stock - - 3,300 3,300 - - - - - -
Stock options 176 176 327 347 245 261 - - - -
Shares issuable in connection
with acquired company 236 236 323 323 138 138 - - - -
Shares for computation 13,913 13,913 14,001 14,021 10,412 10,428 9,676 9,676 9,189 9,189
Earnings (loss) per share before
extraordinary gains (losses) $ 2.13 $ 2.13 $ .25 $ .25 $ .13 $ .13 $ (.85) $ (.85) $ (2.11) $ (2.11)
Extraordinary gains (losses) (.87) (87) 1.03 1.03 - - (.05) (.05) .29 .29
Earnings before value of induced
conversion 1.26 1.26 1.28 1.28 .13 .13 (.90) (.90) (1.82) (1.82)
Value of induced conversion (.86) (.86) - - - - - - - -
Net earnings (loss) per share $ .40 $ .40 $ 1.28 $ 1.28 $ .13 $ .13 $ (.90) $ (.90) $ (1.82) $ (1.82)
</TABLE>
EXHIBIT 21
Subsidiaries of Talley Industries, Inc.
The following are the subsidiaries of the Registrant, as of December 31,
1996:
Percentage
of Voting Jurisdiction
Securities of
Owned Incorporation
---------- -------------
1. Talley Manufacturing and Technology, Inc. 100% Delaware
a. Amcan Specialty Steels, Inc. 100% New Jersey
b. Dimetrics, Inc. 100% Delaware
c. Electrodynamics, Inc. 100% Arizona
d. John J. McMullen Associates, Inc. 100% Delaware
e. Porcelain Products Co. 100% Delaware
f. Rowe Industries, Inc. 100% Delaware
g. Talley Canada, Inc. 100% Canada
h. Talley Defense Systems, Inc. 100% Delaware
i. Talley Metals Technology, Inc. 100% Delaware
j. Talley Technology, Inc. 100% Delaware
k. Universal Propulsion Company, Inc. 100% Delaware
l. Waterbury Companies, Inc. 100% Delaware
2. Talley Real Estate Company, Inc. 100% Delaware
a. Talley Realty Development, Inc. 100% Delaware
b. Talley Realty Holding Company, Inc. 100% Delaware
b.(1) LME Capital Corporation 90% Delaware
c. Talley Realty Investment Group, Inc. 100% Delaware
d. Talley Realty Finance and
Investment Company, Inc. 100% Arizona
d.(1) New California Corp. 100% California
Each of the above subsidiaries is included in the Company's Consolidated
Financial Statements. Several inactive or minor corporations are not
included above because all of them, when taken in the aggregate, do not
constitute a significant subsidiary.
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-3 and S-8 (Nos. 33-10193, 2-85486, 2-85487, 2-91162,
2-85473, 33-5432, 2-63214, 33-22657, 33-30335, 33-37258, 33-15175,
33-47065, 33-51492, 33-60922, 33-51511 and 33-53901) of Talley
Industries, Inc. of our report dated February 17, 1997 appearing
on page F-59 of this Form 10-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 25, 1997
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-8 (Nos. 2-85473, 33-5432, 33-47065 and 33-51492) of Talley
Industries, Inc. of our report dated February 21, 1997 appearing
on page F-1 of the Annual Report on Form 11-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Company's
Balance Sheet and Statement of Operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996<F1>
<PERIOD-END> DEC-31-1996
<CASH> 48,758,000
<SECURITIES> 0
<RECEIVABLES> 54,015,000
<ALLOWANCES> 925,000
<INVENTORY> 64,684,000
<CURRENT-ASSETS> 176,292,000
<PP&E> 147,912,000
<DEPRECIATION> 98,588,000
<TOTAL-ASSETS> 280,385,000
<CURRENT-LIABILITIES> 69,827,000
<BONDS> 123,185,000
0
764,000
<COMMON> 14,618,000
<OTHER-SE> 59,104,000
<TOTAL-LIABILITY-AND-EQUITY> 280,385,000
<SALES> 309,169,000
<TOTAL-REVENUES> 502,698,000
<CGS> 249,307,000
<TOTAL-COSTS> 311,565,000
<OTHER-EXPENSES> 149,393,000
<LOSS-PROVISION> 158,000
<INTEREST-EXPENSE> 25,406,000
<INCOME-PRETAX> 32,629,000
<INCOME-TAX> 1,836,000
<INCOME-CONTINUING> 30,793,000
<DISCONTINUED> 0
<EXTRAORDINARY> (12,052,000)
<CHANGES> 0
<NET-INCOME> 18,741,000
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<FN>
<F1>Total revenues include amounts from airbag royalties litigation
settlement and other expenses include an $85.0 million reserve for realty
assets.
</FN>
</TABLE>
EXHIBIT 99.1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-4778
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
B. Name of issuer of the securities held pursuant to the plan
and the address of its principal executive office:
TALLEY INDUSTRIES, INC.
2702 North 44th Street
Phoenix, Arizona 85008
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
INDEX OF FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Pages
Report of Independent Accountants F-1
Financial Statements:
Statement of Financial Condition - December 31, 1996 and 1995 F-2
Statement of Income and Changes in Plan Equity - For the years
ended December 31, 1996, 1995 and 1994 F-3
Notes to Financial Statements F-4
Schedules:
Schedules I, II and III have been omitted because the required
information is shown in the financial statements.
Exhibits:
None
<PAGE>
Report of Independent Accountants
To the Participants and Administrator
of Talley Savings Plus, The Employee
Stock Purchase Plan of Talley
Industries, Inc. and Affiliated Companies
In our opinion, the accompanying statement of financial condition
and the related statement of income and changes in plan equity
present fairly, in all material respects, the financial condition
of Talley Savings Plus, The Employee Stock Purchase Plan of
Talley Industries, Inc. and Affiliated Companies at December 31,
1996 and 1995, and the changes in its plan equity for each of the
three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Plan's management; our
responsibility is to express an opinion on these financial
statements based upon our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 21, 1997
F-1
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
STATEMENT OF FINANCIAL CONDITION
December 31,
-------------------------
Assets 1996 1995
- ------ ----------- -----------
Investments, at market:
Common Stock of Talley Industries, Inc. -
1,833,981 shares and 770,193 shares
(cost $12,879,759 and $5,641,754) in
1996 and 1995, respectively $13,525,610 $ 6,642,915
Series B Preferred Stock of Talley
Industries, Inc. - 0 and 406,394
shares (cost $-0- and $6,787,001)
in 1996 and 1995, respectively - 6,603,903
Money market fund and cash 73,130 182,095
Receivables from Talley Industries, Inc.
and Affiliated Companies:
Employee contributions 17,539 35,689
Employer contributions 8,765 17,841
Interest receivable 586 965
----------- -----------
Total assets 13,625,630 13,483,408
----------- -----------
Liabilities
-----------
Forfeiture payable 27,859 21,020
----------- -----------
Total liabilities 27,859 21,020
----------- -----------
Plan equity $13,597,771 $13,462,388
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY
Years Ended December 31,
-----------------------------------------
Additions: 1996 1995 1994
--------- ----------- ----------- ------------
Interest income $ 6,877 $ 8,819 $ 3,751
Realized gains - 9,094 45,519
Unrealized appreciation
(depreciation) in market
value of investments (172,210) 2,038,018 2,213,402
Contributions:
Employee 1,068,497 972,427 940,921
Employer 534,947 498,772 712,901
----------- ----------- ------------
1,438,111 3,527,130 3,916,494
Deductions:
Withdrawals and terminations 1,295,889 1,622,820 2,057,728
Forfeitures 6,839 8,367 18,350
Interest expense - - 15,556
----------- ----------- -----------
1,302,728 1,631,187 2,091,634
----------- ----------- -----------
Net increase 135,383 1,895,943 1,824,860
Plan equity:
-----------
Beginning of year 13,462,388 11,566,445 9,741,585
----------- ----------- -----------
End of year $13,597,771 $13,462,388 $11,566,445
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS
Significant Accounting Policies
-------------------------------
The accounts of the Plan are maintained on an accrual basis. Assets
of the Plan are valued at current value. Securities are valued in an
active market at the last reported sales price on the last business day
of the year. Benefits are recorded when paid.
Description of Plan
-------------------
The following brief description of the Talley Savings Plus Plan is
provided for general information purposes only. Reference should be
made to the Plan agreement for more complete information.
General - Talley Savings Plus is an employee stock purchase plan
adopted January 1, 1984 for the employees of Talley
Industries, Inc.(the Company) and Affiliated Companies.
The Plan is classified as a "defined contribution
plan", an "individual account plan" and an "employee
pension benefit plan" under the Employee Retirement
Income Security Act of 1974 (ERISA). A participant's
benefits at any time depend on the amount credited to
his/her individual account and accordingly the Company,
the Committee and the Trustee do not guarantee any
level of benefits.
Eligibility- Employees eligible to participate under the Plan are those
who have attained the age of twenty-one (21) years, have
completed one (1) "year of continuous service" as defined
in the Plan, and are not covered under a collective
bargaining agreement.
Employee
Contributions- Each eligible employee who elects to participate may
contribute, out of amounts he or she would otherwise
receive in cash, 1% to 5% of his or her pretax
compensation from the Company to the Plan's trust fund.
Employer
Contributions- For so long as the Plan is in effect, the Company will
contribute property having a value equal to 50% of
employee contributions. Under the terms of the Plan, the
Company may contribute Common stock, Series B $1.00
Cumulative Convertible Preferred stock, cash or other
property. The Company made additional contributions to
the Plan of .5% of the aggregate compensation of those
employees who were participants in the payroll stock
F-4
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Employer
Contributions- ownership plan (PAYSOP) prior to the Tax Reform Act of 1986,
(Cont.) which repealed the PAYSOP provision in the tax code. In its
sole discretion, the Company may make a contribution to the
Plan in such amount as it may determine, from time to time.
Such contributions may be made without regard to the
existence of profits. The Company's discretionary
contribution is allocated based on the relationship of
the Company contribution account balances of
participants eligible for discretionary contribution to
Company contribution account balances for all participants.
The Company contributions for the match of 50% of the employee
contributions, and for the discretionary contribution, were
$534,247 and $700, respectively, in 1996, $486,227 and $12,545,
respectively, in 1995, and $471,297 and $241,604, respectively,
in 1994.
Investment
Program - Amounts contributed at an employee's direction, along with
all contributions made by the Company other than PAYSOP
contributions, are invested in one fund consisting of shares
of Common stock and Series B Preferred stock of the Company
and a money market fund. PAYSOP contributions are invested
solely in Common stock of the Company. Investment earnings
or losses are allocated monthly based on beginning of month
balances of the respective participant's accounts. During
1994, 33,405 unallocated shares, which collateralized a note
payable, were released and allocated to participant accounts
as principal payments were made on the loan collateralized by
such shares. The note payable was paid off in 1994.
During the years ended December 31, 1996, 1995 and 1994, the
Plan sold -0- shares, 14,900 shares and 60,863 shares,
respectively, of Common stock for proceeds of $-0-, $116,214
and $467,708, respectively. There were distributions of stock
to participants, related to withdrawals and terminations,
valued at $187,698, $331,191 and $560,687 for 1996, 1995 and
1994, respectively.
In April 1996, pursuant to a conversion offer from the Company,
all of the Preferred B stock in the Plan were converted into
Common stock. At the time of the conversion, 408,394 shares of
the Preferred B stock were converted on the basis of 2.5 shares
of Common stock for each share of Preferred B stock for a total
of 1,020,985 shares of Common stock. Under the original terms,
each share of Series B Preferred stock was convertible into
F-5
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
1.31 shares of Common Stock. The conversion automatically
extinguished all unpaid dividends on the Series B Preferred
stock of $5 per share.
Vesting - Each participant will at all times be fully vested as
to all amounts credited or allowable to him under the
participant's own employee contribution account and the
Company PAYSOP account. Company matching contributions
will vest 20% per year of service until fully vested;
however, such contributions will be fully vested
upon termination by death, disability or retirement,
upon attainment of age 65 or upon termination of the
Plan or complete discontinuance of Company matching
contributions. Non-vested Company contributions will be
forfeited upon termination of employment with the
Company. Amounts allowable as forfeitures will be
applied to Plan expenses.
Distributions- Upon the death, disability, retirement or other separation
from employment of a participant, distribution of all
vested amounts credited to such participant will be made
in a lump sum. All such distributions will be in cash or
Company Common stock or Series B Preferred stock at the
discretion of the Committee, except the participant may
request that distribution from his accounts be made in
Common stock or Series B Preferred stock of the Company,
in which event distribution from the accounts will be made
in such stock.
The Plan also allows participants who have reached age
55 and have been in the Plan 10 or more years to
diversify the investment of their accounts.
Participants can elect to take a partial cash
distribution each year, for a maximum of 6 years, from
the Plan and put it into a qualified Individual
Retirement Account.
Expenses - Commissions and trustee fees and other administrative
expenses are paid by the Company to the extent not paid
by forfeitures. Excess forfeitures become a liability
of the Plan and are used to offset future Plan
expenses. The Company has also contributed amounts to
the plan to pay the interest expense on the note payable.
Participants - At December 31, 1996 there were 866 participants with
account balances in the Plan.
F-6
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Income Tax Status
-----------------
Talley Industries, Inc. has received a ruling dated December 6, 1996
from the Internal Revenue Service substantiating that the Plan qualifies
under Section 401 of the Internal Revenue Code of 1986. The Company restated
the plan documents effective January 1, 1994 to comply with the Tax Reform Act
of 1986, subsequent legislation and applicable regulations. A plan that
qualifies is exempt from Federal Income Tax, and amounts contributed are not
taxed to the employee until a distribution from the Plan is received. If a
former employee receives a full distribution of his or her Plan accounts due
to his or her termination of employment with the Company, he or she will
realize taxable income in an amount by which the value of his or her
distribution exceeds the amount of his or her own undistributed contributions
that have previously been taxed. Under federal laws effective beginning in
1993, the Company is required to withhold 20% of each distribution a
participant receives unless the distribution is transferred directly into an
IRA or a qualified plan, or unless the distribution is specifically exempted
by the law.
In addition to the foregoing tax consequences, special rules are applicable if
the distribution to the employee includes shares of Common stock. If the
employee receives a lump sum distribution of the entire vested amount of his
or her accounts in a single taxable year due to separation from employment,
and the distribution includes shares of Common stock, the difference between
the fair market value of the stock distributed and its cost to the Trustee
(the "net unrealized appreciation"),if the fair market value is greater than
such cost, is not recognized for tax purposes at the time of distribution.
Only the aggregate cost of the distributed stock to the Trustee is includable
in the employee's gross income at the time of distribution. When the employee
disposes of the stock in a subsequent sale or taxable transfer, any excess of
the amount realized by such recipient over the costs of such stock to the
Trustee will constitute and be taxed as a capital gain.
Reconciliation of Financial Statements to the Annual Return/Report of
---------------------------------------------------------------------
Employee Benefit Plan (Internal Revenue Service Form 5500)
----------------------------------------------------------
The following is a reconciliation of net assets available for benefits per the
financial statements and the net assets available per the Form 5500:
December 31,
1996 1995
Net assets available for benefits per the ----------- -----------
financial statements $13,597,771 $13,462,388
Amounts allocated to withdrawing participants (14,393) (60,108)
----------- -----------
Net assets available for benefits per the Form 5500
$13,583,378 $13,402,280
=========== ===========
F-7
<PAGE>
TALLEY SAVINGS PLUS
THE EMPLOYEE STOCK PURCHASE PLAN
OF
TALLEY INDUSTRIES, INC. AND AFFILIATED COMPANIES
NOTES TO FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of benefits paid to participants per
the financial statements to the Form 5500:
Year Ended
December 31, 1996
-----------------
Benefits paid to participants
per the financial statements $1,295,889
Amounts allocated to withdrawing
participants at December 31, 1996 14,393
Amounts allocated to withdrawing
participants at December 31, 1995 (60,108)
Benefits paid to participants per ----------
the Form 5500 $1,250,174
==========
Amounts allocated to withdrawing participants are recorded on the Form
5500 for benefit claims that have been processed and approved for
payment prior to year end, but not yet paid.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to current
year presentation.
Note Payable
------------
Pursuant to a 1986 amendment to the Plan which gives the Administration
Committee authority to direct the trustee to borrow funds to purchase
Company securities, a promissory note for $2,000,000 was executed on
April 17, 1989. This note payable was paid off in 1994.
F-8
EXHIBIT 99.18
TALLEY SAVINGS PLUS
<PAGE>
TABLE OF CONTENTS
PAGE
PREAMBLE AND INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE - EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Effective Date. . . . . . . . . . . . . . . . . . . . . 1
ARTICLE TWO - DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . 2
2.1. Definitions . . . . . . . . . . . . . . . . . . . . . . 2
2.2. Construction. . . . . . . . . . . . . . . . . . . . . . 16
2.3. Determination of "Top Heavy" Status . . . . . . . . . . 17
ARTICLE THREE - ELIGIBILITY AND PARTICIPATION. . . . . . . . . . . . . . 18
3.1. Eligibility . . . . . . . . . . . . . . . . . . . . . . 18
3.2. Participation . . . . . . . . . . . . . . . . . . . . . 18
3.3. Crediting of Service. . . . . . . . . . . . . . . . . . 19
3.4. Break in Continuous Service . . . . . . . . . . . . . . 19
3.5. Affiliated Corporations . . . . . . . . . . . . . . . . 20
3.6. Change of Status or Job Classification. . . . . . . . . 20
ARTICLE FOUR - PAYROLL DEFERRAL CONTRIBUTIONS. . . . . . . . . . . . . . 20
4.1. Payroll Deferral Contributions. . . . . . . . . . . . . 20
4.2. Designation and Change of Designation
of Payroll Deferral Contributions . . . . . . . . . . . 22
4.3. Suspension of Payroll Deferral
Contributions . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE FIVE - COMPANY CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 23
5.1. Company Contributions . . . . . . . . . . . . . . . . . 23
5.2. Payment of Contributions. . . . . . . . . . . . . . . . 23
5.3. Limitation on Company Contributions . . . . . . . . . . 24
ARTICLE SIX - ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . 25
6.1. Separate Accounts . . . . . . . . . . . . . . . . . . . 25
6.2. Allocation of Contributions . . . . . . . . . . . . . . 26
6.3. Limitation on Annual Additions. . . . . . . . . . . . . 27
6.4. Valuation and Account Adjustments . . . . . . . . . . . 30
6.5. Statements to Participants. . . . . . . . . . . . . . . 31
i
<PAGE>
TABLE OF CONTENTS
(Continued)
ARTICLE SEVEN - VESTING. . . . . . . . . . . . . . . . . . . . . . . . . 31
7.1. Vesting in the Payroll Deferral
Contributions Account and the Payroll
Tax Credit Contributions Account. . . . . . . . . . . . 31
7.2. Vesting in the Company Contributions
Account . . . . . . . . . . . . . . . . . . . . . . . . 31
7.3. Determination of Vested Interest in the
Event of Separation from Employment . . . . . . . . . . 32
7.4. Restoration of Forfeiture . . . . . . . . . . . . . . . 32
7.5. Amendments to Vesting Schedule. . . . . . . . . . . . . 33
ARTICLE EIGHT - INVESTMENT OF CONTRIBUTIONS. . . . . . . . . . . . . . . 33
8.1. Investment of Accounts. . . . . . . . . . . . . . . . . 33
8.2. Voting of Company Securities. . . . . . . . . . . . . . 34
8.3. Securities Registration . . . . . . . . . . . . . . . . 35
8.4. Tender or Exchange Offers . . . . . . . . . . . . . . . 36
8.5. Confidentiality . . . . . . . . . . . . . . . . . . . . 36
8.6. Investment Diversification. . . . . . . . . . . . . . . 37
ARTICLE NINE - LOANS TO ACQUIRE COMPANY SECURITIES . . . . . . . . . . . 38
9.1. Loan to Acquire Company Securities. . . . . . . . . . . 38
9.2 Terms of Loans to Acquire Company
Securities. . . . . . . . . . . . . . . . . . . . . . . 38
9.3. The Loan Suspense Account . . . . . . . . . . . . . . . 39
ARTICLE TEN - DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . 40
10.1. Retirement. . . . . . . . . . . . . . . . . . . . . . . 40
10.2. Disability Retirement . . . . . . . . . . . . . . . . . 40
10.3. Death . . . . . . . . . . . . . . . . . . . . . . . . . 40
10.4. Other Separations From Employment . . . . . . . . . . . 41
10.5. Financial Necessity . . . . . . . . . . . . . . . . . . 41
10.6. Time of Distribution of Benefits. . . . . . . . . . . . 43
10.7. Method of Distribution. . . . . . . . . . . . . . . . . 44
10.8. Put Option. . . . . . . . . . . . . . . . . . . . . . . 45
10.9. Designation of Beneficiary. . . . . . . . . . . . . . . 46
10.10. Additional Distribution Limitations . . . . . . . . . . 47
10.11. Direct Rollover Option. . . . . . . . . . . . . . . . . 48
10.12. Facility of Payment . . . . . . . . . . . . . . . . . . 49
10.13. No Assignment Permitted . . . . . . . . . . . . . . . . 49
10.14. Unclaimed Accounts; Notice. . . . . . . . . . . . . . . 51
ii
<PAGE>
TABLE OF CONTENTS
(Continued)
ARTICLE ELEVEN - ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . 51
11.1. Administration Committee. . . . . . . . . . . . . . . . 51
11.2. Powers of the Administration Committee. . . . . . . . . 52
11.3. Claims. . . . . . . . . . . . . . . . . . . . . . . . . 52
11.4. Scope of Responsibility . . . . . . . . . . . . . . . . 53
11.5. Expenses. . . . . . . . . . . . . . . . . . . . . . . . 54
11.6. Uniform Administration. . . . . . . . . . . . . . . . . 54
11.7. Trust Agreement . . . . . . . . . . . . . . . . . . . . 55
ARTICLE TWELVE - AMENDMENT, MERGER AND TERMINATION . . . . . . . . . . . 55
12.1. Amendment of Plan . . . . . . . . . . . . . . . . . . . 55
12.2. Merger. . . . . . . . . . . . . . . . . . . . . . . . . 55
12.3. Termination . . . . . . . . . . . . . . . . . . . . . . 55
ARTICLE THIRTEEN - GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . 56
13.1. Limitation on Participants' Rights. . . . . . . . . . . 56
13.2. Heirs and Successors. . . . . . . . . . . . . . . . . . 57
13.3. Duration. . . . . . . . . . . . . . . . . . . . . . . . 57
iii
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TALLEY SAVINGS PLUS
PREAMBLE AND INTRODUCTION
Effective January 1, 1984, TALLEY INDUSTRIES, INC. a
Delaware corporation ("Talley"),established TALLEY SAVINGS PLUS
(the "Plan") to make available to employees of the Company a
program designed to provide an opportunity for systematic savings
and to provide an opportunity for increased employee interest in
the Company through acquisition of Talley stock, thereby to
assist in the attraction and retention of qualified employees, to
permit employee salary reduction contributions to be directed on
a favorable tax basis through utilization of the provisions of
Section 401(k) of the Internal Revenue Code (the "Code") and to
permit certain Talley contributions to qualify for Federal tax
credits pursuant to Sections 41 and 409 of the Code. The Plan
was thereafter amended and restated in its entirety on Septem-
ber 30, 1985. It was subsequently amended to establish an
"employee stock ownership plan" (as defined in Section 407(d)(6)
of the Employee Retirement Income Security Act (the "Act") and
Section 4975(e)(7) of the Code that is designed to invest primar-
ily in "qualifying employee securities" (as defined in Section
407(d)(5) of the Act and Section 4975(e)(8) of the Code) of the
Company. The Plan was subsequently amended and restated in its
entirety on February 27, 1987. It was thereafter amended several
times. Effective January 1, 1994, Talley Manufacturing and
Technology, Inc. (the "Company") became the sponsor of the Plan.
By this instrument, the Company intends to amend and restate the
Plan to comply with the Tax Reform Act of 1986, subsequent
legislation and applicable regulations, and to make certain other
revisions. It is the intention of the Company that the Plan, as
it is constituted on and after the Effective Date, shall continue
to be qualified under the provisions of Section 401(a) of the
Code, as amended, and that the Trust Fund maintained pursuant to
the Trust Agreement executed in connection with the Plan shall
continue to be exempt from taxation pursuant to Section 501(a) of
the Code, as amended.
ARTICLE ONE
EFFECTIVE DATE
1.1. Effective Date. This amendment and restatement of
the Plan is effective January 1, 1987, except as otherwise
expressly provided.
This Plan is not a new plan succeeding the Plan as
constituted prior to the Effective Date, but is an amendment and
restatement of the Plan as so constituted. The amount, right to
and form of any benefits under this Plan, if any, of each person
who is an employee after the Effective Date, or of any persons
who are claiming rights or benefits derived through such an
employee, shall be determined under this Plan. The amount, right
<PAGE>
to and form of benefits, if any, of each person who separated
from employment with the Company prior to the Effective Date, or
of persons who are claiming rights or benefits derived through
such a former employee, shall be determined in accordance with
the provisions of the Plan in effect on the date of termination
of his employment, except as may be otherwise expressly provided
under this Plan as required under the Code or the Act, unless he
shall again become an employee after the Effective Date.
ARTICLE TWO
DEFINITIONS AND CONSTRUCTION
2.1. Definitions. When a word or phrase shall appear
in this Plan with the initial letter capitalized, and the word or
phrase does not commence a sentence, the word or phrase shall
generally be a term defined in this Section 2.1. The following
words and phrases with the initial letter capitalized shall have
the meanings set forth in this Section 2.1, unless a clearly
different meaning is required by the context in which the word or
phrase is used:
(a) "Accounts" - The Participant's Company Con-
tributions Account, Payroll Tax Credit Contributions
Account and Payroll Deferral Contributions Account.
(b) "Act" - The Employee Retirement Income Secu-
rity Act of 1974, as the same may be amended from time
to time.
(c) "Administration Committee" - The Master Trust
Administration Committee, or such other Committee
appointed by the Board and certified to the Trustee,
appointed to administer the terms and provisions of the
Plan. The duties and responsibilities of the Adminis-
tration Committee are more particularly described in
ARTICLE ELEVEN of this Plan.
(d) "Affiliate" - An entity that is a member of a
"controlled group of corporations" (within the meaning
of Section 414(b) of the Code as modified by Section
415(h) of the Code), an "affiliated service group"
(within the meaning of Section 414(m) of the Code), or
a group of trades or business under common control
(within the meaning of Section 414(c) of the Code as
modified by Section 415(h) of the Code) that also
includes the Company as a member; and any other entity
required to be aggregated with the Company pursuant to
regulations issued by the United States Treasury De-
partment under Section 414(o) of the Code.
2
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(e) "Annual Addition" - The sum allocable to a
Participant's separate Accounts (maintained pursuant to
Section 6.1) for any Plan Year; such sum being composed
of the amounts described in (1), (2) and (3) as follows:
(1) The Company Contributions allocable for
the Plan Year to the Company Contributions
Account, including forfeitures allocable under
Section 7.4 (computed as if no part of the Company
Contribution is allocable to the Loan Suspense
Account pursuant to Section 9.2 and is to be allo-
cable only among Company Contribution Accounts);
(2) The Payroll Deferral Contributions allo-
cable to a Participant's Payroll Deferral Contri-
butions Account for the Plan Year; and
(3) Amounts allocated to a medical account
which must be treated as annual additions pursuant
to Section 415(l)(1) or Section 419A(d)(2) of the
Code.
Any rollover contributions or transfers from other
qualified plans, restorations of forfeitures, or other
items similarly enumerated in Treasury Regulation Sec-
tion 1.415-6(b)(3) shall not be considered in calculat-
ing a Participant's Annual Additions for any Plan Year.
In calculating Annual Additions for all defined contri-
bution plans sponsored by the Company and its Affili-
ates, after-tax employee contributions under all such
plans shall constitute Annual Additions for a Plan
Year. However, for purposes of calculating the "de-
defined contribution plan fraction" for any Plan Year
pursuant to Section 6.3, nondeductible employee contri-
butions allocated to a Participant during any Plan Year
commencing on or before December 31, 1986, will be
considered to be part of the Annual Addition for that
Plan Year only to the extent of the lesser of (i) the
amount of nondeductible contributions in excess of six
percent (6%) of the Participant's Compensation for that
year or (ii) one-half (1/2) of the nondeductible con-
tributions allocable during the year to the Partici-
pant's accounts.
(f) "Authorized Leave of Absence" - A leave of
absence from the performance of active service for the
Company that is authorized by the Company in accordance
with the Company's uniformly applied rules regarding
leaves of absence. An authorized leave of absence
shall include temporary lay-off for a period of less
than twelve (12) months, service as a member of the
3
<PAGE>
armed forces of the United States if the Employee
returns to the employ of the Company within any period
during which his reemployment rights are protected by
law, maternity or paternity leave, and such other forms
of leave as shall be determined in accordance with the
Company's uniformly applied rules regarding leaves of
absence. For purposes of this Section 2.1(f), "mater-
nity or paternity leave" is a leave of absence granted
as a result of (1) the pregnancy of the Employee, (2)
the birth of a child of the Employee, (3) the placement
of the child with the Employee in connection with the
Employee's adoption of such child, or (4) the Employ-
ee's decision to care for his or her child for the
period beginning immediately following the child's
birth or placement with the Employee.
(g) "Base Pay" - The total amount of compensation
in the form of regular salary, regular hourly wages,
shift differential, commissions or piece-rate compensa-
tion paid by the Company to a Participant for the
performance of service or during paid time off. "Base
Pay" shall include earnings in lieu of Base Pay, such
as jury-duty pay, reserve pay, sick pay paid by the
Company or an Affiliate (but not sick pay paid by an
insurance company under a plan or arrangement estab-
lished by the Company or an Affiliate), funeral leave
and maternity pay. "Base Pay" shall also include the
amount of Payroll Deferral Contributions that would
have been paid to the Participant as current salary,
hourly wage compensation or piece-rate compensation
reportable on Internal Revenue Service Form W-2, but
for the Participant's election to direct Payroll Defer-
ral Contributions. "Base Pay" shall specifically not
include bonuses, overtime pay, short-term disability
pay, pay in lieu of vacation, directors' fees, moving
and relocation reimbursements or allowances and any
Company contributions or benefits under any other
"employee benefit plan" (as defined in the Act), and
any other deferred or "fringe" benefits. Only Base Pay
paid during periods of actual Plan participation shall
be includible as Base Pay hereunder. For Plan Years
beginning prior to January 1, 1989, if the Plan is "top
heavy" under Section 2.3, Base Pay in excess of Two
Hundred Thousand Dollars ($200,000.00) shall be disre-
garded for each Plan Year during which the Plan is "top
heavy." For Plan Years beginning after December 31,
1988, but prior to January 1, 1994, Base Pay in excess
of Two Hundred Thousand Dollars ($200,000.00) shall be
disregarded for all purposes, and for Plan Years begin-
ning after December 31, 1993, Base Pay in excess of One
Hundred Fifty Thousand Dollars ($150,000.00) shall be
disregarded for all purposes. The dollar limitation
4
<PAGE>
referred to in the preceding two sentences shall be
adjusted for each Plan Year commencing after Decem-
ber 31, 1987, to take into account any cost-of-living
adjustment for that Plan Year under applicable regula-
tions or rulings of the United States Treasury Depart-
ment under Section 416(d)(2) and Section 415(d) of the
Code (as modified by Section 401(e)(17) of the Code).
Notwithstanding the foregoing, for purposes of applying
the foregoing limitation to an Employee who is a
"5-percent owner" as defined in Section 414(q)(3) of
the Code, or a Highly Compensated Employee who is among
the ten (10) most Highly Compensated Employees during
the Plan Year, Base Pay paid to any member of the
family of that Employee shall be deemed to have been
paid directly to the Employee. For purposes of this
Section, the term "family" shall mean the Employee's
spouse and any lineal descendants of the Employee who
have not attained the age of nineteen (19) years prior
to the end of the Plan Year. If the foregoing dollar
limitation (as adjusted for cost-of-living increases)
is exceeded as a result of the application of the
foregoing rules, the Base Pay of the Employee and any
affected family members taken into account for purposes
of this Plan shall be reduced by each individual's
proportionate share of Base Pay in excess of such
limitation. Each individual's proportionate share of
such excess amount shall be an amount which bears the
same ratio to the excess amount as the individual's
Base Pay (determined without regard to the dollar
limitation (as adjusted for cost-of-living increases))
bears to the aggregated Base Pay of the Employee and
any affected family members (determined without regard
to the foregoing dollar limitation (as adjusted for
cost-of-living increases)).
(h) "Beneficiary" - The person or persons desig-
nated to receive benefits under this Plan in the event
of death of the Participant, as provided in Section
10.8.
(i) "Benefit Commencement Date" - The first day
on which all events (including the passing of the day
on which benefits are scheduled to commence) have oc-
curred which entitle the Participant to receive his
first benefit payment from the Plan.
(j) "Board" - The Board of Directors of the
Company.
(k) "Break in Continuous Service" - A twelve (12)
continuous month period, commencing with an Employee's
5
<PAGE>
Termination Date, during which the Employee is not
credited with at least one Hour of Service.
(l) "Code" - The Internal Revenue Code of 1986,
as the same may be amended from time to time.
(m) "Company" - Talley Industries, Inc., a Dela-
ware corporation, provided that, effective January 1,
1994, "Company" shall mean Talley Manufacturing and
Technology, Inc., a Delaware corporation, and each
corporation that succeeds to substantially all the
business of the Company and elects to continue the Plan
hereunder. The term "Company" as used hereunder shall
include Affiliates that have adopted this Plan by
action of their respective boards of directors and with
the consent of the Board. Adopting Affiliates shall be
deemed to have delegated to the Board all authority to
appoint and remove members of the Administration Com-
mittee and the Trustee and to amend or terminate the
Plan.
(n) "Company Contribution" - The amount regularly
contributed to the Trust Fund for the Plan Year by the
Company for the benefit of the Participants, in accor-
dance with Section 5.1(a).
(o) "Company Contributions Account" - The account
established pursuant to Section 6.1 to which Company
Contributions (including forfeitures allocated as a
part of the Company Contribution) and Discretionary
Company Contributions (including forfeitures allocated
as a part of the Discretionary Company Contribution)
are credited.
(p) "Company ESOP Contributions" - The amount
contributed to the Trust Fund for the Plan Year by the
Company in its discretion in accordance with Section
5.1(c).
(q) "Company Securities" - Common capital stock
and Series B $1.00 Cumulative Convertible Preferred
Stock of Talley Industries, Inc., and "qualifying
employer securities" of Talley Industries, Inc., as
defined in Section 407(d)(5) of the Act and Section
4975(e)(8) of the Code and the applicable regulations
issued thereunder.
(r) "Compensation" - All wages, salaries, and
fees for professional services and other amounts re-
ceived for personal services actually rendered in the
course of employment with the Company (including, but
not limited to, commissions paid salesmen, compensation
6
<PAGE>
for services on the basis of a percentage of profits,
commissions on insurance premiums, tips and bonuses),
and excluding the following:
(1) Company contributions to a plan of de-
ferred compensation which are not includible in
the Employee's gross income for the taxable year
in which contributed, or Company contributions
under a simplified employee pension plan to the
extent such contributions are deductible by the
Employee, or any distributions from a plan of de-
ferred compensation;
(2) Amounts realized from the exercise of a
non-qualified stock option, or when restricted
stock (or property) held by the Employee either
becomes freely transferable or is no longer sub-
ject to a substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange
or other disposition of stock acquired under a
qualified stock option; and
(4) Other amounts which receive special tax
benefits.
For purposes of this paragraph, Compensation for a Plan
Year is the Compensation actually paid or includible in
gross income during such year. For Plan Years begin-
ning prior to January 1, 1989, if the Plan is "top
heavy" under Section 2.3, Compensation in excess of Two
Hundred Thousand Dollars ($200,000.00) shall be disre-
garded for each Plan Year during which the Plan is "top
heavy." For Plan Years beginning after December 31,
1988, but prior to January 1, 1994, Compensation in
excess of Two Hundred Thousand Dollars ($200,000.00)
shall be disregarded for all purposes, and for Plan
Years beginning after December 31, 1993, Compensation
in excess of One Hundred Fifty Thousand Dollars
($150,000.00) shall be disregarded for all purposes.
The dollar limitation referred to in the preceding two
sentences shall be adjusted for each Plan Year commenc-
ing after December 31, 1987, to take into account any
cost-of-living adjustment for that Plan Year under
applicable regulations or rulings of the United States
Treasury Department under Section 416(d)(2) and Section
415(d) of the Code (as modified by Section 401(a)(17)
of the Code). Notwithstanding the foregoing, for pur-
poses of applying the foregoing limitation to an Em-
ployee who is a "5-percent owner" as defined in Section
414(q)(3) of the Code, or a Highly Compensated Employee
who is among the ten (10) most Highly Compensated
7
<PAGE>
Employees during the Plan Year, Compensation paid to
any member of the family of that Employee shall be
deemed to have been paid directly to the Employee. For
purposes of this Section, the term "family" shall mean
the Employee's spouse and any lineal descendants of the
Employee who have not attained the age of nineteen (19)
years prior to the end of the Plan Year. If the forego-
ing dollar limitation (as adjusted for cost-of-living
increases) is exceeded as a result of the application
of the foregoing rules, the Compensation of the Employ-
ee and any affected family members taken into account
for purposes of this Plan shall be reduced by each
individual's proportionate share of Compensation in
excess of such limitation. Each individual's propor-
tionate share of such excess amount shall be an amount
which bears the same ratio to the excess amount as the
individual's Compensation (determined without regard to
the dollar limitation (as adjusted for cost-of-living
increases)) bears to the aggregated Compensation of the
Employee and any affected family members (determined
without regard to the foregoing dollar limitation (as
adjusted for cost-of-living increases)).
(s) "Continuous Service" - The service of the
Employee measured in years and completed calendar
months, based on the period of elapsed time of Employ-
ment, as provided in the applicable regulations of the
United States Treasury Department (as of the Effective
Date, Treas. Reg. 1.410(a)-7). For purposes of deter-
mining Continuous Service, periods of Employment as an
employee of an Affiliate (while such an Affiliate is an
Affiliate) shall be deemed to be Employment with the
Company. Continuous Service shall be measured in a
twelve (12) month period, commencing with the first
Hour of Service, or the anniversary of the first Hour
of Service. The determination of Continuous Service
shall be subject to the following rules: (1) Continuous
Service shall not be interrupted in the event the
Employee is on an Authorized Leave of Absence, and (2)
Continuous Service shall be interrupted on the Employ-
ee's Termination date, unless the Employee again recom-
mences Employment prior to the occurrence of a Break in
Continuous Service.
(t) "Discretionary Company Contribution" - The
amounts contributed to the Trust Fund by the Company
pursuant to Section 5.1(b).
(u) "Disability" - The inability of the Employee
to engage in any substantial gainful activity with the
Company by reason of any medically determinable physi-
cal or mental impairment that can be expected to result
8
<PAGE>
in death or to be of long-continued or indefinite
duration. An Employee shall be conclusively presumed
to be disabled when so certified by a physician who is
appointed by the Administration Committee. The Admin-
istration Committee will determine Disability, and its
determination shall be binding and conclusive upon all
persons whomsoever, provided that the Administration
Committee may reconsider and revise its determination.
(v) "Effective Date" - January 1, 1987, except as
otherwise expressly noted.
(w) "Employee" - Each person who is receiving
remuneration or who is entitled to remuneration for
services rendered to the Company in the legal relation-
ship of employer and employee and not in the relation-
ship of a private contractor (or who would be receiving
or be entitled to remuneration were such person not on
an Authorized Leave of Absence). Employees who are
covered by a collective bargaining agreement with a
union with whom the Company or an Affiliate or its
representative has bargained in good faith over retire-
ment benefits and individuals who are deemed to be
employees solely by reason of their status as "leased
employees" (as defined in Section 414(n) of the Code)
of the Company shall not be deemed to be Employees
under this Plan. When the term "Employee" appears in
this Plan without being initially capitalized, such
term shall include all employees of the Company, in-
cluding employees subject to a collective bargaining
agreement and those individuals who are deemed to be
"leased employees" (as defined in Section 414(n) of the
Code) of the Company.
(x) "Employment" - The service of any person who
is engaged in rendering personal services to the Com-
pany, or an Affiliate, as an Employee and not in a
private contractual capacity. Employment shall be
measured form the first Hour of Service of the Employee
during his first period of Employment, or, in the event
of reemployment following a Break in Continuous Ser-
vice, when credit for Continuous Service is forfeited
under Section 3.4, from the first Hour of Service
following the Break in Continuous Service.
(y) "Highly Compensated Employee" - All Employees
who are "highly compensated active employees" and
"highly compensated former employees" as described in
this Section 2.1(y).
(1) A "highly compensated active employee"
is an Employee who performs services for the Com-
9
<PAGE>
pany or its Affiliates during the current Plan
Year (the "determination year") and who:
(A) During the determination year, or
during the preceding Plan Year, is or was a
"five percent owner" as described in Section
416(i)(1) of the Code and applicable regula-
tions thereunder; or
(B) For both the current and preceding
Plan Year (i) receives compensation in excess
of Seventy-Five Thousand Dollars ($75,000.00)
from the Company or one or more of its Affil-
iates; (ii) is a corporate officer (within
the meaning of Code Section 414(q)(5)) of the
Company or one or more of its Affiliates
whose level of compensation places him in a
class consisting of the fifty (50) highest
paid corporate officers of the Company and
its Affiliates and exceeds fifty percent
(50%) of the applicable dollar limitation
under Section 415(b)(1)(A) of the Code; or
(iii) receives compensation from the Company
or its Affiliates in excess of Fifty Thousand
Dollars ($50,000.00) and is ranked within the
highest-paid twenty percent (20%) of Employ-
ees of the Company and Affiliates, ranked in
terms of compensation (the "top paid group").
The dollar limitations set forth in this
Section 2.1(y)(1)(B) shall be adjusted each
year beginning in 1989 to take into account
any cost-of-living increase adjustment allow-
able pursuant to applicable rulings or regu-
lations of the United States Treasury Depart-
ment under Code Section 415(d); or
(C) Satisfies one or more of the re-
quirements of Section 2.1(y)(1)(B)(i), (ii)
and (iii) for the determination year and is
one of the one hundred (100) most highly
compensated Employees of the Company and its
Affiliates during the determination year.
(2) A "highly compensated former employee"
is any individual formerly employed by the Company
or its Affiliates who satisfied the definition of
"highly compensated active employee" set forth
above, at the time he separated from employment or
at any time after he attained fifty-five (55)
years of age. No highly compensated former em-
ployee shall be considered a member of (A) the 100
most highly compensated Employees of the Company,
10
<PAGE>
(B) the group of includible officers or (C) the
top-paid group (as defined in Section
2.1(y)(1)(B)). If, at any time prior to the ter-
mination of employment and prior to attaining
fifty-five (55) years of age, a highly compensated
active employee receives compensation which is
less than fifty percent (50%) of the Employee's
annual average compensation for the three (3) con-
secutive years preceding the determination year,
and if, under all the facts and circumstances,
such Employee's future services for and compensa-
tion from the Company will not rise above that
amount, then such Employee shall be deemed to be a
highly compensated former employee upon his actual
separation from employment with the Company.
(3) For purposes of determining who is a
"Highly Compensated Employee," the following rules
shall apply:
(A) The compensation of a "5-percent
owner" or of an Employee who is among the ten
(10) most highly paid Employees of the Compa-
ny or its Affiliates (determined without
regard to the provisions of this paragraph)
shall include compensation paid by the Compa-
ny or its Affiliates to the members of the
"family" (as defined in Code Section
414(q)(6)(B)) of such Employee. For this
purpose, such family members shall not be
treated as separate Employees of the Company
and its Affiliates.
(B) The following employees shall be
excluded from the definition of "Employee"
for purposes of determining which employees
shall be included in the top-paid group:
(i) Employees who have not com-
pleted six (6) months of service during
the current and prior calendar years;
(ii) Employees who work for the
Company less than seventeen and one-half
(17-1/2) hours per week during fifty
percent (50%) or more of the weeks
worked by such Employees;
(iii) Employees who normally work
for the Company during not more than six
(6) months in any year;
11
<PAGE>
(iv) Employees who have not at-
tained twenty-one (21) years of age;
(v) Employees who are nonresident
aliens and who have not earned U.S.
source income from the Company; and
(vi) Employees covered under the
terms of a "collective bargaining agree-
ment" (within the meaning of Code Sec-
tion 7701(a)(46) and the regulations
thereunder) if ninety percent (90%) of
the Employees of the Company are covered
by one or more such agreements, and the
Plan covers only Employees who are not
so covered.
At the election of the Administrative Committee,
the age and service requirements in this Section
2.1(y)(3)(B) may be reduced (but not to less than
zero).
(C) "Compensation" shall have the meaning
set forth in Section 2.1(r), as adjusted to in-
clude all elective contributions made by or on
behalf of an Employee or a member of his family
(as defined in Code Section 414(q)(6)(B)) to a
cash or deferred arrangement pursuant to Code
Section 402(a)(8); a simplified employee pension
plan pursuant to Code Section 402(h)(1)(B); a
cafeteria plan within the meaning of Code Section
125; or a tax-sheltered annuity as defined in Code
Section 403 where contributions are made pursuant
to a salary reduction agreement.
(D) The Company may make a calendar year
election for purposes of determining the Highly
Compensated Employees for the Plan Year, as pro-
vided in the applicable regulations issued under
Section 414(q) of the Code.
(z) "Hour of Service" -
(1) An hour for which an Employee is direct-
ly or indirectly compensated, or is entitled to
compensation, by the Company or an Affiliate for
the performance of duties.
(2) An hour for which an Employee is direct-
ly or indirectly compensated, or is entitled to
compensation, by the Company or an Affiliate on
account of a period of time during which no duties
12
<PAGE>
are performed (irrespective of whether the employ-
ment relationship has terminated) due to vacation,
holiday, illness, incapacity (including disabili-
ty), layoff, jury duty, military duty or any leave
of absence. Hours of Service credited under this
Section 2.1(z)(2) shall be calculated and credited
pursuant to Section 2530.200b-2 of the Department
of Labor Regulations governing the computation of
Hours of Service, which are incorporated herein by
this reference.
(3) An hour for which back pay (irrespective
of mitigation of damages) is either awarded or
agreed to by the Company or an Affiliate. The
same Hours of Service shall not be credited both
under Section 2.1(z)(1) or (2) above, as the case
may be, and under this Section 2.1(z)(3).
(4) Employees shall also be credited with
any additional Hours of Service required to be
credited pursuant to any Federal law other than
the Act or the Code.
(aa) "Inactive Participant" - A Participant who is
not entitled to make or direct Payroll Deferral Contri-
butions under the Plan.
(bb) "Key Employee" - An Employee or former Em-
ployee who is or was, at any time during the Plan Year
ending on the "determination date" (as defined in
Section 2.3) or during any of the four (4) preceding
Plan Years:
(1) A corporate officer of the Company who
is or was among the fifty (50) highest paid offi-
cers and whose Compensation exceeds fifty percent
(50%) of the applicable dollar limitation in Sec-
tion 415(b)(1)(A) of the Code (as such sum shall
be adjusted for each Plan Year commencing after
December 31, 1987, to take into account any
cost-of-living increase adjustment for that Plan
Year pursuant to the applicable regulations or
rulings of the United States Treasury Department
under Section 415(d) of the Code). The number of
Employees treated as officers hereunder shall not
exceed ten percent (10%) of all employees, ranked
in order of Compensation from highest to lowest.
(2) An Employee (i) whose ownership interest
in the Company is more than one-half of one per-
cent (.5%) in value, (ii) whose ownership interest
is among the ten (10) largest ownership interests
13
<PAGE>
of shareholders who are Employees and (iii) whose
Compensation exceeds the applicable dollar limita-
tion of Section 415(c)(1)(A) of the Code (as such
sum shall be adjusted for each Plan Year commenc-
ing after December 31, 1987, to take into account
any cost-of-living increase adjustment for that
Plan Year pursuant to the applicable regulations
or rulings of the United States Treasury Depart-
ment under Section 415(d) of the Code). If two
(2) or more Employees have equal ownership inter-
ests in the Company, the Employee or Employees re-
ceiving the greater Compensation shall be treated
owning the larger interest or interests in the
Company.
(3) An Employee who owns more than five per-
cent (5%) of the issued and outstanding shares of
stock of the Company or stock possessing more than
five percent (5%) of the total combined voting
power of all stock of the Company.
(4) An Employee who owns more than one per-
cent (1%) of issued and outstanding shares of
stock of the Company or stock possessing more than
one percent (1%) of the total combined voting
power of all stock of the Company and whose Com-
pensation is more than One Hundred Fifty Thousand
Dollars ($150,000.00).
The Beneficiary of a Key Employee who is receiving or
has received benefits under the Plan during the Plan
Year or any of the four (4) preceding Plan Years shall
also be a Key Employee. For purposes of this Section
2.1(bb), ownership shall be determined under Section
318 of the Code, as modified by Section
416(i)(1)(B)(iii) of the Code.
(cc) "Loan Suspense Account" - The suspense ac-
count created in accordance with Section 9.3 to provide
for the crediting of Company Securities in accordance
with ARTICLE NINE and Section 4975(d)(3) of the Code
and the applicable regulations thereunder.
(dd) "Participant" - Each Employee who as of or
after the Effective Date has satisfied the eligibility
requirements specified in Section 3.1 and has elected
to participate in accordance with Section 3.2.
(ee) "Payroll Deferral Contributions" - The con-
tributions of the Company directed by a Participant
pursuant to Section 4.1 of the Plan.
14
<PAGE>
(ff) "Payroll Deferral Contributions Account" -
The separate bookkeeping account established pursuant
to Section 6.1 to record and credit the Payroll Defer-
ral Contributions made on behalf of a Participant and
the net gains and losses thereon.
(gg) "Payroll Tax Credit Contributions Account" -
The account established pursuant to Section 6.1 to
which "Payroll Tax Credit Contributions," made by the
Company in accordance with the terms and provisions of
the Plan as in effect prior to January 1, 1987, are
allocated.
(hh) "Plan" - TALLEY SAVINGS PLUS, as set forth
herein and as the same may be amended from time to
time.
(ii) "Plan Year" - The fiscal year used pursuant
to this Plan, which is the calendar year commencing
each January 1.
(jj) "Retirement Plan" - The Retirement Plan of
Talley Industries, Inc. (effective January 1, 1994, the
Retirement Plan of Talley Manufacturing and Technology,
Inc.), as amended from time to time. For purposes of
Sections 6.3 and 10.1, the term "Retirement Plan" shall
also refer to any "employee pension benefit plan" (as
defined in the Act) of an Affiliate intended to qualify
under Section 401(a) of the Code (other than a plan
intended to satisfy the requirements of Section 401(k)
of the Code).
(kk) "Termination Date" - The earlier of (1) the
date on which an Employee quits, retires, is discharged
or dies, or (2) the first anniversary of the first day
of the period during which the Employee was absent from
service with the Company for any reason other than
resignation, retirement, discharge or death.
(ll) "Trust Agreement" - The trust agreement exe-
cuted in connection with this Plan to provide for the
administration and investment of the Trust Fund.
(mm) "Trust Fund" - The fund held by the Trustee
to contain Company Contributions, Discretionary Company
Contributions, Payroll Tax Credit Contributions made
pursuant to the Plan as in effect prior to January 1,
1987, and Payroll Deferral Contributions, together with
the forfeitures, gains and income thereon, to be held,
administered and distributed under this Plan and the
Trust Agreement.
15
<PAGE>
(nn) "Trustee" - The trustee or trustees appointed
under the Trust Agreement.
(oo) "Valuation Date" - The date for valuing the
assets of the Trust Fund, which shall be the last
business day of each calendar month.
(pp) "Year of Eligibility Service" - A consecutive
twelve (12) month period in which the Employee is
credited with at least one thousand (1,000) Hours of
Service. The twelve (12) month period shall commence
on the date the Employee is first credited with an Hour
of Service. After this initial computation period, the
subsequent twelve (12) month period shall commence on
the first day of the Plan Year that commences within
the initial twelve (12) month period in which a Year of
Eligibility Service was to be credited. Thereafter,
Years of Eligibility Service shall be measured on the
Plan Year.
2.2. Construction. The masculine gender, where ap-
pearing in this Plan, shall include the feminine gender, and
vice-versa, and the singular may include the plural, and vice-
versa, unless the context clearly indicates to the contrary. The
term "delivered to the Administration Committee," as used in this
Plan, shall include delivery to a person or persons designated by
the Administration Committee for the disbursement and receipt of
administrative forms. Delivery shall be deemed to have occurred
only when the form or other communication is actually received,
and, with respect to the receipt of forms effective as of a
payroll period, delivery effective for the payroll period must be
made within the time indicated by the Administration Committee
for receipt of such form or other communication to be effective
as of the next-occurring payroll period. Any such rule with
respect to delivery shall be uniformly applicable to all Employ-
ees. Headings and subheadings are for the purpose of reference
only and are not to be considered in the construction of this
Plan. If any provision of this Plan is determined to be for any
reason invalid or unenforceable, the remaining provisions shall
continue in full force and effect. All of the provisions of this
Plan shall be construed and enforced according to the laws of the
State of Arizona and shall be administered according to the laws
of such state, except as otherwise required by the Act, the Code
or other Federal law. It is the intention of the Company that
the Plan as amended herein shall continue to constitute a quali-
fied stock bonus plan under the provisions of Section 401(a) of
the Code, and that the Trust Fund maintained pursuant to the
Trust Agreement shall continue to be exempt from taxation pursu-
ant to Section 501(a) of the Code. This Plan shall be construed
in a manner consistent with the Company's intention.
16
<PAGE>
2.3. Determination of "Top Heavy" Status. In the event
that the Plan shall become "top heavy" or "super top heavy," as
determined under this Section 2.3, certain additional provisions
of this Plan will become operative (for such period as the Plan
shall be "top heavy" or "super top heavy"). The provisions of
this Section 2.3 shall supersede any conflicting provisions of
this Plan.
The Plan will be "top heavy" for a Plan Year if, on the
last day of the prior Plan Year (the "determination date"), more
than sixty percent (60%) of the cumulative balances credited to
all Accounts of all Participants are credited to or allocable to
the Accounts of Key Employees. The Plan will be "super top
heavy" for a Plan Year if, on the determination date, more than
ninety percent (90%) of the cumulative balances credited to all
Accounts of all Participants are credited to or allocable to the
accounts of Key Employees. The balance credited to or allocable
to a Participant's Accounts for purposes of this Section 2.3
shall include contributions made on or before the determination
date, together with distributions made during such Plan Year and
in the preceding four (4) Plan Years. The Accounts of a Partici-
pant who was formerly a Key Employee and the Accounts of a
Participant who has not performed any services for the Company or
an Affiliate during the five (5) year period ending on the
determination date shall not be taken into account for purposes
of this Section 2.3. The value of Accounts shall be determined
as of the date on which the determination under this Section 2.3
is made.
Notwithstanding anything in this Section 2.3 to the
contrary, however, in the event that the Plan shall be determined
by the Administrative Committee (in its sole and absolute discre-
tion, but pursuant to the provisions of Section 416 of the Code)
to be a constituent in an "aggregation group," this Plan shall be
considered "top heavy" or "super top heavy" only if the "aggrega-
tion group" is a "top heavy group" or "super top heavy group."
For purposes of this Section 2.3, an "aggregation group" shall
include each plan intended to qualify under Section 401(a) of the
Code sponsored by the Company or an Affiliate in which one (1) or
more Key Employees participate and each other plan of the Company
or an Affiliate that is considered in conjunction with such other
plans in determining whether or not the nondiscrimination and
coverage requirements of Section 401(a)(4) or Section 410 of the
Code are met, and may include, in the sole and absolute discre-
tion of the Administrative Committee, any other such plan of the
Company or an Affiliate which, if considered in conjunction with
the plans required to be included in an "aggregation group,"
satisfies the nondiscrimination and coverage requirements of
Section 401(a)(4) and Section 410 of the Code. A "top heavy
group," for purposes of this Section 2.3, is an "aggregation
group" in which the sum of the "present values" of the "cumula-
tive accrued benefits" (as determined under this Section 2.3) of
17
<PAGE>
Key Employees under all "defined benefit plans" (as defined in
Section 414(j) of the Code) and the aggregate of amounts consid-
ered to be credited to accounts pursuant to this Section 2.3
under all "defined contribution plans" (as defined in Section
414(i) of the Code) included in such group exceeds sixty percent
(60%) of the total such amount for all Employees covered by such
plans. A "super top heavy group" shall be determined under the
same procedures, but substituting the term "ninety percent (90%)"
for the term "sixty percent (60%)."
The "present value" of a "cumulative accrued benefit"
shall be the actuarial equivalent discounted value of a periodic
benefit, determined pursuant to applicable regulations under
Section 416 of the Code using the interest and mortality assump-
tions designated in the applicable defined benefit plans for
purposes of determining actuarial equivalency.
ARTICLE THREE
ELIGIBILITY AND PARTICIPATION
3.1. Eligibility. Each Employee who is a Participant
in the Plan as of the Effective Date shall continue to be a
Participant on the Effective Date. Each Employee who has at-
tained the age of twenty-one (21) years and completed a Year of
Eligibility Service prior to or as of the Effective Date shall be
eligible to participate as of the Effective Date. Each Employee
who is not eligible to participate as of the Effective Date shall
be eligible to participate as of the first day of the first
calendar month coincident with or following the later of (a) the
date on which the Employee shall attain the age of twenty-one
(21) years, or (b) the date on which he is credited with a Year
of Eligibility Service, unless he shall leave employment with the
Company prior to such date. Notwithstanding anything to the
contrary in this Plan, Employees who are covered by a collective
bargaining agreement with a union with whom the Company or an
Affiliate or its representative has bargained in good faith over
retirement benefits shall not be eligible to participate in this
Plan unless their collective bargaining agreement provides for
participation in this Plan. Individuals who are "leased employ-
ees" of the Company (within the meaning of Section 414(n) of the
Code) shall not be eligible to participate in the Plan.
3.2. Participation. Participation in the Plan is
entirely voluntary. Each Employee who is eligible to become a
Participant pursuant to Section 3.1 may become a Participant by
signing an enrollment form provided by the Administration Com-
mittee and delivering the form to the Administration Committee.
The enrollment form shall authorize compensation reductions in an
amount equal to the amount of Payroll Deferral Contributions
elected by the Participant. The Participant shall designate on
the form the amount of his directed Payroll Deferral Contribu-
18
<PAGE>
tions, subject to the right of the Administration Committee to
refuse to accept the Participant's designation if the Administra-
tion Committee determines that the designation would cause the
Plan to fail to satisfy the requirements of Section 4.1. The
Base Pay of an Employee who elects to direct Payroll Deferral
Contributions shall be reduced by an amount not to exceed five
percent (5%) of his Base Pay and the cumulative amount of the
reduction authorized by such Participants shall be retained by
the Company. All forms to be delivered to the Administration
Committee pursuant to this Section 3.2 must be received by the
Administration Committee within any uniform period prescribed by
the Administration Committee in order for the forms to be effec-
tive as of a particular payroll period. If a form is not re-
ceived by the Administration Committee prior to the close of such
period, it shall be given effect (if then valid) as of the next
succeeding payroll period when the form would have been effective
(if timely received).
3.3. Crediting of Service. Except as provided in
Section 3.4, all years of Continuous Service and all Years of
Eligibility Service shall be taken into account under this Plan.
An Authorized Leave of Absence granted by the Company for which
an Employee is not compensated shall be disregarded in determin-
ing whether the Employee has satisfied the eligibility require-
ments specified in Section 3.1. An Employee's participation in
the Plan, but not his right, if any, to payment of benefits,
shall be terminated upon his Termination Date, or upon his loss
of status as an Employee eligible to participate in the Plan. A
Participant shall be an Inactive Participant during an Authorized
Leave of Absence.
3.4. Break in Continuous Service. In the event that a
Participant credited with one (1) or more years of Continuous
Service shall sustain a Break in Continuous Service, the Par-
ticipant's years of Continuous Service prior to the Break in
Continuous Service shall be credited to him only after the Par-
ticipant is credited with a year of Continuous Service after the
Break in Continuous Service.
If an Employee separates from employment with the Com-
pany and is later rehired, he shall remain credited with all
Years of Service and years of Continuous Service credited to him
during his prior period of employment and if the Employee shall
have then satisfied the requirements of Section 3.1, he shall be
eligible to apply for participation as of his date of rehire, as
provided in Sections 3.1 and 3.2. If a rehired Employee would on
his rehire date still have the status of an Inactive Participant
had he not separated from employment, he shall remain an Inactive
Participant until he would otherwise qualify for active partici-
pation.
19
<PAGE>
3.5. Affiliated Corporations. For purposes of comput-
ing an Employee's Years of Eligibility Service and years of
Continuous Service, employees of Affiliates shall be given credit
for periods of employment with such Affiliates (while such
Affiliates were Affiliates) in the event that they become Employ-
ees as though during such periods they were Employees of the
Company. Persons employed by a corporation that is acquired by
the Company or by an Affiliate of the Company shall be credited
with service under the Plan in the event that they become employ-
ees only to the extent required under regulations of the United
States Treasury Department under Section 414(a)(2) of the Code.
3.6. Change of Status or Job Classification. In the
event that the status or job classification of a Participant
changes, without termination of employment with the Company, so
that he no longer meets the definition of "Employee," as defined
in Section 2.1, he shall become an Inactive Participant. In the
event that an Employee who was ineligible to participate in the
Plan because of his status as an employee covered by a collective
bargaining agreement not providing for participation in the Plan
or as a "leased employee" becomes eligible to participate due to
a change in his status or job classification, his years of
Continuous Service and Years of Eligibility Service prior to his
change of status or job classification shall be credited to him,
subject to Sections 3.3 and 3.4. In the event that a Participant
ceases to be an Employee, as defined in Section 2.1, as a result
of his transfer to an Affiliate not participating in the Plan,
then he shall become an Inactive Participant until returning to
the status of an Employee eligible for participation (in which
event he may recommence active participation in accordance with
the terms of this Plan), or until his separation from Employment
with the Company and its Affiliates, for any reason, whichever
first occurs.
ARTICLE FOUR
PAYROLL DEFERRAL CONTRIBUTIONS
4.1. Payroll Deferral Contributions. For each calendar
month of the Plan Year, there shall be payable from the Company
on behalf of Plan Participants who have elected to direct Payroll
Deferral Contributions a "compensation reduction distribution."
The amount of the compensation reduction distribution shall be
equal to the amount of the aggregate reduction of Base Pay of all
Participants who have elected to direct Payroll Deferral Contri-
butions for such calendar month of the Plan Year. Each Partici-
pant who has elected to direct Payroll Deferral Contributions
shall be entitled to allocation of a distributive share of the
compensation reduction distribution equal to the amount of
Payroll Deferral Contributions elected by the Participant, not to
exceed five percent (5%) of his Base Pay for such month. Each
Participant who has elected to direct Payroll Deferral Contribu-
20
<PAGE>
tions who is not an Inactive Participant may elect to have
contributed a Payroll Deferral Contribution by the Company to the
Trust Fund out of his share of the compensation reduction distri-
bution, subject to termination or suspension of the right to
direct Payroll Deferral Contributions. Payroll Deferral Contri-
butions shall be directed in whole percentage increments of Base
Pay, from one percent (1%) to five percent (5%) of Base Pay, as
the Participant shall elect on a form provided by and delivered
to the Administration Committee.
In no event shall the Payroll Deferral Contribution
made on behalf of a Participant for a Plan Year exceed the lesser
of five percent (5%) of his Base Pay for the Plan Year or Seven
Thousand Dollars ($7,000.00) (as adjusted each Plan Year for
cost-of-living increases in accordance with Section 402(g)(5) of
the Code and the regulations thereunder) in the aggregate. In
applying the Seven Thousand Dollar ($7,000.00) limitation re-
ferred to in the prior sentence, amounts contributed by a Partic-
ipant on a pre-tax basis to any other qualified cash or deferred
arrangement (as defined in Section 401(k) of the Code), any
elective employer contributions to a simplified employee pension
plan which are not included in the Participant's gross income due
to Section 402(h)(1)(E) of the Code and any employer contribution
used to purchase an annuity contract under Section 403(b) of the
Code pursuant to a salary reduction arrangement (within the
meaning of Section 3121(a)(5)(E) of the Code) shall be taken into
account. If the sum of the foregoing contributions and the
Participant's Payroll Deferral Contributions under this Plan for
any Plan Year exceeds Seven Thousand Dollars ($7,000.00) (as
adjusted for that Plan Year for cost-of-living increases in
accordance with Code Section 402(g)(5) and the regulations issued
thereunder), the Participant may elect to have the excess amount
returned to him from this Plan by advising the Administration
Committee of the excess contributions and requesting the return
of all or any portion of such excess contributions from the Plan.
Such notice must be in writing in a form acceptable to the
Administration Committee and be received by the Administration
Committee no later than March 1 of the Plan Year following the
Plan Year for which the excess contributions were made. The
Administration Committee may, in its sole and absolute discre-
tion, return any excess contributions together with any income
thereon, to the Participant by April 15 of the Plan Year follow-
ing the Plan Year for which the excess contributions were made.
In the event that the Administration Committee deter-
mines, in its sole and absolute discretion, that the average rate
of Payroll Deferral Contributions (as a percentage of compensa-
tion) made on behalf of Highly Compensated Employees, would cause
discrimination under Section 401(k)(3)(A) of the Code and Trea-
sury Regulations Sections 1.401(k)-1(b) and 1.401(m)-2, the
Administration Committee shall direct the Trustee to refund the
Payroll Deferral Contributions directed by Highly Compensated
21
<PAGE>
Employees, plus any earnings thereon, prior to the expiration of
the two and one-half (2-1/2) month period beginning after the end
of the Plan Year of deferral, until the Plan is no longer dis-
criminatory under Section 401(k)(3)(A) and Treasury Regulations
Sections 1.401(k)-1(b) and 1.401(m)-2. The Payroll Deferral
Contributions and the earnings thereon of those Highly Compensat-
ed Employees having the highest rate of Payroll Deferral Contri-
butions (as a percentage of compensation) within such group of
Participants shall be refunded first until the Plan is no longer
discriminatory under Section 401(k)(3)(A) and Treasury Regula-
tions Sections 1.401(k)-1(b) and 1.401(m)-2. For purposes of
this Section 4.1, "compensation" shall be determined in accor-
dance with Section 414(s) of the Code. Any such refund shall be
limited to the amount that, in the judgment of the Administration
Committee, is expected to meet the requirements of Section
401(k)(3)(A) of the Code and Treasury Regulations Sections
1.401(k)-1(b) and 1.401(m)-2.
4.2. Designation and Change of Designation of Payroll
Deferral Contributions. All designations or changes of desig-
nation of the amount of Payroll Deferral Contributions shall be
made on forms supplied by the Administration Committee, signed by
the Participant and delivered to the Administration Committee. A
designation or change of designation shall be effective as of the
first payroll period in which the form is received by the Admin-
istration Committee prior to the close of the uniform period
prescribed by the Administration Committee for a form to be
effective with respect to a particular payroll period. A desig-
nation form shall be effective until it is succeeded by another
valid designation form, until the Participant becomes an Inactive
Participant, or until the Participant's right to direct and make
Payroll Deferral Contributions is otherwise suspended or termi-
nated. A Participant may change his rate of Payroll Deferral
Contributions not more than two (2) times per Plan Year. All
designations or changes of designation shall be subject to the
right of the Administration Committee to refuse to accept a
designation or change of designation, if the Administration
Committee concludes that such designation or change of designa-
tion would cause the Plan to be discriminatory under Section 4.1.
4.3. Suspension of Payroll Deferral Contributions. A
Participant may suspend Payroll Deferral Contributions as of the
first day of any calendar month. A suspension may last indefi-
nitely, but shall not be made for a period of less than six (6)
calendar months. A Participant who has suspended Payroll Defer-
ral Contributions pursuant to this Section 4.3 shall be an
Inactive Participant and shall not be entitled to resume direct-
ing Payroll Deferral Contributions until the first day of the
month next following a period of at least six (6) calendar months
from the effective date of suspension. At such time he may
recommence contributions in accordance with Section 4.2. Suspen-
sion of Payroll Deferral Contributions shall be made on a form
22
<PAGE>
supplied by the Administration Committee, signed by the Partici-
pant and delivered to the Administration Committee within the
uniform period prescribed by the Administration Committee for
receipt of forms to be effective as of a particular payroll
period. Recommencement of Payroll Deferral Contributions shall
be made only when the Participant subsequently so directs. While
a Participant is on an Authorized Leave of Absence, he shall be
an Inactive Participant, and may recommence directing and/or
making Payroll Deferral Contributions following his return to
active employment in accordance with Section 4.2. A Participant
shall not be entitled to "make-up" suspended Payroll Deferral
Contributions.
ARTICLE FIVE
COMPANY CONTRIBUTIONS
5.1. Company Contributions.
(a) Each calendar month the Company shall contribute
to the Trust Fund an amount equal to fifty percent (50%) of the
Payroll Deferral Contributions directed and/or withheld during
such calendar month and not withdrawn during such calendar month.
(b) In addition to its regular monthly Company Con-
tribution, the Company may make a Discretionary Company Contri-
bution to the Plan on behalf of Participants in such amounts, if
any, as shall be determined from time to time by the Company.
The Discretionary Company Contribution for a Plan Year, when
added to the Payroll Deferral Contributions of the Participants
and the regular monthly Company Contribution, shall in no event
be more than shall be allowable as a deduction for Federal income
tax purposes. Discretionary Company Contributions need not be
made from the Company's current or accumulated net profits.
(c) The Company may, in it sole and absolute discre-
tion, contribute an additional amount to the Trust Fund as a
Company ESOP Contribution for purposes of paying all or part of
the interest on an exempt loan under ARTICLE NINE.
5.2. Payment of Contributions. Monthly Company Con-
tributions and Payroll Deferral Contributions shall be paid to
the Trustee by the Company as soon as practicable after the end
of the calendar month for which such contributions are made and
Discretionary Company Contributions may be made at any time
during the Plan Year or as soon as practicable after the end of
the Plan Year. In no event, however, shall Company Contribu-
tions, Payroll Deferral Contributions and Discretionary Contri-
butions be paid by the Company later than the date by which the
Company's Federal income tax return must be filed, including any
extensions of such date. Such contributions may be made in cash,
in "qualifying employer securities" (as defined in Section
23
<PAGE>
407(d)(5) of the Act) that consist of Company Securities, includ-
ing treasury stock or newly issued shares of stock previously
authorized and unissued, in other property acceptable to the
Trustee, or in any combination of such property, as the Company
shall determine, in its sole discretion. For purposes of deter-
mining the amount of such contribution, Company Securities shall
be valued at fair market value, as published in the Wall Street
Journal or other generally accepted comparable financial publica-
tion for the last business day of the calendar month for which
such Company Contribution, Payroll Deferred Contribution and/or
Discretionary Company Contributions is made. If, on any date as
of which a price determination is to be made, the New York Stock
Exchange is closed or Company Securities are not traded, then the
determination will be made on the basis of prices quoted for the
immediately preceding day on which the New York Stock Exchange
was open or such stock was traded. All contributions by the
Company are expressly conditioned on such contributions being
allowed as a deduction for Federal income tax purposes. All
amounts paid into the Trust Fund by the Company shall constitute
irrevocable contributions to the Trust Fund, provided that in the
event that regulations, rulings or announcements the United
States Treasury Department shall so allow, and only in such event
and to the extent therein provided, contributions may be refunded
to the Company if the contribution or any part thereof was made
in error due to mistake of fact or was made conditionally upon
the contribution being allowable as a tax deduction and such tax
deduction is disallowed. Any permissible refund under any of
such circumstances must be made within one (1) year from the date
the contribution was made to the Trust Fund if made due to
mistake of fact, or within one (1) year from the date of disal-
lowance of tax deduction, if made conditionally upon allowance of
a deduction.
5.3. Limitation on Company Contributions. In the event
that the Administration Committee determines, in its sole and
absolute discretion, that the average rate of the Company Contri-
butions made on behalf of Highly Compensated Employees under
Section 5.1(a) (as a percentage of compensation) would cause
discrimination under Section 401(m) of the Code and Treasury
Regulations Sections 1.401(m)-1(b) and 1.401(m)-2, the Adminis-
tration Committee shall direct the Trustee to distribute to
Highly Compensated Employees either (a) the Company Contributions
made on their behalf, plus any earnings thereon, to the extent
non-forfeitable, and to forfeit such Company Contributions and
any earnings thereon to the extent forfeitable or (b) the
Company Contributions made on their behalf, plus any earnings
thereon, without regard to whether such Participant is fully
vested in such contributions, prior to the expiration of the two
and one-half (2-1/2) month period beginning after the end of the
Plan Year of contribution, until the Plan satisfies the require-
ments of Section 401(m) and Treasury Regulations Sections 1.401(-
m)-1(b) and 1.402(m)-2. The Company Contributions made under
24
<PAGE>
Section 5.1(a) on behalf of the Highly Compensated Employees
having the highest rate of Company Contributions (as a percentage
of compensation) and the earnings thereon shall be distributed or
forfeited, whichever is applicable, first. For purposes of this
Section 5.3, "compensation" shall be determined in accordance
with Section 4.2.
If the Administration Committee directs the Trustee to
distribute Company Contributions and the earnings thereon to
Participants who are Highly Compensated Employees without regard
to whether such Participants are vested in their Company Contri-
butions and earnings, a separate account shall be established for
each such Participant's interest in the Plan as of the date of
that distribution. The Participant's vested interest in the
separate account shall, at any relevant time, be equal to an
amount determined pursuant to the following formula: X = P(AB +
(R x D)) - (R x D). For purposes of applying the foregoing
formula, P is the vested percentage at the relevant time, AB is
the Account balance at the relevant time, D is the amount of
distribution, and R is the ratio of the Account balance at the
relevant time to the Account balance after distribution.
Any such distribution or forfeiture shall be limited to
the amount which, in the judgment of the Administration Commit-
tee, is expected to meet the requirements of Section 401(m) of
the Code and Treasury Regulations Sections 1.401(m)-1(b) and
1.401(m)-2.
To the extent permitted by regulations or rulings
issued by the United States Treasury Department, the Administra-
tion Committee may, in its sole and absolute discretion, aggre-
gate Payroll Deferral Contributions with Company Contributions
for purposes of determining whether the requirements of this
Section 5.3 are satisfied.
ARTICLE SIX
ACCOUNTING
6.1. Separate Accounts. A separate Company Contribu-
tions Account, Payroll Tax Credit Contributions Account and
Payroll Deferral Contributions Account will be maintained for
each Participant in the Plan. Each such Account shall be ad-
justed as hereinafter provided to reflect any withdrawals and
distributions, and as hereinafter provided any change in the fair
market value of the Trust Fund. The Accounts shall not reflect
amounts credited to the Loan Suspense Account pursuant to Section
9.2. For purposes of complying with the diversification require-
ments of Section 8.6, the Administration Committee may, in its
sole and absolute discretion, maintain subaccounts within each
Participant's Company Contributions Account for purposes of
accounting for Company Securities acquired prior to January 1,
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1987, and Company Securities acquired after December 31, 1986.
The establishment and maintenance of separate Accounts for each
Participant shall not be construed as giving any person any
interest in any specific assets of the Trust Fund which, for
investment purposes, shall be administered as a single fund
unless and until otherwise directed by the Administration Commit-
tee, or as provided hereunder.
6.2. Allocation of Contributions. Each Participant's
directed Payroll Deferral Contributions shall be credited to his
Payroll Deferral Contributions Account. The monthly Company
Contribution shall be allocated to the Company Contributions
Accounts of Participants with respect to which such Company
Contribution is made by crediting each such respective Partici-
pant's Company Contributions Account with an amount equal to
fifty percent (50%) of the Payroll Deferral Contributions made
and not withdrawn during the calendar month for which the Company
Contribution is made, except to the extent such Company Contribu-
tions are allocable to the Loan Suspense Account pursuant to
Section 9.2. The Discretionary Company Contribution for a Plan
Year and any forfeitures that are available for allocation during
that Plan Year shall be allocated as of the year-end Valuation
Date among the Company Contributions Accounts of all Participants
who are eligible to share in the allocation in the ratio that the
Company Contributions Account balance of each such Participant
for the Plan Year bears to the Company Contributions Account
balance of all such Participants. Discretionary Company Contri-
bution and forfeitures will be allocated to the Company Contribu-
tions Accounts after valuation and the adjustment of accounts as
provided in Section 6.4.
Notwithstanding any provision in this Section 6.2 of
this Plan to the contrary, in any Plan Year in which the Plan is
"top heavy" or "super top heavy" under the provisions of Section
2.3, Company Contribution, Discretionary Company Contribution and
forfeitures (whether separately allocable or allocable as part of
such contributions) be allocated to the Company Contributions
Accounts of Participants who are not Key Employees for the Plan
Year in which the Plan is "top heavy" or "super top heavy" in an
amount that is at least equal to the lesser of (a) three percent
(3%) of such Participant's Compensation for the Plan Year, or (b)
the sum of the Payroll Deferral Contributions, Company Contribu-
tions and Discretionary Company Contributions plus forfeitures
(as a percentage of Compensation) allocated for such Plan Year on
behalf of the Key Employee for whom such combined contribution
percentage is the highest. Such an allocation shall be made to
the Company Contributions Account of a Participant regardless of
whether that Participant elected to make a Payroll Deferral
Contribution for such Plan Year. After the foregoing allocation
of Company Contributions, Discretionary Company Contributions and
forfeitures has been made, the Payroll Deferral Contributions,
any remaining Company Contributions and Discretionary Company
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<PAGE>
Contributions and forfeitures may be allocated in accordance with
the other provisions of Section 6.2 and the Plan.
In determining the amount of the "top heavy" allocation
to be made, (i) all allocations of Payroll Deferral Contribu-
tions, Company Contributions and Discretionary Company Contribu-
tions for the Plan Year under all "defined contribution plans,"
as defined in Section 414(i) of the Code, maintained by the
Company or an Affiliate shall be considered as allocable under
this Plan, (ii) effective for Plan Years beginning after December
31, 1988, the Payroll Deferral Contributions made by Participants
who are Key Employees shall be taken into account and the Payroll
Deferral Contributions made by Participants who are not Key
Employees shall not be taken into account.
In the event that Participants who are not Key Employ-
ees are covered under a "defined benefit plan," as defined in
Section 414(j) of the Code, maintained by the Company or an
Affiliate, no "top heavy" contribution allocation shall be
required pursuant to this Section 6.2 if, pursuant to the terms
and provisions of the defined benefit plan, such Participants are
provided with a "top heavy" minimum defined benefit in the event
of their coverage under such plan and a defined contribution plan
maintained by the Company.
6.3. Limitation on Annual Additions. Notwithstanding
anything in this Plan to the contrary, the Annual Additions to be
allocated to the Accounts of a Participant for any Plan Year
shall not exceed an amount equal to the lesser of (a) Thirty
Thousand Dollars ($30,000.00) (or such greater amount as may be
permitted under Section 415(c)(1)(A) of the Code), or (b)
twenty-five percent (25%) of the Compensation of the Participant
for the Plan Year. The limitations of this Section 6.3 with
respect to any Participant who is at any time participating in
any other "defined contribution plan," as defined in Section
414(i) of the Code, maintained by the Company or by an Affiliate
shall apply as if the total Annual Additions under all such
defined contribution plans in which the Participant is partici-
pating were allocated under this Plan.
The Thirty Thousand Dollar ($30,000.00) limitation
referred to in the preceding paragraph (as adjusted from time to
time in accordance with Section 415(c)(1)(A) of the Code) shall
be adjusted in any "special permissible allocation year" (as
defined in this Section 6.3) beginning on or before July 12,
1989, to be equal to the sum of the Thirty Thousand Dollar
($30,000.00) limitation (as adjusted in accordance with Section
415(c)(1)(A)) and the lesser of (a) Thirty Thousand Dollars
($30,000) (as adjusted in accordance with Section 415(c)(1)(A)),
or (b) the value of Company Securities that are contributed or
purchased with cash contributed to the Trust Fund. For purposes
of the preceding sentence, Company Contributions that are used to
27
<PAGE>
pay the principal on a loan, the proceeds of which are used to
purchase Company Securities, will be treated as a contribution of
Company Securities for the Plan Year. In order to be considered
for purposes of this Section 6.3, any Company Securities pur-
chased with cash contributed by the Company must be allocable to
accounts pursuant to Section 6.2 for the particular "special
permissible allocation year" and such cash must be contributed
within thirty (30) days following the period described in Section
5.2 for making Company Contributions. The securities must be
purchased within sixty (60) days after the end of the period
described in the preceding sentence. A "special permissible
allocation year" shall be a Plan Year for which no more than
one-third (1/3) of Company Contributions is allocable to the
Accounts of Participants who are Highly Compensated Employees.
For any "special permissible allocation year," the limitation
imposed by this Section 6.3 shall not apply to, and the Partici-
pant's Annual Additions shall be determined without regard to,
any forfeitures of Company Securities which were acquired with
the proceeds of an exempt loan and any Company Contributions
and/or Company ESOP Contributions which are applied to pay
interest on an exempt loan. For purposes of this Section 6.3, an
"exempt loan" is a loan described in ARTICLE NINE which is
incurred for purposes of acquiring Company Securities.
In the event it is necessary to limit the Annual Addi-
tions, to the Accounts of a Participant under this Plan, the
Administration Committee shall direct the Trustee to refund to
the Participant such amounts of such Participant's Payroll
Deferral Contributions that would cause or have a part in causing
the limitations on Annual Additions to be exceeded and any
earnings thereon and shall adjust the Participant's Payroll
Deferral Contributions Account accordingly. If the limitations
of this Section 6.3 would still be exceeded following such
refund, the Administration Committee shall limit the allocation
of Discretionary Company Contributions to the Participant's
Company Contributions Account. Funds subject to such limitation
shall be treated as forfeitures to be allocated among other
Company Contributions Accounts, subject to this Section 6.3. To
the extent such allocation may not be made as a result of the
operation of this Section 6.3, the Administration Committee shall
allocate that portion of the Discretionary Company Contribution
otherwise allocable to the Participant's Company Contributions
Account that would cause the limitations of this Section 6.3 to
be exceeded to a suspense account in which such sums shall be
held as forfeitures to be allocated on a first-in-first-out basis
in accordance with Section 6.2 in the next succeeding Plan Year,
to the extent permitted under this Section 6.3. If, after such
reallocation, the limitations of this Section 6.3 remain exceed-
ed, a similar adjustment shall be made for Company Contributions.
If, after such reallocation, the limitations of this Section 6.3
remain excluded, adjustments shall be first made for Annual
Additions under any other defined contribution plan maintained by
28
<PAGE>
the Company or an Affiliate in accordance with the terms of such
plan.
In any case where a Participant under this Plan is also
a participant in the Retirement Plan, or in any other "defined
benefit plan," as defined in Section 414(j) of the Code, main-
tained by the Company or by an Affiliate, the sum of the "defined
benefit plan fraction" under such plan and the "defined contribu-
tion plan fraction" under this Plan and all other defined contri-
bution plans maintained by the Company and its Affiliates shall
not exceed one (1). The "defined benefit plan fraction" for any
Plan Year is a fraction, the numerator of which is the projected
annual benefit payable to the Participant as of the close of the
current Plan Year, and the denominator of which is the lesser of
(a) one hundred twenty-five percent (125%) of the dollar limita-
tion contained in Section 415(b)(1)(A) of the Code, as adjusted
for the Plan Year of such computation under Section 415(d) of the
Code, or (b) one hundred forty percent (140%) of the Partici-
pant's average Compensation for the three (3) Plan Years during
which his Compensation is highest. Notwithstanding the above, if
a Participant was a participant in one or more defined benefit
plans maintained by the Company or an Affiliate which were in
existence on May 6, 1986, the denominator of the defined benefit
plan fraction will not be less than one hundred twenty-five
percent (125%) of the sum of the annual benefits under such plans
which the Participant had accrued as of the close of the last
Plan Year beginning on or before December 31, 1986, calculated as
if the Participant had terminated employment on the last day of
said Plan Year. In calculating a Participant's benefits, the
Administration Committee shall disregard changes in the terms and
conditions of such plans occurring on or after May 6, 1986, and
the cost-of-living adjustments occurring on or after May 6, 1986.
The preceding two sentences shall only apply if the defined
benefit plans individually and in the aggregate satisfy the
requirements of Section 415 of the Code as in effect at the end
of the 1986 Plan Year.
The "defined contribution plan fraction" for any Plan
Year is a fraction, the numerator of which is the sum of the
Annual Additions made to the Participant's Accounts for the Plan
Year and for all prior Plan Years, and the denominator of which
is the lesser of (a) one hundred twenty-five percent (125%) of
the dollar limitation contained in Section 415(c)(1)(A) of the
Code, for the Plan Year and all prior years of Continuous Service
(as adjusted for the Plan Year of such computation pursuant to
Section 415(c)(1)(A) of the Code), or (b) thirty-five percent
(35%) of the Participant's Compensation for the Plan Year and all
prior years of Continuous Service. If the Participant was a
participant in one (1) or more defined contribution plans and one
(1) or more defined benefit plans maintained by the Company or an
Affiliate which were in existence on May 6, 1986, and which
satisfied the requirements of Section 415 for all limitation
29
<PAGE>
years beginning prior to January 1, 1987, the numerator of this
fraction will be adjusted if the sum of this fraction and the
defined benefit plan fraction would otherwise exceed one (1)
under the terms of the Plan. The adjustment shall be made by
permanently subtracting from the numerator an amount equal to the
product of (1) the excess of the sum of the fractions over one
(1) and (2) the denominator of the defined contribution as of the
"determination date." For this purpose, the "determination date"
is last day of the last Plan Year commencing on or before Decem-
ber 31, 1986. Changes in the terms and conditions of any plan
after May 5, 1986, shall be disregarded in adjusting the defined
contribution factor. The adjustment shall be made only after
eliminating any accruals under this or any other plan which are
in excess of the accruals permitted under Section 415 of the
Code.
In the event it is necessary to adjust benefits and/or
contributions to prevent the combined fraction from being exceed-
ed in a Plan Year, the Participant's benefits under the Retire-
ment Plan or other defined benefit plan shall be reduced so as to
eliminate any excess over the combined fraction, as provided in
the Retirement Plan, and such reduction of benefit shall be made,
if necessary, prior to the allocation of Company Contributions or
Payroll Deferral Contributions to Accounts. In order to make
such reduction, accruals for the Participant's benefit shall be
automatically adjusted to reflect the limits of this Section 6.3.
Any further reductions necessary shall be made by reducing the
Annual Additions under this Plan as provided above.
In the event that the Plan shall become "top heavy" and
therefore subject to the provisions of Section 6.2, a factor of
"one hundred percent (100%)" shall be substituted for the factor
of "one hundred twenty-five percent (125%) for purposes of
determining the "defined benefit plan fraction" and the "defined
contribution plan fraction" described above.
6.4. Valuation and Account Adjustments. Within a rea-
sonable time after a Valuation Date, the Administration Committee
or its agent shall cause Accounts to be credited and adjusted by
(a) allocating all Payroll Deferral Contributions, Company
Contributions and Discretionary Company Contributions not other-
wise allocable to the Loan Suspense Account and not previously
credited to Accounts, (b) allocating Company Securities released
from the Loan Suspense Account in accordance with Section 9.3,
which are attributable to Company Contributions allocated to the
Loan Suspense Account pursuant to Section 9.3, to the Company
Contributions Accounts of the Participants on whose behalf such
contributions were made in an amount that bears the same ratio to
the total number of Company Securities released from the Loan
Suspense Account since the last Valuation Date as the Company
Contributions made on behalf of each such Participant since the
last Valuation Date and used to pay principal and/or interest on
30
<PAGE>
a loan under ARTICLE NINE bears to the Company Contributions made
on behalf of all Participants since the last Valuation Date and
used to pay principal and/or interest on the loan, (c) charging
to the proper Accounts withdrawals and distributions not previ-
ously charged to Accounts, and (d) crediting or charging Partici-
pants' Accounts with their pro rata share of increases or de-
creases in the fair value of the Trust Fund since the most recent
Valuation Date. Income from the Company Securities allocated to
the Loan Suspense Account pursuant to Section 9.2 shall be
allocable as income from assets of the Trust Fund not allocated
to the Loan Suspense Account, unless such income forms part of
the collateral for a loan pursuant to Section 9.2 or is to be
used to pay the principal and/or interest on a loan entered into
in connection with the purchase of such Company Securities
pursuant to ARTICLE NINE.
6.5. Statements to Participants. As of the final Val-
uation Date in each Plan Year, and at such other times as the
Administration Committee shall determine, each Participant shall
be provided with a statement showing his Account balances as of
such date.
ARTICLE SEVEN
VESTING
7.1. Vesting in the Payroll Deferral Contributions
Account and the Payroll Tax Credit Contributions Account. Each
Participant shall at all times be fully vested in all amounts
credited to or allocable to his Payroll Deferral Contributions
Account and Payroll Tax Credit Contributions Account, and his
rights and interest therein shall not be forfeitable for any
reason.
7.2. Vesting in the Company Contributions Account.
Each Participant shall be fully vested in the amounts credited to
or allocable to his Company Contributions Account, and his rights
and interest therein shall thereafter not be forfeitable for any
reason, on and after the first to occur of the following events:
(a) Attainment by the Participant of the age of
sixty-five (65) years; or
(b) The date of separation from Employment of the
Participant due to Disability, as determined by the
Committee; or
(c) The date of death of the Participant; or
(d) Termination of the Plan, as provided in Sec-
tion 12.3 of this Plan; or
31
<PAGE>
(e) Complete discontinuance of Company Contribu-
tions, as provided in Section 12.3 of this Plan; or
(f) The completion of five (5) years of Continu-
ous Service by the Participant; or
(g) The date of retirement of the Participant
under the Retirement Plan if, at the time of such re-
tirement, he is fully vested and has satisfied the
requirements for early, normal or late retirement ben-
efits under the Retirement Plan.
7.3. Determination of Vested Interest in the Event of
Separation from Employment. In the event a Participant shall
separate from Employment with the Company and such Participant
shall not be fully vested in the amounts credited to or allocable
to his Company Contributions Account in accordance with Section
7.2, the vested interest of the Participant in such account shall
be determined as of the Valuation Date preceding or coincident
with the date on which his benefits are payable in accordance
with this Section 7.3, in accordance with the following schedule:
Years of Vested Percentage of
Continuous Service Company Contributions Account
------------------ -----------------------------
Less than one 0%
One but less than two 20%
Two but less than three 40%
Three but less than four 60%
Four but less than five 80%
Five or more 100%
Any amounts credited to his Company Contributions Account in
which the Participant is not vested shall be forfeited upon the
earlier of (i) the date on which the Participant receives a
distribution of his Accounts pursuant to Sections 10.6 and 10.7,
and (ii) the last day of the Plan Year in which occurs the
Participant's fifth (5th) consecutive Break in Continuous Ser-
vice, provided that the Participant does not again become an
Employee of the Company or an Affiliate prior to that date.
7.4. Restoration of Forfeiture. In the event that (a)
amounts are distributed to a non-vested or partially-vested
Participant or Inactive Participant upon his separation from
employment with the Company, (b) the Participant or Inactive
Participant sustains a forfeiture of amounts credited to his
Company Contributions Account upon his separation from employ-
ment, and (c) the former Participant or Inactive Participant
shall again become an Employee of the Company or an Affiliate
prior to the occurrence of a period of five (5) consecutive
32
<PAGE>
Breaks in Continuous Service, an amount equal to the amount
forfeited upon his prior separation from employment shall be
restored to his Company Contributions Account upon reemployment.
To restore such amounts, the Company will make a special alloca-
tion of forfeitures occurring in the Plan Year in which the
Employee resumes employment with the Company, and if such forfei-
tures are not sufficient to completely restore the amounts
forfeited, the Company will make a special contribution equal to
the amounts forfeited. Such amounts will be allocated to the
Participant's Company Contributions Account.
7.5. Amendments to Vesting Schedule. No amendments to
the vesting schedule set forth in Sections 7.2 and 7.3 shall
deprive an Employee who is a Participant or Inactive Participant
on the later of (a) the date the amendment is adopted, or (b),
the date the amendment is effective, of any nonforfeitable
benefit to which he is entitled under the Plan (determined as of
such date) without regard to such amendment. If the vesting
schedule designated in Sections 7.2 and 7.3 is amended, each
Participant whose benefits would be determined under such sched-
ule shall have the right to elect, during the period after the
amendment that is computed pursuant to this Section 7.5, to have
his nonforfeitable benefit determined without regard to such
amendment; provided, however, that no election shall be provided
to any Participant whose nonforfeitable vested benefit under the
Plan, as amended, cannot at any time be less than the benefit
computed without regard to such amendment. The election period
shall commence on the date the amendment is adopted and end on
the later of (a) sixty (60) days after adoption of the amendment,
(b) sixty (60) days after the effective date of the amendment, or
(c) sixty (60) days after the Participant is notified of the
amendment in writing by the Company or Administration Committee.
Such election, if exercised, shall be irrevocable, and shall be
available only to an Employee who is a Participant or Inactive
Participant when the election is made.
ARTICLE EIGHT
INVESTMENT OF CONTRIBUTIONS
8.1. Investment of Accounts. The assets of the Trust
Fund shall, to the extent practicable and in accordance with
applicable laws and regulations, be invested principally in
securities of Talley Industries, Inc. that are "qualifying
employer securities," as defined in Section 407 of the Act. All
amounts allocable to balances credited to Payroll Tax Credit
Contributions Accounts shall be invested in such qualifying
employer securities consisting of common stock of Talley Indus-
tries, Inc., except as permitted under applicable regulations
with respect to cash balances being held for stock investment.
33
<PAGE>
The Trustee may, in its sole and absolute discretion,
acquire Company Securities through brokers, investment managers,
on the open market, in private transactions and placements,
through a "party or parties in interest" (as defined in Section
3(14) of the Act), or through a "disqualified person or persons"
(as defined in Section 4975 of the Code) (including the Company
or an Affiliate), or through any combination of such sources;
provided that no acquisition of Company Securities from the
Company or Affiliate, or sale of Company Securities to, a party
in interest or disqualified person may be made unless: (a) the
acquisition or sale is for adequate consideration, or, in the
case of a marketable obligation, a price not less favorable to
the Trust Fund than the price determined under Section 407(e)(1)
of the Act; (b) no commission is charged with respect thereto;
and (c) such acquisition or sale is made in a manner consistent
with any applicable regulations under Section 4975 of the Code
and Sections 406, 407 or 408 of the Act.
The Trustee may keep portions of the Trust Fund in cash
or short-term obligations as it may from time to time determine
to be in the best interests of the Trust Fund, except as provided
above with respect to amounts allocated to Payroll Tax Credit
Contributions Accounts. Notwithstanding anything to the contrary
in this Section 8.1, however, no sums attributable to a Partici-
pant's Payroll Deferral Contributions Account may be invested in
Company Securities unless there is then in effect with respect to
the Trust Fund a registration statement or Regulation A offering
circular pursuant to the Securities Act of 1933. The Administra-
tion Committee shall determine, in its sole and exclusive discre-
tion (but in reliance upon legal counsel to the Company, if it
desires), when a registration statement or Regulation A offering
circular is in effect with respect to the Trust Fund. Except as
provided in this Section 8.1 regarding investment in the Trust
Fund when a registration statement or Regulation A offering
circular is not in effect, it shall be permissible, as provided
hereunder, for all sums allocable to the Company Contributions
Accounts, Payroll Deferral Contributions Accounts and Payroll Tax
Credit Contributions Accounts to be invested in the "qualifying
employer securities" of Talley Industries, Inc., and the Trustee
is specifically authorized and empowered pursuant to this Plan
and in accordance with the terms and provisions of the Trust
Agreement to hold any amount of "qualifying employer securities"
(as defined in Section 407(d)(5) of the Act), up to an amount
equal to the entire value of the Trust Fund, without regard to
the diversification requirements of Section 404(a)(1)(C) and Sec-
tion 407(a) of the Act, as permitted pursuant to Section
404(a)(2) and Section 407(b)(1) of the Act.
8.2. Voting of Company Securities. The Trustee shall
vote all Company Securities held as assets of the Trust Fund as
provided in this Section 8.2. Company Securities held as assets
of the Trust Fund and allocated to the Accounts of a Participant
34
<PAGE>
shall be voted by the Trustee only in accordance with the direc-
tions of the Participant (or his Beneficiary, if a Participant
has died). Prior to each annual or special meeting of the share-
holders of Talley Industries, Inc. at which matters are to be
voted upon, the Administration Committee shall send or cause to
be sent to all Participants proxy materials for such meeting,
together with a form to be returned to the Administration Com-
mittee or its designated agent instructing the Trustee to vote
shares of Company Securities allocated to the Participant's
Accounts in accordance with the Participant's wishes. The voting
direction form may be prepared and distributed in accordance with
the regular proxy solicitation procedures of Talley Industries,
Inc. and each such Participant shall have the right to direct the
Trustee how such full and fractional shares are to be voted by
completion and execution of the voting direction form. Upon
receipt of such instructions, the Administration Committee shall
instruct the Trustee to vote or cause to be voted such full and
fractional shares of Company Securities in accordance with each
Participant's instructions. If the Administration Committee or
its designated agent does not receive instructions from a Partic-
ipant prior to such meeting, none of the Company Securities
allocated to such Participant's Accounts shall be voted. If the
Administration Committee has designated an agent for purposes of
this Section 8.2, the Administration Committee may remove such
agent and appoint a new such agent, or exercise its powers
without the use of an agent, as it shall determine in its sole
discretion. Company Securities which are not allocated to
Participants' Accounts shall be voted by the Trustee in the same
proportions as those Company Securities with respect to which
Participants (or their Beneficiaries) have the right to direct
voting.
8.3. Securities Registration. In the event that, in
the opinion of counsel for the Company or the Administration
Committee, any acquisition, sale or distribution of Company
Securities shall be made in circumstances requiring registration
of the Securities or Participants' interests in the Trust Fund
under the Securities Act of 1933 or qualification of the securi-
ties under the "blue sky" laws of any state or states, or requir-
ing any other form of compliance with Federal or state securities
laws, then the Company at its own expense may take or cause to be
taken any and all such action as may be necessary or appropriate
to effect such registration, qualification, or other form of
compliance, and the Trustee shall be under no obligation to
acquire, sell or distribute the Company Securities subject to
such registration, qualification or compliance requirements until
such requirements have, in the opinion of counsel for the Company
or Administration Committee, been satisfied. Until such time as
such requirements are satisfied, the Trustee may invest all or
any part of funds or assets otherwise specified to be invested in
Company Securities in securities issued or guaranteed by the
United States of America or any agency thereof, or in short-term
35
<PAGE>
commercial paper. To the extent permitted by law, the Trustee
shall be under no liability for any acquisition, sale or distri-
bution of Company Securities made pursuant to the direction of
the Administration Committee. Any written direction of the
Administration Committee shall constitute a certification that
the acquisition, sale or distribution of Company Securities so
directed is one which the Administration Committee is authorized
to direct and is in compliance with the applicable Federal and
state securities laws. The Trustee shall be under no liability
for any distribution made by it in accordance with the directions
of the Administration Committee and shall be under no duty to
make inquiries as to whether any acquisition, sale or distribu-
tion of Company Securities directed by the Administration Commit-
tee is made pursuant to the provisions of this Plan or in accor-
dance with Federal or state securities laws.
8.4. Tender or Exchange Offers. Each Participant (or
in the event of the Participant's death, his Beneficiary) shall
have the right, to the extent of the Company Securities allocated
to the Participant's Accounts, to direct the Trustee, in writing
on a form provided by the Administration Committee, whether or
not to tender or exchange such Company Securities, and the
Trustee shall have no discretion with respect thereto. The
Administration Committee shall utilize its best efforts to
distribute or cause to be distributed in a timely manner to each
Participant (or his Beneficiary) such information as will be
distributed to the Company's shareholders with respect to any
such tender or exchange offer, as well as a form on which the
Participant (or his Beneficiary) may direct the Trustee as to
whether the Company Securities allocated to the Participant's
Accounts shall be tendered or exchanged. If the Trustee shall
not receive timely directions from a Participant (or his Benefi-
ciary) as to whether the Company Securities allocated to the
Participant's Accounts shall be tendered or exchanged, the
Trustee shall not tender or exchange such securities. Unallocat-
ed shares of Company Securities and Company Securities held by
the Trustee pending allocation to Participants' Accounts shall be
tendered or exchanged by the Trustee in the same proportions as
shares with respect to which Participants (or their Beneficia-
ries) have the right to direct the Trustee in response to the
tender or exchange offer and the Trustee shall have no discretion
with respect thereto.
8.5. Confidentiality. In the event of a tender or
exchange offer with respect to Company Securities, the Adminis-
tration Committee shall advise each Participant (or in the event
of the Participant's death, his Beneficiary) in writing (with a
copy to the Trustee) that the decision to tender or exchange, or
not to tender or exchange, will be confidential and the Adminis-
tration Committee will set up appropriate procedures (such as
with an independent accounting firm, bank or transfer agent) so
that Participants' or Beneficiaries' individual decisions are not
36
<PAGE>
disclosed to the Company or Talley Industries, Inc., its offi-
cers, directors, agents, or to any member of the Administration
Committee, it being intended that each Participant or Beneficiary
be allowed to make tender and exchange decisions on a fully
confidential basis.
8.6. Investment Diversification. Notwithstanding any
provision to the contrary in this Plan, a Participant who has
attained the age of fifty-five (55) years and completed ten (10)
years of participation in the Plan may elect for each Plan Year
during the election period described in this Section 8.6 to
diversity the investment of his Accounts to the extent said
accounts are invested in Company Securities acquired by the
Trustee after December 31, 1986. Any election by a Participant
to diversity with respect to any Plan year during the election
period must be made in writing to the Administration Committee
within ninety (90) days after the end of that Plan Year in a form
acceptable to the Administration Committee. For purposes of this
Section 8.6, the election period shall commence with the Plan
Year beginning in the Plan Year in which the Participants attains
the age of fifty-five (55) years and completed ten (10) years of
participation and shall end on the last day of the sixth (6th)
Plan Year following commencement. The portion of the
Participant's Accounts eligible for diversification in any Plan
year during the election period shall be an amount equal to the
number of shares allocated to the Participant's Accounts which
were acquired after December 31, 1986, multiplied by twenty-five
percent (25%), and then reduced by the number of shares with
respect to which the Participant has previously elected diversi-
fication pursuant to this Section 8.6. Notwithstanding the
foregoing, in the last Plan Year of the election period, "fifty
percent (50%)" shall be substituted for "twenty-five (25%)" in
the preceding sentence. Any fractional shares shall be rounded
up to the next whole share of Company Securities.
To satisfy its diversification obligation under this
Section 8.6, the Administration Committee may offer the Partic-
ipant, in its sole and absolute discretion but in accordance with
uniform rules which do not discriminate in favor of Highly
Compensated Employees, one (1) or more of the following options:
(i) the right to have those shares with respect to which diversi-
fication is available distributed to the Participant, (ii) the
right to have the fair market value of such shares transferred to
another employee pension or profit sharing plan in which the
Participant participates, provided that such plan satisfies the
requirements of Section 401(a) of the Code and provides at least
three (3) investment options other than Company Securities,
and/or (iii) the right to direct the investment of the fair
market value of such shares in one (1) or more of at least three
(3) investment funds which the Administration Committee estab-
lishes under the Plan. The Administration Committee shall take
action to diversify the Participant's Accounts within ninety (90)
37
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days after the Participant elects to diversify his Accounts
pursuant to this Section 8.6.
ARTICLE NINE
LOANS TO ACQUIRE COMPANY SECURITIES
9.1. Loan to Acquire Company Securities. The Adminis-
tration Committee shall have the authority to direct the Trustee
to borrow funds to purchase Company Securities. In the event
that such funds are borrowed from, or the loan is guaranteed by,
a "disqualified person," as defined in Section 4975(e)(2) of the
Code, or a "party in interest," as defined in Section (3)(14) of
the Act, such loan shall be made only in accordance with all of
the provisions of this ARTICLE NINE. Any loan entered into by
the Trustee in connection with the purchase of Company Securities
shall be directed by the Administration Committee and shall be
primarily for the benefit of Participants and their Beneficia-
ries. The proceeds of any loan shall be used within a reasonable
time after receipt only for all or any of the following purposes:
(a) To acquire Company Securities;
(b) To repay the loan entered into in connection
with the purchase of Company Securities as provided in
(a) above; or
(c) To repay a prior loan entered into in con-
nection with the purchase of other Company Securities.
The provisions of this ARTICLE NINE are intended to be in com-
pliance with Section 4975(d)(3) of the Code and the applicable
regulations thereunder and Section 408(b)(3) of the Act and the
applicable regulations thereunder. This ARTICLE NINE is to be
construed in a manner consistent with such intention.
9.2 Terms of Loans to Acquire Company Securities. Any
loan transaction entered into by the Trustee at the direction of
the Administration Committee in order to purchase Company Securi-
ties must, at the time the loan is made, be at least as favorable
to the Plan as the terms of a comparable loan resulting from an
arms-length negotiation between independent parties. The inter-
est rate of any such loan must not be in excess of a reasonable
rate of interest considering the amount and duration of the loan,
the security and any guaranty involved, the credit standing of
the Plan, and/or the guarantor, if any, and the interest rate
prevailing for comparable loans. Any loan transaction entered
into by the Trustee in connection with this ARTICLE NINE shall
provide that the lender shall be without recourse against the
assets of the Trust Fund, except that the lender may have re-
course against Company Securities acquired with the proceeds of
the loan and Company Securities used as collateral on a prior
38
<PAGE>
loan repaid with the proceeds of the current loan given as
collateral and other assets of the Trust Fund that consist of
Company Contributions and Company ESOP Contributions that are
made under the Plan in order to enable the Trustee to meet its
obligations under the loan, and earnings attributable to the
Company Securities given as collateral. Payments on a loan
during a Plan Year shall not exceed an amount equal to the sum of
Company Contributions and Company ESOP contributions made by the
Company in order to enable the Trustee to meet its obligation
under the loan, together with earnings thereon, received during
or prior to the Plan Year, less payments on the loan in prior
Plan Years. Any such Company Contributions, Company ESOP Contri-
butions and the earnings on such contributions and Company Secur-
ities given as collateral shall be accounted for separately in
the books of account of the Plan by crediting such contributions
and the earnings thereon to the Loan Suspense Account, rather
than to the Company Contributions Accounts of Participants. Any
such loan shall also provide that in the event of default, the
value of Plan assets transferred in satisfaction of the loan
shall not exceed the amount of default. The loan shall provide
for a transfer of Plan assets upon default only upon and to the
extent of the failure of the Plan to meet the payment schedule of
the loan. Any loan entered into in connection with this ARTICLE
NINE shall be for a specific term, and may not be payable at the
demand of any person, except in the case of default.
9.3. The Loan Suspense Account. Company Securities
purchased with the proceeds of a loan entered into pursuant to
this ARTICLE NINE shall not be credited to Participants' Company
Contributions Accounts, but shall be credited to the Loan Sus-
pense Account. One (1) or more such accounts may be established
under this Section 9.3 with respect to one (1) or more such
loans. Company Contributions, Company ESOP Contributions and the
earnings thereon to be utilized by the Trustee for the purpose of
repaying a loan entered into pursuant to this ARTICLE NINE shall
also be credited to the Loan Suspense Account. If a loan entered
into pursuant to this ARTICLE NINE shall provide for at least
annual payments of principal and interest at a cumulative rate
that is not less rapid at any time than level annual payments of
principal and interest over ten (10) years, then the Administra-
tion Committee may directed that, as of each monthly accounting
date during the duration of the loan, the number of shares of
Company Securities released from the Loan Suspense Account for
allocation pursuant to Section 6.4 shall equal the number of
Company Securities held immediately before release as of the
monthly accounting date multiplied by a fraction. The numerator
of the fraction is the principal paid during the period ending on
the monthly accounting date and the denominator of the fraction
is the sum of the numerator plus all principal to be paid during
all future periods, determined without taking into account
extensions, renewals or refinancings. To the degree that any
interest payments on the loan would be regarded as principal
39
<PAGE>
under standard loan amortization tables, such interest shall be
treated as principal for purposes of this calculation. The
foregoing method of release shall be utilized by the Adminis-
tration Committee, unless a different method, permitted under
Section 4975(e)(7) of the Code and the regulations issued there-
under is required under the applicable loan documents. If the
Loan Suspense Account includes more than one (1) class of Company
Securities, the number of Company Securities of each class to be
released for a Plan Year must be determined by applying the same
fraction to each class. Such released Company Securities shall
be subject to allocation pursuant to Section 6.4.
ARTICLE TEN
DISTRIBUTION OF BENEFITS
10.1. Retirement. A Participant shall be entitled
to full distribution of all amounts credited to his Accounts upon
his retirement pursuant to the terms of the Retirement Plan,
after becoming fully vested and entitled to receive early, normal
or late retirement benefits under the Retirement Plan. In the
case of a Participant not entitled to retirement benefits under
the Retirement Plan, such Participant shall be entitled to full
distribution of all amounts credited to his Accounts upon separa-
tion from Employment on and after attaining the age of sixty-five
(65) years.
10.2. Disability Retirement. A Participant who
shall terminate Employment due to Disability shall be entitled to
full distribution of all amounts credited to his Accounts, as
provided in Section 10.6 and Section 10.7, as of the date of
separation from Employment due to Disability.
10.3. Death. In the event that a Participant shall
die prior to retirement, Disability or the commencement of
benefits following any other separation from Employment, the
Participant's spouse or the Participant's Beneficiary if the
Participant is unmarried, or if the Participant has made an
effective election to have benefits paid to a Beneficiary other
than the Participant's spouse, shall be entitled to full dis-
tribution of all amounts credited to the Participant's Accounts
as of the date of the Participant's death, as provided in Section
10.6 and Section 10.7. A married Participant's election to have
benefits paid under this Section 10.3 paid to a Beneficiary other
than the Participant's spouse shall not be effective unless the
Participant's spouse consents in writing to his election. The
consent of the Participant's spouse must acknowledge the effect
of the Participant's election and the spouse's consent thereto,
be witnessed by a notary public and be delivered to the Adminis-
tration Committee. No spousal election shall be required under
this Section 10.3 if the Administration Committee determines, in
its sole and absolute discretion, that such consent cannot be
40
<PAGE>
obtained because the spouse cannot be located or such other
circumstances exist that prevent the Administration Committee
from obtaining such consent (as permitted under applicable
regulations issued by the United States Treasury Department under
the Code). The Administration Committee may require and rely upon
such proofs of death and the right of the spouse or Beneficiary
to receive benefits pursuant to this Section 10.3 as the Adminis-
tration Committee may reasonably determine, and its determination
of death and the right of such spouse or Beneficiary to receive
payment shall be binding and conclusive upon all persons whomso-
ever.
10.4. Other Separations From Employment. A Partic-
ipant who separates from Employment for any reason other than
retirement under the Retirement Plan, or after attaining the age
of sixty-five (65) years, death or Disability shall receive
distribution of all amounts credited to his Payroll Tax Credit
Contributions Account, his Payroll Deferral Contributions Account
and the vested portion of his Company Contributions Account, in
the manner provided in Section 10.6 and Section 10.7, and any
remaining amounts allocable to his Company Contributions Account
in which the Participant is not vested shall be subject to
forfeiture, subject to Section 7.3 and Section 7.4.
10.5. Financial Necessity. In accordance with
rules established by the Administration Committee uniformly
applicable to all Participants and Inactive Participants, all or
any part of the amounts credited to the Payroll Deferral Contri-
butions Account of a Participant or Inactive Participant may, in
the sole discretion of the Administration Committee, be dis-
tributed to the Participant or Inactive Participant in cash at
any time after the receipt of his written application to the
Administration Committee showing demonstrable financial need for
distribution in order to meet a financial hardship described in
this Section 10.5.
(a) For Plan Years beginning prior to January 1,
1989, the following expenses shall constitute financial
hardships for purposes of this Section 10.5:
(i) Extraordinary medical or
medically-related expenses;
(ii) Family educational expenses in an amount
considered by the Administration Committee to be
burdensome in relation to the Participant's or
Inactive Participant's other financial resources
for meeting such expenses;
(iii) Substantial expenses of the Participant
in connection with the purchase of the Partici-
pant's principal residence;
41
<PAGE>
(iv) Extraordinary expenses related to an
unanticipated casualty, accident or other misfor-
tune; or
(v) Extraordinary expenses related to any
other similar need approved by the Administration
Committee.
(b) Effective for Plan Years beginning after
December 31, 1988, the following expenses shall con-
stitute financial hardships for purposes of this Sec-
tion 10.5:
(i) Medical expenses described in Section
213(d) of the Code incurred by the Participant,
the Participant's spouse or any of his dependents
(as defined in Section 152 of the Code) or any
expenses that must be incurred by the Participant,
his spouse or his dependents (as defined above) as
a condition of receiving medical care described in
Code Section 213(d);
(ii) The purchase (excluding mortgage pay-
ments) of a principal residence for the Partici-
pant;
(iii) Payment of tuition and tuition-related
fees for the next twelve (12) months of
post-secondary education for the Participant, the
Participant's spouse or any of his dependents (as
defined in Section 152 of the Code);
(iv) The need to prevent the eviction of the
Participant from his principal residence or fore-
closure on the mortgage on the Participant's prin-
cipal residence; or
(v) Any other circumstance or expense des-
ignated by the Commissioner of Internal Revenue as
a deemed immediate and heavy financial need in any
published revenue ruling, notice or other document
of general applicability.
If the Participant is married at the time he submits his appli-
cation for a distribution under this Section 10.5, his spouse
must consent to the distribution. The spouse's consent must be
in writing, acknowledge the effect of the distribution and the
spouse's consent thereto, be witnessed by a notary public and be
delivered to the Administration Committee. No spousal consent
shall be necessary if the Administration Committee determines in
its sole and absolute discretion that the spouse cannot be
located or there exist such other circumstances preventing
42
<PAGE>
consent as may be prescribed by applicable regulations or rulings
of the United States Treasury Department. Prior to approving the
Participant's application, the Administration Committee must find
that the distribution is necessary in light of an immediate and
heavy financial need of the Participant which cannot be satisfied
from the Participant's other resources and the distribution does
not exceed the amount required to meet the immediate financial
need created by the hardship, plus any taxes and penalties which
may be due as a result of the distribution. Any distribution
made pursuant to this Section 10.5 shall be in the sole discre-
tion of the Administration Committee, both as to the determina-
tion of financial need and the amount distributable. Any such
distribution approved by the Administration Committee shall be
made from amounts credited to the Participant's or Inactive
Participant's Payroll Deferral Contributions Account. No hard-
ship distribution shall be made from earnings credited to a
Participant's Payroll Deferral Contribution Account after Decem-
ber 31, 1988. No amounts credited to the Participant's or
Inactive Participant's Payroll Tax Credit Contributions Account
or Company Contributions Account may be distributed on the basis
of hardship.
10.6. Time of Distribution of Benefits. Payment to
a Participant who is entitled to benefits under Section 10.1 or
Section 10.2 and to Beneficiaries entitled to payment under
Section 10.3 shall commence within a reasonable time following
the Participant's retirement date, date of separation from
Employment due to Disability, or the later of the Participant's
separation from Employment or attainment of the age of sixty-five
(65) years. Notwithstanding anything to the contrary in this
Section 10.6, no distribution may be made to a Participant (or to
his spouse as Beneficiary if the Participant has died) prior to
the date upon which the Participant has attained the age of
sixty-five (65) years (or would have attained such age had the
Participant survived) without the consent of the Participant and
his spouse, if any, (or the consent of the Participant's spouse
alone if the Participant has died), if the value of the Partici-
pant's Accounts is in excess of Three Thousand Five Hundred
Dollars ($3,500.00). Payment to a fully or partially vested
Participant pursuant to Section 10.4 shall commence as soon as
practicable following the date on which the Participant attains
the age of sixty-five (65) years; provided that the Administra-
tion Committee shall commence payment of benefits to the Partici-
pant at any time after the Participant's separation from Employ-
ment if (a) the amount of the Participant's vested interest in
his Accounts is not in excess of Three Thousand Five Hundred
Dollars ($3,500.00), or (b) the Participant requests an immediate
distribution of his Accounts. No distribution may be made
pursuant to the preceding sentence after the Participant's
Benefit Commencement Date unless the Participant consents in
writing to the distribution. If the foregoing conditions are not
satisfied, payment shall commence within a reasonable time after
43
<PAGE>
the first Plan Year in which such Participant attains the age of
sixty-five (65) years.
Any amounts credited to the Participant's Company Con-
tributions Account in which the Participant is not vested shall
be forfeited upon distribution of benefits to the Participant.
If a Participant who has received a distribution from his Ac-
counts pursuant to this Section 10.6 on separation from employ-
ment with the Employer shall become an Employee prior to sustain-
ing a period of five (5) consecutive Breaks in Continuous Ser-
vice, an amount equal to the amount forfeited by such Employee
upon his separation from employment pursuant to Section 7.3,
shall be restored to the Employee's Company Contributions Account
pursuant to Section 7.4.
Subject to Section 10.9 and unless the Participant
elects otherwise, payment to the Participant shall commence no
later than sixty (60) days after the last to occur of (a) the
last day of the Plan Year in which the Participant attains the
age of sixty-five (65) years, (b) the last day of the Plan Year
in which the Participant separates from Employment with the
Company, or (c) the tenth (10th) anniversary of the last day of
the Plan Year in which the Participant commenced participation.
Notwithstanding any provision to the contrary in this
Section 10.6, at the election of the Participant, distribution of
his Company Contributions Account will begin no later than the
end of the Plan Year following (a) the Plan Year in which the
Participant terminated employment on account of retirement on or
after attaining the age of sixty-five (65) years, Disability or
death, or (b) the fifth (5th) Plan Year following the Plan Year
in which the Participant terminated for any other reasons.
Notwithstanding the foregoing, any shares of Company Securities
allocated to the Participant's Company Contributions Account
which were acquired with the proceeds of a loan subject to
ARTICLE NINE shall be excluded for purposes of determining the
balance in the Participant's Company Contributions Account under
the foregoing distribution rule until the Plan Year following the
Plan Year in which such loan has been repaid in full.
For the purpose of determining the amount to be dis-
tributed to Participants, the amount subject to distribution
shall be determined as of the Valuation Date coinciding with or
immediately preceding the date upon which distribution is to
commence, provided that if the Participant requests a distribu-
tion in cash, the Participant shall only be entitled to an amount
that could be obtained from a sale of the Company Securities
available for distribution to the Participant.
10.7. Method of Distribution. Distributions under
this Plan shall be made in a single lump sum in kind or in cash,
as elected by the Participant. All distributions shall be made
44
<PAGE>
in Company Securities (other than cash in lieu of fractional
shares) or shall be made in cash, or shall be made in a combi-
nation of cash and Company Securities, as the Administration
Committee shall determine; provided, however, that each Partici-
pant shall have the right, by notice in writing to the Adminis-
tration Committee, to irrevocably elect to receive amounts
allocable to his Accounts that are distributable pursuant to this
Section 10.7 in Company Securities (other than cash in lieu of
fractional shares). In the event Company Securities are distrib-
uted, such Company Securities shall be valued at its fair market
value, as published for the Valuation Date in the Wall Street
Journal or other generally accepted comparable financial publica-
tion. If, on any date as of which a price determination is to be
made, the New York Stock Exchange is closed or Company Securities
are not traded, then the determination will be made on the basis
of prices quoted for the next preceding day on which the New York
Stock Exchange was open or the securities were traded.
10.8. Put Option. Company Securities acquired with
the proceeds of a loan entered into pursuant to this ARTICLE TEN
prior to December 31, 1986, and all Company Securities acquired
after December 31, 1986, shall be subject to a put option as
provided in this Section 10.8 if the Company Securities are not
publicly traded when the Company Securities are distributed, or
if the Company Securities are subject to a "trading limitation"
when distributed. For purposes of this Section 10.8, a "trading
limitation" is a restriction under any Federal or state securi-
ties law or any regulation thereunder affecting the security that
would make the Company Securities not as freely tradeable as
Company Securities not subject to the restriction. The put
option granted pursuant to this Section 10.8 may be exercisable
by the Participant, a donee of the Participant, a Beneficiary
receiving the Company Securities, or by any other person (includ-
ing the Participant's estate or its distributees) to whom the
Company Securities pass by reason of the Participant's death. In
the event that Company Securities are subject to the put option
granted by this Section 10.8, the holder of the option may "put"
the securities to the Company, by notifying the Company in
writing that he is exercising the put option granted by this
Section 10.8. The price at which the option is exercisable shall
be the fair market value of the Company Securities as of the most
recent Valuation Date under the Plan, with fair market value as
of such date being determined by the Trustee; provided, however,
if the holder of the put option is a "disqualified person" as
defined in Section 4975(e)(2) of the Code, the fair market value
shall be determined as of the date of exercise, and such valua-
tion shall constitute a good faith determination of value. The
put option granted pursuant to this Section 10.8 shall extend to
the Company and shall not extend to the Plan. However, the
Administration Committee shall have the option to assume for the
Plan the rights and obligation so the Company at the time that
the put option is exercised, if it so desires. If the Plan
45
<PAGE>
assumes the put, the put against the Company shall be extin-
guished. The put option shall be exercisable for a sixty (60)
day period, beginning on the date the security subject to the put
option is distributed (the "first put option period"), and for an
additional sixty (60) day period in the next following Plan Year
(the "second put option period") if the put is not exercised
during the first put option period. The second put option period
shall begin on the first day of the Plan Year beginning after the
Plan Year in which the securities are distributed unless regula-
tions issued by the United States Treasury Department provide
otherwise, in which case the second put option period shall begin
and end on the dates specified in said regulations. If a Partic-
ipant receives Company Securities which are publicly traded
without restriction when distributed from the Trust Fund but
which cease to be so traded before the expiration of the former
Participant's second put option period, the put option provisions
of this Section 10.8 may be exercised by that former Participant
during the balance (if any) of the first and/or second put option
periods. The Company will notify each such former Participant of
the applicability of this Section 10.8 in writing on or before
the tenth (10th) day after the day on which the Company Securi-
ties previously distributed cease to be so publicly traded. The
number of days between such tenth (10th) day and the date on
which notice is actually given, if later than the tenth (10th)
day, shall be added to the duration of the put option, but only
if the notice is given, or required to be given, during a put op-
tion period. Any such notice shall inform distributees of the
terms of the put option that they are to hold. The period during
which a put option pursuant to this Section 10.8 shall be exer-
cisable shall not include any time in which a distributee is
unable to exercise the put option because the Company or other
party bound by the put option is prohibited from honoring it by
applicable state or Federal law. Payment under a put option
pursuant to this Section 10.8 may not be restricted by the provi-
sions of a loan agreement. Deferred payments under an exercised
put option shall be permissible if adequate security and a
reasonable interest rate are provided. Payment may be made in a
lump sum or in equal installments not less frequently than
annually, beginning within thirty (30) days after the date the
put option is exercised, for a period of not more than five (5)
years. The determination of whether payment shall be made in
installments or in a lump sum shall be made by the Administration
Committee, in its sole discretion. Payment of the put option
described in this Section 10.8 shall not be restricted by the
provisions of a loan or any other arrangement, including the
terms of the Company's or Affiliates' charter or articles of
incorporation, unless so required by applicable state law.
10.9. Designation of Beneficiary. Each Participant
shall have the right to designate, on forms supplied by and
delivered to the Administration Committee, a Beneficiary or
Beneficiaries to receive his benefits hereunder in the event of
46
<PAGE>
his death; provided that the Beneficiary of a married Participant
shall be his spouse unless the Participant designates a Benefi-
ciary other than his spouse in accordance with the provisions of
Section 10.3. Each Participant may change his Beneficiary
designation from time to time by execution and delivery of a new
form, subject to the provisions of Section 10.3. Upon receipt of
such designation by the Administration Committee, such designa-
tion or change of designation shall become effective as of the
date of the notice, whether or not the Participant is living at
the time the notice is received. There shall be no liability on
the part of the Company, the Administration Committee or the
Trustee with respect to any payment authorized by the Administra-
tion Committee in accordance with the most recent valid Benefi-
ciary designation of the Participant in its possession before
receipt of a more recent and valid Beneficiary designation. If no
designated Beneficiary is living when benefits become payable, or
if there is no designated Beneficiary, the Beneficiary shall be
the Participant's spouse; or if no spouse is then living, such
Participant's issue, including any legally adopted child or
children, in equal shares by right of representation; or if no
such designated Beneficiary and no such spouse or issue, includ-
ing any legally adopted child or children, is living upon the
death of a Participant, or if all such persons die prior to the
full distribution of such Participant's benefits, then the
Beneficiary shall be the estate of the Participant.
10.10. Additional Distribution Limitations. Distri-
bution of a Participant's Accounts must commence by April 1 of
the calendar year following the later of the calendar year in
which the Participant attains the age of seventy and one-half
(70-1/2) years, regardless of whether the Participant has re-
tired.
In the event that the Participant or former Participant
dies after his Benefit Commencement Date but before his entire
interest is distributed, the remaining portion of his interest
must be distributed at least as rapidly as under the method of
distribution in effect as of the date of his death.
In the event of the death of a Participant or former
Participant prior to the commencement of distributions to such
Participant or former Participant, the Participant's Accounts
shall be distributed in full no later than five (5) years follow-
ing the death of the Participant or former Participant. Notwith-
standing the foregoing, if any portion of the benefits payable to
(or for the benefit of) a designated Beneficiary is to be dis-
tributed (in accordance with the applicable regulations under the
Code) over the life of the designated Beneficiary or over the
life expectancy of the designated Beneficiary and such distribu-
tion shall begin no later than one (1) year after the date of
death, then the portion payable shall be treated as distributed
on the date the distributions commence. For purposes of the
47
<PAGE>
foregoing, if the Participant's or former Participant's surviving
spouse is his designated Beneficiary, distributions need not
commence until December 31 of the calendar year in which the
Participant or former Participant would have attained the age of
seventy and one-half (70-1/2) years. If the surviving spouse of
the Participant or former Participant dies prior to the commence-
ment of distribution of benefits to her, benefits payable to her
designated Beneficiary shall be distributed as if the surviving
spouse were a Participant.
Notwithstanding any provision to the contrary in this
ARTICLE TEN, all distributions from this Plan shall be made in
accordance with the provisions of Section 401(a)(9) of the Code
and the regulations issued thereunder and in the event of a
conflict between the provisions of the Plan and this Section
10.10, the provisions of Section 401(a)(9) and the applicable
regulations thereunder, the latter provisions shall control.
10.11. Direct Rollover Option. Notwithstanding the
foregoing, a Participant who is entitled to receive a distribu-
tion on or after January 1, 1993, may elect to make a direct
rollover of all or part of that distribution to an individual
retirement account satisfying the requirements of Code Section
408(a), an individual retirement annuity satisfying the require-
ments of Code Section 408(b) (other than an endowment contract),
a defined contribution plan established by another employer which
satisfies the requirements of Code Section 401(a), or an annuity
plan described in Code Section 403(b).
The surviving spouse of a deceased Participant or the
spouse of a Participant who is entitled to a distribution of
benefits from the Plan pursuant to a "qualified domestic rela-
tions order" may also elect to make a direct rollover of all or
part of such distribution pursuant to this Section 10.11, provid-
ed that the Trustee may make such a transfer on behalf of a
spouse only to an individual retirement account satisfying the
requirements of Code Section 408(a) or an individual retirement
annuity satisfying the requirements of Code Section 408(b) (other
than an endowment contract). Upon receipt of the Participant's
or spouse's election the Trustee shall make a trustee-to-trustee
transfer of the amount of the distribution subject to the Parti-
cipant's direct rollover election to the eligible plan or ar-
rangement designated by the Participant or spouse. The Partici-
pant's or spouse's election shall be made in such form and at
such time as shall be determined by the Administration Committee
in its sole and absolute discretion.
The Participant or spouse shall have no right to elect
a direct rollover of any part of a distribution which is paid in
substantially equal installments (at least annually) over the
life or life expectancy of the Participant or the joint lives or
joint life expectancies of the Participant and his Beneficiary or
48
<PAGE>
over a specified period of at least ten (10) years, or any
distribution which is required under Code Section 401(a)(9).
10.12. Facility of Payment. If a person entitled to
any payment hereunder shall be under a legal disability, or, in
the sole judgment of the Administration Committee, shall other-
wise be unable to apply such payment to his own interest and
advantage, the Administration Committee may, in the exercise of
its discretion, direct the Trustee to make any such payment in
any one (1) or more of the following ways: (a) directly to such
person, (b) to his legal guardian or conservator, or (c) to his
spouse or to any person charged with the legal duty of his
support, to be expended for his benefit. The decision of the
Administration Committee shall in each case be final and binding
upon all persons in interest.
10.13. No Assignment Permitted. No Participant or
Beneficiary, and no creditor of a Participant or Beneficiary,
shall have any right to assign, pledge, hypothecate, anticipate
or in any way create a lien upon the Trust Fund. All payments to
be made to Participants or their Beneficiaries shall be made only
upon their personal receipt or endorsement, except as provided in
Section 10.12, and no interest in the Trust Fund shall be subject
to assignment or transfer or otherwise be alienable, either by
voluntary or involuntary act or by operation of law or equity, or
subject to attachment, execution, garnishment, sequestration,
levy or other seizure under any legal, equitable or other pro-
cess, or be liable in any way for the debts or defaults of
Participants and Beneficiaries. This Section 10.13 shall not
preclude arrangements for the withholding of taxes from benefit
payments, arrangements for the recovery of benefit overpayments,
arrangements for the transfer of benefit rights to another plan,
or arrangements for direct deposit of benefit payments to an
account in a bank, savings and loan association or credit union
(provided that such arrangement is not part of an arrangement
constituting an assignment or alienation).
Additionally, this Section 10.13 shall not preclude
arrangements for the distribution of the benefits of a Partici-
pant or Beneficiary pursuant to the terms and provisions of a
"qualified domestic relations order," as described in Section
401(a)(13) and Section 414(p) of the Code and Section 206(d)(3)
of the Act, that permits distribution of benefits in a distri-
bution mode under the Plan, does not require payment of increased
benefits and does not require payment of benefits allocated to an
alternate payee under a prior "qualified domestic relations
order."
An order requiring payment to an alternate payee before
a Participant has separated from employment may qualify as a
"qualified domestic relations order" even if it requires payment
prior to the Participant's "earliest retirement age," which is
49
<PAGE>
the earliest date on which the Participant could elect to receive
retirement benefits pursuant to this Plan. If the order requires
payments to commence prior to a Participant's actual retirement,
the payment amount must be determined as if the Participant had
retired on the date on which such payments are to begin under
such order, but taking into account only the present account
balance at that time. The order may call for the payment of
benefits to an alternate payee in any form in which benefits may
be paid under the Plan to the Participant.
All decisions and determinations with respect to a
domestic relations order, including whether such order is a
"qualified domestic relations order" within the meaning of Sec-
tion 401(a)(13) and Section 414(p) of the Code and Section
206(d)(3) of the Act shall be made by the Administration Com-
mittee within a reasonable time following its receipt of such
order and in accordance with such uniform and nondiscriminatory
rules and procedures as adopted by the Administration Committee.
Upon receipt of a domestic relations order, the Administration
Committee shall notify the Participant or Beneficiary whose
benefits may be affected by such order of its receipt of such
order. The Administration Committee shall also advise the
Participant or Beneficiary and the alternate payee named in the
order of its rules and procedures relating to the determination
of the qualified status of such order. If payment of benefits to
the Participant or Beneficiary has commenced at the time a
domestic relations order is received by the Administration
Committee or benefits become payable after receipt of such order,
the Administration Committee shall direct the Trustee to segre-
gate and hold the amounts which would be payable to the alternate
payee under the order if such order is ultimately determined to
be a "qualified domestic relations order." If the Administration
Committee determines that the order is a "qualified domestic
relations order" within eighteen (18) months of the segregation
of benefits payable to the alternate payee under such order, the
Administration Committee shall direct the Trustee to pay the
segregated amounts (plus any earnings thereon) as well as such
future amounts as may be specified in such order to the alternate
payee. If the Administration Committee determines that the order
is not a "qualified domestic relations order" or is unable to
determine whether such order is a "qualified domestic relations
order" within the eighteen (18) month period following the
segregation of benefits, the Administration Committee shall
direct the Trustee to pay the segregated amounts (plus any
earnings thereon) to the Participant or Beneficiary. A determi-
nation by the Administration Committee after the close of such
eighteen (18) month period that the order is a "qualified domes-
tic relations order" shall be applied prospectively.
All determinations of the Administration Committee
hereunder with respect to the status of an order as a "qualified
50
<PAGE>
domestic relations order" shall be binding and conclusive on all
interested parties, subject to the provisions of Section 11.3.
10.14. Unclaimed Accounts; Notice. Neither the
Company nor the Administration Committee nor the Trustee shall be
obligated to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Administration Committee, by
certified or registered mail addressed to his last known address
of record with the Administration Committee or the Company, shall
notify any Participant, or Beneficiary, that he is entitled to a
distribution under this Plan. In the event that the Participant
or Beneficiary shall make no claim for benefits or shall fail to
make his correct address known, after two (2) years, the Adminis-
tration Committee may, in its sole discretion, cancel the Parti-
cipant's Accounts. The Administration Committee shall notify the
Social Security Administration of the Participant's (or Benefici-
ary's) failure to claim the distribution to which he is entitled.
The Administration Committee shall request the Social Security
Administration to notify the Participant (or Beneficiary) in
accordance with any procedures it has established for this
purpose. In the event that the former Participant (or Beneficia-
ry) shall subsequently make a valid claim for benefits under the
Plan, the Administration Committee shall restore the Accounts of
the Participant, and the Company shall make a special contribu-
tion in an amount equal to the Participant's account balance at
the time of the prior cancellation of his Accounts. Such contri-
butions shall be allocated among the Participant's Accounts in
accordance with their prior respective balances.
ARTICLE ELEVEN
ADMINISTRATION
11.1. Administration Committee. The Board shall
appoint the members of the Administration Committee. Officers or
other employees and Board members may serve on the Administration
Committee, and the membership of the Administration Committee may
be the same as such Committee is constituted under the Retirement
Plan. In such event, such Administration Committee, in acting in
its capacity under this Plan, shall be governed by the terms and
provisions of this Plan. The Administration Committee may
appoint agents, who need not be members of the Administration
Committee, as may be necessary for the effective performance of
its duties, whether ministerial or discretionary. The compensa-
tion of any agents who are not employees of the Company or an
Affiliate shall be fixed by the Administration Committee within
any limitations set by the Board. Members of the Administration
Committee shall serve without compensation from the Trust Fund.
The proper expenses of the Administration Committee, including
the compensation of its agents, if any, who are not employees of
the Company shall be paid from the Trust Fund, unless paid by the
Company.
51
<PAGE>
11.2. Powers of the Administration Committee. The
Administration Committee shall have the discretion and authority
to perform the administrative duties of the Administration Com-
mittee as described in this Plan or required for proper admin-
istration of the Plan and shall have all powers necessary to
enable it to properly carry out such duties. Without limiting
the generality of the foregoing, the Administration Committee
shall have the power and discretion to construe and interpret
this Plan, to hear and resolve claims relating to this Plan, to
decide all questions and disputes arising under this Plan, to
determine the eligibility of employees to participate in the
Plan, to determine the years of Continuous Service, to determine
the status and rights of a Participant, to determine the identity
of the Beneficiary or Beneficiaries entitled to receive any
benefits payable hereunder on account of the death of a Partici-
pant, and to determine the manner and time of payment of benefits
under this Plan. All benefit disbursements by the Trustee shall
be made upon the instructions of the Administration Committee or
its agent. The decision of the Administration Committee upon all
matters within the scope of its authority shall be binding and
conclusive upon all persons. The Administration Committee shall
file all reports and forms lawfully required to be filed by the
Administration Committee with any governmental agency or depart-
ment, Federal or state, and shall distribute any forms, reports,
statements or plan descriptions lawfully required to be distrib-
uted to Participants and others by any governmental agency or
department, Federal or state.
11.3. Claims. Any Employee, Participant, Benefi-
ciary or any other person claiming benefits, eligibility, partic-
ipation or any other right or interest under this Plan may file a
written claim setting forth the basis of the claim with the
employee benefits administrators of the Company on forms pre-
scribed by the Administration Committee. In connection with the
determination of a claim, or in connection with review of a
denied claim, the claimant may examine this Plan and any other
pertinent documents generally available to Participants relating
to the claim and may submit comments in writing. A written
notice of the disposition of any such claim shall be furnished to
the claimant within sixty (60) days after the claim is filed with
the employee benefits administrators of the Company, provided
that the employee benefit administrators of the Company may have
additional time to decide the claim if they advise the claimant
in writing of the need for additional time and the date on which
they expect to decide the claim. The notice of disposition of a
claim shall refer, if appropriate, to pertinent provisions of
this Plan, shall set forth in writing the reasons for denial of
the claim if the claim is denied (including references to any
pertinent provisions of this Plan), and where appropriate, shall
explain how the claimant can perfect the claim. If the claim is
denied, in whole or in part, the claimant shall also be notified
in writing that a review procedure is available. Thereafter,
52
<PAGE>
within ninety (90) days after receiving the written notice of the
Administration Committee's disposition of the claim, the claimant
may request in writing, and shall be entitled to, a review
meeting with the Administration Committee to present reasons why
the claim should be allowed. The claimant may also submit a
written statement of his claim and the reasons for granting the
claim. Such statement may be submitted in addition to, or in
lieu of, the review meeting with the Administration Committee.
If the claimant does not request a review meeting within ninety
(90) days after receiving written notice of the Administration
Committee's disposition of the claim, the claimant shall be
deemed to have accepted the Administration Committee's written
disposition, unless the claimant shall have been physically or
mentally incapacitated so as to be unable to request review
within the ninety (90) day period. A decision on review shall be
rendered in writing by the Administration Committee ordinarily
not later than sixty (60) days after review, and a written copy
of such decision shall be delivered to the claimant. If special
circumstances require an extension of the ordinary period, the
Administration Committee shall so notify the claimant. In any
event, if a claim is not determined within one hundred twenty
(120) days after submission for review, it shall be deemed to be
denied. The Administration Committee shall have the right to
request of and receive from a claimant such additional informa-
tion, documents or other evidence as the Administration Committee
may reasonably require. To the extent permitted by law, a
decision on review by the Administration Committee shall be
binding and conclusive upon all persons whomsoever. To the
extent permitted by law, completion of the claims procedures
described in this Section 11.3 shall be a mandatory precondition
that must be complied with prior to commencement of a legal or
equitable action in connection with the Plan by a person claiming
rights under the Plan, or by another person claiming rights
through such a person. The Administration Committee may, in its
sole discretion, waive these procedures as a mandatory precon-
dition to such an action.
11.4. Scope of Responsibility. The Company, the
Administration Committee and the Trustee shall perform the duties
respectively assigned to them under this Plan and shall not be
responsible for performing duties assigned to others under the
terms and provisions of this Plan. No inference of approval or
disapproval is to be made from the inaction of any party de-
scribed above or the employee or agent of any of them with regard
to the action of any other such party. The Company shall have
authority to employ advisers, legal counsel, accountants and
investment managers in connection with the administration of the
Trust Fund, and may delegate to the Administration Committee
and/or the Trustee authority to employ such persons. To the
extent permitted by applicable law, the Company, the Administra-
tion Committee and the Trustee shall not be liable for complying
with the directions of any advisors, legal counsel, accountants
53
<PAGE>
and investment managers appointed pursuant to this Section 11.4.
Persons, organizations or corporations acting in a position of
any fiduciary responsibility with respect to the Plan may serve
in more than one (1) fiduciary capacity. To the extent permitted
by law, the Company shall and does hereby jointly and severally
indemnify and agree to hold harmless its employees, agents and
members of the Administration Committee, from all loss, damage,
or liability, joint or several, including payment of expenses in
connection with defense against any such claim, for their acts,
omissions and conduct, and for the acts, omissions and conduct of
their duly appointed agents, which acts, omissions, or conduct
constitutes or is alleged to constitute a breach of such indivi-
dual's fiduciary or other responsibilities under the Act or any
other law, except for those acts, omissions, or conduct resulting
from his own willful misconduct, willful failure to act, or gross
negligence; provided, however, that if any party would otherwise
be entitled to indemnification hereunder in respect of any
liability and such party shall be insured against loss as a
result of such liability by any insurance contract or contracts,
such party shall be entitled to indemnification hereunder only to
the extent by which the amount of such liability shall exceed the
amount thereof payable under such insurance contract or con-
tracts. The Company may obtain insurance covering itself and
others for breaches of fiduciary obligations under this Plan to
the extent permitted by law, and nothing in this Plan shall
restrict the right of any person to obtain such insurance for
himself in connection with the performance of his duties under
this Plan. The Administration Committee shall be the named
fiduciary and plan administrator under this Plan. The Trustee,
the Administration Committee and the Company do not in any way
guarantee the Trust Fund from loss or depreciation. The Company
does not guarantee the payment of any money which may be or
become due to any person from the Trust Fund, and the liability
of the Administration Committee and the Trustee to make any
payment under the Plan at any and all times will be limited to
the then available assets of the Trust Fund.
11.5. Expenses. Expenses of Plan administration
may be charged to the Trust Fund and paid out of forfeitures.
However, the Company may elect, in its discretion, to pay such
expenses directly, in which case they shall not be paid by the
Trust Fund.
11.6. Uniform Administration. Whenever in the
administration of the Plan any action is required by the Adminis-
tration Committee, such action shall be uniform in nature as ap-
plied to all persons similarly situated and no such action shall
be taken which will discriminate in favor of Participants who are
Highly Compensated Employees. The Plan will be administered by
the Administration Committee for the exclusive benefit of the
Participants and their Beneficiaries.
54
<PAGE>
11.7. Trust Agreement. The Company shall maintain
a Trust Agreement providing for the administration of the Trust
Fund in such form and containing such provisions as the Company
and Trustee shall agree upon, including, but not limited to,
provisions with respect to the powers and authority of the
Trustee and the authority of the Company to amend the Trust
Agreement, to remove the Trustee and to appoint a new Trustee or
Trustees in its place, to terminate the trust and to settle the
accounts of the Trustee on behalf of all persons having an
interest in the Trust Fund.
ARTICLE TWELVE
AMENDMENT, MERGER AND TERMINATION
12.1. Amendment of Plan. The Company shall have
the right at any time to amend this Plan by an instrument in
writing duly executed pursuant to authority granted by the Board.
Any such amendment may be in whole or in part and may be pro-
spective or retroactive; provided, however, that no amendment
shall be effective to the extent it would divert any part of the
corpus or income of the Trust Fund for purposes other than the
exclusive benefit of Participants and their Beneficiaries or
would have the effect of decreasing the benefits payable to
Participants from their Accounts as of the date the amendment is
adopted. No amendment shall substantially increase the duties
and liabilities of the members of the Administration Committee
then serving without their written consent.
12.2. Merger. In the event of merger or consolida-
tion of this Plan with any other stock bonus plan, profit sharing
plan or pension plan, or a transfer of assets or liabilities of
the Trust Fund to any other such plan, then each Participant
shall be entitled to a benefit (if the Plan was then terminated)
immediately after such merger, consolidation or transfer that is
equal to or greater than the benefit he would have been entitled
to receive immediately before such merger, consolidation or
transfer (if the Plan had then terminated).
12.3. Termination. It is the expectation of the
Company that this Plan and the payment of contributions hereunder
will be continued indefinitely. However, continuance of the Plan
is not assumed as a contractual obligation of the Company and the
right is reserved at any time to reduce or discontinue contribu-
tions hereunder. In the event the Board decides that it is
impossible or inadvisable for the Company to make its contribu-
tions as herein provided, the Board shall have the power to
terminate contributions by appropriate resolution. In such event
or in the event contributions are permanently discontinued
without the delivery to the Trustee of such a resolution, then
after the date specified in such resolution, or after the date of
such discontinuance of contributions, the balance credited to the
55
<PAGE>
Accounts of each Participant shall be fully vested and not
forfeitable. In the event of termination of the Plan or perma-
nent discontinuance of contributions, the Administration Commit-
tee shall either promptly direct the Trustee to liquidate and
distribute all assets remaining in the Trust Fund to Participants
as though their Employment with the Company had terminated or
shall direct the Trustee to continue the Plan, in which event
benefits shall be distributed in accordance with ARTICLE TEN.
Upon the liquidation of all assets of the Trust Fund, the Admin-
istration Committee, after deducting all costs and expenses of
liquidation and distribution, shall make the allocations required
under Section 6.4 where applicable, with the same effect as
though the date of completion of liquidation was a Valuation
Date. No distributions shall be made after termination of the
Plan or discontinuance of Company Contributions until a reason-
able time after the Company has received from the United States
Treasury Department a determination under the provisions of the
Code as to the effect of such termination or discontinuance upon
the qualification of the Plan, if the Company, in its sole
discretion, seeks such a determination. In the event such
determination is unfavorable, then prior to making any distribu-
tions hereunder, the Trustee shall pay any Federal or state
income taxes due because of the income of the Trust Fund and
shall then distribute the balance in the manner above provided.
This Plan and the Trust Fund shall terminate at the expiration of
the longest legally permissible period during which such a trust
may continue under applicable law.
In the event of partial termination of the Plan or
partial discontinuance of contributions, to the extent required
by law, the balance credited to the Accounts of all Participants
subject to such partial termination or partial discontinuance of
contributions shall become fully vested and nonforfeitable. In
such event, the Accounts of such Participants shall become
distributable in accordance with this Section 12.3.
ARTICLE THIRTEEN
GENERAL PROVISIONS
13.1. Limitation on Participants' Rights. The Plan
shall not be deemed to constitute a contract between the Company
and any employee or to be a consideration for, or an inducement
for, the employment of any employees by the Company. Participa-
tion in the Plan shall not give any employee the right to be
retained in the Company's employ, or any right or interest in the
Trust Fund other than as herein provided. The Company reserves
the right to dismiss any employee without any liability for any
claim either against the Trust Fund, except to the extent herein
provided, or against the Company.
56
<PAGE>
13.2. Heirs and Successors. All of the provisions
of this Plan shall be binding upon all persons who shall be enti-
tled to any benefits hereunder, and their heirs and legal rep-
resentatives.
13.3. Duration. This Plan shall continue in full
force and effect for the maximum period permitted under applica-
ble law, subject to the Board's right to amend or terminate the
Plan as provided in ARTICLE TWELVE of the Plan.
IN WITNESS WHEREOF, the Company has caused this amended
and restated Plan to be executed and its corporate seal to be
hereunto affixed by its duly authorized officers, this 16th day
of December, 1994.
TALLEY INDUSTRIES, INC.
By Mark S. Dickerson
---------------------------
V.P.
Its -----------------------
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
By Mark S. Dickerson
---------------------------
V.P.
Its -----------------------
57
EXHIBIT 99.19
FIRST AMENDMENT TO
TALLEY SAVINGS PLUS
Effective January 1, 1984, Talley Industries, Inc.
("Talley"), the predecessor sponsor to Talley Manufacturing and
Technology, Inc. (the "Company"), established Talley Savings Plus
(the "Plan"). The Plan was thereafter amended and restated in
its entirety on September 30, 1985, and was amended several times
thereafter. The Plan was then amended and restated in its en-
tirety effective January 1, 1987, and was subsequently amended
several times. The Plan was thereafter amended and restated in
its entirety on December 16, 1994. By this instrument, the
Company intends to amend the Plan to require the Trustee to
retain the responsibility to decide whether to tender or exchange
shares of Talley stock allocated to Participants' accounts in
those cases in which the tender or exchange offer is made by the
Company or an Affiliate.
1. This Amendment shall amend only the Sections and
subsections set forth herein and those Sections and subsections
not amended hereby shall remain in full force and effective.
2. Section 8.4 is hereby amended in its entirety as
follows:
8.4. Tender, Exchange, Conversion or Other Offers. In
the event of a tender, exchange, conversion or other offer
made by or on behalf of the Company or an Affiliate, which
offer relates to Company Securities, the Trustee shall make
the determination, in its sole and absolute discretion,
whether to accept or reject that offer, in whole or in part,
with respect to Company Securities held as assets of the
Trust Fund.
In the event of a tender, exchange, conversion or other
offer made by or on behalf of a person other than the Compa-
ny or an Affiliate, which offer relates to Company Securi-
<PAGE>
ties, each Participant (or in the event of the Participant's
death, his Beneficiary) shall have the right, to the extent
of the Company Securities allocated to the Participant's
Accounts, to direct the Trustee, in writing on a form pro-
vided by the Administration Committee, to accept or reject
that offer, in whole or in part, with respect to such Compa-
ny Securities, and the Trustee shall have no discretion with
respect thereto. The Administration Committee shall utilize
its best efforts to distribute or cause to be distributed in
a timely manner to each Participant (or his Beneficiary)
such information as will be distributed to the Company's
shareholders with respect to any such tender, exchange,
conversion or other offer, as well as a form on which the
Participant (or his Beneficiary) may direct the Trustee as
to whether to accept or reject such offer, in whole or in
part, with respect to the Company Securities allocated to
the Participant's Accounts. If the Trustee shall not re-
ceive timely directions from a Participant (or his Benefi-
ciary) as to whether to accept or reject a tender, exchange,
conversion or other offer with respect to the Company Secu-
rities allocated to the Participant's Accounts, the Trustee
shall not accept such offer with respect to such securities.
The Trustee shall accept or reject a tender, exchange,
conversion or other offer with respect to unallocated shares
of Company Securities and Company Securities held by the
Trustee pending allocation to Participants' Accounts in the
same proportions as the shares with respect to which Partic-
ipants (or their Beneficiaries) have the right to direct the
Trustee in response to the offer and the Trustee shall have
no discretion with respect thereto.
3. This Amendment shall be effective February 1,
1996.
Except as amended and supplemented by this instrument,
the Company hereby ratifies the Plan as amended and restated on
December 16, 1994, and thereafter amended.
March 7
DATED: _______________, 1996.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
Mark S. Dickerson
By_________________________________
Vice President
Its ------------------------------
2
EXHIBIT 99.20
SECOND AMENDMENT TO
TALLEY SAVINGS PLUS
Effective January 1, 1984, the predecessor to TALLEY
MANUFACTURING AND TECHNOLOGY, INC. (the "Company") established
TALLEY SAVINGS PLUS (the "Plan"). The Plan was thereafter amended
and restated in its entirety on September 30, 1985. It was subse-
quently amended on April 30, 1986 and July 7, 1986. The Plan was
subsequently amended and restated in its entirety on February 27,
1987. It was thereafter amended several times. The Plan was most
recently amended and restated on December 16, 1994 and thereafter
amended on March 7, 1996. In connection with its consideration of
the Company's application for a determination with respect to the
Plan's continued qualification following its amendment and re-
statement in the entirety, the Internal Revenue Service ("IRS")
has requested an amendment to the Plan as a condition of issuing a
favorable determination letter. By this instrument, the Company
intends to amend the Plan to make certain of the changes requested
by IRS.
1. This Amendment shall amend only those Sections set
forth herein and those Sections not amended hereby shall remain in
full force and effect.
2. Section 2.1(q) is hereby amended to read as fol-
lows:
(q) "Company Securities" - Common capital stock and
Series B $1.00 Cumulative Convertible Preferred Stock of
Talley Industries, Inc. (or any other corporation that is a
member of a controlled group of corporations along with the
Company, as defined in Section 409(l)(4) of the Code (a
"related corporation") which is readily tradeable on an
established securities market; provided that if at any time
there is no common stock which meets the foregoing require-
<PAGE>
ments, "Company Securities" shall mean common stock of Talley
Industries, Inc. or any related corporation having a combi-
nation of voting power and dividend rights equal to or in
excess of (i) that class of common stock of Talley Indus-
tries, Inc. or any related corporation having the greatest
voting power and (ii) that class of common stock of Talley
Industries, Inc. or any related corporation having the
greatest dividend rights.
Non-callable preferred stock shall also constitute
"Company Securities" if such stock is convertible at any time
into stock which meets the foregoing requirements and if such
conversion is at a conversion price which is reasonable as
determined as of the date of the acquisition by the Plan.
Preferred stock shall be treated as noncallable if there is a
reasonable opportunity after the call for conversion. If the
proceeds of a loan satisfying the requirements of ARTICLE
NINE, which is subject to Section 133 of the Code, are used
to purchase preferred stock, then the preferred stock pur-
chased must have voting rights equivalent to the common stock
into which it may be converted.
3. The third paragraph of Section 4.1 is hereby
amended to read as follows:
In the event that the Administration Committee deter-
mines, in its sole and absolute discretion, that the average
rate of Payroll Deferral Contributions (as a percentage of
compensation) made on behalf of Highly Compensated Employees,
would cause discrimination under Section 401(k)(3)(A) of the
Code and Treasury Regulations Sections 1.401(k)-1(b) and
1.401(m)-2, the Administration Committee shall direct the
Trustee to refund the Payroll Deferral Contributions directed
by Highly Compensated Employees, plus any earnings thereon,
prior to the expiration of the two and one-half (2-1/2) month
period beginning after the end of the Plan Year of deferral,
until the Plan is no longer discriminatory under Section
401(k)(3)(A) and Treasury Regulations Sections 1.401(k)-1(b)
and 1.401(m)-2. The Payroll Deferral Contributions and the
earnings thereon of those Highly Compensated Employees having
the highest rate of Payroll Deferral Contributions (as a
percentage of compensation) within such group of Participants
shall be refunded first until the Plan is no longer discrimi-
natory under Section 401(k)(3)(A) and Treasury Regulations
Sections 1.401(k)-1(b) and 1.401(m)-2. For purposes of this
Section 4.1, "compensation" shall be determined in accordance
with Section 414(s) of the Code. Any such refund shall be
(a) reduced by any excess deferrals previously distributed to
the Participant for the taxable year of the Participant
ending with or within the Plan Year in accordance with Code
Section 402(g), and (b) limited to the amount that, in the
2
<PAGE>
judgment of the Administration Committee, is expected to meet
the requirements of Section 401(k)(3)(A) of the Code and
Treasury Regulations Sections 1.401(k)-1(b) and 1.401(m)-2.
4. The second paragraph of Section 6.3 is hereby
amended to read as follows:
The Thirty Thousand Dollar ($30,000.00) limitation
referred to in the preceding paragraph (as adjusted from time
to time in accordance with Section 415(c)(1)(A) of the Code)
shall be adjusted in any "special permissible allocation
year" (as defined in this Section 6.3) beginning on or before
July 12, 1989, to be equal to the sum of the Thirty Thousand
Dollar ($30,000.00) limitation (as adjusted in accordance
with Section 415(c)(1)(A)) and the lesser of (a) Thirty
Thousand Dollars ($30,000) (as adjusted in accordance with
Section 415(c)(1)(A)), or (b) the value of Company Securities
that are contributed or purchased with cash contributed to
the Trust Fund. For purposes of the preceding sentence,
Company Contributions that are used to pay the principal on a
loan, the proceeds of which are used to purchase Company
Securities, will be treated as a contribution of Company
Securities for the Plan Year. In order to be considered for
purposes of this Section 6.3, any Company Securities pur-
chased with cash contributed by the Company must be allocable
to accounts pursuant to Section 6.2 for the particular
"special permissible allocation year" and such cash must be
contributed within thirty (30) days following the period
described in Section 5.2 for making Company Contributions.
The securities must be purchased within sixty (60) days after
the end of the period described in the preceding sentence. A
"special permissible allocation year" shall be a Plan Year
for which no more than one-third (1/3) of Company Contribu-
tions is allocable to the Accounts of Participants who are
Highly Compensated Employees. For any "special permissible
allocation year" beginning after July 12, 1989, the limita-
tion imposed by this Section 6.3 shall not apply to, and the
Participant's Annual Additions shall be determined without
regard to, any forfeitures of Company Securities which were
acquired with the proceeds of an exempt loan and any Company
Contributions and/or Company ESOP Contributions which are
applied to pay interest on an exempt loan. For purposes of
this Section 6.3, an "exempt loan" is a loan described in
ARTICLE NINE which is incurred for purposes of acquiring
Company Securities.
5. Section 7.3 is hereby amended in its entirety to
read as follows:
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7.3. Determination of Vested Interest in the Event of
Separation from Employment. In the event a Participant shall
separate from Employment with the Company and such Partici-
pant shall not be fully vested in the amounts credited to or
allocable to his Company Contributions Account in accordance
with Section 7.2, the vested interest of the Participant in
such account shall be determined as of the Valuation Date
preceding or coincident with the date on which his benefits
are payable in accordance with this Section 7.3, in accor-
dance with the following schedule:
Years of Vested Percentage of
Continuous Service Company Contributions Account
------------------ ------------------------------
Less than one 0%
One but less than two 20%
Two but less than three 40%
Three but less than four 60%
Four but less than five 80%
Five or more 100%
Any amounts credited to his Company Contributions Account in
which the Participant is not vested shall be forfeited upon
the earlier of (i) the date on which the Participant re-
ceives a distribution of his Accounts pursuant to Sections
10.6 and 10.7, and (ii) the last day of the Plan Year in
which occurs the Participant's fifth (5th) consecutive Break
in Continuous Service, provided that the Participant does
not again become an Employee of the Company or an Affiliate
prior to that date.
Notwithstanding the foregoing, (a) any Company Securi-
ties allocated to a Participant's accounts from the Loan
Suspense Account in accordance with Treasury Regulation
Section 54.4975-11(d)(2) may, to the extent required by
Treasury Regulation Section 54.4975-11(d)(4), be forfeited
only after other assets allocated to the Participant's
account, if any, are forfeited, and (b) if the Plan holds
more than one (1) class of Company Securities purchased with
the proceeds of an exempt loan under ARTICLE NINE, stock
from each such class of Company Securities shall be forfeit-
ed in an amount which bears the same ratio to the total
amount of Company Securities to be forfeited as the amount
of each class of Company Securities purchased with the
proceeds of an exempt loan under ARTICLE NINE and held in
the Participant's Accounts bears to the total amount of
Company Securities purchased with the proceeds of an exempt
loan under ARTICLE NINE and held in the Participant's Ac-
counts.
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6. Section 9.1 is hereby amended in its entirety to
read as follows:
9.1. Loan to Acquire Company Securities. The Adminis-
tration Committee shall have the authority to direct the
Trustee to borrow funds to purchase Company Securities. In
the event that such funds are borrowed from, or the loan is
guaranteed by, a "disqualified person," as defined in
Section 4975(e)(2) of the Code, or a "party in interest," as
defined in Section (3)(14) of the Act, such loan shall be
made only in accordance with all of the provisions of this
ARTICLE NINE. Any loan entered into by the Trustee in
connection with the purchase of Company Securities shall be
directed by the Administration Committee and shall be pri-
marily for the benefit of Participants and their Beneficia-
ries. The Trustee and the Administration Committee shall
not obligate the Plan to acquire Company Securities from any
person upon the occurrence of a future event except as may
otherwise be permitted under Section 10.8. The proceeds of
any loan shall be used within a reasonable time after re-
ceipt only for all or any of the following purposes:
(a) To acquire Company Securities;
(b) To repay the loan entered into in con-
nection with the purchase of Company Securities as
provided in (a) above; or
(c) To repay a prior loan entered into in
connection with the purchase of other Company
Securities.
The provisions of this ARTICLE NINE are intended to be in
compliance with Section 4975(d)(3) of the Code and the
applicable regulations thereunder and Section 408(b)(3) of
the Act and the applicable regulations thereunder. This
ARTICLE NINE is to be construed in a manner consistent with
such intention.
7. Section 9.2 is hereby amended in its entirety to
read as follows:
9.2 Terms of Loans to Acquire Company Securities. Any
loan transaction entered into by the Trustee at the direc-
tion of the Administration Committee in order to purchase
Company Securities must, at the time the loan is made, be at
least as favorable to the Plan as the terms of a comparable
loan resulting from an arms-length negotiation between inde-
pendent parties. The interest rate of any such loan must
not be in excess of a reasonable rate of interest consider-
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<PAGE>
ing the amount and duration of the loan, the security and
any guaranty involved, the credit standing of the Plan,
and/or the guarantor, if any, and the interest rate prevail-
ing for comparable loans. The term of the loan shall be for
a fixed period and the loan shall not be payable on demand
except in the event of a default under the terms of the
loan. Any loan transaction entered into by the Trustee in
connection with this ARTICLE NINE shall provide that the
lender shall be without recourse against the assets of the
Trust Fund, except that the lender may have recourse against
Company Securities acquired with the proceeds of the loan
and Company Securities used as collateral on a prior loan
repaid with the proceeds of the current loan given as
collateral and other assets of the Trust Fund that consist
of Company Contributions and Company ESOP Contributions that
are made under the Plan in order to enable the Trustee to
meet its obligations under the loan, and earnings attribu-
table to the Company Securities given as collateral. Pay-
ments on a loan during a Plan Year shall not exceed an
amount equal to the sum of Company Contributions and Company
ESOP contributions made by the Company in order to enable
the Trustee to meet its obligation under the loan, together
with earnings thereon, received during or prior to the Plan
Year, less payments on the loan in prior Plan Years. Any
such Company Contributions, Company ESOP Contributions and
the earnings on such contributions and Company Securities
given as collateral shall be accounted for separately in the
books of account of the Plan by crediting such contributions
and the earnings thereon to the Loan Suspense Account,
rather than to the Company Contributions Accounts of
Participants. Any such loan shall also provide that in the
event of default, the value of Plan assets transferred in
satisfaction of the loan shall not exceed the amount of
default. The loan shall provide for a transfer of Plan
assets upon default only upon and to the extent of the
failure of the Plan to meet the payment schedule of the
loan. Any loan entered into in connection with this ARTICLE
NINE shall be for a specific term, and may not be payable at
the demand of any person, except in the case of default.
8. A new Section 9.4 is hereby added to the Plan
which shall read as follows:
9.4 Nonterminable Protections and Rights. Except as
provided in Section 10.8, or as otherwise required by ap-
plicable law, no Company Securities acquired with the pro-
ceeds of an exempt loan may be subject to put, call or
option, or buy-sell or similar arrangements, while held by
and when distributed from the Plan, whether or not the Plan
is then an "employee stock ownership plan" as defined in
Section 4975(e)(7) of the Code. Furthermore, the
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<PAGE>
protections and rights specified in this Section 9.4 and in
Section 10.8 shall be nonterminable, except to the extent
otherwise provided by law. The protections and rights
accorded by Section 10.8 to Participants and Beneficiaries
or other persons (including the Participant's estate or its
distributees) to whom Company Securities passes by way of
gift from the Participant or by reason of the Participant's
death shall never terminate, even if all loans satisfying
the requirements of ARTICLE NINE have been repaid or the
Plan ceases to be an "employee stock ownership plan" as
defined in Section 4975(e)(7) of the Code. The fact that a
put option is not exercisable pursuant to the provisions of
Section 10.8, however, shall not violate the requirements of
this Section 9.4.
9. Section 10.8 is hereby amended in its entirety to
read as follows:
10.8. Put Option. Company Securities acquired with
the proceeds of a loan entered into pursuant to ARTICLE NINE
prior to December 31, 1986, and all Company Securities
acquired after December 31, 1986, shall be subject to a put
option as provided in this Section 10.8 if the Company
Securities are not publicly traded when the Company Securi-
ties are distributed, or if the Company Securities are
subject to a "trading limitation" when distributed. For
purposes of this Section 10.8, a "trading limitation" is a
restriction under any Federal or state securities law or any
regulation thereunder affecting the security that would make
the Company Securities not as freely tradeable as Company
Securities not subject to the restriction. The put option
granted pursuant to this Section 10.8 may be exercisable by
the Participant, a donee of the Participant, a Beneficiary
receiving the Company Securities, or by any other person
(including the Participant's estate or its distributees) to
whom the Company Securities pass by reason of the Partici-
pant's death. In the event that Company Securities are
subject to the put option granted by this Section 10.8, the
holder of the option may "put" the securities to the
Company, by notifying the Company in writing that he is
exercising the put option granted by this Section 10.8. The
price at which the option is exercisable shall be the fair
market value of the Company Securities as of the most recent
Valuation Date under the Plan; provided, however, if the
holder of the put option is a "disqualified person" as
defined in Section 4975(e)(2) of the Code, the fair market
value shall be determined as of the date of exercise. For
purposes of this Section 10.8, the fair market value of Com-
pany Securities shall be determined by an "independent ap-
praiser" satisfying the requirements of Section 401(a)(28)
of the Code.
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<PAGE>
The put option granted pursuant to this Section 10.8
shall extend to the Company and shall not extend to the
Plan. However, the Administration Committee shall have the
option to assume for the Plan the rights and obligation so
the Company at the time that the put option is exercised, if
it so desires. If the Plan assumes the put, the put against
the Company shall be extinguished. The put option shall be
exercisable for a sixty (60) day period, beginning on the
date the security subject to the put option is distributed
(the "first put option period"), and for an additional sixty
(60) day period in the next following Plan Year (the "second
put option period") if the put is not exercised during the
first put option period. The second put option period shall
begin on the first day of the Plan Year beginning after the
Plan Year in which the securities are distributed unless
regulations issued by the United States Treasury Department
provide otherwise, in which case the second put option
period shall begin and end on the dates specified in said
regulations. If a Participant receives Company Securities
which are publicly traded without restriction when
distributed from the Trust Fund but which cease to be so
traded before the expiration of the former Participant's
second put option period, the put option provisions of this
Section 10.8 may be exercised by that former Participant
during the balance (if any) of the first and/or second put
option periods. The Company will notify each such former
Participant of the applicability of this Section 10.8 in
writing on or before the tenth (10th) day after the day on
which the Company Securities previously distributed cease to
be so publicly traded. The number of days between such
tenth (10th) day and the date on which notice is actually
given, if later than the tenth (10th) day, shall be added to
the duration of the put option, but only if the notice is
given, or required to be given, during a put option period.
Any such notice shall inform distributees of the terms of
the put option that they are to hold. The period during
which a put option pursuant to this Section 10.8 shall be
exercisable shall not include any time in which a
distributee is unable to exercise the put option because the
Company or other party bound by the put option is prohibited
from honoring it by applicable state or Federal law. Pay-
ment under a put option pursuant to this Section 10.8 may
not be restricted by the provisions of a loan agreement.
If the Participant received a lump sum distribution of
his vested interest in his Accounts, deferred payments under
the exercised put option are permissible if payments will
commence no later than thirty (30) days after the exercise
of the put option, be made in substantially equal install-
ments made at least annually over a period of not more than
five (5) years, adequate security is provided and the unpaid
installments bear a reasonable rate of interest. If the
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<PAGE>
Participant is receiving installment payments of his vested
interest in the Plan, payment under an exercised put option
shall be made no later than thirty (30) days after the date
the put option is exercised. Payment of the put option de-
scribed in this Section 10.8 shall not be restricted by the
provisions of a loan or any other arrangement, including the
terms of the Company's or Affiliates' charter or articles of
incorporation, unless so required by applicable state law.
10. This Amendment shall be effective as of January 1,
1989.
Except as amended hereby, the Company ratifies and con-
firms the Plan as adopted on December 16, 1994 and as thereafter
amended.
December 17
Dated: ____________________, 1996.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
Mark S. Dickerson
By ----------------------------------
Vice President
Its--------------------------------
9