Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-4778
TALLEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0180396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2702 North 44th Street, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirement for the past 90 days.
YES[ X ] NO[ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock March 31, 1997
$1.00 par value 14,280,453
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996 1
Consolidated Statement of Earnings -
Three Months Ended March 31, 1997 and 1996 2
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity - Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis 8-15
Part II Other Information
Legal Proceedings 16
Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(thousands)
March 31, December 31,
ASSETS 1997 1996
-------- -----------
Cash and cash equivalents $ 45,133 $ 48,758
Accounts receivable, net of allowance for
doubtful accounts of $919 at March 31,
1997 and $925 at December 31, 1996 53,112 53,090
Inventories, net 62,556 64,684
Deferred income taxes 3,400 3,660
Prepaid expenses 6,346 6,100
-------- --------
Current assets 170,547 176,292
Long-term receivables 6,860 6,517
Property, plant and equipment, net 51,386 49,324
Intangibles 41,626 41,965
Other assets 6,085 6,287
-------- --------
Total assets $276,504 $280,385
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 4,962 $ 5,160
Current maturities of realty debt 301 362
Accounts payable 22,193 20,116
Accrued expenses 41,066 44,189
-------- --------
Current liabilities 68,522 69,827
Long-term debt 122,421 123,185
Deferred income taxes 1,762 2,179
Other liabilities 10,452 10,708
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 14 14
Series B 750 750
Series D - -
Common stock, $1 par value,
authorized 20,000,000 shares 14,280 14,618
Capital in excess of par value 77,090 79,884
Foreign currency translation adjustment (640) (562)
Accumulated deficit (18,147) (20,218)
-------- --------
Total stockholders' equity 73,347 74,486
Total liabilities and -------- --------
stockholders' equity $276,504 $280,385
======== ========
The accompanying notes are an integral part of the financial statements.
-1-
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(thousands, except per share amounts)
Three Months
Ended
March 31,
-----------------
1997 1996
------- -------
Sales $66,933 $72,742
Services 21,191 14,920
Royalties 207 7,465
------- -------
88,331 95,127
------- -------
Cost of sales 49,070 55,378
Cost of services 19,000 13,021
Selling, general, and administrative expenses 14,932 16,119
------- -------
83,002 84,518
------- -------
Earnings from operations 5,329 10,609
Other income (expense), net 532 (952)
------- -------
5,861 9,657
------- -------
Interest expense 3,677 7,181
------- -------
Earnings before income taxes 2,184 2,476
Income tax provision 113 560
------- -------
Net earnings $ 2,071 $ 1,916
======= =======
Earnings (loss) applicable to common shares $ 1,880 $(3,196)
======= =======
Earnings (loss) per share of common
stock and common stock equivalents:
Net earnings before consideration for
induced conversion of preferred stock .13 .13
Assumed value of conversion inducement - (.42)
------- -------
Earnings (loss) applicable to common shares $ .13 $ (.29)
======= =======
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(thousands)
Three Months Ended
March 31,
--------------------
1997 1996
-------- --------
Cash and cash equivalents at beginning of year $ 48,758 $ 10,475
Cash flows from operating activities: -------- --------
Net earnings 2,071 1,916
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes (157) 1,201
Depreciation and amortization 2,200 2,200
Original discount amortization - 2,713
Gain on sale of property and equipment (1) (38)
Other (37) 97
Changes in assets and liabilities, net of
effects from acquired businesses:
Increase in accounts receivable (2,489) (983)
Increase in inventories (1,695) (7,061)
Increase in prepaid expenses (301) (465)
Decrease in realty assets - 1,854
Increase in accounts payable 2,077 5,984
Decrease in accrued expenses (2,622) (937)
Increase (decrease) in other liabilities 1,281 (461)
Other, net - (16)
-------- --------
Cash flows from operating activities 327 6,004
Cash flows from investing activities:
Proceeds from sale of subsidiary 4,097 -
Purchase of assets of acquired business - (3,876)
Purchases of property and equipment (3,916) (1,466)
Reduction of long-term receivables 15 278
Increase in long-term receivables - (474)
Proceeds from sale of property and equipment 7 52
-------- --------
Cash flows from investing activities 203 (5,486)
Cash flows from financing activities:
Preferred stock conversion cost - (213)
Payment of dividends (191) -
Purchase of common stock (2,941) -
Redemption of Discount Debentures (242) -
Repayment of long-term debt (720) (120,774)
Repayment of realty debt (61) (684)
Proceeds from new long-term debt - 120,285
-------- --------
Cash flows from financing activities (4,155) (1,386)
Net decrease in cash and cash equivalents (3,625) (868)
-------- --------
Total cash and cash equivalents at March 31 $ 45,133 $ 9,607
======== ========
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1997 and 1996
(thousands)
Capital in
Preferred Stock Common Excess of Retained
Series A Series B Series D Stock Par Value Earnings
-------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 67 $1,548 $ 120 $10,053 $86,035 $(38,959)
Net earnings 1,916
Conversion to Common stock (120) 1,906 (1,999)
------ ------ ------ ------- ------- --------
BALANCE AT MARCH 31, 1996 $ 67 $1,548 $ - $11,959 $84,036 $(37,043)
BALANCE AT DECEMBER 31, 1996 $ 14 $ 750 $ - $14,618 $79,884 $(20,218)
Net earnings 2,071
Dividends - Preferred stock (191)
Common stock retirements (338) (2,603)
------ ------ ------ ------- ------- --------
BALANCE AT MARCH 31, 1997 $ 14 $ 750 $ - $14,280 $77,090 $(18,147)
====== ====== ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - General
- ----------------
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of March 31, 1997 and December 31,
1996 and the results of operations for the three-month period, and
cash flows and changes in stockholders' equity for the three-month
period ended March 31, 1997 and 1996. Such results, however, may
not be indicative of the results for the full year.
For additional information regarding significant accounting
policies, and accounting matters applicable to the Company,
reference should be made to the Company's Annual Report to
Shareholders for the year ended December 31, 1996.
Note 2 - Inventories
- --------------------
Inventories are summarized as follows (in thousands):
March 31, December 31,
1997 1996
-------- -----------
Raw materials and supplies $11,605 $10,995
Work-in-process 11,865 11,564
Finished goods 23,854 26,158
Inventories applicable to
government contracts 15,232 15,967
------- -------
$62,556 $64,684
======= =======
Note 3 - Earnings Per Share
- ---------------------------
Earnings per share of Common stock and Common stock equivalents
has been computed on the basis of the average number of Common
shares outstanding during each period. The average number of
shares has been adjusted for assumed exercise at the beginning of
the period (or date of grant, if later) for any dilutive stock
options, with funds obtained thereby used to purchase shares of
-5-
<PAGE>
Note 3 - Earnings Per Share, continued
- --------------------------------------
the Company's Common stock at the average price during the period,
and assumed conversion of all dilutive convertible preferred stock.
Common stock equivalents that are anti-dilutive are excluded from
the computation of earnings per share and earnings are reduced by
the dividend requirements on such equivalents.
Note 4 - Acquisition and Dispositions
- -------------------------------------
In March 1997, the Company sold the assets of its Canadian
steel distributor. Cash proceeds from the sale were $4.1 million.
The purchaser assumed $2.3 million of liabilities.
In January 1996, a subsidiary of the Company acquired certain
assets of Markel, a manufacturer of a silicone wire product line.
The purchase price was approximately $4.3 million.
Note 5 - Preferred Stock Conversions
- ------------------------------------
On February 16, 1996, the Company issued 1,905,849 shares of
Talley Common stock in connection with the conversion of all of
the Company's Series D Preferred stock, 702,919 more shares than
originally designated. The conversion automatically extinguished
all unpaid dividends on that stock, totaling approximately $2.6
million as of December 31, 1995.
On April 22, 1996, pursuant to a conversion offer with respect
to the Company's Series B and Series A Preferred stock,
approximately 798,000 shares or approximately 52% of the
outstanding shares of Series B and approximately 53,000 shares or
approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock
for each outstanding Series B share. Series A holders who
converted received 2.0 shares of Common stock for each outstanding
Series A share. Common stock issued of approximately 1,995,000
shares in connection with the conversion of Series B Preferred
stock and approximately 106,000 in connection with the conversion
of Series A Preferred stock was approximately 948,000 and 56,000
more shares than issuable under the original conversion terms of
the respective series of preferred stock. Prior to the conversion
there were approximately 1,548,000 shares of Series B outstanding
and 67,000 shares of Series A outstanding. The conversion
automatically extinguished all unpaid dividends on the Series B and
Series A shares that were converted totaling approximately $4.0
million ($5 per share) on the Series B Preferred stock and totaling
approximately $0.3 million ($5.50 per share) on the Series A
Preferred stock at March 31, 1996.
-6-
<PAGE>
Note 5 - Preferred Stock Conversions, continued
- -----------------------------------------------
The transactions do not impact the net earnings of the Company,
but "earnings applicable to common shares (after deduction of
preferred stock dividends)," as supplementally disclosed by the
Company, and the "earnings per share of common stock and common
stock equivalent share" have been reduced. The excess of the fair
value of the common shares transferred in the transactions by the
Company, over the fair value of the common shares issuable,
pursuant to the original conversion terms, have been subtracted
from net earnings in the calculations of net earnings available to
common shareholders and earnings per share.
Note 6 - Bonds Repurchased
- --------------------------
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 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.
Note 7 - Repurchase of Common Stock
- -----------------------------------
In late 1996 and early 1997, the Board of Directors approved
the repurchase of up to 950,000 shares of the Company's Common
stock, on the open market or in negotiated transactions, from
time to time, at prices deemed appropriate by the Company's
officers, with such shares to be retired as authorized but
unissued shares. At December 31, 1996, the total number of shares
of common stock repurchased was 277,300 shares for a total cost of
approximately $2.1 million. In January 1997, another 337,367
shares were repurchased for a total cost of approximately $2.9
million.
-7-
<PAGE>
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following is management's discussion and analysis of
certain significant factors which have affected the Company. A
summary of period-to-period changes in the consolidated statement
of earnings is shown below (in thousands):
Three Months
Ended
March 31,
------------------
1997 1996
-------- --------
REVENUES:
Government Products and Services $ 40,774 $ 31,619
Airbag Royalties - 7,250
Stainless Steel Products 30,263 38,935
Industrial Products 17,294 16,030
Realty - 1,293
-------- --------
$ 88,331 $ 95,127
======== ========
OPERATING INCOME:
Government Products and Services $ 4,251 $ 2,037
Airbag Royalties - 7,250
Stainless Steel Products 2,629 4,945
Industrial Products 987 632
Realty - (1,119)
-------- --------
Total operating income 7,867 13,745
Corporate expense (2,533) (4,204)
Non-segment interest income 527 116
Interest expense (3,677) (7,181)
-------- --------
Earnings before income taxes $ 2,184 $ 2,476
======== ========
Revenues for the three-month period ended March 31, 1997
decreased $6.8 million from $95.1 million to $88.3 million, when
compared with the corresponding period in the prior year.
Royalties from automotive airbags ceased with the mid-1996
conclusion of the airbag royalties litigation. Airbag royalties
recorded in the first quarter of 1996 were $7.3 million. Revenue
increases from the Company's Government Products and Services
segment, primarily from the Company's naval architectural and
engineering unit, were offset by decreases in stainless steel
products, resulting primarily from lower steel prices, as
competitive pressures from domestic and foreign suppliers affected
the sales volume and sales prices.
-8-
<PAGE>
Operating income from the Government Products and Services
segment increased from $2.0 million to $4.3 million. Automotive
airbag royalties in the Airbag Royalty segment in the first quarter
of 1996 were $7.3 million. There were no royalties in 1997,
following the mid-1996 conclusion of the airbag royalties
litigation. Operating income from the Stainless Steel Products
segment for the three months ended March 31, 1997, when compared
with the first three months of 1996, was $2.3 million lower, while
operating income from the Company's Industrial Products segment
increased $.4 million. Pursuant to the disposition of
substantially all of the Company's real estate in December of 1996,
losses in the Realty segment decreased by $1.1 million for the
first three months of 1997, when compared with the prior year.
The gross profit percentage, excluding airbag royalties, of
22.9%, for the three months ended March 31, 1997 was up slightly
from the gross profit percentage of 22.2% for the comparable period
in 1996. The slight increase from the prior year is primarily due
to higher margins on certain government contracts and an
improvement in the margin on industrial products, partially offset
by a lower margin on stainless steel products. Earnings before
income taxes for the three months ended March 31, 1997 was $2.2
million compared with $2.5 million in the first three months of the
previous year. Net earnings for the three months ended March 31,
1997 and 1996 were $2.1 million and $1.9 million, respectively.
GOVERNMENT PRODUCTS AND SERVICES. Revenue and operating
income for the three months ended March 31, 1997 increased by $9.2
million and $2.2 million, respectively, when compared with the same
period in the prior year, primarily the result of an increase in
service revenues from the Company's naval architectural and
engineering unit and favorable results upon conclusion, or the
timing of completion, of certain other contracts.
AIRBAG ROYALTIES. As described in the Notes to the
Consolidated Financial Statements for the year ended December 31,
1996, the quarterly royalty payments ceased with the payments
received from TRW in the third quarter of 1996. Airbag royalties
in the first quarter of 1996 were $7.3 million.
STAINLESS STEEL PRODUCTS. During the first three months of
1997, sales for the Stainless Steel Products segment decreased $8.7
million, while operating income decreased $2.3 million, when
compared with the same period in 1996. Revenue and earnings were
affected by lower prices, as competitive pressures from domestic
and foreign suppliers affected the sales volume and sales prices.
-9-
<PAGE>
INDUSTRIAL PRODUCTS. In the three-month period ended March
31, 1997, Industrial Products sales increased $1.3 million while
operating income increased $.4 million, when compared with the same
period in 1996. Increases in sales and operating income resulted
primarily from increased orders for insecticides and air
fresheners.
REALTY. In December of 1996 all real estate properties,
except for one, were sold. The Company plans to dispose of the
single property not included in this bulk sale. There were no
sales or earnings in 1997, compared with sales and operating losses
of $1.3 million and $1.1 million, respectively, in the first
quarter of 1996.
OTHER. Interest expense for the three months ended March 31,
1997 decreased to $3.7 million, from $7.2 million in the comparable
period in 1996. The decrease is primarily due to the repurchase of
a substantial portion of the Company's Senior Discount Debentures
and the paydown of the Company's revolving credit facility in the
second half of 1996. The overhead expenses decreased in the first
three months of 1997 from $4.2 million to $2.5 million when
compared with the comparable period in 1996. Corporate overhead
for 1996 was above historical levels primarily due to high costs
incurred in connection with the TRW litigation. The income tax
provision for the first three months of 1997 was $.1 million
compared to $.6 million in the comparable period in 1996. Due to
unrecognized federal tax carryforward benefits, primarily the
result of losses in the Company's real estate segment, the Company
has no Federal tax provision in 1996 or the first three months of
1997. The tax provision in the first quarter of 1996 and 1997 is
primarily for state jurisdictions.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At March 31, 1997, the Company had $45.1 million in cash and
cash equivalents and net working capital of $102.0 million. Cash
generated from operating activities for the three months ended
March 31, 1997 was $.3 million. The amount primarily reflects cash
generated from earnings and an increase in accounts payable, offset
in part by cash used to increase inventories, an increase in
accounts receivable and a decrease in accrued expenses. Cash
generated from operations during the first three months of 1996 was
$6.0 million. Cash generated from investing activities during the
quarter ended March 31, 1997 was $.2 million, consisting primarily
-10-
<PAGE>
Financial Condition, Liquidity and Capital Resources, continued
- ---------------------------------------------------------------
of the sale of assets of a subsidiary, offset by capital
expenditures. Cash used in financing activities of $4.2 million
reflects the repurchases of the Company's common stock and a
decrease in the Company's long-term debt.
In October 1993, the Company completed a major refinancing
program. This refinancing program included an offering of $185
million of debt securities, consisting of $70 million gross
proceeds of Senior Discount Debentures due 2005, issued by the
Company to yield 12.25% and $115 million of Senior Notes due 2003,
with an interest rate of 10.75% issued by a wholly owned subsidiary
of the Company, Talley Manufacturing and Technology, Inc. ("Talley
Manufacturing"). In connection with this refinancing, Talley
Manufacturing obtained a secured credit facility with institutional
lenders.
Borrowings under the secured credit facility may not exceed
the collateral base as defined in the governing credit agreement.
The facility consists of a five-year revolving credit facility of
up to $40.0 million and a five-year $20.0 million term loan
facility. At March 31, 1997 availability under the total facility
was approximately $50.5 million, of which approximately $10.5
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 in 1996 from the
sale of the assets of the real estate operations and from the
resolution of the automotive airbag royalties litigation, have been
used to reduce the Company's total indebtedness.
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 is dependent primarily
upon distributions from those subsidiaries in order to meet its
debt service and other obligations. The Company is 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.
Cash available to the Company is required to be used for
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
-11-
<PAGE>
Financial Condition, Liquidity and Capital Resources, continued
- ---------------------------------------------------------------
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
limited amount of outstanding Senior Discount Debentures, after the
repurchases of a substantial portion of the debentures in 1996, and
due to the current cash balances, the Company believes that funds
will be available in sufficient amounts, and at the required times,
to permit the Company to meet its obligations.
Other Matters
- -------------
Litigation - TRW Inc.
---------------------
A judgment in the Company's favor in the amount of $138.0
million was entered against TRW Inc. (TRW) by the United States
District Court for the District of Arizona in June 1995 following
a jury verdict that TRW had repudiated and breached the April 1989
Airbag Royalty Agreement with the Company. The $138.0 million
damages amount represented the jury's calculation of the present
value of the remaining stream of Airbag Royalties which would have
been payable by TRW through the April 2001 scheduled expiration
date of the Airbag Royalty Agreement had TRW not breached the
Agreement. TRW appealed the judgment, and, during the pendency of
the appeal, was ordered by the District Court to continue making
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).
-12-
<PAGE>
Other Matters, 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.
Recently Issued Accounting Standards
------------------------------------
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per Share" which is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods. Under the provisions of this new pronouncement,
the Company is required to present Basic Earnings per Share and
Diluted Earnings per Share. Basic Earnings per Share is computed
by dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the
denominator) during the period. Income available to common
stockholders is computed by deducting both dividends declared in
the period on preferred stock (whether or not paid) and the
dividends accumulated for the period on cumulative preferred stock
(whether or not earned) from income from continuing operations and
also from net income. Diluted Earnings per Share is computed
similar to Basic Earnings per Share, except that the denominator is
increased to include the number of additional common shares that
-13-
<PAGE>
Other Matters, continued
- ------------------------
Recently Issued Accounting Standards, continued
-----------------------------------------------
would have been outstanding if the dilutive potential common shares
had been issued. Under this new pronouncement, the Company is
required to disclose a reconciliation of the numerators and the
denominators of the basic and diluted per-share computations for
income from continuing operations, the effect that has been given
to preferred dividends in arriving at income available to common
stockholders in computing basic EPS, and securities that could
potentially dilute basic EPS in the future that were not included
in the computation of diluted EPS because to do so would have been
anti-dilutive for the period(s) presented.
Had this Statement been effective for the quarter ending March
31, 1997, the Basic Earnings per share and the Diluted Earnings per
share would have been $.13 and $.13, respectively.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this
Quarterly Report contain forward-looking statements that are based
on current expectations, estimates and projections about the
industries in which the Company operates. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions
are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce
competitive new products and services on a timely and cost
effective basis; the mix of products/services; the achievement of
lower costs and expenses; domestic and foreign governmental and
public policy changes including environmental regulations;
protection and validity of patent and other intellectual property
rights; reliance on large customers; the cyclical nature of certain
-14-
<PAGE>
Forward-Looking Statements, continued
- -------------------------------------
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.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Litigation - TRW Inc.
---------------------
For a description of legal proceedings involving the Company,
see "Other Matters" within Management's Discussion and Analysis.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
11* Computation of Earnings per Common and Common
Equivalent Share.
27* Financial Data Schedule for Talley Industries,
Inc., March 31, 1997.
99.1* Consent and Sixth Amendment to the Loan and
Security Agreement dated March 24, 1997 by and
among Talley Manufacturing and Technology, Inc.,
Talley Canada, Inc. and Transamerica Business
Credit Corporation, as agent.
99.2* Third Amendment to Talley Savings Plus, an
employee stock purchase plan for the employees of
Talley Industries, Inc. and Affiliated Companies,
dated March 20, 1997.
* Documents marked with an asterisk are filed with this report.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months
ended March 31, 1997.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TALLEY INDUSTRIES, INC.
-------------------------------
(Registrant)
Date: May 13, 1997 By Kenneth May
---------------------- ----------------------------
Kenneth May
Vice President, Controller
Principal Accounting
Officer
Date: May 13, 1997 By Mark S. Dickerson
---------------------- ----------------------------
Mark S. Dickerson
Vice President
and Secretary
-17-
EXHIBIT 11
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Common
and Common Equivalent Share
(thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1 9 9 7 1 9 9 6
----------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
Net earnings before stock dividend $ 2,071 $ 2,071 $ 1,916 $ 1,916
Preferred stock dividend - - (473) (405)
------- ------- ------- -------
Net earnings 2,071 2,071 1,443 1,511
Assumed value of common shares
issued to induce conversion of
Series D Preferred stock - - (4,639) (4,639)
------- ------- ------- -------
Net earnings (loss) for
computation $ 2,071 $ 2,071 $(3,196) $(3,128)
======= ======= ======= =======
Average common shares
outstanding during period 14,322 14,322 10,996 11,960
Common stock equivalents:
Convertible preferred stock 997 997 - -
Stock options 22 22 - -
Shares issuable in connection
with acquired company 20 20 - -
------- ------- ------- -------
Shares for computation 15,361 15,361 10,996 11,960
======= ======= ======= =======
Earnings (loss) per share:
Net earnings before consideration
for induced conversion of
preferred stock .13 .13 .13 .13
Assumed value of conversion
inducement - - (.42) (.39)
------- ------- ------- -------
Net earnings (loss) per $ .13 $ .13 $ (.29) $ (.26)
common share ======= ======= ======= =======
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 45,133,000
<SECURITIES> 0
<RECEIVABLES> 54,031,000
<ALLOWANCES> 919,000
<INVENTORY> 62,556,000
<CURRENT-ASSETS> 170,547,000
<PP&E> 150,174,000
<DEPRECIATION> 98,788,000
<TOTAL-ASSETS> 276,504,000
<CURRENT-LIABILITIES> 68,522,000
<BONDS> 122,421,000
0
764,000
<COMMON> 14,280,000
<OTHER-SE> 58,303,000
<TOTAL-LIABILITY-AND-EQUITY> 276,504,000
<SALES> 66,933,000
<TOTAL-REVENUES> 88,331,000
<CGS> 49,070,000
<TOTAL-COSTS> 68,070,000
<OTHER-EXPENSES> 14,932,000
<LOSS-PROVISION> 31,000
<INTEREST-EXPENSE> 3,677,000
<INCOME-PRETAX> 2,184,000
<INCOME-TAX> 113,000
<INCOME-CONTINUING> 2,071,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,071,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
EXHIBIT 99.1
CONSENT AND SIXTH AMENDMENT
This CONSENT AND SIXTH AMENDMENT (this "Consent") is
entered into as of March 24, 1997, by and among TALLEY
MANUFACTURING AND TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), TALLEY CANADA INC., an Ontario, Canada corporation
("Talley Canada"), the lenders parties to the Loan Agreement
referred to below (the "Lenders"), and TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation, as agent (the "Agent") for the
Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have
heretofore entered into a Loan and Security Agreement dated October
22, 1993, as amended (the "Loan Agreement");
WHEREAS, pursuant to a Continuing Guaranty and Security
Agreement, dated October 22, 1993, as amended (the "Talley Canada
Guaranty") executed by Talley Canada in favor of the Agent, Talley
Canada has guaranteed to the Agent and the Lenders under the Loan
Agreement certain indebtedness, obligations and liabilities of the
Borrower;
WHEREAS, Talley Canada and the Borrower have heretofore
entered into a Subsidiary Loan and Security Agreement dated October
22, 1993, as amended (the "Talley Canada Loan Agreement") pursuant
to which Talley Canada has executed in favor of the Borrower a
Revolving Note (as defined in the Talley Canada Loan Agreement and
hereinafter referred to as the "Talley Canada Revolving Note") and
has granted to the Borrower a Lien upon all of Talley Canada's
Collateral (as defined in the Talley Canada Loan Agreement and
hereinafter referred to as the "Talley Canada Collateral");
WHEREAS, pursuant to the Collateral Assignment Agreement, the
Borrower has collaterally assigned to the Agent and the Lenders all
of the Borrower's rights and Liens under or relating to the Talley
Canada Loan Agreement;
<PAGE>
WHEREAS, Talley Canada owns and operates a service center
specializing in stainless steel sheet, bar, plate and angle iron
(collectively, the "Business");
WHEREAS, the Borrower, Talley Canada, Ulbrich of Canada, Inc.
(the "Buyer") and Ulbrich Stainless Steels and Special Metals, Inc.
propose to enter into an Assets Purchase Agreement (the "Purchase
Agreement") pursuant to which Talley Canada agrees to sell and the
Buyer agrees to purchase all of the assets of the Business, both
tangible and intangible, as more fully set forth in the Purchase
Agreement (but excluding the Excluded Assets, as defined in the
Purchase Agreement) (the "Purchase and Sale Transaction");
WHEREAS, in connection with the Purchase and Sale Transaction,
the Borrower and Talley Canada have requested that the Agent and
the Lenders agree to release the Talley Canada Guaranty (the
"Talley Canada Guaranty Release");
WHEREAS, the Borrower desires to terminate the Talley Canada
Loan Agreement (the "Talley Canada Loan Termination") and all Loan
Documents (as defined therein and hereinafter referred to as the
"Talley Canada Loan Documents") and to release the Talley Canada
Collateral (the "Talley Canada Collateral Release");
WHEREAS, the Purchase and Sale Transaction, the Talley Canada
Guaranty Release, the Talley Canada Loan Termination and the Talley
Canada Collateral Release (each, individually, a "Proposed
Transaction" and, collectively, the "Proposed Transactions")
require the written consent of the Agent and the Lenders, and the
Borrower and Talley Canada have requested that the Agent and
Lenders so consent; and
WHEREAS, the Agent and the Lenders are willing to consent to
the Proposed Transactions on the terms and conditions herein set
forth;
2
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in
the Loan Agreement.
2. Consent to Proposed Transactions.
2.1. Consent. The Agent and the Lenders hereby consent
to the Proposed Transactions; provided, however, that such consent
is subject to conditions set forth in Section 2.2 of this Consent.
2.2. Conditions to Consent. The consent provided for in
Section 2.1 of this Consent is subject to the following conditions:
(a) Each Proposed Transaction shall be consummated and
become effective simultaneously with the consummation and
effectiveness of all of the other Proposed Transactions (the
date of the consummation of the Proposed Transactions being
hereinafter referred to as the "Transaction Closing Date");
(b) No Term Loan (as defined in the Talley Canada Loan
Agreement) has been made by the Borrower to Talley Canada
pursuant to the Talley Canada Loan Agreement and, as of the
date hereof, the outstanding principal balance of the Talley
Canada Revolving Note is zero;
(c) The Agent shall have reviewed and approved all
documents and instruments to be executed and delivered in
connection with the Talley Canada Loan Termination, and such
Proposed Transactions shall be consummated in accordance
therewith;
(d) The Purchase and Sale Transaction shall be
consummated strictly in accordance with the terms of the
Purchase and Sale Agreement substantially in the form
transmitted from Brenda L. Bolt, under cover of letter dated
March 12, 1997, to Alan M. Christenfeld, with material changes
to such form as may have been approved by the Lenders;
3
<PAGE>
(e) The Agent shall have received a copy of the
resolutions of the Board of Directors of the Borrower and the
resolutions of the sole shareholder of Talley Canada (each in
form and substance reasonably satisfactory to the Agent)
authorizing (i) the execution, delivery and performance of
this Consent, the documents referred to herein, and the other
Loan Documents contemplated hereby and thereby, and (ii) the
consummation of the Proposed Transactions and the other
transactions contemplated hereby and thereby, all certified by
the Secretary or an Assistant Secretary of each of the
Borrower and Talley Canada on the date hereof. Such
certificates shall state that the resolutions set forth
therein have not been amended, modified, revoked or rescinded
as of the date of such certificate;
(f) No Default, Event of Default or Subsidiary Event of
Default shall have occurred and be existing either on the date
hereof, immediately after giving effect to this Consent, or on
the Transaction Closing Date;
(g) The representations and warranties contained herein,
in the Loan Agreement and in all other Loan Documents (other
than representations and warranties that expressly speak only
as of a specified different date) shall be true and correct as
of the date hereof, immediately after giving effect to this
Consent, and on the Transaction Closing Date;
(h) The Agent shall have received a certificate, in form
and substance satisfactory to the Agent, dated the date of the
effectiveness of this Consent and signed by the President or
a Vice President and the Treasurer or Controller of the
Borrower certifying that the conditions set forth in this
Section 2.2 have been fulfilled and as to such other matters
as the Agent shall reasonably require;
(i) The Agent shall have received such other agreements,
opinions, certificates, representations, instruments and other
documents as it may reasonably require, all in form and
substance satisfactory to the Agent;
(j) Such consent is strictly limited to the facts set
forth herein; and
(k) All other conditions set forth in Section 6 hereof
shall have been satisfied.
4
<PAGE>
3. Representations and Warranties. The Borrower and Talley
Canada hereby represent and warrant to the Agent and the Lenders
that (a) the execution, delivery and performance of the this
Consent, and the other documents and instruments to be executed and
delivered in connection herewith by the Borrower and Talley Canada
are within their respective corporate powers and have been duly
authorized by all necessary corporate action, (b) no consent,
approval, authorization of, or declaration or filing with, any
governmental or public authority, and no consent of any other
Person, is required in connection with the execution, delivery and
performance of the this Consent and the other documents and
instruments to be executed and delivered in connection herewith by
the Borrower and Talley Canada, except for this Consent and those
others already duly obtained, (c) this Consent has been duly
executed by the Borrower and Talley Canada and constitutes the
legal, valid and binding obligation of the Borrower and Talley
Canada, enforceable against them in accordance with its terms, (d)
the execution, delivery and performance by the Borrower and Talley
Canada of this Consent and the other documents and instruments to
be executed and delivered in connection herewith by the Borrower
and Talley Canada do not and will not conflict with, or constitute
a violation or breach of, or constitute a default under, or result
in the creation or imposition of any Lien upon the property of the
Borrower or Talley Canada (other than Liens the creation of which
are expressly contemplated hereunder) by reason of the terms of (i)
any contract, mortgage, Lien, lease, agreement, indenture, or
instrument to which the Borrower or Talley Canada is a party or
which is binding upon it, (ii) any requirement of law applicable to
the Borrower or Talley Canada or (iii) the Certificate or Articles
of Incorporation or By-Laws of the Borrower or Talley Canada, (e)
no event has occurred and is continuing which constitutes a
Default, an Event of Default or a Subsidiary Event of Default, and
(f) after giving effect to the Proposed Transactions, Talley Canada
will have no material assets other than the Excluded Assets and no
material liabilities.
4. Covenants by Borrower and Talley Canada.
(a) The Borrower hereby covenants that, from and after
the Transaction Closing Date, it will not allow Talley Canada to,
and Talley Canada hereby covenants that, from and after the
Transaction Closing Date, it will not, possess or acquire any
material assets other than the Excluded Assets, have or incur any
material liabilities or conduct any material business.
5
<PAGE>
(b) The Borrower and Talley Canada each hereby covenant
that, within 10 Business Days after the Transaction Closing Date,
they shall deliver to the Agent a true and correct copy of the
Purchase Agreement certified as such by the President or a Vice
President and the Secretary or an Assistant Secretary of each of
the Borrower and Talley Canada.
5. Amendments to Loan Agreement. Effective as of the
Transaction Closing Date immediately after the consummation of the
Proposed Transactions, the Loan Agreement shall be amended in the
following respects:
5.1. The definition of the term "Non-Operating
Subsidiaries" set forth in Section 1.1 of the Loan Agreement shall
be amended in its entirety to read as follows:
"Non-Operating Subsidiaries" shall mean individually
and in the aggregate Merrick Corporation, Stencel Aero
Engineering Corporation, The Waterbury Button Company,
Talley International Investment Corporation, Talley
Automotive Products, Inc., McMullen Industries, Inc.,
Dimetrics International Inc., WDC, Inc. and Talley Canada
Inc.
5.2. The words "Talley Canada, Inc., an Ontario, Canada
corporation" set forth in Schedule 1.3 of the Loan Agreement shall
be deleted.
5.3. The row beginning with the words "Talley Canada,
Inc." in the column entitled "Name of Sub," and all information in
such row, shall be deleted from Schedule 2.1 of the Loan Agreement.
6. Conditions to Effectiveness. This Consent shall be
effective as of the date first above written upon satisfaction of
the following conditions precedent:
6.1. Execution of this Consent. The Agent shall have
received a copy of this Consent duly executed by the Borrower,
Talley Canada and the Lenders.
6.2. Confirmation of Loan Documents. Each Subsidiary
shall have executed the Confirmation of Loan Documents set forth
below.
6
<PAGE>
7. Authorization to Sign Releases and Other Documents. By
their signatures below, the Lenders hereby authorize Transamerica
Business Credit Corporation, as Agent (a) to execute and deliver
such documents and instruments as are necessary or appropriate, in
the Agent's judgment, to effectuate, on and after the Transaction
Closing Date, the Talley Canada Guaranty Release, the Talley Canada
Loan Termination and the Talley Canada Collateral Release; (b) to
consent to the delivery of such other documents and instruments in
connection with the Proposed Transactions as the Agent shall
require, each in form and substance satisfactory to the Agent; and
(c) to execute and deliver such written consents, releases,
terminations and other documents and instruments, and to take such
other action, in connection with the Proposed Transactions as the
Agent shall deem appropriate.
8. Reference to and Effect on Loan Documents.
8.1. Except as specifically modified herein, all of the
terms of the Loan Agreement and the Talley Canada Loan Agreement
shall remain unchanged and in full force and effect.
8.2. Except as expressly set forth herein, the execution,
delivery and effectiveness of this Consent shall not operate as a
waiver of any right, power or remedy of any Lender or the Agent
under the Loan Agreement, the Talley Canada Loan Agreement or any
of the other Loan Documents, nor constitute a waiver of any
Default, Event of Default or Subsidiary Event of Default, or a
consent to any noncompliance with any provision of the Loan
Agreement, the Talley Canada Loan Agreement or any of the other
Loan Documents.
9. Execution in Counterparts. This Consent may be executed
in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered
(including delivery by telecopier) shall be deemed to be an
original and all of which taken together shall constitute one and
the same instrument.
7
<PAGE>
10. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
11. Headings. Section headings in this Consent are included
herein for convenience of reference only and shall not constitute
a part of this Consent or be given any substantive effect.
[Rest of page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Consent to be executed and delivered by their proper and duly
authorized officers as of the date set forth above.
BORROWER:
--------
TALLEY MANUFACTURING AND TECHNOLOGY,INC.
By: Mark S. Dickerson
------------------------------
Name: Mark S. Dickerson
Title: Vice President
TALLEY CANADA:
-------------
TALLEY CANADA, INC.
By: Mark S. Dickerson
------------------------------
Name: Mark S. Dickerson
Title: Vice President
AGENT:
-----
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Michael Burns
------------------------------
Name: Michael Burns
Title: Vice President
9
<PAGE>
LENDERS:
-------
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Michael Burns
------------------------------
Name: Michael Burns
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
By: Donald A. Tomlinson
------------------------------
Name: Donald A. Tomlinson
Title: Vice President
NATIONAL BANK OF CANADA
By: Thomas H. Hopkins
------------------------------
Name: Thomas H. Hopkins
Title: Vice President
By: Beth Pease
------------------------------
Name: Beth Pease
Title: Vice President
10
<PAGE>
CONFIRMATION OF LOAN DOCUMENTS
Each of the undersigned hereby consents to the execution
and delivery of the foregoing Consent and the consummation of the
Proposed Transactions. Each of the undersigned hereby confirms
that each of the Loan Documents to which it is a party shall remain
in full force and effect on the terms provided therein and that
each reference in the Loan Documents to the "Loan Agreement" shall
be a reference to the Loan Agreement as modified by the Consent.
Each of the undersigned further confirms that there exists no
Default or Event of Default (as defined in the Subsidiary Loan
Agreement to which it is a party) and that all representations and
warranties made by it in the Loan Documents to which it is a party
are true and correct as though made on and as of the date hereof
(other than representations and warranties that expressly speak
only as of a specified different date).
Dated: As of March 24, 1997
AMCAN SPECIALTY STEELS, INC.;
DIMETRICS, INC.; ELECTRODYNAMICS,
INC.; JOHN J. McMULLEN ASSOCIATES,
INC.; PORCELAIN PRODUCTS CO.; ROWE
INDUSTRIES, INC.; TALLEY AUTOMOTIVE
PRODUCTS, INC.; TALLEY CANADA,
INC.; TALLEY DEFENSE SYSTEMS, INC.;
TALLEY INTERNATIONAL INVESTMENT
CORPORATION; TALLEY METALS
TECHNOLOGY, INC.; TALLEY
TECHNOLOGY, INC.; UNIVERSAL
PROPULSION COMPANY; WATERBURY
COMPANIES, INC.; WDC, INC.;
By: Mark S. Dickerson
---------------------------
Name: Mark S. Dickerson
Title: Secretary
11
EXHIBIT 99.2
THIRD 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 was there-
after amended on March 7, 1996, and December 17, 1996. By this
instrument, the Company intends to amend the Plan's provisions
regarding the voting of Company Securities allocated to Partic-
ipant Accounts for which no timely voting instructions are re-
ceived and the voting of those shares of Company Securities which
are not allocated to Participant Accounts to reflect the position
of the Internal Revenue Service and the United States Department
of Labor requiring trustees to vote such shares in their discre-
tion.
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 8.2 is hereby amended in its entirety to
read as follows:
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. Except as
otherwise provided in this Section 8.2, Company Securi-
ties held as assets of the Trust Fund and allocated to
the Accounts of a Participant shall be voted by the
Trustee in accordance with the directions of the Partic-
ipant (or his Beneficiary, if a Participant has died).
<PAGE>
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 Committee or its desig-
nated agent instructing the Trustee to vote shares of
Company Securities allocated to the Participant's Ac-
counts in accordance with the Participant's wishes. The
voting direction form may be prepared and distributed in
accordance with the regular proxy solicitation proce-
dures of Talley Industries, Inc. and each such Partici-
pant 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 re-
ceipt 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 timely instructions from a Participant prior
to such meeting, the Company Securities allocated to
such Participant's Accounts shall be voted by the
Trustee in it discretion. Company Securities which are
not allocated to Participants' Accounts shall be voted
by the Trustee in its discretion. 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.
3. This Amendment shall be effective as of January 1,
1997.
Except as amended hereby, the Company ratifies and con-
firms the Plan as adopted on December 16, 1994 and as thereafter
amended.
Dated: March 20, 1997.
TALLEY MANUFACTURING AND
TECHNOLOGY, INC.
By: Mark S. Dickerson
-------------------------------
Mark S. Dickerson
Its: Vice President
-------------------------------
Vice President
2
