<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
TALLEY INDUSTRIES, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $1.00 (including the associated preferred stock
purchase rights);
Series A Convertible Preferred Stock; and
Series B $1 Cumulative Convertible Preferred Stock.
(2) Aggregate number of securities to which transaction applies: 14,964,621
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $12.00 per share of Common Stock
(including the associated preferred stock purchase rights), $11.70 per
share of Series A Convertible Preferred Stock and $16.00 per share of
Series B $1 Cumulative Convertible Preferred Stock.
(Set forth the amount on which the filing fee is calculated and state
how it was determined): The amount of the filing fee, calculated in
accordance with Rule 0-11, equals 1/50th of one percent of the
aggregate value of cash offered for such Shares. The calculation of the
fee assumes the purchase of 13,793 shares of Series A Convertible
Preferred Stock at $11.70 per share, 749,486 shares of Series B $1
Cumulative Convertible Preferred Stock at $16.00 per share, and
14,374,173 shares of Common Stock at $12.00 per share. Such number of
Shares includes all outstanding shares as of September 19, 1997, and
assumes the exercise of all stock options to purchase shares of Common
Stock issued by Talley Industries, Inc. which were outstanding as of
September 19, 1997.
(4) Proposed maximum aggregate value of transaction: $184,643,230
(5) Total fee paid: $36,929
[ ] Fee paid previously with preliminary materials.
<PAGE> 2
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $36,929
(2) Form, Schedule or Registration Statement No.: Schedule 14D-1
(3) Filing Party: Score Acquisition Corp., Carpenter Technology Corporation
(4) Date Filed: October 2, 1997, October 6, 1997, October 9, 1997, October
10, 1997, October 20, 1997, October 22, 1997, October 27, 1997, October
29, 1997, November 4, 1997, November 20, 1997, December 1, 1997,
December 4, 1997 and December 5, 1997.
<PAGE> 3
TO THE STOCKHOLDERS OF TALLEY INDUSTRIES, INC.:
You are cordially invited to attend a Special Meeting of the
Stockholders (the "Special Meeting") of Talley Industries, Inc. ("Talley") to be
held on Thursday, February 19, 1998, at 10:00 a.m., local time, at the offices
of Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, Pennsylvania 19103.
As described in the enclosed Proxy Statement, at the Special Meeting,
you will be asked to consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated September 25, 1997 (the "Merger Agreement"),
among Carpenter Technology Corporation, a Delaware corporation ("Carpenter"),
Score Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Carpenter ("Sub"), and Talley, providing for, among other things, the merger of
Sub with and into Talley (the "Merger"). Following the Merger, Talley will
continue as the surviving corporation (the "Surviving Corporation") and will
become a wholly owned subsidiary of Carpenter. A copy of the Merger Agreement is
attached to this Proxy Statement as Exhibit A.
The Merger will constitute the second and final step of the acquisition
of Talley by Carpenter. The first step was a tender offer (the "Offer")
commenced by Sub on October 2, 1997 for all of the outstanding shares of Series
A Convertible Preferred Stock ("Series A Preferred Shares"), Series B $1
Cumulative Convertible Preferred Stock ("Series B Preferred Shares" and together
with the Series A Preferred Shares, "Preferred Shares") and Common Stock, par
value $1.00 per share ("Common Shares" and together with the Preferred Shares,
the "Shares"), of Talley, including, in the case of Common Shares, the
associated Preferred Stock Purchase Rights, at a purchase price of $11.70 per
Series A Preferred Share, $16.00 per Series B Preferred Share and $12.00 per
Common Share, net to the seller in cash, without interest thereon (the "Offer
Price"). Pursuant to the Offer, which expired on December 4, 1997, Sub accepted
for payment 12,509 Series A Preferred Shares (or approximately 90.7% of the
Series A Preferred Shares outstanding), 497,618 Series B Preferred Shares (or
approximately 66.4% of the Series B Preferred Shares outstanding) and 10,777,195
Common Shares (or approximately 75.9% of the Common Shares outstanding). On a
fully diluted basis, this represents approximately 74.4% of all Shares
outstanding on December 5, 1997 and approximately 75.4% of all Shares
outstanding on January 14, 1998, the record date for the Special Meeting (the
"Record Date"). In accordance with the Merger Agreement, Carpenter intends to
cause Sub to vote in favor of the Merger and to merge with and into Talley, and
all Shares (other than Shares owned by Carpenter, Sub or any other subsidiary
of Carpenter, or Shares held by Talley as treasury stock, or by stockholders,
if any, of Talley who are entitled to and who properly exercise appraisal
rights under the Delaware General Corporation Law), will be converted into the
right to receive the respective Offer Price.
YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT, APPROVED THE
MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS OF TALLEY AND RECOMMENDS THAT THE STOCKHOLDERS OF
TALLEY VOTE THEIR SHARES "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
SUB OWNS AN AGGREGATE OF 11,262,268 SHARES, REPRESENTING, ON A FULLY
DILUTED BASIS, APPROXIMATELY 75.3% OF ALL SHARES OUTSTANDING ON THE RECORD DATE.
BECAUSE THE APPROVAL OF THE HOLDERS OF A MAJORITY OF ALL OUTSTANDING SHARES IS
SUFFICIENT TO APPROVE AND ADOPT THE MERGER AGREEMENT, SUB CAN CAUSE THE MERGER
TO OCCUR WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER HOLDER OF SHARES. CARPENTER
AND SUB HAVE AGREED PURSUANT TO THE MERGER AGREEMENT TO VOTE ALL THEIR SHARES IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
IF THE MERGER IS CONSUMMATED, HOLDERS OF SHARES WHO DO NOT VOTE IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND WHO OTHERWISE COMPLY
WITH THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW (A
COPY OF WHICH IS ATTACHED AS EXHIBIT B TO THIS PROXY STATEMENT) WILL BE ENTITLED
TO RECEIVE SUCH CONSIDERATION AS MAY BE DETERMINED TO BE DUE UNDER SUCH
PROVISIONS.
<PAGE> 4
You are urged to read this Proxy Statement, which describes the terms
of the Merger, in its entirety. A copy of the Merger Agreement is included as
Exhibit A to this Proxy Statement. Also included as exhibits to the Proxy
Statement are Exhibit B, Section 262 of the Delaware General Corporation Law,
Exhibit C, the Opinion of J.P. Morgan Securities Inc. regarding the Offer and
the Merger, Exhibit D, Talley's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and Exhibit E, Talley's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997. You should also review these
materials.
Whether or not you plan to attend the Special Meeting, you are
requested to complete, date, sign and return the proxy in the enclosed
postage-paid envelope. Executed proxies with no instructions indicated thereon
will be voted FOR approval and adoption of the Merger Agreement and the Merger.
You may revoke your proxy at any time before it has been voted, and if you
attend the Special Meeting, you may vote your Shares personally, whether or not
you have previously submitted a proxy.
Please do not send in your Share certificates at this time. If the
Merger is consummated, you will be sent a letter of transmittal for that purpose
as soon as reasonably practicable thereafter.
Very truly yours,
/s/ Robert W. Cardy
Robert W. Cardy
Chief Executive Officer and Chairman of the Board
<PAGE> 5
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Talley Industries, Inc., a Delaware corporation
("Talley"), will be held on Thursday, February 19, 1998, at 10:00 a.m., local
time, at the offices of Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717
Arch Street, Philadelphia, Pennsylvania 19103, for the following purposes:
(a) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated as of September 25, 1997 (the "Merger
Agreement"), among Carpenter Technology Corporation, a Delaware corporation
("Carpenter"), Score Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Carpenter ("Sub"), and Talley. A copy of the Merger
Agreement is attached to this Proxy Statement as Exhibit A. As more fully
described in the Proxy Statement, the Merger Agreement provides that (i) Sub
will be merged with and into Talley (the "Merger"), the separate corporate
existence of Sub will cease with Talley continuing as the surviving corporation,
as a consequence of which Talley will become a wholly owned subsidiary of
Carpenter; and (ii) each issued and outstanding share of Series A Convertible
Preferred Stock ("Series A Preferred Shares"), Series B $1 Cumulative
Convertible Preferred Stock ("Series B Preferred Shares" and together with the
Series A Preferred Shares, "Preferred Shares") and Common Stock, par value $1.00
per share ("Common Shares" and together with the Preferred Shares, the
"Shares"), of Talley (other than Shares owned by Carpenter, Sub or any other
subsidiary of Carpenter, or Shares held by Talley as treasury stock, or Shares
held by stockholders who shall have demanded and perfected any appraisal rights
they may have under Delaware General Corporation Law), will be converted, upon
the consummation of the Merger, into the right to receive $11.70 per Series A
Preferred Share, $16.00 per Series B Preferred Share and $12.00 per Common
Share, respectively, net to the seller in cash without interest thereon.
(b) To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on January 14,
1998, as the record date (the "Record Date") for the determination of Talley's
stockholders entitled to notice of and to vote at the Special Meeting. Only
holders of Shares of record at the close of business on that date will be
entitled to notice of and to vote at the Special Meeting or any adjournments or
postponements thereof. A list of Talley stockholders entitled to vote at the
Special Meeting will be available for examination by any Talley stockholder, for
proper purposes, during normal business hours, at Talley's corporate offices,
2702 North 44th Street, Suite 100A, Phoenix, Arizona 85008, commencing two
business days after the date of this Notice of Special Meeting and continuing
through the date of the Special Meeting.
SUB OWNS AN AGGREGATE OF 11,262,268 SHARES, REPRESENTING, ON A FULLY
DILUTED BASIS, APPROXIMATELY 75.3% OF ALL SHARES OUTSTANDING ON THE RECORD DATE.
BECAUSE THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF ALL OUTSTANDING
SHARES IS SUFFICIENT TO APPROVE AND ADOPT THE MERGER AGREEMENT, SUB CAN CAUSE
THE MERGER TO OCCUR WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER HOLDERS OF SHARES.
CARPENTER AND SUB HAVE AGREED PURSUANT TO THE MERGER AGREEMENT TO VOTE ALL THEIR
SHARES IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
<PAGE> 6
IF THE MERGER IS CONSUMMATED, HOLDERS OF SHARES WHO DO NOT VOTE IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND WHO OTHERWISE COMPLY
WITH THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
WILL BE ENTITLED TO RECEIVE SUCH CONSIDERATION AS MAY BE DETERMINED TO BE DUE
UNDER SUCH PROVISIONS. SEE EXHIBIT B TO THIS PROXY STATEMENT FOR THE TEXT OF
SECTION 262 AND "THE SPECIAL MEETING APPRAISAL RIGHTS" IN THIS PROXY STATEMENT
FOR A DESCRIPTION OF THE PROCEDURES TO BE FOLLOWED TO EXERCISE SUCH RIGHTS.
By Order of the Board of Directors,
/s/ Mark S. Dickerson
Mark S. Dickerson
Corporate Secretary
Date: January 16, 1998
<PAGE> 7
TALLEY INDUSTRIES, INC.
2702 NORTH 44TH STREET
SUITE 100A
PHOENIX, ARIZONA 85008
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
FEBRUARY 19, 1998
This Proxy Statement (the "Proxy Statement") is being furnished to the
holders of Shares of Series A Convertible Preferred Stock ("Series A Preferred
Shares"), Series B $1 Cumulative Convertible Preferred Stock ("Series B
Preferred Shares" and together with the Series A Preferred Shares, "Preferred
Shares") and Common Stock, par value $1.00 per share ("Common Shares" and
together with the Preferred Shares, the "Shares"), of Talley Industries, Inc., a
Delaware corporation ("Talley"), (the holders of the Shares being hereinafter
referred to as the "Stockholders"), in connection with the solicitation of
proxies by the Board of Directors of Talley (the "Board of Directors") for use
at the Special Meeting of Stockholders to be held on Thursday, February 19,
1998, at 10:00 a.m., local time, at the offices of Dechert Price & Rhoads, 4000
Bell Atlantic Tower, 1717 Arch Street, Philadelphia, Pennsylvania 19103, and at
any adjournments or postponements thereof (the "Special Meeting"). The Board of
Directors has fixed the close of business on January 14, 1998, as the record
date (the "Record Date") for determining the Stockholders entitled to notice of
and to vote at the Special Meeting with respect to this solicitation.
This Proxy Statement, the accompanying Notice of Special Meeting and
the accompanying proxy are first being mailed to Stockholders on or about
January 16, 1998.
At the Special Meeting, the Stockholders will consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger dated September
25, 1997 (the "Merger Agreement"), among Carpenter Technology Corporation, a
Delaware corporation ("Carpenter"), Score Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Carpenter ("Sub"), and Talley,
providing for, among other things, the merger of Sub with and into Talley (the
"Merger"). Following the Merger, Talley will continue as the surviving
corporation (the "Surviving Corporation") and will become a wholly owned
subsidiary of Carpenter. A copy of the Merger Agreement is attached to this
Proxy Statement as Exhibit A.
The Merger is the second step in a two-part transaction, the purpose of
which is the acquisition by Carpenter of the entire equity interest in Talley.
The first step was a tender offer (the "Offer") commenced by Sub on October 2,
1997 for all of the outstanding shares of Series A Shares Preferred Shares,
Series B Preferred Shares and Common Stock of Talley, including, in the case of
Common Shares, the associated Preferred Stock Purchase Rights, at a purchase
price of $11.70 per Series A Preferred Share, $16.00 per Series B Preferred
Share and $12.00 per Common Share, net to the seller in cash, without interest
thereon (the "Offer Price"). Pursuant to the Offer, which expired on December 4,
1997, Sub accepted for payment 12,509 Series A Preferred Shares (or
approximately 90.7% of the Series A Preferred Shares outstanding), 497,618
Series B Preferred Shares (or approximately 66.4% of the Series B Preferred
Shares outstanding) and 10,777,195 Common Shares (or approximately 75.9% of the
Common Shares outstanding). On a fully diluted basis, this represents 74.4% of
all Shares outstanding on December 5, 1997 and approximately 75.4% of all Shares
outstanding on January 14, 1998, the Record Date. In accordance with the Merger
Agreement, Carpenter intends to cause Sub to merge with and into Talley pursuant
to which all Shares (other than Shares owned by Carpenter, Sub or any other
subsidiary of Carpenter, or Shares held by Talley as treasury stock, or by
stockholders, if any, who shall have demanded and perfected any appraisal rights
they may have under Delaware General Corporation Law), will be converted into
the right to receive the respective Offer Price.
YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT, APPROVED THE
MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE THEIR
SHARES "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
<PAGE> 8
SUB OWNS AN AGGREGATE OF 11,287,322 SHARES, REPRESENTING, ON A FULLY
DILUTED BASIS, APPROXIMATELY ____% OF ALL SHARES OUTSTANDING ON THE RECORD DATE.
BECAUSE THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF ALL OUTSTANDING
SHARES IS SUFFICIENT TO APPROVE AND ADOPT THE MERGER AGREEMENT, SUB CAN CAUSE
THE MERGER TO OCCUR WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER STOCKHOLDER.
CARPENTER AND SUB HAVE AGREED PURSUANT TO THE MERGER AGREEMENT TO VOTE ALL THEIR
SHARES IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
IF THE MERGER IS CONSUMMATED, HOLDERS OF SHARES WHO DO NOT VOTE IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND WHO OTHERWISE COMPLY
WITH THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
WILL BE ENTITLED TO RECEIVE SUCH CONSIDERATION AS MAY BE DETERMINED TO BE DUE
UNDER SUCH PROVISIONS. SEE EXHIBIT B TO THIS PROXY STATEMENT FOR THE TEXT OF
SECTION 262 AND "THE SPECIAL MEETING -- APPRAISAL RIGHTS" IN THIS PROXY
STATEMENT FOR A DESCRIPTION OF THE PROCEDURES TO BE FOLLOWED TO EXERCISE SUCH
RIGHTS.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement, including the exhibits.
Whether or not you plan to attend the special meeting, please complete,
date, sign and return the proxy card in the enclosed postage-paid envelope.
------------------------------
The date of this Proxy Statement is January 16, 1998.
------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT IMPLY THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF TALLEY
SINCE THE DATE HEREOF.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE SPECIAL MEETING............................................................................................. 1
Introduction........................................................................................... 1
Matters To Be Considered at the Special Meeting........................................................ 1
Date, Place and Time................................................................................... 2
Effective Time......................................................................................... 2
Record Date and Voting................................................................................. 2
Vote Required; Revocability of Proxies................................................................. 3
Solicitation of Proxies and Expenses................................................................... 4
Exchange of Certificates............................................................................... 4
Appraisal Rights....................................................................................... 4
PARTIES TO THE MERGER........................................................................................... 5
Certain Information Concerning Talley.................................................................. 5
Certain Information Concerning Carpenter and Sub....................................................... 6
THE MERGER...................................................................................................... 6
Background of the Merger............................................................................... 6
Reasons For The Merger; Recommendation of the Talley Board of Directors................................ 11
Opinion of Financial Advisor........................................................................... 13
Information Concerning Talley's Financial Advisor...................................................... 16
Certain Effects of the Consummation of the Offer on the Shares......................................... 16
Rights Agreement....................................................................................... 16
Accounting Treatment of the Merger..................................................................... 17
Regulatory Requirements................................................................................ 17
THE MERGER AGREEMENT............................................................................................ 17
The Merger Agreement................................................................................... 17
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION................................................................. 22
Board Representation................................................................................... 22
Options; Employee Benefits; Severance and Other Agreements............................................. 23
CERTAIN TAX CONSEQUENCES TO STOCKHOLDERS........................................................................ 23
SELECTED FINANCIAL INFORMATION OF TALLEY........................................................................ 24
LITIGATION...................................................................................................... 26
PRICE RANGE OF THE SHARES; DIVIDENDS............................................................................ 27
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................... 29
The Sub Designees...................................................................................... 30
The Independent Directors.............................................................................. 31
INDEPENDENT PUBLIC ACCOUNTANTS.................................................................................. 32
OTHER MATTERS................................................................................................... 32
ADDITIONAL INFORMATION.......................................................................................... 32
OTHER MEETINGS.................................................................................................. 33
</TABLE>
- i -
<PAGE> 10
EXHIBITS
Exhibit A Agreement and Plan of Merger, dated September 25, 1997, among
Carpenter Technology Corporation, Score Acquisition Corp. and
Talley Industries, Inc.
Exhibit B Section 262 of the Delaware General Corporation Law.
Exhibit C Opinion of J.P. Morgan Securities Inc.
Exhibit D Annual Report on Form 10-K of Talley Industries, Inc. for the
fiscal year ended December 31, 1996 (without exhibits) as
filed with the Securities and Exchange Commission.
Exhibit E Quarterly Report on Form 10-Q of Talley Industries, Inc. for
the quarter ended September 30, 1997 (without exhibits) as
filed with the Securities and Exchange Commission.
- ii -
<PAGE> 11
THE SPECIAL MEETING
INTRODUCTION.
This Proxy Statement is being furnished to stockholders
("Stockholders") of Talley Industries, Inc., a Delaware corporation ("Talley"),
in connection with the special meeting to be held at 10:00 a.m., local time, on
Thursday, February 19, 1998 at the offices of Dechert Price & Rhoads, 4000 Bell
Atlantic Tower, 1717 Arch Street, Philadelphia, Pennsylvania 19103, and any
adjournments or postponements thereof (the "Special Meeting").
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING.
Each copy of this Proxy Statement mailed to Stockholders is accompanied
by a proxy card furnished in connection with the solicitation of proxies by the
Board of Directors of Talley (the "Board of Directors" or the "Board") for use
at the Special Meeting. At the Special Meeting, Stockholders of Talley will meet
to:
(a) Consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger dated September 25, 1997 (the "Merger Agreement"), among
Carpenter Technology Corporation, a Delaware corporation ("Carpenter"), Score
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Carpenter ("Sub"), and Talley. A copy of the Merger Agreement is attached to
this Proxy Statement as Exhibit A. As more fully described below, the Merger
Agreement provides that: (i) Sub will be merged with and into Talley (the
"Merger"), the separate corporate existence of Sub will cease with Talley
continuing as the surviving corporation, as a consequence of which Talley will
become a wholly owned subsidiary of Carpenter; and (ii) each issued and
outstanding share of Series A Convertible Preferred Stock ("Series A Preferred
Shares"), Series B $1 Cumulative Convertible Preferred Stock ("Series B
Preferred Shares" and together with the Series A Preferred Shares, "Preferred
Shares") and Common Stock, par value $1.00 per share ("Common Shares" and
together with the Preferred Shares, the "Shares"), of Talley (other than Shares
owned by Carpenter, Sub or any other subsidiary of Carpenter, or Shares held by
Talley as treasury stock, or Shares held by stockholders who shall have demanded
and perfected any appraisal rights they may have under Delaware General
Corporation Law), will be converted, upon the consummation of the Merger, into
the right to receive $11.70 per Series A Preferred Share, $16.00 per Series B
Preferred Share and $12.00 per Common Share, respectively, net to the seller in
cash without interest thereon.
(b) To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT, APPROVED THE
MERGER, DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE THEIR
SHARES "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
PURSUANT TO THE OFFER, SUB ACQUIRED 11,262,268 SHARES, WHICH
CONSTITUTE, ON A FULLY DILUTED BASIS, APPROXIMATELY 75.3% OF ALL SHARES
OUTSTANDING ON THE RECORD DATE. BECAUSE THE APPROVAL OF THE HOLDERS OF AT LEAST
A MAJORITY OF ALL OUTSTANDING SHARES IS SUFFICIENT TO APPROVE AND ADOPT THE
MERGER AGREEMENT, SUB CAN CAUSE THE MERGER TO OCCUR WITHOUT THE AFFIRMATIVE VOTE
OF ANY OTHER STOCKHOLDER. CARPENTER AND SUB HAVE AGREED PURSUANT TO THE MERGER
AGREEMENT TO VOTE ALL THEIR SHARES IN FAVOR OF APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE MERGER.
STOCKHOLDERS ARE REQUESTED PROMPTLY TO COMPLETE, DATE, SIGN AND RETURN
THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL
HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT.
<PAGE> 12
IF THE MERGER IS CONSUMMATED, HOLDERS OF SHARES WHO DO NOT VOTE IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND WHO OTHERWISE COMPLY
WITH THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
WILL BE ENTITLED TO RECEIVE SUCH CONSIDERATION AS MAY BE DETERMINED TO BE DUE
UNDER SUCH PROVISIONS. SEE EXHIBIT B TO THIS PROXY STATEMENT FOR THE TEXT OF
SECTION 262 AND "THE SPECIAL MEETING -- APPRAISAL RIGHTS" BELOW FOR A
DESCRIPTION OF THE PROCEDURES TO BE FOLLOWED TO EXERCISE SUCH RIGHTS.
DATE, PLACE AND TIME.
The Talley Special Meeting will be held at the offices of Dechert Price
& Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, Pennsylvania
91903 on Thursday, February 19, 1998, commencing at 10:00 a.m., local time.
EFFECTIVE TIME.
Subject to the provisions of the Merger Agreement, Carpenter, Sub and
Talley shall cause the Merger to be consummated by filing with the Secretary of
State of the State of Delaware, as provided in the Delaware General Corporation
Law (the "DGCL"), a certificate of merger or other appropriate document (in any
such case, the "Certificate of Merger") and the parties shall make all other
filings or recordings required under the DGCL (the later of the time of such
filing or the time specified in the Certificate of Merger being the "Effective
Time"). Assuming all conditions to the Merger are met or waived prior thereto,
it is anticipated that the Effective Time will occur as soon as practicable
after the Special Meeting.
RECORD DATE AND VOTING.
The Board of Directors has fixed the close of business on January 14,
1998 as the record date (the "Record Date") for the determination of the
Stockholders entitled to notice of and to vote at the Special Meeting. Only
Stockholders of record at the close of business on that date will be entitled
to vote at the Special Meeting. At the close of business on the Record Date,
there were 13,793 Series A Preferred Shares, 749,586 Series B Preferred Shares
and 14,201,242 Common Shares outstanding and entitled to vote at the Special
Meeting, held by approximately 12 Series A Preferred Stockholders, 546 Series B
Preferred Stockholders and 1,548 Common Stockholders, respectively, of record.
The holders of Common Stock and Series B Preferred Shares on the Record
Date will be entitled to one vote for each Share held of record and the holders
of Series A Preferred Shares will be entitled to four-tenths of one vote for
each Share held of record. The presence, in person or by proxy, of the holders
of record of a majority of the outstanding Shares entitled to be voted at the
Special Meeting is necessary to constitute a quorum thereat. Carpenter and Sub
intend to have all their Shares present at the Special Meeting, which will
satisfy the quorum requirements under the DGCL and the Bylaws of Talley for the
Special Meeting. Abstentions (including broker non-votes) will also be included
in the calculation of the number of votes represented at the Special Meeting for
purposes of determining whether a quorum has been achieved.
If a Stockholder was a record holder of Shares as of the close of
business on the Record Date, such Stockholder may elect to grant a proxy in
favor of, withhold a proxy or abstain with respect to each proposal by marking
the "FOR," "AGAINST" or "ABSTAINS" box, as applicable, underneath each such
proposal on the accompanying proxy card and signing, dating and returning it
promptly in the enclosed post-paid envelope.
If the enclosed proxy card is properly executed and received by Talley
in time to be voted at the Special Meeting, the Shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval and adoption
of the Merger Agreement.
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<PAGE> 13
The Board is not aware of any matters other than those set forth in the
Notice of Special Meeting of Stockholders (which has been mailed to Stockholders
along with this Proxy Statement) that may be brought before the Special Meeting.
If any other matters properly come before the Special Meeting, the persons named
in the accompanying proxy will vote the Shares represented by all properly
executed proxies on such matters in such manner as shall be determined by a
majority of the Board, except that Shares represented by proxies which have been
voted "against" the Merger Agreement will not be used to vote "for" postponement
or adjournment of the Special Meeting for the purposes of allowing additional
time for soliciting additional votes "for" the Merger Agreement. See "Vote
Required; Revocability of Proxies" and "OTHER MATTERS."
Stockholders should not forward any Share certificates with their proxy
cards. If the Merger is consummated, Share certificates should be delivered in
accordance with instructions set forth in a letter of transmittal, which will be
sent to Stockholders by ChaseMellon Shareholder Services L.L.C., in its capacity
as the disbursing agent for the Merger (the "Disbursing Agent"), as soon as
reasonably practicable after the Effective Time. See "Exchange of Certificates"
below.
VOTE REQUIRED; REVOCABILITY OF PROXIES.
The affirmative vote of holders of a majority of the outstanding Shares
entitled to vote at the Special Meeting voting as a single class is required and
sufficient to approve and adopt the Merger Agreement. Because the required vote
of the Stockholders on the Merger Agreement is based upon the total number of
outstanding Shares, rather than upon the Shares actually voted, the failure by
the holder of any such Shares to submit a proxy card or to vote in person at the
Special Meeting or the abstention from voting by a Stockholder (including broker
non-votes) will have the same effect as a vote cast "against" the approval and
adoption of the Merger Agreement.
The Proxy Card accompanying this Proxy Statement is solicited on behalf
of the Talley Board of Directors for use at the Special Meeting. All proxies
that are properly executed and received by Talley prior to the vote at the
Special Meeting, and that are not revoked, will be voted at the Special Meeting
in accordance with the instructions indicated thereon. Executed proxies, which
do not have instructions marked thereon, will be voted FOR approval and adoption
of the Merger Agreement and the Merger.
A proxy given pursuant to this solicitation may be revoked at any time
before it is exercised at the Special Meeting by (i) delivering to Mark S.
Dickerson, Corporate Secretary, Talley Industries, Inc., 2702 North 44th Street,
Suite 100A, Phoenix, Arizona 85008, at or before the Special Meeting a written
notice of revocation bearing a later date than the proxy, (ii) duly executing a
subsequent proxy relating to the same Shares and delivering it to the Corporate
Secretary at or before the Special Meeting, or (iii) attending the Special
Meeting and voting in person (although attendance at the Special Meeting will
not in and of itself constitute a revocation of a proxy).
Please note, however, that if a Stockholder's Shares are held of record
by a broker, bank or other nominee and that Stockholder wishes to vote at the
Special Meeting, the Stockholder must bring to the Special Meeting a letter from
the broker, bank or other nominee confirming that Stockholder's beneficial
ownership of the Shares.
As Carpenter and Sub own sufficient Shares to approve and adopt the
Merger Agreement without the vote of any other Stockholder, the approval and
adoption of the Merger Agreement is assured.
No vote of the stockholders of Carpenter is required in connection with
the Merger Agreement or the Merger. Carpenter, as the sole shareholder of Sub,
has approved the Merger Agreement and the Merger. The obligations of Talley, Sub
and Carpenter to consummate the Merger are subject, among other things, to the
condition that the Stockholders approve and adopt the Merger Agreement. See "THE
MERGER AGREEMENT -- Conditions of the Merger."
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<PAGE> 14
SOLICITATION OF PROXIES AND EXPENSES.
Talley will bear the costs of soliciting proxies from Stockholders. In
addition to soliciting proxies by mail, directors, officers and employees of
Talley and Carpenter and their affiliates, without receiving additional
compensation therefor, may solicit proxies by telephone, by telegram or in
person. Arrangements also will be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of Shares held of record by such persons, and Talley will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
EXCHANGE OF CERTIFICATES.
Promptly after the Effective Time, the Disbursing Agent will send each
holder of Shares of record, as of immediately prior to the Effective Time, a
letter of transmittal and detailed instructions specifying the procedures to be
followed in surrendering certificates relating to the Shares in exchange for the
Offer Price. Share certificates should not be forwarded to the Disbursing Agent
until receipt of the transmittal letter. See "The Merger Agreement - Exchange
Procedures."
APPRAISAL RIGHTS.
Stockholders of Talley who do not vote in favor of the Merger may,
under certain circumstances and by following the procedures prescribed by
Section 262 of the DGCL ("Section 262"), exercise appraisal rights and receive
cash for their Shares.
If a Stockholder of Talley exercises appraisal rights in connection
with the Merger under Section 262, any Shares of Talley with respect to which
such rights have been exercised and perfected will not be converted into the
Offer Price but instead will be converted into the right to receive such
consideration as may be determined by the Delaware Court of Chancery (the
"Court") to be due with respect to such Shares pursuant to the laws of the State
of Delaware.
The following summary of the provisions of Section 262 is not intended
to be a complete statement of such provisions and is qualified in its entirety
by reference to the full text of Section 262, a copy of which is attached to
this Proxy Statement as Exhibit B and incorporated herein by reference.
Holders of record of Shares of Talley who hold such Shares continuously
through the Effective Time, who follow the procedures in Section 262 with
respect to appraisal of their Shares and who have not voted in favor of the
Merger, will be entitled to have their Shares appraised by the Court and to
receive payment of the "fair value" of such Shares as of the Effective Time, as
described below.
If a proposed merger for which appraisal rights are provided under
Section 262 is to be submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting, must notify each of its
stockholders of record, who was such on the record date for such meeting, that
appraisal rights are available and must provide each such stockholder with a
copy of Section 262. This Proxy Statement is being sent by personal delivery or
by mail on or about January 16, 1998 to all Stockholders of record of Talley on
January 14, 1998 and constitutes notice of the appraisal rights available to
such holders under Section 262. As indicated above, a copy of the full text of
Section 262 is attached hereto as Exhibit B. A Stockholder electing to demand
appraisal of his Shares must do so by a separate written demand as provided in
Section 262 prior to the taking of the vote on the Merger at the Special
Meeting. A vote against the Merger will not constitute a demand for appraisal.
Voting in favor of the approval and adoption of the Merger Agreement, or
delivering a proxy in connection with the Special Meeting (unless the proxy
votes against, or expressly abstains from the vote on, the approval and adoption
of the Merger Agreement), will constitute a waiver of the Stockholder's right of
appraisal and will nullify any written demand for appraisal submitted by the
Stockholder. A Stockholder of record who elects to exercise appraisal rights
should mail or deliver, before the taking of the vote on the Merger, his
separate written demand to Talley at 2702 North 44th Street, Suite 100A,
Phoenix, Arizona 85008, Attention: Corporate
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<PAGE> 15
Secretary. The demand should specify the holder's name and mailing address, the
number of Shares owned and that such holder is demanding appraisal of his
Shares. Only a holder of record of Shares of Talley (or such holder's duly
appointed representative) is entitled to assert appraisal rights for the Shares
registered in that holder's name.
Within ten days after the Effective Time of the Merger, Talley must
notify each Stockholder who has complied with Section 262 and has not voted in
favor of the Merger of the date that the Merger became effective.
Within 120 days after the Effective Time, any Stockholder who has
continuously held his Shares through the Effective Time, has made a valid
written demand and has not voted in favor of approval and adoption of the Merger
Agreement and the Merger may (i) file a petition in the Court demanding a
determination of the value of Shares, and (ii) upon written request, receive
from Talley a statement setting forth the aggregate number of Shares not voted
in favor of approval and adoption of the Merger Agreement and the Merger and
with respect to which demands for appraisal have been received and the aggregate
number of holders of such Shares. Such statement must be mailed to the
Stockholder within the later of ten days after the written request therefor has
been received by Talley or within ten days after expiration of the period for
delivery of demands for appraisal.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court will determine the Stockholders who have become entitled to
appraisal rights and will determine the "fair value" of the Shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining such "fair value," the
Court is required to take into account all relevant factors and in determining
the fair rate of interest, the Court may consider the rate of interest which the
surviving corporation would have had to pay to borrow money during the pendency
of the proceeding. The costs of the proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application by a Stockholder, the Court may also order that all or a
portion of the expenses incurred by any Stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all Shares entitled to appraisal.
Any holder of Shares who has duly demanded appraisal rights under
Section 262 will not, after the Effective Time, be entitled to vote the Shares
of Talley subject to such demand for any purpose or be entitled to the payment
of dividends or other distributions on such Shares (except dividends or other
distributions payable to Stockholders of record as of a date prior to the
Effective Time.)
If any holder of Shares who demands appraisal rights under Section 262
effectively withdraws or loses his right to appraisal, the Shares of such holder
will be converted into a right to receive the Offer Price as provided in the
Merger Agreement. A holder will effectively lose such holder's right to
appraisal if such holder votes in favor of approval and adoption of the Merger
Agreement and the Merger, or if no petition for appraisal is filed within 120
days after the Effective Time, or if the holder delivers to Talley a written
withdrawal of such holder's demand for an appraisal and an acceptance of the
Merger, except that any such attempt to withdraw made more than 60 days after
the Effective Time requires the written approval of Talley. A holder of Shares
may also lose such holder's right to appraisal if such holder fails to comply
with the Court's direction to submit the certificates representing such Shares
to the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings.
PARTIES TO THE MERGER
CERTAIN INFORMATION CONCERNING TALLEY.
General. Talley is a Delaware corporation with its principal executive
offices located at 2702 North 44th Street, Phoenix, Arizona 85008. The telephone
number of Talley at such offices is (602) 957-7711. Talley is a diversified
manufacturer of a wide range of proprietary and other specialized products for
defense, industrial and commercial applications.
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<PAGE> 16
Description of the Shares. Each Common Share and each Series B
Preferred Share that is outstanding as of the close of business on any
applicable record date for any matter to be acted upon by Stockholders is
entitled to one vote on such matter. Each Series A Preferred Share that is
outstanding as of the close of business on any applicable record date for any
matter to be acted upon by Stockholders is entitled to four-tenths of one vote
on such matter.
Board of Directors and Management. On October 20, 1997, Ralph A. Rockow
resigned as a director of Talley as of such date. Pursuant to the Merger
Agreement, on December 9, 1997, Robert T. Craig, Jack C. Crim, Alex Stamatakis,
Donald J. Ulrich and Fred Israel resigned from the Board of Directors, and the
persons designated as Sub's designees as set forth in "SHARE OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS - Sub Designees" were elected to the Board of
Directors to fill the vacancies created thereby. In addition, on December 9,
1997, Admiral Paul L. Foster resigned as Chief Executive Officer and Chairman of
the Board of Talley, and Robert W. Cardy, President and Chief Executive Officer
of Carpenter, was appointed as the new Chief Executive Officer and Chairman of
the Board of Talley.
Plans for the Company. Carpenter expects to operate Talley's stainless
steel products group consisting of Talley Metals Technology, Inc. and Amcan
Specialty Steels, Inc. Carpenter intends to invest further in Talley Metals
Technology, Inc. Carpenter also intends to divest the companies in Talley's
government products and services group and industrial products group. The
companies expected to be sold include Talley Defense Systems, Inc., Universal
Propulsion Company, Inc., Electrodynamics, Inc., John J. McMullen Associates,
Inc., Rowe Industries, Inc., Dimetrics, Inc., Porcelain Products Co. and
Waterbury Companies, Inc. No agreement has been entered into, or understanding
reached, relating to a sale of any of such companies as of the date hereof,
however, Credit Suisse First Boston Corporation has been retained as the
exclusive financial advisor in connection with any future potential sale.
CERTAIN INFORMATION CONCERNING CARPENTER AND SUB.
Carpenter. Carpenter, a Delaware corporation, has its principal
executive office at 101 West Bern Street, Reading, Pennsylvania 19612-4662, and
its telephone number at that location is (610) 208-2000. Carpenter is engaged in
the manufacture, fabrication and distribution of specialty metals and engineered
products.
Sub. Sub is a wholly owned subsidiary of Carpenter and has not
conducted any business other than that incident to its formation, the execution
and delivery of the Merger Agreement, the commencement and consummation of the
Offer, and the approval of the Merger. The principal executive office of Sub is
located at 101 West Bern Street, Reading, Pennsylvania 19612-4662, and its
telephone number at that location is (610) 208-2000. Pursuant to the terms of
the Merger Agreement, at the Effective Time, Sub will be merged with and into
Talley, with Talley continuing as the Surviving Corporation.
Source and Amount of Funds. The total amount of funds required by Sub
to purchase all outstanding Shares pursuant to the Offer and the Merger and to
pay fees and expenses related to the Offer and the Merger is estimated to be
approximately $188 million. Sub has obtained all funds needed for the Offer and
the Merger through a capital contribution made by Carpenter to Sub.
To finance the acquisition, Carpenter has completed arrangements to
expand its revolving credit agreement to $500 million. Carpenter also plans to
issue approximately $125 million of common stock in the first calendar quarter
of 1998 and expects to use the proceeds to pay down short-term indebtedness.
THE MERGER
BACKGROUND OF THE MERGER.
In early 1997, a dissident stockholder group led by Mr. Saad Alissa
publicly disclosed that it might launch a proxy fight to oust a class of
Talley's current directors and to eliminate Talley's antitakeover protections.
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This action followed discussions between Talley and Mr. Alissa, during which
Mr. Alissa suggested, among other things, that Talley hire an investment banker
to provide strategic advice to Talley.
At its meeting on March 4, 1997, the Board of Directors unanimously
agreed to engage an independent investment bank to provide strategic financial
advice to Talley. After interviewing several investment banks, a committee of
three outside directors selected J. P. Morgan Securities Inc. ("J.P. Morgan").
On April 11, 1997, the stockholder group led by Saad Alissa, which at
that time controlled approximately 10.3% of the Common Stock, filed its proxy
materials seeking to replace Talley's directors nominated for reelection at
Talley's annual meeting and to remove certain of Talley's antitakeover
protections.
On May 8, 1997, at Talley's annual meeting, Talley's stockholders
elected Mr. Ralph A. Rockow and Mr. Robert T. Craig, both of whom were nominees
of Saad Alissa's group, to the Board of Directors.
On June 3, 1997, Mr. William H. Mallender, the Chairman and Chief
Executive Officer of Talley who was not reelected to the Board of Directors at
the annual meeting, resigned those offices. Several days thereafter, Admiral
Foster became Chairman and Chief Executive Officer of Talley.
On June 12, 1997, in a letter addressed to Admiral Foster, a party made
an indication of interest ranging from $18 million to $25 million to purchase
Universal Propulsion Company, Inc., a subsidiary in Talley's government products
and services segment. In a letter dated June 24, 1997 sent to the party who had
sent the June 12 letter and in subsequent letters to other parties that had
previously expressed interest in certain of Talley's businesses, Admiral Foster
responded that Talley would not consider any proposals until it had concluded
its strategic financial review.
On June 19, 1997, representatives of J. P. Morgan presented the initial
findings of their strategic review of Talley to the Board of Directors. After
the presentation, the Board of Directors, with the participation of the J. P.
Morgan representatives, discussed various alternatives for Talley, including,
among others, (i) a "stay the course" strategy consisting of the continued
pursuit of Talley's then strategic objectives; (ii) clarification of Talley's
business portfolio through selected divestitures (whether via sale, spinoff or
other divestiture method); and (iii) sale or liquidation of the entire company.
A decision on which alternatives to pursue was postponed until the next meeting
of the Board of Directors.
On July 18, 1997, in a telephone conversation with Admiral Foster, Mr.
Robert Cardy, the Chairman and Chief Executive Officer of Carpenter, expressed
interest in purchasing the steel businesses of Talley for a purchase price of
$110,000,000. In a subsequent telephone conversation, Admiral Foster responded
that Talley's Board would be meeting on July 22 and 23 and that he would call
Mr. Cardy after that meeting.
On July 22 and July 23, 1997, the Board of Directors met to consider
the various courses of action that had been reviewed at its June meeting.
Representatives of J. P. Morgan participated in a discussion of the various
alternatives and responded to questions from the Board on a wide range of
topics, including the possibility of spinning off one or more units as a
separate company, the prospects for improving Talley's stock price in the short
term and the potential benefits and risks associated with a sale of Talley.
Carpenter's proposal concerning Talley's steel businesses was also discussed at
this time, including an analysis of the "tax leakage" from any sale (the taxes
payable by Talley on the gain above the relatively low tax basis of the steel
assets) and the resulting reduction in cash flow. This analysis indicated, among
other things, that a sale of the steel businesses would dilute Talley's
earnings.
After the representatives of J. P. Morgan were excused from the
meeting, the Board of Directors unanimously voted to engage J. P. Morgan to
explore the sale of Talley and advise the Board of Directors in connection with
such sale. The Board of Directors decided to reject Carpenter's offer to
purchase Talley's steel businesses, but decided to encourage Carpenter to
consider submitting an offer for the entire company.
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<PAGE> 18
Following the Board meeting, Admiral Foster called Mr. Cardy to inform
him that at the present time Talley was not interested in selling individual
subsidiaries but would entertain proposals for the entire company.
On August 1, 1997, Admiral Foster received from Mr. Cardy a non-binding
indication of interest to purchase all of the outstanding shares of Common Stock
of Talley for a purchase price of $10 per share. Carpenter's indication of
interest was conditioned upon receipt by Carpenter of an exclusive due diligence
period. In the letter, Mr. Cardy also stated that Carpenter would consider
increasing the proposed price in its indication of interest if it received
additional information on Talley's air bag business, as information publicly
available regarding the nascent air bag business did not permit a proper
valuation of that business.
After consultation with representatives of J. P. Morgan and senior
management of Talley, Admiral Foster rejected Carpenter's $10 per share
indication of interest. In a letter dated August 4, 1997 addressed to Mr. Cardy,
Admiral Foster stated that Carpenter's $10 per share indication of interest was
insufficient to warrant the grant of a period of exclusive due diligence.
Admiral Foster, however, did offer Carpenter the opportunity to conduct limited
due diligence on Talley's air bag business.
On August 4, 1997, Mr. Cardy accepted Admiral Foster's offer of limited
due diligence, and an initial confidentiality agreement between Carpenter and
Talley was executed. On August 5, 1997, the limited due diligence was conducted.
On August 7, 1997, in a letter addressed to Admiral Foster, Mr. Cardy
increased the price in Carpenter's proposal to purchase all outstanding shares
of Common Stock to $12.00 per share. Carpenter's $12 per share proposal was
subject to due diligence and Carpenter Board approval of a definitive agreement
and conditioned upon receipt by Carpenter of an exclusive due diligence period.
After consultation with representatives of J. P. Morgan and Talley's outside
legal advisor, Talley acceded to Carpenter's request for a 45-day period of due
diligence but agreed to only a limited exclusivity provision, which provided
that Talley would not initiate, solicit or encourage other offers for Talley
during this period, but could participate in discussions or negotiations with,
and provide confidential information to, a third party if Admiral Foster
determined in good faith, after receiving advice from Talley's financial
advisor, that such third party had submitted a bona fide proposal or indication
of interest that was, or could reasonably have been expected to lead to, an
acquisition proposal that was financially superior to Carpenter's $12 per share
proposal. On August 11, 1997, Carpenter and J. P. Morgan, solely as Talley's
representative, executed the Confidentiality Agreement.
During the period from August 11, 1997 until the execution of the
Merger Agreement on September 25, 1997, Carpenter conducted a due diligence
review of Talley's operations which included due diligence on all of Talley's
divisions at Talley's corporate headquarters and at each of Talley's major
facilities.
During this period, Talley and representatives of J. P. Morgan received
a number of inquiries from third parties concerning Talley as a whole and
certain of Talley's businesses. Certain of these inquiries were requests for
nonpublic information regarding Talley. In response to these requests, such
parties were told that if they were interested in receiving non-public
information, the would need to be as specific as possible as to the nature of
their interest, in particular with respect to their valuation assumptions.
On several occasions during Carpenter's due diligence period, in
response to requests from representatives of Talley and J. P. Morgan to increase
the value of their offer, Carpenter responded that it was unwilling to pay more
than $12 per share of Common Stock.
On August 22, 1997, Admiral Foster received a letter from a party
containing a proposal to purchase for cash at a purchase price of $12.00 per
share a majority (but not all) of Talley's outstanding shares of Common Stock.
The party's proposal was conditioned upon obtaining financing and upon Talley
agreeing to pay a break-up fee to the party in the amount of $1 per outstanding
share of Common Stock in the event Talley terminated its agreement with the
party to accept a superior proposal. In a letter dated August 27, 1997, a
representative of J. P. Morgan informed the party that it was not in a
position, at that time, to enter into discussions or provide any confidential
information to the party on the basis of the proposal as set forth in its
August 22 letter. After this
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<PAGE> 19
letter was sent, a representative of J. P. Morgan called a representative of
the party to inform the party that as a result of the restrictions set forth in
the Confidentiality Agreement, Talley would not be able to engage in
discussions unless the party improved its proposal.
On September 11, 1997, the Board of Directors held a special meeting to
receive an update from representatives of J. P. Morgan on the status of the
discussions between Carpenter and Talley. At the meeting, representatives of J.
P. Morgan informed the Board that they had received a number of inquiries
regarding certain of Talley's businesses but no inquiries (other than
Carpenter's) with respect to the purchase of all the outstanding shares of
Common Stock of Talley. J. P. Morgan's representatives also told the Board that,
based upon their judgments as to the values of the individual businesses of
Talley, they did not believe that a liquidation of Talley could reasonably be
expected to lead to value superior to Carpenter's $12 per share proposal. During
the same meeting, representatives of J. P. Morgan also reviewed with the Board
an updated valuation analysis of Talley.
On September 16, 1997, Admiral Foster received another letter from the
party that sent the August 22 letter. In this letter, the party made separate
proposals to Talley to purchase the government products and services segment at
a price ranging from $120 million to $130 million and the industrial products
segment at a price ranging from $35 million to $40 million and also requested
permission to conduct due diligence. In a subsequent telephone conversation,
Admiral Foster asked a representative of the party whether the proposals
included the air bag business. The representative informed Admiral Foster that
the proposals did not include air bags since insufficient public information was
available with which to value that business. When Admiral Foster offered to
provide the same limited due diligence on the air bag business that had
previously been provided to Carpenter, the party stated that it wanted to
perform full due diligence on the government products and services segment and
the industrial products segment. After discussions with representatives of J. P.
Morgan and Talley's outside legal counsel, Admiral Foster called the party to
inform it that its proposals as described in the September 16 letter were not
sufficient to permit Talley to allow it to conduct extensive due diligence.
On September 18, 1997, during a telephone conversation, representatives
of J. P. Morgan were informed by representatives of Credit Suisse First Boston
corporation ("Credit Suisse First Boston"), Carpenter's financial advisor, that
Carpenter would agree to pay $11.70 per share of Series A Preferred Stock and
$16.00 per share of Series B Preferred Stock. During this conversation,
representatives of Credit Suisse First Boston stated that Carpenter was
unwilling to offer any additional consideration for the Preferred Stock.
From September 19, 1997 through September 25, 1997, the legal advisors
to Carpenter and Talley conducted negotiations on the terms and conditions of
the Offer, the Merger and the Merger Agreement.
On September 25, 1997, the Board of Directors of Talley held a meeting
to consider the Offer, the Merger and the Merger Agreement. All of Talley's
directors participated in the meeting. At the commencement of the meeting, Mr.
Rockow and Mr. Craig distributed the following memorandum to the Board:
"To: Board of Directors, Talley Industries, Inc.
From: Ralph A. Rockow
Robert T. Craig
Re: Carpenter Technology Corporation
Date: September 25, 1997
We understand that the sole purpose of this meeting is consideration of
and action upon the proposed Agreement and Plan of Merger among Carpenter
Technology Corporation, Carpenter Acquisition Corp. and Talley Industries, Inc.
("Talley"). As members of the Talley Board of Directors, we are concerned that
approval of the proposed transaction at this meeting would necessarily cause
each of us to breach our fiduciary duties to Talley and its shareholders.
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<PAGE> 20
Because of our concerns, we have retained outside counsel to advise us
of our obligations as Board members and to assist us in determining whether we
are meeting those obligations. It is our understanding that, in considering a
significant transaction such as the proposed agreement, we have the duty to:
1. Act in the best interests of the shareholders of Talley;
2. Inform ourselves of all material information reasonably available to
us prior to making a decision and prior to submitting the proposal to the Talley
stockholders;
3. Evaluate the available information in a deliberate manner before
submitting the proposal to the Talley stockholders;
4. Consider the impact of the proposal on the employees and other
constituencies of Talley; and
5. Satisfy ourselves that the proposal is the best available proposal
and that entering into the transaction will not unreasonably discourage other
superior proposals.
We are not able to conclude that acting upon the pending proposal at
this meeting will allow us to discharge our duty to exercise an informed
business judgment. This is based upon a number of factors including the
following:
1. We have had a very limited time to review a 49 page single-spaced
document (plus exhibits) containing a number of significant provisions not
previously raised with the Board;
2. The entire Board will not have had an opportunity to receive and
examine the fairness opinion which we understand will be presented at this
meeting by J.P. Morgan Securities, Inc. to satisfy ourselves that it has taken
into account all factors which may bear upon the fairness of the cash
consideration to be received by the Talley stockholders; and
3. The entire Board has not been advised about, or had the opportunity
to evaluate, other inquiries which might result in superior proposals for Talley
and the stockholders and we are concerned that the $6 million termination fee
could create a significant impediment to other viable proposals.
It is, therefore, our request and recommendation that a decision on the
proposed transaction be deferred for a reasonable period of time to enable all
Board members to become fully familiar with the proposal now before us."
Mr. Rockow and Mr. Craig then made a motion to adjourn the meeting for
two weeks to provide additional time to consider the Offer, the Merger and the
Merger Agreement. The motion was defeated by a vote of 8 of the 10 directors. At
the September 25 meeting, the Board of Directors of Talley reviewed the Offer,
the Merger and the Merger Agreement with Talley's executive officers, outside
legal counsel and representatives of J. P. Morgan. The Board of Directors of
Talley heard presentations by its outside legal counsel with respect to the
terms of the proposed Offer, the Merger and the Merger Agreement and by
representatives of J. P. Morgan with respect to the financial terms of the
proposed Offer and the Merger. The Board of Directors, with the participation
of the representatives of J. P. Morgan, reviewed again the alternatives for
Talley discussed during the Board's June meeting. In this connection,
representatives of J. P. Morgan discussed with the Board of Directors an
analysis of various liquidation scenarios, including the September 16
indication of interest. Based solely upon a discounted cash flow analysis of
the projections prepared by the management of the Company and assuming that (i)
the $110 million proposal for the steel businesses by Parent; (ii) the combined
$155 million to $170 million proposal from the September 16 party for the
government products and services and industrial products segments
(collectively, the "Other Proposals"); and (iii) a value range of approximately
$100 million to $120 million for the remaining businesses were able to be
realized; this analysis concluded (based on these assumptions) that a value
range of approximately $11 to $13 per share of Common Shares would likely be
realized by Talley's Stockholders (after taking into account taxes, debt and
corporate charges that would be
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payable in connection with such liquidation). In addition, based upon
the valuation methodologies employed by J.P. Morgan, including a discounted cash
flow analysis premised upon management's projections and management's
projections as adjusted by J.P. Morgan, a comparable company analysis and a
comparable acquisition analysis, and assuming (i) the value of the other
proposals and (ii) a value range of $42 million to $52 million for the remaining
businesses were able to be realized; this analysis concluded (based on these
assumptions) that a value range of approximately $9 to $10 per share of Common
Shares would likely be realized by Talley's stockholders (after taking into
account taxes, debt and corporate charges that would be payable in connection
with such liquidation). As a result of these analyses, J.P. Morgan advised the
Board that, after taking into account taxes, debt and corporate charges that
would be payable in connection with a liquidation and the risks, uncertainties
and time requirements associated with a liquidation process, in J.P. Morgan's
view, none of those scenarios would be reasonably likely to provide Talley's
Stockholders with value superior to the proposed transaction with Carpenter. At
the conclusion of their presentation, representatives of J.P. Morgan delivered
their oral opinion to the Board of Directors (subsequently confirmed in writing)
that, as of such date, the consideration proposed to be received by the
Stockholders of Talley in the Offer and in the Merger was fair, from a financial
point of view, to such holders.
Based upon such discussions, presentations and opinion, the Board of
Directors, by a vote of 8 of the 10 directors, (i) approved the Offer and the
Merger and the execution of the Merger Agreement substantially in the form
presented to it, and (ii) determined to recommend that Talley's Stockholders
accept the Offer and tender their Shares and approve the Merger and the Merger
Agreement. Mr. Rockow and Mr. Craig voted against the transaction, stating that
they objected to the process for the reasons set forth in the memorandum they
had distributed at the commencement of the Board meeting and that they
considered the $12 price offered by Carpenter to be less than what they viewed
as an appropriate value for Talley.
Later on September 25, 1997, representatives of Talley, Carpenter and
Sub executed the Merger Agreement. Carpenter and Talley each issued a press
release announcing the deal on September 26, 1997.
On October 2, 1997, Sub commenced the Offer. The expiration date of the
Offer was subsequently extended to December 4, 1997.
On December 1, 1997, Carpenter announced that the waiting period under
the provisions of the Hart-Scott Rodino Antitrust Improvements Act of 1976
expired at 11:59 p.m. on November 28, 1997 with respect to the Offer.
On December 4, 1997, Carpenter announced that the Offer had expired as
scheduled on such date at 12:00 midnight, New York City time. On December 5,
1997, Sub accepted for payment pursuant to the Offer a total of 10,777,195
Common Shares, 12,509 Series A Preferred Shares and 497,618 Series B Preferred
Shares. On a fully diluted basis, this represents approximately 74.4% of
Talley's outstanding Shares.
REASONS FOR THE MERGER; RECOMMENDATION OF THE TALLEY BOARD OF DIRECTORS.
In reaching its conclusions, including the adoption of the Merger
Agreement, the approval of the Merger, the determination that the Offer and the
Merger, are fair to, and in the best interests of, the Stockholders and the
recommendation that the Stockholders vote their Shares "FOR" approval and
adoption of the Merger Agreement, the Board considered a number of factors
including, among other things, the following:
(i) Talley's businesses, financial condition, results of
operations, assets, liabilities, business strategy and
prospects, as well as various uncertainties associated with
those prospects.
(ii) Talley's existing competition in the industries in which it
operates and future competition in its major product lines,
the relative size of the other participants in the industries
in which it operates and the available capital and resources
of such other participants as compared to the available
capital and resources of Talley.
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(iii) The oral opinion (subsequently confirmed in writing) of J. P.
Morgan, Talley's financial advisor, that, as of the date
thereof and based upon and subject to various considerations
and assumptions set forth therein, the consideration to be
paid to Talley's stockholders pursuant to the Offer and the
Merger is fair, from a financial point of view, to such
stockholders. A copy of the opinion rendered by J. P. Morgan
to Talley's Board of Directors, setting forth the procedures
followed, the matters considered, the scope of the review
undertaken and the assumptions made by J. P. Morgan in
arriving at its opinion, is attached hereto as Exhibit C and
is incorporated herein by reference. Stockholders are urged to
read such opinion in its entirety.
(iv) The financial analysis performed by J. P. Morgan, which
indicated, among other things, that (A) based solely upon a
discounted cash flow analysis of the projections prepared by
the management of Talley, if Talley were sold in pieces, a
value range of approximately $11 to $13 per share of Common
Stock would likely be realized by Talley's stockholders (after
taking into account taxes, debt and corporate charges that
would be payable in connection with such a liquidation) and
(B) based upon the valuation methodologies employed by J. P.
Morgan, including a discounted cash flow analysis premised
upon management's projections and management's projections as
adjusted by J. P. Morgan, a comparable company analysis and a
comparable acquisition analysis, if Talley were sold in
pieces, a value range of approximately $6 to $8 per share of
Common Stock would likely be realized by Talley's stockholders
(after taking into account taxes, debt and corporate charges
that would be payable in connection with such a liquidation).
The J.P. Morgan analysis also indicated that if the risks,
uncertainties and time requirements associated with a
liquidation process were taken into account, the present value
of each of these ranges would likely be substantially lower.
(v) The publicity surrounding the proxy contest (the "Proxy
Contest") conducted by a dissident stockholder group and the
disclosure by Talley that it had retained J. P. Morgan to
conduct a strategic financial review of Talley and the effect
of such information on the market of potentially interested
acquirers.
(vi) The number and quality of the indications of interest received
by Talley and J. P. Morgan since the Proxy Contest.
(vii) The fact that the Offer would not be subject to a financing
condition.
(viii) The alternatives to the Merger available to Talley, including,
without limitation, (A) continuing to maintain Talley as an
independent company and not engaging in any extraordinary
transaction and (B) the sale or spin-off of all or some of the
various businesses that comprise Talley, which the Board of
Directors deemed less attractive in light of the uncertainties
associated with each of these alternatives, the limitations
imposed by Talley's existing debt covenants, and the timing
and possible values that might be realized by stockholders
pursuant to such alternatives.
(ix) The facts that (A) the $12.00 per share of Common Stock price
to be received by Talley's Stockholders in both the Offer and
the Merger represents premiums of 21.7%, 27.1%, 30.6%
and 32.3% over the average closing prices for the 30-day
period, the 45-day period, the 60-day period and the 90-day
period, respectively, preceding September 25, 1997 and a
premium of approximately 44.9% over the average price at which
the Common Stock has traded in the past year and (B) the
$16.00 per share of Series B Preferred Stock price to be
received by Talley's stockholders in both the Offer and the
Merger represents negative premiums of 4.9%, 2.7%, 1.6% and
.2% over the average closing prices for the 30-day period, the
45-day period, the 60-day period and the 90-day period,
respectively, preceding September 25, 1997 and a premium of
approximately 1.2% over the average price at which the Series
B Preferred Stock has traded in the past year; and that such
prices would be payable in cash, thus eliminating any
uncertainties in valuing the consideration to be received by
Talley's Stockholders.
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<PAGE> 23
(x) The fact that the price per share of Preferred Stock to be
received by Talley's preferred Stockholders in both the Offer
and the Merger is equivalent to the sum of the conversion
value for each share of Preferred Stock and an amount equal to
one quarterly dividend on each share of Preferred Stock.
(xi) The financial and other terms and conditions of the Offer, the
Merger and the Merger Agreement, including, without
limitation, the facts that the terms of the Merger Agreement
would not unduly discourage other third parties from making
bona fide proposals subsequent to execution of the Merger
Agreement, would not prevent Talley from determining, in the
exercise of its fiduciary duties in accordance with the Merger
Agreement, to provide information to and engage in
negotiations with such third parties and would permit Talley,
subject to payment of a termination fee, to enter into a
transaction with a party that made a bona fide proposal that
would offer Talley's Stockholders greater value than the Offer
and the Merger.
(xii) The structure of the transaction, which is designed, among
other things, to result in receipt by the holders of Shares at
the earliest practicable time of the consideration to be paid
in the Offer and the fact that the consideration to be paid in
the Offer and the Merger is the same.
(xiii) The likelihood that the Offer and the Merger would be
consummated.
The foregoing discussion of the information and factors considered and
given weight by the Board of Directors is not intended to be exhaustive. In view
of the variety of factors considered in connection with its evaluation of the
Offer and the Merger, the Board of Directors did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Board of Directors may have given different weights to different factors.
OPINION OF FINANCIAL ADVISOR.
Pursuant to an engagement letter dated July 23, 1997, Talley retained
J.P. Morgan as its financial advisor in connection with an evaluation of
strategic alternatives, including the Offer, the Merger and other matters
arising in connection therewith.
At the meeting of the Board of Directors of Talley on September 25,
1997, J.P. Morgan rendered its oral opinion (subsequently confirmed in writing)
to the Board of Directors of Talley that, as of such date, and based upon and
subject to various considerations and assumptions set forth therein, the
consideration to be paid to Talley's Stockholders pursuant to the Offer and the
Merger is fair, from a financial point of view, to such Stockholders. No
limitations were imposed by Talley's Board of Directors upon J.P. Morgan with
respect to the investigations made or procedures followed by it in rendering its
opinions.
THE FULL TEXT OF THE WRITTEN OPINION OF J.P. MORGAN DATED AS OF
SEPTEMBER 25, 1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT C TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. TALLEY'S STOCKHOLDERS ARE
URGED TO READ THE OPINION IN ITS ENTIRETY. J.P. MORGAN'S WRITTEN OPINION IS
ADDRESSED TO THE BOARD OF DIRECTORS OF TALLEY, IS DIRECTED ONLY TO THE
CONSIDERATION TO BE PAID IN THE OFFER AND THE MERGER AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF TALLEY AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE TALLEY SPECIAL MEETING. THE SUMMARY OF THE OPINION OF J.P. MORGAN
SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, J.P. Morgan reviewed, among other things, a
draft of the Merger Agreement, the audited financial statements of Talley for
the fiscal year ended December 31, 1996, and the unaudited financial statements
of Talley for the period ended June 30, 1997, current and historical market
prices of Talley's Common Shares; the terms of the Preferred Shares; certain
publicly available information concerning the business
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<PAGE> 24
of Talley and of certain other companies engaged in businesses comparable to
those of Talley, and the reported market prices for certain other companies'
securities deemed comparable; publicly available terms of certain transactions
involving companies comparable to Talley and the consideration paid for such
companies; the terms of other business combinations deemed relevant by J.P.
Morgan; certain internal financial analyses and forecasts prepared by Talley
and its management; and certain agreements with respect to outstanding
indebtedness or obligations of Talley. J.P. Morgan also held discussions with
certain members of the senior management of Talley with respect to certain
aspects of the Offer and the Merger, and the past and current business
operations of Talley, the financial condition and future prospects and
operations of Talley, and certain other matters believed necessary or
appropriate to J.P. Morgan's inquiry. In addition, J.P. Morgan visited certain
representative facilities of Talley, and reviewed such other financial studies
and analyses and considered such other information as it deemed appropriate for
the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification,
the accuracy and completeness of all information that was publicly available or
that was furnished to it by Talley or otherwise reviewed by J.P. Morgan, and
J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P. Morgan.
In relying on financial analyses and forecasts provided to it, J.P. Morgan has
assumed that they have been reasonably prepared based on assumptions reflecting
the best currently available estimates and judgments by management as to the
expected future results of operations and financial condition of Talley to which
such analyses or forecasts relate. J.P. Morgan has also assumed that the Offer
and the Merger will have the tax consequences described in this Proxy Statement,
and in discussions with, and materials furnished to J.P. Morgan by,
representatives of Talley, and that the other transactions contemplated by the
Merger Agreement will be consummated as described in the Merger Agreement and
this Proxy Statement. In considering the allocation of consideration to be paid
by the Buyer to the holders of the Preferred Shares and the Common Shares, J.P.
Morgan assumed that the conversion ratios for converting Preferred Shares into
Common Shares reflect the relative differences in value between the Preferred
Shares and the Common Shares. J.P. Morgan relied as to all legal matters
relevant to rendering its opinion upon the advice of counsel to Talley.
The projections furnished to J.P. Morgan for Talley were prepared by
the management of Talley. Talley does not publicly disclose internal management
projections of the type provided to J.P. Morgan in connection with J.P. Morgan's
analysis of the Offer and the Merger, and such projections were not prepared
with a view toward public disclosure. These projections were based on numerous
variables and assumptions that are inherently uncertain and may be beyond the
control of management, including, without limitation, factors related to general
economic and competitive conditions and prevailing interest rates. Accordingly,
actual results could vary significantly from those set forth in such
projections.
J.P. Morgan's opinion is based on economic, market and other conditions
as in effect on, and the information made available to J.P. Morgan as of, the
date of its opinion. Subsequent developments may affect the written opinion of
J.P. Morgan, and J.P. Morgan does not have any obligation to update, revise, or
reaffirm such opinion.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
Public Trading Multiples. Using publicly available information, J.P.
Morgan compared selected financial data of Talley's businesses with similar data
for selected publicly traded companies engaged in businesses which J.P. Morgan
judged to be analogous to those of Talley. The companies selected by J.P. Morgan
were Alliant Techsystems, Thiokol, Breed Technologies, Primex Technologies, TRW
Inc., OEA, Special Devices, Inc., Sequa, Lockheed Martin, Northrop Grumman,
Raytheon, Litton Industries, DuCommun, BEI Electronics, AMP, Cooper Industries,
Emerson Electric, General Signal, Hubbell, Thomas & Betts, Michael Baker Corp.,
STC Group Inc., VSE Corp., ICF Kaiser International Inc., Jacobs Engineering,
Stone & Webster, Lukens Steel, Armco, J&L Specialty Steel, Allegheny Teledyne,
Carpenter Technology, A.M. Castle, Olympic Steel, Reliance Steel, Ryerson Tull,
ACT Manufacturing, Benchmark Electronics, CMC Industries, IEC Electronics, Jabil
Circuit Inc., Plexus,
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<PAGE> 25
SCI Systems, Solectron, American Vanguard, Cambrex, Consep, Detrex, and Hawkins
Chemical. These companies were selected, among other reasons, because of their
overall similarities to Talley's discrete businesses, such as industry
dynamics, size, profitability, projected growth and cyclicality. For each
comparable company, publicly available financial performance through the twelve
months ended June 30, 1997 was measured. J.P. Morgan selected the mean and the
median value for each multiple, specifically: firm value to sales, firm value
to earnings before interest and taxes, firm value to earnings before interest,
taxes, depreciation and amortization and equity value to earnings. These
multiples were then applied to Talley's historical and projected financial
results, yielding implied trading values for Talley's Common Shares of
approximately $8.00 to $13.00 per share.
Selected Transaction Analysis. Using publicly available information,
J.P. Morgan examined selected transactions with respect to certain of Talley's
businesses. However, because comparable public transaction data was not
available for all of Talley's businesses, J.P. Morgan was unable to utilize this
analysis to arrive at an estimated range of equity values for Talley's Common
Shares.
Discounted Cash Flow Analysis. J.P. Morgan conducted a discounted cash
flow analysis for each of Talley's subsidiaries for the purpose of determining
the fully diluted equity value per share for Talley's Common Shares. J.P. Morgan
calculated the unlevered free cash flows that each of Talley's subsidiaries are
expected to generate during fiscal years 1997 through 2002, based upon financial
projections prepared by the management of Talley's subsidiaries as reviewed by
senior management of Talley, and upon management projections as adjusted by J.P.
Morgan to reflect more moderate growth in revenues and lower operating margins
during the projection period. J.P. Morgan also calculated a range of terminal
values for each of Talley's subsidiaries at the end of the projection period to
calculate a range of terminal values for most subsidiaries, J.P. Morgan applied
a perpetual growth rate ranging from 1.5% to 4.5%, depending on the dynamics of
each subsidiary, to the unlevered free cash flow of Talley's subsidiaries during
the final year of the projection period. For certain of Talley's subsidiaries,
the use of a perpetual growth rate was not possible due to the high growth stage
of the subsidiary as projected by management. Therefore, in order to calculate a
terminal value range for these subsidiaries, an exit multiple methodology was
applied to the relevant result during the final year of the projection period.
The unlevered free cash flows and the range of terminal values were then
discounted to present values using a discount rate range of approximately 10.0%
to 11.0%, which was chosen by J.P. Morgan based upon an analysis of the weighted
average cost of capital of Talley and its subsidiaries. The present value of the
unlevered free cash flows and the range of terminal values were then adjusted
for Talley's estimated 1997 valuation date excess cash, option exercise proceeds
and total debt. Based on the adjusted management projections and the discount
rate described above, the discounted cash flow analysis indicated a range of
equity values of approximately $6.40 to $10.25 per share of Talley's Common
Shares on a stand-alone basis (i.e., without synergies). Based on the unadjusted
management projections and the discount rate range described above, the
discounted cash flow analysis indicated a range of equity values of
approximately $14.00 to $18.10 per share of Talley's Common Shares on a
stand-alone basis (i.e., without synergies).
Liquidation Analysis. J.P. Morgan conducted an analysis of various
liquidation scenarios and concluded that, after taking into account taxes, debt
and corporate charges that would be payable in connection with a liquidation and
the risks, uncertainties and time requirements associated with a liquidation
process, that, based on the adjusted management projections the liquidation
analysis indicated a range of equity values of approximately $6.20 to $8.50;
based on the management projections the liquidation analysis indicated a range
of equity values of approximately $10.90 to $13.10.
J.P. Morgan reviewed the analyses used to render its September 25, 1997
oral opinion to the Board of Directors of Talley by performing procedures to
update certain of such analyses and by reviewing the assumptions upon which such
analyses were based and the factors considered in connection therewith.
The summary set forth above does not purport to be a complete
description of the analyses or data presented by J.P. Morgan. The preparation of
a fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. J.P. Morgan believes that the summary
set forth above and its analyses must be considered as a whole and that
selecting portions thereof, without considering all of its analyses, could
create an incomplete view of the processes underlying its analyses and opinion.
J.P. Morgan
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<PAGE> 26
based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and
industry-specific factors. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above under the description of each
such analysis. J.P. Morgan's analyses are not necessarily indicative of actual
values or actual future results that might be achieved, which values may be
higher or lower than those indicated. Moreover, J.P. Morgan's analyses are not
and do not purport to be appraisals or otherwise reflective of the prices at
which the businesses could actually be bought or sold.
INFORMATION CONCERNING TALLEY'S FINANCIAL ADVISOR.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to advise Talley with
respect to the Offer and the Merger on the basis of such experience.
For services rendered in connection with its engagement, including the
Offer and the Merger, Talley has agreed to pay J.P. Morgan a fee of
approximately $4,100,000. In addition, Talley has agreed to reimburse J.P.
Morgan for its expenses incurred in connection with its services, including the
fees and disbursements of counsel, and will indemnify J.P. Morgan against
certain liabilities, including liabilities arising under the Federal securities
laws.
J.P. Morgan and its affiliates maintain banking and other business
relationships with Talley and its affiliates, for which it receives customary
fees. In the ordinary course of their businesses, affiliates of J.P. Morgan may
actively trade the debt and equity securities of Talley for their own accounts
or for the accounts of customers and, accordingly, they may at any time hold
long or short positions in such securities.
CERTAIN EFFECTS OF THE CONSUMMATION OF THE OFFER ON THE SHARES.
Since the consummation of the Offer, the Series B Preferred Shares and
the Common Shares have continued to be listed on the New York Stock Exchange.
The Series B Preferred Shares and the Common Shares are also currently
registered under the Securities and Exchange Act of 1934 (the "Exchange Act").
Upon consummation of the Merger, Talley intends to delist the Series B Preferred
Shares and the Common Shares from all stock exchanges or quotation systems, to
terminate the registration of the Series B Preferred Shares and the Common
Shares under the Exchange Act and to terminate the duty of Talley to file
reports under the Exchange Act. If registration of the Series B Preferred
Shares and the Common Shares under the Exchange Act were terminated, those
shares would no longer constitute "margin securities" for the purposes of the
margin regulations of the Federal Reserve Board, with the result that lenders
may no longer extend credit on collateral of such shares.
RIGHTS AGREEMENT.
The Rights Agreement contains certain provisions that may delay, defer
or prevent a takeover of Talley. Pursuant to the Merger Agreement, Talley's
Board of Directors has taken all action necessary to render the Rights Agreement
inapplicable to the Offer, the Merger and any other transaction contemplated by
the Merger Agreement. The Board of Directors adopted a resolution prior to
execution of the Merger Agreement to the effect that the acquisition of Shares
pursuant to the Offer and the Merger constituted a Permitted Offer (as defined
in the Rights Agreement), and no further action by the Board of Directors was
necessary under the Rights Agreement in order to render the rights issued
thereunder (the "Rights") inapplicable to the Offer, the Merger and any other
transactions contemplated by the Merger Agreement. On December 9, 1997, the
Board of Directors approved an amendment to the Rights Agreement rendering the
Rights then outstanding null and void and terminating Talley's obligations to
issue additional Rights and its obligations under the Rights Agreement.
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<PAGE> 27
ACCOUNTING TREATMENT OF THE MERGER.
The Merger will be accounted for under the "purchase" method of
accounting whereby the purchase price will be allocated based on the fair values
of assets acquired and liabilities assumed.
REGULATORY REQUIREMENTS.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), and the rules promulgated thereunder by the Federal Trade Commission
(the "FTC"), certain acquisition transactions, including the Merger, cannot be
consummated unless certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Department of Justice")
and specified waiting period requirements have been satisfied. All required
filings with respect to the Merger have been made under the HSR Act and the
applicable waiting period has expired.
Despite the expiration of the requisite waiting period under the HSR
Act, at any time before or after the consummation of the Merger, the Department
of Justice, the FTC or another third party could take action under antitrust
laws with respect to the Merger, including seeking to enjoin or rescind the
Merger and any state could take any such action under state antitrust laws as it
deems necessary or desirable in the public interest.
Talley is not aware of any other governmental approvals or actions that
may be required for consummation of the Merger.
THE MERGER AGREEMENT
Talley, Carpenter and Sub have entered into the Merger Agreement. The
following is a summary of certain provisions of the Merger Agreement, a copy of
which is attached hereto as Exhibit A. Such summary is qualified in its entirety
by reference to the Merger Agreement.
THE MERGER AGREEMENT.
The Effective Time. Subject to the provisions of the Merger Agreement,
Carpenter, Sub and Talley shall cause the Merger to be consummated by filing
with the Secretary of State of the State of Delaware, as provided in the DGCL, a
certificate of merger or other appropriate document (in any such case, the
"Certificate of Merger") and the parties shall make all other filings or
recordings required under the DGCL (the later of the time of such filing or the
time specified in the Certificate of Merger being the "Effective Time").
The Merger. The Merger Agreement provides that, upon the terms and
subject to the conditions thereof and in accordance with the relevant provisions
of the DGCL, Sub shall be merged with and into Talley (the "Merger") as soon as
practicable following the satisfaction or waiver of the conditions set forth in
the Merger Agreement. Following the Merger, Talley shall continue as the
Surviving Corporation under the name "Talley Industries, Inc." and shall
continue its existence under the laws of the State of Delaware, and the separate
corporate existence of Sub shall cease. At the election of Carpenter, and
subject to the execution of an appropriate amendment to the Merger Agreement,
any direct or indirect wholly owned subsidiary of Carpenter may be substituted
for Sub as a constituent corporation in the Merger.
At the Effective Time, by virtue of the Merger and without any action
on the part of Carpenter, Sub, Talley or the holders of any of the following
securities: (a) each Share held by Talley as treasury stock and each issued and
outstanding Share owned by Carpenter, Sub or any other subsidiary of Carpenter
shall be canceled and retired and no payment made with respect thereto; (b) each
issued and outstanding Share, other than those Shares referred to in (a) above,
or Dissenting Shares (as defined below), shall be converted into the right to
receive from the Surviving Corporation an amount of cash, without interest,
equal to the respective Offer Price applicable to such Share (the "Merger
Consideration"); and (c) each common share, par value $1 per share, of Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into one fully-paid and nonassessable share of common stock, par value
$1 per share, of the Surviving Corporation.
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<PAGE> 28
Any issued and outstanding Shares held by a person who does not vote in
favor of the Merger and complies with all the provisions of Delaware law
concerning the right of holders of Shares to require appraisal of their Shares
("Dissenting Shares") shall become the right to receive such consideration as
may be determined to be due to such Stockholder pursuant to the laws of the
State of Delaware. If, after the Effective Time, such Stockholder withdraws his
demand for appraisal or fails to perfect or otherwise loses his right of
appraisal, in any case pursuant to the DGCL, his Shares shall be deemed to be
converted as of the Effective Time into the right to receive the Merger
Consideration.
Organizational Documents. The Merger Agreement also provides that at
the Effective Time and without any further action on the part of Talley and Sub,
the Certificate of Incorporation of Talley as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation from and after the Effective Time until amended in accordance with
applicable law. At the Effective Time and without any further action from the
part of Talley and Sub, the Bylaws of Sub in effect at the Effective Time shall
be the Bylaws of the Surviving Corporation from and after the Effective Time
until amended in accordance with applicable law. The directors of Sub and the
officers of Talley immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation until their respective
successors are duly elected and qualified, except that the President and Chief
Executive Officer of Sub will become the Chairman and Chief Executive Officer of
the Surviving Corporation. See "PARTIES TO THE MERGER - Certain Information
Concerning Talley."
Stockholders' Meeting. After consummation of the Offer, to the extent
required by applicable law, Talley shall promptly take all action necessary in
accordance with the DGCL and its Certificate of Incorporation and Bylaws to
convene a stockholders' meeting (the "Special Meeting") to consider and vote on
the Merger Agreement and the transactions contemplated thereby. At the Special
Meeting, all of the Shares then owned by Carpenter, Sub or any other subsidiary
of Carpenter shall be voted to approve the Merger Agreement. Subject to its
fiduciary duties, the Board of Directors of Talley shall recommend that Talley's
Stockholders vote to approve the Merger Agreement if such vote is sought, shall
use its best efforts to solicit from Stockholders of Talley proxies in favor of
the Merger and shall take all other reasonable action in its judgment necessary
and appropriate to secure the vote of Stockholders required by the DGCL to
effect the Merger.
Proxy Statement. If required under applicable law, Talley and Carpenter
shall prepare the Proxy Statement, file it with the Commission under the
Exchange Act as promptly as practicable after Sub purchases Shares pursuant to
the Offer, and use all reasonable efforts to have it cleared by the Commission.
As promptly as practicable after the Proxy Statement has been cleared by the
Commission, Talley shall mail the Proxy Statement to the Stockholders of Talley
as of the record date for the Meeting.
Company Board Representation. The Merger Agreement provides that,
promptly upon the acceptance for payment of and payment for any Shares by Sub,
Sub will be entitled to designate such number of directors, rounded up to the
next whole number, on the Board of Directors of Talley as will give Sub, subject
to compliance with Section 14(f) of the Exchange Act, representation on the
Board of Directors of Talley equal to the product of (i) the number of directors
on the Board of Directors of Talley and (ii) the percentage that such number of
votes represented by Shares so purchased bears to the number of votes
represented by Shares outstanding, and Talley shall at such time, subject to
applicable law, including applicable fiduciary duties, cause Sub's designees to
be so elected by its existing Board of Directors. See "INTERESTS OF CERTAIN
PERSONS IN THE TRANSACTION - Board Representation."
Exchange Procedures. Pursuant to the Merger Agreement, promptly after
the Effective Time of the Merger, the Surviving Corporation shall cause the
Disbursing Agent to mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the Effective
Time represented Shares (the "Certificates") a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the Certificates to
the Disbursing Agent) and instructions for use in effecting the surrender of the
Certificate or payment thereof. Upon surrender to the Disbursing Agent of a
Certificate, together with such letter of transmittal duly executed,
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<PAGE> 29
the holder of such Certificate shall be paid in exchange therefor cash in an
amount equal to the product of the number of Shares represented by such
Certificate multiplied by the respective Offer Price, and such Certificate
shall forthwith be canceled. No interest will be paid or accrued on the cash
payable upon the surrender of the Certificates. If payment is to be made to a
person other than the person in whose name the Certificate surrendered is
registered, it shall be a condition of payment that the Certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the person requesting such payment pay any transfer or other taxes
required by reason of the payment to a person other than the registered holder
of the Certificate surrendered or established to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable. Until
surrendered in accordance with the provisions above, each Certificate (other
than Certificates representing Shares owned by Carpenter, Sub, or any other
subsidiary of Carpenter or Certificates representing Shares owned by
Stockholders who shall have complied with all the provisions of the DGCL
concerning the right of stockholders to require appraisal of their Shares)
shall represent for all purposes only the right to receive the Offer Price in
cash multiplied by the number of Shares evidenced by such Certificate, without
any interest thereon.
Conduct of Business Pending Merger. Except as contemplated by the
Merger Agreement or as approved in writing by Carpenter, during the period from
the date of the Merger Agreement to the acceptance of Shares for payment, Talley
and the subsidiaries will each conduct its operations according to its ordinary
and usual course of business. Without limiting the generality of the foregoing,
neither Talley nor any subsidiary of Talley (the "Subsidiary" or
"Subsidiaries"), without the prior written consent of Carpenter, will (i) issue,
sell or pledge, or authorize or propose the issuance, sale or pledge of (A)
additional shares of capital stock of any class (including the Shares), or
securities convertible into any such shares, or any rights, warrants or options
to acquire any such shares or other convertible securities, or grant or
accelerate any right to convert or exchange any securities of Talley for shares,
other than (1) Shares issuable pursuant to the terms of outstanding stock
options and commitments disclosed in the Merger Agreement, or (2) issuance of
shares of capital stock to Talley by a wholly-owned Subsidiary, or (B) any other
securities in respect of, in lieu of or in substitution for Shares outstanding
on the date thereof or split, combine or reclassify any of Talley's capital
stock; (ii) purchase, redeem or otherwise acquire, or propose to purchase or
otherwise acquire, any of its outstanding securities (including the Shares);
(iii) declare, set aside or pay any dividend or other distribution on any shares
of capital stock of Talley other than the regular quarterly dividends of $.275
per share with respect to the Series A Preferred Shares and $.25 per share with
respect to the Series B Preferred Shares, except that a direct or indirect
wholly-owned Subsidiary may pay a dividend or distribution to its parent; (iv)
except as disclosed to Carpenter prior to the date of the Merger Agreement,
make any acquisition of a material amount of assets or securities, any
disposition (including by way of mortgage, license, encumber or any Lien) of a
material amount of assets or securities, or enter into a material contract or
release or relinquish any material contract rights, or make any amendments, or
modifications thereto, except in all instances for actions in the ordinary
course of business; (v) (A) except in the ordinary course of business, incur
any indebtedness for borrowed money or guarantee any such indebtedness of
another person, issue or sell any debt securities or warrants or other rights
to acquire any debt securities of Talley or any Subsidiary, guarantee any debt
securities of another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing or (B) make any
loans, advances of capital contributions to, or investments in, any other
person, other than to Talley or any direct or indirect wholly owned Subsidiary;
(vi) pay, discharge, settle or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction, in
the ordinary course of business or in accordance with their terms; (vii)
propose or adopt any amendments (initiated by the Board of Directors) to the
Certificate of Incorporation or Bylaws of Talley (or any such similar
organizational documents of Talley's Subsidiaries); (viii) except as disclosed
in the Merger Agreement, enter into any new employment, severance or
termination agreements with, or grant any increase in severance or termination
pay to, any officers, directors or key employees or grant any material
increases in the compensation or benefits to officers, directors and key
employees; (ix) change any accounting methods, principles or practices
materially affecting their assets, liabilities or business, except insofar as
may be required by a change in generally accepted accounting principles; (x)
make any material tax election or settle or compromise any material income tax
liability; (xi) except as disclosed to Carpenter prior to the date of the
Merger Agreement, make or agree to make any new capital expenditure or
expenditures not previously committed to which individually is in excess of
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<PAGE> 30
$500,000 or which in the aggregate are in excess of $1 million; or (xii) agree
in writing or otherwise to take any of the foregoing actions or any action
which would make any representation or warranty in the Merger Agreement untrue
or incorrect at any time prior to acceptance of Shares for payment in the
Offer.
Access to Information. Between the date of the Merger Agreement and the
Effective Time, Talley will upon reasonable notice (i) give Carpenter and its
authorized representatives reasonable access during regular business hours to
Talley's and each Subsidiary's plants, offices, warehouses and other facilities
and to its books and records, (ii) permit Carpenter to make such inspections as
it may require, and (iii) cause its officers and those of Talley's Subsidiaries
to furnish Carpenter with such financial and operating data and other
information with respect to the business and properties of Talley and its
Subsidiaries as Carpenter may from time to time reasonably request. Information
obtained by Carpenter shall be subject to the provisions of the confidentiality
agreement between Talley and Carpenter, dated August 7, 1997 (the
"Confidentiality Agreement"), which remains in full force and effect, but shall
terminate upon the acceptance for payment of the Shares pursuant to the Offer.
No Solicitation of Transactions. The Merger Agreement provides that
Talley shall not, nor shall it permit any Subsidiary to, nor shall it authorize
or permit any officer, director or employee of or any representative of Talley
or any of its subsidiaries to, directly or indirectly, (i) solicit, initiate or
knowingly encourage the submission of any proposal with respect to a merger or
other business combination involving Talley or any proposal or offer to acquire
in any manner, an equity interest in not less than 20% of the outstanding voting
securities of, or assets representing not less than 20% of the annual revenues
or net earnings of Talley and its subsidiaries taken as a whole (a "Takeover
Proposal") or (ii) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to any inquiries or the
making of any proposal that constitutes or may reasonably be expected to lead
to, a Takeover Proposal; provided, however, that prior to the acceptance for
payment of Shares pursuant to the Offer, to the extent consistent with the
fiduciary obligations of the Board of Directors of Talley, as determined in good
faith by the Board of Directors after consultation with outside counsel, Talley
may upon receipt by Talley of an unsolicited written, bona fide Takeover
Proposal, furnish information with respect to Talley pursuant to a customary
confidentiality agreement containing "standstill" provisions no less onerous
than in the Confidentiality Agreement and participate in negotiations regarding
such Takeover Proposal.
Reasonable Best Efforts. The Merger Agreement provides that, upon the
terms and subject to the conditions thereof, each of the parties thereto will
use its reasonable best efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by the Merger Agreement, including, without
limitation, (i) obtaining all necessary consents, approvals or waivers from
third parties and governmental authorities necessary to the consummation of the
transactions contemplated by the Merger Agreement and (ii) opposing vigorously
any litigation or administrative proceeding relating to the Merger Agreement or
the transactions contemplated thereby.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto, including,
without limitation, representations and warranties by Talley as to Talley's
capitalization, the absence of any required filings and consents, the absence of
conflicts with charter documents and contracts, SEC filings and financial
statements, absence of certain changes or events, business, compliance with the
law, the absence of litigation, employee benefits plans, the filing and
compliance of reports with the requirements of the Commission, environmental
matters, brokers and taxes.
Indemnification. All rights to indemnification and exculpation from
liabilities for acts or omissions occurring at or prior to the Effective Time
now existing in favor of the current or former directors or officers of Talley
and its Subsidiaries as provided in their respective certificates of
incorporation or by-laws (or comparable organizational documents) and any
indemnification agreements of Talley, the existence of which does not constitute
a breach of the Merger Agreement, shall be assumed by the Surviving Corporation
in the Merger, without further action, as of the Effective Time and shall
survive the Merger and shall continue in full force and effect (to the extent
consistent with applicable law) in accordance with their terms. For six years
after the Effective Time, Carpenter shall cause the Surviving Corporation to
honor its commitments and obligations
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<PAGE> 31
pursuant to the indemnification procedures listed in the Merger Agreement; and
the Surviving Corporation shall provide officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the Effective
Time, including but not limited to the transactions contemplated by this
Agreement, covering each person currently covered by Talley's officers' and
directors' liability insurance policy, or who becomes covered by such policy
prior to the Effective Time, on terms with respect to coverage and amount no
less favorable than those of such policy in effect on the date of the Merger
Agreement (provided that in satisfying its obligation under this Section the
Surviving Corporation shall not be obligated to pay annual premiums in excess
of 175% of the amount per annum Talley paid in its last full fiscal year).
Employee Plans and Benefits. As soon as practicable following the date
of the Merger Agreement, the Board of Directors of Talley (or, if appropriate,
any committee administering the stock plans) shall adopt such resolutions or
take such other actions as are required in accordance with the stock plans to
adjust the terms of all outstanding stock options to provide that, at the
Effective Time, each stock option, whether vested or not, outstanding
immediately prior to the Effective Time be canceled in exchange for a cash
payment by Talley of an amount equal to (i) the excess, if any, of (x) the price
per Share to be paid pursuant to the Offer over (y) the exercise price per Share
subject to such stock option, multiplied by (ii) the number of Shares for which
such stock option shall not theretofore have been exercised. The stock plans
shall terminate as of the Effective Time, and the provisions in any other
Benefit Plan providing for the potential issuance, transfer or grant of any
capital stock of Talley or any Subsidiary or any interest in respect of any
capital stock of Talley or any Subsidiary shall be deleted as of the Effective
Time, and Talley shall ensure that following the Effective Time no holder of a
stock option or any participant in the stock plans or other benefit plan shall
have any right thereunder to acquire any capital stock of Talley or any
Subsidiary or the Surviving Corporation.
Employment Contracts. From and after the Effective Time, Carpenter
shall cause the Surviving Corporation to honor in accordance with their terms
all existing employment, severance, consulting or other compensation agreements,
plans or contracts between Talley or any Subsidiary and any officer, director or
employee of Talley or any Subsidiary. For the one-year period immediately
following the Effective Time, Carpenter shall cause Talley to provide such
benefit plans, programs and arrangements that are no less favorable in the
aggregate than the existing benefit plans.
Termination. The Merger Agreement may be terminated, and the Merger may
be abandoned at any time prior to the Effective Time, notwithstanding approval
thereof by the stockholders of Talley: (a) by mutual written consent of Talley
and Carpenter; (b) by either Talley or Carpenter, if (1) the Offer terminates or
expires in accordance with its terms without Sub having purchased any Shares
pursuant to the Offer because of a failure of any of the conditions set forth in
the Merger Agreement (provided, however, that the right to terminate shall not
be available to any party whose failure to fulfill any of its obligations under
the Merger Agreement results in the failure to have satisfied any such
condition); (2) Shares have not been accepted for payment pursuant to the Offer
on or prior to December 31, 1997; (provided, however, that the right to
terminate shall not be available to any party whose failure to fulfill any of
its obligations under the Merger Agreement results in the failure of the Offer
to be consummated by such time); (3) any governmental entity shall have issued a
final order, injunction, decree, judgment or ruling or taken any other final
action restraining or otherwise prohibiting consummation of the Merger or any of
the other transactions contemplated by the Merger Agreement and such action
shall have become final and nonappealable; (provided, however, that the party
seeking to terminate pursuant to this clause shall have used all reasonable
efforts to prevent the entry of and to remove such action; or (4) the Board of
Directors of Talley shall have (A) withdrawn or modified in a manner adverse to
Carpenter and Sub its approval or recommendation of the Offer or the Merger or
(B) approved or recommended any takeover proposal in respect of Talley. In the
event that the Merger Agreement is terminated by Talley or Carpenter pursuant to
clause (4), Talley shall promptly, but in no event later than two business days
after such event, pay Carpenter a fee of $6 million in immediately available
funds by wire transfer to an account designated by Carpenter.
Conditions of the Merger. The respective obligation of each party to
effect the Merger is subject to the satisfaction or waiver, where permissible,
prior to the Effective Time, of the following conditions: (a) if required by
applicable law, the Merger Agreement shall have been approved by the affirmative
vote of the Stockholders
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<PAGE> 32
of Talley by the requisite vote in accordance with applicable law; (b) Sub
shall have accepted for payment and purchased Shares tendered pursuant to the
Offer; and (c) no judgment, order, decree, statute, law, ordinance, rule,
regulation, temporary restraining order, preliminary or permanent injunction or
other order enacted, entered, promulgated, enforced or issued by any court of
competent jurisdiction or other Government Entity or other legal restraint or
prohibition (collectively, "Restraints") preventing the consummation of the
Merger shall be in effect, provided, however, that the party seeking to assert
this condition shall have used reasonable efforts to prevent the entry of any
such Restraints and to appeal as promptly as possible any such Restraints that
may be entered.
Except as otherwise specifically provided in the Merger Agreement, each
party shall bear its own expenses in connection with the Merger Agreement and
the transactions contemplated thereby.
Amendment, Extension and Waiver. To the extent permitted by applicable
law, the Merger Agreement may be amended by the parties at any time before or
after approval of the Merger Agreement by the Stockholders of Talley; provided,
however, that after any such Stockholder approval, no amendment shall be made
which by law requires further approval of Talley's Stockholders without the
approval of such Stockholders. The Merger Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties.
At any time prior to the Effective Time, a party hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto by any
other party or (iii) subject to the Merger Agreement, waive compliance by any
other party with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to the Merger Agreement to assert any of its
rights under the Merger Agreement or otherwise shall not constitute a waiver of
such rights.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
BOARD REPRESENTATION.
The Merger Agreement provides that, promptly upon the acceptance for
payment of and payment for any Shares by Sub pursuant to the Offer, Sub will be
entitled to designate such number of directors, rounded up to the next whole
number, on the Board of Directors of Talley as will give Sub, subject to
compliance with Section 14(f) of the Exchange Act, representation on the Board
of Directors of Talley equal to the product of (i) the number of directors on
the Board of Directors of Talley and (ii) the percentage that such number of
votes represented by Shares so purchased bears to the number of votes
represented by Shares outstanding, and Talley shall at such time, subject to
applicable law, including applicable fiduciary duties, cause Sub's designees to
be so elected by its existing Board of Directors; provided, however, that in the
event that Sub's designees are elected to the Board of Directors of Talley,
until the Effective Time such Board of Directors shall have at least three
directors who were directors on the date of the Merger Agreement and who are not
officers or affiliates of Talley (the "Independent Directors"); and provided
further, that if the number of Independent Directors shall be reduced below
three for any reason whatsoever any remaining Independent Directors (or
Independent Director, if there shall be only one remaining) shall designate
persons to fill such vacancies who shall be deemed to be Independent Directors
for purposes of the Merger Agreement or, if no Independent Directors then
remain, the other directors shall designate three persons to fill such vacancies
who shall not be officers or affiliates of Talley, or officers or affiliates of
Carpenter or any of their respective subsidiaries, and such persons shall be
deemed to be Independent Directors for purposes of the Merger Agreement. In
connection with the foregoing, Talley has, subject to applicable law, including
applicable fiduciary duties, obtained the resignation of such number of its
current directors as is necessary to enable Sub's designees to be elected or
appointed to Talley's Board of Directors as provided above.
Pursuant to the Merger Agreement, on December 9, 1997, five of Talley's
directors resigned and Sub's designees were elected to fill the vacancies
created pursuant to the foregoing provisions. As of the date hereof,
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<PAGE> 33
three directors who were directors of Talley prior to consummation of the Offer
remain on the Talley Board as Independent Directors. See ("SHARE OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS -- The Sub Designees" and "-- The Independent
Directors").
OPTIONS; EMPLOYEE BENEFITS; SEVERANCE AND OTHER AGREEMENTS.
On December 9, 1997, the Board of Directors of Talley adopted
resolutions to adjust the terms of all outstanding stock options to provide
that, at the Effective Time, each stock option, whether vested or not,
outstanding immediately prior to the Effective Time be canceled in exchange for
a cash payment by Talley of an amount equal to (i) the excess, if any, of (x)
the price per Share to be paid pursuant to the Offer over (y) the exercise price
per Share subject to such stock option, multiplied by (ii) the number of Shares
for which such stock option shall not theretofore have been exercised. The stock
plans shall terminate as of the Effective Time, and the provisions in any other
benefit plan providing for the potential issuance, transfer or grant of any
capital stock of Talley or any Subsidiary or any interest in respect of any
capital stock of Talley or any Subsidiary shall be deleted as of the Effective
Time, and Talley shall ensure that following the Effective Time no holder of a
stock option or any participant in the stock plans or other benefit plan shall
have any right thereunder to acquire any capital stock of Talley or any
Subsidiary or the Surviving Corporation.
Carpenter has agreed to honor or cause Sub to honor, in accordance with
their respective terms, all existing employment, severance, consulting or other
compensation agreements, plans or contracts between Talley or any Subsidiary of
Talley and any officer, director or employee of Talley or any Subsidiary of
Talley. For the one-year period immediately following the Effective Time,
Carpenter shall cause Talley to provide such benefit plans, programs and
arrangements that are no less favorable in the aggregate than the existing
benefit plans.
Talley entered into an employment contract dated as of August 11, 1997,
with Admiral Paul L. Foster whereby Admiral Foster agreed to serve as Chief
Executive Officer and Chairman of the Board of Directors of Talley for a one
year term which commenced on June 9, 1997. The contract permits the Company to
terminate his services at any time upon one months' notice. Such termination
entitles Admiral Foster to a lump sum payment equal to the balance of his base
salary and certain health benefits and life and long-term disability insurance
coverage through June 9, 1998. The base salary payable to Admiral Foster under
his employment contract is $400,000. In addition, Talley will provide to, unless
earlier terminated, Admiral Foster certain health benefits and life and
long-term disability insurance coverage through August 31, 1998. On December 9,
1997, Admiral Foster resigned as Chief Executive Officer and Chairman of the
Board of Talley. However, Admiral Foster continues to serve as a consultant to
Talley under the same employment contract.
CERTAIN TAX CONSEQUENCES TO STOCKHOLDERS
The following is a summary of certain United States federal income tax
consequences of the Merger to beneficial owners of Shares whose Shares are
converted to cash in the Merger. The discussion is for general information only
and does not purport to consider all aspects of federal income taxation that
might be relevant to beneficial owners of Shares. The discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing regulations promulgated thereunder and administrative and
judicial interpretations thereof, all of which are subject to change. The
discussion applies only to beneficial owners of Shares in whose hands Shares are
capital assets within the meaning of Section 1221 of the Code, and may not apply
to Shares received pursuant to the exercise of employee stock options or
otherwise as compensation, or to certain types of beneficial owners of Shares
(such as insurance companies, tax-exempt organizations and broker-dealers) who
may be subject to special rules. This discussion does not discuss the federal
income tax consequences to a beneficial owner of Shares who, for United States
federal income tax purposes, is a non-resident alien individual, a foreign
corporation, a foreign partnership or a foreign estate or trust, nor does it
consider the effect of any foreign, state or local tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH BENEFICIAL OWNER OF
SHARES SHOULD CONSULT SUCH BENEFICIAL OWNER'S OWN TAX ADVISOR TO DETERMINE THE
APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH
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<PAGE> 34
BENEFICIAL OWNER AND THE PARTICULAR TAX EFFECTS TO SUCH BENEFICIAL OWNER OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER TAX
LAWS.
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes, and may also be a taxable
transaction under applicable state, local, foreign income or other tax laws. In
general, for federal income tax purposes, a beneficial owner of Shares will
recognize capital gain or loss equal to the difference between the beneficial
owner's adjusted tax basis in the Shares converted to cash in the Merger and the
amount of cash received therefor. Gain or loss must be determined separately for
each block of Shares (i.e., Shares acquired at the same cost in a single
transaction) converted to cash in the Merger.
Under recently enacted changes to the Code, net capital gain recognized
by individuals, estates and trusts from the sale of property held more than 18
months will generally be taxed at a maximum rate of 20% for federal income tax
purposes (or 10% if the capital gain would be taxed at only a 15% rate if it
were treated as ordinary income). Net capital gain from the sale of property
held for more than one year but not more than 18 months is taxed at a maximum
rate of 28%. There are limitations on the deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%, unless a beneficial owner of Shares (i) is a
corporation or comes within certain exempt categories and, when required,
demonstrates this fact or (ii) provides a correct TIN to the payor, and
otherwise complies with applicable requirements of the backup withholding rules.
A beneficial owner who does not provide a correct TIN may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding does not
constitute an additional tax and will be creditable against the beneficial
owner's federal income tax liability. Each beneficial owner of Shares should
consult with his or her own tax advisor as to his or her qualification for
exemption from backup withholding and the procedure for obtaining such
exemption. Those who convert their Shares into cash in the Merger may prevent
backup withholding by completing a Substitute Form W-9 and submitting it to the
disbursing agent for the Merger.
Carpenter will be entitled to deduct and withhold from the
consideration otherwise payable pursuant to the Merger Agreement to any holder
of Shares such amounts as Carpenter is required to deduct and withhold with
respect to the making of such payment. To the extent that amounts are so
withheld by Carpenter, such withheld amounts shall be treated for all purposes
of the Merger Agreement as having been paid to the holder of the Shares in
respect of which such deduction and withholding was made by Carpenter.
SELECTED FINANCIAL INFORMATION OF TALLEY
Set forth below is certain selected consolidated financial data with
respect to Talley for the five fiscal years ended December 31, 1996, excerpted
or derived from the audited financial statements of Talley contained in Talley's
Annual Reports on Form 10-K for the fiscal years then ended, as filed with the
Securities and Exchange Commission (the "Commission"). The selected consolidated
financial data of Talley for the nine months ended September 30, 1997 and 1996
have been taken or derived from the unaudited consolidated financial statements
of Talley contained in Talley's Quarterly Reports on Form 10-Q for such fiscal
periods as filed with the Commission. More comprehensive financial information
is included in such reports and other documents filed by Talley with the
Commission, and the following summary is qualified in its entirety by reference
to such reports and such other documents and all the financial information
(including any related notes) contained therein. Such reports and other
documents should be available for inspection and copies thereof should be
obtainable in the manner set forth under "Additional Information."
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<PAGE> 35
TALLEY INDUSTRIES, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31
1996 1995 1994 1993 1992
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues ........................... $ 502,698 $385,286 $ 327,760 $ 324,200 $ 320,718
Cost and expenses ........................ 460,958 346,018 297,492 298,704 305,533
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 30,793 3,555 3,506 (5,994) (17,204)
(loss)
Extraordinary gains (loss), net of income
taxes .................................... (12,052) 14,409 -- (504) 2,637
Net earnings (loss) ...................... 18,741 17,964 3,506 (6,498) (14,567)
Net earnings (loss) per common share ..... .40 1.28 .13 (.90) (1.82)
Weighted average number of common
shares outstanding ....................... 13,913 14,001 10,412 9,676 9,189
BALANCE SHEET DATA:
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 liabilities ........................ 205,899 314,265 329,737 345,896 323,041
Long-term debt (including long-term
realty debt) ............................. 123,185 235,716 226,011 243,115 229,756
Stockholders' equity ..................... 74,486 58,334 40,166 36,542 40,781
Book value per common share .............. 4.05 1.44 (0.17) (0.31) .34
</TABLE>
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<PAGE> 36
TALLEY INDUSTRIES, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands of dollars, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Nine
Months Months
Ended Ended
09/30/97 09/30/96
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA:
Total Revenues ........................... 264,176 391,869
Cost and expenses ........................ 246,193 354,418
Earnings before income taxes and
extraordinary loss ....................... 7,393 30,972
Income tax provision ..................... 469 1,575
Earnings before extraordinary gains (loss) 6,924 29,397
Extraordinary loss, net of income
taxes ................................... -- (1,642)
Net earnings ............................. 6,924 27,755
Net earnings per common share ............ .45 1.03
Weighted average number of common
shares outstanding ....................... 15,246 15,202
BALANCE SHEET DATA:
Working Capital .......................... 105,657 117,172
Total assets ............................. 278,642 402,076
Total liabilities ........................ 201,559 312,337
Long-term debt (including long-term
realty debt) ............................. 122,946 129,931
Stockholders' equity ..................... 77,083 89,739
Book value per common share .............. 4.38 4.73
</TABLE>
LITIGATION
On September 26, 1997, Talley and certain of its directors were named
as defendants in a purported class action filed on behalf of the stockholders of
Talley in the Chancery Court of Delaware (the "Original Stockholders Actions").
The complaints in the Original Stockholder Actions alleged breach of fiduciary
duty on the part of the Board of Directors arising out of execution of the
Merger Agreement and sought declaratory and injunctive relief barring defendants
and their counsel, agents, employees and all persons acting under, in concert
with, or for them, from proceeding with, consummating, or closing the Offer and
the Merger, as well as damages in an unspecified amount. A copy of the complaint
was filed as Exhibit g(1) to Carpenter's Tender Offer Statement on Schedule
14D-1, dated October 2, 1997, (the "Schedule 14D-1"), and is incorporated herein
by reference, and the foregoing summary is qualified in its entirety by
reference thereto.
On October 8, 1997, the complaints in the Original Stockholder Actions
were amended to add Brickell Partners as a newly named plaintiff and Sub and
Carpenter as additional defendants (the "Amended Complaint"). This Amended
Complaint alleged breach of fiduciary duty on the part of the Board of Directors
arising out of execution of the Merger Agreement and failure to disclose
material information in the Schedule 14D-1 and Schedule 14D-9, dated October 2,
1997, as filed with the Commission by Talley (the "Schedule 14D-9"), and sought
declaratory and injunctive relief barring defendants and their counsel, agents,
employees and all persons acting under, in concert with, or for them, from
proceeding with, consummating, or closing the Offer and the Merger, as well as
damages in an unspecified amount.
- 26 -
<PAGE> 37
Subsequent to the filing of the Original Stockholder Action, four other
purported class action complaints (collectively, the "Subsequent Actions") were
filed against Talley and certain of its directors on behalf of the stockholders
of Talley in the Chancery Court of Delaware.
On October 16, 1997, with respect to all the filed actions (including
the Amended Complaint and the Subsequent Actions), counsel for the plaintiffs
entered into a Memorandum of Understanding, dated October 16, 1997 (the "MOU"),
with counsel for the defendants providing for a proposed settlement of all such
actions. The MOU provides, among other things: (i) that Talley supplement the
disclosure contained in the Schedule 14D-9 which supplement was completed on
October 17, 1997 as Amendment No. 3 to the Schedule 14D-9; (ii) that Sub proceed
with the Offer, the Merger and all other transactions contemplated by the Merger
Agreement without further application for injunctive relief by plaintiffs; (iii)
that plaintiffs withdraw their motion for a preliminary injunction promptly upon
the execution of the MOU; (iv) that Talley bear the cost of notice to
stockholders in connection with the settlement of the stockholder actions and
the settlement hearing; (v) that the parties attempt in good faith to agree upon
and execute an appropriate stipulation of settlement and any other documentation
required for court approval of the settlement of the actions upon the terms set
forth in the MOU; (vi) that the stipulation expressly provide that (a) the
defendants have denied, and continue to deny, that any of them have committed or
aided or abetted in the commission of any violation of law, and that they are
entering into a stipulation of settlement solely because the proposed settlement
would eliminate the burden and expense of further litigation and (b) the
plaintiffs thereby release the defendants and any of their affiliates or other
representatives, whether under state or federal law, and whether directly,
representatively or in any other capacity, excluding statutory appraisal rights,
in connection with, or that arise out of the subject matter of the stockholder
actions, the Offer, the Merger, the negotiation and consideration of the Merger,
and the fiduciary or disclosure obligations of any of the defendants (or persons
to be released) with respect to the foregoing; (vii) that consummation of the
settlement is contingent upon an appropriate stipulation of settlement, final
court approval and dismissal of the action with prejudice, with each party
bearing its own costs; (viii) that plaintiffs petition (and defendants consent
solely in connection with the settlement) the court for certification as a
class, consisting of all the stockholders of Talley from September 26, 1997 to
the Record Date; (ix) that the settlement is conditioned upon the satisfactory
completion of confirmatory discovery and upon consummation of the Merger; and
(x) that the settlement contemplated by the MOU not be binding upon any party
until an appropriate stipulation of settlement has been signed and final court
approval of the settlement and the dismissal of the action with prejudice, with
each party bearing its own costs (except as provided in the MOU). In addition,
the parties have agreed in the MOU that plaintiffs' counsel in the Original
Stockholder Actions and the Subsequent Actions will apply to the Delaware court
for an award of attorneys' fees and disbursements in an amount not to exceed
$330,000. Defendants have agreed not to oppose such application and Talley will
pay plaintiffs' counsel the amounts awarded by the court. The MOU has been filed
as (g)(3) to the Schedule 14D-1 and is incorporated herein by reference, and the
foregoing summary of the MOU is qualified in its entirety by reference thereto.
PRICE RANGE OF THE SHARES; DIVIDENDS.
The Common Shares and Series B Preferred Shares are listed and traded
on the NYSE under the symbols "TAL" and "TALB", respectively. The Series A
Preferred Shares are traded occasionally in the over-the-counter market. The
following tables set forth, for the quarters indicated, the high and low sales
prices for the Common Shares and Series B Preferred Shares on the NYSE as
reported by Talley's Annual Report on Form 10-K for the year ended December 31,
1996 (the "1996 Annual Report") with respect to periods occurring in 1995 and
1996 and as reported by the Dow Jones News Service thereafter, and the amount of
cash dividends paid or declared per share for each quarter based on publicly
available sources.
- 27 -
<PAGE> 38
<TABLE>
<CAPTION>
COMMON SHARES (TAL) High Low Cash Dividends
- ------------------- ---- --- --------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
First Quarter .................. $10.25 $7.38 $0.00
Second Quarter ................. 11.00 7.50 0.00
Third Quarter .................. 9.75 7.63 0.00
Fourth Quarter ................. 9.25 7.63 0.00
YEAR ENDED DECEMBER 31, 1996:
First Quarter .................. 8.63 6.75 0.00
Second Quarter ................. 9.13 6.50 0.00
Third Quarter .................. 9.38 7.25 0.00
Fourth Quarter ................. 8.00 6.63 0.00
YEAR ENDED DECEMBER 31, 1997:
First Quarter .................. 9.75 7.38 0.00
Second Quarter ................. 9.38 7.13 0.00
Third Quarter .................. 13.00 7.81 0.00
Fourth Quarter ................. 13.00 10.875 0.00
SERIES B PREFERRED SHARES (TALB)
- --------------------------------
High Low Cash Dividends
---- --- --------------
YEAR ENDED DECEMBER 31, 1995:
First Quarter .................. $15.50 $12.50 $0.00
Second Quarter ................. 17.13 13.50 0.00
Third Quarter .................. 16.50 14.50 0.00
Fourth Quarter ................. 16.50 12.88 0.00
YEAR ENDED DECEMBER 31, 1996:
First Quarter .................. 17.75 15.75 0.00
Second Quarter ................. 21.00 16.25 0.00
Third Quarter .................. 20.75 18.25 0.00
Fourth Quarter ................. 20.00 13.25 5.50(1)
YEAR ENDED DECEMBER 31, 1997:
First Quarter .................. 16.63 13.88 0.25
Second Quarter ................. 16.38 14.00 0.25
Third Quarter .................. 18.00 15.69 0.25
Fourth Quarter ................. 16.875 15.438 0.25
</TABLE>
In December 1996 Talley paid a dividend arrearage on its Series A
Preferred Shares of $6.05 per share. Talley paid further cash dividends on its
Series A Preferred Shares of $0.275 per share in March 1997, June 1997,
September 1997 and December 1997.
On August 6, 1997, the last full trading day prior to the date that
Carpenter sent a letter to Talley expressing interest in acquiring Talley, the
closing sale price reported on the NYSE was $8.56 per Common Share and $15.94
per Series B Preferred Share. On September 25, 1997, the last full trading day
prior to announcement
- --------
(1) In December 1996 Talley paid a dividend arrearage on its Series B Preferred
Shares of $5.50 per share.
- 28 -
<PAGE> 39
of the Offer, the closing sale price reported on the NYSE was $11.44 per Common
Share and $17.63 per Series B Preferred Share. On October 1, 1997, the last
full trading day before commencement of the Offer, the closing sale price
reported on the NYSE was $12.25 per Common Share and $16.50 per Series B
Preferred Share. On January 14, 1998, the record date, the closing sale price
reported on the NYSE was $11.875 per Common Share and on January 7, 1998, the
last date with trading activity, the closing sale price reported on the NYSE
was $15.625 per Series B Preferred Share. STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR THE SHARES.
Pursuant to the Merger Agreement, the Company has agreed not to
declare, set aside, make or pay any dividend or other distribution, other than
regular quarterly dividends consistent with past practice, in an amount not to
exceed $.275 per share with respect to the Series A Preferred Shares and $.25
per share with respect to the Series B Preferred Shares.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of January 14, 1998, the
record date, regarding the only persons known to Talley to own beneficially
more than five percent of the total number of the outstanding shares of any
class (or series of the Preferred Shares) of Talley's voting securities:
<TABLE>
<CAPTION>
Amount and Nature
Title of of Beneficial Percent of
Class/Series Name and Address of Beneficial Owner Ownership(1) Class/Series
------------ ------------------------------------ ------------ ------------
<S> <C> <C> <C>
Series A Carpenter Technology Corporation.......................... 12,509 90.7%
101 West Bern Street
Reading, Pennsylvania 19612-4662
Series B Carpenter Technology Corporation.......................... 499,038 66.6%
Common Carpenter Technology Corporation ......................... 10,750,721 75.7%
Shares
Saad A. Alissa............................................ 1,227,800(2) 8.70%
P.O. Box 192
Alkhobar 81962
Saudi Arabia
</TABLE>
- --------
(1) In presenting the information set forth in this table and the notes thereto,
Talley has relied in part upon statements of the persons or entities named
therein filed with the SEC pursuant to Section 13(d) or 13(g) of then
Exchange Act. For purposes of this table, Preferred Shares have not been
deemed converted to Common Shares in calculating the beneficial ownership of
Common Shares. Unless otherwise noted below, each beneficial owner has sole
investment and voting power with respect to the shares listed, subject to
community property laws where applicable.
(2) Mr. Alissa is the beneficial owner of 1,227,800 shares of Common Stock. This
amount includes 450,000 Common Shares owned by General Investors Limited
("GIL"), which is wholly owned by Mr. Alissa and 743,800 Common Shares owned
by Financial Investors Limited ("FIL"), which is wholly owned by Abdullatif
Ali Alissa, Est. (the "Establishment"). Mr. Alissa is President of the
Establishment. The Establishment, Mr. Alissa and FIL share the investment
and voting power of the 743,800 Common Shares owned by FIL. Mr. Alissa and
GIL share the investment and voting power of the 450,000 Common Shares owned
by GIL. The foregoing information is based solely upon the filings made by
Mr. Alissa and his various affiliated entities with the SEC under Section 13
of the Exchange Act.
- 29 -
<PAGE> 40
The following table sets forth information regarding the beneficial
ownership of Talley's voting securities by the directors of Talley, by each of
the Sub Designees (as defined below), by certain executive officers and by all
directors and executive officers of Talley as a group.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF OF SHARES OF
- ------------------------ ------------ ------------
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
Current Directors:
Edward B. Bruno ................................... -- *
Robert W. Cardy ................................... -- *
G. Walton Cottrell ................................ -- *
Dennis M. Draeger ................................. -- *
Paul L. Foster .................................... 2,000 *
Robert W. Lodge ................................... -- *
Joseph A. Orlando ................................. 2,000 *
John W. Stodder ................................... 2,000 *
David Victor ...................................... 2,000 *
John R. Welty ..................................... -- *
Named Executive Officers Who Are Not Also
Directors or Sub Designees:
Jack C. Crim ...................................... -- --
Mark S. Dickerson ................................. -- --
Kenneth May ....................................... -- --
Daniel R. Mullen .................................. -- --
All Directors and Executive Officers as a group(14) -- *
</TABLE>
- -----------------------------------
*Less than 1%.
THE SUB DESIGNEES.
On December 9, 1997, Robert T. Craig, Jack C. Crim, Alex Stamatakis,
Donald J. Ulrich and Fred Israel resigned from the Board of Directors. Pursuant
to the Merger Agreement on December 9, 1997, the persons set forth below, who
were designated as Sub's designees (the "Sub Designees"), were elected to the
Board of Directors to fill the vacancies created thereby.
Set forth below are the name, present principal occupation and the
material positions and occupations within the past five years for each of the
persons who were elected to the Board of Directors as the Sub Designees. The
Board of Directors is currently fixed at ten members. Unless otherwise
indicated, the business address for each individual listed below is 101 West
Bern Street, Reading, Pennsylvania 19612. Each of the individuals listed below
is a citizen of the United States.
- 30 -
<PAGE> 41
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT, DIRECTOR
NAME MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS SINCE
---- -------------------------------------------------- -----
<S> <C> <C>
Edward B. Bruno Controller of Carpenter, 1975 to present. 1997
Robert W. Cardy Chairman of the Board and Chief Executive Officer of Talley, December 1997
1997 to present; Chairman of the Board of Carpenter, 1992 to present;
President and Chief Executive Officer of Carpenter, 1992 to present;
President and Chief Operating Officer of Carpenter, 1990 to 1992;
Director of Carpenter, 1990 to present.
G. Walton Cottrell Senior Vice President-Finance and Chief Financial Officer of Carpenter, 1997
1993 to present; Vice President-Finance and Chief Financial Officer of
Carpenter, 1989 to 1993.
Dennis M. Draeger Senior Vice President-Steel Operations of Carpenter, 1996 to present; 1997
President of Worldwide Floor Products Operations, Armstrong World
Industries, Inc. from 1994 to 1996; Group Vice President, Floor Products
Operations, Armstrong World Industries, Inc. from 1988 to 1993; Director
of Carpenter from 1992 to 1996.
Robert W. Lodge Vice President-Human Resources of Carpenter, 1991 to present. 1997
John R. Welty Vice President, General Counsel and Secretary of Carpenter, 1993 to 1997
present; General Counsel and Secretary of Carpenter, 1992 to 1993;
General Counsel and Assistant Secretary of Carpenter, 1991 to 1992.
</TABLE>
THE INDEPENDENT DIRECTORS.
The Merger Agreement provides that in the event that Sub's Designees
are elected to the Board of Directors of Talley, until the Effective Time the
Board shall have at least three directors who are directors on the date of the
Merger Agreement and who are not officers or affiliates of Talley; and provides
further, that, in such event, if the number of Independent Directors shall be
reduced below three for any reason whatsoever, any remaining Independent
Directors (or Independent Director, if there shall be only one remaining) shall
designate persons to fill such vacancies who shall be deemed to be Independent
Directors for purposes of the Merger Agreement or, if no Independent Directors
then remain, the other directors shall designate three persons to fill such
vacancies who shall not be officers or affiliates of Talley, or officers or
affiliates of Carpenter or any of their respective subsidiaries, and such
persons shall be deemed to be Independent Directors for purposes of the Merger
Agreement.
The names of the Independent Directors are set forth below as well as
each member's principal occupation, business experience and the period during
which each has served as a director of Talley.
- 31 -
<PAGE> 42
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT, DIRECTOR
NAME MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS SINCE
---- -------------------------------------------------- -----
<S> <C> <C>
Paul L. Foster Chairman of the Board and Chief Executive Officer of Talley from June 1992
1997 to December 1997; Professor of Finance and former Dean, College
of Business Administration, Saint Joseph's University, Philadelphia,
Pennsylvania; a director of Wheeling Jesuit College, Wheeling, West
Virginia; a member of the General Accounting Office Research,
Education and Advisory Committee; and retired Rear Admiral, United
States Navy.
Joseph A. Orlando Independent financial consultant and former President of Whitehead 1992
Associates (venture capital, real estate, and securities investments).
John W. Stodder Corporate finance and merger/acquisition consultant; manager of private 1970
investments; Vice Chairman, Emeritus of Josten's, Inc. (manufacturer
of educational and motivational products); a director of Trans Leasing
International, Inc. (medical and office products leasing); and a director
of Stevens International, Inc. (manufacturer of web-fed printing and
packaging equipment and currency printing systems).
David Victor Of Counsel, Osborn Maledon, P.A. (attorneys). Prior to joining this law 1985
firm in May 1996, Mr. Victor had been a member of Meyer, Hendricks,
Victor, Ruffner & Bivens, P.L.C. since May 1995 (attorneys). Prior to
May 1995, Mr. Victor was a member of Meyer, Hendricks, Victor,
Osborn & Maledon, P.A. (attorneys).
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Price Waterhouse LLP are not expected to attend the
Special Meeting.
OTHER MATTERS
Management of Talley knows of no other matters that may properly be, or
which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before such Special Meeting, the persons
named in the enclosed proxy or their substitutes will vote the proxies in
accordance with their judgment with respect to such matters, unless authority to
do so is withheld in the proxy.
ADDITIONAL INFORMATION
Attached to this Proxy Statement is a copy of Talley's 1996 10-K
(without exhibits) and Talley's 10-Q (without exhibits) for the quarter ended
September 30, 1997. Talley is subject to the informational filing requirements
of the Exchange Act and in accordance therewith is obligated to file periodic
reports, proxy statements and other information with the Commission relating to
its business, financial condition and other matters. Information as of
particular dates concerning Talley's directors and officers, their remuneration,
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with Talley is required to
be disclosed in such proxy statements and distributed to Talley's stockholders
and filed with the Commission. Such reports, proxy statements and other
information should be available for inspection at the public reference
facilities of the Commission located in Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should also be available for inspection and copying
at prescribed rates at the regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Such
reports, proxy statements and other information may also be obtained at the Web
site that the Commission maintains at http://www.sec.gov. Copies of this
material may also be obtained by mail, upon payment of the Commission's
customary fees, from the Commission's principal office at 450
- 32 -
<PAGE> 43
Fifth Street, N.W., Washington, D.C. 20549. In addition, such material should
also be available for inspection at offices of the NYSE, 20 Broad Street, New
York, New York 10005.
All information contained in this Proxy Statement concerning Carpenter
and its subsidiaries, including Sub, has been supplied by Carpenter and has not
been independently verified by Talley. Except as otherwise indicated, all other
information contained in this Proxy Statement has been supplied by Talley.
OTHER MEETINGS
To be brought before an annual meeting of Talley, Stockholder proposals
must be timely received at the executive offices of Talley, and must meet the
other requirements of the rules of the Commission relating to Stockholders
proposals and of the Talley Bylaws. In the event the Merger is not consummated
and Talley holds a 1998 Annual Meeting, Talley will so notify its Stockholders
of such meeting, including the date by which Stockholder proposals must be
received at Talley's executive offices in order to be considered for inclusion
in the proxy materials related to such meeting.
Dated: January 16, 1998
- 33 -
<PAGE> 44
EXHIBIT A
[EXECUTION COUNTERPART]
AGREEMENT AND PLAN OF MERGER
among
CARPENTER TECHNOLOGY CORPORATION,
SCORE ACQUISITION CORP.
and
TALLEY INDUSTRIES, INC.
Dated September 25, 1997
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 THE OFFER................................................ 1
SECTION 1.1 The Offer............................................ 1
SECTION 1.2 Company Actions...................................... 3
ARTICLE 2 THE MERGER............................................... 6
SECTION 2.1 The Merger........................................... 6
SECTION 2.2 Effective Time....................................... 7
SECTION 2.3 Effects of the Merger................................ 7
SECTION 2.4 Certificate of Incorporation and Bylaws.............. 7
SECTION 2.5 Directors and Officers............................... 7
SECTION 2.6 Conversion of Shares................................. 8
SECTION 2.7 Dissenting Shares.................................... 8
SECTION 2.8 Payments for Shares.................................. 9
ARTICLE 3 REPRESENTATIONS AND WARRANTIES
OF PARENT AND ACQUISITION SUB............................ 10
SECTION 3.1 Organization and Qualification....................... 10
SECTION 3.2 Authority Relating to this Agreement................. 11
SECTION 3.3 Information Supplied................................. 11
SECTION 3.4 Consents and Approvals; No Violation................. 12
SECTION 3.5 Financing............................................ 12
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ 13
SECTION 4.1 Organization and Qualification....................... 13
SECTION 4.2 Capitalization....................................... 14
SECTION 4.3 Authority Relative to this Agreement................. 15
SECTION 4.4 Absence of Certain Changes........................... 16
SECTION 4.5 Reports.............................................. 17
SECTION 4.6 Proxy Statement...................................... 17
SECTION 4.7 Consents and Approvals; No Violation................. 18
SECTION 4.8 Fees and Commissions................................. 18
SECTION 4.9 Information Supplied................................. 19
SECTION 4.10 Litigation.......................................... 19
SECTION 4.11 Patents and Other Proprietary Rights................ 19
SECTION 4.12 Benefit Plans; ERISA Compliance..................... 20
SECTION 4.13 Taxes............................................... 23
SECTION 4.14 Compliance with Applicable Laws..................... 25
SECTION 4.15 State Takeover Statutes............................. 28
SECTION 4.16 Labor Matters....................................... 28
SECTION 4.17 Undisclosed Liabilities............................. 28
SECTION 4.18 Certain Agreements.................................. 28
SECTION 4.19 Amendment of Rights Agreement....................... 28
</TABLE>
- i -
<PAGE> 46
<TABLE>
<S> <C>
ARTICLE 5 COVENANTS................................................ 29
SECTION 5.1 Conduct of Business of the Company................... 29
SECTION 5.2 No Solicitation...................................... 31
SECTION 5.3 Access to Information................................ 33
SECTION 5.4 Reasonable Best Efforts.............................. 33
SECTION 5.5 Indemnification, Exculpation and Insurance.......... 34
SECTION 5.6 Stock Options; Employee Plans and Benefits
and Employment Contracts............................. 35
SECTION 5.7 Meeting of the Company's Stockholders................ 37
SECTION 5.8 Public Announcements................................. 38
SECTION 5.9 Stockholder Litigation............................... 38
SECTION 5.10 Rights Agreement.................................... 38
ARTICLE 6 CONDITIONS TO CONSUMMATION OF MERGER..................... 38
SECTION 6.1 Conditions to Each Party's Obligation to
Effect the Merger.................................... 38
SECTION 7.1 Termination.......................................... 39
SECTION 7.2 Effect of Termination................................ 40
SECTION 7.3 Termination Fee...................................... 40
SECTION 7.4 Amendment............................................ 40
SECTION 7.5 Extension; Waiver.................................... 41
SECTION 7.6 Procedure for Termination, Amendment,
Extension or Waiver.................................. 41
SECTION 7.7 Concurrence of Independent Directors................. 41
ARTICLE 8 MISCELLANEOUS............................................ 41
SECTION 8.1 Non-Survival of Representations and Warranties....... 41
SECTION 8.2 Entire Agreement; Assignment......................... 42
SECTION 8.3 Validity............................................. 42
SECTION 8.4 Notices.............................................. 42
SECTION 8.5 Governing Law........................................ 44
SECTION 8.6 Jurisdiction......................................... 44
Section 8.7 Descriptive Headings................................. 44
SECTION 8.8 Parties in Interest.................................. 44
SECTION 8.9 Counterparts......................................... 44
SECTION 8.10 Fees and Expenses................................... 44
SECTION 8.11 Certain Definitions................................. 45
SECTION 8.12 Performance by Acquisition Sub...................... 46
</TABLE>
- ii -
<PAGE> 47
DISCLOSURE SCHEDULES
4.1(b) Subsidiaries
4.2 Capitalization
4.4 Absence of Certain Changes
4.7 Consents and Approvals; No Violation
4.10 Litigation
4.11 Intellectual Property Rights
4.12 Benefits
4.13 Taxes
4.16 Labor Matters
4.18 Covenants Not to Compete
5.6(d) Agreements with Current and Former Officers and
Directors
- iii -
<PAGE> 48
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated
September 25, 1997, among CARPENTER TECHNOLOGY CORPORATION, a Delaware
corporation ("Parent"), SCORE ACQUISITION CORP., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Acquisition Sub"), and TALLEY INDUSTRIES,
INC., a Delaware corporation (the "Company").
The respective Boards of Directors of Parent, Acquisition Sub
and the Company have each determined that it is advisable, on the terms and
subject to the conditions of this Agreement, (i) for a wholly-owned subsidiary
of Parent to commence a cash tender offer to purchase all outstanding shares of
Series A Convertible Preferred Stock ("Series A Preferred Shares"), Series B $1
Cumulative Convertible Preferred Stock ("Series B Preferred Shares and together
with the Series A Preferred Shares, "Preferred Shares") and Common Stock, par
value $1 per share, of the Company ("Common Shares" and together with the
Preferred Shares, "Shares") and (ii) following the cash tender offer, to merge
Acquisition Sub with and into the Company.
In consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, Parent, Acquisition
Sub and the Company hereby agree as follows:
ARTICLE 1
THE OFFER
SECTION 1.1 The Offer.
(a) As promptly as practicable but in no event
later than the fifth business day after the public announcement of the execution
of this Agreement, Parent shall cause Acquisition Sub to commence (within the
meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), and Acquisition Sub shall commence, an offer (as amended or
supplemented in accordance with this Agreement, the "Offer") to purchase for
cash all issued and outstanding Shares at a price of $11.70 per Series A
Preferred Share, $16.00 per Series B Preferred Share and $12.00 per Common Share
net to the seller in cash (such prices, or such higher prices per Share as may
be paid in the Offer, being referred to as the "Offer Prices"). The obligation
of Acquisition Sub, and of Parent to cause Acquisition Sub, to consummate the
Offer, to accept for payment and to pay for any Shares tendered shall be subject
to only those conditions set forth in Annex A hereto (any of which may be waived
by Acquisition Sub in its sole discretion; provided
<PAGE> 49
that, without the consent of the Company, Acquisition Sub shall not waive the
Minimum Tender Condition (as defined in Annex A)).
(b) As soon as practicable on the date of commencement of the Offer, Parent and
Acquisition Sub shall file with the Securities and Exchange Commission (the
"SEC") with respect to the Offer a Tender Offer Statement on Schedule 14D-1 (the
"Schedule 14D-1"), which will comply in all material respects with the
provisions of applicable federal securities laws and will contain the offer to
purchase relating to the Offer (the "Offer to Purchase") and forms of related
letters of transmittal and summary advertisement (which documents, together with
any supplements or amendments thereto, are referred to herein collectively as
the "Offer Documents"). Parent will deliver copies of the proposed forms of the
Schedule 14D-1 and the Offer Documents (as well as any change thereto) to the
Company within a reasonable time prior to the commencement of the Offer for
prompt review and comment by the Company and its counsel. Parent will provide
the Company and its counsel in writing any comments that Acquisition Sub, Parent
or their counsel may receive from the SEC or its staff with respect to the Offer
Documents promptly after the receipt thereof. Parent and Acquisition Sub
represent that the Schedule 14D-1 and the Offer Documents (including any
amendments or supplements thereto) (i) shall comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations
thereunder and (ii) shall not, in the case of the Schedule 14D-1 at the time
filed with the SEC and at the time the Offer is consummated and in the case of
the Offer Documents when first published, sent or given to the stockholders of
the Company and at the time the Offer is consummated, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading; provided, however,
that Parent and Acquisition Sub make no covenant, representation or warranty as
to any of the information relating to and supplied by the Company in writing
specifically for inclusion in the Schedule 14D-1 or the Offer Documents
(including any amendments or supplements thereto). Parent and Acquisition Sub
shall promptly correct any information in the Schedule 14D-1 or the Offer
Documents that shall have become false or misleading in any material respect and
take all steps necessary to cause such Schedule 14D-1 or Offer Documents as so
corrected to be filed with the SEC and disseminated to the stockholders of the
Company, as and to the extent required by applicable law. Parent and Acquisition
Sub will provide copies of any amendments or supplements to the Offer
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Documents or the Schedule 14D-1 prior to any filing of such amendments or
supplements with the SEC in order to provide the Company and its counsel with a
reasonable opportunity to review and comment.
(c) Each of Parent and Acquisition Sub expressly
reserves the right to modify the terms of the Offer, except that neither Parent
nor Acquisition Sub shall, without the prior written consent of the Company,
decrease the consideration payable in the Offer, change the form of
consideration payable in the Offer, decrease the number of Shares sought
pursuant to the Offer, change or modify the conditions to the Offer in a manner
adverse to the Company or holders of Shares, impose additional conditions to the
Offer, waive the Minimum Tender Condition, or amend any term of the Offer in any
manner adverse to the Company or holders of Shares. Notwithstanding the
foregoing, Acquisition Sub, without the consent of the Company, (i) shall extend
the Offer, if at the then scheduled expiration date of the Offer any of the
conditions to Acquisition Sub's obligation to accept for payment and pay for
Shares shall not have been satisfied, until such time as such condition is
satisfied or waived, if such condition may in the reasonable judgment of
Acquisition Sub be satisfied in a time period reasonable for such satisfaction,
(ii) may, if any such condition is not waived, extend the Offer until such
condition is waived, (iii) may extend the Offer for any period required by any
rule, regulation, interpretation or position of the SEC or the staff thereof
applicable to the Offer and (iv) may extend the Offer on one or more occasions
for an aggregate period of not more than five business days if the Minimum
Tender Condition has been satisfied and there has theretofore been validly
tendered and not withdrawn Shares representing at least 70% but less than 90% of
each class of the outstanding Shares (on a fully diluted basis).
(d) Parent will provide or cause to be provided
to Acquisition Sub on a timely basis the funds necessary to accept for payment,
and pay for, Shares that Acquisition Sub becomes obligated to accept for
payment, and pay for, pursuant to the Offer.
SECTION 1.2 Company Actions.
(a) The Company hereby consents to the Offer and
represents that (i) its Board of Directors, at a meeting duly called and held,
has duly and by the affirmative vote of at least 4/5ths of the duly elected,
qualified and acting members of the
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Board at the time of such meeting, adopted resolutions approving the Offer, the
Merger (as defined in Section 2.1) and this Agreement, determining that the
terms of the Offer and the Merger are fair to, and in the best interests of, the
Company's stockholders and recommending acceptance of the Offer and approval of
the Merger and this Agreement by the stockholders of the Company and (ii) J. P.
Morgan Securities Inc. ("JPMorgan") has delivered to the Company's Board of
Directors its opinion that as of the date of this Agreement the cash
consideration to be received by holders of the Common Shares for such Shares is
fair to such holders from a financial point of view. The Company hereby consents
to the inclusion in the Offer Documents of the recommendations of the Company's
Board of Directors described in this Section.
(b) The Company will file with the SEC on the
date of the commencement of the Offer a Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9") containing such recommendations of the
Board in favor of the Offer and the Merger, and shall disseminate the Schedule
14D-9 as required by Rule 14d-9 promulgated under the Exchange Act. The Company
will deliver the proposed forms of the Schedule 14D-9 and the exhibits thereto
to Parent within a reasonable time prior to the commencement of the Offer for
prompt review and comment by Parent and its counsel. Parent and its counsel
shall be given a reasonable opportunity to review any amendments and supplements
to the Schedule 14D-9 prior to their filing with the SEC or dissemination to
stockholders of the Company. The Company will provide Parent and its counsel in
writing any comments that the Company or its counsel may receive from the SEC or
its staff with respect to the Schedule 14D-9 promptly after receipt thereof. The
Company represents that the Schedule 14D-9, on the date filed with the SEC and
on the date first published, sent or given to the stockholders of the Company,
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company shall promptly correct any information in the
Schedule 14D-9 that shall have become false or misleading in any material
respect and take all steps necessary to cause such Schedule 14D-9 as so
corrected to be filed with the SEC and disseminated to the stockholders of the
Company, as and to the extent required by applicable federal securities laws.
(c) In connection with the Offer, the Company
shall furnish to, or cause to be furnished to, Parent mailing
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labels, security position listings and any available listing or computer file
containing the names and addresses of the record holders of the Shares as of a
recent date and shall furnish Parent with such information and assistance as
Parent or its agents may reasonably request in communicating the Offer to the
stockholders of the Company. Subject to the requirements of law, and except for
such steps as are necessary to disseminate the Offer Documents and any other
documents necessary to consummate the Merger, Parent and Acquisition Sub shall,
and shall cause each of their affiliates to, hold the information contained in
any of such labels and lists in confidence, use such information only in
connection with the Offer and the Merger, and, if this Agreement is terminated,
deliver to the Company all copies of such information or extracts therefrom then
in their possession or under their control.
(d) Promptly upon the acceptance for payment of
and payment for any Shares by Acquisition Sub, Acquisition Sub shall be entitled
to designate such number of directors, rounded up to the next whole number, on
the Board of Directors of the Company as will give Acquisition Sub, subject to
compliance with Section 14(f) of the Exchange Act, representation on the Board
of Directors of the Company equal to the product of (i) the number of directors
on the Board of Directors of the Company and (ii) the percentage that such
number of votes represented by Shares so purchased bears to the number of votes
represented by Shares outstanding, and the Company shall at such time, subject
to applicable law, including applicable fiduciary duties, cause Acquisition
Sub's designees to be so elected by its existing Board of Directors; provided,
however, that in the event that Acquisition Sub's designees are elected to the
Board of Directors of the Company, until the Effective Time such Board of
Directors shall have at least three directors who are directors on the date of
this Agreement and who are not officers or affiliates of the Company (the
"Independent Directors"); and provided further, that, in such event, if the
number of Independent Directors shall be reduced below three for any reason
whatsoever any remaining Independent Directors (or Independent Director, if
there shall be only one remaining) shall designate persons to fill such
vacancies who shall be deemed to be Independent Directors for purposes of this
Agreement or, if no Independent Directors then remain, the other directors shall
designate three persons to fill such vacancies who shall not be officers or
affiliates of the Company, or officers or affiliates of Parent or any of their
respective subsidiaries, and such persons shall be deemed to be Independent
Directors for purposes of this Agreement. Subject to applicable law, including
applicable fiduciary duties, the
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Company shall take all action requested by Parent necessary to effect any such
election, including mailing to its stockholders the information statement (the
"Information Statement") containing the information required by Section 14(f) of
the Exchange Act and Rule 14(f)-1 promulgated thereunder, and the Company shall
make such mailing with the mailing of the Schedule 14D-9 (provided that Parent
and Acquisition Sub shall have provided to the Company on a timely basis all
information required to be included in the Information Statement with respect to
Acquisition Sub's designees). In connection with the foregoing, the Company
will, subject to applicable law, including applicable fiduciary duties,
promptly, at the option of Parent, either increase the size of the Company's
Board of Directors and/or obtain the resignation of such number of its current
directors as is necessary to enable Acquisition Sub's designees to be elected or
appointed to the Company's Board of Directors as provided above.
ARTICLE 2
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the
conditions hereof, and in accordance with the relevant provisions of the
Delaware General Corporation Law (the "DGCL"), Acquisition Sub shall be merged
with and into the Company (the "Merger") as soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 7. Following the
Merger, the Company shall continue as the surviving corporation (the "Surviving
Corporation") under the name "Score" and shall continue its existence under the
laws of the State of Delaware, and the separate corporate existence of
Acquisition Sub shall cease. At the election of Parent, and subject to the
execution of an appropriate amendment to this Agreement, any direct or indirect
wholly owned subsidiary of Parent may be substituted for Acquisition Sub as a
constituent corporation in the Merger. Notwithstanding this Section 2.1, Parent
may elect at any time prior to the fifth business day immediately preceding the
date on which the notice of the meeting of stockholders of the Company to
consider approval of the Merger and this Agreement (the "Meeting") is first
given to the Company's stockholders that instead of merging Acquisition Sub into
the Company as hereinabove provided, to merge the Company into Acquisition Sub
or another direct or indirect wholly-owned subsidiary of Parent; provided,
however, that the Company shall not be deemed to have breached any of its
representations, warranties or covenants
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herein solely by reason of such election. In such event the parties shall
execute an appropriate amendment to this Agreement in order to reflect the
foregoing and to provide that Acquisition Sub or such other subsidiary of Parent
shall be the Surviving Corporation and shall continue under the name "Score".
SECTION 2.2 Effective Time. Upon the terms and subject to the
conditions hereof, as soon as possible after consummation of the Offer and to
the extent required by the DGCL after the vote of the stockholders of the
Company in favor of the approval of the Merger and this Agreement has been
obtained, the Merger shall be consummated by filing with the Secretary of State
of the State of Delaware, as provided in the DGCL, a certificate of merger or
other appropriate documents (in any such case, the "Certificate of Merger") and
the parties hereto shall make all other filings or recordings required under the
DGCL (the later of the time of such filing or the time specified in the
Certificate of Merger being the "Effective Time").
SECTION 2.3 Effects of the Merger. The Merger shall have the
effects set forth in Section 259 of the DGCL. As of the Effective Time, the
Company, as the Surviving Corporation, shall be a wholly owned subsidiary of
Parent.
SECTION 2.4 Certificate of Incorporation and Bylaws.
(a) The Certificate of Incorporation of the
Company in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation from and after the
Effective Time until amended in accordance with applicable law.
(b) The Bylaws of Acquisition Sub in effect at
the Effective Time shall be the Bylaws of the Surviving Corporation from and
after the Effective Time until amended in accordance with applicable law.
SECTION 2.5 Directors and Officers. The directors of
Acquisition Sub and the officers of the Company immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
until their respective successors are duly elected and qualified, except that
the President and Chief Executive Officer of Acquisition Sub will become the
Chairman and Chief Executive Officer of the Surviving Corporation.
SECTION 2.6 Conversion of Shares. At the Effective Time, by
virtue of the Merger and without any action on the part
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of Parent, Acquisition Sub, the Company or the holders of any of the following
securities:
(a) each Share held by the Company as treasury stock and each
issued and outstanding Share owned by Parent, Acquisition Sub or any other
subsidiary of Parent shall be cancelled and retired and no payment made with
respect thereto;
(b) each issued and outstanding Share, other than those Shares
referred to in Section 2.6(a) or Dissenting Shares (as defined in Section 2.7),
shall be converted into the right to receive from the Surviving Corporation an
amount of cash, without interest, equal to the respective Offer Price applicable
to such Share (the "Merger Consideration"); and
(c) each common share, par value $1 per share, of Acquisition
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into one fully-paid and nonassessable share of common stock, par value
$1 per share, of the Surviving Corporation.
SECTION 2.7 Dissenting Shares. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding Shares held by a
person (a "Dissenting Stockholder") who objects to the Merger and complies with
all the provisions of Delaware law concerning the right of holders of Shares to
require appraisal of their Shares ("Dissenting Shares") shall not be converted
as described in Section 2.6(b) but shall become the right to receive such
consideration as may be determined to be due to such Dissenting Stockholder
pursuant to the laws of the State of Delaware. If, after the Effective Time,
such Dissenting Stockholder withdraws his demand for appraisal or fails to
perfect or otherwise loses his right of appraisal, in any case pursuant to the
DGCL, his Shares shall be deemed to be converted as of the Effective Time into
the right to receive the Merger Consideration. The Company shall give Parent (i)
prompt notice of any demands for appraisal of Shares received by the Company and
(ii) the opportunity to participate in and direct all negotiations and
proceedings with respect to any such demands. The Company shall not, without the
prior written consent of Parent, make any payment with respect to, or settle,
offer to settle or otherwise negotiate, any such demands.
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SECTION 2.8 Payments for Shares.
(a) Prior to the Effective Time, Parent shall appoint a
commercial bank or trust company reasonably acceptable to the Company to act as
disbursing agent for the Merger (the "Disbursing Agent"). Parent will enter into
a disbursing agent agreement with the Disbursing Agent, in form and substance
reasonably acceptable to the Company, and shall deposit or cause to be deposited
with the Disbursing Agent in trust for the benefit of the Company's stockholders
cash at such times as shall be necessary to make the payments pursuant to
Section 2.6 to holders of Shares (such amounts being hereinafter referred to as
the "Exchange Fund"). The Disbursing Agent shall, pursuant to irrevocable
instructions, make the payments provided for in the preceding sentence out of
the Exchange Fund. The Disbursing Agent shall invest portions of the Exchange
Fund as Parent directs.
(b) Promptly after the Effective Time, the Surviving
Corporation shall cause the Disbursing Agent to mail to each record holder, as
of the Effective Time, of an outstanding certificate or certificates which
immediately prior to the Effective Time represented Shares (the "Certificates")
a form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Disbursing Agent) and instructions
for use in effecting the surrender of the Certificate or payment therefor. Upon
surrender to the Disbursing Agent of a Certificate, together with such letter of
transmittal duly executed, the holder of such Certificate shall be paid in
exchange therefor cash in an amount equal to the product of the number of Shares
represented by such Certificate multiplied by the Merger Consideration, and such
Certificate shall forthwith be cancelled. No interest will be paid or accrued on
the cash payable upon the surrender of the Certificates. If payment is to be
made to a person other than the person in whose name the Certificate surrendered
is registered, it shall be a condition of payment that the Certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the person requesting such payment pay any transfer or other taxes required
by reason of the payment to a person other than the registered holder of the
Certificate surrendered or established to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.8, each Certificate (other
than Certificates representing Shares owned by Parent, Acquisition Sub or any
other
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subsidiary of Parent or Dissenting Shares) shall represent for all purposes only
the right to receive the Merger Consideration in cash multiplied by the number
of Shares evidenced by such Certificate, without any interest thereon.
(c) At and after the Effective Time, there shall be no
transfers of Shares which were outstanding immediately prior to the Effective
Time on the stock transfer books of the Surviving Corporation. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be cancelled and exchanged for cash as provided in this Section 2.8.
(d) Any portion of the Exchange Fund (including the proceeds
of any investments thereof) that remains unclaimed by the stockholders of the
Company for six months after the Effective Time shall be repaid to the Surviving
Corporation. Any stockholders of the Company who have not theretofore complied
with Section 2.8 shall thereafter look only to Parent and the Surviving
Corporation for payment of their claim for the Merger Consideration per Share,
without any interest thereon.
(e) To the fullest extent permitted by applicable law, none of
Parent, Acquisition Sub, the Company or the Disbursing Agent shall be liable to
any person in respect of any cash delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF PARENT AND ACQUISITION SUB
Parent and Acquisition Sub represent and warrant to the
Company as follows:
SECTION 3.1 Organization and Qualification. Each of Parent and
Acquisition Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power to carry on its business as it is now being conducted.
Each of Parent and Acquisition Sub is duly qualified as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
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result in a material adverse effect on Parent or its ability to consummate the
transactions contemplated by this Agreement.
SECTION 3.2 Authority Relating to this Agreement. Each of
Parent and Acquisition Sub has all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery by Parent and Acquisition Sub of
this Agreement and the consummation by Parent and Acquisition Sub of the
transactions contemplated hereby have been duly and validly authorized by the
respective Boards of Directors of Parent and Acquisition Sub, and the
stockholder of Acquisition Sub, and no other corporate proceedings on the part
of Parent or Acquisition Sub are necessary to authorize this Agreement, or
commence the Offer or to consummate the transactions so contemplated by this
Agreement (including the Offer). This Agreement has been duly and validly
executed and delivered by each of Parent and Acquisition Sub and, assuming this
Agreement constitutes a valid and binding obligation of the Company, this
Agreement constitutes a valid and binding agreement of each of Parent and
Acquisition Sub, enforceable against each of Parent and Acquisition Sub in
accordance with its terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws affecting
creditors' rights generally.
SECTION 3.3 Information Supplied. None of the information
supplied by Parent, Acquisition Sub and their respective affiliates specifically
for inclusion in the Schedule 14D-9 or the Proxy Statement (as hereinafter
defined), if required, shall, with respect to the Schedule 14D-9, at the time
such Schedule is filed with the SEC or first published, sent or given to holders
of Shares or the Offer is consummated or, with respect to the Proxy Statement,
at the time the Proxy Statement is mailed or at the time of the Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The letter to stockholders, notice of meeting, proxy statement and
form of proxy, or the information statement, as the case may be, to be
distributed to stockholders in connection with the Merger, or any schedule
required to be filed with the SEC in connection therewith, are collectively
referred to herein as the "Proxy Statement." If, at any time prior to the
Effective Time, any event relating to Parent or any of its affiliates, officers
or directors is discovered by Parent that should be set forth in a supplement to
the Proxy Statement, Parent will promptly inform the Company.
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SECTION 3.4 Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by Parent and Acquisition Sub nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective Certificates of
Incorporation or Bylaws of Parent or Acquisition Sub, (ii) require any consent,
approval, order, authorization or permit of, or registration, declaration or
filing with or notification to, any Federal, state or local government or any
court, administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (a "Governmental Entity") by Parent or
Acquisition Sub, except (A) the filing of a premerger notification and report
form by Parent under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "H-S-R Act"), (B) pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), and the Exchange Act, (C) the filing of the
Certificate of Merger pursuant to the DGCL, (D) such consents, approvals,
orders, authorizations, registrations and declarations as may be required under
the law of any foreign country in which the Parent or any of its subsidiaries
conducts any business or owns any assets, (F) such filings and approvals as may
be required under the "blue sky", takeover or securities laws of various states,
or (G) where the failure to obtain any such consent, approval, authorization or
permit, or to make any such filing or notification, would not prevent or delay
consummation of the Offer or the Merger or would not otherwise prevent Parent
from performing its obligations under this Agreement; (iii) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, license, agreement or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or any of their respective
assets may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents have
been obtained or which, in the aggregate, would not result in a material adverse
effect on Parent; or (iv) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Parent, any of its subsidiaries or any of their
respective assets, except for violations which in the aggregate would not result
in a material adverse effect on Parent.
SECTION 3.5 Financing. At each of (i) the time of acceptance
for purchase by Acquisition Sub of Shares pursuant to the Offer and (ii) the
Effective Time, Parent will have, and will make available to Acquisition Sub,
the funds necessary to
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consummate the Offer and the Merger and the transactions contemplated thereby,
and to pay related fees and expenses.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to Parent and
Acquisition Sub as follows:
SECTION 4.1 Organization and Qualification.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite corporate power to carry on its business as it is now being
conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
result in a Material Adverse Effect.
(b) The only subsidiaries of the Company (collectively,
"Subsidiaries") are those identified in Schedule 4.1(b). Each Subsidiary is a
corporation or other organization duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization and
has the requisite corporate or other power to carry on its business as it is now
being conducted, and each Subsidiary is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or leased or the nature of its activities makes such qualification necessary,
except where the failure to be so qualified would not result in a Material
Adverse Effect. Except as disclosed on Schedule 4.1(b), all of the outstanding
shares of capital stock of each Subsidiary have been validly issued and are
fully paid and non-assessable and are owned by the Company, by another
wholly-owned Subsidiary of the Company or by the Company and another such
wholly-owned Subsidiary, free and clear of all pledges, claims, equities,
options, liens, charges, rights of first refusal, "tag" or "drag" along rights,
encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"). Except for the capital stock or other equity interests
of the Subsidiaries or as otherwise specifically indicated in the SEC Documents
(as defined in Section 4.5) or in
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Schedule 4.1(b), the Company does not own, directly or indirectly, any capital
stock or other equity interest in any corporation, partnership, joint venture or
other entity. The Company has made available to Parent complete and correct
copies of its Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation") and Bylaws and the comparable charters and
bylaws or other organizational documents of the Subsidiaries, in each case as
amended to the date of this Agreement.
SECTION 4.2 Capitalization.
(a) The authorized capital stock of the Company consists of
20,000,000 Common Shares and 5,000,000 shares of Preferred Stock, par value $1
per share. All of the issued and outstanding Shares have been duly authorized
and validly issued and are fully paid and nonassessable and are not subject to
preemptive rights. As of September 19, 1997, 13,793 Series A Preferred Shares,
749,486 Series B Preferred Shares and 14,113,623 Common Shares were issued and
outstanding and an aggregate of 1,622,050 Common Shares were reserved for
issuance pursuant to the 1996 Comprehensive Stock Plan of Score Industries,
Inc., the Company's 1978 and 1990 Stock Option Plans and the 1996 Non-Employee
Director Stock Plan (collectively, the "Stock Plans"). Except as disclosed in
Schedule 4.2, such Common Shares reserved for issuance under the Stock Plans
have not been issued and will not prior to the Effective Time be issued, and,
except as disclosed in Schedule 4.2, no commitment has been or will be made for
their issuance other than under stock options outstanding under the Stock Plans
("Stock Options") as of the date of this Agreement. Schedule 4.2 sets forth the
exercise prices and number of Shares in respect of outstanding Stock Options
under the Stock Plans. In addition, each outstanding Common Share has a
Preferred Stock purchase right attached, allowing the holder upon the occurrence
of certain events described in the Rights Agreement between the Company and
ChaseMellon Shareholder Services L.L.C., as Rights Agent, relating to such
rights (the "Rights"), as amended and restated on February 2, 1996 (the "Rights
Agreement"), to purchase one one-hundredth of a share of Series C Junior
Participating Preferred Stock at an exercise price of $32. No shares of such
Series C Preferred Stock have been issued as of the date of this Agreement.
(b) There are no bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the
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right to vote) on any matters on which stockholders of the Company may vote.
Except as set forth above or otherwise on Schedule 4.2, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any of the
Subsidiaries is a party or by which any of them is bound, obligating the Company
or any of the Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of the Company or any of the Subsidiaries or obligating the Company or any of
the Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or undertaking.
Except as disclosed in Schedule 4.2, there are no outstanding contractual
obligations of the Company or any of the Subsidiaries to repurchase, redeem or
otherwise acquire, or providing preemptive or registration rights with respect
to, any shares of capital stock of the Company or any of the Subsidiaries. The
Company and the Subsidiaries do not have outstanding any loans to any person in
respect of the purchase of securities issued by the Company or any Subsidiary.
SECTION 4.3 Authority Relative to this Agreement. The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby (subject
with respect to the Merger to approval of the Merger and this Agreement by the
holders of a majority of the votes represented by the Shares). The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly and validly authorized and
approved by the affirmative vote of no fewer than 4/5ths of the duly elected,
qualified and acting members of the Board of Directors of the Company, and no
other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions so contemplated,
other than (with respect to the Merger) the approval of this Agreement by the
holders of a majority of the votes represented by the Shares, voting together as
one class, and no separate vote of the Preferred Shares will be required for
such approval. This Agreement has been duly and validly executed and delivered
by the Company, and, assuming this Agreement constitutes a valid and binding
obligation of each of Parent and Acquisition Sub, constitutes a valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, and other similar laws
affecting creditors' rights generally.
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SECTION 4.4 Absence of Certain Changes. Except as disclosed in
the SEC Documents or in Schedule 4.4 or as contemplated by this Agreement, since
June 30, 1997 until the commencement of the Offer, no event has occurred or will
occur and no circumstances exist or will exist, and as of the date hereof the
Company is not aware of any event or circumstances which may reasonably be
likely to occur or exist, that would be reasonably likely to result in a
Material Adverse Effect, except for general economic changes, changes that
affect the industry of the Company or any Subsidiary generally, and changes in
the Company's business after the date hereof attributable solely to actions
taken by Parent or Acquisition Sub. Except as disclosed in the SEC Documents or
in Schedule 4.4, since June 30, 1997, there has not been (a) any declaration,
setting aside or payment of any dividend or other distribution in respect of the
capital stock of the Company or any redemption or other acquisition by the
Company of any Shares; (b) any entry into any agreement, commitment or
transaction by the Company or any Subsidiary which is material to the Company
and the Subsidiaries taken as a whole, except agreements, commitments or
transactions in the ordinary course of business, (c) any split, combination or
reclassification of the Company's capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock, (d)(i) any granting by the
Company or any of the Subsidiaries to any officer or key employee of the Company
or any of the Subsidiaries of any increase in compensation, except in the
ordinary course of business or as was required under employment agreements in
effect as of the date of the most recent financial statements included in the
SEC Documents or (ii) any entry by the Company or any Subsidiary into any
employment, severance or termination agreement with any such officer or key
employee or granting by the Company or any Subsidiary to any such officer or key
employee of any increase in severance or termination pay, except (A) as was
required under employment, severance or termination agreements in effect as of
the date of the most recent financial statements included in the SEC Documents
or (B) as disclosed on Schedule 5.6(d) of the Disclosure Schedule, or (e) any
damage, destruction or loss, whether or not covered by insurance, that has or
would be reasonably likely to have a Material Adverse Effect or (f) any change
in accounting methods, principles or practices by the Company or any Subsidiary
materially affecting its assets, liabilities or business, except insofar as may
have been required by a change in generally accepted accounting principles.
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SECTION 4.5 Reports. Since January 1, 1995, the Company has
filed all required forms, reports and documents with the SEC required to be
filed by it pursuant to the federal securities laws and the SEC rules and
regulations thereunder (collectively, the "SEC Documents"), all of which have
complied as of their respective filing dates in all material respects with all
applicable requirements of the Securities Act and the Exchange Act, and the
rules promulgated thereunder. None of such forms, reports or documents required
by the Exchange Act at the time filed, nor any of such forms, reports or
documents required by the Securities Act as of the date of their effectiveness
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except to the extent that information contained in any SEC Document
has been revised or superseded by a later-filed SEC Document filed and publicly
available prior to the date hereof. The financial statements of the Company
included in the SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
SECTION 4.6 Proxy Statement. If a Proxy Statement is required
for the consummation of the Merger under applicable law, the Proxy Statement
will comply in all material respects with the Exchange Act, except that no
representation is made by the Company with respect to information supplied by
Parent or any affiliate of Parent specifically for inclusion in the Proxy
Statement. None of the information supplied by the Company specifically for
inclusion in the Proxy Statement shall, at the time the Proxy Statement is
mailed or at the time of the Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
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SECTION 4.7 Consents and Approvals; No Violation. Except as
set forth on Schedule 4.7, neither the execution and delivery of this Agreement
by the Company nor the consummation of the transactions contemplated hereby will
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both) under, or require any consent or approval by a party
under or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets or the Company or any
Subsidiary under (i) the Certificate of Incorporation or Bylaws of the Company
or the comparable charter or organizational documents of any Subsidiary, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
the Company or any Subsidiary or its respective properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Company or any Subsidiary or their respective
properties or assets, other than, in the case of clauses (ii) or (iii), any such
conflicts, violations, defaults, rights or Liens that individually or in the
aggregate would not have a Material Adverse Effect. Except as set forth on
Schedule 4.7, no consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by the Company
or any Subsidiary in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the transactions
contemplated by this Agreement, except for (i) the filing of a premerger
notification and report form by the Company under the H-S-R Act, (ii)
requirements under the Securities Act and the Exchange Act, (iii) the filing of
the Certificate of Merger pursuant to the DGCL and appropriate documents with
the relevant authorities of other states in which the Company is qualified to do
business; (iv) requirements under state environmental statutes or regulations
and (v) such other consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not
have a Material Adverse Effect.
SECTION 4.8 Fees and Commissions. Except for those fees and
expenses payable to JPMorgan pursuant to the letter agreement, dated July 23,
1997, no person is entitled to receive from the Company or any Subsidiary any
investment banking, brokerage or finder's fee in connection with this Agreement
or the transactions contemplated hereby. A copy of the aforementioned agreement
has previously been delivered to Parent.
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<PAGE> 66
SECTION 4.9 Information Supplied. None of the information
supplied or to be supplied by the Company for inclusion or incorporation by
reference in (i) the Offer Documents, (ii) the Schedule 14D-9 or (iii) the
information to be filed by the Company in connection with the Offer pursuant to
Rule 14f-1 promulgated under the Exchange Act (the "Information Statement"),
will, at the respective times the Offer Documents, the Schedule 14D-9 and the
Information Statement are filed with the SEC or first published, sent or given
to the Company's stockholders, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Schedule 14D-9 and the Information Statement
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder, except that no
representation or warranty is made by the Company with respect to statements
made or incorporated by reference therein based on information supplied by
Parent or Acquisition Sub specifically for inclusion or incorporation by
reference therein.
SECTION 4.10 Litigation. Except as disclosed in the SEC
Documents or in Schedule 4.10 of the Disclosure Statement, as of the date hereof
there is no suit, action or proceeding pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary before any court or
arbitrator or before or by any governmental body, agency or official that would
be reasonably likely to have a Material Adverse Effect, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any Subsidiary having, or which is
reasonably likely to have, a Material Adverse Effect.
SECTION 4.11 Patents and Other Proprietary Rights. To
the Company's knowledge, except as disclosed in Schedule 4.11, the Company and
Subsidiaries have rights to use, whether through ownership, licensing or
otherwise, all patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of which
the Company is aware that are necessary for its business as now conducted
(collectively, "Intellectual Property Rights"). Except as disclosed in Schedule
4.11, the Company and Subsidiaries have not assigned, hypothecated or otherwise
encumbered any of the Intellectual Property Rights and none of the licenses
included in the Intellectual Property Rights purport to grant sole or exclusive
licenses to another entity or person, including, without limitation, sole or
exclusive licenses limited to
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<PAGE> 67
specific fields of use. To the Company's knowledge, except as disclosed in
Schedule 4.11, the patents owned by the Company and Subsidiaries are valid and
enforceable and any patent issuing from patent applications of the Company and
Subsidiaries will be valid and enforceable, except as such invalidity or
unenforceability would not, individually or in the aggregate, be reasonably
likely to have a Material Adverse Affect. Except as disclosed in writing to
Parent prior to the date hereof: (i) the Company has no knowledge of any
infringement by any other party of any of the Intellectual Property Rights, and
(ii) the Company and Subsidiaries have not entered into any agreement to
indemnify any other party against any charge of infringement of any of its
Intellectual Property Rights except for such matters as would not, individually
or in the aggregate, be reasonably likely to have a Material Adverse Affect. To
the Company's knowledge, the Company and Subsidiaries have not and do not
violate or infringe any intellectual property right of any other person or
entity, and the Company and Subsidiaries have not received any communication
alleging that any of them violates or infringes the intellectual property right
of any other person or entity, except as disclosed in writing to Parent prior to
the date hereof and except for any such violations or infringements as would
not, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect. The Company and Subsidiaries are not subject to any pending suit
for infringing any intellectual property right of another entity or person.
SECTION 4.12 Benefit Plans; ERISA Compliance.
(a) Schedule 4.12(a) sets forth a complete list of all
"employee benefit plans" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), bonus, pension, profit
sharing, deferred compensation, incentive compensation, excess benefit, stock,
stock option, severance, termination pay, change in control or other material
employee benefit plans, programs or arrangements, including, but not limited to,
those providing medical, dental, vision, disability, life insurance and vacation
benefits (other than those required to be maintained by law), qualified or
unqualified, funded or unfunded, foreign or domestic currently maintained, or
contributed to, or required to be maintained or contributed to, by the Company
or any other person or entity that, together with the Company, is treated as a
single employer under Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code") (each a "Commonly Controlled Entity") for the benefit of
any current or former employees, officers,
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directors or independent contractors of the Company or any Subsidiary and with
respect to which the Company or any Subsidiary has any liability (collectively,
the "Benefit Plans"). Except with respect to any "multiemployer plan" (as
defined in Section 3(37) of ERISA), the Company has delivered or made available
to Parent true, complete and correct copies of each Benefit Plan and related
trust agreement and annuity contract and (to the extent applicable) a copy of
each Benefit Plan's current summary plan description. In addition, to the extent
applicable, the Company has provided or made available to Parent a copy of the
most recent IRS determination letter issued, and copies of the two most recently
filed IRS Forms 5500 together with all schedules, actuarial reports and
accountants' statements for each Benefit Plan, including Form 5500, Schedule B
for each Benefit Plan that is a "defined benefit plan" (as defined in Section
3(35) of ERISA), other than a multiemployer plan.
(b) To the Company's knowledge, each Benefit Plan has been
administered in accordance with its terms and in compliance with the applicable
provisions of ERISA and the Code where the failure to so administer or comply
would have a Material Adverse Effect.
(c) All Benefit Plans (other than a multiemployer plan)
intended to be qualified under Section 401(a) of the Code have been the subject
of determination letters from the Internal Revenue Service to the effect that
such Benefit Plans are qualified and exempt from Federal income taxes under
Section 401(a) and 501(a), respectively, of the Code as amended at least through
the statutory changes implemented under the Tax Reform Act of 1986, and no such
determination letter has been revoked nor, to the knowledge of the Company, has
revocation been threatened, nor has any such Benefit Plan been amended since the
date of its most recent determination letter or application therefor in any
respect that would adversely affect its qualification.
(d) No Benefit Plan which is a "single-employer plan" (as
defined in Section 4001(a)(15) of ERISA) and which is subject to Title IV of
ERISA is, as of its most recent valuation date, unfunded by an amount which
would have Material Adverse Effect based on actuarial assumptions indicated in
the most recent actuarial valuation report. To the knowledge of the Company,
neither the Company nor any of the Subsidiaries is aware of any facts or
circumstances that would materially and adversely change the funded status of
any such Benefit Plans. None of the Benefit Plans has an "accumulated funding
deficiency" (as such term is
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<PAGE> 69
defined in Section 302 of ERISA or Section 412 of the Code), and there has been
no application for a waiver of the minimum funding standards imposed by Section
412 of the Code with respect to any Benefit Plan.
(e) To the Company's knowledge, no person or entity has
incurred any liability under Title IV of ERISA or Section 412 of the Code during
the time such person or entity was required to be treated as a single employer
with the Company under Section 414 of the Code that would have a Material
Adverse Effect.
(f) During the last five years, to the Company's knowledge,
there has been no "reportable event" (as that term is defined in Section 4043 of
ERISA) which is reasonably likely to have a Material Adverse Effect with respect
to any Benefit Plan that is a single employer plan subject to Title IV of ERISA.
(g) With respect to any Benefit Plan that is an employee
welfare benefit plan (as defined in Section 3(1) of ERISA), (i) to the best of
the Company's knowledge, no such Benefit Plan provides benefits, including
without limitation, death or medical benefits, except as set forth on Schedule
4.12(g), beyond termination of employment or retirement other than (A) coverage
mandated by law or (B) death or retirement benefits under a Benefit Plan
qualified under Section 401(a) of the Code, and (ii) each such Benefit Plan
(including any such Plan covering retirees or other former employees) may be
amended or terminated without liability that would have a Material Adverse
Effect to the Company or any of its subsidiaries on or at any time after the
consummation of the Offer.
(h) Except as set forth on Schedule 4.12(h), no employee of
the Company or any Commonly Controlled Entity will become entitled to any
retirement, severance or similar benefit or enhanced or accelerated benefit
solely as a result of the transactions contemplated hereby. Without limiting the
generality of the foregoing, no amount required to be paid or payable to or with
respect to any employee of the Company or any Commonly Controlled Entity in
connection with the transactions contemplated hereby (either solely as a result
thereof or as a result of such transactions in conjunction with any other event)
will be an "excess parachute payment" within the meaning of Section 280G of the
Code.
(i) Except as indicated on Schedule 4.12(i), at no time since
December 31, 1990, have the Company or any Commonly Controlled Entity, been
required to contribute to, or incurred
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any withdrawal liability, within the meaning of Section 4201 of ERISA to any
multiemployer pension plan, within the meaning of Section 3(37) of ERISA. All
required contributions, withdrawal liability payments or other payments of any
type that the Company or any Commonly Controlled Entity have been obligated to
make to any multiemployer plan have been duly and timely made. Any withdrawal
liability incurred with respect to any multiemployer plan has been fully paid as
of the date hereof. Neither the Company nor any Commonly Controlled Entity has
undertaken any course of action that could reasonably be expected to lead to a
complete or partial withdrawal from any multiemployer plan that would reasonably
be expected to result in a withdrawal liability that would have a Material
Adverse Effect. Set forth next to each multiemployer plan listed on Schedule
4.12(i) is the amount of the withdrawal liability that would be incurred by the
Company or any Commonly Controlled Entity with respect to such plan, under
Section 4201 of ERISA, if the Company or any Commonly Controlled Entity were to
completely withdraw from such multiemployer plan on the date hereof.
(j) Except as listed on Schedule 4.12(j), neither the Company
nor any Commonly Controlled Entity has any secondary liability resulting from a
transaction described in ERISA Section 4204 that would, if the Company or
Commonly Controlled Entity were to become primarily liable, reasonably be likely
to have a Material Adverse Effect.
(k) Except as disclosed in the SEC Documents or in Schedule
5.6(d), there exist no employment, consulting, severance, termination or
indemnification agreements, arrangements or understandings between either of the
Company or any Subsidiary and any current or former officer or director of
either of the Company or any Subsidiary or for which either of the Company or
any Subsidiary is liable.
SECTION 4.13 Taxes.
(a) Each of the Company and each Subsidiary has filed all
Federal income tax returns and all other material tax returns and reports
(including information returns and reports) required to be filed by it on or
before the date hereof and on or before the date Shares are accepted for payment
pursuant to the Offer (or requests for extensions to file such tax returns have
been timely filed, granted and have not expired). All such returns are complete
and correct in all material respects, have been prepared in accordance with all
applicable laws and requirements and accurately reflect in all material respects
the taxable
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income (or other measure of tax) of the party filing the same. Except as
disclosed on Schedule 4.13, each of the Company and each Subsidiary has paid (or
the Company has paid on their behalf) all taxes shown to be due on such return,
all material taxes for which no return was required to be filed and all other
taxes for which a notice of assessment or demand for payment has been received.
The most recent financial statements contained in the SEC Documents reflect an
adequate reserve for all taxes payable by the Company and the Subsidiaries for
all taxable periods and portions thereof through the date of such financial
statements.
(b) True and complete copies of federal and state income
returns of the Company and each Subsidiary for each of the taxable years ended
December 31, 1992 through December 31, 1996 have been made available to Parent.
(c) Except as disclosed on Schedule 4.13, no deficiencies for
any taxes have been proposed, asserted or assessed against the Company or any
Subsidiary that have not yet been paid or settled, and no requests for waivers
of the time to assess any such taxes are pending and neither the Company nor any
Subsidiary is currently the subject of an audit or examination with respect to
tax matters and neither the Company nor any Subsidiary has received notice from
a taxing authority of its intention to conduct such an audit or examination. No
taxing authority for a jurisdiction in which the Company or any Subsidiary does
not file tax returns has asserted that the Company or any such Subsidiary is or
may be subject to tax by such jurisdiction. The Federal income tax returns of
the Company and each of the Subsidiaries consolidated in such returns have been
examined by and settled with the Internal Revenue Service for all years through
December 31, 1992.
(d) Except as disclosed on Schedule 4.13, neither the Company
nor any Subsidiary (i) currently has in effect any consent under Section 341(f)
of the Code; (ii) currently has in effect a waiver or consent extending any
statute of limitation for the assessment or collection of tax, which waiver or
consent remains outstanding; (iii) has ever joined in or been required to join
in the filing of a consolidated Federal income tax return or a combined or
consolidated state income tax return other than one for which the Company is the
common parent; (iv) has ever applied for a ruling with respect to a tax matter
or entered into a closing agreement with respect to a tax matter that has a
continuing effect; (v) has ever filed or been the subject of an election under
Section 338(g) or Section 338(h)(10) of the Code
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or caused or been the subject of a deemed election under Section 338(e) of the
Code; or (vi) has ever agreed to make or been required to make an adjustment
under Section 481 of the Code by reason of a change in accounting method or
otherwise that has continuing effect. Except as disclosed on Schedule 4.13,
neither the Company nor any Subsidiary (i) owns an interest in any entity or is
a party to an arrangement that is treated as a partnership for federal income
tax purposes or (ii) is a party to a tax sharing or tax allocation agreement
pursuant to which it could be liable for taxes of another person.
(e) As used in this Agreement, "taxes" shall include all
Federal, state, local and foreign income, property, sales, excise and other
taxes, tariffs or governmental charges of any nature whatsoever.
(f) The Company is not a "real property holding corporation"
as defined in the Code.
SECTION 4.14 Compliance with Applicable Laws.
(a) Except for matters disclosed in the SEC Documents and
during the Phase I site assessments performed by Dames & Moore, to the knowledge
of the Company, each of the Company and each Subsidiary has obtained and
maintained all Federal, state, local and foreign governmental approvals,
authorizations, certificates, filings, franchises, licenses, notices, permits
and rights ("Permits") necessary as of the Effective Time for it to own, lease
or operate its properties and assets as now owned, leased or operated and to
carry on its business as now conducted, except for any failure to obtain or
maintain such Permits which is not reasonably likely to have a Material Adverse
Effect. Except for matters disclosed in the SEC Documents and during the Phase I
site visits performed by Dames & Moore, to the knowledge of the Company, each of
the Company and each Subsidiary has complied with and is in compliance with all
statutes, laws, Environmental Laws, ordinances, rules, orders and regulations of
any Governmental Entity, Permits and Environmental Permits applicable prior to
or as of the Effective Time, except for noncompliance which is not reasonably
likely to have a Material Adverse Effect. "Environmental Permit" means Permit
under any federal, state, local or foreign Environmental Law (as hereinafter
defined) applicable prior to or as of the Effective Time. The term
"Environmental Laws" means any federal, state, local or foreign statute, code,
ordinance, rule, regulation, judgment, order, writ, decree, injunction, common
law, Permit, or settlement or consent agreement applicable prior to or as of the
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Effective Time relating to the protection of the environment or human health or
to Hazardous Materials (as defined below).
(b) Except for matters disclosed in the SEC Documents and
during the Phase I site assessments performed by Dames & Moore, to the knowledge
of the Company, there have been no releases of Hazardous Materials by the
Company or any Subsidiary or by any predecessor in interest in, on or under any
properties now owned, operated or leased by the Company or any Subsidiary which
could be the basis for liability under Environmental Laws and, to the knowledge
of the Company, there have been no releases of Hazardous Material by the Company
or any Subsidiary or any predecessor in interest in, on or under any properties
formerly owned, operated or leased by the Company or any Subsidiary which could
be the basis for liability under Environmental Laws, except for those which are
not reasonably likely to have a Material Adverse Effect. The term "Hazardous
Materials" means hazardous or toxic materials, substances or wastes that are
regulated by or that could be the basis for liability under Environmental Laws.
(c) Except for matters disclosed in the SEC Documents and
during the Phase I site assessments performed by Dames & Moore, to the knowledge
of the Company, neither the Company nor any Subsidiary has received any written
notice of violation, citation, summons or order, been served with a complaint or
assessed a penalty and no investigation is pending or has been threatened by any
governmental entity within the five year period immediately preceding the date
hereof or, if prior to that time period, which remains unresolved, and which
reasonably could be expected to require the Company or any Subsidiary to expend
money or abide by conditions contained in settlement agreements or consent
decrees, which is reasonably likely to have a Material Adverse Effect: (i) with
respect to any alleged violation by the Company or any Subsidiary or any of its
or their predecessors in interest of any Environmental Law; or (ii) with respect
to any alleged failure by the Company or any Subsidiary to have complied with
any Environmental Permit; or (iii) with respect to any use, possession,
generation, treatment, storage, recycling, transportation or disposal
(collectively, "Management" or when used as a verb, "Managed"), or release of
any Hazardous Materials by or on behalf of the Company or any Subsidiary or any
of their predecessors in interest.
(d) Except for matters disclosed in the SEC Documents and
during the Phase I site assessments performed by Dames & Moore, to the knowledge
of the Company, neither the Company nor any Subsidiary has received any written
request for information,
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notice of claim, demand or notification that it or any predecessor in interest
is or may be potentially responsible or/and liable under Environmental Laws,
with respect to any investigation or clean-up of any threatened or actual
release of any Hazardous Material within the five-year period immediately
preceding the date hereof or, if prior to that time period, which remains
unresolved, and which reasonably could be expected to require the Company or any
Subsidiary to expend money to an extent which is reasonably likely to have a
Material Adverse Effect.
(e) Except for matters disclosed in the SEC Documents and
during the Phase I site assessments performed by Dames & Moore, to the knowledge
of the Company, no Hazardous Materials Managed by or on behalf of the Company or
any of the Subsidiaries or any predecessor in interest has come to be located at
any site which is listed pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Comprehensive
Environmental Response, Compensation and Liability Information System
("CERCLIS") or on any similar published state list, or which is the subject of
federal, state or local enforcement actions or investigations which may
reasonably lead to claims against the Company or any Subsidiary under
Environmental Laws for cleanup costs, remedial work, damages to natural
resources or for personal injury claims, which are reasonably likely to have a
Material Adverse Effect.
(f) Except for matters disclosed in the SEC Documents, in the
materials made available for review by Parent and during the Phase I site
assessments performed by Dames & Moore, to the knowledge of the Company, there
have been no environmental inspections, investigations, studies, audits, tests,
reviews or other analyses, other than those required to be done routinely
pursuant to Environmental Permits or Environmental Laws, conducted in relation
to any property or business now or previously owned, operated or leased by the
Company or any Subsidiary which have been performed by or on behalf of the
Company or any Subsidiary or, to the knowledge of the Company, by any other
person regarding any environmental condition, matter or activity which could be
the basis of liability under Environmental Laws which is reasonably likely to
have a Material Adverse Effect.
(g) For the purposes of this Section 4.14 only, the "knowledge
of the Company" shall mean the actual knowledge of the executive officers of the
Company.
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SECTION 4.15 State Takeover Statutes. The Board of Directors
of the Company has approved the Offer, the Merger and the other transactions
contemplated by this Agreement in accordance with the provisions of Section 203
of the DGCL.
SECTION 4.16 Labor Matters. Except as disclosed in Schedule
4.16, to the knowledge of the Company, as of the date hereof (a) no employee of
the Company or any Subsidiary is represented by any union or other labor
organization; (b) the Company and all of the Subsidiaries are in material
compliance with applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours, and are not engaged in
any unfair labor practice; (c) there is no unfair labor practice complaint
against the Company or any of the Subsidiaries pending before the National Labor
Relations Board; (d) there is no labor strike, dispute, slowdown, representation
campaign or work stoppage pending or threatened against or affecting the Company
or any of the Subsidiaries; (e) no material grievance or arbitration proceeding
arising out of or under collective bargaining agreements is pending and no claim
therefor has been asserted against the Company or the Subsidiaries; and (f)
neither the Company nor any of the Subsidiaries has experienced any material
work stoppage since January 1, 1996.
SECTION 4.17 Undisclosed Liabilities. Except as and to the
extent disclosed in the SEC Documents, except for liabilities incurred in the
ordinary course of business and otherwise not in contravention of this Agreement
and except for liabilities or obligations under this Agreement or incurred in
connection with the transactions contemplated hereby, the Company does not have
any liabilities or obligations of any nature (whether absolute, contingent or
otherwise) that would be reasonably likely to have a Material Adverse Effect.
SECTION 4.18 Certain Agreements. Except as disclosed in
Schedule 4.18, neither the Company nor any of the Subsidiaries is a party to, or
bound by, any contract or agreement that materially limits the ability of the
Company directly or through any of its subsidiaries to compete in any line of
business or with any person in any geographic area during any period of time.
SECTION 4.19 Amendment of Rights Agreement. The Board of
Directors of the Company has taken all action necessary to (i) render the Rights
Agreement inapplicable to the Offer, the Merger and the other transactions
contemplated by this Agreement and (ii) ensure that (A) neither Parent nor any
of its wholly-
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owned subsidiaries will become an "Acquiring Person" (as defined in the Rights
Agreement) by reason of consummation of the transactions contemplated by this
Agreement and (B) a "Shares Acquisition Date", "Distribution Date" or
"Triggering Event" (each as defined in the Rights Agreement) does not occur by
reason of the approval, execution or delivery of this Agreement, the
consummation of the Offer, the Merger or the other transactions contemplated by
this Agreement.
ARTICLE 5
COVENANTS
SECTION 5.1 Conduct of Business of the Company. Except as
contemplated by this Agreement or as approved in writing by Parent, during the
period from the date of this Agreement to the acceptance of Shares for payment,
the Company and the Subsidiaries will each conduct its operations according to
its ordinary and usual course of business. Without limiting the generality of
the foregoing, and except as otherwise expressly provided in this Agreement,
neither the Company nor any Subsidiary, without the prior written consent of
Parent, will
(i) issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) additional shares of capital stock of any class
(including the Shares), or securities convertible into any such shares, or any
rights, warrants or options to acquire any such shares or other convertible
securities, or grant or accelerate any right to convert or exchange any
securities of the Company for shares, other than (1) Shares issuable pursuant to
the terms of outstanding Stock Options and commitments disclosed in Section 4.2,
or (2) issuance of shares of capital stock to the Company by a wholly-owned
Subsidiary, or (B) any other securities in respect of, in lieu of or in
substitution for Shares outstanding on the date thereof or split, combine or
reclassify any of the Company's capital stock;
(ii) purchase, redeem or otherwise acquire, or propose
to purchase or otherwise acquire, any of its outstanding securities (including
the Shares);
(iii) declare, set aside or pay any dividend or other
distribution on any shares of capital stock of the Company other than the
regular quarterly dividends of $.275 per share with respect to the Series A
Preferred Shares and $.25 per share with respect to the Series B Preferred
Shares, except that
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a direct or indirect wholly-owned Subsidiary may pay a dividend or distribution
to its parent;
(iv) except as disclosed to Parent prior to the date
hereof, make any acquisition of a material amount of assets or securities, any
disposition (including by way of mortgage, license, encumberance or any Lien) of
a material amount of assets or securities, or enter into a material contract or
release or relinquish any material contract rights, or make any amendments, or
modifications thereto, except in all instances for actions in the ordinary
course of business;
(v) (A) except in the ordinary course of business, incur
any indebtedness for borrowed money or guarantee any such indebtedness of
another person, issue or sell any debt securities or warrants or other rights to
acquire any debt securities of the Company or any Subsidiary, guarantee any debt
securities of another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing or (B) make any
loans, advances of capital contributions to, or investments in, any other
person, other than to the Company or any direct or indirect wholly owned
Subsidiary;
(vi) pay, discharge, settle or satisfy any material
claims, liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business or in accordance with their
terms;
(vii) propose or adopt any amendments (initiated by the
Board of Directors) to the Certificate of Incorporation or Bylaws of the Company
(or any such similar organizational documents of the Subsidiaries);
(viii) except as disclosed in Schedule 5.6(d) of the
Disclosure Statement, enter into any new employment, severance or termination
agreements with, or grant any increase in severance or termination pay to, any
officers, directors or key employees or grant any material increases in the
compensation or benefits to officers, directors and key employees;
(ix) change any accounting methods, principles or
practices materially affecting their assets,
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liabilities or business, except insofar as may be required by a change in
generally accepted accounting principles;
(x) make any material tax election or settle or
compromise any material income tax liability;
(xi) except as disclosed to Parent prior to the date
hereof, make or agree to make any new capital expenditure or expenditures not
previously committed to which individually is in excess of $500,000 or which in
the aggregate are in excess of $1 million; or
(xii) agree in writing or otherwise to take any of the
foregoing actions or any action which would make any representation or warranty
in this Agreement untrue or incorrect at any time prior to acceptance of Shares
for payment in the Offer.
SECTION 5.2 No Solicitation.
(a) The Company shall not, nor shall it permit any Subsidiary
to, nor shall it authorize or permit any officer, director or employee of or any
investment banker, attorney or other advisor or representative of the Company or
any of its subsidiaries to, directly or indirectly, (i) solicit, initiate or
knowingly encourage the submission of any Takeover Proposal or (ii) participate
in any discussions or negotiations regarding, or furnish to any person any
information with respect to any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to a Takeover Proposal;
provided, however, that prior to the acceptance for payment of Shares pursuant
to the Offer, to the extent consistent with the fiduciary obligations of the
Board of Directors of the Company, as determined in good faith by the Board of
Directors after consultation with outside counsel, the Company may upon receipt
by the Company of an unsolicited written, bona fide Takeover Proposal, furnish
information with respect to the Company pursuant to a customary confidentiality
agreement containing "standstill" provisions no less onerous than in the
Confidentiality Agreement (as defined in Section 5.3) and participate in
negotiations regarding such Takeover Proposal. Without limiting the foregoing,
it is understood that any violation of the restrictions set forth in the
preceding sentence by any officer, director or employee of the Company or any
Subsidiary or any investment banker, attorney or other advisor or representative
of the Company or any Subsidiary, shall be deemed to be a breach of this Section
5.2(a) by the Company. For
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purposes of this Agreement, "Takeover Proposal" means any proposal or offer for,
or any expression of interest (by public announcement or otherwise) by any
person other than Parent or its affiliates in, a merger or other business
combination involving the Company or any proposal or offer to acquire in any
manner (including through a joint venture with the Company), directly or
indirectly, an equity interest in not less than 20% of the outstanding voting
securities of, or assets representing not less than 20% of the annual revenues
or net earnings of the Company and the Subsidiaries taken as a whole.
(b) Neither the Board of Directors of the Company nor any
committee thereof shall (i) approve or recommend, or propose to approve or
recommend, any Takeover Proposal or (ii) cause the Company or any of its
Subsidiaries to enter into any agreement with respect to any Takeover Proposal.
Notwithstanding the foregoing, in the event the Board of Directors of the
Company receives an unsolicited Takeover Proposal that, in the exercise of its
fiduciary obligations (as determined in good faith by the Board of Directors and
after consultation with outside counsel), it determines to be a Superior
Proposal, the Board of Directors may (subject to the following sentences)
withdraw or modify its approval or recommendation of the Offer, this Agreement
and the Merger taken together, or approve or recommend any such Superior
Proposal, in order to enter into an agreement with respect to such a Superior
Proposal, in each case at any time after the third business day following
Parent's receipt of written notice (a "Notice of Superior Proposal") advising
Parent that the Board of Directors has received a Superior Proposal and
specifying the material terms and conditions of such Superior Proposal. For
purposes of this Agreement, a "Superior Proposal" means any bona fide Takeover
Proposal on terms which the Board of Directors of the Company determines in its
good faith judgment, after consultation with JPMorgan or another financial
advisor of nationally recognized reputation, to be more favorable to the
Company's stockholders than the Offer and the Merger and for which financing is
available. Nothing contained herein shall prohibit the Company from taking and
disclosing to its stockholders a position contemplated by Rule 14e-2(a)
promulgated under the Exchange Act.
(c) In addition to the obligations of the Company set forth in
paragraph (b) above, the Company shall promptly advise Parent of any request for
non-public information or any Takeover Proposal, or any inquiry with respect to
or which could reasonably be expected to lead to any Takeover Proposal and the
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material terms and conditions of such request, Takeover Proposal or inquiry.
(d) Neither the Board of Directors of the Company nor any
committee thereof shall withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Parent or Acquisition Sub, the approval or recommendation by
such Board of Directors or any such committee of the Offer, this Agreement or
the Merger, unless failure to do so could be a breach of its fiduciary
obligations as they would exist without the foregoing prohibition (as determined
in good faith by the Board of Directors and after consultation with outside
counsel).
SECTION 5.3 Access to Information.
(a) Between the date of this Agreement and the Effective Time,
the Company will upon reasonable notice (i) give Parent and its authorized
representatives reasonable access during regular business hours to the Company's
and each Subsidiary's plants, offices, warehouses and other facilities and to
its books and records, (ii) permit Parent to make such inspections as it may
require, and (iii) cause its officers and those of the Subsidiaries to furnish
Parent with such financial and operating data and other information with respect
to the business and properties of the Company and the Subsidiaries as Parent may
from time to time reasonably request.
(b) Information obtained by Parent pursuant to this Section
5.3 shall be subject to the provisions of the confidentiality agreement between
the Company and Parent, dated August 7, 1997 (the "Confidentiality Agreement"),
which remains in full force and effect, but shall terminate upon the acceptance
for payment of the Shares pursuant to the Offer.
SECTION 5.4 Reasonable Best Efforts.
(a) Subject to Section 5.2, each of the parties hereto will
use its reasonable best efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement. Such reasonable best efforts
shall include, without limitation, (i) obtaining all necessary consents,
approvals or waivers from third parties and governmental authorities necessary
to the consummation of the transactions contemplated by this Agreement and (ii)
opposing vigorously any litigation or administrative proceeding relating
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to this Agreement or the transactions contemplated hereby, including, without
limitation, promptly appealing any adverse court or agency order.
Notwithstanding the foregoing or any other provisions contained in this
Agreement to the contrary, neither Parent nor any of its affiliates shall be
under any obligation of any kind to agree with any Governmental Entity,
including but not limited to any governmental or regulatory authority with
jurisdiction over the enforcement of any applicable federal, state, local and
foreign antitrust, competition or other similar laws, or any other party to sell
or otherwise dispose of, hold separate (through the establishment of a trust or
otherwise) particular assets or categories of assets or businesses of any of the
Company, Parent or any of Parent's affiliates.
(b) The Company shall give and make all required notices,
filings and reports to the appropriate persons with respect to the Permits and
Environmental Permits and comply with all applicable requirements under
Environmental Laws that may be necessary for the sale and purchase of the
business and the ownership, operation and use of the assets of Surviving
Corporation by Parent after the Effective Time.
(c) The Company and its Board of Directors shall (i) take all
action necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to the Offer, the Merger, this Agreement or
any of the other transactions contemplated by the foregoing and (ii) if any
state takeover statute or similar statute or regulation becomes applicable to
the Offer, the Merger, this Agreement or any other transactions contemplated by
the foregoing, take all action necessary to ensure that the Offer, the Merger
and the other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Offer, the
Merger and the other transactions contemplated by this Agreement.
SECTION 5.5 Indemnification, Exculpation and Insurance.
(a) All rights to indemnification and exculpation from
liabilities for acts or omissions occurring at or prior to the Effective Time
now existing in favor of the current or former directors or officers of the
Company and the Subsidiaries as provided in their respective certificates of
incorporation or by-laws (or comparable organizational documents) and any
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indemnification agreements of the Company, the existence of which does not
constitute a breach of this Agreement, shall be assumed by the Surviving
Corporation in the Merger, without further action, as of the Effective Time and
shall survive the Merger and shall continue in full force and effect (to the
extent consistent with applicable law) in accordance with their terms.
(b) For six years after the Effective Time, Parent shall cause
the Surviving Corporation to honor its commitments and obligations pursuant to
this Section 5.5. In the event that Parent or the Surviving Corporation or any
of their respective successors or assigns (i) consolidates with or merges into
any other person and is not the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision will be made so that the successors and assigns of Parent or
the Surviving Corporation, as the case may be, assume the obligations set forth
in this Section 5.5(b).
(c) For six years after the Effective Time, the Surviving
Corporation shall provide officers' and directors' liability insurance in
respect of acts or omissions occurring prior to the Effective Time, including
but not limited to the transactions contemplated by this Agreement, covering
each person currently covered by the Company's officers' and directors'
liability insurance policy, or who becomes covered by such policy prior to the
Effective Time, on terms with respect to coverage and amount no less favorable
than those of such policy in effect on the date hereof; provided that in
satisfying its obligation under this Section 5.5 the Surviving Corporation shall
not be obligated to pay annual premiums in excess of 175% of the amount per
annum the Company paid in its last full fiscal year.
(d) The provisions of this Section 5.5 are (i) intended to be
for the benefit of, and will be enforceable by, each indemnified party, his or
her heirs and his or her representatives and (ii) in addition to, and not in
substitution or, any other rights to indemnification or contribution that any
such person may have by contract or otherwise.
SECTION 5.6 Stock Options; Employee Plans and Benefits and
Employment Contracts.
(a) As soon as practicable following the date of this
Agreement, the Board of Directors of the Company (or, if appropriate, any
committee administering the Stock Plans) shall
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adopt such resolutions or take such other actions as are required in accordance
with the Stock Plans to adjust the terms of all outstanding Stock Options to
provide that, at the Effective Time, each Stock Option, whether vested or not,
outstanding immediately prior to the Effective Time be cancelled in exchange for
a cash payment by the Company of an amount equal to (i) the excess, if any, of
(x) the price per Share to be paid pursuant to the Offer over (y) the exercise
price per Share subject to such Stock Option, multiplied by (ii) the number of
Shares for which such Stock Option shall not theretofore have been exercised.
(b) All amounts payable pursuant to Section 5.6(a) shall be
subject to any required withholding of taxes and shall be paid without interest.
The Company shall use its best efforts to obtain all consents of the holders of
the Stock Options as shall be necessary to effectuate the foregoing.
Notwithstanding anything to the contrary contained in this Agreement, payment
shall, at Parent's request, be withheld in respect of any Stock Option until all
necessary consents of the holder are obtained with respect to such Stock Option.
(c) The Stock Plans shall terminate as of the Effective Time,
and the provisions in any other Benefit Plan providing for the potential
issuance, transfer or grant of any capital stock of the Company or any
Subsidiary or any interest in respect of any capital stock of the Company or any
Subsidiary shall be deleted as of the Effective Time, and the Company shall
ensure that following the Effective Time no holder of a Stock Option or any
participant in the Stock Plans or other Benefit Plan shall have any right
thereunder to acquire any capital stock of the Company or any Subsidiary or the
Surviving Corporation.
(d) From and after the Effective Time, Parent shall cause the
Surviving Corporation to honor in accordance with their terms all existing
employment, severance, consulting or other compensation agreements, plans or
contracts between the Company or any Subsidiary and any officer, director or
employee of the Company or any Subsidiary which are specifically disclosed on
Schedule 5.6(d).
(e) For the one-year period immediately following the
Effective Time, Parent shall cause the Company to provide such benefit plans,
programs and arrangements that are no less favorable in the aggregate than the
Benefit Plans.
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SECTION 5.7 Meeting of the Company's Stockholders.
(a) After consummation of the Offer, to the extent required by
applicable law, the Company shall promptly take all action necessary in
accordance with the DGCL and its Certificate of Incorporation and Bylaws to
convene the Meeting to consider and vote on the Merger and this Agreement. At
the Meeting, all of the Shares then owned by Parent, Acquisition Sub or any
other subsidiary of Parent shall be voted to approve the Merger and this
Agreement. Subject to its fiduciary duties and Section 5.2, the Board of
Directors of the Company shall recommend that the Company's stockholders vote to
approve the Merger and this Agreement if such vote is sought, shall use its best
efforts to solicit from stockholders of the Company proxies in favor of the
Merger and shall take all other reasonable action in its judgment necessary and
appropriate to secure the vote of stockholders required by the DGCL to effect
the Merger.
(b) If required under applicable law, the Company and Parent
shall prepare the Proxy Statement, file it with the SEC under the Exchange Act
as promptly as practicable after Acquisition Sub purchases Shares pursuant to
the Offer, and use all reasonable efforts to have it cleared by the SEC. As
promptly as practicable after the Proxy Statement has been cleared by the SEC,
the Company shall mail the Proxy Statement to the stockholders of the Company as
of the record date for the Meeting.
(c) Parent and Acquisition Sub shall not, and they shall cause
their subsidiaries not to, sell, transfer, assign, encumber or otherwise dispose
of the Shares acquired pursuant to the Offer or otherwise prior to the Meeting;
provided, however, that this Section 5.7(c) shall not apply to the sale,
transfer, assignment, encumbrance or other disposition of any or all such Shares
in transactions involving solely Parent, Acquisition Sub and/or one or more of
their wholly owned subsidiaries.
(d) Notwithstanding the foregoing, in the event that
Acquisition Sub shall acquire Preferred Shares representing at least 90% of the
votes represented by all outstanding Preferred Shares and Common Shares
representing at least 90% of the votes represented by all outstanding Common
Shares, the parties hereto agree, at the request of Acquisition Sub, to take all
necessary and appropriate action to cause the Merger to become effective, in
accordance with Section 253 of the DGCL, as soon as reasonably practicable after
such acquisition, without a meeting of the stockholders of the Company.
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SECTION 5.8 Public Announcements. Parent and the Company shall
consult with each other before issuing, and provide each other the opportunity
to review, comment upon and concur with, any press release or other public
statement with respect to the transactions contemplated by this Agreement,
including the Offer and the Merger, and shall not issue any such press release
or make any such public statement prior to such consultation, except as either
party may determine is required by applicable law or by obligations pursuant to
any listing agreement with any national securities exchange.
SECTION 5.9 Stockholder Litigation. The Company shall keep
Parent reasonably informed, and shall consult with Parent on a regular basis,
concerning the defense or settlement of any stockholder litigation against the
Company and its directors relating to any of the transactions contemplated by
this Agreement.
SECTION 5.10 Rights Agreement. The Board of Directors of the
Company shall take all further action (in addition to that previously taken
referred to in Section 4.19) reasonably requested in writing by Parent
(including redeeming the Rights immediately prior to the Effective Time or
amending the Rights Agreement) in order to render the Rights inapplicable to the
Offer, the Merger and the other transactions contemplated by this Agreement.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF MERGER
SECTION 6.1 Conditions to Each Party's Obligation to Effect
the Merger. The respective obligation of each party to effect the Merger is
subject to the satisfaction or waiver, where permissible, prior to the Effective
Time, of the following conditions:
(a) Stockholder Approval. If required by applicable
law, this Agreement shall have been approved by the affirmative vote of the
stockholders of the Company by the requisite vote in accordance with applicable
law;
(b) Purchase of Shares. Acquisition Sub shall have accepted
for payment and purchased Shares tendered pursuant to the Offer.
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(c) No Injunctions or Restraints. No judgment, order, decree,
statute, law, ordinance, rule, regulation, temporary restraining order,
preliminary or permanent injunction or other order enacted, entered,
promulgated, enforced or issued by any court of competent jurisdiction or other
Government Entity or other legal restraint or prohibition (collectively,
"Restraints") preventing the consummation of the Merger shall be in effect;
provided, however, that the party seeking to assert this condition shall have
used reasonable efforts to prevent the entry of any such Restraints and to
appeal as promptly as possible any such Restraints that may be entered.
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER
SECTION 7.1 Termination. This Agreement may be terminated and
the Merger contemplated hereby may be abandoned at any time prior to the
Effective Time, notwithstanding approval thereof by the stockholders of the
Company:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if
(i) the Offer terminates or expires in
accordance with its terms without Acquisition Sub's having purchased any Shares
pursuant to the Offer because of a failure of any of the conditions set forth in
Annex A hereto to have been satisfied at the time of such termination or
expiration; provided, however, that the right to terminate this Agreement
pursuant to this Section 7.1(b)(i) shall not be available to any party whose
failure to fulfill any of its obligations under this Agreement results in the
failure to have satisfied any such condition;
(ii) Shares have not been accepted for
payment pursuant to the Offer on or prior to December 31, 1997; provided,
however, that the right to terminate this Agreement pursuant to this Section
7.1(b)(ii) shall not be available to any party whose failure to fulfill any of
its obligations under this Agreement results in the failure of the Offer to be
consummated by such time;
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(iii) any Governmental Entity shall have
issued a Restraint or taken any other action permanently enjoining, restraining
or otherwise prohibiting consummation of the Merger or any of the other
transactions contemplated by this Agreement and such Restraint or other action
shall have become final and nonappealable; provided, however, that the party
seeking to terminate this Agreement pursuant to this Section 7.1(b)(iii) shall
have used all reasonable efforts to prevent the entry of and to remove such
Restraint or other action; or
(iv) the Board of Directors of the
Company (or, if applicable, any committee thereof) shall have (A) withdrawn or
modified in a manner adverse to Parent and Acquisition Sub its approval or
recommendation of the Offer or the Merger or (B) approved or recommended any
Takeover Proposal in respect of the Company or (C) resolved to take any of the
foregoing actions, in each case in compliance with the provisions contained in
Section 5.2(b) or (d).
SECTION 7.2 Effect of Termination. In the event of termination
of this Agreement by either Parent or the Company as provided in Section 7.1,
this Agreement shall forthwith become void and have no effect, without any
liability on the part of any party or its directors, officers or stockholders,
other than the provisions of Section 5.3(b), this Section 7.2, Section 7.3 and
Section 8.9, which provisions will survive such termination, and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or other agreements
set forth in this Agreement.
SECTION 7.3 Termination Fee. In the event that this Agreement
is terminated by the Company or Parent pursuant to Section 7.1(b)(iv), the
Company shall promptly, but in no event later than two business days after such
event, pay Parent a fee of $6 million (the "Termination Fee") in cash in
immediately available funds by wire transfer to an account designated by Parent.
SECTION 7.4 Amendment. To the extent permitted by
applicable law, this Agreement may be amended by the parties at any time before
or after approval of this Agreement by the stockholders of the Company;
provided, however, that after any such stockholder approval, no amendment shall
be made which by law requires further approval of the Company's stockholders
without the approval of such stockholders. This Agreement may
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not be amended except by an instrument in writing signed on behalf of each of
the parties.
SECTION 7.5 Extension; Waiver. At any time prior to the
Effective Time, a party hereto may (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto by any other party or (c) subject to Section
7.4, waive compliance by any other party with any of the agreements or
conditions contained herein. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.
SECTION 7.6 Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 7.1, an amendment of
this Agreement pursuant to Section 7.4 or an extension or waiver pursuant to
Section 7.5 in order to be effective shall require, in the case of Parent or the
Company, action by its Board of Directors or, with respect to any amendment of
this Agreement, a duly authorized committee of its Board of Directors.
SECTION 7.7 Concurrence of Independent Directors.
Notwithstanding any other provision of this Agreement, from and after the
consummation of the Offer, the concurrence of a majority of the Independent
Directors shall be required for any amendment or determination of this Agreement
by the Company, any waiver of any of the Company's rights hereunder or otherwise
pursuant to Sections 7.1, 7.4 or 7.5, any extension of the time for performance
of Parent's or Acquisition Sub's obligations or other acts hereunder, or any
other action taken by the Company's Board of Directors in connection with this
Agreement (including actions to enforce this Agreement).
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Non-Survival of Representations and Warranties.
None of the representations and warranties made in this Agreement or in any
instrument delivered pursuant to this
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Agreement shall survive after the Effective Time. This Section 8.1 shall not
limit any covenant or agreement of the parties hereto which by its terms
contemplates performance after the Effective Time.
SECTION 8.2 Entire Agreement; Assignment. This Agreement
(including the Schedules hereto) and, to the extent contemplated in Section
5.3(b), the Confidentiality Agreement, (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, among the parties or
any of them with respect to the subject matter hereof and (b) shall not be
assigned by operation of law or otherwise, provided that Parent or Acquisition
Sub may assign any of their rights and obligations to any direct or indirect
wholly owned subsidiary of Parent, but no such assignment shall relieve Parent
or Acquisition Sub of its obligations hereunder. Either Parent, Acquisition Sub
or any direct or indirect wholly owned subsidiary of Parent may purchase Shares
under the Offer.
SECTION 8.3 Validity. The invalidity or unenforceability of
any provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 8.4 Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be deemed to
have been duly given when delivered in person, by facsimile transmission with
confirmation of receipt, by overnight courier (with delivery confirmed), or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
(a) if to Parent or Acquisition Sub:
Carpenter Technology Corporation
101 West Bern Street
Reading, PA 19601
Attention: John R. Welty, Esq.,
Vice President, General
Counsel & Secretary
Fax No. 610-208-3068
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with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attention: Herbert F. Goodrich, Jr., Esq.
Fax No. 215-994-2222
(b) if to the Company:
Talley Industries, Inc.
2702 North 44th Street - Suite 100-A
Phoenix, AZ 85008
Attention: Mark S. Dickerson, Esq.
Vice President, General Counsel
& Secretary
Fax No. 602-852-6972
with copies to:
Osborn Maledon
2929 North Central Avenue
Phoenix, AZ 85012
Attention: David Victor, Esq.
Fax No. 602-640-9355
and to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention: William L. Rosoff, Esq.
Fax No. 212-450-4800
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the
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manner set forth above (provided that notice of any change of address shall be
effective only upon receipt thereof).
SECTION 8.5 Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware.
SECTION 8.6 Jurisdiction. Any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby may be
brought against any of the parties in any federal court located in the State of
Delaware or any Delaware state court, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such courts (and of the appropriate
appellate courts therefrom) in any such suit, action or proceeding and waives
any objection to venue laid therein. Process in any such suit, action or
proceeding may be served on any party anywhere in the world, whether within or
without the State of Delaware. Without limiting the generality of the foregoing,
each party hereto agrees that service of process upon such party at the address
referred to in Section 8.4, together with written notice of such service to such
party, shall be deemed effective service of process upon such party.
SECTION 8.7 Descriptive Headings. The descriptive headings
herein are inserted for convenience of reference only and shall not constitute a
part of or affect the meaning or interpretation of this Agreement.
SECTION 8.8 Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement except for Section 5.5 (which is intended to be for the benefit
of the persons entitled to therein, and may be enforced by such persons).
SECTION 8.9 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
SECTION 8.10 Fees and Expenses. Except as set forth in
Section 7.3, all fees, costs and expenses incurred in connection with the
transactions contemplated by this Agreement
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<PAGE> 92
shall be paid by the party incurring such fees and expenses, whether or not the
Offer or the Merger is consummated.
SECTION 8.11 Certain Definitions. For purposes of this
Agreement (including Annex A hereto), the following terms shall have the
meanings ascribed to them below:
(a) "affiliate" of a person shall mean (i) a person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the first-mentioned person and
(ii) an "associate", as that term is defined in Rule 12b-2 promulgated under the
Exchange Act as in effect on the date of this Agreement.
(b) "beneficial owner" (including the term "beneficially own"
or correlative terms) with respect to any securities means a person who shall be
deemed to be the beneficial owner of such securities which (i) such person or
any of its affiliates beneficially owns, directly or indirectly, (ii) such
person or any of its affiliates has, directly or indirectly, (A) the right to
acquire (whether such right is exercisable immediately or only after the passage
of time), pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement or
understanding or (iii) are beneficially owned, directly or indirectly, by any
other person with which such person or any of its affiliates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any of such securities.
(c) "control" (including the terms "controlling", "controlled
by" and "under common control with" or correlative terms) shall mean the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through ownership of voting
securities, by contract, or otherwise.
(d) "fully diluted" in reference to the Shares means all
outstanding securities entitled generally to vote in the election of directors
of the Company on a fully diluted basis, after giving effect to the exercise or
conversion of all options, rights and securities exercisable or convertible into
such voting securities.
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<PAGE> 93
(e) "knowledge" shall mean the actual knowledge of the
executive officers of the Company after reasonable investigation, including
consultation with the principal executive officers of each of the operating
Subsidiaries.
(f) "Material Adverse Effect" shall mean a material adverse
effect (i) on the financial condition, assets, liabilities, business, or results
of operations of the Company and the Subsidiaries, taken as a whole, except for
changes in the general economic conditions and changes that affect the industry
of the Company or any of the Subsidiaries generally, or (ii) on the ability of
the Company to perform its obligations under this Agreement or to consummate the
transactions contemplated by this Agreement.
(g) "person" shall mean a natural person, company,
corporation, partnership, association, trust or any unincorporated organization.
(h) "subsidiary" shall mean, when used with reference to a
person means a corporation (or other entity) the majority of the outstanding
voting securities (or equity interests) of which are owned directly or
indirectly by such person.
SECTION 8.12 Performance by Acquisition Sub. Parent hereby
agrees to cause Acquisition Sub to comply with its obligations hereunder and
under the Offer and to cause Acquisition Sub to consummate the Merger as
contemplated herein.
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<PAGE> 94
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed on its behalf by its officer thereunto duly authorized,
on the day and year first above written.
CARPENTER TECHNOLOGY CORPORATION
By: /s/ Robert W. Cardy
-------------------------------
Robert W. Cardy,
Chairman, President &
Chief Executive Officer
SCORE ACQUISITION CORP.
By: /s/ Robert W. Cardy
-------------------------------
Robert W. Cardy,
President &
Chief Executive Officer
TALLEY INDUSTRIES, INC.
By: /s/ Paul L. Foster
-------------------------------
Paul L. Foster
Chairman of the Board &
Chief Executive Officer
- 47 -
<PAGE> 95
ANNEX A
TO
AGREEMENT AND PLAN OF MERGER
CONDITIONS TO THE OFFER
Notwithstanding any other provision of the Offer or this
Agreement, Acquisition Sub shall not be required to accept for payment or pay
for, subject to Rule 14e-1(c) of the Exchange Act, any Shares not theretofore
accepted for payment, and may terminate or amend the Offer if (i) that number of
Shares which would represent at least a majority of the voting power represented
by the Shares and other securities entitled generally to vote in the election of
directors of the Company outstanding on a fully diluted basis after giving
effect to the exercise or conversion of all options, rights and securities
exercisable or convertible into or exchangeable for Shares or such voting
securities shall not have been validly tendered and not withdrawn immediately
prior to the expiration of the Offer (the "Minimum Tender Condition"), (ii) any
applicable waiting period under the H-S-R Act shall not have expired or been
terminated prior to the expiration of the Offer or (iii) at any time on or after
the date of commencement of the Offer and before the acceptance of such Shares
for payment or the payment therefor, any of the following conditions exist or
shall occur:
(a) there shall have occurred (i) any general
suspension of trading in, or limitation on prices for, securities on
the New York Stock Exchange or in the over-the-counter market, (ii) any
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iii) any limitation, whether or
not mandatory, by any Governmental Entity on, or other event that
materially affects, the extension of credit by banks or other lending
institutions, (iv) any commencement of a war, armed hostilities or
other national or international calamity involving the armed forces of
the United States, (v) any decline, measured from the date of this
Agreement, in either the Dow Jones Industrial Average or the Standard &
Poor's Index of 400 Industrial Companies by an amount in excess of 20%,
(vi) in the case of any of the foregoing occurrences existing on or at
the time of the commencement of the Offer, a material acceleration or
worsening thereof; or
(b) there shall be pending by any Governmental
Entity, or threatened by the staff of any Governmental Entity, any
suit, action or proceeding, (i) challenging the acquisition by Parent
or Acquisition Sub of any Shares, seeking to restrain or prohibit the
making or consummation of the Offer or the Merger or the performance of
any of the other transactions contemplated by this Agreement (ii)
seeking to prohibit or limit the ownership or operation by the Company,
Parent or any of their respective subsidiaries
<PAGE> 96
of a material portion of the business or assets of the Company or the
Subsidiaries, or Parent or its subsidiaries, or to compel the Company
or Parent to dispose of or hold separate any material portion of the
business or assets of the Company or the Subsidiaries, or Parent or its
subsidiaries, as a result of the Offer or any of the other transactions
contemplated by this Agreement, (iii) seeking to impose limitations on
the ability of Parent or Acquisition Sub to acquire or hold, or
exercise full rights of ownership of, any Shares accepted for payment
pursuant to the Offer including, without limitation, the right to vote
the Shares accepted for payment by it on all matters properly presented
to the stockholders of the Company, or (iv) seeking to prohibit Parent
or any of its subsidiaries from effectively controlling in any material
respect the business or operations of the Company or the Subsidiaries;
(c) there shall be any statute, rule, regulation,
judgment, order or injunction enacted, entered, enforced, promulgated
or deemed applicable to the Offer or the Merger, or any other action
shall be taken by any Governmental Entity or court, other than the
application to the Offer or the Merger of applicable waiting periods
under the H-S-R Act, that is reasonably likely to result, directly or
indirectly, in any of the consequences referred to in clauses (i)
though (iv) of paragraph (b) above;
(d) the Company shall have entered into an agreement
concerning any Superior Proposal, or the Board of Directors of the
Company or any committee thereof shall have resolved to enter into such
an agreement;
(e) any person or group (as defined in Section
13(d)(3) of the Exchange Act) (other than Parent, Acquisition Sub or
any affiliate thereof) shall have become the beneficial owner (as
defined in Rule 13d-3 promulgated under the Exchange Act) of Shares
representing a majority of the total votes represented by all
outstanding Shares;
(f) the Merger Agreement shall have been terminated
in accordance with its terms; or
(g) any of the representations and warranties of the
Company set forth in the Merger Agreement were inaccurate in any
material respect when made or become inaccurate in any material respect
at any time thereafter, or the Company shall have failed in any
material respect to perform any obligation or covenant required by the
Merger Agreement to be performed or complied with by it;
A-2
<PAGE> 97
which, in the reasonable judgment of Acquisition Sub and regardless of the
circumstances giving rise to any such condition, makes it inadvisable to proceed
with the Offer or with such acceptance for payment, purchase of, or payment for
Shares.
The foregoing conditions are for the sole benefit of
Acquisition Sub and Parent and may be asserted by Acquisition Sub or Parent
regardless of the circumstances giving rise to any such condition and may be
waived by Acquisition Sub or Parent, in whole or in part, at any time and from
time to time, in the sole discretion of Acquisition Sub or Parent. The failure
by Acquisition Sub or Parent at any time to exercise any of the foregoing rights
will not be deemed a waiver of any right and each right will be deemed an
ongoing right which may be asserted at any time and from time to time.
A-3
<PAGE> 98
Exhibit B
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
Section 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251 of this title), Section 252, Section 254, Section
257, Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights
<PAGE> 99
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation
surviving or resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other
corporation, or depository receipts in respect thereof, which
shares of stock (or depository receipts in respect thereof) or
depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of
stock, depository receipts and cash in lieu of fractional
shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall
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<PAGE> 100
notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or
within ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of
the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however,
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<PAGE> 101
that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to
each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given;
provided, that, if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the
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<PAGE> 102
stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of
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<PAGE> 103
a stockholder, the Court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 104
EXHIBIT C
[JPMORGAN LETTERHEAD]
September 25, 1997
The Board of Directors
Talley Industries, Inc.
2702 North 44th Street
Suite 100A
Phoenix, AZ 85008
Attention: Admiral Paul L. Foster
Chairman and Chief Executive Officer
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Talley Industries, Inc. (the "Company") of the
consideration proposed to be paid to them in connection with the proposed Tender
Offer (as hereinafter defined) and subsequent merger (the "Merger") of the
Company with a wholly-owned subsidiary of Carpenter Technology Corporation (the
"Buyer"). We understand that pursuant to an Agreement and Plan of Merger (the
"Agreement"), to be entered into among the Company, the Buyer and Score
Acquisition Corp. (the "Acquisition Sub"), (i) Acquisition Sub will commence a
cash tender offer (the "Tender Offer") to purchase all outstanding shares of the
Company's (a) Common Stock, par value $1 per share (the "Common Shares") for
$12.00 per share; (b) Series A Convertible Preferred Stock, par value $1 per
share ("Series A Preferred Shares") for $11.70 per share; and (c) Series B $1
Cumulative Convertible Preferred Stock, par value $1 per share ("Series B
Preferred Shares" and together with the Series A Preferred Shares, the
"Preferred Shares" and together with the Common Shares, collectively the
"Shares"), for $16.00 and (ii) following the Tender Offer the Acquisition Sub
will merge with and into the Company and the Company will become a wholly-owned
subsidiary of the Buyer and upon consummation of the Merger each Common Share
and each Preferred Share will receive the same consideration paid in the Tender
Offer (other than Shares beneficially owned by the Buyer or Shares for which
dissenters' rights have been perfected).
In arriving at our opinion, we have reviewed (i) a draft of the Agreement; (ii)
certain publicly available information concerning the business of the Company
and of certain other companies engaged in businesses comparable to those of the
Company, and the reported market prices for certain other companies' securities
deemed comparable; (iii) publicly available terms of certain transactions
involving companies in businesses comparable to those of the Company and the
consideration received for such companies; (iv) current and historical market
prices of the Shares; (v) the audited financial statements of the Company for
the fiscal year ended December 31, 1996, and the unaudited financial statements
of the Company for the period ended June 30, 1997; (vi) the terms of the
Preferred Shares; (vii) certain agreements with respect to outstanding
indebtedness or obligations of the Company; (viii) certain internal financial
analyses and forecasts prepared by the Company and its management; and (ix) the
terms of other business combinations that we deemed relevant.
In addition, we have held discussions with certain members of the senior
management of the Company with respect to certain aspects of the Tender Offer
and the Merger, and the past and current business operations of the Company, the
financial condition and future prospects and operations of the Company, and
certain other matters we believe necessary or appropriate to our inquiry. We
have visited certain representative facilities of the Company, and reviewed such
other financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company or otherwise reviewed by us, and
we have not assumed any responsibility or liability therefor. We have not
conducted any valuation or appraisal of any assets or liabilities, nor have any
such valuations or appraisals been provided to us. In relying on financial
analyses and forecasts provided to us, we have assumed that they have
<PAGE> 105
been reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management as to the expected future
results of operations and financial condition of the Company to which such
analyses or forecasts relate. We have also assumed that the Tender Offer and the
Merger will have the tax consequences described in discussions with, and in
materials furnished to us by, representatives of the Company, and that the other
transactions contemplated by the Agreement will be consummated as described in
the Agreement. In considering the allocation of consideration to be paid by the
Buyer to the holders of the Preferred Shares and the Common Shares, we have
assumed that the conversion ratios for converting Preferred Shares into Common
Shares reflect the relative differences in value between the Preferred Shares
and the Common Shares. We have relied as to all legal matters relevant to
rendering our opinion upon the advice of counsel to the Company.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and in the information made available to us as of, the date hereof.
It should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as financial advisor to the Company with respect to the proposed
Tender Offer and Merger and will receive a fee from the Company for our
services. We will also receive an additional fee from the Company if the Tender
Offer is consummated. With respect to the Buyer, our affiliate, Morgan Guaranty
Trust Company of New York, currently serves as agent bank for the Buyer's
existing bank financing. In the ordinary course of their businesses, our
affiliates may actively trade the debt and equity securities of the Company or
the Buyer for their own account or for the accounts of customers and,
accordingly, they may at any time hold long or short positions in such
securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be paid pursuant to the Agreement to the
holders of the Shares in the Tender Offer and Merger is fair, from a financial
point of view, to such holders.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any shareholder of the Company as to whether to
tender Preferred or Common Shares pursuant to the Tender Offer or how such
shareholder should vote with respect to the Merger. This opinion may not be
disclosed, referred to, or communicated (in whole or in part) to any third party
for any purpose whatsoever except with our prior written consent in each
instance. This opinion may be reproduced in full in any proxy, information or
solicitation/recommendation statement mailed to shareholders of the Company but
may not otherwise be disclosed publicly in any manner without our prior written
approval and must be treated as confidential.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ NICHOLAS B. PAUMGARTEN
----------------------------------
Name: Nicholas B. Paumgarten
Title: Managing Director
2
<PAGE> 106
Exhibit E
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NO. 1-4778
TALLEY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0180396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2702 NORTH 44TH STREET - SUITE 100-A, PHOENIX, ARIZONA 85008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(602) 957-7711
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirement for the past 90 days.
YES[ X ] NO[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
CLASS OF COMMON STOCK SEPTEMBER 30, 1997
- --------------------- ---------------------
$1.00 PAR VALUE 14,113,623
<PAGE> 107
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 1
Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 1997
and 1996 2
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 3
Consolidated Statement of Changes in Stockholders'
Equity -Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis 9-17
PART II OTHER INFORMATION
Legal Proceedings 18
Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 108
PART I - FINANCIAL INFORMATION
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
- -------------------------------------------- --------- ---------
<S> <C> <C>
Cash and cash equivalents $ 40,957 $ 48,758
Accounts receivable, net of allowance for
doubtful accounts of $1,228 at September
30, 1997 and $925 at December 31, 1996 50,609 53,090
Inventories, net 67,207 64,684
Deferred income taxes 3,800 3,660
Prepaid expenses 7,361 6,100
--------- ---------
Current assets 169,934 176,292
Property, plant and equipment, net 53,298 49,324
Intangibles 38,296 41,965
Deferred charges and other assets 17,114 12,804
--------- ---------
Total assets $ 278,642 $ 280,385
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,010 $ 5,522
Accounts payable 24,016 20,116
Accrued expenses 37,251 44,189
--------- ---------
Current liabilities 64,277 69,827
Long-term debt 122,946 123,185
Deferred income taxes 3,650 2,179
Other liabilities 10,686 10,708
Stockholders' equity:
Preferred stock, $1 par value,
authorized 5,000,000 shares:
Series A 14 14
Series B 749 750
Common stock, $1 par value,
authorized 20,000,000 shares 14,114 14,618
Capital in excess of par value 75,534 79,884
Foreign currency translation adjustment (34) (562)
Accumulated deficit (13,294) (20,218)
--------- ---------
Total stockholders' equity 77,083 74,486
--------- ---------
Total liabilities and
stockholders' equity $ 278,642 $ 280,385
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-1-
<PAGE> 109
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 67,184 $ 76,667 $200,389 $219,256
Services 20,627 17,082 62,896 49,904
Royalties 179 109,023 891 122,709
-------- -------- -------- --------
87,990 202,772 264,176 391,869
-------- -------- -------- --------
Cost of sales 48,364 70,115 146,267 177,808
Cost of services 18,481 15,168 56,316 44,036
Selling, general,
and administrative expenses 14,547 12,761 49,910 47,574
Provision (reversal) of
reserves on realty assets - 85,000 (6,300) 85,000
-------- -------- -------- --------
81,392 183,044 246,193 354,418
-------- -------- -------- --------
Earnings from operations 6,598 19,728 17,983 37,451
Other income (expense), net (435) 16,780 320 14,587
-------- -------- -------- --------
6,163 36,508 18,303 52,038
Interest expense 3,589 6,694 10,910 21,066
-------- -------- -------- --------
Earnings before income taxes
and extraordinary loss 2,574 29,814 7,393 30,972
Income tax provision 219 502 469 1,575
-------- -------- -------- --------
Earnings before
extraordinary loss 2,355 29,312 6,924 29,397
Extraordinary loss - - - (1,642)
-------- -------- -------- --------
Net earnings $ 2,355 $ 29,312 $ 6,924 $ 27,755
======== ======== ======== ========
Earnings applicable
to common shares $ 2,164 $ 29,121 $ 6,351 $ 14,813
======== ======== ======== ========
Earnings (loss) per
share of common stock and
common stock equivalents:
Earnings before
extraordinary loss $ .15 $ 1.85 $ .45 $ 1.93
Extraordinary loss - - - (.11)
-------- -------- -------- --------
Net earnings before
consideration for
induced conversion of
preferred stock .15 1.85 .45 1.82
Assumed value of conversion
inducement - - - (.79)
-------- -------- -------- --------
Earnings applicable
to common shares $ .15 $ 1.85 $ .45 $ 1.03
======== ======== ======== ========
Weighted average shares
outstanding 14,156 15,855 15,246 15,202
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE> 110
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents at beginning of year $ 48,758 $ 10,475
-------- --------
Cash flows from operating activities:
Net earnings 6,924 27,755
Adjustments to reconcile net income
to cash flows from operating activities:
Change in deferred income taxes 1,331 (3,099)
Depreciation and amortization 6,684 6,628
Original discount amortization - 7,929
Loss on sale of subsidiary and product line 1,325 -
Provision (reversal) of reserve on
realty assets (6,300) 85,000
Other 1,318 15,425
Changes in assets and liabilities, net of
effects from acquired businesses:
(Increase)decrease in accounts receivable (533) 17,028
Increase in inventories (6,910) (329)
(Increase) decrease in prepaid expenses (6,431) 476
Decrease in realty assets - 3,967
Increase in accounts payable 3,900 3,289
Increase in accrued expenses 1,053 8,172
Increase (decrease) in other liabilities 493 (588)
Other, net (186) 2,863
-------- --------
Cash flows from operating activities 2,668 174,516
Cash flows from investing activities:
Proceeds from sale of subsidiary and product line 6,162 -
Investment in joint-venture (3,510) -
Purchase of assets of acquired business - (4,327)
Purchases of property and equipment (9,921) (4,675)
Reduction of income tax receivables 4,400 -
Reduction in other assets 97 370
Proceeds from sale of property and equipment 78 150
-------- --------
Cash flows from investing activities (2,694) (8,482)
Cash flows from financing activities:
Preferred stock conversion cost - 3,637
Payment of dividends (573) -
Purchase of common stock (4,339) -
Common stock issued 57 -
Repayment of long-term debt (2,920) (18,694)
Proceeds from borrowings under line of credit - 375,213
Reduction in borrowings under line of credit - (385,792)
-------- --------
Cash flows from financing activities (7,775) (25,636)
Net decrease in cash and cash equivalents (7,801) 140,398
-------- --------
Total cash and cash equivalents at September 30, $ 40,957 $150,873
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE> 111
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK CAPITAL IN RETAINED
-------------------------------------- COMMON EXCESS OF EARNINGS
SERIES A SERIES B SERIES D STOCK PAR VALUE (DEFICIT)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 67 $ 1,548 $ 120 $ 10,053 $ 86,035 $(38,959)
Net earnings 27,755
Conversion to common stock (53) (798) (120) 4,007 (3,438)
Common stock issued 792 3,247
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1996 $ 14 $ 750 $ -- $ 14,852 $ 85,844 $(11,204)
======== ======== ======== ======== ======== ========
BALANCE AT DECEMBER 31, 1996 $ 14 $ 750 $ -- $ 14,618 $ 79,884 $(20,218)
Net earnings 6,924
Dividends - preferred stock (573)
Stock grant 6 51
Conversion to common stock (1) 1
Common stock retirements (511) (3,828)
-------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1997 $ 14 $ 749 $ -- $ 14,114 $ 75,534 $(13,294)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE> 112
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - GENERAL
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1997 and December 31, 1996 and the results of operations for the
three-month and nine-month periods ended September 30, 1997 and 1996, and cash
flows and changes in stockholders' equity for the nine-month periods ended
September 30, 1997 and 1996. Such results, however, may not be indicative of the
results for the full year.
For additional information regarding significant accounting policies,
and accounting matters applicable to the Company, reference should be made to
the Company's Annual Report to Shareholders for the year ended December 31,
1996.
NOTE 2 - INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and supplies $12,710 $10,995
Work-in-process 11,311 11,564
Finished goods 26,784 26,158
Inventories applicable to
government contracts 16,402 15,967
------- -------
$67,207 $64,684
======= =======
</TABLE>
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> 113
NOTE 3 - EARNINGS PER SHARE, CONTINUED
the Company's Common stock at the average price during the period, and assumed
conversion of all dilutive convertible Preferred stock. Common stock equivalents
that are anti-dilutive are excluded from the computation of earnings per share
and earnings are reduced by the dividend requirements on such equivalents.
NOTE 4 - ACQUISITION AND DISPOSITIONS
In May 1997, a subsidiary of the Company sold certain assets of the
connector product line. Proceeds include a note receivable for $1.9 million and
cash of $.2 million.
In March 1997, the Company sold the assets of its Canadian steel
distributor. Cash proceeds from the sale were $4.1 million. The purchaser
assumed $2.3 million of liabilities.
In January 1996, a subsidiary of the Company acquired certain assets of
a manufacturer of a silicone wire product line. The purchase price was
approximately $4.3 million.
NOTE 5 - PREFERRED STOCK CONVERSIONS
On February 16, 1996, the Company issued 1,905,849 shares of Talley
Common stock in connection with the conversion of all of the Company's Series D
Preferred stock, 702,919 more shares than originally designated. The conversion
automatically extinguished all unpaid dividends on that stock, totaling
approximately $2.6 million as of December 31, 1995.
On April 22, 1996, pursuant to a conversion offer with respect to the
Company's Series B and Series A Preferred stock, approximately 798,000 shares or
approximately 52% of the outstanding shares of Series B and approximately 53,000
shares or approximately 79% of the Series A were converted to Common stock.
Series B holders who converted received 2.5 shares of Common stock for each
outstanding Series B share. Series A holders who converted received 2.0 shares
of Common stock for each outstanding Series A share. Common stock issued of
approximately 1,995,000 shares in connection with the conversion of Series B
Preferred stock and approximately 106,000 in connection with the conversion of
Series A Preferred stock was approximately 948,000 and 56,000 more shares than
issuable under the stated conversion terms of the respective series of preferred
stock. Prior to the conversion there were approximately 1,548,000 shares of
Series B outstanding and 67,000 shares of Series A outstanding. The conversion
automatically extinguished all unpaid dividends on the Series B and Series A
shares that were converted totaling approximately $4.0 million ($5 per share) on
the Series B Preferred stock and totaling approximately $0.3 million ($5.50 per
share) on the Series A Preferred stock at March 31, 1996.
-6-
<PAGE> 114
NOTE 5 - PREFERRED STOCK CONVERSIONS, CONTINUED
The transactions did not impact the net earnings of the Company in 1996,
but "earnings applicable to common shares (after deduction of preferred stock
dividends)," as supplementally disclosed by the Company, and the "earnings per
share of common stock and common stock equivalent share" were reduced. The
excess of the fair value of the common shares transferred in the transactions by
the Company, over the fair value of the common shares issuable pursuant to the
stated conversion terms of the preferred stock, were subtracted from net
earnings in the calculations of net earnings available to common shareholders
and earnings per share.
NOTE 6 - BONDS REPURCHASED AND COVENANT DEFEASANCE
During 1996, the Company repurchased $124.0 million aggregate principal
amount of the Senior Discount Debentures with an accreted value of $97.4 million
at the repurchase dates. The purchase price of the debentures was $106.0
million, including accrued interest and prepayment premiums. The Company
recognized $12.1 million in extraordinary losses in connection with the
repurchases of the Senior Discount Debentures. This amount represents the
prepayment premium and deferred debt cost on the extinguished debt. During the
nine months ended September 30, 1997, the Company repurchased an additional $.3
million aggregate principal amount of the Senior Discount Debentures.
An investment was made in U.S. Treasury obligations and placed in trust
in June 1997 to effect a covenant defeasance of the remaining $1.9 million
principal amount of outstanding debentures. For financial reporting purposes,
the assets held in trust are included in the assets of the Company and the
outstanding debentures continue to be reflected as outstanding debt. The
debentures will be redeemed on October 15, 1998, which is the earliest optional
redemption date.
NOTE 7 - REPURCHASE OF COMMON STOCK
In late 1996 and early 1997, the Board of Directors approved the
repurchase of up to 950,000 shares of the Company's Common stock, on the open
market or in negotiated transactions, from time to time, at prices deemed
appropriate by the Company's officers, with such shares to be retired as
authorized but unissued shares. At December 31, 1996, the total number of shares
of common stock repurchased was 277,300 shares for a total cost of approximately
$2.1 million. During the first half of 1997, another 510,367 shares were
repurchased for a total cost of approximately $4.3 million.
-7-
<PAGE> 115
NOTE 8 - AGREEMENT AND PLAN OF MERGER
On September 26, 1997, the Company announced that it had entered into a
definitive Agreement and Plan of Merger (Agreement) with Carpenter Technology
Corporation (Carpenter) to be acquired for cash.
Under the terms of the Agreement, Carpenter commenced an all-cash tender
offer on October 2, 1997 for all outstanding shares of Talley stock at a price
of $12 per share of Talley Common stock, $16 per share of Talley Series B
Preferred stock, and $11.70 per share of Talley Series A Preferred stock.
Assuming a majority (measured by aggregate voting power) of Talley's stock is
duly tendered under the tender offer and not withdrawn before the expiration
date of the offer (December 4, 1997, unless extended), Carpenter is obligated
under the terms of the Agreement to purchase all shares of Talley stock tendered
and not withdrawn, and is further obligated to complete as soon as possible an
all-cash merger whereby all Talley shares remaining outstanding will be acquired
for cash at the same per-share prices as under the tender offer. The tender
offer is also subject to other customary conditions, including expiration of the
Hart-Scott-Rodino (HSR) waiting period. The U.S. Department of Justice,
Antitrust Division (DOJ) has requested that the Company and Carpenter provide
DOJ certain additional information, which has the effect of automatically
extending the HSR waiting period. The Company and Carpenter have advised DOJ
that they intend to provide the requested information as soon as possible.
In connection with the tender offer and proposed merger, Carpenter, the
Company and certain of its present and former directors were named as defendants
in various purported class action complaints filed on behalf of the stockholders
of the Company. The complaints alleged, among other things, breach of fiduciary
duty on the part of the Board of Directors arising out of the Merger Agreement
and failure to disclose material information. On October 16, 1997 a Memorandum
of Understanding was entered into by counsels for the plaintiffs and defendants
requiring the Company to amend and supplement the disclosure contained in its
filings with the Securities and Exchange Commission-Schedule 14D-9. In exchange,
the plaintiffs agreed to dismiss the actions. The settlement is subject to
various conditions, including Court approval.
The foregoing summary of certain provisions of the Agreement is general
in nature and is qualified in its entirety by reference to the definitive
Agreement, which is an Exhibit to this Report. No assurance can be given that
the conditions to the consummation of the tender offer and the merger under the
Agreement will be fulfilled or as to the timing for consummation of the tender
offer or the merger.
-8-
<PAGE> 116
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):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Government Products
and Services $ 37,648 $ 36,906 $117,775 $105,877
Airbag Royalties - 108,520 - 121,913
Stainless Steel Products 29,337 34,418 88,711 105,954
Industrial Products 18,608 20,077 55,293 53,777
Realty 2,397 2,851 2,397 4,348
-------- -------- -------- --------
$ 87,990 $202,772 $264,176 $391,869
======== ======== ======== ========
OPERATING INCOME:
Government Products
and Services $ 2,420 $ (1,421) $ 11,476 $ 3,372
Airbag Royalties - 135,367 - 148,760
Stainless Steel Products 1,740 (509) 6,770 9,351
Industrial Products 1,654 (7,082) 4,428 (5,996)
Realty 2,346 (86,005) 8,656 (88,506)
-------- --------- -------- --------
Total operating income 8,160 40,350 31,330 66,981
Corporate expense (2,575) (4,889) (14,715) (16,202)
Non-segment interest
income 578 1,047 1,688 1,259
Interest expense (3,589) (6,694) (10,910) (21,066)
-------- -------- -------- --------
Earnings before
income taxes and
extraordinary loss $ 2,574 $ 29,814 $ 7,393 $ 30,972
======== ======== ======== ========
</TABLE>
Revenues for the nine-month period ended September 30, 1997 decreased
$127.7 million when compared with the corresponding period in the prior year.
Earnings before income taxes and extraordinary loss for the nine months ended
September 30, 1997 was $7.4 million compared with $31.0 million in the first
nine months of the previous year. Included in the results for periods ended
September 30, 1996 were payments received from TRW Inc. of $156.4 million to
settle the airbag royalties litigation. This amount, which represents a
settlement for airbag royalties and certain
-9-
<PAGE> 117
other matters, reimbursement of litigation costs and interest from the date of
award until paid, was partially offset by a provision for reserve on realty
assets of $85.0 million. Royalties from automotive airbags ceased with the
payments from TRW. Revenue increases for the first nine months of 1997 from the
Company's Government Products and Services segment (primarily from the naval
architectural and engineering unit) were offset by decreases in stainless steel
revenues resulting from the March 1997 sale of the Canadian steel distributor
and from lower sales, as competitive pressures from United States and foreign
suppliers affected the sales volume and sales prices.
During the nine months ended September 30, 1997 operating income from
the Government Products and Services segment and the Realty segment increased
when compared with the first nine months of 1996. The prior year's operating
income for the Realty segment included an $85.0 million provision for reserves
on realty assets; while the current year's operating income included $6.3
million realty asset reserve reversals, with the disposition of the remaining
property. Prior year operating income included writedowns of goodwill and
inventories in the Stainless Steel Products and the Industrial Products
segments, as well as a non-recurring charge in the Government Products and
Services segment regarding defense contract costs and claims.
The gross profit percentage, excluding airbag royalties and realty, was
23.3% for the nine months ended September 30, 1997, up from the gross profit
percentage of 17.8% for the comparable period in 1996. The gross profit
percentage in 1996 was below historical levels due to non-recurring inventory
and goodwill writedowns. The 1997 gross profit percentage is comparable to the
23.4% experienced by the Company during the first nine months of 1995.
Net earnings for the nine months ended September 30, 1997 were $6.9
million compared to net earnings of $27.8 million for the same period in the
prior year. Prior year's results included a $1.6 million extraordinary loss
relating to the repurchase of the Senior Discount Debentures.
GOVERNMENT PRODUCTS AND SERVICES. Revenue and operating income for the
nine months ended September 30, 1997 increased by $11.9 million and $8.1
million, respectively, when compared with the same period in the prior year,
primarily the result of an increase in service revenues from the Company's naval
architectural and engineering unit and favorable results upon conclusion, or the
timing of completion, of certain other contracts. Earnings were also favorably
impacted in 1997 when compared with 1996, as a result of reimbursement of past
research and development cost by a joint venture partner working with the
Company in the development of automotive airbag inflators. Increases in research
and development costs reduced earnings in 1997 and 1996 and a non-recurring
charge in the third quarter of 1996 regarding defense contract costs and claims
further reduced prior year earnings.
-10-
<PAGE> 118
AIRBAG ROYALTIES. As described in the Notes to the Consolidated
Financial Statements for the year ended December 31, 1996, the quarterly royalty
payments ceased with the payments received from TRW in the third quarter of
1996. Airbag royalties in the first nine months of 1996 were $121.9 million.
This amount included a portion of the payments received from TRW to settle the
airbag royalties litigation.
STAINLESS STEEL PRODUCTS. During the first nine months of 1997, sales
for the Stainless Steel Products segment decreased $17.2 million, and operating
income decreased $2.6 million, when compared with the same period in 1996.
Revenue and earnings were affected by the sale of the Canadian steel distributor
in March 1997, and by lower sales, as competitive pressures from United States
and foreign suppliers affected the sales volume and sales prices.
INDUSTRIAL PRODUCTS. In the nine-month period ended September 30, 1997,
Industrial Products sales increased $1.5 million while operating income
increased $10.4 million, when compared with the same period in 1996. The prior
year's earnings were affected by inventory and goodwill writedowns in the third
quarter of 1996. Increases in sales and operating income also resulted from
increased orders for insecticides and air fresheners.
REALTY. In 1992, the Company initiated a plan for the orderly
disposition of all its remaining real estate assets. With the receipt of $156.4
million from TRW to settle the airbag royalty dispute in the third quarter of
1996, and also in view of the slower than expected improvement in the market
conditions for real estate assets, the Company re-evaluated and changed its
strategy for exiting the real estate business. The Company adjusted its strategy
of selling properties to end users in an orderly process over time, to a
strategy of liquidation sales through pricing adjustments and/or joint
development arrangements. This change in strategy resulted in a third quarter
1996 $85.0 million reserve for real estate assets. In December of 1996 all real
estate properties, except for one, were sold for cash and assumption of certain
liabilities. The property not included in the December 1996 sale was sold on
July 30, 1997. In anticipation of the sale of this single remaining property,
the Company reversed $6.3 million of excess reserves in June 1997. Segment
operating income of $8.7 million reflects this reversal and compares to a $88.5
million loss for the first nine months of 1996, which included the $85.0 million
reserves.
OTHER. Interest expense for the nine months ended September 30, 1997
decreased to $10.9 million, from $21.1 million in the comparable period in 1996.
The decrease is primarily due to the repurchase of a substantial portion of
the Company's Senior
-11-
<PAGE> 119
Discount Debentures and the paydown of the Company's revolving credit facility
in the second half of 1996. The $1.6 million extraordinary loss in the second
quarter of 1996, which consists of premiums paid and deferred debt costs
associated with the repurchase of discount debentures, was reclassified from
interest expense during the fourth quarter of 1996 and is so classified in the
prior year's Statement of Earnings included in this quarterly report. The
overhead expenses in the first nine months of 1997 of $14.7 million and $16.2
million in 1996 are above historical levels. The 1997 corporate expenses include
$5.8 million incurred in connection with the severance payments made to the
former Chief Executive Officer of the Company. Higher than normal corporate
expenses were also attributed to above average proxy solicitation costs incurred
in connection with the 1997 Annual Meeting of Stockholders, due to the contested
nature of the meeting. The 1996 corporate expenses included an increase in
employee benefit costs. The income tax provision for the first nine months of
1997 was $.5 million compared to $1.6 million in the comparable period in 1996.
Due to unrecognized federal tax carryforward benefits, primarily the result of
losses in the Company's real estate segment, the Company has no Federal tax
provision in the 1996 or 1997 period; the tax provision is primarily for state
jurisdictions.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $41.0 million in cash and cash
equivalents and net working capital of $105.7 million. Cash generated from
operating activities for the nine months ended September 30, 1997 of $2.7
million includes earnings, and an increase in accounts payable and accrued
expenses, offset by cash used to increase inventories, and an increase in
prepaid expenses and other assets. Cash generated from operations during the
first nine months of 1996 was $174.5 million, due primarily to receipt of the
airbag royalties litigation payment settlement from TRW. Cash used in investing
activities during the nine months ended September 30, 1997 was $2.7 million,
consisting primarily of capital expenditures and investment in a joint venture
producing airbag components offset by proceeds from the sale of assets of a
subsidiary and a product line and the collection of an income tax refund
receivable. Cash used in financing activities of $7.8 million reflects the
repurchases of the Company's common stock, the payment of preferred stock
dividends, and a decrease in the Company's long-term debt. There were no
borrowings under the Company's line of credit during this period.
In October 1993, the Company completed a major refinancing program.
This refinancing program included an offering of $185 million of debt
securities, consisting of $70 million gross proceeds of Senior Discount
Debentures due 2005, issued by the Company to yield 12.25%, and $115 million of
Senior Notes due 2003,
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with an interest rate of 10.75% issued by a wholly owned subsidiary of the
Company, Talley Manufacturing and Technology, Inc. ("Talley Manufacturing"). In
connection with this refinancing, Talley Manufacturing obtained a secured credit
facility with institutional lenders.
Borrowings under the secured credit facility may not exceed the
collateral base as defined in the governing credit agreement. The facility
consists of a five-year revolving credit facility of up to $40.0 million and a
five-year $20.0 million term loan facility. At September 30, 1997 availability
under the total facility was approximately $49.0 million, of which approximately
$9.0 million (the principal balance of the term loan) was borrowed. A
substantial portion of the proceeds received in 1996 from the sale of the assets
of the real estate operations and from the resolution of the automotive airbag
royalties litigation have been used to reduce the Company's total indebtedness.
The Company has recently entered into a joint venture agreement with
Delphi Automotive Systems to manufacture automotive airbag inflators, which will
require significant capital contributions through 1998 to fund the capital
requirements of the venture, as it develops its manufacturing capability. In
addition, the Company is expected to have capital requirements to develop its
manufacturing capability for other airbag related products. The Company is also
committed to significantly higher-than-normal research and development
expenditures for automotive airbag inflators and other airbag related products.
These commitments will require financial resources in the next two to three
years. The Company believes with present cash balances and cash available under
the Company's credit facility, there will be sufficient financial resources to
meet these needs and to support the long-term growth of the Company's core
businesses.
As a holding company with no significant operating or income-producing
assets beyond its stock interests in Talley Manufacturing, the Company is
dependent primarily upon distributions from Talley Manufacturing to meet its
funding requirements. Furthermore, because certain debt covenants limit the
Company's ability to incur additional indebtedness, the Company will be
dependent upon the payment of dividends from Talley Manufacturing (which
payments are limited by debt covenants of Talley Manufacturing) and to any
future sales of equity securities as its primary sources of discretionary
liquidity. Nevertheless, and particularly in light of the current September 30,
1997 cash balances of $26.6 million held at the parent holding company level,
the Company believes that funds will be available to permit the Company to meet
its requirements.
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OTHER MATTERS
AGREEMENT AND PLAN OF MERGER
On September 26, 1997, the Company announced that it had entered into a
definitive Agreement and Plan of Merger (Agreement) with Carpenter Technology
Corporation (Carpenter) to be acquired for cash.
Under the terms of the Agreement, Carpenter commenced an all-cash
tender offer on October 2, 1997 for all outstanding shares of Talley stock at a
price of $12 per share of Talley Common stock, $16 per share of Talley Series B
Preferred stock, and $11.70 per share of Talley Series A Preferred stock.
Assuming a majority (measured by aggregate voting power) of Talley's stock is
duly tendered under the tender offer and not withdrawn before the expiration
date of the offer (December 4, 1997, unless extended), Carpenter is obligated
under the terms of the Agreement to purchase all shares of Talley stock tendered
and not withdrawn, and is further obligated to complete as soon as possible an
all-cash merger whereby all Talley shares remaining outstanding will be acquired
for cash at the same per-share prices as under the tender offer. The tender
offer is also subject to other customary conditions, including expiration of the
Hart-Scott-Rodino (HSR) waiting period. The U.S. Department of Justice,
Antitrust Division (DOJ) has requested that the Company and Carpenter provide
DOJ certain additional information, which has the effect of automatically
extending the HSR waiting period. The Company and Carpenter have advised DOJ
that they intend to provide the requested information as soon as possible.
In connection with the tender offer and proposed merger, Carpenter, the
Company and certain of its present and former directors were named as defendants
in various purported class action complaints filed on behalf of the stockholders
of the Company. The complaints alleged, among other things, breach of fiduciary
duty on the part of the Board of Directors arising out of the Merger Agreement
and failure to disclose material information. On October 16, 1997 a Memorandum
of Understanding was entered into by counsels for the plaintiffs and defendants
requiring the Company to amend and supplement the disclosure contained in its
filings with the Securities and Exchange Commission-Schedule 14D-9. In exchange,
the plaintiffs agreed to dismiss the actions. The settlement is subject to
various conditions, including Court approval.
The foregoing summary of certain provisions of the Agreement is general
in nature and is qualified in its entirety by reference to the definitive
Agreement, which is an Exhibit to this Report. No assurance can be given that
the conditions to the consummation of the tender offer and the merger under the
Agreement will be fulfilled or as to the timing for consummation of the tender
offer or the merger.
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LITIGATION - TRW INC.
A judgment in the Company's favor in the amount of $138.0 million was
entered against TRW Inc. (TRW) by the United States District Court for the
District of Arizona in June 1995 following a jury verdict that TRW had
repudiated and breached the April 1989 Airbag Royalty Agreement with the
Company. The $138.0 million damages amount represented the jury's calculation of
the present value of the remaining stream of Airbag Royalties which would have
been payable by TRW through the April 2001 scheduled expiration date of the
Airbag Royalty Agreement had TRW not breached the Agreement. TRW appealed the
judgment, and, during the pendency of the appeal, was ordered by the District
Court to continue making quarterly payments to the Company in the same amounts
as if the Airbag Royalty Agreement had not been terminated and repudiated by
TRW. On June 19, 1996, the United States Court of Appeal for the Ninth Circuit
rejected TRW's appeal and affirmed the $138.0 million judgment. A petition for
rehearing filed by TRW with the Court of Appeals was denied on July 30, 1996.
In August 1996 TRW made payments aggregating approximately $133.1
million to the Company on account of TRW's obligations under the judgment. The
payments represented the $138.0 million face amount of the judgment award, plus
interest at the default rate specified by the Airbag Royalty Agreement (prime
plus 5%), less the quarterly payments made by TRW pursuant to the District
Court's order during the pendency of the appeal. A further payment was made by
TRW at the same time in the amount of approximately $6.7 million as that portion
of a court-ordered reimbursement of litigation fees and costs (and interest on
the reimbursement amount at the same default rate).
During September 1996, claims between the Company and TRW (which had
been scheduled for trial) and all other matters in dispute with TRW were settled
by the parties pursuant to a global settlement agreement. Under that settlement,
TRW made a further cash payment to the Company on September 3, 1996 in the
aggregate amount of $16.6 million. Accordingly, all claims between the parties
have now been resolved, and cash payments have been made by TRW aggregating
$156.4 million.
The litigation in which this judgment was entered arose out of the
Asset Purchase Agreement dated February 4, 1989 and the License Agreement dated
April 21, 1989, between TRW and the Company pursuant to which TRW acquired the
Company's airbag business. The court dismissed TRW's claims that the Company had
breached a non-compete provision contained in the Asset Purchase Agreement,
thereby entitling TRW to terminate airbag royalty payments to the Company under
the License Agreement (which it purported to do in February 1994) and obtain a
paid-up license to use the Company's airbag technology. The jury found in fact
that TRW had improperly terminated and repudiated the License Agreement.
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<PAGE> 123
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"
which is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Under the provisions of this new
pronouncement, the Company is required to present Basic Earnings per share and
Diluted Earnings per share. Basic Earnings per share is computed by dividing
income available to common stockholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) during the period. Income
available to common stockholders is computed by deducting both dividends
declared in the period on preferred stock (whether or not paid) and the
dividends accumulated for the period on cumulative preferred stock (whether or
not earned) from income from continuing operations and also from net income.
Diluted Earnings per share is computed similar to Basic Earnings per share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. Under this new pronouncement, the Company is required to
disclose a reconciliation of the numerators and the denominators of the basic
and diluted per-share computations for income from continuing operations, the
effect that has been given to preferred dividends in arriving at income
available to common stockholders in computing basic earnings per share, and
securities that could potentially dilute basic earnings per share in the future
that were not included in the computation of diluted earnings per share because
to do so would have been anti-dilutive for the period(s) presented.
Had this Statement been effective for the nine months ending September
30, 1997, the Basic Earnings per share and the Diluted Earnings per share would
have been $.42 and $.42, respectively.
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130 "Reporting Comprehensive Income", and SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information". Both pronouncements are
effective for fiscal years beginning after December 15, 1997. The new
requirements for reporting comprehensive income will have minimal impact on the
Company's financial statement disclosures since items addressed by the
pronouncement, not presently included in its income statements, are minor in
amounts. The Company anticipates that its reportable operating segments may
change and may increase in number based on the requirements of the new standard
on disclosures about segments.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report contain
forward-looking statements that are based on current expectations, estimates and
projections about the
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<PAGE> 124
industries in which the Company operates. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Factors affecting the future include, but are not limited to,
increasing prices and product/service competition by foreign and domestic
competitors, including new entrants; rapid technological developments and
changes; the ability to continue to introduce competitive new products and
services on a timely and cost effective basis; the mix of products/services; the
achievement of lower costs and expenses; domestic and foreign governmental and
public policy changes including environmental regulations; protection and
validity of patent and other intellectual property rights; reliance on large
customers; the cyclical nature of certain of the Company's businesses; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, and financial resources in the amounts, at
the times and on the terms required to support future business. In addition,
such statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other factors.
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<PAGE> 125
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION - TRW INC.
For a description of legal proceedings involving the Company,
see "Other Matters" within Management's Discussion and
Analysis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 * Severance and Settlement Agreement between William
H. Mallender and Talley Industries, Inc. dated June
21, 1997.
10.2 * Employment Agreement dated August 11, 1997 between
the Company and Paul L. Foster.
11 * Computation of Earnings per Common and Common
Equivalent Share.
27 * Financial Data Schedule for Talley Industries, Inc.,
September 30, 1997.
99.1 * Ninth Amendment to the Loan and Security Agreement
dated July 31, 1997 by and among Talley Manufacturing
and Technology, Inc. and Transamerica Business Credit
Corporation.
99.2 * Form of Fourth Amendment to Subsidiary Loan and
Security Agreements dated July 31, 1997 between
Talley Manufacturing and Technology, Inc. and each of
certain subsidiaries.
99.3 Agreement and Plan of Merger among Carpenter
Technology Corporation, Score Acquisition Corp. and
Talley Industries, Inc. dated September 29, 1997
included as Exhibit B to Schedule 14D-9 filed October
2, 1997, incorporated herein by reference.
* Documents marked with an asterisk are filed with this report.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months
ended September 30, 1997.
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<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TALLEY INDUSTRIES, INC.
-----------------------------------
(Registrant)
Date: November 5, 1997 By /s/ Kenneth May
-------------------- --------------------------------
Kenneth May
Vice President, Controller
Principal Accounting Officer
Date: November 5, 1997 By /s/ Mark S. Dickerson
-------------------- --------------------------------
Mark S. Dickerson
Vice President
and Secretary
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<PAGE> 127
Exhibit D
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
SERIES B $1 CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENT FOR THE PAST 90 DAYS. YES[ X ] NO[ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ X ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES ON
JANUARY 31, 1997 WAS $127,145,000.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY COURT. YES[ ] NO[ ]
AS OF 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.
<PAGE> 128
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C> <C>
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
</TABLE>
<PAGE> 129
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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<PAGE> 130
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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<PAGE> 131
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.
I-3
<PAGE> 132
(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
I-4
<PAGE> 133
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,
I-5
<PAGE> 134
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.
I-6
<PAGE> 135
- 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
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
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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,
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(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
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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
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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.
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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,
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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.
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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.
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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.)
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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.
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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> 157
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
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
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> 158
(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> 159
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> 160
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.
<TABLE>
<S> <C> <C>
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
</TABLE>
IV-2
<PAGE> 161
<TABLE>
<S> <C> <C>
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
</TABLE>
IV-3
<PAGE> 162
This page intentionally left blank.
<PAGE> 163
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page in
This Report
-----------
<S> <C>
(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
</TABLE>
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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> 179
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> 180
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
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
============================================ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE> 181
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------- ------------ ------------
<S> <C> <C>
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
================================= ============ ============
</TABLE>
F-19
<PAGE> 182
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------- ----------- -----------
<S> <C> <C>
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
============================================ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE> 183
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Capital in Retained
---------------------------------- Common Excess of Treasury Earnings
Series A Series B Series D Stock Par Value Stock (Deficit)
------- ---------- -------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 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.
F-21
<PAGE> 184
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
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
================================================ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 185
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> 186
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> 187
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> 188
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> 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- --------------------------------------- ------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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 reevaluated 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> 190
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- --------------------------------------- -------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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> 191
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- --------------------------------------- -------- --------
<S> <C> <C>
Machinery and equipment $114,020 $107,576
Buildings and improvements 31,338 30,791
Land 2,554 2,788
- --------------------------------------- -------- --------
$147,912 $141,155
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- ---------------------------------------- -------- --------
<S> <C> <C>
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
- ---------------------------------------- ======== ========
</TABLE>
F-29
<PAGE> 192
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> 193
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> 194
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> 195
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------- -------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price Shares
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
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
======== ===== ======== ===== =======
</TABLE>
F-33
<PAGE> 196
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BENEFIT PLANS, (CONTINUED)
STOCK OPTION PLANS, CONTINUED
<TABLE>
<CAPTION>
1996 1995 1994
SHARES Shares Shares
------ ------ ------
<S> <C> <C> <C>
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
----------- ---------
</TABLE>
Information on the Company's fixed price stock options outstanding at
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Remaining
Options Options Contractual Number
Outstanding Price Life Exercisable
----------- ----- ---- -----------
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
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> 197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BENEFIT PLANS, (CONTINUED)
STOCK OPTION PLANS, CONTINUED
<TABLE>
<CAPTION>
(balance in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
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> 198
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995 1994
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
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
============================= ======== ======== ========
</TABLE>
The following table sets forth the aggregate funded status of defined benefit
plans at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- --------------------------------------
ASSETS EXCEED Assets Exceed Accumulated
ACCUMULATED Accumulated Benefits
(balances in thousands) BENEFITS Benefits Exceed Assets
- ----------------------- -------- -------- -------------
<S> <C> <C> <C>
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
</TABLE>
F-36
<PAGE> 199
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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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> 200
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> 201
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> 202
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> 203
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995 1994
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
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)
======== ======== ========
</TABLE>
F-41
<PAGE> 204
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- ---------------------------------- -------- --------
<S> <C> <C>
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)
================================== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995 1994
- ------------------------------ -------- -------- --------
<S> <C> <C> <C>
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)
======== ======== ========
</TABLE>
F-42
<PAGE> 205
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> 206
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> 207
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> 208
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.
<TABLE>
<CAPTION>
(balances in thousands) 1996 1995
- ------------------------- -------------------- ------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
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
</TABLE>
F-46
<PAGE> 209
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> 210
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> 211
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> 212
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> 213
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> 214
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> 215
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> 216
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> 217
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:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ---------------------------------------- -------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-55
<PAGE> 218
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<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>
F-56
<PAGE> 219
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> 220
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<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>
F-58
<PAGE> 221
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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Phoenix, Arizona
February 17, 1997
F-59
<PAGE> 222
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<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 earnings (loss) $ (506) $ 722 $ 963 $ 2,327
========================================== ========= ======== ======== ========
Net earnings (loss) per share $ (.10) $ .02 $ .04 $ .17
========================================== ========= ======== ======== ========
</TABLE>
F-60
<PAGE> 223
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> 224
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<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
============================= ======== ======== ======== ======== ========
</TABLE>
For the dividends per common share see Stock Market Data on page F-64.
<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>
F-62
<PAGE> 225
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
STOCK MARKET DATA
SECURITIES
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.
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:
<TABLE>
<CAPTION>
Common Stock (TAL) Series B (TALB)
--------------------------------------- --------------------------------------------
Quarter 1996 1995 1996 1995
---------------- ----------------- ------------------ --------------------
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>
F-63
<PAGE> 226
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> 227
DIRECTORS AND CORPORATE MANAGEMENT
<TABLE>
<CAPTION>
DIRECTORS
- ---------
<S> <C>
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 **
</TABLE>
* Executive Committee Members
** Audit Committee
<TABLE>
<CAPTION>
CORPORATE MANAGEMENT
- --------------------
<S> <C>
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
</TABLE>
F-65
<PAGE> 228
SCHEDULE I
Page 1 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-66
<PAGE> 229
SCHEDULE I
Page 2 of 6
TALLEY INDUSTRIES, INC.
(Registrant Only)
STATEMENT OF CONDITION (BALANCE SHEET)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-67
<PAGE> 230
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)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-68
<PAGE> 231
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)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes and the notes to the consolidated financial statements.
F-69
<PAGE> 232
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> 233
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> 234
SCHEDULE II
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
(THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
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
</TABLE>
Notes:
(a) Uncollectible accounts charged against reserves, net of bad debt
recoveries.
F-72
<PAGE> 235
SCHEDULE III
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT TO GROSS AMOUNT AT WHICH
COMPANY ACQUISITION CARRIED AT CLOSE OF PERIOD
------------------- -------------------- ----------------------------------------
BLDGS BLDGS
AND LAND CARRYING AND (3) (1)(2)(4)
DESCRIPTION ENCUMBRANCES LAND IMPROVE IMPROVE COSTS LAND IMPROVE RESERVE TOTAL
----------- ------------ -------- ------- ------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------- ------- -------- ------ ------- ------ ------- ---- -------- -----
(Various properties)
$ 362 $ 11,618 $ 0 $28,554 $8,079 $(48,251) $ 0 $ 48,251 $ 0
======= ======== ====== ======= ====== ======== ==== ======== =====
</TABLE>
<TABLE>
<CAPTION>
(5)
ACCUM DATE OF DATE DEP.
DESCRIPTION DEPREC. CONSTR. ACQUIRED LIFE
----------- ------- ------- --------- ----
<S> <C> <C> <C> <C>
Las Montanas N/A N/A VARIOUS N/A
- ------------
(Resort & Residential - CA)
Collateralized credit lines
- ----------------------------
(Various properties)
</TABLE>
NOTES:
(1) CARRYING COSTS - RECONCILIATION OF BEGINNING AND ENDING BALANCE:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
(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.
F-73
<PAGE> 236
SCHEDULE IV
TALLEY INDUSTRIES, INC. AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
====== ======
</TABLE>
Notes:
(a) Carrying amount of mortgages reconciliation of beginning and ending
balances:
<TABLE>
<CAPTION>
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
======= ======= =======
</TABLE>
(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.
F-74
<PAGE> 237
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> 238
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.
<PAGE> 239
9.1 Amended and Restated Voting Trust Agreement entered into as of February
7, 1996, by and among Talley Industries, Inc., John J. McMullen and
First Interstate Bank of Arizona, N.A., as Trustee, attached as Exhibit
9.1 of Registrant's current report on Form 8-K dated February 2, 1996,
incorporated herein by this reference.
10.1** Employment Agreement dated June 26, 1984 between the Company and
William H. Mallender, attached as Exhibit 10.1 to the Company's Form
10-K for the year ended December 31, 1984, incorporated herein by this
reference.
10.2** Amendment to Employment Agreement dated September 30, 1985, between the
Company and William H. Mallender, attached as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1985,
incorporated herein by this reference.
10.3** Second Amendment to Employment Agreement dated February 25, 1986
between the Company and William H. Mallender, attached as Exhibit 10.3
to the Company's Annual Report on Form 10-K for the period ended
December 31, 1988, incorporated herein by this reference.
10.4** Third Amendment to Employment Agreement dated December 1, 1988 between
the Company and William H. Mallender, attached as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the period ended December 31,
1988, incorporated herein by this reference.
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.
<PAGE> 240
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.
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.
<PAGE> 241
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.
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.
<PAGE> 242
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.
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.
<PAGE> 243
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> 244
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.
<PAGE> 245
99.4 Second Amendment to Loan and Security Agreement dated June 30, 1994, by
and among Talley Manufacturing and Technology, Inc. and Transamerica
Business Credit Corporation, as agent, attached as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 1994, incorporated
herein by reference.
99.5 Third Amendment to Loan and Security Agreement dated December 16, 1994,
by and among Talley Manufacturing and Technology, Inc. and Transamerica
Business Credit Corporation, as agent, attached as Exhibit 99.5 to the
Company's Form 10-K for the year ended December 31, 1994, incorporated
herein by reference.
99.6 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.
<PAGE> 246
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.
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.
<PAGE> 247
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.
<PAGE> 248
PROXY
TALLEY INDUSTRIES, INC.
2702 NORTH 44TH STREET
SUITE 100A
PHOENIX, ARIZONA 85008
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
FEBRUARY 19, 1998
The undersigned stockholder of Talley Industries, Inc. ("Talley")
hereby appoints Mark S. Dickerson and John R. Welty, and each of them singly,
with full power of attorney and power of substitution, to represent the
undersigned at the Special Meeting of Stockholders of Talley, to be held on
February 19, 1998, at 10:00 a.m., local time, at the offices of Dechert Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia 19103, and at
any adjournment or postponement thereof (the "Special Meeting"), and to vote all
shares of stock of Talley held of record by the undersigned on January 14, 1998
and which the undersigned is entitled to vote upon the matters set forth in the
Notice of Special Meeting of Stockholders, dated January 16, 1998, and
accompanying the Proxy Statement, dated January 16, 1998, receipt of which is
hereby acknowledged.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF TALLEY.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL IN ITEM 1. THIS
PROXY WILL BE VOTED AS SPECIFIED OR, WHERE NO DIRECTION IS GIVEN, WILL BE VOTED
FOR THE PROPOSAL IN ITEM 1. A VOTE TO TRANSACT SUCH OTHER BUSINESS AS MAY BE
PROPERLY TAKEN UNDER ITEM 2 WILL BE VOTED BY THE PERSONS HEREINBEFORE NAMED AS
ATTORNEYS AND AS DETERMINED BY A MAJORITY OF THE BOARD OF DIRECTORS OF TALLEY.
STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY VOTE IN PERSON EVEN
THOUGH THEY HAVE PREVIOUSLY MAILED THIS PROXY. PLEASE DATE, SIGN AND RETURN THIS
PROXY PROMPTLY IN THE ENCLOSED PRE-PAID PRE-ADDRESSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
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<PAGE> 249
Please mark
your votes as
indicated in
this example. /x/
The Board of Directors of Talley recommends a vote FOR Proposal 1:
FOR AGAINST ABSTAIN
1. To approve and adopt an Agreement and Plan / / / / / /
of Merger dated as of September 25, 1997 (the
"Merger Agreement"), by and among Carpenter Technology Corporation, a Delaware
corporation ("Carpenter"), Score Acquisition Corp., a Delaware corporation and
a wholly owned subsidiary of Carpenter ("Sub"), and Talley. A copy of the Merger
Agreement is attached to the accompanying Proxy Statement as Exhibit A. As more
fully described in the Proxy Statement, the Merger Agreement provides that: (i)
Sub will be merged with and into Talley (the "Merger"), with Talley continuing
as the surviving corporation, as a consequence of which, Talley will thereupon
become a wholly owned subsidiary of Carpenter; and (ii) each issued and
outstanding share of Series A Preferred Shares, Series B Preferred Shares and
Common Shares (collectively, the "Shares") other than Shares owned by Carpenter,
Sub, or any other subsidiary of Carpenter, or Shares held by Talley as treasury
stock, or Shares held by stockholders who shall have demanded and perfected any
appraisal rights they may have under Delaware General Corporation Law), will be
converted, upon the consummation of the Merger, into the right to receive $11.70
per Series A Preferred Share, $16.00 per Series B Preferred Share and $12.00 per
Common Share, respectively, in cash without interest thereon.
FOR AGAINST ABSTAIN
2. In the discretion of the proxies, to vote / / / / / /
upon such other business as may properly come before the Special Meeting, and
any adjournment or postponement thereof.
The undersigned stockholder may revoke this proxy at any time before it
is voted by filing with the Secretary of Talley either an instrument revoking
the proxy or a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person (although attendance at the Special Meeting
will not in and of itself constitute a revocation of a proxy).
PLEASE DATE AND SIGN EXACTLY AS NAME APPEARS ON SHARE CERTIFICATES.
Please mark, sign, date and mail promptly.
Signature(s)____________________________________________ Date_________________
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee, guardian, corporate officer or
partner, please give full title as such. If a corporation, please sign in
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person. This Proxy votes all
shares held in all capacities.
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(ARROW) FOLD AND DETACH HERE (ARROW)
